# **FORM 10-K**

 

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

# ** **

**x****        ****ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OFTHE SECURITIES EXCHANGE ACT OF 1934**

** **

# **For the fiscal yearended December 31, 2008**

# ** **

**Commission File No. 001-11677**

** **

**PACCAR FINANCIAL CORP.**

(Exact name of Registrant as specified in itscharter)

 

| **Washington**           | ** ** | **91-6029712**                       |
|--------------------------|------------|--------------------------------------|
| (State of incorporation) |       | (I.R.S. Employer Identification No.) |

 

| **777 106****th**** Avenue N.E., Bellevue, Washington** | ** ** | **98004**  |
|--------------------------------------------------------------|------------|------------|
| (Address of principal executive offices)                     |       | (Zip Code) |

 

The Registrant’s telephone number, includingarea code is **(425) 468-7100**

 

Securities registeredpursuant to Section 12(b) of the Act:

 

| **Title of Each Class**                  | ** ** | **Name of Each Exchange on Which Registered** |
|------------------------------------------|------------|-----------------------------------------------|
| **Series K Medium-Term Notes**      | ** ** | ** **                                    |
| **$300 Million Due April 27, 2009** | ** ** | **New York Stock Exchange**                   |

 

Indicate by check mark if the registrant is a well-known seasonedissuer, as defined in Rule 405 of the Securities Act. 

Yes:  x     No:  o

 

Indicate by check mark if the registrant is not required to file reportspursuant to Section 13 or Section 15(d) of the Act.

Yes:  o     No:  x

 

Indicate by check mark whether the registrant (1) has filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorterperiods that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days.         Yes:  x      No:  o

 

Indicate by check mark if disclosure of delinquent filers pursuant toItem 405 of Regulation S-K (§229.405 of this chapter) is not contained herein,and will not be contained, to the best of registrant’s knowledge, in definitiveproxy or information statements incorporated by reference in Part III ofthis Form 10-K or any amendment to this Form 10-K.  x

 

Indicate by check mark whether the registrant is a large acceleratedfiler, an accelerated filer, a non-accelerated filer, or a smaller reportingcompany. See definition of “large accelerated filer”, “accelerated filer”, “smallerreporting company” in Rule 12b-2 of the Exchange Act.

 
| Large  accelerated filer:  o | Accelerated  filer:  o | Non-accelerated  filer:  x | Smaller  reporting company:  o |
|----------------------------------------|----------------------------------|--------------------------------------|------------------------------------------|

 

Indicate by check mark whether the registrant is a shell company (asdefined in Rule 12(b)-2 of the Act).      Yes:  o      No:  x

 

The aggregate market value of the voting stock held by non-affiliates ofthe registrant as of June 30, 2008:      None

 

The number of shares outstanding of the registrant’s classes of commonstock as of January 31, 2009:

 

###### CommonStock, $100 par value — 145,000 shares

######  

THE REGISTRANT IS A WHOLLY-OWNED INDIRECT SUBSIDIARY OF PACCAR INC ANDMEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTIONS (I) (1) (a) AND(b) OF FORM 10-K AND IS, THEREFORE, FILING THIS FORM WITH THEREDUCED DISCLOSURE FORMAT.

 

 

 

----

 

