<PAGE>

--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

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

                                   FORM 10-Q

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

       FOR THE FISCAL QUARTER ENDED SEPTEMBER 30, 2005

OR


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

                        COMMISSION FILE NUMBER 001-15515

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

                         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, RI 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 [ ]

     Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).

                               Yes [ ]     No [X]

     Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act).

                               Yes [ ]     No [X]

     All of the shares of common stock of the registrant are owned by Textron
Inc.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>

                         TEXTRON FINANCIAL CORPORATION

                               TABLE OF CONTENTS

<Table>
<Caption>
                                                              PAGE
                                                              ----
<S>                                                           <C>
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
  Consolidated Statements of Income for the three and nine
     months ended September 30, 2005 and 2004 (unaudited)...    2
  Consolidated Balance Sheets at September 30, 2005 and
     January 1, 2005 (unaudited)............................    3
  Consolidated Statements of Cash Flows for the nine months
     ended September 30, 2005 and 2004 (unaudited)..........    4
  Consolidated Statements of Changes in Shareholder's Equity
     through September 30, 2005 (unaudited).................    5
  Notes to Consolidated Financial Statements (unaudited)....    6
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
        CONDITION AND RESULTS OF OPERATIONS.................   14
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
        MARKET RISK.........................................   26
Item 4. CONTROLS AND PROCEDURES.............................   26
PART II. OTHER INFORMATION
Item 6. EXHIBITS............................................   27
</Table>

                                        1
<PAGE>

                         PART I.  FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

                         TEXTRON FINANCIAL CORPORATION

                       CONSOLIDATED STATEMENTS OF INCOME
                                  (UNAUDITED)

<Table>
<Caption>
                                                       THREE MONTHS                           NINE MONTHS
                                                           ENDED                                 ENDED
                                            -----------------------------------   -----------------------------------
                                             SEPTEMBER 30,      SEPTEMBER 30,      SEPTEMBER 30,      SEPTEMBER 30,
                                                  2005               2004               2005               2004
                                            ----------------   ----------------   ----------------   ----------------
                                                                          (IN MILLIONS)
<S>                                         <C>                <C>                <C>                <C>
Finance charges and discounts.............        $117               $ 90               $331               $269
Rental revenues on operating leases.......           9                  8                 24                 22
Other income..............................          29                 31                 88                109
                                                  ----               ----               ----               ----
TOTAL REVENUES............................         155                129                443                400
Interest expense..........................          56                 38                152                111
Depreciation of equipment on operating
  leases..................................           5                  5                 14                 14
                                                  ----               ----               ----               ----
NET INTEREST MARGIN.......................          94                 86                277                275
Selling and administrative expenses.......          47                 44                140                132
Provision for losses......................           4                 14                 17                 48
                                                  ----               ----               ----               ----
INCOME BEFORE INCOME TAXES................          43                 28                120                 95
Income taxes..............................          14                  9                 40                 31
                                                  ----               ----               ----               ----
NET INCOME................................        $ 29               $ 19               $ 80               $ 64
                                                  ====               ====               ====               ====
</Table>

                See notes to consolidated financial statements.
                                        2
<PAGE>

ITEM 1.  FINANCIAL STATEMENTS (CONTINUED)

                         TEXTRON FINANCIAL CORPORATION

                          CONSOLIDATED BALANCE SHEETS
                                  (UNAUDITED)

<Table>
<Caption>
                                                               SEPTEMBER 30,     JANUARY 1,
                                                                    2005            2005
                                                              ----------------   ----------
                                                                      (IN MILLIONS)
<S>                                                           <C>                <C>
ASSETS
Cash and equivalents........................................       $   39          $  127
Finance receivables, net of unearned income:
  Installment contracts.....................................        1,538           1,455
  Revolving loans...........................................        1,537           1,402
  Distribution finance receivables..........................        1,376           1,026
  Golf course and resort mortgages..........................          962           1,005
  Leveraged leases..........................................          550             539
  Finance leases............................................          474             410
                                                                   ------          ------
Total finance receivables...................................        6,437           5,837
  Allowance for losses on receivables.......................          (96)            (99)
                                                                   ------          ------
Finance receivables-net.....................................        6,341           5,738
Equipment on operating leases-net...........................          228             237
Goodwill....................................................          169             169
Other assets................................................          366             467
                                                                   ------          ------
Total assets................................................       $7,143          $6,738
                                                                   ======          ======

LIABILITIES AND SHAREHOLDER'S EQUITY
LIABILITIES
Accrued interest and other liabilities......................       $  457          $  453
Amounts due to Textron Inc. ................................           14              14
Deferred income taxes.......................................          474             453
Debt........................................................        5,181           4,783
                                                                   ------          ------
Total liabilities...........................................        6,126           5,703
SHAREHOLDER'S EQUITY
Capital surplus.............................................          574             574
Investment in parent company preferred stock................          (25)            (25)
Accumulated other comprehensive income......................            3               1
Retained earnings...........................................          465             485
                                                                   ------          ------
Total shareholder's equity..................................        1,017           1,035
                                                                   ------          ------
Total liabilities and shareholder's equity..................       $7,143          $6,738
                                                                   ======          ======
</Table>

                See notes to consolidated financial statements.
                                        3
<PAGE>

ITEM 1.  FINANCIAL STATEMENTS (CONTINUED)

                         TEXTRON FINANCIAL CORPORATION

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                 NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004
                                  (UNAUDITED)

<Table>
<Caption>
                                                               2005      2004
                                                              -------   -------
                                                                (IN MILLIONS)
<S>                                                           <C>       <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income..................................................  $    80   $    64
Adjustments to reconcile net income to net cash provided by
  operating activities:
  Provision for losses......................................       17        48
  Deferred income tax provision.............................       21        26
  Depreciation..............................................       25        27
  Amortization..............................................        9         8
  Increase (decrease) in accrued interest and other
     liabilities............................................       46       (66)
  Net noncash securitization and syndication income.........        3        (6)
  Other.....................................................       17        12
                                                              -------   -------
     Net cash provided by operating activities..............      218       113
CASH FLOWS FROM INVESTING ACTIVITIES:
Finance receivables originated or purchased.................   (8,062)   (7,862)
Finance receivables repaid..................................    7,149     6,870
Proceeds from receivable sales, including securitizations...      230       302
Proceeds from disposition of operating leases and other
  assets....................................................       53        84
Purchase of assets for operating leases.....................      (38)      (47)
Other capital expenditures..................................       (6)       (8)
Decrease in other investments...............................       21        51
                                                              -------   -------
     Net cash used by investing activities..................     (653)     (610)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt....................    1,200       770
Principal payments on long-term debt........................     (556)     (550)
Proceeds from issuance of nonrecourse debt..................       39       178
Redemption of junior subordinated debentures................       --       (26)
Net (decrease) increase in commercial paper.................     (189)       14
Net decrease in other short-term debt.......................      (13)       (7)
Principal payments on nonrecourse debt......................      (36)      (48)
Capital contributions from Textron Inc. ....................        7         7
Dividends paid to Textron Inc. .............................     (107)      (77)
                                                              -------   -------
     Net cash provided by financing activities..............      345       261
Effect of exchange rate changes on cash.....................        2         2
                                                              -------   -------
Net decrease in cash and equivalents........................      (88)     (234)
Cash and equivalents at beginning of period.................      127       357
                                                              -------   -------
Cash and equivalents at end of period.......................  $    39   $   123
                                                              =======   =======
</Table>

                See notes to consolidated financial statements.
                                        4
<PAGE>

ITEM 1.  FINANCIAL STATEMENTS (CONTINUED)

                         TEXTRON FINANCIAL CORPORATION

           CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY
                                  (UNAUDITED)

<Table>
<Caption>
                                                    INVESTMENT    ACCUMULATED
                                                    IN PARENT        OTHER
                                                     COMPANY     COMPREHENSIVE                  TOTAL
                                          CAPITAL   PREFERRED       INCOME       RETAINED   SHAREHOLDER'S
                                          SURPLUS     STOCK         (LOSS)       EARNINGS      EQUITY
                                          -------   ----------   -------------   --------   -------------
                                                                   (IN MILLIONS)
<S>                                       <C>       <C>          <C>             <C>        <C>
BALANCE JANUARY 3, 2004.................   $574        $(25)          $(2)        $ 462        $1,009
Comprehensive income:
Net income..............................     --          --            --            94            94
Other comprehensive income:
  Foreign currency translation..........     --          --            10            --            10
  Change in unrealized net losses on
     hedge contracts, net of income
     taxes..............................     --          --            (3)           --            (3)
  Change in unrealized net gains on
     interest-only securities, net of
     income taxes.......................     --          --            (4)           --            (4)
                                                                      ---                      ------
  Other comprehensive income............     --          --             3            --             3
                                                                                               ------
Comprehensive income....................     --          --            --            --            97
Capital contributions from Textron
  Inc. .................................      9          --            --            --             9
Dividends paid to Textron Inc. .........     (9)         --            --           (71)          (80)
                                           ----        ----           ---         -----        ------
BALANCE JANUARY 1, 2005.................    574         (25)            1           485         1,035
Comprehensive income:
Net income..............................     --          --            --            80            80
Other comprehensive income:
  Change in unrealized net gains on
     interest-only securities, net of
     income taxes.......................     --          --             4            --             4
  Foreign currency translation..........     --          --            (1)           --            (1)
  Change in unrealized net losses on
     hedge contracts, net of income
     taxes..............................     --          --            (1)           --            (1)
                                                                      ---                      ------
  Other comprehensive income............     --          --             2            --             2
                                                                                               ------
Comprehensive income....................     --          --            --            --            82
Capital contributions from Textron
  Inc. .................................      7          --            --            --             7
Dividends paid to Textron Inc. .........     (7)         --            --          (100)         (107)
                                           ----        ----           ---         -----        ------
BALANCE SEPTEMBER 30, 2005..............   $574        $(25)          $ 3         $ 465        $1,017
                                           ====        ====           ===         =====        ======
</Table>

