##### Table of Contents









UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





FORM 10-Q


|   |  |                                                                                             
|-- |  | --------------------------------------------------------------------------------------------
|þ  |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934 
|  
|   |  | For the fiscal quarter ended June 30, 2005                                                  
|  
|OR
|  
|o  |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934

Commission file number 001-15515





Textron Financial Corporation


(Exact Name of Registrant as Specified in its Charter)





|                                                                   |  |                                         
|------------------------------------------------------------------ |  | ----------------------------------------
|Delaware                                                           |  | 05-6008768                              
|(State or Other Jurisdiction of
    Incorporation or Organization) |  | (I.R.S. Employer
    Identification No.)

40 Westminster Street, P.O. Box 6687, Providence, RI
02940-6687


401-621-4200


(Address and telephone number of Principal Executive
Offices)







þ o




o þ












---










TEXTRON FINANCIAL CORPORATION


TABLE OF CONTENTS


|                                                                                                       |                                                                                                                 |      |    |   | 
|------------------------------------------------------------------------------------------------------ | --------------------------------------------------------------------------------------------------------------- | ---- | -- | - | 
|                                                                                                       |                                                                                                                 | Page |   
|                                                                                                       |                                                                                                                 |      |   
|PART I. FINANCIAL
    INFORMATION                                                                      |                                                                                                                 |      |    |  
|Item 1.  FINANCIAL
    STATEMENTS                                                                      |                                                                                                                 |      |    |  
|                                                                                                       | Consolidated Statements of Income for the
    three and six months ended June 30, 2005 and 2004
    (unaudited) |      |    | 2 | 
|                                                                                                       | Consolidated Balance Sheets at
    June 30, 2005 and January 1, 2005 (unaudited)                                |      |    | 3 | 
|                                                                                                       | Consolidated Statements of Cash Flows for
    the six months ended June 30, 2005 and 2004 (unaudited)           |      |    | 4 | 
|                                                                                                       | Consolidated Statements of Changes in
    Shareholders Equity through June 30, 2005
    (unaudited)            |      |    | 5 | 
|                                                                                                       | Notes to Consolidated Financial Statements
    (unaudited)                                                      |      |    | 6 | 
|Item 2.  MANAGEMENTS
    DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
    OPERATIONS |                                                                                                                 |      | 15 |  
|Item 3.  QUANTITATIVE
    AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                |                                                                                                                 |      | 26 |  
|Item 4.  CONTROLS
    AND PROCEDURES                                                                   |                                                                                                                 |      | 26 |  
|PART II. OTHER INFORMATION                                                                             |                                                                                                                 |      |    |  
|Item 6.  EXHIBITS                                                                                      |                                                                                                                 |      | 28 |  
|EX-12 Computation of Earnings                                                                         
|EX 31.1 Section 302 Certifcation of CEO                                                               
|EX-31.2 Section 302 Certification of CFO                                                              
|EX- 32.1 Section 906 Certification of CEO                                                             
|EX-32.2 Section 906 Certification of CFO                                                              



1



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##### Table of Contents






PART I.     FINANCIAL
INFORMATION







|        |                     
|------- | --------------------
|Item 1. | Financial Statements

TEXTRON FINANCIAL CORPORATION





CONSOLIDATED STATEMENTS OF INCOME


(Unaudited)


|                                              |  |               |     |  |            |   |     |          |  |   |          |  |  |   |     | 
|--------------------------------------------- |  | ------------- | --- |  | ---------- | - | --- | -------- |  | - | -------- |  |  | - | --- | 
|                                              |  | Three Months  |     |  | Six Months |  
|                                              |  | Ended         |     |  | Ended      |  
|                                              |  |               |     |  |            |  
|                                              |  | June 30,      |     |  | June 30,   |   |     | June 30, |  |   | June 30, | 
|                                              |  | 2005          |     |  | 2004       |   |     | 2005     |  |   | 2004     | 
|                                              |  |               |     |  |            |   |     |          |  |   |          | 
|                                              |  | (In millions) |    
|Finance charges and discounts                 |  | $             | 110 |  |            | $ | 85  |          |  | $ | 214      |  |  | $ | 179 | 
|Rental revenues on operating leases           |  |               | 8   |  |            |   | 8   |          |  |   | 15       |  |  |   | 14  | 
|Other income                                  |  |               | 29  |  |            |   | 44  |          |  |   | 59       |  |  |   | 78  | 
|                                              |  |               |     |  |            |   |     |          |  |   |          | 
|Total revenues                                |  |               | 147 |  |            |   | 137 |          |  |   | 288      |  |  |   | 271 | 
|Interest expense                              |  |               | 51  |  |            |   | 34  |          |  |   | 96       |  |  |   | 72  | 
|Depreciation of equipment on operating leases |  |               | 5   |  |            |   | 5   |          |  |   | 9        |  |  |   | 9   | 
|                                              |  |               |     |  |            |   |     |          |  |   |          | 
|Net interest margin                           |  |               | 91  |  |            |   | 98  |          |  |   | 183      |  |  |   | 190 | 
|Selling and administrative expenses           |  |               | 46  |  |            |   | 48  |          |  |   | 93       |  |  |   | 89  | 
|Provision for losses                          |  |               | 1   |  |            |   | 14  |          |  |   | 13       |  |  |   | 34  | 
|                                              |  |               |     |  |            |   |     |          |  |   |          | 
|Income before income taxes                    |  |               | 44  |  |            |   | 36  |          |  |   | 77       |  |  |   | 67  | 
|Income taxes                                  |  |               | 15  |  |            |   | 12  |          |  |   | 26       |  |  |   | 22  | 
|                                              |  |               |     |  |            |   |     |          |  |   |          | 
|Net income                                    |  | $             | 29  |  |            | $ | 24  |          |  | $ | 51       |  |  | $ | 45  | 
|                                              |  |               |     |  |            |   |     |          |  |   |          | 



2



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##### Table of Contents



Item 1.     Financial Statements (Continued)


TEXTRON FINANCIAL CORPORATION





CONSOLIDATED BALANCE SHEETS


(Unaudited)


|                                              |                                     |               |       |       |            |   |       |       |  
|--------------------------------------------- | ----------------------------------- | ------------- | ----- | ----- | ---------- | - | ----- | ----- | -
|                                              |                                     | June 30,      |       |       | January 1, |  
|                                              |                                     | 2005          |       |       | 2005       |  
|                                              |                                     |               |       |       |            |  
|                                              |                                     | (In millions) |      
|Assets                                       
|Cash and equivalents                          |                                     | $             | 77    |       |            | $ | 127   |      
|Finance receivables, net of unearned income:  |                                     |               |       |       |            |   |       |      
|                                              | Installment contracts               |               |       | 1,486 |            |   |       | 1,455 |  
|                                              | Revolving loans                     |               |       | 1,452 |            |   |       | 1,402 |  
|                                              | Distribution finance receivables    |               |       | 1,222 |            |   |       | 1,026 |  
|                                              | Golf course and resort mortgages    |               |       | 940   |            |   |       | 1,005 |  
|                                              | Leveraged leases                    |               |       | 530   |            |   |       | 539   |  
|                                              | Finance leases                      |               |       | 464   |            |   |       | 410   |  
|                                              |                                     |               |       |       |            |  
|Total finance receivables                     |                                     |               | 6,094 |       |            |   | 5,837 |      
|                                              | Allowance for losses on receivables |               |       | (99   | )          |   |       | (99   | )
|                                              |                                     |               |       |       |            |  
|Finance receivables-net                       |                                     |               | 5,995 |       |            |   | 5,738 |      
|Equipment on operating leases-net             |                                     |               | 233   |       |            |   | 237   |      
|Goodwill                                      |                                     |               | 169   |       |            |   | 169   |      
|Other assets                                  |                                     |               | 388   |       |            |   | 467   |      
|                                              |                                     |               |       |       |            |  
|Total assets                                  |                                     | $             | 6,862 |       |            | $ | 6,738 |      
|                                              |                                     |               |       |       |            |  
|                                             
|Liabilities and shareholders equity         
|Liabilities                                   |                                     |               |       |       |            |   |       |      
|Accrued interest and other liabilities        |                                     | $             | 420   |       |            | $ | 453   |      
|Amounts due to Textron Inc.                   |                                     |               | 39    |       |            |   | 14    |      
|Deferred income taxes                         |                                     |               | 457   |       |            |   | 453   |      
|Debt                                          |                                     |               | 4,965 |       |            |   | 4,783 |      
|                                              |                                     |               |       |       |            |  
|Total liabilities                             |                                     |               | 5,881 |       |            |   | 5,703 |      
|Shareholders equity                          |                                     |               |       |       |            |   |       |      
|Capital surplus                               |                                     |               | 574   |       |            |   | 574   |      
|Investment in parent company preferred stock  |                                     |               | (25   | )     |            |   | (25   | )    
|Accumulated other comprehensive (loss) income |                                     |               | (7    | )     |            |   | 1     |      
|Retained earnings                             |                                     |               | 439   |       |            |   | 485   |      
|                                              |                                     |               |       |       |            |  
|Total shareholders equity                    |                                     |               | 981   |       |            |   | 1,035 |      
|                                              |                                     |               |       |       |            |  
|Total liabilities and shareholders equity    |                                     | $             | 6,862 |       |            | $ | 6,738 |      
|                                              |                                     |               |       |       |            |  



