##### 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
    March 31, 2007oro

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934   Commission file number
    0-27559
      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 months ended March 31,
    2007 and 2006 (unaudited)

2Consolidated
    Balance Sheets at March 31, 2007 and December 30, 2006
    (unaudited)

3Consolidated
    Statements of Cash Flows for the three months ended
    March 31, 2007 and 2006 (unaudited)

4Consolidated
    Statements of Changes in Shareholders Equity through
    March 31, 2007 (unaudited)

5Notes to the
    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

26Item 4.


CONTROLS AND
    PROCEDURES

26PART II.
    OTHER INFORMATIONItem 6.


EXHIBITS

27EX-12 Computation of Ratio of Earnings to Fixed ChargesEX-31.1 Section 302 Certification of C.E.OEX-31.2 Section 302 Certification of C.F.O.EX-32.1 Section 906 Certification of C.E.O.EX-32.2 Section 906 Certification of C.F.O.   1




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##### Table of Contents



PART I.
    FINANCIAL INFORMATION  Item 1.
    Financial
    Statements  TEXTRON
    FINANCIAL CORPORATION
 CONSOLIDATED STATEMENTS OF INCOME

Three Months Ended March 31, 2007 and 2006

(Unaudited) 2007


2006(In millions)Finance charges

$
166


$
145Securitization gains


15



11Rental revenues on operating leases


8



7Other income


21



19Total revenues


210



182Interest expense


100



73Depreciation of equipment on
    operating leases


4



4Net interest margin


106



105Selling and administrative expenses


49



47Provision for losses


5



9Income before income
    taxes


52



49Income taxes


17



18Net income

$
35


$
31    2




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##### Table of Contents



Item 1.
    Financial
    Statements (Continued)  TEXTRON
    FINANCIAL CORPORATION
 CONSOLIDATED BALANCE SHEETS

(Unaudited) March 31,


December 30,2007


2006(In millions)AssetsCash and equivalents

$
48


$
47Finance receivables, net of
    unearned income:Distribution finance receivables


2,152



2,423Revolving loans


2,025



1,948Installment contracts


1,771



1,674Golf course and resort mortgages


1,148



1,060Finance leases


613



590Leveraged leases


553



615Total finance receivables


8,262



8,310Allowance for losses on finance
    receivables


(94
)


(93
)Finance receivables  net


8,168



8,217Equipment on operating
    leases  net


243



238Goodwill


169



169Other assets


369



329Total assets

$
8,997


$
9,000Liabilities and
    shareholders equityLiabilitiesAccrued interest and other
    liabilities

$
496


$
479Amounts due to Textron Inc.


20



20Deferred income taxes


481



497Debt


6,991



6,862Total liabilities


7,988



7,858Shareholders
    equityCapital surplus


592



592Investment in parent company
    preferred stock


(25
)


(25
)Accumulated other comprehensive
    income


7



7Retained earnings


435



568Total shareholders equity


1,009



1,142Total liabilities and
    shareholders equity

$
8,997


$
9,000    3




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##### Table of Contents



Item 1.
    Financial
    Statements (Continued)  TEXTRON
    FINANCIAL CORPORATION
 CONSOLIDATED STATEMENTS OF CASH FLOWS

Three Months Ended March 31, 2007 and 2006

(Unaudited) 2007


2006(In millions)Cash flows from operating
    activities:Net income

$
35


$
31Adjustments to reconcile net
    income to net cash provided by operating activities:Provision for losses


5



9Increase in accrued interest and
    other liabilities


9



50Depreciation


7



7Amortization


2



3Non-cash gains in excess of
    collections on securitizations and syndications


(3
)


3Deferred income tax provision


2



(1
)Other  net


12



(2
)Net cash provided by operating
    activities


69



100Cash flows from investing
    activities:Finance receivables originated or
    purchased


(3,111
)


(2,700
)Finance receivables repaid


2,469



2,201Proceeds from receivable sales,
    including securitizations


613



Other investments


7



(2
)Proceeds from disposition of
    operating lease and other assets


11



34Other capital expenditures


(2
)


