##### Table of Contents



UNITED STATES
 SECURITIES AND EXCHANGE
    COMMISSION
 Washington, D.C.
    20549
      Form 10-Q
  þ

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934For the fiscal quarter ended
    September 30, 2006oro

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
  Rule 12b-2
  o o þ
  Rule 12b-2 o þ




---



##### 



TEXTRON
    FINANCIAL CORPORATION
  TABLE OF
    CONTENTS
  
  PagePART I.
    FINANCIAL INFORMATIONItem 1.


FINANCIAL
    STATEMENTSConsolidated
    Statements of Income for the three and nine months ended
    September 30, 2006 and 2005 (unaudited)

2Consolidated
    Balance Sheets at September 30, 2006 and December 31,
    2005 (unaudited)

3Consolidated
    Statements of Cash Flows for the nine months ended
    September 30, 2006 and 2005 (unaudited)

4Consolidated
    Statements of Changes in Shareholders Equity through
    September 30, 2006 (unaudited)

5Notes to
    Consolidated Financial Statements (unaudited)

6Item 2.


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

16Item 3.


QUANTITATIVE AND
    QUALITATIVE DISCLOSURES ABOUT MARKET RISK

29Item 4.


CONTROLS AND
    PROCEDURES

29PART II.OTHER INFORMATIONItem 6.


EXHIBITS

30Ex-12 Computation of Ratio of Earnings to Fixed ChargesEx-31.1 Section 302 Certification of CEOEx-31.2 Section 302 Certification of CFOEx-32.1 Section 906 Certification of CEOEx-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 Ended


Nine Months EndedSeptember 30,


September 30,


September 30,


September 30,2006


2005


2006


2005(In millions)Finance charges and discounts

$
175


$
117


$
476


$
331Securitization gains


11



9



32



34Rental revenues on operating leases


8



9



24



24Other income


18



20



54



54Total revenues


212



155



586



443Interest expense


95



56



252



152Depreciation of equipment on
    operating leases


4



5



13



14Net interest margin


113



94



321



277Selling and administrative expenses


50



47



145



140Provision for losses


10



4



18



17Income before income
    taxes


53



43



158



120Income taxes


7



14



45



40Net income

$
46


$
29


$
113


$
80    2




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##### Table of Contents



Item 1.
    Financial
    Statements (Continued) TEXTRON
    FINANCIAL CORPORATION



CONSOLIDATED
    BALANCE SHEETS

(Unaudited)  September 30,


December 31,2006


2005(In millions)AssetsCash and equivalents

$
51


$
10Finance receivables, net of
    unearned income:Distribution finance receivables


2,268



1,654Revolving loans


1,878



1,633Installment contracts


1,688



1,374Golf course and resort mortgages


1,113



1,020Leveraged leases


610



569Finance leases


581



513Total finance receivables


8,138



6,763Allowance for losses on finance
    receivables


(94
)


(96
)Finance receivables-net


8,044



6,667Equipment on operating leases-net


232



231Goodwill


169



169Other assets


327



364Total assets

$
8,823


$
7,441Liabilities and
    shareholders equityLiabilitiesAccrued interest and other
    liabilities

$
547


$
499Amounts due to Textron Inc.


11



11Deferred income taxes


478



461Debt


6,678



5,420Total liabilities


7,714



6,391Shareholders
    equityCapital surplus


592



574Investment in parent company
    preferred stock


(25
)


(25
)Accumulated other comprehensive
    income


13



5Retained earnings


529



496Total shareholders equity


1,109



1,050Total liabilities and
    shareholders equity

$
8,823


$
7,441    3




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##### Table of Contents



Item 1.
    Financial
    Statements (Continued) TEXTRON
    FINANCIAL CORPORATION
    CONSOLIDATED STATEMENTS OF CASH FLOWS
    Nine Months Ended September 30, 2006 and 2005
    (Unaudited)  2006


2005(In millions)Cash flows from operating
    activities:Net income

$
113


$
80Adjustments to reconcile net
    income to net cash provided by operating activities:Increase in accrued interest and
    other liabilities