                See notes to consolidated financial statements.
                                        5
<PAGE>

ITEM 1.  FINANCIAL STATEMENTS (CONTINUED)

                         TEXTRON FINANCIAL CORPORATION

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 1.  BASIS OF PRESENTATION

     The consolidated financial statements should be read in conjunction with
the consolidated financial statements included in Textron Financial
Corporation's Annual Report on Form 10-K for the year ended January 1, 2005. The
accompanying 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 September 30, 2005, and its consolidated results of operations and
cash flows for each of the interim periods presented. The results of operations
for the interim periods are not necessarily indicative of the results to be
expected for the full year.

NOTE 2.  RECENT ACCOUNTING PRONOUNCEMENTS

     Textron Financial participates in Textron Inc.'s (Textron) 1999 Long-Term
Incentive Plan (the "Plan"). The Plan awards employees options to purchase
Textron shares and restricted stock. In December 2004, the FASB issued Statement
of Financial Accounting Standards ("SFAS") No. 123 (Revised 2004), "Share-Based
Payment" ("SFAS No. 123-R"), which replaces SFAS No. 123, "Accounting for
Stock-Based Compensation" and supercedes Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees." SFAS No. 123-R requires
companies to measure compensation expense for share-based payments to employees,
including stock options, at fair value and expense such compensation over the
service period beginning with the first interim or annual period after June 15,
2005. In April 2005, the Securities and Exchange Commission delayed the
transition date for companies to the first fiscal year beginning after June 15,
2005, effectively delaying Textron's required adoption of SFAS No. 123-R until
the first quarter of 2006. Textron elected to adopt SFAS No. 123-R in the first
quarter of 2005 using the modified prospective method. In connection with the
adoption of this standard, the compensation expense recognized related to
Textron Financial employees through September 30, 2005 was $1.5 million.

NOTE 3.  OTHER INCOME

<Table>
<Caption>
                                               THREE MONTHS                           NINE MONTHS
                                                   ENDED                                 ENDED
                                    -----------------------------------   -----------------------------------
                                     SEPTEMBER 30,      SEPTEMBER 30,      SEPTEMBER 30,      SEPTEMBER 30,
                                          2005               2004               2005               2004
                                    ----------------   ----------------   ----------------   ----------------
                                                                  (IN MILLIONS)
<S>                                 <C>                <C>                <C>                <C>
Securitization gains..............        $ 9                $15                $34                $ 44
Servicing income..................          7                  8                 24                  24
Investment income.................          5                  3                 10                  10
Prepayment income.................          2                  2                  5                  10
Late charges......................          1                  1                  4                   5
Syndication income................          1                  1                  2                   6
Other.............................          4                  1                  9                  10
                                          ---                ---                ---                ----
Total other income................        $29                $31                $88                $109
                                          ===                ===                ===                ====
</Table>

     The Other component of Other income includes commitment fees, residual
gains, insurance fees and other miscellaneous fees, which are primarily
recognized as income when received. Impairment charges related to assets
acquired through repossession of collateral are also recorded in the Other
component of Other income.

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

                         TEXTRON FINANCIAL CORPORATION

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

NOTE 4.  MANAGED AND SERVICED FINANCE RECEIVABLES

     Textron Financial manages and services finance receivables for a variety of
investors, participants and third-party portfolio owners. Managed and serviced
finance receivables are summarized below.

<Table>
<Caption>
                                                               SEPTEMBER 30,     JANUARY 1,
                                                                    2005            2005
                                                              ----------------   ----------
                                                                      (IN MILLIONS)
<S>                                                           <C>                <C>
Total managed and serviced finance receivables..............      $ 9,647         $ 9,268
Third-party portfolio servicing.............................         (602)           (606)
Nonrecourse participations..................................         (405)           (488)
SBA sales agreements........................................          (31)            (39)
                                                                  -------         -------
Total managed finance receivables...........................        8,609           8,135
Securitized receivables.....................................       (2,033)         (2,032)
Other managed finance receivables...........................         (139)           (266)
                                                                  -------         -------
Owned finance receivables...................................      $ 6,437         $ 5,837
                                                                  =======         =======
</Table>

     Third-party portfolio servicing largely relates to finance receivable
portfolios of resort developers and loan portfolio servicing for third-party
financial institutions.

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

     Other managed finance receivables represent the rental streams related to
equipment lease portfolios sold to a third-party financial institution, which
continue to be serviced and managed by Textron Financial.

     Owned receivables include approximately $84 million of finance receivables
that were unfunded at September 30, 2005, primarily as a result of holdback
arrangements. The corresponding liability is included in Accrued interest and
other liabilities on Textron Financial's Consolidated Balance Sheets.

NOTE 5.  LOAN IMPAIRMENT

     Textron Financial periodically evaluates finance receivables, excluding
homogeneous loan portfolios and finance leases, for impairment. A loan is
considered impaired when it is probable that the Company will be unable to
collect all amounts due according to the contractual terms of the loan
agreement. In addition, the Company identifies loans that are considered
impaired due to the significant modification of the original loan terms to
reflect deferred principal payments, generally at market interest rates, but
which continue to accrue finance charges since full collection of principal and
interest is not doubtful. Impairment is measured by comparing the fair value of
a loan to its carrying amount. Fair value is based on the present value of
expected future cash flows discounted at the loan's effective interest rate, the
loan's observable market price or, if the loan is collateral dependent, at the
fair value of the collateral, less selling costs. If the fair value of the loan
is less than its carrying amount, the Company establishes a reserve based on
this difference. 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 that may differ from actual results.

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

                         TEXTRON FINANCIAL CORPORATION

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

<Table>
<Caption>
                                                               SEPTEMBER 30,     JANUARY 1,
                                                                    2005            2005
                                                              ----------------   ----------
                                                                      (IN MILLIONS)
<S>                                                           <C>                <C>
Nonaccrual finance receivables..............................        $113            $119
Impaired nonaccrual finance receivables (included in
  nonaccrual finance receivables above).....................        $ 87            $ 85
Impaired accrual finance receivables........................          17              58
                                                                    ----            ----
Total impaired finance receivables..........................        $104            $143
                                                                    ====            ====
Impaired finance receivables with identified reserve
  requirements..............................................        $ 65            $ 48
Allowance for losses on finance receivables related to
  impaired loans............................................        $ 17            $ 16
</Table>

     The average recorded investment in impaired nonaccrual finance receivables
during the first nine months of 2005 was $81 million compared to $96 million in
the corresponding period in 2004. The average recorded investment in impaired
accrual finance receivables was $27 million during the first nine months of
2005, compared to $21 million in the corresponding period of 2004.

     Nonaccrual finance receivables resulted in Textron Financial's finance
charges being reduced by $9 million and $12 million for the first nine months of
2005 and 2004, respectively. No finance charges were recognized using the cash
basis method.

     Captive finance receivables with recourse that were delinquent 90 days or
more amounted to $21 million at September 30, 2005 and $31 million at January 1,
2005, and were 7.4% and 9.3% of captive finance receivables with recourse,
respectively. Revenues recognized on these accounts were $1 million and $3
million for the first nine months of 2005 and 2004, respectively.

     Textron Financial has a performance guarantee from Textron for leases with
the U.S. and Canadian subsidiaries of Collins & Aikman Corporation ("C&A"). At
September 30, 2005, these leases had outstanding balances of $56 million and $16
million, respectively. During the second quarter of 2005, the U.S. subsidiary of
C&A filed for Chapter 11 bankruptcy protection. The Company has not classified
this lease as nonaccrual due to the performance guarantee from Textron.

NOTE 6.  OTHER ASSETS

<Table>
<Caption>
                                                               SEPTEMBER 30,     JANUARY 1,
                                                                    2005            2005
                                                              ----------------   ----------
                                                                      (IN MILLIONS)
<S>                                                           <C>                <C>
Retained interests in securitizations.......................        $207            $233
Other long-term investments.................................          49              64
Fixed assets -- net.........................................          35              41
Repossessed assets and properties...........................          21              21
Investment in equipment residuals...........................          12              13
Other.......................................................          42              95
                                                                    ----            ----
Total other assets..........................................        $366            $467
                                                                    ====            ====
</Table>

     Interest-only securities within retained interests in securitizations were
$63 million and $62 million at September 30, 2005 and January 1, 2005,
respectively.