**PACCAR Financial Corp.**

** **

**INDEX**

 
| **PART I**            |                                                                                                                |   |
|----------------------------|---------------------------------------------------------------------------------------------------------------------|--------|
|                       |                                                                                                                |   |
| **Item 1.**                | **Business**                                                                                                        | **3**  |
| **Item 1A.**               | **Risk Factors**                                                                                                    | **4**  |
| **Item 1B.**               | **Unresolved Staff Comments**                                                                                       | **10** |
| Item 2.                    | Properties                                                                                                          | 10     |
| Item 3.                    | Legal  Proceedings                                                                                                  | 10     |
| Item 4.                    | Submission of Matters to a  Vote of Security Holders                                                                | 10     |
|                       |                                                                                                                |   |
| **PART II**           |                                                                                                                |   |
|                       |                                                                                                                |   |
| Item 5.                    | Market for Registrant’s  Common Equity, Related Stockholder Matters and Issuer Purchases of Equity  Securities | 10     |
| Item 6.                    | Selected Financial  Data                                                                                            | 11     |
| Item 7.                    | Management’s  Discussion and Analysis of Financial Condition and Results of Operation                          | 12     |
| Item 7A.                   | Quantitative  and Qualitative Disclosures about Market Risk                                                         | 17     |
| Item 8.                    | Financial  Statements and Supplementary Data                                                                        | 17     |
| Item 9.                    | Changes in and  Disagreements with Accountants on Accounting and Financial Disclosure                               | 35     |
| Item  9A & 9A(T). | Controls and  Procedures                                                                                            | 35     |
| Item 9B.                   | Other Information                                                                                                   | 35     |
|                       |                                                                                                                |   |
| **PART III**          |                                                                                                                |   |
|                       |                                                                                                                |   |
| Item 10.                   | Directors, Executive Officers  and Corporate Governance                                                             | 36     |
| Item 11.                   | Executive Compensation                                                                                              | 36     |
| Item 12.                   | Security Ownership of Certain  Beneficial Owners and Management and Related Stockholder Matters                     | 36     |
| Item 13.                   | Certain Relationships and  Related Transactions, and Director Independence                                          | 36     |
| Item 14.                   | Principal  Accounting Fees and Services                                                                             | 36     |
|                       |                                                                                                                |   |
| **PART IV**           |                                                                                                                |   |
|                       |                                                                                                                |   |
| Item 15.                   | Exhibits,  Financial Statement Schedules                                                                            | 37     |

 

2

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**PACCAR Financial Corp.**

(Millions of Dollars)

 

**PART I**

 

#### **ITEM1 AND 1A.**                        BUSINESSAND RISK FACTORS

#### ** **

## GENERAL

##  

PACCAR FinancialCorp.

 

PACCAR Financial Corp. (the “Company”), aWashington corporation, was incorporated in 1961 as a wholly-owned subsidiaryof PACCAR Inc (“PACCAR”) to finance the sale of PACCAR products. In 2000,PACCAR transferred the stock of the Company to PACCAR Financial ServicesCorporation (“PFSC”), a wholly-owned subsidiary of PACCAR.

 

The Company principally provides financing andleasing of PACCAR-manufactured trucks and other transportation equipment soldthrough PACCAR’s independent dealer network in the United States. The Companyalso finances dealer inventories of new and used transportation equipment. TheCompany’s PacLease division franchises PACCAR dealerships to engage infull-service and finance leasing. In selected markets, PacLease directlyengages in full-service leasing with its customers through Company-owned storesand on a limited basis through PACCAR dealerships.

 

### PACCAR

###  

PACCAR has twoprincipal industry segments, (1) design, manufacture and distribution oflight-, medium- and heavy-duty trucks and related aftermarket distribution ofparts and (2) finance and leasing services provided to customers anddealers. PACCAR distributes trucks and parts primarily through its independentdealer network. PACCAR’s finance and leasing activities are principally relatedto PACCAR products and associated equipment. Other manufactured productsinclude industrial winches.

 

PACCAR and itssubsidiaries design and manufacture heavy-duty diesel trucks which are marketedunder the Peterbilt, Kenworth and DAF nameplates. These vehicles, which arebuilt in four plants in the United States, three in Europe and one each inAustralia, Canada and Mexico, are used worldwide for over-the-road andoff-highway hauling of freight, petroleum, wood products, construction andother materials.

 

PACCAR, throughits Peterbilt and Kenworth Divisions, competes in the North Americanmedium-duty (Class 6/7) markets primarily with conventional models. Thesemedium-duty trucks are assembled at facilities located in Ste. Therese, Quebecand Mexicali, Mexico, which are owned by PACCAR’s wholly-owned subsidiaries.PACCAR competes in the European light/medium (6 to 15 metric ton) commercialvehicle market with DAF cab-over-engine trucks assembled in the United Kingdomby Leyland, one of PACCAR’s wholly-owned subsidiaries. Commercial trucks andrelated replacement parts comprise the largest segment of PACCAR’s business,accounting for 90% of total 2008 net sales and revenues.