79



46Provision for losses


18



17Depreciation


21



25Amortization


8



9Deferred income tax provision


18



21Collections in excess of noncash
    gains on securitizations and syndications


5



3Other  net


8



17Net cash provided by operating
    activities of continuing operations


270



218Net cash used by operating
    activities of discontinued operations


(4
)


Net cash provided by operating
    activities


266



218Cash flows from investing
    activities:Finance receivables originated or
    purchased


(9,298
)


(8,062
)Finance receivables repaid


7,636



7,149Proceeds from receivable sales,
    including securitizations


185



230Proceeds from disposition of
    operating leases and other assets


62



53Purchase of assets for operating
    leases


(53
)


(38
)Other capital expenditures


(8
)


(6
)Other investments


13



21Net cash used by investing
    activities of continuing operations


(1,463
)


(653
)Cash flows from financing
    activities:Proceeds from issuance of
    long-term debt


1,514



1,200Principal payments on long-term
    debt


(756
)


(556
)Net increase (decrease) in
    commercial paper


444



(189
)Net decrease in other short-term
    debt


(11
)


(13
)Proceeds from issuance of
    nonrecourse debt


142



39Principal payments on nonrecourse
    debt


(34
)


(36
)Capital contributions from Textron
    Inc.


25



7Dividends paid to Textron
    Inc.


(87
)


(107
)Net cash provided by financing
    activities of continuing operations


1,237



345Effect of exchange rate changes on
    cash


1



2Net cash provided (used) by
    continuing operations


45



(88
)Net cash used by discontinued
    operations


(4
)


Net increase (decrease) in cash
    and equivalents


41



(88
)Cash and equivalents at beginning
    of year


10



127Cash and equivalents at end of
    period

$
51


$
39    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)  Investmentin Parent


Accumulated





TotalCompany


Other





Share-Capital


Preferred


Comprehensive


Retained


holdersSurplus


Stock


Income


Earnings


Equity(In millions)Balance January 1,
    2005

$
574


$
(25
)

$
1


$
485


$
1,035Comprehensive income:Net income














111



111Other comprehensive income:Foreign currency translation










(1
)






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










5







5Other comprehensive income










4







4Comprehensive income


















115Capital contributions from Textron
    Inc.


9















9Dividends to Textron Inc.


(9
)










(100
)


(109
)Balance December 31,
    2005


574



(25
)


5



496



1,050Comprehensive income:Net income














113



113Other comprehensive income:Foreign currency translation










5







5Change in unrealized net losses on
    hedge contracts, net of income taxes










5







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










(2
)






(2
)Other comprehensive income










8







8Comprehensive income


















121Capital contributions from Textron
    Inc.


25















25Dividends to Textron Inc.


(7
)










(80
)


(87
)Balance September 30,
    2006

$
592


$
(25
)

$
13


$
529


$
1,109    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  Form 10-K
  Note 2.
    Recent
    Accounting Pronouncements       6




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##### Table of Contents



Item 1.
    Financial
    Statements (Continued)   TEXTRON
    FINANCIAL CORPORATION
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
  No. 13-2
    Note 3.
    Other
    Income  Three Months Ended


Nine Months EndedSeptember 30,


September 30,


September 30,


September 30,2006


2005


2006


2005(In millions)Servicing income

$
7


$
7


$
22


$
24Investment income


4



5



12



10Syndication income


2



1



2



2Late charges


1



1



3



4Prepayment income






2



2



5Other


4



4



13



9Total other income

$
18


$
20


$
54


$
54     Note 4.
    Discontinued
    Operations   7




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##### Table of Contents



Item 1.
    Financial
    Statements (Continued)   TEXTRON
    FINANCIAL CORPORATION
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
    Note 5.
    Managed
    and Serviced Finance Receivables    September 30,


December 31,2006


2005(In millions)Total managed and serviced finance
    receivables

$
11,101


$
9,915Nonrecourse participations


(590
)


