<PAGE>   1

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                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

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

                                   FORM 10-Q

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

                   FOR THE FISCAL QUARTER ENDED JUNE 30, 2001

                                       OR

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

        FOR THE TRANSITION PERIOD FROM                TO

                         COMMISSION FILE NUMBER 0-27559

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

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

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

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

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

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

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

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

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<PAGE>   2

                         TEXTRON FINANCIAL CORPORATION

                               TABLE OF CONTENTS

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

Item 1. FINANCIAL STATEMENTS

  Condensed Consolidated Statement of Income for the three
     and six months ended June 30, 2001 and 2000
     (unaudited)............................................    2

  Condensed Consolidated Balance Sheet at June 30, 2001 and
     December 30, 2000 (unaudited)..........................    3

  Condensed Consolidated Statement of Cash Flows for the six
     months ended June 30, 2001 and 2000 (unaudited)........    4

  Condensed Consolidated Statement of Changes in
     Shareholder's Equity through June 30, 2001
     (unaudited)............................................    5

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

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

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
        MARKET RISK.........................................   19

PART II. OTHER INFORMATION

Item 6. EXHIBITS AND REPORTS ON FORM 8-K....................   20
</Table>

                                        1
<PAGE>   3

                         PART I. FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

                         TEXTRON FINANCIAL CORPORATION

                   CONDENSED CONSOLIDATED STATEMENT OF INCOME
                                  (UNAUDITED)

<Table>
<Caption>
                                                   THREE MONTHS ENDED       SIX MONTHS ENDED
                                                        JUNE 30,                JUNE 30,
                                                  --------------------    --------------------
                                                    2001        2000        2001        2000
                                                  --------    --------    --------    --------
                                                                 (IN THOUSANDS)
<S>                                               <C>         <C>         <C>         <C>
REVENUES
  Finance charges and discounts.................  $129,511    $147,624    $268,772    $282,825
  Rental revenues on operating leases...........     4,620       4,378       9,376       9,306
  Gains on securitizations......................     8,391       1,808      13,561       1,808
  Investment income.............................     3,706       1,135       7,457       1,808
  Other income..................................    17,758      14,765      35,522      25,950
                                                  --------    --------    --------    --------
                                                   163,986     169,710     334,688     321,697
EXPENSES
  Interest......................................    69,994      82,426     147,758     157,698
  Selling and administrative....................    38,922      29,837      72,815      57,791
  Provision for losses..........................    11,708       9,908      22,889      15,369
  Depreciation of equipment on operating
     leases.....................................     1,895       2,708       3,724       4,569
  Special charges...............................     1,853          --       1,853          --
                                                  --------    --------    --------    --------
                                                   124,372     124,879     249,039     235,427
                                                  --------    --------    --------    --------
INCOME BEFORE INCOME TAXES AND DISTRIBUTIONS ON
  PREFERRED SECURITIES..........................    39,614      44,831      85,649      86,270
Income taxes....................................    14,825      17,330      32,083      33,342
Distributions on preferred securities (net of
  tax benefits of $207, $216, $414 and $432,
  respectively).................................       355         341         706         684
                                                  --------    --------    --------    --------
NET INCOME......................................  $ 24,434    $ 27,160    $ 52,860    $ 52,244
                                                  ========    ========    ========    ========
</Table>

     See notes to condensed consolidated financial statements (unaudited).
                                        2
<PAGE>   4
ITEM 1.  FINANCIAL STATEMENTS (CONTINUED)

                         TEXTRON FINANCIAL CORPORATION

                      CONDENSED CONSOLIDATED BALANCE SHEET
                                  (UNAUDITED)

<Table>
<Caption>
                                                               JUNE 30,      DEC. 30,
                                                                 2001          2000
                                                              ----------    ----------
                                                               (DOLLARS IN THOUSANDS)
<S>                                                           <C>           <C>
ASSETS
Cash and equivalents........................................  $   23,948    $    6,498
Finance receivables -- net of unearned income:
  Installment contracts.....................................   2,419,436     1,985,304
  Revolving loans...........................................   1,638,050     1,304,591
  Golf course and resort mortgages..........................     739,990       678,409
  Floorplan receivables.....................................     534,790       894,037
  Leveraged leases..........................................     377,941       360,982
  Finance leases............................................     335,318       360,639
  Commercial real estate mortgages..........................       4,419         5,450
                                                              ----------    ----------
          Total finance receivables.........................   6,049,944     5,589,412
  Allowance for losses on receivables.......................    (133,231)     (115,953)
                                                              ----------    ----------
          Finance receivables -- net........................   5,916,713     5,473,459
Equipment on operating leases -- net........................     131,109       135,356
Goodwill -- net.............................................     209,586       215,608
Other assets -- net.........................................     381,824       299,875
                                                              ----------    ----------
          Total assets......................................  $6,663,180    $6,130,796
                                                              ==========    ==========
LIABILITIES AND SHAREHOLDER'S EQUITY
LIABILITIES
  Accrued interest and other liabilities....................  $  271,357    $  190,921
  Amounts due to Textron Inc................................      21,691        19,998
  Deferred income taxes.....................................     316,601       315,322
  Debt......................................................   5,063,137     4,666,869
                                                              ----------    ----------
          Total liabilities.................................   5,672,786     5,193,110
                                                              ----------    ----------
Textron Financial and Litchfield obligated mandatory
  redeemable preferred securities of trust subsidiary
  holding solely Litchfield junior subordinated
  debentures................................................      27,745        28,009
SHAREHOLDER'S EQUITY
Common stock ($100 par value, 4,000 shares authorized; 2,500
  shares issued and outstanding)............................         250           250
Capital surplus.............................................     573,676       533,676
Investment in parent company preferred stock................     (25,000)      (25,000)
Accumulated other comprehensive loss........................     (14,588)           --
Retained earnings...........................................     428,311       400,751
                                                              ----------    ----------
          Total shareholder's equity........................     962,649       909,677
                                                              ----------    ----------
          Total liabilities and shareholder's equity........  $6,663,180    $6,130,796
                                                              ==========    ==========
</Table>

     See notes to condensed consolidated financial statements (unaudited).
                                        3
<PAGE>   5
ITEM 1.  FINANCIAL STATEMENTS (CONTINUED)

