##### Table of Contents



UNITED STATES
 SECURITIES AND EXCHANGE
    COMMISSIONWashington, 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
    June 30, 2006ORo

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934   Commission file number
    001-15515
      Textron Financial
    Corporation
 (Exact name of registrant as
    specified in its charter)
      Delaware

05-6008768(State or other jurisdiction
    of
    incorporation or organization)

(I.R.S. Employer
    Identification No.)   40 Westminster Street, P.O. Box 6687, Providence,
    RI
    02940-6687
    401-621-4200(Address and telephone number of
    principal executive offices)
        þ o
  Rule 12b-2
 o o þ
  Rule 12b-2).
  o þ




---



##### 



TEXTRON
    FINANCIAL CORPORATION
  TABLE OF
    CONTENTS
   
 PagePART I.
    FINANCIAL INFORMATIONItem 1. FINANCIAL
    STATEMENTSConsolidated
    Statements of Income for the three and six months ended
    June 30, 2006 and 2005 (unaudited)


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


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


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


5Notes to
    Consolidated Financial Statements (unaudited)


6Item 2. MANAGEMENTS
    DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
    OPERATIONS


15Item 3. QUANTITATIVE
    AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK


27Item 4. CONTROLS
    AND PROCEDURES


27PART II.
    OTHER INFORMATIONItem 6. EXHIBITS


28EX-12 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGESEX-31.1 SECTION 302 CERTIFICATION OF THE CEOEX-31.2 SECTION 302 CERTIFICATION OF THE CFOEX-32.1 SECTION 906 CERTIFICATION OF THE CEOEX-32.2 SECTION 906 CERTIFICATION OF THE CFO   1




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##### Table of Contents



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

(Unaudited)  Three Months


Six MonthsEnded


EndedJune 30,


June 30,


June 30,


June 30,2006


2005


2006


2005(In millions)Finance charges and discounts

$
156


$
110


$
301


$
214Securitization gains


10



15



21



25Rental revenues on operating leases


9



8



16



15Other income


17



14



36



34Total revenues


192



147



374



288Interest expense


84



51



157



96Depreciation of equipment on
    operating leases


5



5



9



9Net interest margin


103



91



208



183Selling and administrative expenses


48



46



95



93Provision for losses


(1
)


1



8



13Income before income
    taxes


56



44



105



77Income taxes


20



15



38



26Net income

$
36


$
29


$
67


$
51    2




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##### Table of Contents



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

(Unaudited)  June 30,


December 31,2006


2005(In millions)AssetsCash and equivalents

$
23


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


1,937



1,654Revolving loans


1,806



1,633Installment contracts


1,641



1,374Golf course and resort mortgages


1,143



1,020Leveraged leases


562



569Finance leases


543



513Total finance receivables


7,632



6,763Allowance for losses on finance
    receivables


(92
)


(96
)Finance receivables-net


7,540



6,667Equipment on operating leases-net


244



231Goodwill


169



169Other assets


345



364Total assets

$
8,321


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

$
526


$
499Amounts due to Textron Inc.


11



11Deferred income taxes


465



461Debt


6,258



5,420Total liabilities


7,260



6,391Shareholders
    equityCapital surplus


592



574Investment in parent company
    preferred stock


(25
)


(25
)Accumulated other comprehensive
    income


11



5Retained earnings


483



496Total shareholders equity


1,061



1,050Total liabilities and
    shareholders equity

$
8,321


$
7,441    3




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##### Table of Contents



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

Six Months Ended June 30, 2006 and 2005

(Unaudited) 2006


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

$
67


$
51Adjustments to reconcile net
    income to net cash provided by operating activities:Increase in accrued interest and
    other liabilities


51



40Provision for losses


8



13Depreciation


14



17Amortization


5



5Deferred income tax provision


5



5Collections in excess of noncash
    gains on securitizations and syndications


4



Other  net


1



15Net cash provided by operating
    activities of continuing operations


155



146Net cash used by operating
    activities of discontinued operations


(4
)


Net cash provided by operating
    activities


151



146Cash flows from investing
    activities:Finance receivables originated or
    purchased


(5,996
)


(5,208
)Finance receivables repaid


4,974



4,687Proceeds from receivable sales,
    including securitizations


50



233Proceeds from disposition of
    operating leases and other assets


46



26Purchase of assets for operating
    leases


(48
)


(24
)Other capital expenditures


(5
)


(4
)Other investments


8



13Net cash used by investing
    activities of continuing operations


(971
)


(277
)Cash flows from financing
    activities:Proceeds from issuance of
    long-term debt


1,009



1,150Principal payments on long-term
    debt


(652
)


(556
)Net increase (decrease) in
    commercial paper


519



(382
)Net decrease in other short-term
    debt


(7
)


(11
)Proceeds from issuance of
    nonrecourse debt


25



Principal payments on nonrecourse
    debt






(23
)Capital contributions from Textron
    Inc.