(383
)Third-party portfolio servicing


(371
)


(509
)SBA sales agreements


(20
)


(28
)Total managed finance receivables


10,120



8,995Securitized receivables


(1,982
)


(2,124
)Other managed finance receivables






(108
)Owned finance receivables

$
8,138


$
6,763           Note 6.
    Loan
    Impairment   8




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##### Table of Contents



Item 1.
    Financial
    Statements (Continued)   TEXTRON
    FINANCIAL CORPORATION
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
    September 30,


December 31,2006


2005(In millions)Nonaccrual finance receivables

$
100


$
89Impaired nonaccrual finance
    receivables (included in nonaccrual finance receivables above)

$
83


$
67Impaired accrual finance
    receivables


84



36Total impaired finance receivables

$
167


$
103Impaired finance receivables with
    identified reserve requirements

$
62


$
53Allowance for losses on finance
    receivables related to impaired loans

$
15


$
18           Note 7.
    Other
    Assets  September 30,


December 31,2006


2005(In millions)Retained interests in
    securitizations

$
189


$
208Other long-term investments


42



53Fixed assets  net


33



33Repossessed assets and properties


24



22Investment in equipment residuals


3



10Other


36



38Total other assets

$
327


$
364  9




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##### Table of Contents



Item 1.
    Financial
    Statements (Continued)   TEXTRON
    FINANCIAL CORPORATION
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
            Note 8.
    Debt and
    Credit Facilities  September 30,


December 31,2006


2005(In millions)Short-term debt:Commercial paper

$
1,631


$
1,187Other short-term debt


2



13Total short-term debt


1,633



1,200Long-term debt:Fixed rate notesDue 2006 (weighted-average rates of
    2.97% and 3.04%, respectively)


184



519Due 2007 (weighted-average rates of
    5.49% and 5.54%, respectively)


846



813Due 2008 (weighted-average rates of
    4.12% and 4.12%, respectively)


615



603Due 2009 (weighted-average rates of
    5.67% and 5.87%, respectively)


652



542Due 2010 (weighted-average rates of
    4.58% and 4.58%, respectively)


557



557Due 2011 and thereafter
    (weighted-average rates of 5.03% and 4.71%, respectively)


651



226Variable rate notesDue 2006 (weighted-average rates of
    5.84% and 4.78%, respectively)


110



516Due 2007 (weighted-average rates of
    5.82% and 4.93%, respectively)


330



275Due 2008 (weighted-average rates of
    5.53% and 4.38%, respectively)


330



220Due 2009 (weighted-average rate of
    5.50%)


595



Due 2010 (weighted-average rate of
    5.59%)


225



Long-term debt


5,095



4,271Unamortized discount


(3
)


(4
)Fair value adjustments


(47
)


(47
)Total long-term debt


5,045



4,220Total debt

$
6,678


$
5,420    10




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##### Table of Contents



Item 1.
    Financial
    Statements (Continued)   TEXTRON
    FINANCIAL CORPORATION
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
      Amount notReserved as SupportCommercial


Letters of Credit


for CommercialFacility


Paper


Issued Under


Paper and Letters ofAmount


Outstanding


Facility


Credit(In millions)Committed Lines of Credit:Textron Financial multi-year
    facility expiring in 2011

$
1,750


$
1,631


$
13


$
106Textron multi-year facility
    expiring in 2011

$
1,250


$



$
23


$
1,227     September 30,

September 30,2006

2005Commercial paper


5.29
%


3.84
%Other short-term debt


3.36
%


5.00
%            11




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##### Table of Contents



Item 1.
    Financial
    Statements (Continued)   TEXTRON
    FINANCIAL CORPORATION
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
    Note 9.
    Accumulated
    Other Comprehensive Income and Comprehensive Income    Nine Months EndedSeptember 30,


September 30,2006


2005(In millions)Beginning of year

$
5


$
1Amortization of deferred losses on
    hedge contracts, net of income taxes of $1 million and
    $2 million, respectively