                         TEXTRON FINANCIAL CORPORATION

                 CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
                    SIX MONTHS ENDED JUNE 30, 2001 AND 2000
                                  (UNAUDITED)

<Table>
<Caption>
                                                                 2001           2000
                                                              -----------    -----------
                                                                    (IN THOUSANDS)
<S>                                                           <C>            <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income..................................................  $    52,860    $    52,244
Adjustments to reconcile net income to net cash provided by
  operating activities:
  Provision for losses......................................       22,889         15,369
  Depreciation and amortization.............................       19,153         15,685
  Deferred income tax provision.............................        9,777        (22,165)
  Gain on sale of real estate owned.........................           --         (1,875)
  Decrease in accrued interest and other liabilities........       (2,994)        (8,984)
  Gains on securitizations..................................      (13,561)        (1,808)
  Other.....................................................      (21,739)         7,660
                                                              -----------    -----------
          Net cash provided by operating activities.........       66,385         56,126
CASH FLOWS FROM INVESTING ACTIVITIES:
Finance receivables originated or purchased.................   (3,654,760)    (3,536,677)
Finance receivables repaid..................................    2,790,170      2,623,419
Proceeds from receivable sales, including securitizations...      818,097        333,115
Acquisitions, net of cash acquired..........................     (387,524)            --
Proceeds from disposition of operating leases and other
  assets....................................................        9,386         21,670
Purchase of assets for operating leases.....................       (7,728)       (34,859)
Proceeds from real estate owned.............................           --          5,736
Other capital expenditures..................................       (6,737)        (5,696)
Other investments...........................................       (4,263)        (6,475)
                                                              -----------    -----------
          Net cash used in investing activities.............     (443,359)      (599,767)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt....................      548,440      1,185,000
Principal payments on long-term debt........................     (594,642)      (508,422)
Net increase in commercial paper............................      430,940        134,095
Proceeds from issuance of nonrecourse debt..................       60,177         95,500
Principal payments on nonrecourse debt......................      (78,414)       (93,458)
Net increase (decrease) in short-term debt..................       11,530       (250,004)
Net increase in amounts due to Textron Inc..................        1,693            846
Capital contributions from Textron Inc......................       44,504             --
Dividends paid to Textron Inc...............................      (29,804)        (9,700)
                                                              -----------    -----------
          Net cash provided by financing activities.........      394,424        553,857
                                                              -----------    -----------
NET INCREASE IN CASH........................................       17,450         10,216
Cash and equivalents at beginning of period.................        6,498         17,379
                                                              -----------    -----------
Cash and equivalents at end of period.......................  $    23,948    $    27,595
                                                              ===========    ===========
</Table>

     See notes to condensed consolidated financial statements (unaudited).
                                        4
<PAGE>   6
ITEM 1.  FINANCIAL STATEMENTS (CONTINUED)

                         TEXTRON FINANCIAL CORPORATION

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

<Table>
<Caption>
                                                                 ACCUMULATED
                                                   INVESTMENT       OTHER
                                                    IN PARENT      COMPRE-
                               COMMON   CAPITAL      COMPANY       HENSIVE     RETAINED
                               STOCK    SURPLUS    PREF. STOCK      LOSS       EARNINGS    TOTAL
                               ------   --------   -----------   -----------   --------   --------
<S>                            <C>      <C>        <C>           <C>           <C>        <C>
BALANCE JANUARY 1, 2000......   $250    $508,676    $     --      $     --     $360,235   $869,161
Net income...................     --          --          --            --      118,016    118,016
Capital contributions from
  Textron Inc................     --      31,757     (25,000)           --           --      6,757
Dividends to Textron Inc.....     --      (6,757)         --            --      (77,500)   (84,257)
                                ----    --------    --------      --------     --------   --------
BALANCE DECEMBER 30, 2000....    250     533,676     (25,000)           --      400,751    909,677
Net income...................     --          --          --            --       52,860     52,860
Other comprehensive loss.....     --          --          --       (14,588)          --    (14,588)
Capital contributions from
  Textron Inc................     --      44,504          --            --           --     44,504
Dividends to Textron Inc.....     --      (4,504)         --            --      (25,300)   (29,804)
                                ----    --------    --------      --------     --------   --------
BALANCE JUNE 30, 2001........   $250    $573,676    $(25,000)     $(14,588)    $428,311   $962,649
                                ====    ========    ========      ========     ========   ========
</Table>

     See notes to condensed consolidated financial statements (unaudited).
                                        5
<PAGE>   7
ITEM 1.  FINANCIAL STATEMENTS (CONTINUED)

                         TEXTRON FINANCIAL CORPORATION

        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 1. BASIS OF PRESENTATION

     The financial statements should be read in conjunction with the financial
statements included in Textron Financial Corporation's Annual Report on Form
10-K for the year ended December 30, 2000. The accompanying unaudited
consolidated financial statements include the accounts of Textron Financial
Corporation (Textron Financial or the Company) and its subsidiaries. All
significant intercompany transactions are eliminated. The consolidated financial
statements are unaudited and reflect all adjustments (consisting only of normal
recurring adjustments) which are, in the opinion of management, necessary for a
fair presentation of Textron Financial's consolidated financial position at June
30, 2001, and December 30, 2000, and its consolidated results of operations for
each of the respective three- and six-month periods ended June 30, 2001 and
2000, and its consolidated cash flows for each of the six-month periods ended
June 30, 2001 and 2000. The results of operations for the interim periods are
not necessarily indicative of the results to be expected for the full year.
Certain prior year balances have been reclassified to conform to the current
year presentation.

NOTE 2. SPECIAL CHARGES

     The Company records restructuring liabilities at the time management
approves and commits to a restructuring plan that identifies all significant
actions to be taken and the expected completion date of the plan. The
restructuring liability includes those restructuring costs that (1) can be
reasonably estimated, (2) are not associated with and do not benefit activities
that will be continued, and (3) are not associated with or are not incurred to
generate revenues after the commitment date. Restructuring costs are incurred as
a direct result of the plan and (1) are incremental to other costs incurred by
Textron Financial in the conduct of its activities prior to the commitment date,
or (2) represent contractual obligations that existed prior to the commitment
date and will either continue after the exit plan is completed with no economic
benefit to the enterprise or reflect a penalty to cancel a contractual
obligation.