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

                         TEXTRON FINANCIAL CORPORATION

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

     Other long-term investments and Repossessed assets and properties include
assets received in satisfaction of troubled loans. Declines in the value of
these assets subsequent to receipt are recorded as impairment charges in Other
income.

     The cost of fixed assets is being depreciated using the straight-line
method based on the estimated useful lives of the assets.

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

     The Other category primarily represents the fair value of derivative
instruments and debt acquisition costs.

NOTE 7.  DEBT AND CREDIT FACILITIES

<Table>
<Caption>
                                                               SEPTEMBER 30,     JANUARY 1,
                                                                    2005            2005
                                                              ----------------   ----------
                                                                      (IN MILLIONS)
<S>                                                           <C>                <C>
Commercial paper............................................       $1,100          $1,289
Other short-term debt.......................................            5              18
                                                                   ------          ------
  Total short-term borrowings...............................        1,105           1,307
Fixed rate notes
  Due 2005 (weighted-average rates of 4.39% and 5.59%,
     respectively)..........................................           21             181
  Due 2006 (weighted-average rates of 3.04% and 3.04%,
     respectively)..........................................          519             519
  Due 2007 (weighted-average rates of 5.54% and 5.55%,
     respectively)..........................................          812             808
  Due 2008 (weighted-average rates of 4.12% and 4.39%,
     respectively)..........................................          603              42
  Due 2009 (weighted-average rates of 5.87% and 5.87%,
     respectively)..........................................          542             542
  Due 2010 and thereafter (weighted-average rates of 4.63%
     and 4.66%, respectively)...............................          669             268
                                                                   ------          ------
  Total fixed rate notes....................................        3,166           2,360
Variable rate notes
  Due 2005 (weighted-average rates of 4.41% and 3.24%,
     respectively)..........................................          100             475
  Due 2006 (weighted-average rates of 4.24% and 2.81%,
     respectively)..........................................          516             466
  Due 2007 (weighted-average rates of 4.45% and 3.15%,
     respectively)..........................................          225             175
  Due 2008 (weighted-average rate of 3.83%).................          100              --
                                                                   ------          ------
  Total variable rate notes.................................          941           1,116
Unamortized discount........................................           (3)             (3)
Fair value adjustments......................................          (28)              3
                                                                   ------          ------
  Total debt................................................       $5,181          $4,783
                                                                   ======          ======
</Table>

     The weighted-average interest rates on short-term borrowings have been
determined by relating the annualized interest cost to the daily average dollar
amounts outstanding. The combined weighted-average interest rate was 3.05%
during the nine months ended September 30, 2005, and 3.84% at September 30,
2005.

     As part of its commercial paper program, the Company has a policy of
maintaining unused committed bank lines of credit in an amount not less than
outstanding commercial paper balances. These lines of credit

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

                         TEXTRON FINANCIAL CORPORATION

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

total $1.5 billion, of which $500 million expires in July 2006 and $1.0 billion
expires in 2010. The $500 million facility includes a one-year term out option,
effectively extending its expiration into 2007. Lines of credit not reserved as
support for outstanding commercial paper or letters of credit were $388 million
at September 30, 2005, compared to $187 million at January 1, 2005. Textron
Financial is also permitted to borrow under Textron's $1.3 billion revolving
credit facility, which expires in 2010. At September 30, 2005, $1.2 billion of
the Textron facility was not reserved as support for outstanding commercial
paper or letters of credit. Textron Financial has an uncommitted credit facility
of CAD 50 million, which was unused at September 30, 2005. The Company also
maintains an AUD 50 million committed credit facility, which expires in 2006. At
September 30, 2005, this facility was unused. Textron Financial also has a $25
million multi-currency committed credit facility, of which $20 million remained
unused at September 30, 2005. This facility expires in 2006.

     Interest on Textron Financial's variable rate notes is predominantly tied
to the three-month LIBOR for U.S. dollar deposits. The weighted-average interest
rate on these notes before consideration of the effect of interest rate exchange
agreements, was 3.82% and 2.52% for the nine months ended September 30, 2005 and
September 30, 2004, respectively. In addition, Textron Financial had $200
million of interest rate exchange agreements at both September 30, 2005 and
January 1, 2005, related to the conversion of variable rate debt to fixed rate
debt with a weighted-average fixed interest rate of 3.43%.

     The Company had interest rate exchange agreements related to the conversion
of fixed rate debt to variable rate debt of $3.0 billion and $2.2 billion at
September 30, 2005 and January 1, 2005, respectively, whereby the Company makes
periodic floating rate payments in exchange for periodic fixed rate receipts.
The weighted-average rate of these interest rate exchange agreements was 3.81%
and 2.46% for the nine months ended September 30, 2005 and September 30, 2004,
respectively.

     Through its subsidiary, Textron Financial Canada Funding Corp. (Textron
Canada Funding), the Company periodically issues debt securities. Textron
Financial owns 100% of the common stock of Textron Canada Funding. Textron
Canada Funding is a financing subsidiary of Textron Financial with no
operations, revenues or cash flows other than those related to the issuance,
administration and repayment of debt securities that are fully and
unconditionally guaranteed by Textron Financial.

     Securitizations are an important source of liquidity for Textron Financial
and involve the periodic transfer of finance receivables to qualified special
purpose trusts. The amount of debt issued by these qualified special purpose
trusts was $1.9 billion at both September 30, 2005 and January 1, 2005,
respectively.

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

                         TEXTRON FINANCIAL CORPORATION

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

NOTE 8.  ACCUMULATED OTHER COMPREHENSIVE LOSS AND COMPREHENSIVE INCOME

     Accumulated other comprehensive income (loss) is as follows:

<Table>
<Caption>
                                                                         NINE MONTHS
                                                                            ENDED
                                                             -----------------------------------
                                                              SEPTEMBER 30,      SEPTEMBER 30,
                                                                   2005               2004
                                                             ----------------   ----------------
                                                                        (IN MILLIONS)
<S>                                                          <C>                <C>
Beginning of period........................................        $ 1                $(2)
Net deferred gain (loss) on interest-only securities, net
  of income tax of $2 million and income tax benefit of $1
  million, respectively....................................          4                 (3)
Amortization of deferred loss on terminated hedge
  contracts, net of income taxes of $2 million and $2
  million, respectively....................................          4                  3
Net deferred loss on marketable equity security, net of
  income tax benefit of $1 million.........................         --                 (3)
Foreign currency translation...............................         (1)                 3
Net deferred loss on hedge contracts, net of income tax
  benefits of $3 million and $2 million, respectively......         (5)                (4)
                                                                   ---                ---
End of period..............................................        $ 3                $(6)
                                                                   ===                ===
</Table>

     Comprehensive income is summarized below:

<Table>
<Caption>
                                               THREE MONTHS                           NINE MONTHS
                                                   ENDED                                 ENDED
                                    -----------------------------------   -----------------------------------
                                     SEPTEMBER 30,      SEPTEMBER 30,      SEPTEMBER 30,      SEPTEMBER 30,
                                          2005               2004               2005               2004
                                    ----------------   ----------------   ----------------   ----------------
                                                                  (IN MILLIONS)
<S>                                 <C>                <C>                <C>                <C>
Net income........................        $29                $19                $80                $64
Other comprehensive income
  (loss)..........................         10                  5                  2                 (4)
                                          ---                ---                ---                ---
Comprehensive income..............        $39                $24                $82                $60
                                          ===                ===                ===                ===
</Table>

NOTE 9.  CONTINGENCIES

     On February 3, 2004, in the Court of Common Pleas for Knox County, Ohio, a
purported class action lawsuit was commenced against the Company and Litchfield,
certain of their current and former officers, and other third-parties, related
to the financing of certain land purchases by consumers through a third-party
land developer commonly known as "Buyer's Source." Among other claims, the
purported class action alleges fraud and failure to disclose certain information
in the financing of Buyer's Source and seeks compensatory damages and punitive
damages in excess of $10 million. The Company intends to aggressively defend
this claim. The Company believes that the purported class action will not have a
material effect on the Company's financial position and results of operations.

     Textron Financial is subject to challenges from tax authorities regarding
amounts of tax due. These challenges may alter the timing or amount of taxable
income or deductions, or the allocation of income among tax jurisdictions. The
Internal Revenue Service (IRS) is conducting an examination of the Company's
Federal income tax returns for the years 2001, 2000, 1999 and 1998, and has
issued Notices of Proposed Adjustment that may affect certain leveraged lease
transactions with a total initial investment of approximately $94 million.
Resolution of these issues may result in an adjustment to the timing of taxable
income and

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

                         TEXTRON FINANCIAL CORPORATION

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

deductions that reduce the effective yield of the leveraged lease transactions
and could result in a pretax adjustment to income. Management believes that the
proposed IRS adjustments are inconsistent with existing tax law and intends to
vigorously defend the Company's position. The resolution of these issues and the
impact on the Company's financial position and results of operations cannot be
reasonably estimated at this time.