3



4Foreign currency translation


5



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


2



(5
)Net deferred (loss) gain on
    interest-only securities, net of income tax benefit of
    $1 million and income taxes of $2 million, respectively


(2
)


4End of period

$
13


$
3     Three Months Ended


Nine Months EndedSeptember 30,


September 30,


September 30,


September 30,2006


2005


2006


2005(In millions)Net income

$
46


$
29


$
113


$
80Other comprehensive income


2



10



8



2Comprehensive income

$
48


$
39


$
121


$
82   Note 10.
    Contingencies     12




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##### Table of Contents



Item 1.
    Financial
    Statements (Continued)   TEXTRON
    FINANCIAL CORPORATION
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
  and/or
    Note 11.
    Income
    Taxes    Three Months Ended


Nine Months EndedSeptember 30,


September 30,


September 30,


September 30,2006


2005


2006


2005Federal statutory income tax rate


35.0
%


35.0
%


35.0
%


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


1.3



1.3



1.3



1.3Tax exempt interest


(0.3
)


(1.3
)


(0.3
)


(1.3
)Foreign tax rate differential


(7.0
)


(3.3
)


(3.2
)


(2.0
)Canadian dollar functional currency


(21.5
)






(7.3
)


Change in state valuation allowance


4.5



1.0



1.5



1.1Interest on tax
    contingencies  leveraged leases


2.3



1.2



2.3



1.3Other, net


(2.4
)


(2.7
)


(1.1
)


(2.1
)Effective income tax rate


11.9
%


31.2
%


28.2
%


33.3
%     Note 12.
    Financial
    Information about Operating Segments   13




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##### Table of Contents



Item 1.
    Financial
    Statements (Continued)   TEXTRON
    FINANCIAL CORPORATION
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
    Three Months Ended


Nine Months EndedSeptember 30,


September 30,


September 30,


September 30,2006


2005


2006


2005(In millions)Revenues:Distribution Finance

$
70


$
43


$
193


$
127Aviation Finance


36



26



96



73Golf Finance


35



26



97



74Resort Finance


28



25



88



66Asset-Based Lending


23



19



67



53Structured Capital


15



10



30



34Other


5



6



15



16Total revenues

$
212


$
155


$
586


$
443Income before income taxes:(1)(2)Distribution Finance

$
23


$
19


$
71


$
51Aviation Finance


8



6



24



22Golf Finance


6



6



23



20Resort Finance


6



7



27



14Asset-Based Lending


2



6



8



16Structured Capital


10



6



15



20Other


(2
)


(7
)


(10
)


(23
)Income before income taxes

$
53


$
43


$
158


$
120   September 30,


December 31,2006


2005(In millions)Finance assets:(3)Distribution Finance

$
2,301


$
1,710Aviation Finance


1,704



1,278Golf Finance


1,558



1,344Resort Finance


1,224



1,155Asset-Based Lending


879



764Structured Capital


754



704Other


208



332Total finance assets

$
8,628


$
7,287     (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. 14




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##### Table of Contents



Item 1.
    Financial
    Statements (Continued)   TEXTRON
    FINANCIAL CORPORATION
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
  (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). 15




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##### Table of Contents



Item 2.
    Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations  TEXTRON
    FINANCIAL CORPORATION
  Key
    Business Initiatives and Trends
      out-of-trend
      Financial
    Condition
  Liquidity
    and Capital Resources
     16




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##### Table of Contents



Item 2.
    Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations (Continued)    Amount notReserved as SupportCommercial


Letters of Credit


for CommercialFacility


Paper


Issued Under


Paper and Letters ofAmount


Outstanding


Facility


Credit(In millions)Committed Lines of Credit:Textron Financial multi-year
    facility expiring in 2011

$
1,750


$
1,631


$
13


$
106Textron multi-year facility
    expiring in 2011

$
1,250


$



$
23


$
1,227                17




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##### Table of Contents



Item 2.
    Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations (Continued)  Off-Balance
    Sheet Arrangements
      Managed
    Finance Receivables
    September 30,