     To enhance competitiveness and profitability in certain businesses, the
Company approved a restructuring program during the second quarter of 2001. The
program includes the consolidation of loan origination facilities and the
rationalization of certain product lines. Restructuring costs of $1.9 million
recorded in earnings during the second quarter of 2001 primarily consisted of
severance-related benefits. The Company expects to fund the cash requirements of
its restructuring activities with cash flow from operations.

     In connection with the restructuring program initiated in the second
quarter of 2001, the Company expects to terminate 101 employees with 39
employees actually terminated as of June 30, 2001. Additionally, the Company
paid actual termination benefits of $0.3 million, which were charged against the
restructuring reserve.

     Accruable restructuring costs recorded in earnings have been included in
Special charges in the Condensed Consolidated Statement of Income.

     The specific restructuring measures and associated estimated costs are
based on the Company's best judgement under prevailing circumstances. The
Company believes that the restructuring reserve balance of $1.6 million is
adequate to carry out the restructuring activities formally identified and
committed to as of June 30, 2001.

                                        6
<PAGE>   8
ITEM 1.  FINANCIAL STATEMENTS (CONTINUED)
                         TEXTRON FINANCIAL CORPORATION

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

NOTE 3. MANAGED FINANCE RECEIVABLES

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

<Table>
<Caption>
                                                       JUNE 30,      DEC. 30,
                                                         2001          2000
                                                      ----------    ----------
                                                           (IN THOUSANDS)
<S>                                                   <C>           <C>
Owned receivables...................................  $6,049,944    $5,589,412
Securitized receivables.............................   1,827,865     1,324,089
                                                      ----------    ----------
                                                       7,877,809     6,913,501
Nonrecourse participations..........................     540,307       573,157
Third-party portfolio servicing.....................     458,794       445,207
SBA sales agreements................................      38,210        33,222
                                                      ----------    ----------
          Total managed finance receivables.........  $8,915,120    $7,965,087
                                                      ==========    ==========
</Table>

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

     The third-party portfolio servicing amounts largely represent finance
receivable portfolios of resort developers and third-party securitizations.

     Owned receivables include approximately $60 million of noncash finance
receivables additions that were unfunded at June 30, 2001, due to a timing
difference. The corresponding liability is included in Accrued interest and
other liabilities on the Condensed Consolidated Balance Sheet.

NOTE 4. LOAN IMPAIRMENT

     The Company measures reserves for credit losses on nonhomogeneous impaired
loans based on the present value of expected future cash flows discounted at the
loan's effective interest rate, at the observable market price or at the fair
value of collateral if the loan is collateral dependent. This evaluation is
inherently subjective, as it requires estimates, including the amount and timing
of future cash flows expected to be received on impaired loans, which are likely
to differ from actual results.

     Accrual of interest income is suspended for accounts that are contractually
delinquent by more than three months, unless collection is not doubtful. In
addition, detailed reviews of loans may result in earlier suspension if
collection is doubtful. Cash payments on nonaccrual accounts, including finance
charges, generally are applied to reduce loan principal. The Company had
nonaccrual loans and leases totaling $104.6 million at June 30, 2001, as
compared to $101.9 million at December 30, 2000, of which approximately $48.3
million and $76.4 million, respectively, were considered impaired, excluding
finance leases and homogeneous loan portfolios. The allowance for losses on
receivables related to impaired loans was $22.0 million at June 30, 2001, and
$34.1 million at December 30, 2000. The average recorded investment in impaired
loans during the first six months of 2001 was $64.6 million, as compared to
$61.5 million in the corresponding period in 2000. Nonaccrual loans resulted in
Textron Financial's revenues being reduced by approximately $4.7 million and
$3.5 million for the first six months of 2001 and 2000, respectively. No
interest income was recognized using the cash basis method.

                                        7
<PAGE>   9
ITEM 1.  FINANCIAL STATEMENTS (CONTINUED)
                         TEXTRON FINANCIAL CORPORATION

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

NOTE 5. OTHER ASSETS

<Table>
<Caption>
                                                         JUNE 30,    DEC. 30,
                                                           2001        2000
                                                         --------    --------
                                                            (IN THOUSANDS)
<S>                                                      <C>         <C>
Securitization related assets..........................  $173,159    $129,608
Investment in equipment residuals......................    78,128      51,204
Fixed assets -- net....................................    39,745      36,382
Acquisition, Development and Construction (ADC)
  arrangements.........................................    29,218      32,619
Other..................................................    61,574      50,062
                                                         --------    --------
          Total other assets...........................  $381,824    $299,875
                                                         ========    ========
</Table>

     The Investment in equipment residuals represents the remaining equipment
residual values associated with the Textron golf and turf equipment lease
payments that were securitized.

NOTE 6. DEBT AND CREDIT FACILITIES

<Table>
<Caption>
                                                       JUNE 30,      DEC. 30,
                                                         2001          2000
                                                      ----------    ----------
                                                           (IN THOUSANDS)
<S>                                                   <C>           <C>
Short-term debt:
  Commercial paper..................................  $1,386,752    $  955,812
  Short-term debt...................................      21,520         9,990
                                                      ----------    ----------
          Total short-term debt.....................   1,408,272       965,802
Long-term debt:
  5.66% -- 5.95% notes; due 2001 to 2004............     417,390       218,000
  6.13% -- 6.73% notes; due 2003....................      32,676       133,264
  7.13% -- 7.37% notes; due 2002 to 2004............   1,080,920     1,080,618
  Variable rate notes; due 2001 to 2004.............   2,123,879     2,269,185
                                                      ----------    ----------
          Total long-term debt......................   3,654,865     3,701,067
                                                      ----------    ----------
          Total debt................................  $5,063,137    $4,666,869
                                                      ==========    ==========
</Table>

     Combined commercial paper and short-term debt weighted average interest
rates, before consideration of the effect of interest rate exchange agreements,
have been determined by relating the annualized interest cost to the daily
average dollar amounts outstanding. The combined weighted average interest rate
during the six months ended June 30, 2001, was 5.21%. The combined weighted
average interest rate, before consideration of the effect of interest rate
exchange agreements, at June 30, 2001, was 4.03%.