23



5Dividends paid to Textron
    Inc.


(85
)


(102
)Net cash provided by financing
    activities of continuing operations


832



81Effect of exchange rate changes on
    cash


1



Net cash provided (used) by
    continuing operations


17



(50
)Net cash used by discontinued
    operations


(4
)


Net increase (decrease) in cash
    and equivalents


13



(50
)Cash and equivalents at beginning
    of year


10



127Cash and equivalents at end of
    period

$
23


$
77    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


OtherCompany


Comprehensive





TotalCapital


Preferred


Income


Retained


ShareholdersSurplus


Stock


(Loss)


Earnings


Equity(In millions)Balance January 1,
    2005

$
574


$
(25
)

$
1


$
485


$
1,035Comprehensive income:Net income














111



111Other comprehensive income:Foreign currency translation










(1
)






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










5







5Other comprehensive income










4







4Comprehensive income


















115Capital contributions from Textron
    Inc.


9















9Dividends to Textron Inc.


(9
)










(100
)


(109
)Balance December 31,
    2005


574



(25
)


5



496



1,050Comprehensive income:Net income














67



67Other comprehensive income:Foreign currency translation










4







4Change in unrealized net losses on
    hedge contracts, net of income taxes










4







4Change in unrealized net gains on
    interest-only securities, net of income tax benefit










(2
)






(2
)Other comprehensive income










6







6Comprehensive income


















73Capital contributions from Textron
    Inc.


23















23Dividends to Textron Inc.


(5
)










(80
)


(85
)Balance June 30,
    2006

$
592


$
(25
)

$
11


$
483


$
1,061    5




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##### Table of Contents



Item 1.
    Financial
    Statements (Continued)  TEXTRON
    FINANCIAL CORPORATION



NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)  Note 1.
    Basis of
    Presentation  Form 10-K
  Note 2.
    Recent
    Accounting Pronouncements        No. 13-2
 6




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##### Table of Contents



Item 1.
    Financial
    Statements (Continued)  TEXTRON
    FINANCIAL CORPORATION
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
    (Unaudited)  (Continued)
     Note 3.
    Other
    Income  Three Months


Six MonthsEnded


EndedJune 30,


June 30,


June 30,


June 30,2006


2005


2006


2005(In millions)Servicing income

$
8


$
9


$
15


$
17Investment income


4



2



8



5Late charges


1



2



2



3Prepayment income






1



2



3Syndication income














1Other


4







9



5Total other income

$
17


$
14


$
36


$
34     Note 4.
    Discontinued
    Operations   7




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##### Table of Contents



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


December 31,2006


2005(In millions)Total managed and serviced finance
    receivables

$
10,578


$
9,915Nonrecourse participations


(471
)


(383
)Third-party portfolio servicing


(358
)


(509
)SBA sales agreements


(22
)


(28
)Total managed finance receivables


9,727



8,995Securitized receivables


(2,030
)


(2,124
)Other managed finance receivables


(65
)


(108
)Owned finance receivables

$
7,632


$
6,763           Note 6.
    Loan
    Impairment    8




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##### Table of Contents



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


December 31,2006


2005(In millions)Nonaccrual finance receivables

$
89


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

$
73


$
67Impaired accrual finance
    receivables


89



36Total impaired finance receivables

$
162


$
103Impaired finance receivables with
    identified reserve requirements

$
62


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

$
14


$
18           Note 7.
    Other
    Assets  June 30,


December 31,2006


2005(In millions)Retained interests in
    securitizations

$
189


$
208Other long-term investments


46



53Fixed assets  net


33



33Repossessed assets and properties


23



22Investment in equipment residuals


8



10Other


46



38Total other assets

$
345


$
364        9




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##### Table of Contents



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


December 31,2006


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

$
1,706


$
1,187Other short-term debt


6



13Total short-term debt


1,712



1,200Long-term debt:Fixed rate notesDue 2006 (weighted-average rates
    of 2.90% and 3.04%, respectively)


173



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


816



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


608



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


651



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


557



557Due 2011 and thereafter
    (weighted-average rates of 4.98% and 4.71%, respectively)