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

NOTE 10.  FINANCIAL INFORMATION ABOUT OPERATING SEGMENTS

     The Company aligns its business units into six operating segments based on
the markets served and the products offered: Aircraft Finance, Asset-Based
Lending, Distribution Finance, Golf Finance, Resort Finance and Structured
Capital. In addition, the Company maintains an Other segment (non-core) that
includes franchise finance, media finance, syndicated bank loans and other
liquidating portfolios related to a strategic realignment of the Company's
business and product lines into core and non-core businesses.

<Table>
<Caption>
                                               THREE MONTHS                           NINE MONTHS
                                                   ENDED                                 ENDED
                                    -----------------------------------   -----------------------------------
                                     SEPTEMBER 30,      SEPTEMBER 30,      SEPTEMBER 30,      SEPTEMBER 30,
                                          2005               2004               2005               2004
                                    ----------------   ----------------   ----------------   ----------------
                                                                  (IN MILLIONS)
<S>                                 <C>                <C>                <C>                <C>
Revenues:
  Distribution Finance............        $ 43               $ 37               $127               $120
  Golf Finance....................          26                 21                 74                 58
  Aircraft Finance................          26                 20                 73                 58
  Resort Finance..................          25                 22                 66                 62
  Asset-Based Lending.............          19                 13                 53                 41
  Structured Capital..............          10                 11                 34                 31
  Other...........................           6                  5                 16                 30
                                          ----               ----               ----               ----
Total revenues....................        $155               $129               $443               $400
                                          ====               ====               ====               ====
Income before income taxes:(1)(2)
  Distribution Finance............        $ 19               $ 15               $ 51               $ 59
  Golf Finance....................           6                  4                 20                 11
  Aircraft Finance................           6                  6                 22                 16
  Resort Finance..................           7                  1                 14                 (5)
  Asset-Based Lending.............           6                  4                 16                 12
  Structured Capital..............           6                  5                 20                 15
  Other...........................          (7)                (7)               (23)               (13)
                                          ----               ----               ----               ----
Income before income taxes........        $ 43               $ 28               $120               $ 95
                                          ====               ====               ====               ====
</Table>

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

                         TEXTRON FINANCIAL CORPORATION

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

<Table>
<Caption>
                                                               SEPTEMBER 30,     JANUARY 1,
                                                                    2005            2005
                                                              ----------------   ----------
                                                                      (IN MILLIONS)
<S>                                                           <C>                <C>
Finance assets:(3)
  Distribution Finance......................................       $1,427          $1,084
  Aircraft Finance..........................................        1,334           1,217
  Golf Finance..............................................        1,224           1,100
  Resort Finance............................................        1,107           1,196
  Structured Capital........................................          761             774
  Asset-Based Lending.......................................          733             584
  Other.....................................................          367             450
                                                                   ------          ------
Total finance assets........................................       $6,953          $6,405
                                                                   ======          ======
</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, 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).

                                        13
<PAGE>

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

                         TEXTRON FINANCIAL CORPORATION

KEY BUSINESS INITIATIVES AND TRENDS

     Textron Financial Corporation (Textron Financial or the Company) is a
diversified commercial finance company with operations in six segments: Aircraft
Finance, Asset-Based Lending, Distribution Finance, Golf Finance, Resort Finance
and Structured Capital. Textron Financial's other financial services and
products include transaction syndication, equipment appraisal and disposition,
and portfolio servicing.

     During the first nine months of 2005, Textron Financial experienced steady
growth in its managed finance receivable portfolio. Excluding non-core
portfolios, managed finance receivables grew by $575 million, or 7%, from
year-end 2004, primarily in Distribution Finance and Asset-Based Lending. The
Company expects continued growth in its core portfolios throughout the remainder
of 2005 and into 2006.

     Portfolio quality statistics have continued to improve during 2005.
Nonperforming assets as a percentage of finance assets decreased to 1.92% at
September 30, 2005, from 2.18% at year-end 2004; and 60+ days contractual
delinquency as a percentage of finance receivables decreased to 1.01% at
September 30, 2005, from 1.47% at year-end 2004. The Company expects relative
stability in these statistics into 2006; however, the Company could experience
an out-of-trend result in any one quarter.

     Net interest margin as a percentage of average net investment (net interest
margin percentage) decreased to 6.20% during the first nine months of 2005, as
compared to 7.19% during the corresponding period in 2004. Net interest margin
percentage was negatively impacted by lower other income, lower relative
receivable pricing, the loss of the Prime rate floor benefit experienced in
2004, and a shift in mix of the fixed rate portfolio. This impact was partially
offset by lower relative borrowing costs from improved credit spreads on debt
issuances. Net interest margin percentage, as compared to 2004, will continue to
be negatively impacted from lower relative receivable pricing; however, the
Company anticipates that this impact will continue to be largely offset by
improved credit spreads on debt issuances.

     Operating efficiency (the ratio of selling and administrative expenses
divided by net interest margin) deteriorated during the first nine months of
2005 primarily attributable to the effects of lower relative receivable pricing
on net interest margin and increased employee salaries and benefits expense.
Operating efficiency was 50.5% as compared to 47.1% as of year-end 2004;
however, selling and administrative expenses as a percentage of average managed
finance receivables decreased to 1.99% at September 30, 2005, from 2.01% at
year-end 2004. The Company anticipates that this trend in operating efficiency
will improve into 2006, based on continuing process improvement initiatives, an
increase in net interest margin due to growth in the core business portfolios
and stability in net interest margin percentage.

FINANCIAL CONDITION

Liquidity and Capital Resources

     Textron Financial mitigates liquidity risk (i.e., the risk that the Company
will be unable to fund maturing liabilities or the origination of new finance
receivables) by developing and preserving reliable sources of capital. The
Company uses a variety of financial resources to meet these capital needs. Cash
is provided from finance receivable collections, sales and securitizations as
well as the issuance of commercial paper and term debt in the public and private
markets. This diversity of capital resources enhances the Company's funding
flexibility, limits dependence on any one source of funds, and results in
cost-effective funding. In making particular funding decisions, management
considers market conditions, prevailing interest rates and credit spreads, and
the maturity profile of its assets and liabilities.

     As part of its commercial paper program, the Company has a policy of
maintaining unused committed bank lines of credit in an amount not less than
outstanding commercial paper balances. These lines of credit currently total
$1.5 billion, of which $500 million expires in July 2006 and $1 billion expires
in 2010. The $500 million facility includes a one-year term out option,
effectively extending its expiration into 2007. Lines of credit not reserved as
support for outstanding commercial paper or letters of credit were $388 million
at
                                        14
<PAGE>

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

OF OPERATIONS (CONTINUED)
September 30, 2005, compared to $187 million at January 1, 2005. Textron
Financial is also permitted to borrow under Textron's $1.3 billion revolving
credit facility, which expires in 2010. At September 30, 2005, $1.2 billion of
the Textron facility was not reserved as support for outstanding commercial
paper or letters of credit. Textron Financial has an uncommitted credit facility
of CAD 50 million, which was unused at September 30, 2005. The Company also
maintains an AUD 50 million committed credit facility, which expires in 2006. At
September 30, 2005, this facility was unused. Textron Financial also has a $25
million multi-currency committed credit facility, of which $20 million remained
unused at September 30, 2005. This facility expires in 2006.

     Under a shelf registration statement filed with the Securities and Exchange
Commission, Textron Financial may issue public debt securities in one or more
offerings up to a total maximum offering of $4.0 billion. Under this
registration statement, Textron Financial issued $1.1 billion of term debt and
CAD 130 million of term debt during the first nine months of 2005. The proceeds
from the USD term debt issuance were used to repay short-term debt. Proceeds
from the CAD term debt issuance were used to pay down the Company's Canadian
credit facilities. At September 30, 2005, Textron Financial had $2.1 billion of
capacity under this registration statement.

     Cash flows provided by operating activities were $218 million during the
first nine months of 2005, compared to $113 million in the corresponding period
of 2004. The increase in cash flows was primarily due to the timing of payments
of accrued interest and other liabilities and the timing of an income tax
payment of $60 million in the first quarter of 2004.

     Cash flows used by investing activities totaled $653 million during the
first nine months of 2005, compared to $610 million in the corresponding period
of 2004. The decrease in cash flows was primarily the result of lower proceeds
from receivables sales, including securitizations of $72 million and lower
proceeds from the disposition of operating leases and other assets of $31
million. These decreases were partially offset by a $79 million decrease in
finance receivable originations, net of cash collections.

     Cash flows provided by financing activities were $345 million during the
first nine months of 2005, compared to $261 million in the corresponding period
of 2004. The increase in cash flows was primarily attributable to a net increase
in debt outstanding which was used to fund asset growth. During the first nine
months of 2004, similar asset growth was funded through the use of $421 million
in cash proceeds generated from the sale of a liquidating portfolio in December
2003.