(3
)Purchase of assets for operating
    leases


(15
)


(18
)Net cash used by investing
    activities


(28
)


(488
)Cash flows from financing
    activities:Proceeds from issuance of
    long-term debt


574



556Principal payments on long-term
    debt


(82
)


(50
)Proceeds from issuance of
    subordinated debt


300



Net decrease in commercial paper


(684
)


(54
)Net increase (decrease) in other
    short-term debt


6



(2
)Principal payments on nonrecourse
    debt


(19
)


Capital contributions from Textron
    Inc.


2



2Dividends paid to Textron
    Inc.


(137
)


(64
)Net cash (used) provided by
    financing activities


(40
)


388Effect of exchange rate changes on
    cash






Net increase in cash and
    equivalents


1



Cash and equivalents at beginning
    of year


47



10Cash and equivalents at end of
    period

$
48


$
10    4




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##### Table of Contents



Item 1.
    Financial
    Statements (Continued)  TEXTRON
    FINANCIAL CORPORATION
  CONSOLIDATED STATEMENTS OF CHANGES IN
    SHAREHOLDERS EQUITY
 (Unaudited)
  Investment


Accumulatedin Parent


Other





TotalCompany


Comprehensive





Share-Capital


Preferred


Income


Retained


holdersSurplus


Stock


(Loss)


Earnings


Equity(In millions)Balance December 31,
    2005

$
574


$
(25
)

$
5


$
496


$
1,050Comprehensive income:Net income














152



152Other comprehensive income:Foreign currency translation










1







1Change in unrealized net losses on
    hedge contracts, net of income taxes










5







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










(4
)






(4
)Other comprehensive income










2







2Comprehensive income


















154Capital contributions from Textron
    Inc.


27















27Dividends to Textron Inc.


(9
)










(80
)


(89
)Balance December 30,
    2006


592



(25
)


7



568



1,142Comprehensive income:Net income














35



35Other comprehensive income:Foreign currency translation










(1
)






(1
)Change in unrealized net losses on
    hedge contracts, net of income taxes


















Change in unrealized net gains on
    interest-only securities, net of income taxes










1







1Other comprehensive income


















Comprehensive income


















35Cumulative effect of a change in
    accounting principle














(33
)


(33
)Capital contributions from Textron
    Inc.


2















2Dividends to Textron Inc.


(2
)










(135
)


(137
)Balance March 31,
    2007

$
592


$
(25
)

$
7


$
435


$
1,009    5




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##### Table of Contents



Item 1.
    Financial
    Statements (Continued)  TEXTRON
    FINANCIAL CORPORATION
  NOTES TO
    THE CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
  Note 1.
    Basis of
    Presentation  Form 10-K
  Note 2.
    Recent
    Accounting Pronouncements      Note 3.
    Other
    Income  Three Months EndedMarch 31,


March 31,2007


2006(In millions)Servicing income

$
8


$
7Investment income


3



4Prepayment gains


2



2Late charges


1



1Other


7



5Total other income

$
21


$
19    6




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##### Table of Contents



Item 1.
    Financial
    Statements (Continued)   TEXTRON
    FINANCIAL CORPORATION
  NOTES TO
    THE CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
  Note 4.
    Managed
    and Serviced Finance Receivables    March 31,


December 30,2007


2006(In millions)Total managed and serviced finance
    receivables

$
12,161


$
11,536Nonrecourse participations


(770
)


(695
)Third-party portfolio servicing


(630
)


(581
)Small business administration
    sales agreements


(17
)


(19
)Total managed finance receivables


10,744



10,241Securitized receivables


(2,482
)


(1,931
)Owned finance receivables

$
8,262


$
8,310           March 31,


December 30,2007


2006(In millions)Rental receivable

$
1,647


$
1,838Nonrecourse debt


(1,107
)


(1,292
)Estimated residual values of
    leased assets


315



329855



875Less unearned income


(302
)