3



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##### Table of Contents



Item 1.     Financial Statements (Continued)


TEXTRON FINANCIAL CORPORATION





CONSOLIDATED STATEMENTS OF CASH FLOWS


Six Months Ended June 30, 2005 and 2004


(Unaudited)


|                                                                                  |                                                               |                                                  |        |    |      |   |        |      |      |  
|--------------------------------------------------------------------------------- | ------------------------------------------------------------- | ------------------------------------------------ | ------ | -- | ---- | - | ------ | ---- | ---- | -
|                                                                                  |                                                               | 2005                                             |        |    | 2004 |  
|                                                                                  |                                                               |                                                  |        |    |      |  
|                                                                                  |                                                               | (In millions)                                    |       
|Cash flows from operating activities:                                             |                                                               |                                                  |        |    |      |   |        |     
|Net income                                                                        |                                                               | $                                                | 51     |    |      | $ | 45     |     
|Adjustments to reconcile income to net cash provided by
    operating activities: |                                                               |                                                  |        |    |      |   |        |     
|                                                                                  | Provision for losses                                          |                                                  |        | 13 |      |   |        | 34   |     
|                                                                                  | Depreciation                                                  |                                                  |        | 17 |      |   |        | 18   |     
|                                                                                  | Amortization                                                  |                                                  |        | 5  |      |   |        | 6    |     
|                                                                                  | Deferred income tax provision                                 |                                                  |        | 5  |      |   |        | 22   |     
|                                                                                  | Noncash gains on securitizations and syndications             |                                                  |        |   |      |   |        | (6   | )   
|                                                                                  | Increase (decrease) in accrued interest and other liabilities |                                                  |        | 40 |      |   |        | (101 | )   
|                                                                                  | Other                                                         |                                                  |        | 15 |      |   |        | 3    |     
|                                                                                  |                                                               |                                                  |        |    |      |  
|                                                                                  |                                                               | Net cash provided by operating activities        |        |    | 146  |   |        |      | 21   |  
|Cash flows from investing activities:                                             |                                                               |                                                  |        |    |      |   |        |     
|Finance receivables originated or purchased                                       |                                                               |                                                  | (5,208 | )  |      |   | (5,130 | )   
|Finance receivables repaid                                                        |                                                               |                                                  | 4,687  |    |      |   | 4,707  |     
|Proceeds from receivable sales, including securitizations                         |                                                               |                                                  | 233    |    |      |   | 248    |     
|Proceeds from disposition of operating leases and other assets                    |                                                               |                                                  | 26     |    |      |   | 46     |     
|Purchase of assets for operating leases                                           |                                                               |                                                  | (24    | )  |      |   | (19    | )   
|Other capital expenditures                                                        |                                                               |                                                  | (4     | )  |      |   | (5     | )   
|Decrease in other investments                                                     |                                                               |                                                  | 13     |    |      |   | 42     |     
|                                                                                  |                                                               |                                                  |        |    |      |  
|                                                                                  |                                                               | Net cash used by investing activities            |        |    | (277 | ) |        |      | (111 | )
|Cash flows from financing activities:                                             |                                                               |                                                  |        |    |      |   |        |     
|Proceeds from issuance of long-term debt                                          |                                                               |                                                  | 1,150  |    |      |   | 445    |     
|Principal payments on long-term debt                                              |                                                               |                                                  | (556   | )  |      |   | (550   | )   
|Redemption of junior subordinated debentures                                      |                                                               |                                                  |       |    |      |   | (26    | )   
|Net (decrease) increase in commercial paper                                       |                                                               |                                                  | (382   | )  |      |   | 57     |     
|Net (decrease) increase in other short-term debt                                  |                                                               |                                                  | (11    | )  |      |   | 1      |     
|Principal payments on nonrecourse debt                                            |                                                               |                                                  | (23    | )  |      |   | (40    | )   
|Capital contributions from Textron Inc.                                           |                                                               |                                                  | 5      |    |      |   | 5      |     
|Dividends paid to Textron Inc.                                                    |                                                               |                                                  | (102   | )  |      |   | (72    | )   
|                                                                                  |                                                               |                                                  |        |    |      |  
|                                                                                  |                                                               | Net cash provided (used) by financing activities |        |    | 81   |   |        |      | (180 | )
|                                                                                  |                                                               |                                                  |        |    |      |  
|Net decrease in cash and equivalents                                              |                                                               |                                                  | (50    | )  |      |   | (270   | )   
|Cash and equivalents at beginning of period                                       |                                                               |                                                  | 127    |    |      |   | 357    |     
|                                                                                  |                                                               |                                                  |        |    |      |  
|Cash and equivalents at end of period                                             |                                                               | $                                                | 77     |    |      | $ | 87     |     
|                                                                                  |                                                               |                                                  |        |    |      |  



4



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##### Table of Contents



Item 1.     Financial Statements (Continued)


TEXTRON FINANCIAL CORPORATION





CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS
EQUITY


(Unaudited)


|                                                 |                                                            |               |     |            |           |   |               |        |  |   |          |       |   |               |     |   |  |   |       |    |  
|------------------------------------------------ | ---------------------------------------------------------- | ------------- | --- | ---------- | --------- | - | ------------- | ------ |  | - | -------- | ----- | - | ------------- | --- | - |  | - | ----- | -- | -
|                                                 |                                                            |               |     | Investment |           |   | Accumulated   |        |  |   |          |      
|                                                 |                                                            |               |     | in Parent  |           |   | Other         |        |  |   |          |      
|                                                 |                                                            |               |     | Company    |           |   | Comprehensive |        |  |   |          | Total |  
|                                                 |                                                            | Capital       |     |            | Preferred |   |               | Income |  |   | Retained |       |   | Shareholders |    
|                                                 |                                                            | Surplus       |     |            | Stock     |   |               | (Loss) |  |   | Earnings |       |   | Equity        |    
|                                                 |                                                            |               |     |            |           |   |               |        |  |   |          |       |   |               |    
|                                                 |                                                            | (In millions) |    
|Balance January 3, 2004                          |                                                            | $             | 574 |            |           | $ | (25           | )      |  | $ | (2       | )     |   | $             | 462 |   |  | $ | 1,009 |   
|Comprehensive income:                            |                                                            |               |     |            |           |   |               |        |  |   |          |       |   |               |     |   |  |   |       |   
|Net income                                       |                                                            |               |    |            |           |   |              |        |  |   |         |       |   |               | 94  |   |  |   | 94    |   
|Other comprehensive income, net of income taxes: |                                                            |               |     |            |           |   |               |        |  |   |          |       |   |               |     |   |  |   |       |   
|                                                 | Foreign currency translation                               |               |     |           |           |   |               |       |  |   |          | 10    |   |               |     |  |  |   |       | 10 |  
|                                                 | Change in unrealized net losses on hedge contracts         |               |     |           |           |   |               |       |  |   |          | (3    | ) |               |     |  |  |   |       | (3 | )
|                                                 | Change in unrealized net gains on interest-only securities |               |     |           |           |   |               |       |  |   |          | (4    | ) |               |     |  |  |   |       | (4 | )
|                                                 |                                                            |               |     |            |           |   |               |        |  |   |          |       |   |               |    
|                                                 | Other comprehensive income                                 |               |     |           |           |   |               |       |  |   |          | 3     |   |               |     |  |  |   |       | 3  |  
|                                                 |                                                            |               |     |            |           |   |               |        |  |   |          |       |   |               |    
|Comprehensive income                             |                                                            |               |    |            |           |   |              |        |  |   |         |       |   |               |    |   |  |   | 97    |   
|Capital contributions from Textron Inc.          |                                                            |               | 9   |            |           |   |              |        |  |   |         |       |   |               |    |   |  |   | 9     |   
|Dividends to Textron Inc.                        |                                                            |               | (9  | )          |           |   |              |        |  |   |         |       |   |               | (71 | ) |  |   | (80   | ) 
|                                                 |                                                            |               |     |            |           |   |               |        |  |   |          |       |   |               |    
|Balance January 1, 2005                          |                                                            |               | 574 |            |           |   | (25           | )      |  |   | 1        |       |   |               | 485 |   |  |   | 1,035 |   
|Comprehensive income:                            |                                                            |               |     |            |           |   |               |        |  |   |          |       |   |               |     |   |  |   |       |   
|Net income                                       |                                                            |               |    |            |           |   |              |        |  |   |         |       |   |               | 51  |   |  |   | 51    |   
|Other comprehensive income, net of income taxes: |                                                            |               |     |            |           |   |               |        |  |   |          |       |   |               |     |   |  |   |       |   
|                                                 | Foreign currency translation                               |               |     |           |           |   |               |       |  |   |          | (7    | ) |               |     |  |  |   |       | (7 | )
|                                                 | Change in unrealized net losses on hedge contracts         |               |     |           |           |   |               |       |  |   |          | (4    | ) |               |     |  |  |   |       | (4 | )
|                                                 | Change in unrealized net gains on interest-only securities |               |     |           |           |   |               |       |  |   |          | 3     |   |               |     |  |  |   |       | 3  |  
|                                                 |                                                            |               |     |            |           |   |               |        |  |   |          |       |   |               |    
|                                                 | Other comprehensive loss                                   |               |     |           |           |   |               |       |  |   |          | (8    | ) |               |     |  |  |   |       | (8 | )
|                                                 |                                                            |               |     |            |           |   |               |        |  |   |          |       |   |               |    
|Comprehensive income                             |                                                            |               |    |            |           |   |              |        |  |   |         |       |   |               |    |   |  |   | 43    |   
|Capital contributions from Textron Inc.          |                                                            |               | 5   |            |           |   |              |        |  |   |         |       |   |               |    |   |  |   | 5     |   
|Dividends to Textron Inc.                        |                                                            |               | (5  | )          |           |   |              |        |  |   |         |       |   |               | (97 | ) |  |   | (102  | ) 
|                                                 |                                                            |               |     |            |           |   |               |        |  |   |          |       |   |               |    
|Balance June 30, 2005                            |                                                            | $             | 574 |            |           | $ | (25           | )      |  | $ | (7       | )     |   | $             | 439 |   |  | $ | 981   |   
|                                                 |                                                            |               |     |            |           |   |               |        |  |   |          |       |   |               |    



