TEXTRON FINANCIAL CORP - 10-K Annual Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 28, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-27559

TEXTRON FINANCIAL CORPORATION
(Exact Name of Registrant as Specified in Its Charter)

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

40 WESTMINSTER STREET, P.O. BOX 6687, PROVIDENCE, R.I. 02940-6687
(401) 621-4200
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained herein,
and will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. (Not applicable).

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2.) Yes [ ] No [X]

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

REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION I (1)(a)
AND (b) OF FORM 10-K AND IS THEREFORE FILING THIS FORM WITH THE REDUCED
DISCLOSURE FORMAT.
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TABLE OF CONTENTS

PART I.
Item 1. Business.................................................... 3
Item 2. Properties.................................................. 14
Item 3. Legal Proceedings........................................... 14
Item 4. Submission of Matters to a Vote of Security Holders......... 15
PART II.
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters....................................... 15
Item 6. Selected Financial Data..................................... 15
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 17
Item 7A. Quantitative and Qualitative Disclosure About Market Risk... 26
Item 8. Financial Statements and Supplementary Data................. 27
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................. 53
PART III.
Item 10. Directors and Executive Officers of the Registrant.......... 53
Item 11. Executive Compensation...................................... 53
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................ 53
Item 13. Certain Relationships and Related Transactions.............. 53
Item 14. Controls and Procedures..................................... 53
PART IV.
Item 15. Exhibits, Financial Statement Schedules and Reports on Form
8-K....................................................... 54

2

PART I.

ITEM 1. BUSINESS

GENERAL

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. Aircraft Finance provides financing for new and used
Cessna business jets and piston-engine airplanes, Bell helicopters and other
general aviation aircraft. Asset-Based Lending pursues two types of lending
primarily secured by accounts receivable and inventory: general purpose
asset-based lending, which provides asset-based loans to smaller middle-market
companies that manufacture or distribute finished goods, and specialty
asset-based lending, which factors freight bills and utility service
receivables, and extends asset-based loans to small niche-oriented finance
companies. Distribution Finance offers inventory finance programs for dealers of
Textron manufactured products and for dealers of a variety of other household,
housing, leisure, agricultural and technology products. Golf Finance makes
mortgage loans for the acquisition and refinancing of golf courses, and provides
term financing for E-Z-GO golf cars and Textron Turf Care equipment. Resort
Finance extends loans to developers of vacation interval resorts and
recreational and residential land lots, secured primarily by notes receivable
and interval and land lot inventory. Structured Capital engages in tax-oriented,
long-term leases of large-ticket equipment and real estate, primarily with
investment grade lessees. Textron Financial's other financial services and
products include transaction syndication, equipment appraisal and disposition,
insurance brokerage and portfolio servicing. Some of these ancillary services
are offered through Asset Control LLC and TBS Business Services, Inc.

All of Textron Financial's stock is owned by Textron Inc. (Textron), an $11
billion global multi-industry company with operations in five business segments:
Aircraft, Fastening Systems, Industrial Products, Industrial Components and
Finance. At December 28, 2002, 23% of Textron Financial's total managed finance
receivables were related to Textron or Textron's products (Textron-related
receivables). For further information on Textron Financial's relationship with
Textron, see "Relationship with Textron" below.

Textron Financial's financing activities are confined almost exclusively to
secured lending and leasing to commercial markets. Textron Financial's services
are offered primarily in North America. However, Textron Financial does finance
Textron products worldwide, principally Bell helicopters and Cessna aircraft.

DESCRIPTION OF BUSINESS SEGMENTS AND OPERATING UNITS

Textron Financial provides a wide range of financing, leasing and related
services through the following six business segments:

- Aircraft Finance

- Asset-Based Lending

- Distribution Finance

- Golf Finance

- Resort Finance

- Structured Capital

For additional information regarding Textron Financial's business segments,
see below and Note 19 to the consolidated financial statements in Item 8 of this
Form 10-K.

Aircraft Finance

Textron Financial provides financing for new and used Cessna business jets
and piston-engine airplanes, Bell helicopters and other general aviation
aircraft.

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The following table sets forth certain financial information regarding the
Aircraft Finance segment for the periods indicated:

Asset-Based Lending

Textron Financial provides two types of lending primarily secured by
accounts receivable and inventory: general purpose asset-based lending, which
provides asset-based loans to smaller middle-market companies that manufacture
or distribute finished goods, and specialty asset-based lending, which factors
freight bills and utility service receivables, and extends asset-based loans to
small niche-oriented finance companies.

The following table sets forth certain financial information regarding the
Asset-Based Lending segment for the periods indicated:

Distribution Finance

Textron Financial offers inventory finance programs for dealers of Textron
manufactured products and for dealers of a variety of other household, housing,
leisure, agricultural and technology products.

4

The following table sets forth certain financial information regarding the
Distribution Finance segment for the periods indicated:

Golf Finance

Textron Financial makes mortgage loans for the acquisition and refinancing
of golf courses, and provides term financing for E-Z-GO golf cars and Textron
Turf Care equipment.

The following table sets forth certain financial information regarding the
Golf Finance segment for the periods indicated:

Resort Finance

Textron Financial extends loans to developers of vacation interval resorts
and recreational and residential land lots, secured primarily by notes
receivable and interval and land lot inventory.

5

The following table sets forth certain financial information regarding the
Resort Finance segment for the periods indicated:

Structured Capital

Textron Financial engages in tax-oriented, long-term leases of large-ticket
equipment and real estate, primarily with investment grade lessees.

The following table sets forth certain financial information regarding the
Structured Capital segment for the periods indicated:

Other

The Other segment includes franchise finance (loans primarily to operators
of restaurants and convenience store/gas outlets), media finance (working
capital, acquisition and debt refinancing of broadcast, publishing and other
media operators) and small business finance (unsecured lines of credit and term
financing). This segment also includes liquidating portfolios related to a
strategic realignment of the Company's businesses and product lines in 2001.

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The following table sets forth certain financial information regarding the
various businesses included in the Other segment for the periods indicated:

7

COMPETITION

Textron Financial operates in markets which are highly fragmented and
extremely competitive. They are characterized by competitive factors that vary,
to some extent, by product and geographic region. Textron Financial's
competitors include:

- Commercial finance companies;

- National and regional banks and thrift institutions;

- Insurance companies;

- Leasing companies; and

- Finance operations of equipment vendors.

Textron Financial competes primarily on the basis of pricing, terms,
structure and service. Competitors often seek to compete aggressively on the
basis of these factors. The Company may lose market share to the extent that it
is unwilling to match competitors' practices. To the extent that Textron
Financial matches these practices, the Company may experience decreased margins,
increased risk of credit losses or both. Many of Textron Financial's competitors
are large companies that have substantial capital, technological and marketing
resources. This has become increasingly the case given the consolidation
activity in the commercial finance industry. In some instances, Textron
Financial's competitors have access to capital at a lower cost than Textron
Financial.

RELATIONSHIP WITH TEXTRON

General

Textron Financial derives a portion of its business from financing the sale
and lease of products manufactured and sold by Textron. In 2002, 2001 and 2000,
Textron Financial paid Textron $1.1 billion, $1.3 billion and $1.4 billion,
respectively, for the sale of manufactured products to third parties that were
financed by the Company. In addition, the Company paid Textron $104.3 million in
2002, $62.1 million in 2001 and $50.3 million in 2000 for the purchase of
operating lease equipment. Textron Financial recognized finance charge revenues
from Textron and affiliates (net of payments or reimbursements for interest
charged at more or less than market rates on Textron manufactured products) of
$9.4 million in 2002, $4.0 million in 2001 and $11.6 million in 2000, and
operating lease revenues of $21.0 million in 2002, $10.9 million in 2001 and
$10.9 million in 2000.

Textron Financial and Textron utilize an intercompany account for the
allocation of Textron overhead charges and for the settlement of Textron
manufactured product sales to third parties that were financed by Textron
Financial. For additional information regarding the relationship between Textron
Financial and Textron, see Notes 4, 5 and 10 to the consolidated financial
statements in Item 8 of this Form 10-K.

Agreements with Textron

Textron Financial and Textron are parties to several agreements which
govern various aspects of the Textron Financial-Textron relationship. They are
described below:

Receivables Purchase Agreement

Under a Receivables Purchase Agreement with Textron, Textron Financial has
recourse to Textron with respect to certain finance receivables and operating
leases relating to products manufactured and sold by Textron. Finance
receivables of $526.7 million at December 28, 2002, and $648.1 million at
December 29, 2001, and operating leases of $122.3 million at December 28, 2002,
and $90.6 million at December 29, 2001, were subject to recourse to Textron or
due from Textron. In addition, Textron Financial had recourse to Textron on
subordinated certificates of $59.2 million and $55.8 million at year-end 2002
and 2001, respectively, and on cash reserve accounts of $10.4 million and $13.9
million at year-end 2002 and 2001, respectively. Both the subordinated
certificates and the cash reserve accounts are retained interests related to

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receivable securitizations. Under the Receivables Purchase Agreement, Textron
also makes available to Textron Financial a line of credit of up to $100 million
for junior subordinated borrowings at the prime interest rate.

Support Agreement with Textron

Under a Support Agreement with Textron dated as of May 25, 1994, Textron is
required to pay to Textron Financial, quarterly, an amount sufficient to provide
that Textron Financial's pre-tax earnings, before extraordinary items and fixed
charges (including interest on indebtedness and amortization of debt discount
"fixed charges"), will not be less than 125% of the Company's fixed charges. No
such payments under the Support Agreement were required for the years ended
2002, 2001, or 2000, when Textron Financial's fixed-charge coverage ratios (as
defined) were 161%, 171%, and 158%, respectively. Textron also has agreed to
maintain Textron Financial's consolidated shareholder's equity at an amount no
less than $200 million. Pursuant to the terms of the Support Agreement, Textron
is required to directly or indirectly own 100% of Textron Financial's common
stock. The Support Agreement also contains a third-party beneficiary provision
entitling Textron Financial's lenders to enforce its provisions against Textron.

Tax Sharing Agreement with Textron

Textron Financial's revenues and expenses are included in the consolidated
federal tax return of Textron. The Company files most of its state income tax
returns on a separate basis. Textron Financial is allocated federal tax benefits
and charges on the basis of statutory U.S. tax rates applied to the Company's
taxable income or loss included in the consolidated returns. The benefits of
general business credits, foreign tax credits and any other tax credits are
utilized in computing current tax liability. Textron Financial is paid for tax
benefits generated and utilized in Textron's consolidated federal and state
income tax returns, whether or not the Company would have been able to utilize
those benefits on a separate tax return. Income tax assets or liabilities are
settled on a quarterly basis.

Under a Tax Sharing Agreement with Textron, Textron has agreed to loan to
Textron Financial, on a junior subordinated interest-free basis, an amount equal
to Textron's deferred income tax liability attributable to the manufacturing
profit not yet recognized for tax purposes on products manufactured by Textron
and financed by Textron Financial. Borrowings under this arrangement are
reflected in "Amounts due to Textron Inc." on the Consolidated Balance Sheets in
Item 8 of this Form 10-K.

REGULATIONS

Small Business Act

SBA loans made by Textron Financial are governed by the Small Business Act
and the Small Business Investment Act of 1958, as amended, and also may be
subject to state regulations relating to commercial transactions generally.
These federal and state statutes and regulations specify the types of loans and
loan amounts which are eligible for the SBA guarantee, as well as the servicing
requirements imposed on the lender to maintain the effectiveness of the SBA
guarantee.

Other

Textron Financial's activities are subject, in certain instances, to
supervision and regulation by state and federal governmental authorities. These
activities also may be subject to various laws, including consumer finance laws
in some instances, and judicial and administrative decisions imposing various
requirements and restrictions, which, among other things:

- Regulate credit granting activities;

- Establish maximum interest rates, finance charges and other charges;

- Require disclosures to customers;

- Govern secured transactions;

9

- Affect insurance brokerage activities; and

- Set collection, foreclosure, repossession and claims handling procedures
and other trade practices.

Although most states do not intensively regulate commercial finance
activity, many states impose limitations on interest rates and other charges,
and prohibit certain collection and recovery practices. They also may require
licensing of certain business activities and specific disclosure of certain
contract terms. Textron Financial also is required to comply with certain
provisions of the Equal Credit Opportunity Act. The Company also may be subject
to regulation in those foreign countries in which it has operations.