December 31,2006


2005(Dollars in millions)Distribution Finance

$
3,632



36
%

$
2,993



33
%Aviation Finance


1,911



19
%


1,664



19
%Golf Finance


1,552



15
%


1,435



16
%Resort Finance


1,221



12
%


1,138



13
%Asset-Based Lending


879



9
%


764



8
%Structured Capital


728



7
%


689



8
%Other


197



2
%


312



3
%Total managed finance receivables

$
10,120



100
%

$
8,995



100
%     Nonperforming
    Assets
   18




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##### Table of Contents



Item 2.
    Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations (Continued)      September 30,


December 31,2006


2005(Dollars in millions)Golf Finance

$
33



2.09
%

$
13



0.99
%Asset-Based Lending


23



2.63
%


6



0.81
%Resort Finance


19



1.53
%


31



2.67
%Aviation Finance


11



0.65
%


14



1.07
%Distribution Finance


4



0.18
%


2



0.11
%Other


33



16.10
%


45



13.64
%Total nonperforming assets

$
123



1.43
%

$
111



1.53
%     Interest
    Rate Sensitivity
      Financial
    Risk Management
   19




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##### Table of Contents



Item 2.
    Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations (Continued)      RESULTS
    OF OPERATIONS
  For
    the three and nine months ended September 30, 2006 vs.
    September 30, 2005
  Revenues
    and Net Interest Margin
    Three Months Ended


Nine Months EndedSeptember 30,


September 30,


September 30,


September 30,2006


2005


2006


2005(Dollars in millions)Finance charges and discounts

$
175


$
117


$
476


$
331Securitization gains


11



9



32



34Rental revenues on operating leases


8



9



24



24Other income


18



20



54



54Total revenues


212



155



586



443Interest expense


95



56



252



152Depreciation of equipment on
    operating leases


4



5



13



14Net interest margin

$
113


$
94


$
321


$
277Portfolio yield


9.46
%


8.13
%


9.17
%


7.69
%Net interest margin as a
    percentage of average net investment


5.91
%


6.25
%


5.98
%


6.20
%      20




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##### Table of Contents



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


Nine Months EndedSeptember 30,


September 30,


September 30,


September 30,2006


2005


2006


2005(Dollars in millions)Selling and administrative expenses

$
50


$
47


$
145


$
140Selling and administrative
    expenses as a percentage of average managed and serviced finance
    receivables


1.86
%


2.00
%


1.89
%


1.99
%Operating efficiency ratio


44.2
%


50.1
%


45.2
%


50.5
%     Provision
    for Losses
  Three Months Ended


Nine Months EndedSeptember 30,


September 30,


September 30,


September 30,2006


2005


2006


2005(In millions)Allowance for losses on finance
    receivables beginning of period

$
92


$
99


$
96


$
99Provision for losses


10



4



18



17Less net charge-offs:Asset-Based Lending


4



1



6



1Distribution Finance


3



4



4



8Resort Finance


1



1



2



8Golf Finance










1



2Aviation Finance






1



1



Other










6



1Total net charge-offs


8



7



20



20Allowance for losses on
    receivables end of period

$
94


$
96


$
94


$
96    21




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##### Table of Contents



Item 2.
    Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations (Continued)      Income
    Taxes
    Three Months Ended


Nine Months EndedSeptember 30,


September 30,


September 30,


September 30,2006


2005


2006


2005Federal statutory income tax rate


35.0
%


35.0
%


35.0
%


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


1.3



1.3



1.3



1.3Tax exempt interest


(0.3
)


(1.3
)


(0.3
)


(1.3
)Foreign tax rate differential


(7.0
)


(3.3
)


(3.2
)


(2.0
)Canadian dollar functional currency


(21.5
)






(7.3
)


Change in state valuation allowance


4.5



1.0



1.5



1.1Interest on tax
    contingencies  leveraged leases


2.3



1.2



2.3



1.3Other, net


(2.4
)


(2.7
)


(1.1
)