 

Substantially alltrucks and related parts are sold to independently-owned dealers. The Kenworthand Peterbilt nameplates are marketed and distributed by separate divisions inthe U.S. and a foreign subsidiary in Canada. The Kenworth nameplate is alsomarketed and distributed by foreign subsidiaries in Mexico and Australia. TheDAF nameplate is marketed and distributed by a foreign subsidiary headquarteredin The Netherlands. A U.S. division, PACCAR International, also markets allthree nameplates outside each of Kenworth’s, Peterbilt’s and DAF’s primarymarkets. The decision to operate as a subsidiary or as a division is incidentalto Truck Segment operations and reflects legal, tax and regulatory requirementsin the various countries where PACCAR operates.

 

Therewere three other principal competitors in the U.S. and Canada Class 8truck market in 2008. PACCAR’s share of that market was 26.0% of retail salesin 2008. In Europe there were five other principal competitors in thecommercial vehicle market in 2008, including parent companies to twocompetitors of PACCAR in the United States. In 2008, DAF had a 14.1% share ofthe Western and Central European heavy-duty market and a 9.3% share of thelight/medium market. These markets are highly competitive in price, quality andservice, and PACCAR is not dependent on any single customer for its sales.There are no significant seasonal variations.

 

3

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**PACCAR Financial Corp.**

(Millions of Dollars)

 

Inaddition to the Company, which provides financing, leasing and full-servicetruck leasing in the United States, PACCAR offers similar financing programsfor PACCAR products through other wholly-owned finance companies in Mexico,Canada, Australia, the United Kingdom, and Continental Europe. PACCAR alsoconducts full-service leasing operations through wholly-owned subsidiaries inCanada, Mexico and Germany.

 

PACCAR’scommon stock is traded on the NASDAQ Global Select Market under the symbolPCAR. PACCAR and the Company are subject to the informational requirements ofthe Securities Exchange Act of 1934 and, in accordance therewith, file reportsand other information with the Securities and Exchange Commission (the “Commission”).All reports, proxy statements and other information filed by PACCAR and theCompany with the Commission may be inspected and copied at the public referencefacility maintained by the Commission at 100 F Street, N.E., Washington, D.C.20549 or through the Commission’s internet site at www.sec.gov.

 

BUSINESS OF THE COMPANY

 

TheCompany operates primarily in one industry segment, truck and related equipmentfinancing in the United States. The Company provides financing to customers anddealers for new Kenworth and Peterbilt trucks, used trucks, truck trailers andallied equipment. The Company’s PacLease division franchises PACCAR dealershipsto engage in full-service and finance leasing. In selected markets, PacLeasedirectly engages in full-service leasing with its customers throughCompany-owned stores and on a limited basis through PACCAR dealerships.

 

TheCompany conducts business with most PACCAR dealers in the United States. Thevolume of the Company’s business is significantly affected by PACCAR’s sales oftrucks to its dealers and competition from other financing sources.

 

Asof December 31, 2008, the Company employed 277 full-time employees, noneof whom are represented by a collective bargaining agent. The Company considersrelations with its employees to be good.

 

#### **RISKFACTORS**

#### ** **

The Company is exposed tocertain risks and uncertainties that could have a material adverse impact tothe Company’s financial condition and operating results, including:

 

Sales of PACCAR Products

 

The Company’s business issubstantially dependent upon the sale of PACCAR products and its ability tooffer competitive financing in the United States. Changes in the volume ofsales of PACCAR products due to a variety of reasons could impact the level ofbusiness of the Company. Refer to the “Relationship with PACCAR and Affiliates”section in this Business section and Note D – Transactions with PACCAR andAffiliates for further discussion regarding the Company’s relationship withPACCAR.