     Interest on Textron Financial's variable rate notes is tied predominately
to the three-month LIBOR for U.S. dollar deposits. The weighted average interest
rate on these notes was 4.61% at June 30, 2001.

     Textron Financial has bank line of credit agreements of $1.4 billion, of
which $600 million will expire in 2001 and $800 million will expire in 2003.
There were no amounts outstanding under these lines at June 30, 2001 and
December 30, 2000. As of July 26, 2001, Textron Financial has received
commitments to increase the credit agreements to $1.5 billion by extending the
one-year line for an additional year in the amount of $500 million, and the
multi-year line until 2006 in the amount of $1 billion.

                                        8
<PAGE>   10
ITEM 1.  FINANCIAL STATEMENTS (CONTINUED)
                         TEXTRON FINANCIAL CORPORATION

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

     The terms of certain of the Company's loan agreements and credit
facilities, under the most restrictive covenant, limit the payment of dividends
to $365.2 million at June 30, 2001. In the first six months of 2001, Textron
Financial declared dividends and paid dividends of $29.8 million.

NOTE 7. INTEREST RATE EXCHANGE AGREEMENTS

     Under interest rate exchange agreements, Textron Financial makes periodic
fixed payments in exchange for periodic variable payments and vice versa.
Textron Financial has entered into such agreements to mitigate its exposure to
changes in interest rates.

     Interest rate exchange agreements were designated against specific short-
and long-term notes, against specifically identified receivable portfolios and
to mitigate interest rate exposure on Textron Financial's interest-only
securities resulting from securitizations.

     During the first six months of 2001, Textron Financial terminated $229
million of fixed rate interest rate exchange agreements, which were entered into
in 2000 but not effective until February 2001. These agreements were terminated
in conjunction with the issuance of $300 million of fixed rate term debt. The
termination premium will be amortized over the remaining original term of the
agreements.

     During the first quarter of 2001, $715 million of interest rate exchange
agreements involving prime-based payments and LIBOR-based receipts matured. The
objective of these interest rate exchange agreements was to lock in the net
interest rate margin each period by eliminating the basis risk between
LIBOR-based debt obligations and prime-based loan receivables. Textron Financial
has not replaced these interest rate exchange agreements.

     The Company also terminated $150 million of fixed rate interest rate
exchange agreements and contemporaneously entered into $150 million of variable
rate interest rate exchange agreements designated for the Company's debt. In
addition, Textron Financial terminated $154 million of fixed rate interest rate
exchange agreements and simultaneously issued $253 million of fixed rate
interest exchange agreements related to interest-only securities resulting from
an increase in securitization activity.

     Interest rate floor agreements totaling $154 million, entered into through
AAA-rated counterparties to the various Textron Financial Corporation
Receivables Trusts (the Trusts), provide a minimum interest rate on variable
rate receivables held by the Trusts and are tied to both the prime rate and one-
and six-month LIBOR. The Trusts receive payments when the floor rate exceeds the
corresponding index interest rate. These interest rate floor agreements are
adjusted periodically to match the amortization of the variable rate contracts
in the securitized portfolio.

     The Company has a foreign currency exchange agreement with a third party to
convert a $32.5 million variable rate note to a C$50 million variable rate note.
This agreement also includes the exchange of receipts indexed to three-month
LIBOR for payments based on BA-CDOR.

NOTE 8. CONTINGENCIES

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

                                        9
<PAGE>   11
ITEM 1.  FINANCIAL STATEMENTS (CONTINUED)
                         TEXTRON FINANCIAL CORPORATION

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

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

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

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

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

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

NOTE 10. ACCUMULATED OTHER COMPREHENSIVE LOSS AND COMPREHENSIVE INCOME

     Accumulated other comprehensive loss is as follows:

<Table>
<Caption>
                                                            SIX MONTHS ENDED
                                                          --------------------
                                                          JUNE 30,    JUNE 30,
                                                            2001        2000
                                                          --------    --------
                                                             (IN THOUSANDS)
<S>                                                       <C>         <C>
Beginning of year.......................................  $     --    $    --
Transitional adjustment due to change in accounting for
  derivative instruments and hedging activities.........   (11,580)        --
Amortization of deferred loss on terminated hedge
  contracts, net of taxes...............................       469
Net deferred loss on hedge contracts, net of taxes......    (3,477)        --
                                                          --------    -------
End of period...........................................  $(14,588)   $    --
                                                          ========    =======
</Table>

<Table>
<Caption>
                                       THREE MONTHS ENDED       SIX MONTHS ENDED
                                      --------------------    --------------------
                                      JUNE 30,    JUNE 30,    JUNE 30,    JUNE 30,
                                        2001        2000        2001        2000
                                      --------    --------    --------    --------
                                                     (IN THOUSANDS)
<S>                                   <C>         <C>         <C>         <C>
Net income..........................  $24,434     $27,160     $52,860     $52,244
Other comprehensive loss............     (635)         --     (14,588)         --
                                      -------     -------     -------     -------
Comprehensive income................  $23,799     $27,160     $38,272     $52,244
                                      =======     =======     =======     =======
</Table>

                                        10
<PAGE>   12
ITEM 1.  FINANCIAL STATEMENTS (CONTINUED)
                         TEXTRON FINANCIAL CORPORATION

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

NOTE 11. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

     Effective December 31, 2000, Textron Financial adopted Statement of
Financial Accounting Standards (SFAS) No. 133 "Accounting for Derivative
Instruments and Hedging Activities," as amended, which requires that all
derivative instruments be reported on the balance sheet at fair value and
establishes criteria for designation and effectiveness of hedging relationships.
In accordance with the transition provisions of SFAS No. 133, the Company
recorded a cumulative transition adjustment to decrease other comprehensive
income by approximately $11.6 million, net of taxes, to recognize the fair value
of cash flow hedges as of the date of adoption. The cumulative effect of
adoption was not material to the Company's results of operations.