Existing statutes and regulations have not had a material adverse effect on
the Company's business. However, it is not possible to forecast the nature of
future legislation, regulations, judicial decisions, orders or interpretations
or their impact upon Textron Financial's future business, financial condition,
results of operations or prospects.

EMPLOYEES

As of December 28, 2002, Textron Financial had 1,194 employees. The Company
is not subject to any collective bargaining agreements.

RISK MANAGEMENT

Textron Financial's business activities involve various elements of risk.
The Company considers the principal types of risk to be:

- Credit risk;

- Asset/liability risk (including interest rate and foreign exchange risk);
and

- Liquidity risk.

Proper management of these risks is essential to maintaining profitability.
Accordingly, the Company has designed risk management systems and procedures to
identify and quantify these risks. Textron Financial has established appropriate
policies and set prudent limits in these areas. The Company's management of
these risks and levels of compliance with its policies and limits, is
continuously monitored by means of administrative and information systems.

Credit Risk Management

Textron Financial manages credit risk through:

- Underwriting procedures;

- Centralized approval of individual transactions exceeding certain size
limits; and

- Active portfolio and account management.

The Company has developed underwriting procedures for each operating unit
that assess a prospective customer's ability to perform in accordance with
financing terms. These procedures include:

- Analyzing business or property cash flows and collateral values;

- Performing financing sensitivity analyses; and

- Assessing potential exit strategies.

Textron Financial has developed a tiered credit approval system, which
allows certain transaction types and sizes to be approved at the operating unit
level. The delegation of credit authority is done under strict policy
guidelines. Annually, Textron Financial's operating units are also subject to
internal audits by the Company.

10

Depending on transaction size and complexity, transactions outside of
operating unit authority require the approval of a Group President and Group
Credit Officer. Transactions exceeding group authority require one or more of
the President and Chief Operating Officer, the Executive Vice President and
Chief Credit Officer, the Chairman and Chief Executive Officer or Textron
Financial's Credit Committee, depending on the size of the transaction. Textron
Financial's Credit Committee is comprised of its Chairman and Chief Executive
Officer, President and Chief Operating Officer, Executive Vice President and
Chief Credit Officer, Executive Vice President and Chief Financial Officer and
Executive Vice President, General Counsel and Secretary.

The Company controls the credit risk associated with its portfolio by
limiting transaction sizes, as well as diversifying transactions by industry,
geographic area, property type and borrower. Through these practices, Textron
Financial identifies and limits exposure to unfavorable risks and seeks
favorable financing opportunities. Management reviews receivable aging trends
and watch list reports and conducts regular business reviews in order to monitor
portfolio performance. Certain receivable transactions are originated with the
intent of fully or partially selling them. This strategy provides an additional
tool to manage credit risk.

Geographic Concentration

Textron Financial continuously monitors its portfolio to avoid any undue
geographic concentration in any region of the U.S. or in any foreign country.
The largest concentration of domestic receivables was in the Southeastern U.S.,
representing 27% of Textron Financial's total managed finance receivable
portfolio at December 28, 2002. International receivables are generated mostly
in support of Textron product sales. At December 28, 2002, international
receivables represented 13% of Textron Financial's managed finance receivable
portfolio, with no single country representing more than 4%.

Asset/Liability Risk Management

The Company continuously measures and quantifies interest rate risk,
foreign exchange risk and liquidity risk, in each case taking into account the
effect of derivatives hedging activity. Textron Financial uses derivatives as an
integral part of its asset/liability management program in order to reduce:

- Interest rate exposure arising from changes in interest rates; and

- Foreign currency exposure arising from changes in exchange rates.

The Company does not use derivative financial instruments for the purpose
of generating earnings from changes in market conditions. Before entering into a
derivative transaction, the Company determines that there is a high correlation
between the change in value of, or the cash flows associated with, the hedged
asset or liability and the value of, or the cash flows associated with, the
derivative instrument. When Textron Financial executes a transaction, it
designates the derivative to a specific asset or liability, and as either a fair
value or cash flow hedge. After the inception of a hedge transaction, Textron
Financial monitors the effectiveness of derivatives, on a quarterly basis,
through a review of the amounts and maturities of assets, liabilities and
derivative positions. This information is reviewed by the Company's Senior Vice
President and Treasurer and Executive Vice President and Chief Financial Officer
so that appropriate remedial action can be taken, as necessary.

Textron Financial carefully manages exposure to counterparty risk in
connection with its derivatives. In general, the Company engages in transactions
with counterparties having ratings of at least A by Standard & Poor's Rating
Service or A2 by Moody's Investors Service. Total notional counterparty exposure
is limited to $500 million. At December 28, 2002, the Company's largest single
counterparty credit exposure was $10 million.

Interest Rate Risk Management

Textron Financial manages interest rate risk by monitoring the duration and
interest rate sensitivities of its assets and by incurring liabilities (either
directly or synthetically with derivatives) having a similar duration and
interest sensitivity profile. The Company's internal policies limit the
aggregate mismatch of interest-sensitive assets and liabilities to 10% of total
assets.
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From a quantitative perspective, Textron Financial assesses its exposure to
interest rate changes using an analysis that measures the potential loss in net
income, over a twelve-month period, resulting from a hypothetical change in
interest rates of 100 basis points across all maturities occurring at the outset
of the measurement period (sometimes referred to as a "shock test"). The Company
also assumes in its analysis that prospective receivable additions will be
perfectly match funded, existing portfolios will not prepay and all other
relevant factors will remain constant. This shock test model, when applied to
Textron Financial's asset and liability position at December 28, 2002 and
December 29, 2001, indicates that an increase in interest rates of 100 basis
points would have a beneficial impact on Textron Financial's net income and cash
flows for the following twelve-month periods, whereas a decrease in interest
rates of 100 basis points reduces Textron Financial's net income and cash flow
by $3.6 million and $2.1 million, respectively, for the following twelve-month
periods.

Foreign Exchange Risk Management

A small portion of finance assets owned by Textron Financial are located
outside of the United States. These receivables are generally in support of
Textron's overseas product sales and are predominantly denominated in U.S.
Dollars. Textron Financial presently has foreign currency receivables
principally denominated in Canadian Dollars and Australian Dollars. In order to
minimize the effect of fluctuations in foreign currency exchange rates on the
Company's financial results, Textron Financial borrows in these currencies
and/or enters into forward exchange contracts, on a monthly basis, in amounts
sufficient to hedge its remaining asset exposures.

Liquidity Risk Management

The Company uses cash to fund asset growth and to meet debt obligations and
other commitments. Textron Financial's primary sources of funds are:

- Cash from operations;

- Commercial paper borrowings;

- Issuances of medium-term notes and other term debt securities; and

- Syndication and securitization of receivables.

All commercial paper borrowings are fully backed by committed lines of
credit, providing liquidity in the event of capital market dislocation. If
Textron Financial is unable to access these markets on acceptable terms, the
Company can draw on its bank line of credit facilities and use cash flows from
operations and portfolio liquidations to satisfy its liquidity needs. For
additional information regarding Textron Financial's liquidity risk management,
see "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources," in Item 7 of this Form 10-K.

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PORTFOLIO QUALITY

The following table presents information about the credit quality of the
Company's portfolio:

Nonperforming Assets

Nonperforming assets include nonaccrual finance receivables and repossessed
assets. 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.

The table below shows nonperforming assets by business segment:

The above table does not include captive receivables with recourse to
Textron. Captive receivables with recourse that were 90 days or more delinquent
amounted to 19.3%, 16.0% and 12.6% of captive finance receivables with recourse
for the years ended 2002, 2001 and 2000, respectively. Revenues recognized on
these

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delinquent accounts were approximately $7.4 million, $9.5 million, and $10.1
million for the years ended 2002, 2001 and 2000, respectively.

Delinquent Earning Accounts and Loan Modifications

Textron Financial does not have any earning accounts that are contractually
delinquent by more than three months with the exception of the captive
receivables described above. Loans that are modified are not returned to
accruing status until six months of timely payments have been received or
Textron Financial otherwise deems that full collection of principal and interest
is not doubtful.

Allowance for Losses on Receivables

Management evaluates its allowance for losses on receivables based on a
combination of factors. For its homogeneous loan pools, Textron Financial
examines current delinquencies, the characteristics of the existing accounts,
historical loss experience, the value of the underlying collateral and general
economic conditions and trends. Textron Financial estimates losses will range
from 0.5% to 5.6% of finance receivables depending on the specific homogeneous
loan pool. The range of estimated losses is consistent with prior periods. For
larger balance commercial loans, Textron Financial considers borrower specific
information, industry trends and estimated discounted cash flows, as well as the
factors described above for homogeneous loan pools.

Provisions for losses on finance receivables are charged to income, in
amounts sufficient to maintain the allowance for losses on receivables at a
level considered adequate to cover losses in the existing finance receivable
portfolio, based on management's evaluation and analysis of this portfolio.

Finance receivables are charged off when they are deemed uncollectible.
Finance receivables are written down to the fair value (less estimated costs to
sell) of the related collateral at the earlier of the date the collateral is
repossessed or when no payment has been received for six months, unless
management deems the receivable collectible.

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. 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. 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.

ITEM 2. PROPERTIES

Textron Financial leases office space from a Textron affiliate for its
corporate headquarters at 40 Westminster Street, Providence, Rhode Island 02903.
The Company leases other offices throughout the United States. Primary
operations centers are located in Little Rock, AR; East Hartford, CT;
Alpharetta, GA; Wichita, KS; Williamstown, MA; Golden Valley, MN; Columbus, OH;
Lake Oswego, OR; and King of Prussia, PA. For additional information regarding
Textron Financial's lease obligations, see Note 17 to the consolidated financial
statements in Item 8 of this Form 10-K.

ITEM 3. LEGAL PROCEEDINGS

For information regarding Textron Financial's legal proceedings, see Note
18 to the consolidated financial statements in Item 8 of this Form 10-K.

14

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Omitted per Instruction I of Form 10-K.

PART II.

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

The common stock of Textron Financial is owned entirely by Textron and,
therefore, there is no trading of Textron Financial's stock. Dividends of $62.0
million and $51.1 million were declared and paid in 2002 and 2001, respectively,
and dividends of $84.3 million were declared and $82.0 million were paid in
2000. For additional information regarding restrictions as to dividend
availability, see Note 10 to the consolidated financial statements in Item 8 of
this Form 10-K.

ITEM 6. SELECTED FINANCIAL DATA

The following data should be read in conjunction with Textron Financial's
consolidated financial statements:

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(1) Textron Financial's year-end dates conform with Textron's year-end, which
falls on the nearest Saturday to December 31.

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

(3) 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.

(4) Return on average equity excludes the cumulative effect of change in
accounting principle.

(5) Return on average assets excludes the cumulative effect of change in
accounting principle.

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

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

(8) Delinquency excludes captive receivables with recourse to Textron. Captive
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.

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

(10) Excludes net charge-offs recorded against the real estate owned valuation
allowance of $8.0 million in 2000.

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

FINANCIAL CONDITION

Liquidity and Capital Resources

Textron Financial Corporation (Textron Financial) uses a broad base of
financial resources for its liquidity and capital needs. Cash is provided from
operations and several sources of borrowings, including the issuance of
commercial paper and other short-term debt, sales of medium and long-term debt
in the U.S. and foreign public and private markets and junior subordinated
borrowings under a $100 million line of credit with Textron Inc. (Textron). For
liquidity purposes, Textron Financial has a policy of maintaining sufficient
unused lines of credit to support its outstanding commercial paper. Textron
Financial has bank lines of credit of $1.5 billion, of which $500 million
expires in 2003 and $1.0 billion expires in 2006. The $500 million facility
includes a one-year term out option, effectively extending its expiration into
2004. None of these lines of credit were used at December 28, 2002, or December
29, 2001. Textron Financial also maintains a C$50 million committed Canadian
facility under which it can borrow an additional C$50 million on an uncommitted
basis. At December 28, 2002, Textron Financial has fully used the committed
portion of the facility in addition to borrowing C$1 million under the
uncommitted portion of the facility. Textron Financial also has a $25 million
multi-currency facility, of which $14 million remains unused at year-end 2002.
Both the Canadian and multi-currency facilities expire in 2003. Lines of credit,
including the $100 million line of credit with Textron, not reserved as support
for commercial paper or utilized for letters of credit were $716 million at
December 28, 2002, compared to $977 million at December 29, 2001. The decrease
in the unreserved portion of the lines of credit is mostly attributable to the
pay down and termination of a short-term revolving note agreement with Textron.