(260
)Investment in leveraged leases


553



615Deferred income taxes


(389
)


(410
)Net investment in leveraged leases

$
164


$
205   No. 13-2 13-2). 13-2
 7




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##### Table of Contents



Item 1.
    Financial
    Statements (Continued)   TEXTRON
    FINANCIAL CORPORATION
  NOTES TO
    THE CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
  13-2
  13-2
  Note 5.
    Loan
    Impairment    March 31,


December 30,2007


2006(In millions)Impaired nonaccrual finance
    receivables

$
55


$
60Impaired accrual finance
    receivables






101Total impaired finance receivables

$
55


$
161Impaired nonaccrual finance
    receivables with identified reserve requirements

$
36


$
36Allowance for losses on impaired
    nonaccrual finance receivables

$
19


$
17     March 31,


December 30,2007


2006(In millions)Impaired nonaccrual finance
    receivables

$
55


$
60Nonaccrual homogenous finance
    receivables


21



15Total nonaccrual finance
    receivables


76



75Repossessed assets and properties


40



38Total nonperforming assets

$
116


$
113      8




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##### Table of Contents



Item 1.
    Financial
    Statements (Continued)   TEXTRON
    FINANCIAL CORPORATION
  NOTES TO
    THE CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
     Note 6.
    Other
    Assets  March 31,


December 30,2007


2006(In millions)Retained interests in
    securitizations

$
220


$
179Repossessed assets and properties


40



38Fixed assets  net


35



34Other long-term investments


31



40Investment in equipment residuals


3



3Other


40



35Total other assets

$
369


$
329            9




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##### Table of Contents



Item 1.
    Financial
    Statements (Continued)   TEXTRON
    FINANCIAL CORPORATION
  NOTES TO
    THE CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
   Note 7.
    Debt and
    Credit Facilities  March 31,


December 30,2007


2006(In millions)Short-term debt:Commercial paper

$
1,035


$
1,719Other short-term debt


66



60Total short-term debt


1,101



1,779Long-term debt:Fixed-rate notesDue 2007 (weighted-average rates
    of 5.61% and 5.50%, respectively)


759



843Due 2008 (weighted-average rates
    of 4.12% and 4.12%, respectively)


611



611Due 2009 (weighted-average rates
    of 5.67% and 5.67%, respectively)


649



649Due 2010 (weighted-average rates
    of 4.58% and 4.58%, respectively)


557



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


651



651Total Fixed-rate notes


3,227



3,311Variable-rate notesDue 2007 (weighted-average rates
    of 5.78% and 5.80%, respectively)


275



275Due 2008 (weighted-average rates
    of 5.44% and 5.45%, respectively)


355



355Due 2009 (weighted-average rates
    of 5.46% and 5.47%, respectively)


913



913Due 2010 (weighted-average rates
    of 5.40% and 5.49%, respectively)


708



276Due 2011 (weighted-average rate of
    5.49%)


150



Total Variable-rate notes


2,401



1,819Subordinated debt:Due 2011 and thereafter (6.00%)


300



Unamortized discount


(5
)


(3
)Fair value adjustments


(33
)


(44
)Total long-term and subordinated
    debt


5,890



5,083Total debt

$
6,991


$
6,862    10




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##### Table of Contents



Item 1.
    Financial
    Statements (Continued)   TEXTRON
    FINANCIAL CORPORATION
  NOTES TO
    THE 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)Textron Financial multi-year
    facility expiring in 2011

$
1,750


$
1,035


$
12


$
703Textron multi-year facility
    expiring in 2011


1,250







19



1,231Total

$
3,000


$
1,035


$
31


$
1,934       March 31,


March 31,2007


2006Commercial paper


5.08
%


4.81
%Other short-term debt


4.48
%


4.62
%     Fixed-to-Floating
  and/or
   11




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##### Table of Contents



Item 1.
    Financial
    Statements (Continued)   TEXTRON
    FINANCIAL CORPORATION
  NOTES TO
    THE CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
           Note 8.
    Accumulated
    Other Comprehensive Income (Loss) and Comprehensive
    Income    Three Months EndedMarch 31,