5



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##### Table of Contents



Item 1.     Financial
Statements (Continued)


TEXTRON FINANCIAL CORPORATION





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)




|        |                      
|------- | ---------------------
|Note 1. | Basis of Presentation





|        |                                 
|------- | --------------------------------
|Note 2. | Recent Accounting Pronouncements





|        |             
|------- | ------------
|Note 3. | Other Income

|                     |  |               |    |  |            |   |    |          |  |   |          |  |  |   |    | 
|-------------------- |  | ------------- | -- |  | ---------- | - | -- | -------- |  | - | -------- |  |  | - | -- | 
|                     |  | Three Months  |    |  | Six Months |  
|                     |  | Ended         |    |  | Ended      |  
|                     |  |               |    |  |            |  
|                     |  | June 30,      |    |  | June 30,   |   |    | June 30, |  |   | June 30, | 
|                     |  | 2005          |    |  | 2004       |   |    | 2005     |  |   | 2004     | 
|                     |  |               |    |  |            |   |    |          |  |   |          | 
|                     |  | (In millions) |   
|Securitization gains |  | $             | 15 |  |            | $ | 16 |          |  | $ | 25       |  |  | $ | 29 | 
|Servicing income     |  |               | 9  |  |            |   | 8  |          |  |   | 17       |  |  |   | 16 | 
|Prepayment income    |  |               | 1  |  |            |   | 5  |          |  |   | 3        |  |  |   | 8  | 
|Late charges         |  |               | 2  |  |            |   | 2  |          |  |   | 3        |  |  |   | 4  | 
|Investment income    |  |               | 2  |  |            |   | 3  |          |  |   | 5        |  |  |   | 5  | 
|Syndication income   |  |               |   |  |            |   | 4  |          |  |   | 1        |  |  |   | 5  | 
|Other                |  |               |   |  |            |   | 6  |          |  |   | 5        |  |  |   | 11 | 
|                     |  |               |    |  |            |   |    |          |  |   |          | 
|Total other income   |  | $             | 29 |  |            | $ | 44 |          |  | $ | 59       |  |  | $ | 78 | 
|                     |  |               |    |  |            |   |    |          |  |   |          | 



6



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##### Table of Contents



Item 1.     Financial
Statements (Continued)


TEXTRON FINANCIAL CORPORATION


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)  (Continued)




|        |                                         
|------- | ----------------------------------------
|Note 4. | Managed and Serviced Finance Receivables



|                                               |  |               |        |   |            |   |        |  
|---------------------------------------------- |  | ------------- | ------ | - | ---------- | - | ------ | -
|                                               |  | June 30,      |        |   | January 1, |  
|                                               |  | 2005          |        |   | 2005       |  
|                                               |  |               |        |   |            |  
|                                               |  | (In millions) |       
|Total managed and serviced finance receivables |  | $             | 9,479  |   |            | $ | 9,268  |  
|Third-party portfolio servicing                |  |               | (609   | ) |            |   | (606   | )
|Nonrecourse participations                     |  |               | (474   | ) |            |   | (488   | )
|SBA sales agreements                           |  |               | (33    | ) |            |   | (39    | )
|                                               |  |               |        |   |            |  
|Total managed finance receivables              |  |               | 8,363  |   |            |   | 8,135  |  
|Securitized receivables                        |  |               | (2,084 | ) |            |   | (2,032 | )
|Other managed finance receivables              |  |               | (185   | ) |            |   | (266   | )
|                                               |  |               |        |   |            |  
|Owned finance receivables                      |  | $             | 6,094  |   |            | $ | 5,837  |  
|                                               |  |               |        |   |            |  











|        |                
|------- | ---------------
|Note 5. | Loan Impairment



7



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##### Table of Contents



Item 1.     Financial
Statements (Continued)


TEXTRON FINANCIAL CORPORATION


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)  (Continued)


|                                                                                               |  |               |     |  |            |   |     | 
|---------------------------------------------------------------------------------------------- |  | ------------- | --- |  | ---------- | - | --- | 
|                                                                                               |  | June 30,      |     |  | January 1, |  
|                                                                                               |  | 2005          |     |  | 2005       |  
|                                                                                               |  |               |     |  |            |  
|                                                                                               |  | (In millions) |    
|Nonaccrual finance receivables                                                                 |  | $             | 105 |  |            | $ | 119 | 
|Impaired nonaccrual finance receivables (included in nonaccrual
    finance receivables above) |  | $             | 78  |  |            | $ | 85  | 
|Impaired accrual finance receivables                                                           |  |               | 37  |  |            |   | 58  | 
|                                                                                               |  |               |     |  |            |  
|Total impaired finance receivables                                                             |  | $             | 115 |  |            | $ | 143 | 
|                                                                                               |  |               |     |  |            |  
|Impaired finance receivables with identified reserve requirements                              |  | $             | 59  |  |            | $ | 48  | 
|Allowance for losses on finance receivables related to impaired
    loans                      |  | $             | 16  |  |            | $ | 16  | 











|        |             
|------- | ------------
|Note 6. | Other Assets

|                                      |  |               |     |  |            |   |     | 
|------------------------------------- |  | ------------- | --- |  | ---------- | - | --- | 
|                                      |  | June 30,      |     |  | January 1, |  
|                                      |  | 2005          |     |  | 2005       |  
|                                      |  |               |     |  |            |  
|                                      |  | (In millions) |    
|Retained interests in securitizations |  | $             | 211 |  |            | $ | 233 | 
|Other long-term investments           |  |               | 57  |  |            |   | 64  | 
|Fixed assets  net                    |  |               | 36  |  |            |   | 41  | 
|Repossessed assets and properties     |  |               | 25  |  |            |   | 21  | 
|Investment in equipment residuals     |  |               | 14  |  |            |   | 13  | 
|Other                                 |  |               | 45  |  |            |   | 95  | 
|                                      |  |               |     |  |            |  
|Total other assets                    |  | $             | 388 |  |            | $ | 467 | 
|                                      |  |               |     |  |            |  