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 $3.0 billion. Under this facility,
Textron Financial issued $1.9 billion of term notes during 2002, primarily in
U.S. and Canadian markets, that mature in 2003 through 2009. The proceeds from
these issuances were used to refinance maturing commercial paper and long-term
debt at par. At December 28, 2002, Textron Financial had $1.1 billion available
under this facility.

Through private issuances in 2002, Textron Financial also entered into $170
million of variable rate notes maturing in 2004.

At December 28, 2002, Textron Financial had principal payments due on
long-term debt of $1,069 million in 2003, $1,407 million in 2004, $199 million
in 2005, $25 million in 2006, $726 million in 2007 and $497 million in 2009.

At December 28, 2002, Textron Financial had unused commitments to fund new
and existing customers under $1.5 billion of committed revolving lines of credit
and $1.0 billion of uncommitted revolving lines of credit. Since many of the
agreements will not be used to the extent committed or will expire unused, the
total commitment amount does not necessarily represent future cash requirements.

As a result of a sale of an equipment portfolio in 2001, Textron Financial
retained a contingent recourse liability that had a balance of $17 million at
December 28, 2002. In the event Textron Financial's credit rating drops below a
low BBB, it is required to pledge related equipment residuals of $9 million with
a letter of credit up to $8 million.

Securitizations are an important source of funding ($892 million in 2002),
and represent a significant portion of Textron Financial's revenues and income
before income taxes and distributions on preferred securities (3.8% and 20.0%,
respectively, in 2002, excluding the revolving conduits). During the year,
Textron Financial received net proceeds from the securitization of $299 million
of Aircraft Finance receivables, $185 million of small business finance
receivables (on a revolving basis), $150 million of Distribution Finance
receivables (on a revolving basis), $131 million of Resort Finance receivables
and $127 million of golf equipment receivables. These securitizations provided
Textron Financial with an alternate source of liquidity. Textron Financial used
the proceeds from the securitizations to retire commercial paper. Cash
collections on

17

current and prior period securitization gains were $43 million in 2002, $27
million in 2001 and $3 million in 2000.

In connection with the outstanding $229 million revolving securitization of
small business finance receivables, Textron Financial is obligated to repurchase
a certain class of loans if Textron Financial's credit rating drops below BBB.
Such loans amounted to $41 million at December 28, 2002. Textron Financial has
no other repurchase obligations in connection with any other securitization
transactions. Textron Financial anticipates that it will enter into additional
securitization transactions in 2003.

At December 28, 2002, Textron Financial's credit ratings were as follows:
Standard & Poor's (A- long-term, A2 short-term), Moody's Investors Service (A3
long-term, P2 short-term) and Fitch (A long-term, F1 short-term).

During the second half of 2001, Textron Financial's commercial paper and
long-term debt credit ratings were downgraded from a P1 to P2 and from an A-2 to
A-3, respectively, by Moody's Investors Service and the Company was placed on
Negative Outlook by all three ratings agencies. The economic environment and its
potential impact on the financial performance of the Company's finance
receivable portfolios were listed as contributing factors. While the actions of
the rating agencies caused the Company's cost of capital to increase, it did not
result in any loss of access to capital. Textron Financial did not experience
any commercial paper or long-term debt credit rating downgrades in 2002. Further
downgrades in Textron Financial's ratings could increase borrowing spreads or
limit its access to the commercial paper, securitization and long-term debt
markets. In addition, Textron Financial's $1.5 billion revolving bank line of
credit agreements contain certain financial covenants that Textron Financial
needs to comply with to maintain its ability to borrow under the facilities.
Textron Financial was in full compliance with such covenants at December 28,
2002.

Textron Financial believes that it has adequate credit facilities and
access to credit markets to meet its long-term financing needs.

Cash flows provided by operations were $233 million in 2002, compared to
$282 million in 2001. The decrease was primarily due to the timing of payments
of accrued interest and other liabilities, partially offset by a decrease in
noncash gains on securitizations. Cash flows from operations were $282 million
in 2001, compared to $163 million in 2000. The 2001 increase was primarily due
to a 31% increase in net income before depreciation and amortization and
provision for losses, as well as increases due to the timing of payments of
income taxes and accrued interest and other liabilities, partially offset by
increases in noncash gains on securitizations and other assets.

Cash flows used in investing activities in 2002 and 2001 were funded from
the collection of receivables, the syndication and securitization of receivables
and through the issuance of debt. The decrease in proceeds from receivable
sales, including securitizations, reflects lower aggregate sales from
small-ticket equipment finance and lower securitization activity in Distribution
Finance as well as the franchise, golf equipment and aircraft portfolios. This
decrease was partially offset by proceeds from the sale of certain media and
franchise portfolios of $120 million and $106 million, respectively.

In 2002, the $417 million increase in long-term debt was mostly offset by
the $281 million decrease in short-term debt. The $136 million net increase in
short and long-term debt as well as the $111 million increase in nonrecourse
debt also provided a portion of the cash used in investing activities. In 2001,
the $232 million increase in short-term debt was mostly offset by the $200
million decrease in long-term debt. The $32 million net increase in short and
long-term debt combined with the $75 million increase in nonrecourse debt
provided a portion of the cash used in investing activities.

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 83% at December 28, 2002,
compared to 82% at the end of 2001. Textron Financial's ratio of earnings to
fixed charges was 1.61x in 2002 (1.71x in 2001 and 1.58x in 2000). Commercial
paper and Other short-term debt as a percentage of total debt was 19% at
December 28, 2002, compared to 25% at the end of 2001. Textron Financial has a
policy of matching the duration of its assets with its debt. Changes in short
and long-term debt are directly related to the duration of Textron Financial's
assets and liabilities.
18

In 2002, Textron Financial declared and paid dividends to Textron of $62.0
million, compared to dividends declared and paid of $51.1 million in 2001. The
increase in 2002 was due to excess capital that resulted from slower than
anticipated receivable growth and the return to Textron of capital associated
with the sale of a finance receivable portfolio. Textron contributed capital of
$9.0 million to Textron Financial in 2002, which consisted of Textron's dividend
on the preferred stock of Textron Funding Corporation. The 2001 capital
contribution of $49.0 million was primarily to support the acquisition of a
small business lending portfolio in June of 2001.

Finance Assets

Textron Financial's financing activities are confined almost exclusively to
secured lending and leasing to commercial markets. Management believes that the
portfolio avoids excessive concentration of risk through diversification across
geographic regions, industries and types of collateral, and among borrowers.

Total finance assets, which includes finance receivables, equipment on
operating leases -- net of accumulated depreciation, repossessed assets and
properties, retained interests in securitizations, interest-only securities,
investment in equipment residuals, ADC arrangements, and short and long-term
investments (some of which are classified in Other assets on Textron Financial's
Consolidated Balance Sheets), were $6.5 billion at December 28, 2002, up 3.6%
from $6.3 billion at December 29, 2001. The increase in finance assets was
mostly due to Distribution Finance ($345 million), net of a revolving
securitization conduit, and Golf Finance ($128 million), partially offset by a
decrease in small business finance ($117 million), primarily reflecting the
establishment of a revolving securitization conduit, and the continued
liquidation of portfolios within the Other segment ($117 million). The finance
assets of the Aircraft Finance and Resort Finance segments grew $272 million and
$136 million before consideration of the net change in finance assets from
securitizations of $304 million and $104 million, respectively. The growth in
the Distribution Finance segment was largely the result of portfolio
acquisitions of $338 million along with moderate organic growth. The increase in
the Golf Finance segment was mostly due to organic growth in the golf equipment
portfolio.

Nonperforming Assets

Nonperforming assets, which includes independent and nonrecourse captive
finance assets, as a percentage of finance assets increased to 3.33% ($218
million) at December 28, 2002, from 2.13% ($134 million) at December 29, 2001.
The $84 million increase in nonperforming assets at December 28, 2002, compared
to December 29, 2001, was due to increases in the Resort Finance ($35 million),
Aircraft Finance ($21 million), Golf Finance ($8 million), Distribution Finance
($7 million) and Other ($14 million) segments, partially offset by a decrease in
the Asset-Based Lending segment ($1 million). The increase in the Other segment
primarily includes media finance ($17 million) and franchise finance ($12
million), offset by decreases in other liquidating portfolios ($15 million). The
Other segment represents 22% of owned receivables and 38% of nonperforming
assets. The Company believes that nonperforming assets will generally be in the
range of 2-4% of finance assets depending on economic conditions. The Company
expects modest improvements in portfolio quality as it liquidates portfolios
included in the Other segment. However, a prolonged economic downturn could have
a negative effect on the Company's overall portfolio quality.

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 interest-sensitive assets with
interest-sensitive liabilities limits Textron Financial's risk to changes in
interest rates, and includes entering into interest rate exchange agreements. At
December 28, 2002, interest-sensitive assets in excess of interest-sensitive
liabilities were $629 million, net of $1.4 billion of interest rate exchange
agreements on long-term debt and $219 million of interest rate exchange
agreements on finance receivables. Interest-sensitive assets in excess of
interest-sensitive liabilities were $410 million at December 29, 2001, net of
$370 million of interest rate exchange agreements on long-term debt and $97
million of interest rate exchange agreements on finance receivables.

19

The increase in interest rate exchange agreements was directly related to the
conversion of fixed rate debt to variable rate debt at the time of issuance.
Textron Financial's net position does not reflect a change in management's match
funding strategy.

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
receivables are generally tied to changes in the prime rate offered by major
U.S. banks or LIBOR. 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
change 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 all
other relevant factors will remain constant. This shock test model, when applied
to Textron Financial's asset and liability position at December 28, 2002 and
December 29, 2001, indicates that an increase in interest rates of 100 basis
points would have a beneficial impact on Textron Financial's net income and cash
flows for the following twelve-month periods, whereas a decrease in interest
rates of 100 basis points reduces Textron Financial's net income and cash flow
by $3.6 million and $2.1 million, respectively, for the following twelve-month
periods.

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 of entering into such agreements is not to speculate for profit, but
generally to convert variable rate debt into fixed rate debt and vice versa. The
overall objective of Textron Financial's interest rate risk management is to
achieve a prudent balance between floating and fixed rate debt. These agreements
do not involve a high degree of complexity or risk. Textron Financial does not
trade in interest rate exchange agreements or enter into leveraged interest rate
exchange agreements.

The net effect of these interest rate exchange agreements decreased
interest expense by $19.6 million and $1.2 million in 2002 and 2001,
respectively, and was insignificant in 2000.

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 and liabilities into functional currency denominated
assets and liabilities. 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 exposure
to changes in currency rates. The notional amounts of outstanding foreign
currency forward exchange contracts in 2002 and 2001 were nominal.

CRITICAL ACCOUNTING POLICIES

Allowance for Losses on Receivables

Management evaluates its allowance for losses on receivables based on a
combination of factors. For its homogeneous loan pools, Textron Financial
examines current delinquencies, the characteristics of the existing accounts,
historical loss experience, the value of the underlying collateral and general
economic conditions and trends. Textron Financial estimates losses will range
from 0.5% to 5.6% of finance receivables depending on the specific homogeneous
loan pool. The range of estimated losses is consistent with prior periods. For
larger balance commercial loans, Textron Financial considers borrower specific
information, industry trends and estimated discounted cash flows, as well as the
factors described above for homogeneous loan pools.

Provisions for losses on finance receivables are charged to income, in
amounts sufficient to maintain the allowance for losses on receivables at a
level considered adequate to cover losses in the existing finance receivable
portfolio, based on management's evaluation and analysis of this portfolio.

20

Finance receivables are charged off when they are deemed uncollectible.
Finance receivables are written down to the fair value (less estimated costs to
sell) of the related collateral at the earlier of the date the collateral is
repossessed or when no payment has been received for six months, unless
management deems the receivable collectible.