March 31,2007


2006(In millions)Beginning of year

$
7


$
5Foreign currency translation


(1
)


Amortization of deferred loss on
    hedge contracts, net of income taxes of $0.9 million and
    $0.3 million, respectively


1



1Net deferred loss on hedge
    contracts, net of income tax benefit of $0.5 million in 2007


(1
)


Net deferred gain on interest-only
    securities, net of income taxes of $0.4 million and
    $1.0 million, respectively


1



2End of period

$
7


$
8     Three Months EndedMarch 31,


March 31,2007


2006(In millions)Net income

$
35


$
31Other comprehensive income






3Comprehensive income

$
35


$
34  12




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##### Table of Contents



Item 1.
    Financial
    Statements (Continued)   TEXTRON
    FINANCIAL CORPORATION
  NOTES TO
    THE CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
  Note 9.
    Income
    Taxes          Note 10.
    Contingencies      Note 11.
    Financial
    Information About Operating Segments    13




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##### Table of Contents



Item 1.
    Financial
    Statements (Continued)  TEXTRON
    FINANCIAL CORPORATION
  NOTES TO
    THE CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
  Three Months EndedMarch 31,


March 31,2007


2006(In millions)Revenues:Distribution Finance

$
83


$
59Aviation Finance


40



28Golf Finance


34



30Resort Finance


32



30Asset-Based Lending


23



21Structured Capital


(3
)


7Corporate and Other


1



7Total revenues

$
210


$
182Income before income taxes:(1)(2)Distribution Finance

$
28


$
22Aviation Finance


11



7Golf Finance


8



6Resort Finance


13



13Asset-Based Lending


8



1Structured Capital


(8
)


2Corporate and Other


(8
)


(2
)Income before income taxes

$
52


$
49   March 31,


December 30,2007


2006(In millions)Finance assets:(3)Distribution Finance

$
2,210


$
2,422Aviation Finance


1,903



1,776Golf Finance


1,626



1,524Resort Finance


1,350



1,296Asset-Based Lending


895



864Structured Capital


665



756Corporate and Other


152



170Total finance assets

$
8,801


$
8,808     (1)
    
    Interest expense is allocated to each segment in proportion to
    its net investment in finance assets. Net investment in finance
    assets includes finance assets less deferred income taxes,
    security deposits and other specifically identified liabilities.
    The interest allocated matches all variable-rate finance assets
    with variable-rate debt costs and all fixed-rate finance assets
    with fixed-rate debt costs and includes only debt issued during
    historical periods with credit spreads consistent with those in
    existence during the periods in which the current receivable
    portfolio was originated. If this allocation results in greater
    or less interest expense than was actually 14




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##### Table of Contents



Item 1.
    Financial
    Statements (Continued)   TEXTRON
    FINANCIAL CORPORATION
  NOTES TO
    THE CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
  incurred by the Company, the remaining balance is included in
    the Corporate and Other segments interest expense.Prior to 2007, we allocated 100% of the interest expense
    recognized to the Companys operating segments without
    adjustment. In addition, the allocation was determined, to the
    extent possible, based on matching variable-rate debt with
    variable-rate finance assets and fixed-rate debt with fixed-rate
    finance assets. Any excess floating-rate debt was allocated to
    fixed-rate finance assets. A change in the allocation
    methodology was made to measure the results of each segment more
    consistently with the economic characteristics of their existing
    portfolio, which is consistent with how management internally
    evaluates segment operating performance. The 2006 results have
    not been restated under the new methodology. This change had a
    $4 million positive effect on the collective results of the
    six core portfolio segments in the first quarter of 2007.(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)Textron Financial multi-year
    facility expiring in 2011

$
1,750


$
1,035


$
12


$
703Textron multi-year facility
    expiring in 2011


1,250







19



1,231Total

$
3,000


$
1,035


$
31


$
1,934                  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
    March 31,