627



226Variable rate notesDue 2006 (weighted-average rates
    of 5.37% and 4.78%, respectively)


210



516Due 2007 (weighted-average rates
    of 5.75% and 4.93%, respectively)


275



275Due 2008 (weighted-average rates
    of 5.26% and 4.38%, respectively)


330



220Due 2009 (weighted-average rate of
    5.29%)


395



Long-term debt


4,642



4,271Unamortized discount


(4
)


(4
)Fair value adjustments


(92
)


(47
)Total long-term debt


4,546



4,220Total debt

$
6,258


$
5,420     Facility Amount


Available Credit


Expiration(In millions)Committed Lines of Credit:Textron Financial multi-year
    facility

$
1,750


$
1,737



2011Textron multi-year facility

$
1,250


$
1,225



2011Other Credit Facilities:Canadian dollar uncommitted credit
    facilities


CAD 70



CAD 70



Australian dollar committed credit
    facility


AUD 25



AUD 25



2007Multi-currency committed credit
    facility

$
25


$
19



August 2006  10




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##### Table of Contents



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


June 30,2006


2005Commercial paper


5.31%



3.27%Other short-term debt


5.33%



5.00%              11




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##### Table of Contents



Item 1.
    Financial
    Statements (Continued)  TEXTRON
    FINANCIAL CORPORATION
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
    (Unaudited)  (Continued)
    Note 9.
    Accumulated
    Other Comprehensive Income (Loss) and Comprehensive
    Income    Six MonthsEndedJune 30,


June 30,2006


2005(In millions)Beginning of year

$
5


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


2



2Foreign currency translation


4



(7
)Net deferred gain (loss) on hedge
    contracts, net of income taxes of $1 million and income tax
    benefit of $3 million, respectively


2



(6
)Net deferred (loss) gain on
    interest-only securities, net of income tax benefit of
    $1 million and income taxes of $2 million, respectively


(2
)


3End of period

$
11


$
(7
)     Three Months


Six MonthsEnded


EndedJune 30,


June 30,


June 30,


June 30,2006


2005


2006


2005(In millions)Net income

$
36


$
29


$
67


$
51Other comprehensive income (loss)


3







6



(8
)Comprehensive income

$
39


$
29


$
73


$
43   Note 10.
    Contingencies     12




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##### Table of Contents



Item 1.
    Financial
    Statements (Continued)  TEXTRON
    FINANCIAL CORPORATION
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
    (Unaudited)  (Continued)
       Note 11.
    Financial
    Information about Operating Segments    Three Months


Six MonthsEnded


EndedJune 30,


June 30,


June 30,


June 30,2006


2005


2006


2005(In millions)Revenues:Distribution Finance

$
64


$
44


$
123


$
84Golf Finance


32



26



62



48Aircraft Finance


32



25



60



47Resort Finance


30



20



60



41Asset-Based Lending


23



18



44



34Structured Capital


8



12



15



24Other


3



2



10



10Total revenues

$
192


$
147


$
374


$
288Income before income taxes:(1)(2)Distribution Finance

$
26


$
17


$
48


$
32Golf Finance


11



8



17



14Aircraft Finance


10



10



16



16Resort Finance


8



5



21



7Asset-Based Lending


4



4



6



10Structured Capital


3



7



5



14Other


(6
)


(7
)


(8
)


(16
)Income before income taxes

$
56


$
44


$
105


$
77   13




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##### Table of Contents



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


December 31,2006


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

$
1,973


$
1,710Aircraft Finance


1,599



1,278Golf Finance


1,550



1,344Resort Finance


1,209



1,155Asset-Based Lending


838



764Structured Capital


707



704Other


267



332Total finance assets

$
8,143


$
7,287     (1)
    
    Interest expense is allocated to each segment in proportion to
    its net investment in finance assets. Net investment in finance
    assets includes deferred income taxes, security deposits and
    other specifically identified liabilities. The interest
    allocated matches, to the extent possible, variable rate debt
    with variable rate finance assets and fixed rate debt with fixed
    rate finance assets.(2)
    
    Indirect expenses are allocated to each segment based on the use
    of such resources. Most allocations are based on the
    segments proportion of net investment in finance assets,
    headcount, number of transactions, computer resources and senior
    management time.(3)
    
    Finance assets include: finance receivables; equipment on
    operating leases, net of accumulated depreciation; repossessed
    assets and properties; retained interests in securitizations;
    investment in equipment residuals; Acquisition, Development and
    Construction arrangements; and other short- and long-term
    investments (some of which are classified in Other assets on
    Textron Financials Consolidated Balance Sheets). 14