Goodwill and Other Intangible Assets

Upon adoption of SFAS No. 142, "Goodwill and Other Intangible Assets", on
December 30, 2001, Textron Financial recorded an after-tax transitional
impairment charge of $15.4 million as discussed in Note 8 to the consolidated
financial statements. This new accounting standard requires companies to
evaluate goodwill and other intangible assets for impairment on an annual basis.
Textron Financial evaluates the recoverability of goodwill and other intangible
assets annually in the fourth quarter, or more frequently if events or changes
in circumstances, such as declines in interest margin or cash flows or material
adverse changes in the business climate, indicate that the carrying value of an
asset might be impaired. Textron Financial completed its annual impairment test
in the fourth quarter of 2002 using the estimates from its long-term strategic
plan. No adjustment was required to the carrying value of goodwill or other
intangible assets based on the analysis performed.

Goodwill is considered to be impaired when the net book value of a
reporting unit exceeds its estimated fair value. Fair values are primarily
established using a discounted cash flow methodology. The determination of
discounted cash flows is based on the businesses' strategic plans and long-range
planning forecasts. The assumptions relative to interest margin, operating
expenses and provision for losses included in the plans are management's best
estimates based on current and forecasted market conditions. If different
assumptions were used in these plans, the related undiscounted cash flows used
in measuring impairment could be different potentially resulting in an
impairment charge.

Securitized Transactions

Securitized transactions involve the sale of finance receivables to
qualified special purpose trusts. Textron Financial may retain an interest in
the assets sold in the form of interest-only securities, subordinated
certificates, cash reserve accounts and servicing rights and obligations. The
Company's retained interests are subordinate to other investors' interests in
the securitizations. Gain or loss on the sale of the loans or leases depends in
part on the previous carrying amount of the financial assets involved in the
transfer, allocated between the assets sold and the retained interests based on
their relative fair values at the date of transfer. Retained interests are
recorded at fair value as a component of Other assets on Textron Financial's
Consolidated Balance Sheets. The Company estimates fair values based on the
present value of future cash flows expected under management's best estimates of
key assumptions -- credit losses, prepayment speeds, forward interest rate yield
curves and discount rates commensurate with the risks involved.

Textron Financial reviews the fair values of the retained interests
quarterly using updated assumptions and compares such amounts with the carrying
value of the retained interests. When the carrying value exceeds the fair value
of the retained interests, the Company determines whether the decline in fair
value is other than temporary. When the Company determines the value of the
decline is other than temporary, it writes down the retained interests to fair
value with a corresponding charge to income. When a change in fair value of the
Company's retained interests is deemed temporary, the Company records a
corresponding credit or charge to Other comprehensive income for any unrealized
gains or losses. Based on the sensitivity analysis, as described in Note 6 to
the consolidated financial statements, a 20% adverse change in either the
prepayment speed, expected credit losses or the residual cash flows discount
rate would not result in a material charge to income.

Textron Financial does not provide legal recourse to third-party investors
that purchase interests in Textron Financial's securitizations beyond the credit
enhancement inherent in the retained interest-only securities, subordinated
certificates and cash reserve accounts.

21

RESULTS OF OPERATIONS
2002 VS. 2001

Revenues

Revenues for the twelve months ended December 28, 2002, decreased by $79.0
million or 11.1% reflecting lower yields on finance receivables, partially
offset by higher operating lease revenue. Finance charges and discounts
decreased by $87.2 million or 16.6% reflecting a decrease in portfolio yield
($95.3 million) to 7.73% from 9.40% in 2001, slightly offset by higher finance
charges and discounts ($8.1 million) due to a higher level of average finance
receivables. The lower yields in 2002, as compared to the corresponding period
in 2001, reflect a decrease in the interest rate environment primarily due to
reductions in the prime rate. Operating lease revenue increased due to higher
average operating lease assets. Other income of $163.4 million was unchanged
from the prior year, with higher securitization gains ($11.4 million),
reflecting higher revolving conduit activity, and higher servicing income ($9.5
million) and investment income ($4.0 million), primarily offset by lower
prepayment gains ($14.9 million) and syndication income ($7.8 million).

Interest Expense

Interest expense for the twelve months ended December 28, 2002, decreased
by $75.0 million or 28.0%, primarily as the result of a decrease in the average
borrowing rate for the period from 5.48% to 3.82%, attributable to a lower
interest rate environment, partially offset by 3.5% higher average debt
outstanding.

Interest Margin

Interest margin decreased $9.9 million or 37 basis points (7.18% versus
7.55%) for the twelve months ended December 28, 2002, as compared to the
corresponding period in 2001. The decrease was primarily due to higher relative
borrowing costs ($12.8 million), partially offset by higher average finance
receivables. Despite a lower interest rate environment, corporate borrowing
rates increased as compared to major borrowing indices, such as three-month
LIBOR and U.S. Treasury rates. This increase had a negative effect on interest
margin, net of receivable pricing increases.

Operating Expenses

Selling and administrative expenses for the twelve months of 2002 increased
by $9.2 million, compared to the corresponding period in 2001. The increase
primarily reflects higher legal and collection expense ($15.6 million) and
growth in managed and serviced finance receivables ($5.7 million), offset by a
reduction in goodwill amortization of $12.1 million (reflecting the change in
accounting). Selling and administrative expenses as a percentage of average
managed and serviced finance receivables decreased slightly as compared to the
prior year (1.78% versus 1.79% for the twelve months of 2002 and 2001,
respectively).

Provision for Losses

The provision for losses of $138.5 million was $56.9 million higher than
the corresponding period in 2001 due to higher net charge-offs and the
strengthening of the allowance for losses on receivables. Net charge-offs were
$127.9 million during 2002, compared to $74.4 million in 2001. The higher net
charge-offs reflect increases primarily in the Other segment ($47.1 million),
including syndicated bank loans ($23.1 million), principally related to the
telecommunications industry, small business finance ($12.9 million) and other
liquidating portfolios ($11.1 million), primarily small-ticket equipment
finance. Other changes include increases in the Aircraft Finance ($5.8 million)
and Distribution Finance ($4.5 million) segments, offset by a decrease in the
Asset-Based Lending segment ($6.8 million).

The allowance for losses on receivables increased to $167 million at
December 28, 2002, compared to $144 million at December 29, 2001. The allowance
for losses on receivables as a percentage of total finance receivables was 2.9%
at December 28, 2002, compared to 2.6% at December 29, 2001 (3.1% in 2002 and
2.8% in 2001, excluding captive receivables with recourse to Textron). The
allowance for losses on receivables as a percentage of nonaccrual loans was 92%
at December 28, 2002, compared to 126% at December 29, 2001. The

22

decrease in the percentage represents an increase in nonaccrual finance
receivables at December 28, 2002, supported by strong collateral values.

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 below represents income before special charges, income
taxes, distributions on preferred securities and cumulative effect of change in
accounting principle.

Distribution Finance income increased $6.9 million reflecting higher
interest margin ($23.0 million), offset by higher operating expenses ($13.5
million) and higher provision for losses ($2.6 million). The higher interest
margin was principally due to higher fee income ($14.2 million, principally
revolving securitization income), higher pricing and higher average finance
assets ($40 million).

Resort Finance income increased $1.4 million reflecting higher interest
margin ($5.1 million) and lower operating expenses ($3.7 million), partially
offset by higher provision for losses ($7.4 million). The increase in interest
margin reflects pricing increases and higher average finance assets ($55
million).

Aircraft Finance income decreased by $27.0 million largely reflecting lower
interest margin ($14.4 million), despite $168 million of higher average finance
assets, in addition to a write-down of retained interests in securitized assets
($11.0 million) reflecting lower expected realization on defaulted assets. Also
contributing to lower income was higher provision for losses ($6.4 million),
partially offset by lower operating expenses ($4.8 million). The lower interest
margin is due to competitive pressures inhibiting the ability to pass on higher
borrowing costs related to an increase in interest rate spreads to benchmark
borrowing rates (such as U.S. Treasury rates and LIBOR).

Golf Finance income increased $0.9 million reflecting higher interest
margin ($6.2 million) principally due to higher average finance assets ($155
million). This increase in interest margin was partially offset by higher
operating expenses ($3.6 million) and higher provision for losses ($1.7
million).

Asset-Based Lending income decreased $10.2 million reflecting higher
provision for loan losses ($9.0 million) and lower interest margin ($3.5
million) due to lower finance receivable pricing on lower average finance assets
($18 million), partially offset by a decrease in operating expenses ($2.3
million).

Structured Capital income decreased $9.2 million, reflecting lower interest
margin ($13.5 million), largely due to a nonrecurring prepayment gain of $14.3
million in 2001, partially offset by lower provision for losses ($4.4 million).

Other segment income decreased $38.8 million reflecting higher provision
for losses ($34.2 million), primarily due to higher net charge-offs in
syndicated bank loans ($23.1 million), principally related to the
telecommunication industry, small business finance ($12.9 million) and other
liquidating portfolios ($11.1 million), primarily small-ticket equipment
finance. The decrease also reflects higher operating expenses ($2.8 million) and
lower interest margin ($1.8 million).

Income Before Cumulative Effect of Change in Accounting Principle

Income before cumulative effect of change in accounting principle of $75.7
million was $44.9 million or 37.2% lower than the corresponding period in 2001.
The decrease principally reflects a higher provision for losses ($56.9 million),
lower interest margin ($9.9 million) and higher operating expenses ($9.2
million), offset by lower special charges ($2.7 million) and a lower effective
tax rate. Income before cumulative effect of change in accounting principle
excluding amortization of goodwill was $75.7 million and $131.8 million for 2002
and 2001, respectively.

23

RESULTS OF OPERATIONS
2001 VS. 2000

Revenues

Revenues for the twelve months ended December 29, 2001, increased by $18.7
million or 2.7% reflecting increased other income, partially offset by lower
yields on finance receivables. Finance charges and discounts decreased by $60.5
million or 10.3% reflecting a decrease in portfolio yield ($65.9 million) to
9.40% from 10.59% in 2000, partially offset by higher finance charges and
discounts ($5.4 million) due to a higher level of average finance receivables.
The lower yields reflect a decrease in the interest rate environment in 2001,
compared to the corresponding period in 2000. The increase in other income
($79.3 million) is due mostly to higher securitization gains ($20.7 million),
prepayment gains ($16.3 million), servicing fees ($11.7 million), syndication
income ($11.0 million) and investment income ($10.5 million). The increase in
prepayment gains was principally due to a nonrecurring prepayment gain of $14.3
million in 2001. Operating lease revenue decreased slightly despite a small
increase in average operating lease assets.

Interest Expense

Interest expense for the twelve months ended December 29, 2001, decreased
by $63.5 million or 19.1%, primarily as the result of a decrease in the average
borrowing rate for the period from 6.89% to 5.48%, attributable to a lower
interest rate environment, partially offset by slightly higher average debt
outstanding.

Interest Margin

Interest margin increased $82.8 million or 138 basis points (7.55% versus
6.17%) for the twelve months ended December 29, 2001, as compared to the
corresponding period in 2000. The increase was primarily due to higher
securitization gains, prepayment gains, servicing income, syndication income and
investment income.

Operating Expenses

Selling and administrative expenses for the twelve months of 2001 increased
by $34.7 million, compared to the corresponding period in 2000. Selling and
administrative expenses as a percentage of average managed and serviced finance
receivables increased to 1.79% for the twelve months of 2001 from 1.67% for the
corresponding period in 2000, principally reflecting higher expenses related to
new business initiatives ($16.2 million), growth in managed and serviced finance
receivables ($14.0 million) and higher legal and collection expenses ($4.5
million).

Provision for Losses

The provision for losses of $81.7 million was $45.0 million higher than the
corresponding period in 2000. Net charge-offs were $74.4 million during 2001,
compared to $45.8 million in 2000, which included an $8.0 million charge-off to
the real estate owned valuation allowance. The increase in the provision for
losses primarily reflects the softening of the economy and the resulting
increase in net charge-offs, primarily in the small business finance ($13.2
million) and other liquidating portfolios ($16.9 million), primarily
small-ticket equipment finance.

The allowance for losses on receivables increased to $144 million at
December 29, 2001, compared to $116 million at December 30, 2000. The allowance
for losses on receivables as a percentage of total finance receivables was 2.6%
at December 29, 2001, compared to 2.1% at December 30, 2000 (2.8% in 2001 and
2.4% in 2000, excluding captive receivables with recourse to Textron). The
allowance for losses on receivables as a percentage of nonaccrual loans was 126%
at December 29, 2001, compared to 114% at December 30, 2000.

Operating Results by Segment

Segment income below represents income before special charges, income
taxes, distributions on preferred securities and cumulative effect of change in
accounting principle.