December 30,2007


2006(Dollars in millions)Distribution Finance

$
4,084



38
%

$
3,753



37
%Aviation Finance


2,032



19
%


1,939



19
%Golf Finance


1,615



15
%


1,518



15
%Resort Finance


1,349



13
%


1,295



13
%Asset-Based Lending


895



8
%


864



8
%Structured Capital


643



6
%


730



7
%Corporate and Other


126



1
%


142



1
%Total managed finance receivables

$
10,744



100
%

$
10,241



100
%   No. 13-2 13-2).
  Nonperforming
    Assets
   18




---



##### Table of Contents



Item 2.
    Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations (Continued)     March 31,


December 30,2007


2006(Dollars in millions)Golf Finance

$
31



1.88
%

$
29



1.89
%Resort Finance


15



1.11
%


16



1.22
%Aviation Finance


13



0.71
%


12



0.70
%Asset-Based Lending


12



1.35
%


16



1.81
%Distribution Finance


9



0.42
%


7



0.28
%Corporate and Other


36



23.32
%


33



19.74
%Total nonperforming assets

$
116



1.32
%

$
113



1.28
%     Interest
    Rate Sensitivity
      Financial
    Risk Management
   19




---



##### Table of Contents



Item 2.
    Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations (Continued)     RESULTS
    OF OPERATIONS
  For
    the three months ended March 31, 2007 vs. March 31,
    2006
  Revenues
    and Net Interest Margin
    March 31,


March 31,2007


2006(Dollars in millions)Finance charges

$
166


$
145Securitization gains


15



11Rental revenues on operating leases


8



7Other income


21



19Total revenues


210



182Interest expense


100



73Depreciation of equipment on
    operating leases


4



4Net interest margin

$
106


$
105Portfolio yield


8.30
%


8.89
%Net interest margin as a
    percentage of average net investment


5.15
%


6.22
%   13-2
  13-2
 20




---



##### Table of Contents



Item 2.
    Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations (Continued)   Selling
    and Administrative Expenses
  March 31,


March 31,2007


2006(Dollars in millions)Selling and administrative expenses

$
49


$
47Selling and administrative
    expenses as a percentage of managed and serviced finance
    receivables


1.68
%


1.91
%Operating efficiency ratio


46.2
%


44.8
%     Provision
    for Losses
    March 31,


March 31,2007


2006(In millions)Allowance for losses on finance
    receivables beginning of year

$
93


$
96Provision for losses


5



9Less net charge-offs:Distribution Finance


3



1Asset-Based Lending






2Resort Finance






1Aviation Finance






1Corporate and Other


1



Total net charge-offs


4



5Allowance for losses on finance
    receivables end of period

$
94


$
100      21




---



##### Table of Contents



Item 2.
    Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations (Continued)  Income
    Taxes
    March 31,


March 31,2007


2006Federal statutory income tax rate


35.0
%


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


1.3



1.3Tax exempt interest


(0.2
)


(0.3
)Foreign tax rate differential


(2.0
)


(1.9
)Canadian dollar functional currency


(4.0
)


Interest on tax
    contingencies  leveraged leases


3.3



2.5Tax credits


(1.6
)


(1.8
)Other, net


1.7



1.3Effective income tax rate


33.5
%


36.1
%     Operating
    Results by Segment
    Distribution
    Finance
  March 31,


March 31,2007


2006(In millions)Revenues

$
83


$
59Net interest margin

$
56


$
43Selling and administrative expenses


23



19Provision for losses


5



2Segment income

$
28


$
22    22




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##### Table of Contents



Item 2.
    Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations (Continued)   Aviation
    Finance
  March 31,