 

Credit Risk

 

Credit risk, includingcounterparty credit risk in derivative transactions, is the risk of lossarising from the failure of a customer, dealer or counterparty to meet theterms of any contract with the Company or otherwise fail to perform as agreed.The Company may be exposed to a greater credit risk in periods of adverseeconomic conditions, such as high interest rates and diesel prices, combinedwith a decline in freight demand, since it becomes more difficult for customersand dealers to perform as agreed and could also cause a decrease in the valueof the Company’s collateral. Refer to Note E – Derivative Financial Instrumentsfor further discussion regarding the Company’s exposure to counterparty risk.Refer to Item 7 – Management’s Discussion and Analysis of Financial Conditionfor further discussion of credit losses.

 

4

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**PACCAR Financial Corp.**

(Millions ofDollars)

 

Residual Value Risk

 

Residual value risk isthe risk that the estimated residual value of leased assets at leaseorigination, for the Company’s operating leases and certain direct financingleases, will not be recoverable. When the market value of these leased assetsat contract maturity or at early termination is less than its contractualresidual value, the Company will be exposed to a greater risk of loss on thesales of the returned equipment. Refer to the Critical Accounting Policy on “Equipmenton Operating Leases” in the MD&A section for further discussion regardingthe Company’s exposure to this risk.

 

Market Risk

 

Market risk is the riskthat changes in market interest rates, liquidity or prices will negativelyimpact the Company’s operating results and access to capital. Policiesgoverning market risk exposure are established and periodically reviewed by theCompany’s senior management. Refer to Item 7A. “Quantitative and QualitativeDisclosures about Market Risk” for further discussion regarding the Company’sexposure to this risk.

 

**THE COMPANY’S PRODUCTS**

 

The Company offers thefollowing products to retail customers:

 

Retail Contracts andLoans The Company purchases contracts from dealers and receivesassignments of the contracts and a first lien security interest in the vehiclesfinanced (“Retail Contracts”). Certain Retail Contracts with third partyleasing companies may also include an assignment to the Company of the relatedlease and rental payments due. Retail Contracts purchased by the Company havefixed or floating interest rates.

 

TheCompany also makes loans to the end users of the vehicles financed that are securedby a first lien security interest in the vehicles (“Loans”). Loans have fixedor floating interest rates.

 

Direct Financing Leases The Companyoffers direct financing lease contracts where it is treated as the owner of theequipment for tax purposes and generally retains the tax depreciation (“DirectFinancing Leases”). The lessee is responsible for the payment of property andsales taxes, licenses, maintenance and other operating costs. The lessee isobligated to maintain the equipment and to insure the equipment againstcasualty and liability losses.

 

Mostof the Company’s Direct Financing Leases contain a Terminal Rental AdjustmentClause, which requires the lessee to guarantee to the Company a stated residualvalue upon disposition of the equipment at the end of the direct financinglease term.

 

Operating Leases The Companyoffers operating lease contracts (“Operating Leases”) where the Company ownsthe equipment. The lessee is responsible for the payment of property and salestaxes, licenses, maintenance and other operating items. The lessee is obligatedto maintain the equipment and to insure the equipment against casualty andliability losses.

 

Atthe end of the operating lease term, the lessee has the option to return theequipment to the Company or purchase the equipment at its fair market value.

 

Insurance The Company’sPaclease business offers physical damage and liability insurance on new andused trucks and trailers to its full-service lease customers. The customerretains premium and loss exposure for the policies that are issued through anunrelated regulated insurance carrier. To limit its exposure the Company hasacquired insurance coverage for losses above specified levels from a thirdparty insurance carrier.

 

5

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**PACCAR Financial Corp.**

(Millions ofDollars)

 

The Company offers thefollowing products to PACCAR dealers and PacLease franchisees:

 

Master Notes Master notecontracts (“Master Notes”) are offered to select dealers for new and used trucks.Retail installment contracts originated by the dealer for new or used truckswhich meet the Company’s requirement as to form, terms and creditworthiness forRetail Contracts are pledged to the Company as collateral for direct, fullrecourse loans by the Company to the dealer. Master Notes have fixed orfloating interest rates.

 

Wholesale Contracts The Companyprovides wholesale financing for new and used truck and trailer inventories fordealers (“Wholesale Contracts”). Wholesale Contracts are secured by theinventories financed. The amount of credit extended by the Company for eachtruck is generally limited to the invoice price of new equipment and to thewholesale value of used equipment. Interest charged under Wholesale Contractsis based upon floating interest rates.