8



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##### Table of Contents



Item 1.     Financial
Statements (Continued)


TEXTRON FINANCIAL CORPORATION


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)  (Continued)










9



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Item 1.     Financial
Statements (Continued)


TEXTRON FINANCIAL CORPORATION


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)  (Continued)




|        |                           
|------- | --------------------------
|Note 7. | Debt and Credit Facilities

|                       |                                                                                       |               |     |       |            |   |       |       | 
|---------------------- | ------------------------------------------------------------------------------------- | ------------- | --- | ----- | ---------- | - | ----- | ----- | 
|                       |                                                                                       | June 30,      |     |       | January 1, |  
|                       |                                                                                       | 2005          |     |       | 2005       |  
|                       |                                                                                       |               |     |       |            |  
|                       |                                                                                       | (In millions) |    
|Commercial paper       |                                                                                       | $             | 907 |       |            | $ | 1,289 |      
|Other short-term debt  |                                                                                       |               | 7   |       |            |   | 18    |      
|                       |                                                                                       |               |     |       |            |  
|                       | Total short-term borrowings                                                           |               |     | 914   |            |   |       | 1,307 | 
|Fixed rate notes       |                                                                                       |               |     |       |            |   |       |      
|                       | Due 2005 (weighted-average rates of 4.39% and 5.59%,
    respectively)                |               |     | 21    |            |   |       | 181   | 
|                       | Due 2006 (weighted-average rates of 3.04% and 3.04%,
    respectively)                |               |     | 519   |            |   |       | 519   | 
|                       | Due 2007 (weighted-average rates of 5.55% and 5.55%,
    respectively)                |               |     | 808   |            |   |       | 808   | 
|                       | Due 2008 (weighted-average rates of 4.12% and 4.39%,
    respectively )               |               |     | 548   |            |   |       | 42    | 
|                       | Due 2009 (weighted-average rates of 5.87% and 5.87%,
    respectively)                |               |     | 542   |            |   |       | 542   | 
|                       | Due 2010 and thereafter (weighted-average rates of 4.63% and
    4.66%, respectively) |               |     | 669   |            |   |       | 268   | 
|                       |                                                                                       |               |     |       |            |  
|                       | Total fixed rate notes                                                                |               |     | 3,107 |            |   |       | 2,360 | 
|Variable rate notes    |                                                                                       |               |     |       |            |   |       |      
|                       | Due 2005 (weighted-average rates of 3.98% and 3.24%,
    respectively)                |               |     | 100   |            |   |       | 475   | 
|                       | Due 2006 (weighted-average rates of 3.76% and 2.81%,
    respectively)                |               |     | 516   |            |   |       | 466   | 
|                       | Due 2007 (weighted-average rates of 3.92% and 3.15%,
    respectively)                |               |     | 225   |            |   |       | 175   | 
|                       | Due 2008 (weighted average rate of 3.34%)                                             |               |     | 100   |            |   |       |      | 
|                       |                                                                                       |               |     |       |            |  
|                       | Total variable rate notes                                                             |               |     | 941   |            |   |       | 1,116 | 
|Unamortized discount   |                                                                                       |               | (3  | )     |            |   | (3    | )    
|Fair value adjustments |                                                                                       |               | 6   |       |            |   | 3     |      
|                       |                                                                                       |               |     |       |            |  
|                       | Total debt                                                                            |               | $   | 4,965 |            |   | $     | 4,783 | 
|                       |                                                                                       |               |     |       |            |  





10



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##### Table of Contents



Item 1.     Financial
Statements (Continued)


TEXTRON FINANCIAL CORPORATION


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)  (Continued)














11



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##### Table of Contents



Item 1.     Financial
Statements (Continued)


TEXTRON FINANCIAL CORPORATION


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)  (Continued)




|        |                                                                  
|------- | -----------------------------------------------------------------
|Note 8. | Accumulated Other Comprehensive Loss and Comprehensive
    Income



|                                                                                                                                                 |  |               |    |   |          |   |     |  
|------------------------------------------------------------------------------------------------------------------------------------------------ |  | ------------- | -- | - | -------- | - | --- | -
|                                                                                                                                                 |  | Six Months    |   
|                                                                                                                                                 |  | Ended         |   
|                                                                                                                                                 |  |               |   
|                                                                                                                                                 |  | June 30,      |    |   | June 30, |  
|                                                                                                                                                 |  | 2005          |    |   | 2004     |  
|                                                                                                                                                 |  |               |    |   |          |  
|                                                                                                                                                 |  | (In millions) |   
|Beginning of period                                                                                                                              |  | $             | 1  |   |          | $ | (2  | )
|Amortization of deferred loss on terminated hedge contracts, net
    of income taxes of $1 million and $1 million,
    respectively              |  |               | 2  |   |          |   | 2   |  
|Foreign currency translation                                                                                                                     |  |               | (7 | ) |          |   | (1  | )
|Net deferred loss on hedge contracts, net of income tax benefits
    of $3 million and $1 million, respectively                                  |  |               | (6 | ) |          |   | (3  | )
|Net deferred gain (loss) on interest-only securities, net of
    income tax of $2 million and income tax benefit of
    $4 million, respectively |  |               | 3  |   |          |   | (7  | )
|                                                                                                                                                 |  |               |    |   |          |  
|End of period                                                                                                                                    |  | $             | (7 | ) |          | $ | (11 | )
|                                                                                                                                                 |  |               |    |   |          |  



|                         |  |               |    |  |            |   |    |          |  |   |          |   |  |   |    |  
|------------------------ |  | ------------- | -- |  | ---------- | - | -- | -------- |  | - | -------- | - |  | - | -- | -
|                         |  | Three Months  |    |  | Six Months |  
|                         |  | Ended         |    |  | Ended      |  
|                         |  |               |    |  |            |  
|                         |  | June 30,      |    |  | June 30,   |   |    | June 30, |  |   | June 30, |  
|                         |  | 2005          |    |  | 2004       |   |    | 2005     |  |   | 2004     |  
|                         |  |               |    |  |            |   |    |          |  |   |          |  
|                         |  | (In millions) |   
|Net income               |  | $             | 29 |  |            | $ | 24 |          |  | $ | 51       |   |  | $ | 45 |  
|Other comprehensive loss |  |               |   |  |            |   | (2 | )        |  |   | (8       | ) |  |   | (9 | )
|                         |  |               |    |  |            |   |    |          |  |   |          |  
|Comprehensive income     |  | $             | 29 |  |            | $ | 22 |          |  | $ | 43       |   |  | $ | 36 |  
|                         |  |               |    |  |            |   |    |          |  |   |          |  



|        |              
|------- | -------------
|Note 9. | Contingencies





12



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##### Table of Contents



Item 1.     Financial
Statements (Continued)


TEXTRON FINANCIAL CORPORATION


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)  (Continued)








|         |                                               
|-------- | ----------------------------------------------
|Note 10. | Financial Information about Operating Segments