(2.1
)Effective income tax rate


11.9
%


31.2
%


28.2
%


33.3
%   wholly-
 22




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##### Table of Contents



Item 2.
    Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations (Continued)  Operating
    Results by Segment
    Distribution
    Finance
  Three Months Ended


Nine Months EndedSeptember 30,


September 30,


September 30,


September 30,2006


2005


2006


2005(In millions)Revenues

$
70


$
43


$
193


$
127Net interest margin

$
48


$
33


$
135


$
101Selling and administrative expenses


21



18



61



50Provision for losses


4



(4
)


3



Segment income

$
23


$
19


$
71


$
51       Aviation
    Finance
  Three Months Ended


Nine Months EndedSeptember 30,


September 30,


September 30,


September 30,2006


2005


2006


2005(In millions)Revenues

$
36


$
26


$
96


$
73Net interest margin

$
13


$
12


$
39


$
35Selling and administrative expenses


5



4



15



12Provision for losses






2







1Segment income

$
8


$
6


$
24


$
22    23




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##### Table of Contents



Item 2.
    Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations (Continued)      Golf
    Finance
  Three Months Ended


Nine Months EndedSeptember 30,


September 30,


September 30,


September 30,2006


2005


2006


2005(In millions)Revenues

$
35


$
26


$
97


$
74Net interest margin

$
14


$
12


$
40


$
39Selling and administrative expenses


5



5



14



15Provision for losses


3



1



3



4Segment income

$
6


$
6


$
23


$
20       Resort
    Finance
  Three Months Ended


Nine Months EndedSeptember 30,


September 30,


September 30,


September 30,2006


2005


2006


2005(In millions)Revenues

$
28


$
25


$
88


$
66Net interest margin

$
12


$
15


$
46


$
38Selling and administrative expenses


6



7



17



21Provision for losses






1



2



3Segment income

$
6


$
7


$
27


$
14  24




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##### Table of Contents



Item 2.
    Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations (Continued)      Asset-Based
    Lending
  Three Months Ended


Nine Months EndedSeptember 30,


September 30,


September 30,


September 30,2006


2005


2006


2005(In millions)Revenues

$
23


$
19


$
67


$
53Net interest margin

$
13


$
13


$
39


$
36Selling and administrative expenses


6



6



18



18Provision for losses


5



1



13



2Segment income

$
2


$
6


$
8


$
16       Structured
    Capital
  Three Months Ended


Nine Months EndedSeptember 30,


September 30,


September 30,


September 30,2006


2005


2006


2005(In millions)Revenues

$
15


$
10


$
30


$
34Net interest margin

$
11


$
6


$
18


$
22Selling and administrative expenses


1







3



2Provision for losses














Segment income

$
10


$
6


$
15


$
20  25




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##### Table of Contents



Item 2.
    Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations (Continued)      Other
    Segment
  Three Months Ended


Nine Months EndedSeptember 30,


September 30,


September 30,


September 30,2006


2005


2006


2005(In millions)Revenues

$
5


$
6


$
15


$
16Net interest margin

$
2


$
3


$
4


$
6Selling and administrative expenses


6



7



17



22Provision for losses


(2
)


3



(3
)


7Segment loss

$
(2
)

$
(7
)

$
(10
)

$
(23
)       Selected
    Financial Ratios
  Three Months Ended


Nine Months EndedSeptember 30,


September 30,


September 30,


September 30,2006


2005


2006


2005Net interest margin as a
    percentage of average net investment(1)


5.91
%


6.25
%


5.98
%


6.20
%Return on average equity


17.38
%


11.94
%


14.29
%


10.91
%Return on average assets


2.20
%


1.72
%


1.88
%


1.55
%Selling and administrative
    expenses as a percentage of average managed and serviced finance
    receivables(2)


1.86
%


2.00
%


1.89
%


1.99
%Operating efficiency ratio(3)


44.2
%


50.1
%


45.2
%


50.5
%Net charge-offs as a percentage of
    average finance receivables


0.42
%


0.47
%


0.37
%


0.43
%   26




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##### Table of Contents



Item 2.
    Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations (Continued)  September 30,