     Textron Financial is exposed to market risk, primarily changes in interest
rates and currency exchange rates. To manage the volatility relating to these
exposures, Textron Financial nets the exposures on a consolidated basis to take
advantage of natural offsets. Designation is performed on a specific exposure
basis to support hedge accounting. The changes in fair value of these hedging
instruments are offset in part or in whole by corresponding changes in the fair
value or cash flows of the underlying exposures being hedged. Textron Financial
does not hold or issue derivative financial instruments for trading or
speculative purposes.

     Textron Financial's strategy is to match interest-sensitive assets with
interest-sensitive liabilities to limit the Company's exposure to changes in
interest rates. As part of managing this matching strategy, Textron Financial
has entered into interest rate exchange agreements, including basis swaps, to
lock in desired spreads between certain interest-earning assets and certain
interest-bearing liabilities. Textron Financial has both cash flow and fair
value hedges. For cash flow hedges, during the first six months of 2001, Textron
Financial recorded a charge of $0.8 million, net of a $0.5 million tax benefit,
to Accumulated other comprehensive loss and no impact to the statement of
income. For fair value hedges, during the first six months of 2001, Textron
Financial had interest rate exchange agreements with a fair value liability of
$5.4 million designated as fair value hedges of a fixed rate receivable
portfolio. The fair value hedges are highly effective and therefore, there is an
immaterial net impact to earnings due to hedge ineffectiveness.

NOTE 12.  NEW ACCOUNTING PRONOUNCEMENTS

     In September 2000, the Financial Accounting Standards Board (FASB) issued
SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities -- a Replacement of FASB Statement No. 125." SFAS
No. 140 revised criteria for accounting for securitizations, other
financial-asset and collateral transfers and extinguishments of liabilities.
SFAS No. 140 also introduced new disclosure requirements related to
securitizations, collateral and retained interests in securitized financial
assets. The provisions for accounting for collateral by secured parties and the
new disclosure requirements were effective in the fourth quarter of fiscal 2000,
as required by the statement. Textron Financial also adopted the provisions of
SFAS No. 140 related to the transfers and servicing of financial assets and
extinguishments of liabilities effective April 1, 2001. The adoption of this
statement did not have a material effect on the Company's results of operations
or financial position.

     In July 2001, the FASB issued SFAS No. 141, "Business Combinations," and
SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that
the purchase method of accounting to be used for all business combinations
initiated after June 30, 2001, and prohibits the use of the pooling-of-interests
method. SFAS No. 142 changes the accounting for goodwill from an amortization
method to an impairment-only approach. The amortization of goodwill from past
business combinations will cease upon adoption of this Statement on December 30,
2001. Goodwill and intangible assets acquired in business combinations completed
after June 30, 2001 must comply with the provisions of this Statement. Companies
will also be required to evaluate all existing goodwill for impairment within
six months of adoption comparing the fair value of each reporting unit to its
carrying value at the date of adoption. Any transitional impairment losses
                                        11
<PAGE>   13
ITEM 1.  FINANCIAL STATEMENTS (CONTINUED)
                         TEXTRON FINANCIAL CORPORATION

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

will be recognized in the first interim period in the year of adoption and will
be recognized as the effect of a change in accounting principle. Textron
Financial is evaluating the potential impact of adopting these pronouncements on
the results of operations and financial position.

     In November 1999, the Emerging Issues Task Force (EITF) issued EITF 99-20,
"Recognition of Interest Income and Impairment on Purchased and Retained
Beneficial Interests in Securitized Financial Assets." EITF 99-20 is applicable
for the accounting for interest income and impairment of beneficial interests in
securitization transactions for all quarters beginning after March 15, 2001. The
adoption of this consensus did not have a material impact on the Company's
results of operations or financial position.

NOTE 13. FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS

     Textron Financial has five reportable segments: Small Business, Middle
Markets, Specialty Finance, Structured Capital and Commercial Real Estate. The
Company ceased commercial real estate lending activities in 1993 and began an
orderly liquidation of that portfolio. The Company's reportable segments are
strategically aligned based on the markets served and the products offered. The
accounting policies for these segments are the same as those described for the
consolidated entity.

<Table>
<Caption>
                                            THREE MONTHS ENDED         SIX MONTHS ENDED
                                          -----------------------   -----------------------
                                           JUNE 30,     JUNE 30,     JUNE 30,     JUNE 30,
                                             2001         2000         2001         2000
                                          ----------   ----------   ----------   ----------
                                                           (IN THOUSANDS)
<S>                                       <C>          <C>          <C>          <C>
Revenues
  Small Business........................  $   59,780   $   67,659   $  115,382   $  130,161
  Middle Markets........................      38,836       39,634       86,718       74,087
  Specialty Finance.....................      42,701       46,464       87,276       88,276
  Structured Capital....................      22,669       15,953       45,312       29,173
  Commercial Real Estate................          --           --           --           --
                                          ----------   ----------   ----------   ----------
Total revenues..........................  $  163,986      169,710   $  334,688   $  321,697
                                          ==========   ==========   ==========   ==========
Income (loss) before special charges,
  taxes and distributions on preferred
  securities(1)(2)
  Small Business........................  $    8,756   $   17,578   $   20,986   $   33,960
  Middle Markets........................      12,188        6,839       26,632       12,655
  Specialty Finance.....................      12,196       15,438       23,638       29,035
  Structured Capital....................       8,349        5,919       15,846       10,914
  Commercial Real Estate................         (22)        (943)         400         (294)
                                          ----------   ----------   ----------   ----------
Total income before special charges,
  taxes and distributions on preferred
  securities............................  $   41,467   $   44,831   $   87,502   $   86,270
  Special charges.......................      (1,853)          --       (1,853)          --
                                          ----------   ----------   ----------   ----------
Total income before taxes and
  distributions on preferred
  securities............................  $   39,614   $   44,831   $   85,649   $   86,270
                                          ==========   ==========   ==========   ==========
</Table>

                                        12
<PAGE>   14
ITEM 1.  FINANCIAL STATEMENTS (CONTINUED)
                         TEXTRON FINANCIAL CORPORATION

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

<Table>
<Caption>
                                                               JUNE 30,      DEC. 30,
                                                                 2001          2000
                                                              ----------    ----------
                                                                   (IN THOUSANDS)
<S>                                                           <C>           <C>
Finance assets(3)
  Small Business............................................  $2,635,777    $1,909,856
  Middle Markets............................................   1,329,007     1,685,282
  Specialty Finance.........................................   1,670,549     1,561,473
  Structured Capital........................................     856,149       805,565
  Commercial Real Estate....................................       4,419         5,450
                                                              ----------    ----------
Total finance assets........................................  $6,495,901    $5,967,626
                                                              ==========    ==========
</Table>

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

(2) Indirect expenses are allocated to each segment based on the utilization of
    such resources. Most allocations are based on the segments' 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; beneficial interests in
    securitized assets; investment in equipment residuals; ADC arrangements; and
    long-term investments (some of which are classified in Other assets on
    Textron Financial's Consolidated Balance Sheet).