|                                  |                      |               |     |    |            |   |     |          |   |   |          |     |   |   |     |    |  
|--------------------------------- | -------------------- | ------------- | --- | -- | ---------- | - | --- | -------- | - | - | -------- | --- | - | - | --- | -- | -
|                                  |                      | Three Months  |     |    | Six Months |  
|                                  |                      | Ended         |     |    | Ended      |  
|                                  |                      |               |     |    |            |  
|                                  |                      | June 30,      |     |    | June 30,   |   |     | June 30, |   |   | June 30, |    
|                                  |                      | 2005          |     |    | 2004       |   |     | 2005     |   |   | 2004     |    
|                                  |                      |               |     |    |            |   |     |          |   |   |          |    
|                                  |                      | (In millions) |    
|Revenues:                         |                      |               |     |    |            |   |     |          |   |   |          |     |   |   |     |   
|                                  | Distribution Finance |               | $   | 44 |            |   | $   | 41       |   |   | $        | 84  |   |   | $   | 83 |  
|                                  | Golf Finance         |               |     | 26 |            |   |     | 21       |   |   |          | 48  |   |   |     | 38 |  
|                                  | Aircraft Finance     |               |     | 25 |            |   |     | 18       |   |   |          | 47  |   |   |     | 37 |  
|                                  | Resort Finance       |               |     | 20 |            |   |     | 20       |   |   |          | 41  |   |   |     | 40 |  
|                                  | Asset-Based Lending  |               |     | 18 |            |   |     | 13       |   |   |          | 34  |   |   |     | 27 |  
|                                  | Structured Capital   |               |     | 12 |            |   |     | 10       |   |   |          | 24  |   |   |     | 20 |  
|                                  | Other                |               |     | 2  |            |   |     | 14       |   |   |          | 10  |   |   |     | 26 |  
|                                  |                      |               |     |    |            |   |     |          |   |   |          |    
|Total revenues                    |                      | $             | 147 |    |            | $ | 137 |          |   | $ | 288      |     |   | $ | 271 |   
|                                  |                      |               |     |    |            |   |     |          |   |   |          |    
|Income before income taxes:(1)(2) |                      |               |     |    |            |   |     |          |   |   |          |     |   |   |     |   
|                                  | Distribution Finance |               | $   | 17 |            |   | $   | 18       |   |   | $        | 32  |   |   | $   | 44 |  
|                                  | Golf Finance         |               |     | 8  |            |   |     | 5        |   |   |          | 14  |   |   |     | 7  |  
|                                  | Aircraft Finance     |               |     | 10 |            |   |     | 5        |   |   |          | 16  |   |   |     | 10 |  
|                                  | Resort Finance       |               |     | 5  |            |   |     | 2        |   |   |          | 7   |   |   |     | (5 | )
|                                  | Asset-Based Lending  |               |     | 4  |            |   |     | 4        |   |   |          | 10  |   |   |     | 7  |  
|                                  | Structured Capital   |               |     | 7  |            |   |     | 6        |   |   |          | 14  |   |   |     | 10 |  
|                                  | Other                |               |     | (7 | )          |   |     | (4       | ) |   |          | (16 | ) |   |     | (6 | )
|                                  |                      |               |     |    |            |   |     |          |   |   |          |    
|Income before income taxes        |                      | $             | 44  |    |            | $ | 36  |          |   | $ | 77       |     |   | $ | 67  |   
|                                  |                      |               |     |    |            |   |     |          |   |   |          |    

13



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##### Table of Contents



Item 1.     Financial
Statements (Continued)


TEXTRON FINANCIAL CORPORATION


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)  (Continued)


|                     |                      |               |       |       |            |   |       |       | 
|-------------------- | -------------------- | ------------- | ----- | ----- | ---------- | - | ----- | ----- | 
|                     |                      | June 30,      |       |       | January 1, |  
|                     |                      | 2005          |       |       | 2005       |  
|                     |                      |               |       |       |            |  
|                     |                      | (In millions) |      
|Finance assets:(3)   |                      |               |       |       |            |   |       |      
|                     | Distribution Finance |               | $     | 1,286 |            |   | $     | 1,084 | 
|                     | Aircraft Finance     |               |       | 1,255 |            |   |       | 1,217 | 
|                     | Golf Finance         |               |       | 1,168 |            |   |       | 1,100 | 
|                     | Resort Finance       |               |       | 1,107 |            |   |       | 1,196 | 
|                     | Structured Capital   |               |       | 762   |            |   |       | 774   | 
|                     | Asset-Based Lending  |               |       | 666   |            |   |       | 584   | 
|                     | Other                |               |       | 389   |            |   |       | 450   | 
|                     |                      |               |       |       |            |  
|Total finance assets |                      | $             | 6,633 |       |            | $ | 6,405 |      
|                     |                      |               |       |       |            |  






|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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 finance assets and fixed rate debt with fixed
    rate finance 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 and properties; retained interests in securitizations;
    investment in equipment residuals; Acquisition, Development and
    Construction arrangements; and other short- and long-term
    investments (some of which are classified in Other assets on
    Textron Financials Consolidated Balance Sheets).

14



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|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|Item 2. | Managements Discussion and Analysis of Financial
    Condition and Results of Operations

TEXTRON FINANCIAL CORPORATION


Key Business Initiatives and Trends












Financial Condition


Liquidity and Capital Resources






15



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|        |                                                                                                      
|------- | -----------------------------------------------------------------------------------------------------
|Item 2. | Managements Discussion and Analysis of Financial
    Condition and Results of Operations (Continued)















Off-Balance Sheet Arrangements




16



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|        |                                                                                                      
|------- | -----------------------------------------------------------------------------------------------------
|Item 2. | Managements Discussion and Analysis of Financial
    Condition and Results of Operations (Continued)





Managed Finance Receivables




|                             |  |                      |       |            |  |  |      |  |  |   |       |  |  |  |      | 
|---------------------------- |  | -------------------- | ----- | ---------- |  |  | ---- |  |  | - | ----- |  |  |  | ---- | 
|                             |  | June 30,             |       |            |  |  |     
|                             |  | 2005                 |       |            |  |  |     
|                             |  |                      |       |            |  |  |     
|                             |  |                      |       | January 1, | 
|                             |  |                      |       | 2005       | 
|                             |  |                      |       |            | 
|                             |  | )                    |      
|                             |  | (Dollars in millions |      
|Distribution Finance         |  | $                    | 2,564 |            |  |  | 31%  |  |  | $ | 2,269 |  |  |  | 28%  | 
|Aircraft Finance             |  |                      | 1,618 |            |  |  | 19%  |  |  |   | 1,610 |  |  |  | 20%  | 
|Golf Finance                 |  |                      | 1,320 |            |  |  | 16%  |  |  |   | 1,296 |  |  |  | 16%  | 
|Resort Finance               |  |                      | 1,084 |            |  |  | 13%  |  |  |   | 1,183 |  |  |  | 15%  | 
|Structured Capital           |  |                      | 732   |            |  |  | 9%   |  |  |   | 745   |  |  |  | 9%   | 
|Asset-Based Lending          |  |                      | 666   |            |  |  | 8%   |  |  |   | 584   |  |  |  | 7%   | 
|Other Segment                |  |                      | 379   |            |  |  | 4%   |  |  |   | 448   |  |  |  | 5%   | 
|                             |  |                      |       |            |  |  |      |  |  |   |       | 
|Total managed finance assets |  | $                    | 8,363 |            |  |  | 100% |  |  | $ | 8,135 |  |  |  | 100% | 
|                             |  |                      |       |            |  |  |      |  |  |   |       | 



Nonperforming Assets




17



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|        |                                                                                                      
|------- | -----------------------------------------------------------------------------------------------------
|Item 2. | Managements Discussion and Analysis of Financial
    Condition and Results of Operations (Continued)



|                           |  |                      |     |            |  |  |        |  |  |   |     |  |  |  |       | 
|-------------------------- |  | -------------------- | --- | ---------- |  |  | ------ |  |  | - | --- |  |  |  | ----- | 
|                           |  | June 30,             |     |            |  |  |       
|                           |  | 2005                 |     |            |  |  |       
|                           |  |                      |     |            |  |  |       
|                           |  |                      |     | January 1, | 
|                           |  |                      |     | 2005       | 
|                           |  |                      |     |            | 
|                           |  | )                    |    
|                           |  | (Dollars in millions |    
|Resort Finance             |  | $                    | 38  |            |  |  | 3.39%  |  |  | $ | 53  |  |  |  | 4.44% | 
|Golf Finance               |  |                      | 19  |            |  |  | 1.62%  |  |  |   | 26  |  |  |  | 2.34% | 
|Aircraft Finance           |  |                      | 11  |            |  |  | 0.90%  |  |  |   | 12  |  |  |  | 0.96% | 
|Asset-Based Lending        |  |                      | 9   |            |  |  | 1.32%  |  |  |   | 7   |  |  |  | 1.17% | 
|Distribution Finance       |  |                      | 5   |            |  |  | 0.42%  |  |  |   | 5   |  |  |  | 0.43% | 
|Other                      |  |                      | 45  |            |  |  | 11.67% |  |  |   | 37  |  |  |  | 8.35% | 
|                           |  |                      |     |            |  |  |        |  |  |   |     | 
|Total nonperforming assets |  | $                    | 127 |            |  |  | 1.92%  |  |  | $ | 140 |  |  |  | 2.18% | 
|                           |  |                      |     |            |  |  |        |  |  |   |     | 



Interest Rate Sensitivity






18



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##### Table of Contents



|        |                                                                                                      
|------- | -----------------------------------------------------------------------------------------------------
|Item 2. | Managements Discussion and Analysis of Financial
    Condition and Results of Operations (Continued)



Financial Risk Management






Results of Operations




| |                                                                       
| | ----------------------------------------------------------------------
| | For the three and six months ended June 30, 2005 vs.
    June 30, 2004