     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 September 30, 2005,
compared to 82% at January 1, 2005. Textron Financial's ratio of earnings to
fixed charges was 1.78x and 1.84x for the nine months ended September 30, 2005
and September 30, 2004, respectively. Commercial paper and Other short-term debt
as a percentage of total debt was 21% at September 30, 2005, compared to 27% at
the end of 2004.

     During the first nine months of 2005, Textron Financial declared and paid
dividends to Textron of $107 million, compared to dividends declared and paid of
$77 million during the corresponding period of 2004. The increase in 2005 was
primarily a result of maintaining a targeted debt to equity leverage ratio and
increased profitability. Textron contributed capital of $7 million to Textron
Financial in the first nine months of 2005 and 2004, which consisted of
Textron's dividend on the preferred stock of Textron Funding Corporation.

Off-Balance Sheet Arrangements

     Textron Financial sells finance receivables utilizing both securitizations
and whole-loan sales. As a result of these transactions, finance receivables are
removed from the Company's balance sheet and the proceeds received are used to
reduce the Company's recorded debt levels. Despite the reduction in the recorded
balance sheet position, the Company generally retains a subordinated interest in
the finance receivables sold through

                                        15
<PAGE>

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

OF OPERATIONS (CONTINUED)
securitizations, which may affect operating results through periodic fair value
adjustments. The Company also sells receivables in whole-loan sales in which it
retains a continuing interest, through limited credit enhancement, in the form
of a contingent liability related to finance receivable credit losses and, to a
lesser extent, prepayment risk.

     The Company utilizes off-balance sheet financing arrangements (primarily
asset-backed securitizations) to further diversify the Company's funding
alternatives. These arrangements are an important source of funding that
provided net proceeds of $208 million and $302 million during the first nine
months of 2005 and 2004, respectively. Textron Financial has used the proceeds
from these arrangements to fund the origination of new finance receivables and
to retire commercial paper. Gains related to these transactions amounted to $34
million in the first nine months of 2005 and $44 million in the first nine
months of 2004. The $34 million of securitization gains in the first nine months
of 2005 consisted of $30 million from the recurring finance receivable sales
into the Distribution Finance revolving term and conduit securitization, $2
million from a golf mortgage securitization, $1 million from an incremental sale
into the Resort Finance securitization conduit and $1 million from an
incremental sale into the Aircraft Finance securitization conduit, net of
impairment charges. Cash collections on current and prior period securitization
gains were $41 million and $49 million for the first nine months of 2005 and
2004, respectively.

Managed Finance Receivables

     Managed finance receivables consist of owned finance receivables, and
finance receivables that Textron Financial continues to service, but has sold in
securitizations or similar structures in which some risks of ownership are
retained. The managed finance receivables of our business segments are presented
in the following table.

<Table>
<Caption>
                                                       SEPTEMBER 30,    JANUARY 1,
                                                           2005            2005
                                                       -------------   -------------
                                                           (DOLLARS IN MILLIONS)
<S>                                                    <C>      <C>    <C>      <C>
Distribution Finance.................................  $2,712    31%   $2,269    28%
Aircraft Finance.....................................   1,635    19%    1,610    20%
Golf Finance.........................................   1,347    16%    1,296    16%
Resort Finance.......................................   1,088    13%    1,183    15%
Structured Capital...................................     747     9%      745     9%
Asset-Based Lending..................................     733     8%      584     7%
Other Segment........................................     347     4%      448     5%
                                                       ------   ----   ------   ----
Total managed finance receivables....................  $8,609   100%   $8,135   100%
                                                       ======   ====   ======   ====
</Table>

     Managed finance receivables within the Company's core business increased
$575 million, primarily as a result of growth in Distribution Finance and
Asset-Based Lending. This increase was partially offset by higher collections,
net of new finance receivable originations, in the Resort Finance portfolio. The
decrease in the Other segment represents continued portfolio collections,
prepayments and sales of the liquidating portfolios.

Nonperforming Assets

     Nonperforming assets include nonaccrual finance receivables and repossessed
assets and properties. Textron Financial classifies receivables as nonaccrual
and suspends the recognition of earnings when accounts are contractually
delinquent by more than three months, unless collection of principal and
interest is not doubtful. In addition, earlier suspension may occur if Textron
Financial has significant doubt about the ability of the obligor to meet current
contractual terms. Doubt may be created by payment delinquency, reduction in the
obligor's cash flows, deterioration in the loan to collateral value relationship
or other relevant considerations.

                                        16
<PAGE>

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

OF OPERATIONS (CONTINUED)
     The following table sets forth certain information about nonperforming
assets and the related percentages of owned finance assets at September 30, 2005
and January 1, 2005, by business segment.

<Table>
<Caption>
                                                        SEPTEMBER 30,    JANUARY 1,
                                                            2005            2005
                                                        -------------   ------------
                                                           (DOLLARS IN MILLIONS)
<S>                                                     <C>    <C>      <C>    <C>
Resort Finance........................................  $ 35    3.17%   $ 53   4.44%
Golf Finance..........................................    27    2.19%     26   2.34%
Asset Based Lending...................................     8    1.07%      7   1.17%
Aircraft Finance......................................     7    0.49%     12   0.96%
Distribution Finance..................................     2    0.17%      5   0.43%
Other.................................................    55   15.01%     37   8.35%
                                                        ----            ----
Total nonperforming assets............................  $134    1.92%   $140   2.18%
                                                        ====            ====
</Table>

     The Company believes that nonperforming assets generally will be in the
range of 1% to 4% of finance assets depending on economic conditions.
Nonperforming assets decreased $6 million at September 30, 2005 as compared to
year-end 2004. The core businesses showed significant improvement, decreasing
$24 million from year-end 2004, largely related to improved general economic
conditions, while the Other segment increased by $18 million. The increase in
the Other segment was primarily related to one media finance loan and one
syndicated bank loan. Overall, the Company expects relative stability in
portfolio quality throughout the remainder of 2005 and into 2006; however, the
Company could experience an out-of-trend result in any one quarter.

Interest Rate Sensitivity

     Textron Financial's mix of fixed and floating rate debt is continuously
monitored by management and is adjusted, as necessary, based on evaluations of
internal and external factors. Management's strategy of matching floating rate
assets with floating rate liabilities limits Textron Financial's risk to changes
in interest rates. This strategy includes the use of interest rate exchange
agreements. At September 30, 2005, floating rate liabilities in excess of
floating rate assets were $24 million, net of $2.8 billion of net interest rate
exchange agreements, which effectively converted fixed rate debt to a floating
rate equivalent and $158 million of interest rate exchange agreements, which
effectively converted fixed rate finance receivables to a floating rate
equivalent. Classified within fixed rate assets are $106 million of floating
rate loans with index rate floors that are, on average, 61 basis points above
the applicable index rate (predominately the Prime rate). As a consequence,
these assets are classified as fixed rate, and will remain so until the Prime
rate increases above the floor rates. The Company has benefited from these and
other interest rate floor agreements in the recent low rate environment.
However, in a rising rate environment, this benefit will dissipate until the
Prime rate exceeds the floor rates embedded in these agreements. As a result of
recent increases in short-term interest rates, Textron Financial no longer
benefits from interest rate floors in excess of the applicable index rate in
connection with its ownership of a residual interest in the Distribution Finance
securitization trust.

     Management believes that its asset/liability management policy provides
adequate protection against interest rate risks. Increases in interest rates,
however, could have an adverse effect on interest margin. Variable rate finance
receivables are generally tied to changes in the Prime rate offered by major
U.S. banks. As a consequence, changes in short-term borrowing costs generally
precede changes in variable rate receivable yields. 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 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"). Textron Financial also assumes in its analysis that
prospective receivable additions will be match funded, existing portfolios will
not prepay and contractual maturities of both debt and assets will result in
issuances or reductions of commercial paper. This shock test model, when applied
to

                                        17
<PAGE>

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

OF OPERATIONS (CONTINUED)
Textron Financial's asset and liability position at September 30, 2005,
indicates that an increase in interest rates of 100 basis points would have a
positive impact on Textron Financial's net income and cash flows of $1.1 million
for the following twelve-month period.

FINANCIAL RISK MANAGEMENT

     Textron Financial's results are affected by changes in U.S. and, to a
lesser extent, foreign interest rates. As part of managing this risk, Textron
Financial enters into interest rate exchange agreements. Textron Financial's
objective in 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 match-funding objectives. The fair values of interest rate exchange
agreements are recorded in either Other assets or Accrued interest and other
liabilities on the Company's Consolidated Balance Sheets. These agreements do
not involve a high degree of complexity or risk.

     Textron Financial manages its foreign currency exposure by funding most
foreign currency denominated assets with liabilities in the same currency. The
Company may enter into foreign currency exchange agreements to convert foreign
currency denominated assets, liabilities and cash flows into functional currency
denominated assets, liabilities and cash flows. In addition, as part of managing
its foreign currency exposure, Textron Financial may enter into foreign currency
forward exchange contracts. The objective of such agreements is to manage any
remaining foreign currency exposures to changes in currency rates. The net
notional amounts of outstanding foreign currency forward exchange contracts were
$15 million and $3 million at September 30, 2005 and January 1, 2005,
respectively. The fair values of foreign currency forward exchange contracts are
recorded in either Other assets or Accrued interest and other liabilities on the
Company's Consolidated Balance Sheets. As the Company hedges all substantial
foreign currency exposures which could impact net income, likely future changes
in foreign currency rates are not expected to have a significant impact on
earnings.