March 31,2007


2006(In millions)Revenues

$
40


$
28Net interest margin

$
17


$
13Selling and administrative expenses


5



5Provision for losses


1



1Segment income

$
11


$
7     Golf
    Finance
  March 31,


March 31,2007


2006(In millions)Revenues

$
34


$
30Net interest margin

$
15


$
13Selling and administrative expenses


5



5Provision for losses


2



2Segment income

$
8


$
6     Resort
    Finance
  March 31,


March 31,2007


2006(In millions)Revenues

$
32


$
30Net interest margin

$
16


$
18Selling and administrative expenses


6



6Provision for losses


(3
)


(1
)Segment income

$
13


$
13    23




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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
  March 31,


March 31,2007


2006(In millions)Revenues

$
23


$
21Net interest margin

$
12


$
12Selling and administrative expenses


5



6Provision for losses


(1
)


5Segment income

$
8


$
1     Structured
    Capital
  March 31,


March 31,2007


2006(In millions)Revenues

$
(3
)

$
7Net interest margin

$
(7
)

$
3Selling and administrative expenses


1



1Segment (loss) income

$
(8
)

$
2   13-2 13-2
  Corporate
    and Other Segment
  March 31,


March 31,2007


2006(In millions)Revenues

$
1


$
7Net interest margin

$
(3
)

$
3Selling and administrative expenses


4



5Provision for losses


1



Segment loss

$
(8
)

$
(2
)    24




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##### Table of Contents



Item 2.
    Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations (Continued)    Selected
    Financial Ratios
  Three Months EndedMarch 31,


March 31,2007


2006Net interest margin as a
    percentage of average net investment(1)


5.15
%


6.22
%Return on average equity


12.73
%


12.10
%Return on average assets


1.54
%


1.65
%Selling and administrative
    expenses as a percentage of average managed and serviced finance
    receivables(2)


1.68
%


1.91
%Operating efficiency ratio(3)


46.2
%


44.8
%Net charge-offs as a percentage of
    average finance receivables


0.13
%


0.30
%   March 31,


December 30,2007


200660+ days contractual delinquency
    as a percentage of finance receivables(4)


0.80
%


0.77
%Nonperforming assets as a
    percentage of finance assets(5)


1.32
%


1.28
%Allowance for losses on finance
    receivables as a percentage of finance receivables


1.14
%


1.11
%Allowance for losses on finance
    receivables as a percentage of nonaccrual finance receivables


123.2
%


123.1
%Total debt to tangible
    shareholders equity(6)


8.40
x


7.10
x     (1)
    
    Represents revenues earned less interest expense on borrowings
    and operating lease depreciation as a percentage of average net
    investment. Average net investment includes finance receivables
    plus operating leases, less deferred taxes on leveraged leases.(2)
    
    Average managed and serviced finance receivables include owned
    receivables, receivables serviced under securitizations,
    participations and third-party portfolio servicing agreements.(3)
    
    Operating efficiency ratio is selling and administrative
    expenses divided by net interest margin.(4)
    
    Delinquency excludes any captive finance receivables with
    recourse to Textron. Captive finance receivables represent
    third-party finance receivables originated in connection with
    the sale or lease of Textron manufactured products. Percentages
    are expressed as a function of total Textron Financial
    independent and nonrecourse captive receivables.(5)
    
    Finance assets include: finance receivables; equipment on
    operating leases, net of accumulated depreciation; repossessed
    assets and properties; retained interests in securitizations;
    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
   25




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##### Table of Contents



Item 2.
    Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations (Continued)      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 and other post-retirement employee costs; (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
    Textron; (j) uncertainty in estimating contingent
    liabilities and establishing reserves tailored to address such
    contingencies; (k) the launching of significant new
    products or programs which could result in unanticipated
    expenses; and (l) performance of acquisitions.
   Item 3.
    Quantitative
    and Qualitative Disclosures About Market Risk  Form 10-Q.
   Item 4.
    Controls
    and Procedures  Rule 13a-15(e) 15d-15(e)
   26




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##### Table of Contents



PART II.
    OTHER INFORMATION



TEXTRON FINANCIAL CORPORATION  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  27




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##### Table of Contents



SIGNATURES
      /s/  Thomas
    J. Cullen       28