Revenues and Net Interest Margin




|                                                              |  |                       |      |   |            |   |      |          |  |   |          |   |  |   |      |  
|------------------------------------------------------------- |  | --------------------- | ---- | - | ---------- | - | ---- | -------- |  | - | -------- | - |  | - | ---- | -
|                                                              |  | Three Months          |      |   | Six Months |  
|                                                              |  | Ended                 |      |   | Ended      |  
|                                                              |  |                       |      |   |            |  
|                                                              |  | June 30,              |      |   | June 30,   |   |      | June 30, |  |   | June 30, |  
|                                                              |  | 2005                  |      |   | 2004       |   |      | 2005     |  |   | 2004     |  
|                                                              |  |                       |      |   |            |   |      |          |  |   |          |  
|                                                              |  | (Dollars in millions) |     
|Finance charges and discounts                                 |  | $                     | 110  |   |            | $ | 85   |          |  | $ | 214      |   |  | $ | 179  |  
|Rental revenues on operating leases                           |  |                       | 8    |   |            |   | 8    |          |  |   | 15       |   |  |   | 14   |  
|Other income                                                  |  |                       | 29   |   |            |   | 44   |          |  |   | 59       |   |  |   | 78   |  
|                                                              |  |                       |      |   |            |   |      |          |  |   |          |  
|Total revenues                                                |  |                       | 147  |   |            |   | 137  |          |  |   | 288      |   |  |   | 271  |  
|Interest expense                                              |  |                       | 51   |   |            |   | 34   |          |  |   | 96       |   |  |   | 72   |  
|Depreciation of equipment on operating leases                 |  |                       | 5    |   |            |   | 5    |          |  |   | 9        |   |  |   | 9    |  
|                                                              |  |                       |      |   |            |   |      |          |  |   |          |  
|Net interest margin                                           |  | $                     | 91   |   |            | $ | 98   |          |  | $ | 183      |   |  | $ | 190  |  
|                                                              |  |                       |      |   |            |   |      |          |  |   |          |  
|Portfolio yield                                               |  |                       | 7.57 | % |            |   | 7.04 | %        |  |   | 7.50     | % |  |   | 7.42 | %
|Net interest margin as a percentage of average net investment |  |                       | 6.04 | % |            |   | 7.80 | %        |  |   | 6.15     | % |  |   | 7.54 | %

19



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|        |                                                                                                      
|------- | -----------------------------------------------------------------------------------------------------
|Item 2. | Managements Discussion and Analysis of Financial
    Condition and Results of Operations (Continued)





Selling and Administrative Expenses


|                                                                                            |  |                       |      |   |            |   |      |          |  |   |          |   |  |   |      |  
|------------------------------------------------------------------------------------------- |  | --------------------- | ---- | - | ---------- | - | ---- | -------- |  | - | -------- | - |  | - | ---- | -
|                                                                                            |  | Three Months          |      |   | Six Months |  
|                                                                                            |  | Ended                 |      |   | Ended      |  
|                                                                                            |  |                       |      |   |            |  
|                                                                                            |  | June 30,              |      |   | June 30,   |   |      | June 30, |  |   | June 30, |  
|                                                                                            |  | 2005                  |      |   | 2004       |   |      | 2005     |  |   | 2004     |  
|                                                                                            |  |                       |      |   |            |   |      |          |  |   |          |  
|                                                                                            |  | (Dollars in millions) |     
|Selling and administrative expenses                                                         |  | $                     | 46   |   |            | $ | 48   |          |  | $ | 93       |   |  | $ | 89   |  
|Selling and administrative expenses as a percentage of managed
    and serviced receivables |  |                       | 1.95 | % |            |   | 2.27 | %        |  |   | 1.97     | % |  |   | 2.08 | %
|Operating efficiency ratio                                                                  |  |                       | 50.4 | % |            |   | 49.6 | %        |  |   | 50.8     | % |  |   | 47.1 | %



20



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|        |                                                                                                      
|------- | -----------------------------------------------------------------------------------------------------
|Item 2. | Managements Discussion and Analysis of Financial
    Condition and Results of Operations (Continued)

Provision for Losses


|                                                        |                      |               |     |    |            |   |     |          |  |   |          |   |  |   |     |    | 
|------------------------------------------------------- | -------------------- | ------------- | --- | -- | ---------- | - | --- | -------- |  | - | -------- | - |  | - | --- | -- | 
|                                                        |                      | Three Months  |     |    | Six Months |  
|                                                        |                      | Ended         |     |    | Ended      |  
|                                                        |                      |               |     |    |            |  
|                                                        |                      | June 30,      |     |    | June 30,   |   |     | June 30, |  |   | June 30, |  
|                                                        |                      | 2005          |     |    | 2004       |   |     | 2005     |  |   | 2004     |  
|                                                        |                      |               |     |    |            |   |     |          |  |   |          |  
|                                                        |                      | (In millions) |    
|Allowance for losses on receivables beginning of period |                      | $             | 102 |    |            | $ | 120 |          |  | $ | 99       |   |  | $ | 119 |   
|Provision for losses                                    |                      |               | 1   |    |            |   | 14  |          |  |   | 13       |   |  |   | 34  |   
|Less net charge-offs:                                   |                      |               |     |    |            |   |     |          |  |   |          |   |  |   |     |   
|                                                        | Resort Finance       |               |     | 3  |            |   |     | 15       |  |   |          | 7 |  |   |     | 21 | 
|                                                        | Distribution Finance |               |     | 2  |            |   |     | 4        |  |   |          | 4 |  |   |     | 7  | 
|                                                        | Aircraft Finance     |               |     | (1 | )          |   |     | 3        |  |   |          |  |  |   |     | 3  | 
|                                                        | Asset-Based Lending  |               |     |   |            |   |     | 1        |  |   |          |  |  |   |     | 1  | 
|                                                        | Golf Finance         |               |     | 1  |            |   |     |         |  |   |          | 2 |  |   |     |   | 
|                                                        | Other                |               |     | (1 | )          |   |     | 2        |  |   |          |  |  |   |     | 12 | 
|                                                        |                      |               |     |    |            |   |     |          |  |   |          |  
|Total net charge-offs                                   |                      |               | 4   |    |            |   | 25  |          |  |   | 13       |   |  |   | 44  |   
|Acquisitions and other                                  |                      |               |    |    |            |   | 2   |          |  |   |         |   |  |   | 2   |   
|                                                        |                      |               |     |    |            |   |     |          |  |   |          |  
|Allowance for losses on receivables end of period       |                      | $             | 99  |    |            | $ | 111 |          |  | $ | 99       |   |  | $ | 111 |   
|                                                        |                      |               |     |    |            |   |     |          |  |   |          |  





Operating Results by Segment






| |                     
| | --------------------
| | Distribution Finance

|                                    |  |               |    |  |            |   |    |          |  |   |          |  |  |   |    | 
|----------------------------------- |  | ------------- | -- |  | ---------- | - | -- | -------- |  | - | -------- |  |  | - | -- | 
|                                    |  | Three Months  |    |  | Six Months |  
|                                    |  | Ended         |    |  | Ended      |  
|                                    |  |               |    |  |            |  
|                                    |  | June 30,      |    |  | June 30,   |   |    | June 30, |  |   | June 30, | 
|                                    |  | 2005          |    |  | 2004       |   |    | 2005     |  |   | 2004     | 
|                                    |  |               |    |  |            |   |    |          |  |   |          | 
|                                    |  | (In millions) |   
|Revenues                            |  | $             | 44 |  |            | $ | 41 |          |  | $ | 84       |  |  | $ | 83 | 
|                                   
|Net interest margin                 |  | $             | 35 |  |            | $ | 37 |          |  | $ | 68       |  |  | $ | 76 | 
|Selling and administrative expenses |  |               | 16 |  |            |   | 15 |          |  |   | 32       |  |  |   | 30 | 
|Provision for losses                |  |               | 2  |  |            |   | 4  |          |  |   | 4        |  |  |   | 2  | 
|                                    |  |               |    |  |            |   |    |          |  |   |          | 
|Segment income                      |  | $             | 17 |  |            | $ | 18 |          |  | $ | 32       |  |  | $ | 44 | 
|                                    |  |               |    |  |            |   |    |          |  |   |          | 