RESULTS OF OPERATIONS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2005 VS. SEPTEMBER 30, 2004

REVENUES AND NET INTEREST MARGIN

     A comparison of revenues and net interest margin is set forth in the
following table.

<Table>
<Caption>
                                               THREE MONTHS                           NINE MONTHS
                                                   ENDED                                 ENDED
                                    -----------------------------------   -----------------------------------
                                     SEPTEMBER 30,      SEPTEMBER 30,      SEPTEMBER 30,      SEPTEMBER 30,
                                          2005               2004               2005               2004
                                    ----------------   ----------------   ----------------   ----------------
                                                              (DOLLARS IN MILLIONS)
<S>                                 <C>                <C>                <C>                <C>
Finance charges and discounts.....        $117              $  90               $331              $ 269
Rental revenues on operating
  leases..........................           9                  8                 24                 22
Other income......................          29                 31                 88                109
                                          ----              -----               ----              -----
Total revenues....................         155                129                443                400
Interest expense..................          56                 38                152                111
Depreciation of equipment on
  operating leases................           5                  5                 14                 14
                                          ----              -----               ----              -----
Net interest margin...............        $ 94              $  86               $277              $ 275
                                          ====              =====               ====              =====
Portfolio yield...................        8.13%              7.19%              7.69%              7.33%
Net interest margin as a
  percentage of average net
  investment (Interest margin
  percentage).....................        6.25%              6.54%              6.20%              7.19%
</Table>

                                        18
<PAGE>

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

OF OPERATIONS (CONTINUED)
     The increase in finance charges and discounts for the three and nine months
ended September 30, 2005 principally reflected earnings on $737 million and $834
million of higher average finance receivables ($13 million and $46 million), and
a higher interest rate environment ($29 million and $77 million). This increase
was partially offset by lower relative receivable pricing ($15 million and $62
million), the loss of the Prime rate floor benefit experienced in 2004 and a
shift in mix of the fixed rate portfolio from relatively higher yield assets in
Structured Capital to relatively lower yield assets in Golf Finance and Aircraft
Finance. The decline in Other income for the three months ended was primarily
due to lower securitization gains ($6 million), primarily in Distribution
Finance and Resort Finance, partially offset by a comparative increase in fee
income due to higher 2004 impairment charges related to assets acquired through
bankruptcy or repossession of collateral resulting from troubled loans. The
decline in Other income for the nine months ended September 30, 2005, was mostly
related to lower prepayment income ($5 million), primarily in the media and
franchise portfolios and lower securitization gains ($10 million), primarily in
Distribution Finance and Aircraft Finance.

     Net interest margin increased for the three and nine months ended September
30, 2005, despite a decrease in net interest margin percentage of 0.29% and
0.99%, respectively, as a result of growth in average finance receivables.
Interest expense increased primarily as a result of a $597 million and $752
million increase in average debt levels to fund receivable growth ($5 million
and $19 million) and a higher interest rate environment ($25 million and $68
million), partially offset by improved credit spreads on debt issuances ($12
million and $45 million). While the benefit of these improved credit spreads
substantially offset the impact of lower relative receivable pricing and the
loss of the Prime rate floor benefit, net interest margin percentage decreased
primarily due to lower Other income and the shift in the mix of the fixed rate
portfolio.

SELLING AND ADMINISTRATIVE EXPENSES

<Table>
<Caption>
                                               THREE MONTHS                           NINE MONTHS
                                                   ENDED                                 ENDED
                                    -----------------------------------   -----------------------------------
                                     SEPTEMBER 30,      SEPTEMBER 30,      SEPTEMBER 30,      SEPTEMBER 30,
                                          2005               2004               2005               2004
                                    ----------------   ----------------   ----------------   ----------------
                                                              (DOLLARS IN MILLIONS)
<S>                                 <C>                <C>                <C>                <C>
Selling and administrative
  expenses........................       $  47              $  44               $140               $132
Selling and administrative
  expenses as a percentage of
  average managed and serviced
  receivables.....................        2.00%              1.98%              1.99%              2.05%
Operating efficiency ratio........        50.1%              50.4%              50.5%              48.2%
</Table>

     The increase in selling and administrative expenses for the three and nine
months ended September 30, 2005 was primarily attributable to higher employee
salaries and benefits expense ($3 million and $8 million) as a result of
increased performance based compensation tied to the Company's improved
profitability, higher pension costs and stock option expense.

                                        19
<PAGE>

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

OF OPERATIONS (CONTINUED)
PROVISION FOR LOSSES

<Table>
<Caption>
                                               THREE MONTHS                           NINE MONTHS
                                                   ENDED                                 ENDED
                                    -----------------------------------   -----------------------------------
                                     SEPTEMBER 30,      SEPTEMBER 30,      SEPTEMBER 30,      SEPTEMBER 30,
                                          2005               2004               2005               2004
                                    ----------------   ----------------   ----------------   ----------------
                                                                  (IN MILLIONS)
<S>                                 <C>                <C>                <C>                <C>
Allowance for losses on
  receivables beginning of
  period..........................        $99                $111               $99                $119
Provision for losses..............          4                  14                17                  48
Less net charge-offs:
  Resort Finance..................          1                  12                 8                  33
  Distribution Finance............          4                   3                 8                  10
  Aircraft Finance................          1                   2                --                   5
  Asset-Based Lending.............          1                   2                 1                   3
  Golf Finance....................         --                   1                 2                   1
  Other...........................         --                   2                 1                  14
                                          ---                ----               ---                ----
Total net charge-offs.............          7                  22                20                  66
Acquisitions and other............         --                  (1)               --                   1
                                          ---                ----               ---                ----
Allowance for losses on
  receivables end of period.......        $96                $102               $96                $102
                                          ===                ====               ===                ====
</Table>

     The decrease in provision for losses reflects sustained improvement in
portfolio quality as well as a shift in the mix of the portfolio, reflecting
growth in Distribution Finance, which has traditionally experienced lower levels
of net charge-offs as compared to the Company's total receivable portfolio. In
addition, the Company experienced lower net charge-offs in both its core and
non-core portfolios.

     Although management believes it has made adequate provision for anticipated
losses, realization of these 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

     Segment income presented in the tables below represents income before
income taxes.

  Distribution Finance

<Table>
<Caption>
                                               THREE MONTHS                           NINE MONTHS
                                                   ENDED                                 ENDED
                                    -----------------------------------   -----------------------------------
                                     SEPTEMBER 30,      SEPTEMBER 30,      SEPTEMBER 30,      SEPTEMBER 30,
                                          2005               2004               2005               2004
                                    ----------------   ----------------   ----------------   ----------------
                                                                  (IN MILLIONS)
<S>                                 <C>                <C>                <C>                <C>
Revenues..........................        $43                $37                $127               $120
Net interest margin...............        $33                $34                $101               $109
Selling and administrative
  expenses........................         18                 16                  50                 45
Provision for losses..............         (4)                 3                  --                  5
                                          ---                ---                ----               ----
Segment income....................        $19                $15                $ 51               $ 59
                                          ===                ===                ====               ====
</Table>

                                        20
<PAGE>

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

OF OPERATIONS (CONTINUED)
     Distribution Finance segment income increased $4 million during the third
quarter of 2005, as a result of lower provision for losses ($7 million),
partially offset by a reduction in net interest margin percentage. The lower
provision for losses primarily reflected a change in reserving requirements,
reflecting sustained improvements in credit quality. The increase in revenues is
the result of higher average finance receivables ($431 million) and the impact
of a higher rate environment, partially offset by lower relative receivable
pricing and the loss of the Prime rate floor benefit experienced in 2004 ($6
million). The increase in revenues did not result in an increase in net interest
margin as improved borrowing spreads ($2 million) were offset by the lower
relative receivable pricing.

     The decrease in segment income of $8 million during the first nine months
of 2005 was mostly a result of the decrease in net interest margin ($8 million),
partially offset by lower provision for losses ($5 million). The lower provision
for losses primarily reflects a change in reserving requirements, reflecting
sustained improvements in credit quality. The increase in revenues is the result
of higher average finance receivables ($355 million) and the impact of a higher
rate environment, partially offset by lower relative receivable pricing and the
loss of the Prime rate floor benefit experienced in 2004 ($25 million). The
increase in revenues did not result in an increase in net interest margin as
improved borrowing spreads ($5 million) were offset by lower relative receivable
pricing and a reduction in gains from incremental increases in receivables sold
into the Distribution Finance securitization trust ($2 million). The increase in
selling and administrative expenses ($5 million) was primarily a result of
portfolio growth. Selling and administrative expenses as a percentage of average
managed and serviced receivables decreased to 2.61% from 2.99% for the nine
months ended September 30, 2005 and September 30, 2004, respectively.