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##### 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
     15




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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
     16




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##### Table of Contents



Item 2.
    Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations (Continued)    Managed
    Finance Receivables
    June 30,


December 31,2006


2005(Dollars in millions)Distribution Finance

$
3,305



34
%

$
2,993



33
%Aircraft Finance


1,842



19
%


1,664



19
%Golf Finance


1,603



16
%


1,435



16
%Resort Finance


1,201



12
%


1,138



13
%Asset-Based Lending


838



9
%


764



8
%Structured Capital


682



7
%


689



8
%Other


256



3
%


312



3
%Total managed finance receivables

$
9,727



100
%

$
8,995



100
%     Nonperforming
    Assets
   17




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##### Table of Contents



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


December 31,2006


2005(Dollars in millions)Asset-Based Lending

$
25



3.03
%

$
6



0.81
%Resort Finance


24



2.00
%


31



2.67
%Golf Finance


15



0.98
%


13



0.99
%Aircraft Finance


12



0.73
%


14



1.07
%Distribution Finance


3



0.16
%


2



0.11
%Other


33



12.21
%


45



13.64
%Total nonperforming assets

$
112



1.38
%

$
111



1.53
%     Interest
    Rate Sensitivity
      Financial
    Risk Management
   18




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##### Table of Contents



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


Six MonthsEnded


EndedJune 30,


June 30,


June 30,


June 30,2006


2005


2006


2005(Dollars in millions)Finance charges and discounts

$
156


$
110


$
301


$
214Securitization gains


10



15



21



25Rental revenues on operating leases


9



8



16



15Other income


17



14



36



34Total revenues


192



147



374



288Interest expense


84



51



157



96Depreciation of equipment on
    operating leases


5



5



9



9Net interest margin

$
103


$
91


$
208


$
183Portfolio yield


9.11
%


7.57
%


9.00
%


7.50
%Net interest margin as a
    percentage of average net investment


5.81
%


6.04
%


6.01
%


6.15
%      19




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##### Table of Contents



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


Six MonthsEnded


EndedJune 30,


June 30,


June 30,


June 30,2006


2005


2006


2005(Dollars in millions)Selling and administrative expenses

$
48


$
46


$
95


$
93Selling and administrative
    expenses as a percentage of average managed and serviced finance
    receivables


1.89
%


1.95
%


1.90
%


1.97
%Operating efficiency ratio


46.6
%


50.4
%


45.7
%


50.8
%     Provision
    for Losses
  Three Months


Six MonthsEnded


EndedJune 30,


June 30,


June 30,


June 30,2006


2005


2006


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

$
100


$
102


$
96


$
99Provision for losses


(1
)


1



8



13Less net charge-offs:Asset-Based Lending










2



Resort Finance






3



1



7Distribution Finance


1



2



1



4Golf Finance






1



1



2Aircraft Finance






(1
)


1



Other


6



(1
)


6



Total net charge-offs


7



4



12



13Allowance for losses on
    receivables end of period

$
92


$
99


$
92


$
99      20




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##### Table of Contents



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


Six MonthsEnded


EndedJune 30,


June 30,


June 30,


June 30,2006


2005


2006


2005(In millions)Revenues

$
64


$
44


$
123


$
84Net interest margin

$
44


$
35


$
87


$
68Selling and administrative expenses


21



16



40



32Provision for losses


(3
)


2



(1
)


4Segment income

$
26


$
17


$
48


$
32       Golf
    Finance
  Three Months


Six MonthsEnded


EndedJune 30,


June 30,


June 30,


June 30,2006


2005


2006


2005(In millions)Revenues

$
32


$
26


$
62


$
48Net interest margin

$
13


$
15


$
26


$
27Selling and administrative expenses


4



5



9



10Provision for losses


(2
)


2







3Segment income

$
11


$
8


$
17


$
14    21




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##### Table of Contents



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


Six MonthsEnded


EndedJune 30,


June 30,


June 30,


June 30,2006


2005


2006


2005(In millions)Revenues

$
32


$
25


$
60


$
47Net interest margin

$
14


$
12


$
26


$
23Selling and administrative expenses


5



4



10



8Provision for losses


(1
)


(2
)