                                        13
<PAGE>   15

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

                         TEXTRON FINANCIAL CORPORATION

FINANCIAL CONDITION

LIQUIDITY AND CAPITAL RESOURCES

     Textron Financial Corporation (Textron Financial or the Company) utilizes a
broad base of financial resources for its liquidity and capital resources. Cash
is provided from operations and several different sources of borrowings,
including the issuance of commercial paper and short-term debt, sales of medium-
and long-term debt in the U.S. and foreign financial markets, and junior
subordinated borrowings under a $100 million line of credit with Textron Inc.
(Textron). For liquidity purposes, Textron Financial has a policy of maintaining
sufficient unused lines of credit to support its outstanding commercial paper.
Textron Financial has bank line of credit agreements of $1.4 billion, of which
$600 million will expire in 2001 and $800 million will expire in 2003. As of
July 26, 2001, Textron Financial has received commitments to increase the credit
agreements to $1.5 billion by extending the one-year line for an additional year
in the amount of $500 million, and the multi-year line until 2006 in the amount
of $1 billion. While none of Textron Financial's total lines of credit were
used, those not reserved as support for commercial paper were $113 million at
June 30, 2001, as compared to $544 million at December 30, 2000. Additionally,
Textron Financial maintains a C$50 million Canadian facility, of which C$43
million remains unutilized, and a fully available $25 million UK facility, both
of which will expire in 2001.

     Textron Financial filed a Form S-3 registration statement with the
Securities and Exchange Commission in 1999. Under this shelf registration,
Textron Financial may issue public debt securities in one or more offerings up
to a total maximum offering of $3 billion and has established a medium-term note
program of $1.125 billion within the facility. In the first six months of 2001,
Textron Financial issued $300 million of fixed rate notes and $250 million of
floating rate notes under this facility maturing in 2004 and 2003, respectively.
The proceeds from the issuances were used to refinance maturing commercial paper
and prepay $100 million of fixed rate debt, which was prepayable at par. At June
30, 2001, Textron Financial had $700 million available under this facility.

     During the first six months of 2001, Textron Financial securitized $543
million of floorplan finance receivables (on a revolving basis), $116 million of
captive golf and turf finance receivables, $30 million of franchise finance
receivables, and $26 million of land finance receivables. Securitization gains
for the first six months of 2001 were $13.6 million. These securitizations
provided Textron Financial with an alternative source of financing while
maintaining desired debt-to-capital ratios. Textron Financial utilized the
proceeds from the securitizations to retire commercial paper. Textron Financial
anticipates that it will enter into additional securitization transactions
during the remainder of 2001.

     Cash flows provided by operations were $66 million in the first six months
of 2001, as compared to $56 million in the corresponding period last year. The
increase is primarily due to the timing and payments in accrued interest and
other liabilities and timing of income tax payments, partially offset by an
increase in other assets and noncash gains on securitizations. Cash flows used
in investing activities were funded from the collection of receivables, the
syndication and securitization of receivables and the issuance of commercial
paper and short-term debt. Short-term borrowings increased by $442 million and
long-term debt decreased by $46 million. Borrowings under a junior subordinated
facility increased by $1.7 million reflecting the funding of assets related to
Textron's manufacturing divisions.

     Textron Financial declared and paid dividends to Textron of $29.8 million
during the first six months of 2001, compared to $12.0 million of dividends
declared and $9.7 million paid during the corresponding period of 2000. The
increase in 2001 was due to the retention of earnings in 2000 to support
receivable growth. Textron contributed capital of $44.5 million to Textron
Financial during the first six months of 2001, primarily to support the
acquisition of a small business lending portfolio in June.

                                        14
<PAGE>   16
ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS -- (CONTINUED)

     Because the finance business involves the purchase and carrying of
receivables, a relatively high ratio of borrowings to net worth is customary.
Debt as a percentage of total capitalization was 84% at June 30, 2001, as
compared to 83% at December 30, 2000.

     Textron Financial's ratio of earnings to fixed charges was 1.57x for the
six months ended June 30, 2001, as compared to 1.54x for the corresponding six
months in 2000. Commercial paper and short-term debt as a percentage of total
debt was 28% at June 30, 2001, as compared to 21% at December 30, 2000. The
increase in 2001 was primarily due to receivable growth and repayment of
maturing long-term debt. The Company believes that it has adequate credit
facilities and access to credit markets to meet its long-term financing needs.

FINANCE ASSETS

     Textron Financial's portfolio includes a wide variety of secured loans and
leases to customers located primarily in the United States. Management believes
that the portfolio avoids excessive concentration of risk through
diversification across geographic regions, industries, types of collateral and
among borrowers.

     Total finance assets were $6.5 billion at June 30, 2001, up 8.9% from $6.0
billion at December 30, 2000. The increase in finance assets was mostly due to
the acquisition of a small business lending portfolio ($398 million), increase
in aircraft financing ($239 million), resort receivables ($81 million), and
structured finance receivables ($62 million), partially offset by decreases in
the floorplan financing and asset-based lending portfolios. The floorplan
portfolio decreased by $343 million or 42% primarily reflecting a revolving
portfolio securitization of $543 million.

     Finance receivable additions for the first six months of 2001 were $3.7
billion, as compared to $3.5 billion in 2000. The increase reflects floorplan
finance of $263 million, resort receivables of $24 million and land finance of
$17 million, offset by decreases in most other portfolios due to a weaker
economic environment.