24

Distribution Finance income increased $3.9 million reflecting higher
interest margin ($22.5 million), primarily due to higher other income of $27.8
million, principally revolving securitization income, partially offset by higher
operating expenses ($11.5 million) and higher provision for losses ($7.1
million). The increase in operating expenses reflects the 30% growth in managed
and serviced finance receivables.

Resort Finance income decreased $5.1 million principally reflecting higher
operating expenses ($3.9 million) and higher provision for losses ($0.9
million). Interest margin largely remained unchanged from prior year. The
increase in operating expenses reflects the 23% growth in managed and serviced
finance receivables.

Aircraft Finance income decreased by $15.6 million reflecting lower
interest margin ($9.0 million), mostly due to lower average finance assets ($192
million), higher provision for losses ($6.1 million) and slightly higher
operating expenses ($0.5 million).

Golf Finance income decreased $7.7 million reflecting lower interest margin
($3.7 million), higher provision for loan losses ($2.2 million) and higher
operating expenses ($1.8 million). The lower interest margin primarily reflects
lower finance receivable pricing and lower average finance assets of $21
million.

Asset-Based Lending income increased $20.4 million due to lower provision
for losses ($11.8 million), higher interest margin ($10.4 million), partially
offset by higher operating expenses ($1.8 million). The increase in interest
margin is primarily due to higher finance receivable pricing ($5.9 million) and
higher other income ($5.4 million), partially offset by lower volume.

Structured Capital income increased $13.6 million reflecting higher
interest margin ($16.3 million), primarily due to a nonrecurring prepayment gain
of $14.3 million, partially offset by higher provision for losses ($2.1
million).

Other segment income decreased $6.4 million reflecting higher provision for
losses ($38.4 million), higher operating expenses ($14.7 million), offset by
higher interest margin ($46.7 million). These increases were largely due to the
acquisition of a small business portfolio in the second quarter of 2001. The
increase in loss provision was also due to increases in net charge-offs in other
liquidating portfolios ($16.9 million), primarily small-ticket equipment
finance.

Special Charges

To enhance its competitiveness and profitability, Textron Financial
committed to a plan to restructure its vendor finance and existing small
business finance operations, in the second quarter and its aircraft finance and
machine tool finance operations in the third quarter. As a result, Textron
Financial recognized charges of $2.7 million for the year ended December 29,
2001, terminated 155 employees and closed two facilities. The restructuring
charges related to employee terminations include the cost of severance related
benefits based on established policies and practices. As of December 29, 2001,
Textron Financial paid severance related benefits and other expenses of $1.8
million that were charged against the restructuring reserve, leaving a balance
in the reserve of $0.9 million. Textron Financial paid the remaining
restructuring costs in 2002.

Income Before Cumulative Effect of Change in Accounting Principle

Income before cumulative effect of change in accounting principle for the
twelve months of 2001 of $120.6 million was $2.6 million or 2.2% higher than the
corresponding period in 2000. The favorable results were due to higher average
finance assets, higher fee income ($79.3 million) and a lower effective tax
rate, partially offset by higher selling and administrative expenses ($34.7
million), a higher loss provision ($45.0 million) and special charges ($2.7
million). Income before cumulative effect of change in accounting principle
excluding amortization of goodwill was $131.8 million and $129.0 million for
2001 and 2000, respectively.

NEW ACCOUNTING PRONOUNCEMENTS

In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" (FIN 45). Along

25

with new disclosure requirements, FIN 45 requires guarantors to recognize, at
the inception of certain guarantees, a liability for the fair value of the
obligation undertaken in issuing the guarantee. This differs from the current
practice to record a liability only when a loss is probable and reasonably
estimable. The recognition and measurement provisions of FIN 45 are applicable
on a prospective basis to guarantees issued or modified after December 31, 2002.
The adoption of FIN 45 is not expected to have a material effect on Textron
Financial's results of operations or financial position. Textron Financial has
adopted the disclosure provisions as of December 28, 2002.

In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities, an Interpretation of ARB No. 51" (FIN 46). FIN 46
requires certain variable interest entities to be consolidated by the primary
beneficiary of the entity if the equity investors in the entity do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties. FIN 46 is effective for all
new variable interest entities created or acquired after January 31, 2003. For
variable interest entities created or acquired prior to February 1, 2003, the
provisions of FIN 46 must be applied for the first interim or annual period
beginning after June 15, 2003. Management is currently evaluating the impact of
the adoption of FIN 46 and does not anticipate that it will have a material
effect on Textron Financial's results of operations or financial position.

FORWARD-LOOKING INFORMATION

Certain statements in this Annual Report and other oral and written
statements made by Textron Financial from time to time are forward-looking
statements, including those that discuss strategies, goals, outlook or other
nonhistorical matters; or project revenues, income, returns or other financial
measures. These forward-looking statements are subject to risks and
uncertainties that may cause actual results to differ materially from those
contained in the statements, including the following: (a) changes in worldwide
economic and political conditions that impact interest and foreign exchange
rates; (b) the occurrence of further downturns in customer markets to which
Textron products are sold or supplied and financed or where Textron Financial
offers financing; (c) the ability to control costs and successful implementation
of various cost reduction programs; (d) the ability to maintain portfolio credit
quality; (e) Textron Financial's access to debt financing at competitive rates;
(f) access to equity in the form of retained earnings and capital contributions
from Textron; and (g) uncertainty in estimating contingent liabilities and
establishing reserves tailored to address such contingencies.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

For information regarding Textron Financial's Quantitative and Qualitative
Disclosure about Market Risk, see "Risk Management" in Item 1 of this Form 10-K.

26

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

REPORT OF INDEPENDENT AUDITORS

The Board of Directors
Textron Financial Corporation

We have audited the accompanying consolidated balance sheets of Textron
Financial Corporation as of December 28, 2002 and December 29, 2001, and the
related consolidated statements of income, cash flows, and changes in
shareholder's equity for each of the three years in the period ended December
28, 2002. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Textron
Financial Corporation at December 28, 2002 and December 29, 2001, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended December 28, 2002, in conformity with accounting
principles generally accepted in the United States.

As discussed in Note 1 to the consolidated financial statements, in 2001
the Company adopted SFAS No. 133 "Accounting for Derivative Instruments and
Hedging Activities."

As discussed in Note 8 to the consolidated financial statements, in 2002
the Company adopted SFAS No. 142, "Goodwill and Other Intangible Assets" and the
remaining provisions of SFAS No. 141, "Business Combinations."

/s/ Ernst & Young LLP

Boston, Massachusetts
January 23, 2003

27

CONSOLIDATED STATEMENTS OF INCOME

For each of the three years in the period ended December 28, 2002

See notes to consolidated financial statements.
28

CONSOLIDATED BALANCE SHEETS

See notes to consolidated financial statements.
29

CONSOLIDATED STATEMENTS OF CASH FLOWS

For each of the three years in the period ended December 28, 2002

See notes to consolidated financial statements.
30

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY

For each of the three years in the period ended December 28, 2002

See notes to consolidated financial statements.
31

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations

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. Aircraft Finance provides financing for new and used
Cessna business jets and piston-engine airplanes, Bell helicopters and other
general aviation aircraft. Asset-Based Lending pursues two types of lending
secured by accounts receivable and inventory: general purpose asset-based
lending, which provides asset-based loans to smaller middle-market companies
that manufacture or distribute finished goods, and specialty asset-based
lending, which factors freight bills and utility service receivables, and
extends asset-based loans to small niche-oriented finance companies.
Distribution Finance offers inventory finance programs for dealers of Textron
manufactured products and for dealers of a variety of other household, housing,
leisure, agricultural and technology products. Golf Finance makes mortgage loans
for the acquisition and refinancing of golf courses, and provides term financing
for E-Z-GO golf cars and Textron Turf Care equipment. Resort Finance extends
loans to developers of vacation interval resorts and recreational and
residential land lots, secured primarily by notes receivable and interval and
land lot inventory. Structured Capital engages in tax-oriented, long-term leases
of large-ticket equipment and real estate, primarily with investment grade
lessees. Textron Financial's other financial services and products include
transaction syndication, equipment appraisal and disposition, insurance
brokerage and portfolio servicing.

Textron Financial's financing activities are confined almost exclusively to
secured lending and leasing to commercial markets. Textron Financial's services
are offered primarily in North America. However, Textron Financial does finance
Textron products worldwide, principally Bell helicopters and Cessna aircraft.

Textron Financial is a subsidiary of Textron Inc. (Textron), an $11 billion
multi-industry company with businesses in Aircraft, Fastening Systems,
Industrial Products, Industrial Components and Finance. At December 28, 2002,
23% of Textron Financial's total managed finance receivables were related to
Textron or Textron's products, compared to 26% at December 29, 2001. Textron
Financial's year-end dates conform with Textron's year-end, which falls on the
nearest Saturday to December 31.

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of
Textron Financial and its subsidiaries, all of which are wholly-owned. All
significant intercompany transactions have been eliminated.

Use of Estimates

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in those statements and
accompanying notes. Actual results may differ from such estimates.

Finance Charges and Discounts

Finance charges and discounts include interest on loans, capital lease
earnings, leveraged lease earnings and discounts on certain revolving credit and
factoring arrangements. Finance charges are recognized in finance charge
revenues using the interest method to produce a constant rate of return over the
terms of the finance assets. Accrual of interest income is suspended for
accounts that are contractually delinquent by more than three months, unless
collection is not doubtful. In addition, detailed reviews of loans may result in
earlier suspension if collection is doubtful. Cash payments on nonaccrual
accounts, including finance charges, generally are applied to reduce loan
principal. Accrual of interest is resumed when the loan becomes contractually
current, and suspended interest income is recognized at that time.

32

Finance Receivable Origination Fees and Costs

Fees received and direct loan origination costs are deferred and amortized
to finance charge revenues over the contractual lives of the respective
receivables using the interest method. Unamortized amounts are recognized in
revenues when receivables are sold or paid in full.

Other Income

Other income includes securitization and syndication gains on the sale of
loans and leases, late charges, prepayment gains, residual gains, servicing fees
and other miscellaneous fees, which are primarily recognized as income when
received. It also includes earnings on retained interests in securitizations
including interest on subordinated certificates and cash reserve accounts as
well as the accretable yield on interest-only securities.

Allowance for Losses on Receivables

Management evaluates its allowance for losses on receivables based on a
combination of factors. For its homogeneous loan pools, Textron Financial
examines current delinquencies, the characteristics of the existing accounts,
historical loss experience, the value of the underlying collateral and general
economic conditions and trends. Textron Financial estimates losses will range
from 0.5% to 5.6% of finance receivables depending on the specific homogeneous
loan pool. The range of estimated losses is consistent with prior periods. For
larger balance commercial loans, Textron Financial considers borrower specific
information, industry trends and estimated discounted cash flows, as well as the
factors described above for homogeneous loan pools.

Provisions for losses on finance receivables are charged to income, in
amounts sufficient to maintain the allowance for losses on receivables at a
level considered adequate to cover losses in the existing finance receivable
portfolio, based on management's evaluation and analysis of this portfolio.

Finance receivables are charged off when they are deemed uncollectible.
Finance receivables are written down to the fair value (less estimated costs to
sell) of the related collateral at the earlier of the date the collateral is
repossessed or when no payment has been received for six months, unless
management deems the receivable collectible.

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. 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. 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.

Equipment on Operating Leases

Income from operating leases is recognized in equal amounts over the lease
terms. The costs of such assets are capitalized and depreciated to estimated
residual values using the straight-line method over the estimated useful life of
the asset or the lease term.

Goodwill and Other Intangible Assets

Management evaluates the recoverability of goodwill and other intangibles
annually, or more frequently if events or changes in circumstances, such as
declines in interest margin, earnings or cash flows or material adverse changes
in the business climate, indicate that the carrying value of an asset might be
impaired. Goodwill is considered to be impaired when the net book value of a
reporting unit exceeds its estimated fair

33

value. Fair values are primarily established using a discounted cash flow
methodology. The determination of discounted cash flow is based on the
businesses' strategic plans and long-range planning forecasts.