  Golf Finance

<Table>
<Caption>
                                               THREE MONTHS                           NINE MONTHS
                                                   ENDED                                 ENDED
                                    -----------------------------------   -----------------------------------
                                     SEPTEMBER 30,      SEPTEMBER 30,      SEPTEMBER 30,      SEPTEMBER 30,
                                          2005               2004               2005               2004
                                    ----------------   ----------------   ----------------   ----------------
                                                                  (IN MILLIONS)
<S>                                 <C>                <C>                <C>                <C>
Revenues..........................        $26                $21                $74                $58
Net interest margin...............        $12                $10                $39                $30
Selling and administrative
  expenses........................          5                  4                 15                 14
Provision for losses..............          1                  2                  4                  5
                                          ---                ---                ---                ---
Segment income....................        $ 6                $ 4                $20                $11
                                          ===                ===                ===                ===
</Table>

     Golf Finance segment income increased $2 million during the third quarter
of 2005, primarily as a result of higher net interest margin. The higher net
interest margin was principally the result of earnings from $228 million of
higher average finance receivables ($2 million), and improved borrowing spreads
($4 million), partially offset by lower relative receivable pricing ($3
million).

     The increase in Golf Finance segment income of $9 million during the first
nine months of 2005 primarily reflected higher net interest margin. The higher
net interest margin was due to $295 million of higher average finance
receivables ($6 million) and improved borrowing spreads ($15 million), partially
offset by lower relative receivable pricing ($9 million) and lower other income
($3 million). An increase in securitization gains ($2 million) as a result of a
golf mortgage portfolio securitization in the second quarter of 2005 was more
than offset by lower syndication gains ($4 million) and lower fee income ($1
million).

                                        21
<PAGE>

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

OF OPERATIONS (CONTINUED)
  Aircraft Finance

<Table>
<Caption>
                                               THREE MONTHS                           NINE MONTHS
                                                   ENDED                                 ENDED
                                    -----------------------------------   -----------------------------------
                                     SEPTEMBER 30,      SEPTEMBER 30,      SEPTEMBER 30,      SEPTEMBER 30,
                                          2005               2004               2005               2004
                                    ----------------   ----------------   ----------------   ----------------
                                                                  (IN MILLIONS)
<S>                                 <C>                <C>                <C>                <C>
Revenues..........................        $26                $20                $73                $58
Net interest margin...............        $12                $11                $35                $28
Selling and administrative
  expenses........................          4                  4                 12                 11
Provision for losses..............          2                  1                  1                  1
                                          ---                ---                ---                ---
Segment income....................        $ 6                $ 6                $22                $16
                                          ===                ===                ===                ===
</Table>

     Aircraft Finance segment income was relatively unchanged during the third
quarter of 2005, primarily reflecting higher net interest margin ($1 million)
offset by higher provision for losses ($1 million). The higher net interest
margin was the result of $227 million of higher average finance receivables ($2
million) and improved borrowing spreads ($4 million), partially offset by lower
relative receivable pricing ($3 million) and lower other income ($2 million).
The reduction in other income was primarily due to lower securitization gains
and lower fee income.

     The increase in Aircraft Finance segment income of $6 million during the
first nine months of 2005 was primarily a result of higher net interest margin.
The higher net interest margin was due to $210 million of higher average finance
receivables ($4 million) and improved borrowing spreads ($13 million), partially
offset by lower relative receivable pricing ($8 million) and lower other income
($2 million) primarily due to lower securitization gains.

  Resort Finance

<Table>
<Caption>
                                               THREE MONTHS                           NINE MONTHS
                                                   ENDED                                 ENDED
                                    -----------------------------------   -----------------------------------
                                     SEPTEMBER 30,      SEPTEMBER 30,      SEPTEMBER 30,      SEPTEMBER 30,
                                          2005               2004               2005               2004
                                    ----------------   ----------------   ----------------   ----------------
                                                                  (IN MILLIONS)
<S>                                 <C>                <C>                <C>                <C>
Revenues..........................        $25                $22                $66                $62
Net interest margin...............        $15                $14                $38                $42
Selling and administrative
  expenses........................          7                  5                 21                 18
Provision for losses..............          1                  8                  3                 29
                                          ---                ---                ---                ---
Segment income....................        $ 7                $ 1                $14                $(5)
                                          ===                ===                ===                ===
</Table>

     Resort Finance segment income increased $6 million during the third quarter
of 2005, principally reflecting lower provision for losses ($7 million),
partially offset by higher selling and administrative expenses ($2 million). The
lower provision for losses principally reflected stabilization in portfolio
quality and specific reserving actions taken on several nonperforming accounts
during 2004. Net interest margin remained relatively stable due to higher other
income primarily due to a portfolio sale and higher fee income ($2 million),
partially offset by $178 million of lower average finance receivables ($1
million). Selling and administrative expenses increased as a result of increased
operational expenses related to properties received in satisfaction of troubled
loans.

     The increase in Resort Finance segment income of $19 million during the
first nine months of 2005 was primarily the result of lower provision for losses
($26 million), partially offset by lower net interest margin ($4 million) and
higher selling and administrative expenses ($3 million). The lower provision for
losses
                                        22
<PAGE>

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

OF OPERATIONS (CONTINUED)
principally reflects stabilization in portfolio quality and specific reserving
actions taken on several nonperforming accounts during 2004. The decrease in net
interest margin was due to lower relative receivable pricing ($9 million) and
lower other income ($1 million), partially offset by improved borrowing spreads
($6 million). The lower other income was primarily due to an impairment charge
related to assets acquired through repossession of collateral resulting from a
troubled loan. Selling and administrative expenses increased as a result of
increased operational expenses related to properties received in satisfaction of
troubled loans.

  Asset-Based Lending

<Table>
<Caption>
                                               THREE MONTHS                           NINE MONTHS
                                                   ENDED                                 ENDED
                                    -----------------------------------   -----------------------------------
                                     SEPTEMBER 30,      SEPTEMBER 30,      SEPTEMBER 30,      SEPTEMBER 30,
                                          2005               2004               2005               2004
                                    ----------------   ----------------   ----------------   ----------------
                                                                  (IN MILLIONS)
<S>                                 <C>                <C>                <C>                <C>
Revenues..........................        $19                $13                $53                $41
Net interest margin...............        $13                $10                $36                $33
Selling and administrative
  expenses........................          6                  5                 18                 17
Provision for losses..............          1                  1                  2                  4
                                          ---                ---                ---                ---
Segment income....................        $ 6                $ 4                $16                $12
                                          ===                ===                ===                ===
</Table>

     Asset-Based Lending segment income increased $2 million during the third
quarter of 2005 as compared to the corresponding period in 2004 due to higher
net interest margin ($3 million), resulting from a $147 million increase in
average finance receivables ($2 million) and higher other income ($1 million).

     The increase in Asset-Based Lending segment income of $4 million during the
first nine months of 2005 was due to higher net interest margin ($3 million) and
lower provision for losses ($2 million), partially offset by higher selling and
administrative expenses ($1 million). The increase in net interest margin was
mostly due to $138 million of higher average finance receivables ($6 million),
and improved borrowing spreads ($3 million), partially offset by lower relative
receivable pricing ($5 million). The decrease in provision for losses was
primarily related to specific reserving actions taken on nonperforming accounts
during 2004.

  Structured Capital

<Table>
<Caption>
                                               THREE MONTHS                           NINE MONTHS
                                                   ENDED                                 ENDED
                                    -----------------------------------   -----------------------------------
                                     SEPTEMBER 30,      SEPTEMBER 30,      SEPTEMBER 30,      SEPTEMBER 30,
                                          2005               2004               2005               2004
                                    ----------------   ----------------   ----------------   ----------------
                                                                  (IN MILLIONS)
<S>                                 <C>                <C>                <C>                <C>
Revenues..........................        $10                $11                $34                $31
Net interest margin...............        $ 6                $ 6                $22                $18
Selling and administrative
  expenses........................         --                  1                  2                  3
Provision for losses..............         --                 --                 --                 --
                                          ---                ---                ---                ---
Segment income....................        $ 6                $ 5                $20                $15
                                          ===                ===                ===                ===
</Table>

     Structured Capital segment income remained relatively unchanged during the
third quarter of 2005 compared to the corresponding period in 2004.

     The increase in Structured Capital segment income of $5 million during the
first nine months of 2005 was the result of higher net interest margin,
primarily due to higher average finance receivables of $105 million.