21



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|        |                                                                                                      
|------- | -----------------------------------------------------------------------------------------------------
|Item 2. | Managements Discussion and Analysis of Financial
    Condition and Results of Operations (Continued)







| |             
| | ------------
| | Golf Finance

|                                    |  |               |    |  |            |   |    |          |  |   |          |  |  |   |    | 
|----------------------------------- |  | ------------- | -- |  | ---------- | - | -- | -------- |  | - | -------- |  |  | - | -- | 
|                                    |  | Three Months  |    |  | Six Months |  
|                                    |  | Ended         |    |  | Ended      |  
|                                    |  |               |    |  |            |  
|                                    |  | June 30,      |    |  | June 30,   |   |    | June 30, |  |   | June 30, | 
|                                    |  | 2005          |    |  | 2004       |   |    | 2005     |  |   | 2004     | 
|                                    |  |               |    |  |            |   |    |          |  |   |          | 
|                                    |  | (In millions) |   
|Revenues                            |  | $             | 26 |  |            | $ | 21 |          |  | $ | 48       |  |  | $ | 38 | 
|                                   
|Net interest margin                 |  | $             | 15 |  |            | $ | 12 |          |  | $ | 27       |  |  | $ | 20 | 
|Selling and administrative expenses |  |               | 5  |  |            |   | 6  |          |  |   | 10       |  |  |   | 10 | 
|Provision for losses                |  |               | 2  |  |            |   | 1  |          |  |   | 3        |  |  |   | 3  | 
|                                    |  |               |    |  |            |   |    |          |  |   |          | 
|Segment income                      |  | $             | 8  |  |            | $ | 5  |          |  | $ | 14       |  |  | $ | 7  | 
|                                    |  |               |    |  |            |   |    |          |  |   |          | 







| |                 
| | ----------------
| | Aircraft Finance

|                                    |  |               |    |   |            |   |    |          |  |   |          |   |  |   |    | 
|----------------------------------- |  | ------------- | -- | - | ---------- | - | -- | -------- |  | - | -------- | - |  | - | -- | 
|                                    |  | Three Months  |    |   | Six Months |  
|                                    |  | Ended         |    |   | Ended      |  
|                                    |  |               |    |   |            |  
|                                    |  | June 30,      |    |   | June 30,   |   |    | June 30, |  |   | June 30, |  
|                                    |  | 2005          |    |   | 2004       |   |    | 2005     |  |   | 2004     |  
|                                    |  |               |    |   |            |   |    |          |  |   |          |  
|                                    |  | (In millions) |   
|Revenues                            |  | $             | 25 |   |            | $ | 18 |          |  | $ | 47       |   |  | $ | 37 | 
|                                   
|Net interest margin                 |  | $             | 12 |   |            | $ | 9  |          |  | $ | 23       |   |  | $ | 18 | 
|Selling and administrative expenses |  |               | 4  |   |            |   | 3  |          |  |   | 8        |   |  |   | 7  | 
|Provision for losses                |  |               | (2 | ) |            |   | 1  |          |  |   | (1       | ) |  |   | 1  | 
|                                    |  |               |    |   |            |   |    |          |  |   |          |  
|Segment income                      |  | $             | 10 |   |            | $ | 5  |          |  | $ | 16       |   |  | $ | 10 | 
|                                    |  |               |    |   |            |   |    |          |  |   |          |  



22



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|        |                                                                                                      
|------- | -----------------------------------------------------------------------------------------------------
|Item 2. | Managements Discussion and Analysis of Financial
    Condition and Results of Operations (Continued)







| |               
| | --------------
| | Resort Finance

|                                    |  |               |    |   |            |   |    |          |  |   |          |  |  |   |    |  
|----------------------------------- |  | ------------- | -- | - | ---------- | - | -- | -------- |  | - | -------- |  |  | - | -- | -
|                                    |  | Three Months  |    |   | Six Months |  
|                                    |  | Ended         |    |   | Ended      |  
|                                    |  |               |    |   |            |  
|                                    |  | June 30,      |    |   | June 30,   |   |    | June 30, |  |   | June 30, | 
|                                    |  | 2005          |    |   | 2004       |   |    | 2005     |  |   | 2004     | 
|                                    |  |               |    |   |            |   |    |          |  |   |          | 
|                                    |  | (In millions) |   
|Revenues                            |  | $             | 20 |   |            | $ | 20 |          |  | $ | 41       |  |  | $ | 40 |  
|                                   
|Net interest margin                 |  | $             | 10 |   |            | $ | 13 |          |  | $ | 23       |  |  | $ | 27 |  
|Selling and administrative expenses |  |               | 7  |   |            |   | 6  |          |  |   | 14       |  |  |   | 12 |  
|Provision for losses                |  |               | (2 | ) |            |   | 5  |          |  |   | 2        |  |  |   | 20 |  
|                                    |  |               |    |   |            |   |    |          |  |   |          | 
|Segment income                      |  | $             | 5  |   |            | $ | 2  |          |  | $ | 7        |  |  | $ | (5 | )
|                                    |  |               |    |   |            |   |    |          |  |   |          | 







| |                    
| | -------------------
| | Asset-Based Lending

|                                    |  |               |    |  |            |   |    |          |  |   |          |  |  |   |    | 
|----------------------------------- |  | ------------- | -- |  | ---------- | - | -- | -------- |  | - | -------- |  |  | - | -- | 
|                                    |  | Three Months  |    |  | Six Months |  
|                                    |  | Ended         |    |  | Ended      |  
|                                    |  |               |    |  |            |  
|                                    |  | June 30,      |    |  | June 30,   |   |    | June 30, |  |   | June 30, | 
|                                    |  | 2005          |    |  | 2004       |   |    | 2005     |  |   | 2004     | 
|                                    |  |               |    |  |            |   |    |          |  |   |          | 
|                                    |  | (In millions) |   
|Revenues                            |  | $             | 18 |  |            | $ | 13 |          |  | $ | 34       |  |  | $ | 27 | 
|                                   
|Net interest margin                 |  | $             | 12 |  |            | $ | 11 |          |  | $ | 23       |  |  | $ | 22 | 
|Selling and administrative expenses |  |               | 7  |  |            |   | 6  |          |  |   | 12       |  |  |   | 11 | 
|Provision for losses                |  |               | 1  |  |            |   | 1  |          |  |   | 1        |  |  |   | 4  | 
|                                    |  |               |    |  |            |   |    |          |  |   |          | 
|Segment income                      |  | $             | 4  |  |            | $ | 4  |          |  | $ | 10       |  |  | $ | 7  | 
|                                    |  |               |    |  |            |   |    |          |  |   |          | 



23



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|        |                                                                                                      
|------- | -----------------------------------------------------------------------------------------------------
|Item 2. | Managements Discussion and Analysis of Financial
    Condition and Results of Operations (Continued)





| |                   
| | ------------------
| | Structured Capital

|                                    |  |               |    |  |            |   |    |          |  |   |          |  |  |   |    | 
|----------------------------------- |  | ------------- | -- |  | ---------- | - | -- | -------- |  | - | -------- |  |  | - | -- | 
|                                    |  | Three Months  |    |  | Six Months |  
|                                    |  | Ended         |    |  | Ended      |  
|                                    |  |               |    |  |            |  
|                                    |  | June 30,      |    |  | June 30,   |   |    | June 30, |  |   | June 30, | 
|                                    |  | 2005          |    |  | 2004       |   |    | 2005     |  |   | 2004     | 
|                                    |  |               |    |  |            |   |    |          |  |   |          | 
|                                    |  | (In millions) |   
|Revenues                            |  | $             | 12 |  |            | $ | 10 |          |  | $ | 24       |  |  | $ | 20 | 
|                                   
|Net interest margin                 |  | $             | 8  |  |            | $ | 7  |          |  | $ | 16       |  |  | $ | 12 | 
|Selling and administrative expenses |  |               | 1  |  |            |   | 1  |          |  |   | 2        |  |  |   | 2  | 
|Provision for losses                |  |               |   |  |            |   |   |          |  |   |         |  |  |   |   | 
|                                    |  |               |    |  |            |   |    |          |  |   |          | 
|Segment income                      |  | $             | 7  |  |            | $ | 6  |          |  | $ | 14       |  |  | $ | 10 | 
|                                    |  |               |    |  |            |   |    |          |  |   |          | 







| |              
| | -------------
| | Other Segment

|                                    |  |               |    |   |            |   |    |          |  |   |          |   |  |   |    |  
|----------------------------------- |  | ------------- | -- | - | ---------- | - | -- | -------- |  | - | -------- | - |  | - | -- | -
|                                    |  | Three Months  |    |   | Six Months |  
|                                    |  | Ended         |    |   | Ended      |  
|                                    |  |               |    |   |            |  
|                                    |  | June 30,      |    |   | June 30,   |   |    | June 30, |  |   | June 30, |  
|                                    |  | 2005          |    |   | 2004       |   |    | 2005     |  |   | 2004     |  
|                                    |  |               |    |   |            |   |    |          |  |   |          |  
|                                    |  | (In millions) |   
|Revenues                            |  | $             | 2  |   |            | $ | 14 |          |  | $ | 10       |   |  | $ | 26 |  
|                                   
|Net interest margin                 |  | $             | (1 | ) |            | $ | 9  |          |  | $ | 3        |   |  | $ | 16 |  
|Selling and administrative expenses |  |               | 6  |   |            |   | 11 |          |  |   | 15       |   |  |   | 18 |  
|Provision for losses                |  |               |   |   |            |   | 2  |          |  |   | 4        |   |  |   | 4  |  
|                                    |  |               |    |   |            |   |    |          |  |   |          |  
|Segment income                      |  | $             | (7 | ) |            | $ | (4 | )        |  | $ | (16      | ) |  | $ | (6 | )
|                                    |  |               |    |   |            |   |    |          |  |   |          |  