Pension Benefits and Postretirement Benefits Other than Pensions

Textron Financial participates in Textron's defined contribution and
defined benefit pension plans. The cost of the defined contribution plan
amounted to approximately $2.1 million, $1.9 million and $1.5 million in 2002,
2001 and 2000, respectively. The cost of the defined benefit pension plan
amounted to approximately $4.7 million, $3.4 million and $2.7 million in 2002,
2001 and 2000, respectively. Defined benefits under salaried plans are based on
salary and years of service. Textron's funding policy is consistent with federal
law and regulations. Pension plan assets consist principally of corporate and
government bonds and common stocks. Accrued pension expense is included in
Accrued interest and other liabilities on Textron Financial's Consolidated
Balance Sheets.

Income Taxes

Textron Financial's revenues and expenses are included in Textron's
consolidated tax return. Current tax expense is based on allocated federal tax
charges and benefits on the basis of statutory U.S. tax rates applied to the
Company's taxable income or loss included in Textron's consolidated returns.

Deferred income taxes are recognized for temporary differences between the
financial reporting basis and income tax basis of assets and liabilities, based
on enacted tax rates expected to be in effect when such amounts are expected to
be realized or settled.

Securitized Transactions

Securitized transactions involve the sale of finance receivables to
qualified special purpose trusts. Textron Financial may retain an interest in
the assets sold in the form of interest-only securities, subordinated
certificates, cash reserve accounts and servicing rights and obligations. The
Company's retained interests are subordinate to other investors' interests in
the securitizations. Gain or loss on the sale of the loans or leases depends in
part on the previous carrying amount of the financial assets involved in the
transfer, allocated between the assets sold and the retained interests based on
their relative fair values at the date of transfer. Retained interests are
recorded at fair value as a component of Other assets on Textron Financial's
Consolidated Balance Sheets. The Company estimates fair values based on the
present value of future cash flows expected under management's best estimates of
key assumptions -- credit losses, prepayment speeds, forward interest rate yield
curves and discount rates commensurate with the risks involved.

Textron Financial reviews the fair values of the retained interests
quarterly using updated assumptions and compares such amounts with the carrying
value of the retained interests. When the carrying value exceeds the fair value
of the retained interests, the Company determines whether the decline in fair
value is other than temporary. When the Company determines the value of the
decline is other than temporary, it writes down the retained interests to fair
value with a corresponding charge to income. When a change in fair value of the
Company's retained interests is deemed temporary, the Company records a
corresponding credit or charge to Other comprehensive income for any unrealized
gains or losses.

Textron Financial does not provide legal recourse to third-party investors
that purchase interests in Textron Financial's securitizations beyond the credit
enhancement inherent in the retained interest-only securities, subordinated
certificates and cash reserve accounts.

Derivative Financial Instruments

Textron Financial has entered into various interest rate and foreign
exchange agreements to mitigate its exposure to changes in interest and foreign
exchange rates. Effective December 31, 2000, the Company adopted Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" (SFAS No. 133), as amended. In accordance with SFAS No.
133, the Company records all derivative financial instruments on its balance
sheet at fair value and recognizes changes in fair values in

34

current earnings unless the derivatives qualify as hedges of future cash flows.
For derivatives qualifying as hedges of future cash flows, the Company records
the effective portion of the change in fair value as a component of Other
comprehensive income in the periods the hedged transaction affects earnings. In
accordance with SFAS No. 133, the Company recorded a cumulative transition
adjustment to decrease Other comprehensive income by approximately $11.6
million, net of taxes, to recognize the fair value of cash flow hedges as of the
date of adoption.

Textron Financial recognizes the net interest differential on interest rate
exchange agreements, including premiums paid or received, as adjustments to
finance income or interest expense to correspond with the hedged positions. In
the event of an early termination of a derivative financial instrument, the
Company defers the gain or loss in Other comprehensive income until it
recognizes the hedged transaction in earnings.

While these exchange agreements expose Textron Financial to credit losses
in the event of nonperformance by the counterparties to the agreements, the
Company does not expect any such nonperformance. The Company minimizes the risk
of nonperformance by entering into contracts with financially sound
counterparties having long-term bond ratings of no less than middle A, by
continuously monitoring such credit ratings and by limiting its exposure with
any one financial institution. Textron Financial had minimal exposure to loss
from nonperformance by the counterparties to these agreements at the end of
2002.

Fair Value of Financial Instruments

Fair values of financial instruments are based upon estimates at a specific
point in time using available market information and appropriate valuation
methodologies. These estimates are subjective in nature and involve
uncertainties and significant judgment in the interpretation of current market
data. Therefore, the fair values presented are not necessarily indicative of
amounts Textron Financial could realize or settle currently.

Cash and Equivalents

Cash and equivalents consist of cash in banks and overnight
interest-bearing deposits in banks.

Reclassifications

Certain prior year amounts have been reclassified to conform with the
current year presentation.

New Accounting Pronouncements

In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" (FIN 45). Along with new disclosure
requirements, FIN 45 requires guarantors to recognize, at the inception of
certain guarantees, a liability for the fair value of the obligation undertaken
in issuing the guarantee. This differs from the current practice to record a
liability only when a loss is probable and reasonably estimable. The recognition
and measurement provisions of FIN 45 are applicable on a prospective basis to
guarantees issued or modified after December 31, 2002. The adoption of FIN 45 is
not expected to have a material effect on Textron Financial's results of
operations or financial position. Textron Financial has adopted the disclosure
provisions as of December 28, 2002.

In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities, an Interpretation of ARB No. 51" (FIN 46). FIN 46
requires certain variable interest entities to be consolidated by the primary
beneficiary of the entity if the equity investors in the entity do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties. FIN 46 is effective for all
new variable interest entities created or acquired after January 31, 2003. For
variable interest entities created or acquired prior to February 1, 2003, the
provisions of FIN 46 must be applied for the first interim or annual period
beginning after June 15, 2003. Management is currently evaluating the impact of
the adoption of FIN 46 and does not anticipate that it will have a material
effect on Textron Financial's results of operations or financial position.

35

NOTE 2 OTHER INCOME

The Other component of Other income includes custodial fees, commitment
fees, residual gains, insurance fees and other miscellaneous fees, which are
primarily recognized as income when received.

NOTE 3 SPECIAL CHARGES

To enhance its competitiveness and profitability, the Company committed to
a plan to restructure its vendor finance, existing small business finance,
aircraft finance and machine tool finance operations during 2001. As a result,
the Company recognized charges of $2.7 million for the year ended December 29,
2001.

As a result of the restructuring program, the Company terminated 155
employees and closed two facilities. The restructuring charges related to
employee terminations included the cost of severance related benefits based on
established policies and practices. As of December 29, 2001, the Company had
paid severance related benefits and other expenses of $1.8 million, which were
charged against the restructuring reserve, leaving a balance in the reserve of
$0.9 million. The Company paid the remaining restructuring costs in 2002.

NOTE 4 RELATIONSHIP WITH TEXTRON INC.

Textron Financial is a wholly-owned subsidiary of Textron and derives a
portion of its business from financing the sale and lease of products
manufactured and sold by Textron. Textron Financial recognized finance charge
revenues from Textron and affiliates (net of payments or reimbursements for
interest charged at more or less than market rates on Textron manufactured
products) of $9.4 million in 2002, $4.0 million in 2001 and $11.6 million in
2000, and operating lease revenues of $21.0 million in 2002, $10.9 million in
2001 and $10.9 million in 2000. In 2002, 2001 and 2000, Textron Financial paid
Textron $1.1 billion, $1.3 billion and $1.4 billion, respectively, relating to
the sale of manufactured products to third parties that were financed by the
Company. In addition, the Company paid Textron $104.3 million, $62.1 million and
$50.3 million, respectively, for the purchase of operating lease equipment.

Textron Financial and Textron are parties to several agreements,
collectively referred to as operating agreements, which govern many areas of the
Textron Financial-Textron relationship. Under operating agreements with Textron,
Textron Financial has recourse to Textron with respect to certain finance
receivables and operating leases. Finance receivables of $526.7 million at
December 28, 2002, and $648.1 million at December 29, 2001, and operating leases
of $122.3 million at December 28, 2002, and $90.6 million at December 29, 2001,
were subject to recourse to Textron or due from Textron. In addition, Textron
Financial had recourse to Textron on subordinated certificates of $59.2 million
and $55.8 million at year-end 2002 and 2001, respectively, and on cash reserve
accounts of $10.4 million and $13.9 million at year-end 2002 and 2001,
respectively. Both the subordinated certificates and the cash reserve accounts
are retained interests related to receivable securitizations.

Under the operating agreements between Textron and Textron Financial,
Textron has made available to Textron Financial a $100 million line of credit
for junior subordinated borrowings at the prime interest rate (4.25% at December
28, 2002). Textron Financial had no borrowings under this line at December 28,
2002. In

36

addition, Textron has agreed to lend Textron Financial, interest-free, an amount
not to exceed the deferred income tax liability of Textron attributable to the
manufacturing profit deferred for tax purposes on products manufactured by
Textron and financed by Textron Financial. The Company had borrowings from
Textron of $23.7 million at December 28, 2002 ($20.9 million at December 29,
2001) under this arrangement. These borrowings are reflected in Amounts due to
Textron Inc. on Textron Financial's Consolidated Balance Sheets.

Textron has also agreed to cause Textron Financial's pretax income
available for fixed charges to be no less than 125% of its fixed charges and its
consolidated Shareholder's equity to be no less than $200 million. No related
payments were required for 2002, 2001 or 2000.

The Company had an income tax payable of $9.1 million at December 28, 2002,
and an income tax receivable of $3.8 million at December 29, 2001. These
accounts are settled as Textron manages its consolidated federal tax position.

NOTE 5 FINANCE RECEIVABLES

Contractual Maturities

The contractual maturities of finance receivables outstanding at December
28, 2002, were as follows:

Finance receivables often are repaid or refinanced prior to contractual
maturity. Accordingly, the above tabulation should not be regarded as a forecast
of future cash collections. The ratio of cash collections (net of finance
charges) to average net receivables, excluding distribution finance receivables
and revolving loans, was approximately 54% in 2002 and 65% in 2001. During 2002
and 2001, cash collections of finance receivables (excluding proceeds from
receivable sales or securitizations) were $7.7 billion and $5.8 billion,
respectively.

Installment contracts and finance leases have initial terms generally
ranging from one to twenty years. Installment contracts and finance leases are
secured by the financed equipment and, in some instances, by the personal
guarantee of the principals or recourse arrangements with the originating
vendor. Finance leases include residual values expected to be realized at
contractual maturity.

Revolving loans generally have terms of one to five years, and at times
convert to term loans that contractually amortize over an average term of four
years. Revolving loans consist of loans secured by trade receivables, inventory,
plant and equipment, pools of vacation interval resort notes receivable, pools
of residential and recreational land loans and the underlying real property.

Golf course mortgages have initial terms generally ranging from five to
seven years with amortization periods from 15 to 25 years. Resort mortgages
generally represent construction and inventory loans with terms up to two years.
Golf course and resort mortgages are secured by real property and are generally
limited to 75% or less of the property's appraised market value at loan
origination. Golf course mortgages, totaling $639.1 million, consist of loans
with an average balance of $4.9 million and an average remaining contractual
maturity of four years. Resort mortgages, totaling $323.4 million, consist of
loans with an average balance of $3.8 million and an average remaining
contractual maturity of two years.

37

Distribution finance receivables generally mature within one year.
Distribution finance receivables are secured by the inventory of the financed
distributor or dealer and, in some programs, by recourse arrangements with the
originating manufacturer. Revolving loans and Distribution finance receivables
are cyclical and result in cash turnover that is several times larger than
contractual maturities. In 2002, such cash turnover was 6.7 times contractual
maturities.

Leveraged leases are secured by the ownership of the leased equipment and
real property. Leveraged leases reflect contractual maturities net of
contractual nonrecourse debt payments and include residual values expected to be
realized at contractual maturity. Leveraged leases have initial terms up to
approximately 30 years.

Textron Financial's finance receivables are diversified across geographic
region, borrower industry and type of collateral. Textron Financial's geographic
concentrations (as measured by managed finance receivables) at December 28,
2002, were as follows: Southeast 27%; Far West 15%; Southwest 13%; Mideast 10%;
Great Lakes 9%; New England 4%; Rocky Mountains 4%; other domestic 5%; South
America 4%; and other international 9%. Textron Financial's most significant
collateral concentration was general aviation aircraft, which accounted for 21%
of managed finance receivables (15% of owned receivables) at December 28, 2002.
The Company has industry concentrations in the golf and vacation interval
industries, which each account for 15% of managed finance receivables,
respectively, at December 28, 2002.