December 31,2006


200560+ days contractual delinquency
    as a percentage of finance receivables(4)


0.76
%


0.79
%Nonperforming assets as a
    percentage of finance assets(5)


1.43
%


1.53
%Allowance for losses on finance
    receivables as a percentage of finance receivables


1.15
%


1.43
%Allowance for losses on finance
    receivables as a percentage of nonaccrual finance receivables


93.9
%


108.6
%Total debt to tangible
    shareholders equity(6)


7.20
x


6.19x     (1)
    
    Represents revenues earned less interest expense on borrowings
    and operating lease depreciation as a percentage of average net
    investment. Average net investment includes finance receivables
    plus operating leases, less deferred taxes on leveraged leases.(2)
    
    Average managed and serviced finance receivables include owned
    receivables, receivables serviced under securitizations,
    participations and third-party portfolio servicing agreements.(3)
    
    Operating efficiency ratio is selling and administrative
    expenses divided by net interest margin.(4)
    
    Delinquency excludes any captive finance receivables with
    recourse to Textron. Captive finance receivables represent
    third-party finance receivables originated in connection with
    the sale or lease of Textron manufactured products. Percentages
    are expressed as a function of total Textron Financial
    independent and nonrecourse captive receivables.(5)
    
    Finance assets include: finance receivables; equipment on
    operating leases, net of accumulated depreciation; repossessed
    assets and properties; retained interests in securitizations;
    interest-only securities; investment in equipment residuals;
    Acquisition, Development and Construction arrangements; and
    short- and long-term investments (some of which are classified
    in Other assets on Textron Financials Consolidated Balance
    Sheets). Nonperforming assets include independent and
    nonrecourse captive finance assets.(6)
    
    Tangible shareholders equity equals Shareholders
    equity, excluding Accumulated other comprehensive income (loss),
    less Goodwill.  Recent
    Accounting Pronouncements
     27




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##### Table of Contents



Item 2.
    Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations (Continued)      No. 13-2
    Forward-looking
    Information
  Certain statements in this Quarterly Report on
    Form 10-Q
    and other oral and written statements made by Textron Financial
    from time to time are forward-looking statements, including
    those that discuss strategies, goals, outlook or other
    non-historical matters; or project revenues, income, returns or
    other financial measures. These forward-looking statements speak
    only as of the date on which they are made, and we undertake no
    obligation to update or revise any forward-looking statements.
    These forward-looking statements are subject to risks and
    uncertainties that may cause actual results to differ materially
    from those contained in the statements, including the following:
    (a) changes in worldwide economic and political conditions
    that impact interest and foreign exchange rates; (b) the
    occurrence of slowdowns or downturns in customer markets in
    which Textron products are sold or supplied and financed or
    where we offer financing; (c) the ability to realize full
    value of receivables and investments in securities; (d) the
    ability to control costs and successful implementation of
    various cost reduction programs; (e) increases in pension
    expenses 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) access to debt financing at competitive rates;
    (i) access to equity in the form of retained earnings and
    capital contributions from
 28




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##### Table of Contents



Item 2.
    Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations (Continued)    Item 3.
    Quantitative
    and Qualitative Disclosures About Market Risk  Form 10-Q.
  Item 4.
    Controls
    and Procedures  Rule 13a-15(e) 15d-15(e)
   29




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##### Table of Contents



PART II.
    OTHER INFORMATION  Item 6.
    Exhibits  12


Computation of Ratio of Earnings
    to Fixed Charges31
.1

Certification of Chief Executive
    Officer Pursuant to
    Rule 13a-14(a)31
.2

Certification of Chief Financial
    Officer Pursuant to
    Rule 13a-14(a)32
.1

Certification of Chief Executive
    Officer Pursuant to 18 U.S.C. Section 135032
.2

Certification of Chief Financial
    Officer Pursuant to 18 U.S.C. Section 1350  30




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##### Table of Contents



SIGNATURES
      By:
    /s/  Thomas
    J. Cullen         31