(1
)Segment income

$
10


$
10


$
16


$
16       Resort
    Finance
  Three Months


Six MonthsEnded


EndedJune 30,


June 30,


June 30,


June 30,2006


2005


2006


2005(In millions)Revenues

$
30


$
20


$
60


$
41Net interest margin

$
16


$
10


$
34


$
23Selling and administrative expenses


5



7



11



14Provision for losses


3



(2
)


2



2Segment income

$
8


$
5


$
21


$
7  22




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##### Table of Contents



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


Six MonthsEnded


EndedJune 30,


June 30,


June 30,


June 30,2006


2005


2006


2005(In millions)Revenues

$
23


$
18


$
44


$
34Net interest margin

$
13


$
12


$
26


$
23Selling and administrative expenses


6



7



12



12Provision for losses


3



1



8



1Segment income

$
4


$
4


$
6


$
10       Structured
    Capital
  Three Months


Six MonthsEnded


EndedJune 30,


June 30,


June 30,


June 30,2006


2005


2006


2005(In millions)Revenues

$
8


$
12


$
15


$
24Net interest margin

$
4


$
8


$
7


$
16Selling and administrative expenses


1



1



2



2Provision for losses














Segment income

$
3


$
7


$
5


$
14    23




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##### Table of Contents



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


Six MonthsEnded


EndedJune 30,


June 30,


June 30,


June 30,2006


2005


2006


2005(In millions)Revenues

$
3


$
2


$
10


$
10Net interest margin

$
(1
)

$
(1
)

$
2


$
3Selling and administrative expenses


6



6



11



15Provision for losses


(1
)






(1
)


4Segment loss

$
(6
)

$
(7
)

$
(8
)

$
(16
)       Net
    Income
    Selected
    Financial Ratios
  Three Months


Six MonthsEnded


EndedJune 30,


June 30,


June 30,


June 30,2006


2005


2006


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


5.81%



6.04%



6.01%



6.15%Return on average equity


13.40%



12.01%



12.71%



10.39%Return on average assets


1.74%



1.67%



1.70%



1.47%Selling and administrative
    expenses as a percentage of average managed and serviced finance
    receivables(2)


1.89%



1.95%



1.90%



1.97%Operating efficiency ratio(3)


46.6%



50.4%



45.7%



50.8%Net charge-offs as a percentage of
    average finance receivables


0.39%



0.28%



0.35%



0.42%  24




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##### Table of Contents



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


December 31,2006


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


0.65
%


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


1.38
%


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


1.21
%


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


103.9
%


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


7.11
x


6.19
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)      No. 13-2
  Forward-looking
    Information
  Certain statements in this Quarterly Report on
    Form 10-Q
    and other oral and written statements made by Textron Financial
    from time to time are forward-looking statements, including
    those that discuss strategies, goals, outlook or other
    non-historical matters; or project revenues, income, returns or
    other financial measures. These forward-looking statements speak
    only as of the date on which they are made, and we undertake no
    obligation to update or revise any forward-looking statements.
    These forward-looking statements are subject to risks and
    uncertainties that may cause actual results to differ materially
    from those contained in the statements, including the following:
    (a) changes in worldwide economic and political conditions
    that impact interest and foreign exchange rates; (b) the
    occurrence of slowdowns or downturns in customer markets in
    which Textron products are sold or supplied and financed or
    where we offer financing; (c) the ability to realize full
    value of receivables and investments in securities; (d) the
    ability to control costs and successful implementation of
    various cost reduction programs; (e) increases in pension
    expenses related to lower than expected asset performance or
    changes in discount rates; (f) the impact of changes in tax
    legislation; (g) the ability to maintain portfolio credit
    quality; (h) access to debt financing at competitive rates;
    (i) access to equity in the form of retained earnings and
    capital contributions from Textron; (j) uncertainty in
    estimating contingent liabilities and establishing reserves to
    address such contingencies and (k) performance of
    acquisitions.
 26




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##### Table of Contents



Item 3.
    Quantitative
    and Qualitative Disclosures About Market Risk  Form 10-Q.
  Item 4.
    Controls
    and Procedures  Rule 13a-15(e) 15d-15(e)
   27




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##### Table of Contents



PART II.
    OTHER INFORMATION  Item 6.
    Exhibits  12


Computation of Ratio of Earnings
    to Fixed Charges31
.1

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

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

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

Certification of Chief Financial
    Officer Pursuant to 18 U.S.C. Section 1350  28




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##### Table of Contents



SIGNATURES
    Textron
    Financial CorporationDate: August 7, 2006

/s/  Thomas
    J. CullenThomas J. CullenExecutive Vice President and Chief
    Financial Officer(Principal Financial Officer)  29