Leveraged Leases

Approximately 42% of Textron Financial's investment in leveraged leases is
collateralized by real estate.

The components of income from leveraged leases were as follows:

Finance Leases

38

Minimum lease payments due under finance leases for each of the next five
years and the aggregate amounts due thereafter are as follows: $60.4 million in
2003, $54.2 million in 2004, $30.3 million in 2005, $19.4 million in 2006, $10.5
million in 2007 and $165.3 million thereafter.

Loan Impairment

The Company had $181.6 million of nonaccrual finance receivables at
December 28, 2002, compared to $113.8 million at December 29, 2001. Nonaccrual
finance receivables resulted in Textron Financial's revenues being reduced by
approximately $15.9 million, $10.4 million and $8.6 million for 2002, 2001 and
2000, respectively. No interest income was recognized using the cash basis
method. Excluding homogeneous loan portfolios and finance leases, the Company
had impaired loans of $122.1 million and $53.9 million at December 28, 2002 and
December 29, 2001, respectively. Impaired loans with identified reserve
requirements were $109.9 million at December 28, 2002, compared to $53.9 million
at December 29, 2001. The allowance for losses on receivables related to
impaired loans with identified reserve requirements was $32.7 million and $10.9
million at December 28, 2002 and December 29, 2001, respectively. The average
recorded investment in impaired loans during 2002 was $96.7 million, compared to
$51.1 million in 2001.

Captive finance receivables with recourse that were 90 days or more
delinquent amounted to 19.3%, 16.0% and 12.6% of captive finance receivables
with recourse for the years ended 2002, 2001 and 2000, respectively. Revenues
recognized on these delinquent accounts were approximately $7.4 million, $9.5
million and $10.1 million for the years ended 2002, 2001 and 2000, respectively.

Allowance for Losses on Receivables

Managed and Serviced Finance Receivables

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

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.

Third-party portfolio servicing largely relates to finance receivable
portfolios of resort developers, third-party securitization servicing as well as
private label bank and leasing company portfolio servicing.

39

Owned receivables include approximately $17 million of finance receivables
that were unfunded at December 28, 2002, 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 6 RECEIVABLE SECURITIZATIONS

During 2002, the Company securitized general aviation loans, small business
finance loans, finance receivables for the lease or purchase of E-Z-GO golf cars
and Textron Turf Care equipment (equipment loans and leases), distribution
finance receivables (dealer financing arrangements), vacation interval loans
(timeshare notes receivable) and loans for residential and recreational land
lots (land loan receivables). The Company recognized pretax gains as follows:

The Company receives annual servicing fees approximating 0.70% (for general
aviation loans and equipment loans and leases), 2.0% (for small business finance
loans), 1.50% (for distribution finance receivables), 1.0% (for vacation
interval loans) and 0.50% (for land loan receivables), of the outstanding
balance, and rights to future cash flows arising after the investors in the
securitization trusts have received the return for which they have contracted.
The investors and the securitization trusts have no recourse to the Company's
other assets and liabilities for failure of debtors to pay when due.

Textron Financial has entered into certain interest rate exchange
agreements to mitigate its exposure to decreases in interest rates on its
interest-only securities. For more information regarding Textron Financial's
interest rate exchange agreements, see Note 11 to the consolidated financial
statements.

Key economic assumptions used in measuring the retained interests at the
date of securitization resulting from securitizations completed during 2002 were
as follows:

40

At December 28, 2002, key economic assumptions and the sensitivity of the
current fair value of residual cash flows to immediate 10% and 20% adverse
changes in those assumptions are as follows:

These sensitivities are hypothetical and should be used with caution. As
the figures indicate, changes in fair value based on a 10% variation in
assumptions generally cannot be extrapolated because the relationship of the
change in assumption to the change in fair value may not be linear. Also, in
this table, the effect of a variation in a particular assumption on the fair
value of the retained interest is calculated without changing any other
assumption, in reality, changes in one factor may result in another that may
magnify or counteract the sensitivities losses, such as increases in market
interest rates may result in lower prepayments and increased credit losses.

Static pool losses are calculated by summing the actual and projected
future credit losses and dividing them by the original balance of each pool of
assets. At December 28, 2002, total expected losses for securitizations
occurring in 2002 were 1.07% for general aviation loans, 6.16% for small
business finance loans, 0.16% for equipment loans and leases, 0.16% for
distribution finance receivables, 1.20% for vacation interval loans and 3.17%
for land loan receivables. Total expected losses for securitizations occurring
in 2001 were 0.47% for general aviation aircraft loans, 0.20% for equipment
loans and leases, 1.30% for franchise loans, 0.25% for distribution finance
receivables, 2.18% for vacation interval loans and 4.17% for land loan
receivables.

The table below summarizes certain cash flows received from and (paid to)
securitization trusts during the years ended December 28, 2002 and December 29,
2001, respectively.

41

Historical loss and delinquency amounts for Textron Financial's loans held
and securitized for the year ended December 28, 2002, were as follows:

NOTE 7 EQUIPMENT ON OPERATING LEASES

Initial lease terms of equipment on operating leases range from one to ten
years. Future minimum rentals at December 28, 2002, are $25.8 million in 2003,
$17.0 million in 2004, $15.2 million in 2005, $13.2 million in 2006, $9.4
million in 2007 and $18.3 million thereafter.

NOTE 8 GOODWILL

On December 30, 2001, Textron Financial adopted SFAS No. 142, "Goodwill and
Other Intangible Assets," which requires companies to stop amortizing goodwill
and certain intangible assets with indefinite useful lives, and requires an
annual review for impairment. Upon adoption, Textron Financial discontinued the
amortization of goodwill. Goodwill amortization expense was $11.2 million and
$11.0 million for 2001 and 2000, respectively, net of income taxes.

Under SFAS No. 142, Textron Financial was required to test all existing
goodwill for impairment as of December 30, 2001, on a "reporting unit" basis.
The reporting unit represents the operating segment unless, at businesses one
level below that operating segment (a "component"), discrete financial
information is prepared that is reviewed by segment management, in which case
such component is the reporting unit. In certain instances, components of an
operating segment have been aggregated and deemed a single reporting unit based
on similar economic characteristics of the components. Goodwill is considered to
be impaired when the

42

net book value of a reporting unit exceeds its estimated fair value. Fair values
were established using a discounted cash flow methodology.

As a result of this impairment review of goodwill, Textron Financial
recorded an after-tax transitional impairment charge of $15.4 million ($23.7
million, pre-tax), which is reported in the caption "Cumulative effect of change
in accounting principle." The charge relates to the Franchise Finance division
within the Other segment and is primarily the result of decreasing loan volumes
and an unfavorable securitization market. No impairment charge was appropriate
for this reporting unit under the previous goodwill impairment accounting
standard, which was based on undiscounted cash flows.

Textron Financial also adopted the remaining provisions of SFAS No. 141,
"Business Combinations," on December 30, 2001. For goodwill and intangible
assets reported in connection with acquisitions made prior to July 1, 2001,
these provisions broaden the criteria for recording intangible assets separate
from goodwill and require that certain intangible assets that do not meet the
new criteria, such as workforce, be reclassified into goodwill. Upon adoption of
these provisions, intangible assets totaling $0.9 million were reclassified into
goodwill within the Resort Finance segment.

Goodwill totaled $110.0 million in the Resort Finance segment, $40.6
million in the Asset-Based Lending segment, $16.6 million in the Aircraft
Finance segment and $13.6 million in the Other segment at December 28, 2002.

The impact on net income of discontinuing the amortization of goodwill is
presented below:

NOTE 9 OTHER ASSETS

The Investment in equipment residuals represents the remaining equipment
residual values associated principally with Textron golf and turf equipment
lease payments that were securitized in 2002, 2001 and 2000.

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

43

NOTE 10 DEBT AND CREDIT FACILITIES

Textron Financial has bank lines of credit of $1.5 billion, of which $500
million expires in 2003 and $1.0 billion expires in 2006. Textron Financial's
lines of credit, including the $100 million line of credit with Textron, not
reserved as support for commercial paper or utilized for letters of credit at
December 28, 2002, were $716 million. The Company also maintains a C$50 million
committed Canadian facility under which it can borrow an additional C$50 million
on an uncommitted basis. At December 28, 2002, the Company has fully used the
committed portion of the facility in addition to borrowing C$1 million under the
uncommitted portion of the facility. Textron Financial also has a $25 million
multi-currency facility, of which $14 million remains unused at year-end 2002.
Both the Canadian and multi-currency facilities expire in 2003. Textron
Financial generally pays fees in support of these lines.

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.

The weighted average interest rates on short-term borrowings, before
consideration of the effect of interest rate exchange agreements at year-end
were as follows:

The corresponding weighted average interest rates on these borrowings
during the last three years were 2.07% in 2002, 4.12% in 2001 and 6.44% in 2000.
Weighted average interest rates have been determined by relating interest costs
for each year to the daily average dollar amounts outstanding.

Interest on Textron Financial's variable rate notes is predominately tied
to the three-month LIBOR for U.S. Dollar deposits. The weighted average interest
rate on these notes was 2.16% at December 28, 2002, 2.41% at December 29, 2001,
and 6.96% at December 30, 2000. The corresponding weighted average interest
rates on these notes during the last three years were 2.58% in 2002, 4.89% in
2001 and 6.93% in 2000.

Securitizations are an important source of liquidity for Textron Financial
and involve the periodic transfer of finance receivables to qualified special
purpose trusts. At December 28, 2002, and December 29, 2001, the amount of debt
related to these securitization trusts was $2.3 billion and $2.1 billion,
respectively.

The amount of net assets available for dividends and other payments to
Textron is restricted by the terms of the Company's lending agreements. At
December 28, 2002, $448.5 million of net assets were available to be

44

transferred to Textron under the most restrictive covenant. The lending
agreements contain various restrictive provisions regarding additional debt (not
to exceed 800% of consolidated net worth and qualifying subordinated
obligations), minimum net worth ($200 million), the creation of liens and the
maintenance of a fixed charges coverage ratio (no less than 125%).

Required principal payments on long-term debt outstanding at December 28,
2002, are $1,068.9 million in 2003, $1,407.3 million in 2004, $199.0 million in
2005, $25.0 million in 2006, $725.6 million in 2007 and $497.0 million in 2009.

Cash payments made by Textron Financial for interest were $195.6 million in
2002, $281.5 million in 2001 and $324.7 million in 2000.

NOTE 11 DERIVATIVE FINANCIAL INSTRUMENTS

Textron Financial has entered into interest rate exchange agreements to
mitigate its exposure to interest rate changes by converting certain of its
fixed rate receivables and debt issues to floating rates. The agreements require
the Company to make periodic fixed rate payments in exchange for floating rate
receipts and vice versa based on specified notional amounts. During 2002,
Textron Financial also entered into a foreign currency exchange agreement to
convert a Y6.0 billion fixed rate note to a $44.8 million variable rate note.
The agreement requires the Company to make U.S. Dollar payments based on LIBOR
in exchange for fixed receipts of Yen at specified notional amounts. The Company
has designated these agreements fair value hedges. The Company does not hold or
issue derivative financial instruments for trading or speculative purposes. At
December 28, 2002, the Company had interest rate exchange agreements with a fair
value of $43 million designated as fair value hedges, compared to a liability of
$6 million at December 29, 2001.

Textron Financial has also entered into interest rate exchange, cap and
floor agreements to mitigate its exposure on interest-only securities resulting
from securitizations. The exchange agreements require the Company to make
periodic variable rate payments in exchange for periodic fixed rate receipts and
vice versa based on specified notional amounts. The interest rate cap and floor
agreements require the Company to make periodic variable rate payments based on
specified notional amounts if interest rates exceed or fall below specified
rates. The Company has designated these agreements cash flow hedges.

During 2002, the Company also entered into foreign currency exchange
agreements to convert $107.0 million of variable rate notes receivable to
C$170.0 million of fixed rate notes receivable to manage foreign currency
exposure by matching these notes receivable to Canadian denominated debt. The
agreements require the Company to make U.S. Dollar payments based on LIBOR in
exchange for fixed receipts of Canadian Dollars at specified notional amounts.
The Company has designated these agreements cash flow hedges.

Textron Financial has not incurred or recognized any gains or losses in
earnings as the result of the ineffectiveness or the exclusion from its
assessment of hedge effectiveness of its fair value or cash flow hedges.