                                        23
<PAGE>

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

OF OPERATIONS (CONTINUED)
  Other Segment

<Table>
<Caption>
                                               THREE MONTHS                           NINE MONTHS
                                                   ENDED                                 ENDED
                                    -----------------------------------   -----------------------------------
                                     SEPTEMBER 30,      SEPTEMBER 30,      SEPTEMBER 30,      SEPTEMBER 30,
                                          2005               2004               2005               2004
                                    ----------------   ----------------   ----------------   ----------------
                                                                  (IN MILLIONS)
<S>                                 <C>                <C>                <C>                <C>
Revenues..........................        $ 6                $ 5                $ 16               $ 30
Net interest margin...............        $ 3                $ 1                $  6               $ 16
Selling and administrative
  expenses........................          7                  8                  22                 26
Provision for losses..............          3                 --                   7                  3
                                          ---                ---                ----               ----
Segment income....................        $(7)               $(7)               $(23)              $(13)
                                          ===                ===                ====               ====
</Table>

     Other segment loss was relatively unchanged during the third quarter of
2005, as compared to the corresponding period in 2004. The higher provision for
losses was partially offset by higher net interest margin principally reflecting
an increase in other income ($3 million). The increase in other income
principally reflects a $5 million other than temporary impairment charge
recorded on an investment in 2004, resulting from the resolution of a
nonperforming account, partially offset by lower fee income ($2 million). The
higher provision for losses reflects an increase in specific reserves related to
one syndicated bank loan.

     The loss in the Other segment increased $10 million primarily reflecting a
lower net interest margin ($10 million), and higher provision for losses ($4
million), partially offset by lower selling and administrative expenses ($4
million), resulting from portfolio liquidation. The lower net interest margin
principally reflects the liquidation of the portfolio and lower other income as
a result of impairment charges related to assets acquired through bankruptcy or
repossession of collateral resulting from troubled loans, as well as lower
prepayment income in the media and franchise portfolios. The increase in
provision for losses reflects an increase in specific reserves related to one
syndicated bank loan.

NET INCOME

     Net income of $29 million and $80 million for the three and nine months
ended September 30, 2005, was $10 million and $16 million higher than the
corresponding periods in 2004. The increase was primarily due to a reduction in
provision for losses ($10 million and $31 million) as a result of improved
portfolio quality, higher net interest margin ($8 million and $2 million),
partially offset by higher selling and administrative expenses ($3 million and
$8 million), as a result of growth in average managed finance receivables and
higher employee salaries and benefits expense. The increase in employee salaries
and benefits expense is the result of increased performance based compensation
tied to Company's improved profitability, pension costs and stock option
expense.

SELECTED FINANCIAL RATIOS

<Table>
<Caption>
                                               THREE MONTHS                           NINE MONTHS
                                                   ENDED                                 ENDED
                                    -----------------------------------   -----------------------------------
                                     SEPTEMBER 30,      SEPTEMBER 30,      SEPTEMBER 30,      SEPTEMBER 30,
                                          2005               2004               2005               2004
                                    ----------------   ----------------   ----------------   ----------------
<S>                                 <C>                <C>                <C>                <C>
Net interest margin as a
  percentage of average net
  investment(1)...................        6.25%              6.54%              6.20%              7.19%
Return on average equity..........       11.94%              7.83%             10.91%              8.75%
Return on average assets..........        1.72%              1.22%              1.55%              1.39%
Selling and administrative
  expenses as a percentage of
  average managed and serviced
  finance receivables(2)..........        2.00%              1.98%              1.99%              2.05%
Operating efficiency ratio(3).....        50.1%              50.4%              50.5%              48.2%
Net charge-offs as a percentage of
  average finance receivables.....        0.47%              1.66%              0.43%              1.68%
</Table>

                                        24
<PAGE>

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

OF OPERATIONS (CONTINUED)

<Table>
<Caption>
                                                               SEPTEMBER 30,     JANUARY 1,
                                                                    2005            2005
                                                              ----------------   ----------
<S>                                                           <C>                <C>
60+ days contractual delinquency as a percentage of finance
  receivables(4)............................................        1.01%           1.47%
Nonperforming assets as a percentage of finance assets(5)...        1.92%           2.18%
Allowance for losses on finance receivables as a percentage
  of finance receivables....................................        1.50%           1.70%
Allowance for losses on finance receivables as a percentage
  of nonaccrual finance receivables.........................        85.5%           83.7%
Total debt to tangible shareholder's equity(6)..............        6.13x           5.53x
</Table>

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

(1) Represents revenues earned less interest expense on borrowings and operating
    lease depreciation as a percentage of average net investment. Average net
    investment includes finance receivables plus operating leases, less deferred
    taxes on leveraged leases.

(2) Average managed and serviced finance receivables include owned receivables,
    receivables serviced under securitizations, participations and third-party
    portfolio servicing agreements.

(3) Operating efficiency ratio is selling and administrative expenses divided by
    net interest margin.

(4) Delinquency excludes any captive finance receivables with recourse to
    Textron. Captive finance receivables represent third-party finance
    receivables originated in connection with the sale or lease of Textron
    manufactured products. Percentages are expressed as a function of total
    Textron Financial independent and nonrecourse captive receivables.

(5) Finance assets include: finance receivables; equipment on operating leases,
    net of accumulated depreciation; repossessed assets and properties; retained
    interests in securitizations; investment in equipment residuals;
    Acquisition, Development and Construction arrangements; and other short- and
    long-term investments (some of which are classified in Other assets on
    Textron Financial's Consolidated Balance Sheets). Nonperforming assets
    include independent and nonrecourse captive finance assets.

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

RECENT ACCOUNTING PRONOUNCEMENTS

     Textron Financial participates in Textron Inc.'s 1999 Long-Term Incentive
Plan (the "Plan"). The Plan awards employees options to purchase Textron shares
and restricted stock. In December 2004, the FASB issued Statement of Financial
Accounting Standards ("SFAS") No. 123 (Revised 2004), "Share-Based Payment"
("SFAS No. 123-R"), which replaces SFAS No. 123, "Accounting for Stock-Based
Compensation" and supercedes Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees." SFAS No. 123-R requires companies to
measure compensation expense for share-based payments to employees, including
stock options, at fair value and expense such compensation over the service
period beginning with the first interim or annual period after June 15, 2005. In
April 2005, the Securities and Exchange Commission delayed the transition date
for companies to the first fiscal year beginning after June 15, 2005,
effectively delaying Textron's required adoption of SFAS No. 123-R until the
first quarter of 2006. Textron elected to adopt SFAS No. 123-R in the first
quarter of 2005 using the modified prospective method. In connection with the
adoption of this standard, the compensation expense recognized related to
Textron Financial employees through September 30, 2005 was $1.5 million.

FORWARD-LOOKING INFORMATION

     Certain statements in this quarterly report on Form 10-Q and other oral and
written statements made by Textron Financial from time to time are
forward-looking statements, including those that discuss strategies, goals,
outlook or other nonhistorical matters; or project revenues, income, returns or
other financial measures.

                                        25
<PAGE>

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

OF OPERATIONS (CONTINUED)
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 Textron Financial
offers financing; (c) the ability to realize full value of receivables and
investments in securities; (d) the ability to control costs and successful
implementation of various cost reduction programs; (e) increases in pension
expenses related to lower than expected asset performance or changes in discount
rates; (f) the impact of changes in tax legislation; (g) the ability to maintain
portfolio credit quality; (h) Textron Financial's access to debt financing at
competitive rates; (i) access to equity in the form of retained earnings and
capital contributions from Textron; (j) uncertainty in estimating contingent
liabilities and establishing reserves tailored to address such contingencies and
(k) performance of acquisitions.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     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.

ITEM 4.  CONTROLS AND PROCEDURES

     We have carried out an evaluation, under the supervision and with the
participation of our management, including our Chairman and Chief Executive
Officer (the "CEO") and our Executive Vice President and Chief Financial Officer
(the "CFO"), of the effectiveness of the design and operation of our disclosure
controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended (the "Act")) as of the end of the
fiscal quarter covered by this report. Based upon that evaluation, our CEO and
CFO concluded that our disclosure controls and procedures are effective in
providing reasonable assurance that (a) the information required to be disclosed
by us in the reports that we file or submit under the Act is recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission's rules and forms, and (b) such information
is accumulated and communicated to our management, including our CEO and CFO, as
appropriate to allow timely decisions regarding required disclosure.

     On January 2, 2005, the Company engaged a third-party service provider to
assume operational oversight and maintenance of its information technology
infrastructure. The transfer of operational oversight for data servers to the
third-party provider commenced in the third quarter of 2005 and will continue
throughout the remainder of 2005. This transfer has materially affected The
Company's internal control over financial reporting related to its information
technology infrastructure. We believe that we have taken appropriate actions to
ensure that effective internal controls over financial reporting associated with
the transfer have been and will continue to be maintained during the transition
period.

     Other than as set forth above, there were no other changes in Textron
Financial's internal control over financial reporting during the quarter ended
September 30, 2005 that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.

                                        26
<PAGE>

                           PART II. OTHER INFORMATION

ITEM 6.  EXHIBITS

<Table>
<S>            <C>
    12         Computation of Ratio of Earnings to Fixed Charges
    31.1       Certification of Chief Executive Officer Pursuant to Rule
               13a-14(a)
    31.2       Certification of Chief Financial Officer Pursuant to Rule
               13a-14(a)
    32.1       Certification of Chief Executive Officer Pursuant to 18
               U.S.C. Section 1350
    32.2       Certification of Chief Financial Officer Pursuant to 18
               U.S.C. Section 1350
</Table>

                                        27
<PAGE>

                                   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.
                                          TEXTRON FINANCIAL CORPORATION

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

Date: November 7, 2005

                                        28