NONPERFORMING ASSETS

     Nonperforming assets as a percentage of finance assets remained essentially
unchanged at 1.85% of finance assets ($120 million) at June 30, 2001, as
compared to 1.86% of finance assets ($111 million) at December 30, 2000.
Increases in dollar values primarily related to franchise finance, structured
finance, finance company services, floorplan finance, and small business lending
were partially offset by decreases in aircraft finance, asset-based lending, and
commercial real estate. The allowance for losses on receivables as a percentage
of nonperforming assets increased to 111% at June 30, 2001, as compared to 104%
at December 30, 2000.

INTEREST RATE SENSITIVITY

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

     Management's strategy of matching interest-sensitive assets with
interest-sensitive liabilities limits the Company's risk to changes in interest
rates and includes entering into interest rate exchange agreements as part of
this matching strategy. At June 30, 2001, Textron Financial's interest-sensitive
assets in excess of interest-sensitive liabilities were $169 million, including
$150 million of variable rate interest rate exchange agreements designated for
Textron Financial's debt and $98 million of variable rate interest rate exchange
agreements on finance receivables. The change in the Company's net position does
not reflect a change in management's match funding strategy.

     Management believes that its asset management policy provides adequate
protection against interest rate risks. Increases in interest rates, however,
could have an adverse effect on interest margin. Variable rate receivables are
generally tied to changes in the prime rate offered by major U.S. banks, or
LIBOR. Increases in short-term borrowing costs generally precede increases in
variable rate receivable yields. From a
                                        15
<PAGE>   17
ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS -- (CONTINUED)

quantitative perspective, Textron Financial assesses its exposure to interest
rate changes using an analysis that measures the potential loss in net income,
over a twelve-month period, resulting from a hypothetical increase or decrease
in interest rates of 100 basis points across all maturities occurring at the
outset of the measurement period (sometimes referred to as a "shock test"). The
Company also assumes in its analysis that: prospective receivables additions
will be match funded, existing portfolios will not prepay, and all other
relevant factors will remain constant. This "shock test" model, when applied to
Textron Financial's asset and liability position at June 30, 2001, indicated no
material effect on the Company's net income and cash flows for the following
twelve-month period, or fair value at June 30, 2001.

FINANCIAL RISK MANAGEMENT

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

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

RESULTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2001 VS. JUNE 30, 2000

REVENUES

  Three months ended June 30, 2001 vs. June 30, 2000

     Second quarter 2001 revenues decreased by $5.7 million or 3.4% as compared
to the corresponding period in 2000. Lower finance charges and discounts reflect
lower average receivables and a lower average yield of 9.46% from 10.42%. The
decrease in yield is primarily due to a lower interest rate environment. Lower
finance charges and discounts were partially offset by higher gains on
securitizations, investment and other income, which increased by $12.1 million.
Investment and other income consists of earnings on retained interests in the
securitized portfolios and servicing income. Operating lease rental revenue of
$4.6 million increased slightly despite a decrease in average operating lease
assets.

  Six months ended June 30, 2001 vs. June 30, 2000

     Revenues for the six months ended June 30, 2001 increased by $13.0 million
or 4.0% as compared to the corresponding period in 2000. Higher revenues are
primarily due to higher gains on securitizations, investment and other income,
partially offset by lower finance charges and discounts reflecting lower average
finance receivables and a lower average yield of 9.82% versus 10.29% during the
same period in 2000. The decrease in yield is primarily due to a lower interest
rate environment. Gains on securitizations, investment and other income
increased by $27.0 million due to higher securitization gains, earnings on
retained interests in the securitized portfolios and servicing income.
Securitization gains were $13.6 million, $7.2 million of which were related to
revolving floorplan securitizations. Operating lease rental revenue was
comparable to the same period last year despite lower average operating lease
assets.

                                        16
<PAGE>   18
ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS -- (CONTINUED)

INTEREST EXPENSE

  Three months ended June 30, 2001 vs. June 30, 2000

     Second quarter 2001 interest expense decreased by $12.4 million, or 15.1%,
on 1.9% lower average debt outstanding. The lower interest expense also reflects
a decrease in the average borrowing rate to 5.87% from 6.78%, attributable to a
lower interest rate environment.

  Six months ended June 30, 2001 vs. June 30, 2000

     Interest expense for the six months ended 2001 decreased by $9.9 million,
or 6.3%, on 0.6% higher average debt outstanding. The lower interest expense
reflects a decrease in the average borrowing rate to 6.20% from 6.66%
attributable to a lower interest rate environment.

INTEREST MARGIN

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

  Three months ended June 30, 2001 vs. June 30, 2000

     Interest margin for the second quarter of 2001 increased to 6.78% from
6.07% for the corresponding period in 2000. The increase in interest margin
resulted from higher securitization gains, investment and other income.

  Six months ended June 30, 2001 vs. June 30, 2000

     Interest margin for the first six months of 2001 increased to 6.50% from
5.68% for the corresponding period in 2000. The increase in interest margin
resulted from higher securitization gains, investment and other income.

SELLING AND ADMINISTRATIVE EXPENSES

  Three months ended June 30, 2001 vs. June 30, 2000

     Selling and administrative expenses of $38.9 million increased by $9.1
million in the second quarter of 2001 as compared to the corresponding period in
2000. The increase in 2001 principally reflects higher expenses related to new
business initiatives, higher collection and legal expenses, and growth in
managed receivables. Selling and administrative expenses as a percentage of
average managed receivables were 1.73% (on an annualized basis) in the second
quarter of 2001, as compared to 1.68% in 2000.

  Six months ended June 30, 2001 vs. June 30, 2000

     Selling and administrative expenses for the first six months of 2001
increased by $15.0 million as compared to the corresponding period in 2000. The
increase in 2001 principally reflects higher expenses related to new business
initiatives, higher collection and legal expenses, and growth in managed
receivables. Selling and administrative expenses as a percentage of average
managed receivables were 1.70% (on an annualized basis) in the first six months
of 2001, as compared to 1.66% in 2000.

PROVISION FOR LOSSES

  Three months ended June 30, 2001 vs. June 30, 2000

     The provision for losses of $11.7 million for the second quarter of 2001
increased from $9.9 million for the corresponding period in 2000. The increase
in the provision for losses in 2001 reflects higher net charge-offs and a higher
allowance requirement due to an increase in outstanding finance receivables. Net
charge-offs

                                        17
<PAGE>   19
ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS -- (CONTINUED)

were $10.8 million in the second quarter of 2001 as compared to $10.4 million in
the corresponding period of 2000.