Assuming no changes in interest rates, the Company expects $9.1 million of
net deferred losses to be reclassified to earnings over the next year to offset
interest payments made or received. In addition, the Company expects
approximately $1.9 million, net of income taxes, to be reclassified to earnings
as a result of the amortization of deferred losses related to discontinued
hedges.

45

The derivative financial instruments are summarized as follows:

46

NOTE 12 TEXTRON FINANCIAL AND LITCHFIELD OBLIGATED MANDATORY REDEEMABLE
PREFERRED SECURITIES OF TRUST SUBSIDIARY HOLDING SOLELY LITCHFIELD JUNIOR
SUBORDINATED DEBENTURES

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

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

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

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

NOTE 13 INVESTMENT IN PARENT COMPANY PREFERRED STOCK

On April 12, 2000, Textron made a $25 million noncash capital contribution
to Textron Financial consisting of all of the outstanding shares of Textron
Funding Corporation (Textron Funding), a related corporate holding company.
Textron Funding's only asset is 1,522 shares of Textron Inc. Series D cumulative
preferred stock, bearing an annual dividend yield of 5.92%. The preferred stock,
which has a face value of $152.2 million, is carried at its original cost of $25
million and is presented in a manner similar to treasury stock for financial
reporting purposes. Dividends on the preferred stock are treated as additional
capital contributions from Textron.

NOTE 14 ACCUMULATED OTHER COMPREHENSIVE LOSS

There were no items of Other comprehensive income during 2000.

47

NOTE 15 INCOME TAXES

Income before income taxes, distributions on preferred securities and
cumulative effect of change in accounting principle is as follows:

The components of income taxes were as follows:

Cash (received) paid for income taxes was ($30.8) million in 2002, $15.8
million in 2001 and $77.2 million in 2000.

The federal statutory income tax rate was reconciled to the effective
income tax rate as follows:

48

The components of Textron Financial's deferred tax assets and liabilities
were as follows:

At December 28, 2002, Textron Financial had state net operating loss
carryforwards of approximately $383 million available to offset future state
taxable income. The state net operating loss carryforwards will expire in years
2003 through 2021. The valuation allowance reported above represents the tax
effect of certain state net operating loss carryforwards. Textron Financial is
unable to conclude that "more likely than not" it will realize the benefit from
such carryforwards.

NOTE 16 FAIR VALUE OF FINANCIAL INSTRUMENTS

The following methods and assumptions were used in estimating the fair
value of Textron Financial's financial instruments:

Finance Receivables

The estimated fair values of fixed rate installment contracts, revolving
loans, golf course and resort mortgages and distribution finance receivables
were estimated based on discounted cash flow analyses using interest rates
currently being offered for similar loans to borrowers of similar credit
quality. The estimated fair values of all variable rate receivables approximated
the net carrying value of such receivables. The estimated fair values of
nonperforming loans were based on independent appraisals, discounted cash flow
analyses using risk adjusted interest rates or Textron Financial valuations
based on the fair value of the related collateral. The fair values, net of
carrying amounts of Textron Financial's leveraged leases, finance leases and
operating leases ($460.2 million, $346.8 million and $255.1 million,
respectively, at December 28, 2002, and $404.4 million, $318.9 million and
$201.1 million, respectively, at December 29, 2001), are specifically excluded
from this disclosure under generally accepted accounting principles. As a
result, a significant portion of the assets which are included in the Company's
asset and liability management strategy are excluded from this fair value
disclosure.

Debt, Interest Rate Exchange Agreements, Foreign Currency Forward Exchange
Contracts and Foreign Currency Exchange Agreements

The estimated fair value of fixed rate debt and variable rate long-term
notes was determined by either independent investment bankers or discounted cash
flow analyses using interest rates for similar debt with

49

maturities similar to the remaining terms of the existing debt. The fair values
of short-term borrowings supported by credit facilities approximated their
carrying values. The estimated fair values of interest rate exchange agreements,
foreign currency forward exchange contracts and foreign currency exchange
agreements were determined by independent investment bankers and represent the
estimated amounts that Textron Financial would be required to pay to (or collect
from) a third party to assume Textron Financial's obligations under the
agreements.

The carrying values and estimated fair values of Textron Financial's
financial instruments for which it is practicable to calculate a fair value are
as follows:

NOTE 17 COMMITMENTS

Textron Financial generally enters into various revolving lines of credit,
letters of credit and loan commitments in response to the financing needs of its
customers. The revolving lines of credit include both committed and uncommitted
facilities. Included in the committed facilities are $501 million of commitments
where funding is dependent on compliance with customary financial covenants.
Advances under the remaining $969 million of committed facilities are dependent
on both compliance with customary financial covenants and the availability of
eligible collateral. Advances under the uncommitted facilities of $998 million
are generally at Textron Financial's discretion and the Company has the right to
reduce or cancel these lines at any time. Letters of credit are conditional
commitments issued by the Company to guarantee the performance of a borrower or
an affiliate to a third party. Loan commitments represent agreements to fund
eligible costs of assets generally within one year. Generally, interest rates on
all of these commitments are not set until amounts are funded. Therefore,
Textron Financial is not exposed to interest rate changes.

These financial instruments generate fees and involve, to varying degrees,
elements of credit risk in excess of amounts recognized in the Consolidated
Balance Sheets. Since many of the agreements are expected to expire unused, the
total commitment amount does not necessarily represent future cash requirements.
The
50

credit risk involved in issuing these instruments is essentially the same as
that involved in extending loans to borrowers and the credit quality and
collateral policies for controlling this risk are similar to those involved in
the Company's normal lending transactions.

The contractual amounts of the Company's outstanding commitments to extend
credit at December 28, 2002, are shown below:

Textron Financial's offices are occupied under noncancelable operating
leases expiring on various dates through 2009. Rental expense was $7.6 million
in 2002 ($6.4 million in 2001 and $5.4 million in 2000). Future minimum rental
commitments for all noncancelable operating leases in effect at December 28,
2002, approximated $6.2 million for 2003, $4.5 million for 2004, $3.1 million
for 2005, $2.0 million for 2006 and $1.4 million for 2007. Of these amounts,
$1.7 million in 2003 and $0.5 million in 2004 are payable to Textron and its
subsidiaries.

NOTE 18 CONTINGENCIES

There are 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 19 FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS

During the third quarter of 2002, the Company made a strategic decision to
realign its business units into six operating segments based on the markets
serviced 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 that includes franchise finance
(loans primarily to operators of restaurants and convenience store/gas outlets),
media finance (working capital, acquisition and debt refinancing of broadcast,
publishing and other media operators) and small business finance (unsecured
lines of credit and term financing). This segment also includes liquidating
portfolios related to a strategic realignment of the Company's businesses and
product lines in 2001.

As a result of these segment changes, the financial information for the
years 2001 and 2000 have been recast reflecting the realignment of the segments.

51

- ---------------
(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.

52

(3) Finance assets include: finance receivables; equipment on operating leases,
net of accumulated depreciation; repossessed assets and properties; retained
interests in securitizations; interest-only securities; investment in
equipment residuals; ADC arrangements; and short and long-term investments
(some of which are classified in Other assets on Textron Financial's
Consolidated Balance Sheets).

NOTE 20 QUARTERLY FINANCIAL DATA (UNAUDITED)

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

Not applicable.

PART III.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Omitted per Instruction I of Form 10-K.

ITEM 11. EXECUTIVE COMPENSATION

Omitted per Instruction I of Form 10-K.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Omitted per Instruction I of Form 10-K.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Omitted per Instruction I of Form 10-K.

ITEM 14. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Within the 90 days prior to the date of this report, we carried out an
evaluation, under the supervision and with the participation of our management,
including our Chairman and Chief Executive Officer (our "CEO") and our Executive
Vice President and Chief Financial Officer (our "CFO"), of the effectiveness of
the design and operation of our disclosure controls and procedures (as defined
in Rule 13a-14(c) under the Securities Exchange Act of 1934 (the "Act")). 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.

Changes in Internal Controls

There have been no significant changes in our internal controls or in other
factors that could significantly affect these controls subsequent to the date of
their evaluation.
53

PART IV.

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(A) LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES

The following consolidated financial statements of Textron Financial and
subsidiaries are included in Item 8:

1. Consolidated statements of income -- Years ended December 28, 2002,
December 29, 2001 and December 30, 2000

2. Consolidated balance sheets -- December 28, 2002 and December 29, 2001

3. Consolidated statements of cash flows -- Years ended December 28, 2002,
December 29, 2001 and December 30, 2000

4. Consolidated statements of changes in shareholder's equity -- Years
ended December 28, 2002, December 29, 2001 and December 30, 2000

5. Notes to consolidated financial statements

All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable and therefore have been omitted.

54

EXHIBITS

The following is an Index of Exhibits required by Item 601 of Regulation
S-K filed with the Securities and Exchange Commission as part of this report.

- ---------------
Note: Instruments defining the rights of holders of certain issues of long-term
debt of Textron Financial have not been filed as exhibits to this Report
because the authorized principal amount of any one of such issues does
not exceed 10% of the total assets of Textron Financial and its
subsidiaries on a consolidated basis. Textron Financial agrees to furnish
a copy of each such instrument to the Commission upon request.

* Incorporated by reference to the Exhibit with the same number of Textron
Financial's Registration Statement on Form 10 (File No. 0-27559)

** Incorporated by reference to Exhibit 3.1 of Textron Financial's quarterly
report on Form 10-Q dated August 11, 2000

*** Incorporated by reference to Exhibit 4.1 to Amendment No. 2 to Textron
Financial Corporation's Registration Statement on Form S-3 (No. 333-88509)

**** Incorporated by reference to Exhibit 4.2 to Amendment No. 1 to Textron
Financial Corporation's Registration Statement on Form S-3 (No. 333-72676)

55

(B) REPORTS ON FORM 8-K

The Company filed a report on Form 8-K on December 20, 2002, reporting
under Item 5 of Form 8-K the Company's realignment of certain business segments.

Textron Financial, Textron, Bell Helicopter, Cessna, Cessna Finance Corporation,
Asset Control, LLC, Textron Business Services, Inc., Textron Golf, Turf and
Specialty Products, E-Z-GO, Textron Turf Care and their related trademark
designs and logotypes (and variations of the foregoing) are trademarks, trade
names or service marks of Textron Inc., its subsidiaries, affiliates or joint
ventures.
56

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this Annual Report on Form
10-K to be signed on its behalf by the undersigned, thereunto duly authorized on
this 27th day of February 2003.

Textron Financial Corporation
Registrant

By: *
------------------------------------
Stephen A. Giliotti
Chairman and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below on this 27th day of February 2003, by the following
persons on behalf of the registrant and in the capacities indicated:

By: *
------------------------------------
Stephen A. Giliotti
Chairman and Chief Executive
Officer, Director (Principal
Executive Officer)

By: *
------------------------------------
Ted R. French
Director

By: *
------------------------------------
Mary F. Lovejoy
Director

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

By: /s/ ERIC SALANDER
------------------------------------
Eric Salander
Senior Vice President, Finance
(Principal Accounting Officer)

*By: /s/ ELIZABETH C. PERKINS
-----------------------------------
Elizabeth C. Perkins
Attorney-in-fact

57

CERTIFICATIONS

I, Stephen A. Giliotti, Chairman and Chief Executive Officer of Textron
Financial Corporation (the "Company") certify that:

1. I have reviewed this annual report on Form 10-K of Textron
Financial Corporation;

2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period
covered by this annual report;

3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
annual report;

4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:

a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;

b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this annual report (the "Evaluation Date"); and

c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons performing
the equivalent function):

a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability
to record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and

b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and

6. The registrant's other certifying officers and I have indicated in
this annual report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.

/s/ STEPHEN A. GILIOTTI
--------------------------------------
Stephen A. Giliotti
Chairman and Chief Executive Officer

Date: February 27, 2003

58

I, Thomas J. Cullen, Executive Vice President and Chief Financial Officer of
Textron Financial Corporation (the "Company") certify that:

1. I have reviewed this annual report on Form 10-K of Textron
Financial Corporation;

2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period
covered by this annual report;

3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
annual report;

4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:

a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;

b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this annual report (the "Evaluation Date"); and

c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons performing
the equivalent function):

a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability
to record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and

b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and

6. The registrant's other certifying officers and I have indicated in
this annual report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.

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

Date: February 27, 2003

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