24



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|        |                                                                                                      
|------- | -----------------------------------------------------------------------------------------------------
|Item 2. | Managements Discussion and Analysis of Financial
    Condition and Results of Operations (Continued)

Net Income




Selected Financial Ratios


|                                                                                                               |  |              |       |   |            |  |      |          |  |  |          |   |  |  |      |  
|-------------------------------------------------------------------------------------------------------------- |  | ------------ | ----- | - | ---------- |  | ---- | -------- |  |  | -------- | - |  |  | ---- | -
|                                                                                                               |  | Three Months |       |   | Six Months | 
|                                                                                                               |  | Ended        |       |   | Ended      | 
|                                                                                                               |  |              |       |   |            | 
|                                                                                                               |  | June 30,     |       |   | June 30,   |  |      | June 30, |  |  | June 30, |  
|                                                                                                               |  | 2005         |       |   | 2004       |  |      | 2005     |  |  | 2004     |  
|                                                                                                               |  |              |       |   |            |  |      |          |  |  |          |  
|Net interest margin as a percentage of average net investment(1)                                               |  |              | 6.04  | % |            |  | 7.80 | %        |  |  | 6.15     | % |  |  | 7.54 | %
|Return on average equity                                                                                       |  |              | 12.01 | % |            |  | 9.93 | %        |  |  | 10.39    | % |  |  | 9.15 | %
|Return on average assets                                                                                       |  |              | 1.67  | % |            |  | 1.58 | %        |  |  | 1.47     | % |  |  | 1.48 | %
|Selling and administrative expenses as a percentage of average
    managed and serviced finance receivables(2) |  |              | 1.95  | % |            |  | 2.27 | %        |  |  | 1.97     | % |  |  | 2.08 | %
|Operating efficiency ratio(3)                                                                                  |  |              | 50.4  | % |            |  | 49.6 | %        |  |  | 50.8     | % |  |  | 47.1 | %
|Net charge-offs as a percentage of average finance receivables                                                 |  |              | 0.28  | % |            |  | 1.88 | %        |  |  | 0.42     | % |  |  | 1.69 | %

|                                                                                                  |  |          |      |   |            |  |      |  
|------------------------------------------------------------------------------------------------- |  | -------- | ---- | - | ---------- |  | ---- | -
|                                                                                                  |  | June 30, |      |   | January 1, | 
|                                                                                                  |  | 2005     |      |   | 2005       | 
|                                                                                                  |  |          |      |   |            | 
|60+ days contractual delinquency as a percentage of finance
    receivables(4)                    |  |          | 1.08 | % |            |  | 1.47 | %
|Nonperforming assets as a percentage of finance assets(5)                                         |  |          | 1.92 | % |            |  | 2.18 | %
|Allowance for losses on finance receivables as a percentage of
    finance receivables            |  |          | 1.63 | % |            |  | 1.70 | %
|Allowance for losses on finance receivables as a percentage of
    nonaccrual finance receivables |  |          | 94.7 | % |            |  | 83.7 | %
|Total debt to tangible shareholders equity(6)                                                    |  |          | 6.07 | x |            |  | 5.53 | x






|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Represents revenues earned less interest expense on borrowings
    and operating lease depreciation as a percentage of average net
    investment. Average net investment includes finance receivables
    plus operating leases, less deferred taxes on leveraged leases.                                                                                                                                                                                                                                                                      
|   
|(2) | Average managed and serviced finance receivables include owned
    receivables, receivables serviced under securitizations,
    participations and third-party portfolio servicing agreements.                                                                                                                                                                                                                                                                                                                                                  
|   
|(3) | Operating efficiency ratio is selling and administrative
    expenses divided by net interest margin.                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   
|(4) | Delinquency excludes any captive finance receivables with
    recourse to Textron. Captive finance receivables represent
    third-party finance receivables originated in connection with
    the sale or lease of Textron manufactured products. Percentages
    are expressed as a function of total Textron Financial
    independent and nonrecourse captive receivables.                                                                                                                                                                  
|   
|(5) | Finance assets include: finance receivables; equipment on
    operating leases, net of accumulated depreciation; repossessed
    assets and properties; retained interests in securitizations;
    investment in equipment residuals; Acquisition, Development and
    Construction arrangements; and other short- and long-term
    investments (some of which are classified in Other assets on
    Textron Financials Consolidated Balance Sheets).
    Nonperforming assets include independent and nonrecourse captive
    finance assets.

25



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##### Table of Contents



|        |                                                                                                      
|------- | -----------------------------------------------------------------------------------------------------
|Item 2. | Managements Discussion and Analysis of Financial
    Condition and Results of Operations (Continued)



|    |                                                                                                                                            
|--- | -------------------------------------------------------------------------------------------------------------------------------------------
|(6) | Tangible shareholders equity equals Shareholders
    equity, excluding Accumulated other comprehensive income or
    loss, less Goodwill.

Recent Accounting Pronouncements




Forward-looking Information


Certain statements in this quarterly report on Form 10-Q
and other oral and written statements made by Textron Financial
from time to time are forward-looking statements, including
those that discuss strategies, goals, outlook or other
nonhistorical matters; or project revenues, income, returns or
other financial measures. These forward-looking statements speak
only as of the date on which they are made, and we undertake no
obligation to update or revise any forward-looking statements.
These forward-looking statements are subject to risks and
uncertainties that may cause actual results to differ materially
from those contained in the statements, including the following:
(a) changes in worldwide economic and political conditions
that impact interest and foreign exchange rates; (b) the
occurrence of downturns in customer markets to which Textron
products are sold or supplied and financed or where Textron
Financial offers financing; (c) the ability to realize full
value of receivables and investments in securities; (d) the
ability to control costs and successful implementation of
various cost reduction programs; (e) increases in pension
expenses related to lower than expected asset performance or
changes in discount rates; (f) the impact of changes in tax
legislation; (g) the ability to maintain portfolio credit
quality; (h) Textron Financials access to debt
financing at competitive rates; (i) access to equity in the
form of retained earnings and capital contributions from
Textron; (j) uncertainty in estimating contingent
liabilities and establishing reserves tailored to address such
contingencies and (k) performance of acquisitions.







|        |                                                               
|------- | --------------------------------------------------------------
|Item 3. | Quantitative and Qualitative Disclosures About Market
    Risk








|        |                        
|------- | -----------------------
|Item 4. | Controls and Procedures



26



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##### Table of Contents



|        |                                    
|------- | -----------------------------------
|Item 4. | Controls and Procedures (Continued)







27



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##### Table of Contents



|        |                                    
|------- | -----------------------------------
|Item 4. | Controls and Procedures (Continued)




PART II. OTHER INFORMATION







|        |         
|------- | --------
|Item 6. | Exhibits

| |    |    |  |                                                                                
| | -- | -- |  | -------------------------------------------------------------------------------
| | 12 |    |  | Computation of Ratio of Earnings to Fixed Charges                              
|
| | 31 | .1 |  | Certification of Chief Executive Officer Pursuant to
    Rule 13a-14(a)        
|
| | 31 | .2 |  | Certification of Chief Financial Officer Pursuant to
    Rule 13a-14(a)        
|
| | 32 | .1 |  | Certification of Chief Executive Officer Pursuant to
    18 U.S.C. Section 1350
|
| | 32 | .2 |  | Certification of Chief Financial Officer Pursuant to
    18 U.S.C. Section 1350

28



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##### Table of Contents



|        |                                    
|------- | -----------------------------------
|Item 4. | Controls and Procedures (Continued)

SIGNATURES






| |                                                     
| | ----------------------------------------------------
| | Textron Financial
    Corporation                   
|
| | /s/ Thomas J. Cullen                                
| |                                                     
| | Thomas J. Cullen                                    
| | Executive Vice President and Chief Financial Officer
| | (Principal Financial Officer)                       



29