  Six months ended June 30, 2001 vs. June 30, 2000

     The provision for losses of $22.9 million for the first six months of 2001
increased from $15.4 million for the corresponding period in 2000. The increase
in the provision for losses in 2001 reflects higher net charge-offs. Net
charge-offs were $27.2 million in the first six months of 2001 as compared to
$15.3 million in the corresponding period of 2000. The increase in charge-offs
was primarily due to the charge-off of a fully reserved account in the
asset-based lending portfolio, and higher charge-offs in small business lending,
partially offset by lower real estate charge-offs. The increase in the allowance
for loan losses reflects provisions for receivable growth, acquisition of a
small business lending portfolio, partially offset by net charge-offs against
previously reserved accounts.

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

OPERATING RESULTS BY SEGMENT

  Six months ended June 30, 2001 vs. June 30, 2000

     Small Business income before special charges, taxes and distributions on
preferred securities decreased by $13.0 million primarily reflecting lower
average finance assets of $428 million in aircraft finance due to
securitizations in 2000. Other Small Business lending reflected lower income
before special charges, taxes and distributions on preferred securities due to
higher operating expenses, higher provision for losses and lower average finance
assets of $63 million.

     Middle Markets income before special charges, taxes and distributions on
preferred securities increased by $14.0 million reflecting $362 million of
higher average managed finance assets due to growth in Floorplan Finance and
Franchise Finance, higher interest margin, and higher securitization gains,
partially offset by lower average asset-based lending finance assets, and higher
operating expenses principally in Floorplan Finance new initiatives.

     Specialty Finance income before special charges, taxes and distributions on
preferred securities decreased by $5.4 million, despite $118 million higher
average finance assets, due to higher provision for losses in Tax Lien Finance
(operations have ceased), higher operating expenses and lower interest margin.
Lower interest margin reflects lower yields in Tax Lien Finance and Resort
Receivables Finance and lower other income principally due to a gain on sale of
a Resort Receivables Finance real estate owned property in 2000. The decrease in
interest margin was partially offset by higher interest margin in Golf Finance,
Media Finance and securitization gains in Land Finance.

     Structured Capital income before special charges, taxes and distributions
on preferred securities increased by $4.9 million reflecting higher average
finance assets of $266 million primarily related to syndicated bank loans and
Receivables Funding, partially offset by higher operating expenses. The increase
in income before special charges, taxes and distributions on preferred
securities was further offset by lower interest margin and higher provision for
losses in Finance Company Services.

SPECIAL CHARGES

     To enhance the competitiveness and profitability, the Company has completed
a plan to restructure a portion of its small business segment consisting of
vendor finance and small business lending in addition to rationalizing certain
product lines. As a result, the Company recognized a restructuring charge of
$1.9 million in the second quarter of 2001. The pretax charges associated with
the restructure plan primarily consisted of

                                        18
<PAGE>   20
ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS -- (CONTINUED)

severance-related benefits that were based on established policies and
practices. Accruable restructuring costs have been included in Special charges
in the Condensed Consolidated Statement of Income.

NET INCOME

  Three months ended June 30, 2001 vs. June 30, 2000

     Second quarter 2001 net income was $24.4 million, $2.7 million or 10.0%
lower than the corresponding period in 2000. Lower net income for the quarter
was the result of higher selling and administrative expenses related to new
initiatives, collection and legal expenses, growth in managed receivables,
special charges, and higher provision for losses, partially offset by higher
interest margin reflecting higher securitization gains, investment and other
income.

  Six months ended June 30, 2001 vs. June 30, 2000

     Net income for the first six months of 2001 was $52.9 million, $0.6 million
or 1.2% higher than the corresponding period in 2000. The favorable results were
due to higher interest margin reflecting higher securitization gains, investment
and other income, partially offset by higher selling and administrative expenses
related to new initiatives, collection and legal expenses, and growth in managed
receivables, special charges, and higher provision for loan losses.

FORWARD-LOOKING STATEMENTS

     Certain statements in this Form 10-Q and other oral and written statements
made by Textron Financial from time to time, are forward-looking statements,
including those that discuss strategies, goals, outlook or other nonhistorical
matters; or project revenues, income, returns or other financial measures. These
forward-looking statements are subject to risks and uncertainties that may cause
actual results to differ materially from those contained in the statements,
including: (a) the extent to which Textron Financial is able to successfully
integrate acquisitions; (b) changes in worldwide economic and political
conditions and associated impact on interest and foreign exchange rates; (c) the
level of sales of Textron products for which Textron Financial offers financing;
(d) the ability to maintain credit quality and control costs when entering new
markets; (e) the actions of our competitors and our ability to respond; (f) our
ability to attract and retain qualified and experienced personnel; (g) Textron
Financial's access to debt financing at competitive rates; and (h) access to
equity in the form of retained earnings and capital contributions from Textron.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

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<PAGE>   21

                           PART II. OTHER INFORMATION

                         TEXTRON FINANCIAL CORPORATION

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

<Table>
<Caption>
EXHIBITS
--------
<C>        <S>
   4.1     Indenture dated as of December 9, 1999, between Textron
           Financial Corporation and SunTrust Bank (formerly known as
           Sun Trust Bank, Atlanta), (including form of debt
           securities). Incorporated by reference to Exhibit 4.1 to
           Amendment No. 2 to Textron Financial Corporation's
           Registration Statement on Form S-3 (No. 333-88509).
   4.2     Support Agreement dated as of May 25, 1994, between Textron
           Inc. and Textron Financial Corporation. Incorporated by
           reference to Exhibit 10.1 to Textron Financial Corporation's
           Registration Statement on Form 10 (No. 0-27559).
  12.1     Computation of Ratio of Earnings to Fixed Charges.
</Table>

REPORTS ON FORM 8-K

     No reports on Form 8-K were filed during the quarter ended June 30, 2001.

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<PAGE>   22

                                   SIGNATURES

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

Date: August 1, 2001                      Textron Financial Corporation

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

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