 

Dealer Loans The Companymakes secured loans to selected Peterbilt and Kenworth dealers (“Dealer Loans”).The purpose of these loans includes the financing of real estate, fixed assets,working capital and dealership acquisitions. Dealer Loans have fixed orfloating interest rates.

 

Full-Service Leasing The Companyalso conducts full-service leasing operations under the PacLease trade name.Selected dealers are franchised to provide full-service leasing, which includesthe equipment, maintenance, parts, taxes and licenses all in a combinedcontract with the customer. The Company provides the franchisees with equipmentfinancing and managerial support. The Company also operates full-service leaseoutlets in selected markets on its own behalf.

 

Insurance The Companycharges a fee to provide insurance coverage, through an unrelated regulatedinsurance carrier, on new trucks, used trucks and trailer inventory to dealershaving Wholesale Contracts with the Company.

 

CUSTOMER CONCENTRATION, PASTDUE ACCOUNTS AND LOSS EXPERIENCE

 

Customer Concentration

 

The Company’s customers are concentrated in thetransportation industry throughout the United States. The Company does not havecontractual arrangements with any one party (customers, dealers and/orfranchises) that account for 10% or more of total Interest and Other Revenue orFinance and Lease Receivables for the periods ended December 31, 2008,2007 and 2006.

 

Past Due Receivables andAllowance for Losses

 

Anaccount is considered past due by the Company if any portion of an installmentis due and unpaid for more than 30 days. In periods of adverse economicconditions, past due levels, repossessions and credit losses generallyincrease.

 

Receivables are charged to the allowance for losses when, in thejudgment of management, they are considered uncollectible (generally uponrepossession of the collateral). The provision for losses on finance andother receivables is charged to income based on management’s estimate ofincurred credit losses, net of recoveries, inherent in the portfolio.

 

Forfurther discussion of the allowance for losses, see “Management’s Discussionand Analysis of Financial Condition and Results of Operation.”

 

6

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**PACCAR Financial Corp.**

(Millions of Dollars)

 

COMPETITION AND ECONOMICFACTORS

 

Thecommercial truck and trailer finance and leasing business is highly competitiveamong banks, commercial finance companies, captive finance companies andleasing companies. Many of these institutions have substantially greaterfinancial resources than the Company and may borrow funds at lower rates.

 

Thedealers are the primary source of contracts acquired by the Company. However,dealers are not required to obtain financing from the Company and they have avariety of other sources that may be used for wholesale and customer financingof trucks. Retail purchasers also have a variety of sources available tofinance truck purchases.

 

Theability of the Company to compete in its market is principally based on therates, terms and conditions that the Company offers dealers and retailpurchasers, as well as the specialized services it provides. Rates, terms andconditions are based on the Company’s desire to provide flexible financing andservices to satisfy dealer and customer needs, the ability of the Company toborrow funds at competitive rates and the Company’s need to earn an adequatereturn on its invested capital. The Company’s business is also affected bychanges in market interest rates, which in turn are related to general economicconditions, demand for credit, inflation and governmental policies. Seasonalityis not a significant factor in the Company’s business.

 

Thevolume of receivables available to be acquired by the Company from dealers islargely dependent upon the number of Kenworth and Peterbilt trucks sold in theUnited States. Sales of medium- and heavy-duty trucks depend on the capitalequipment requirements of the transportation industry, which in turn areinfluenced by growth and cyclical variations in the economy. Medium- andheavy-duty truck sales are also sensitive to economic factors such as fuelcosts, interest rates, insurance premiums, federal excise and highway usetaxes, taxation on the acquisition and use of capital goods, as well asgovernment regulations.

 

REGULATION AND SIMILARMATTERS

 

Incertain states, the Company is subject to retail installment sales orinstallment loan statutes and related regulations, the terms of which vary fromstate to state. These laws may require the Company to be licensed as a salesfinance company and may regulate disclosure of finance charges and other termsof retail installment contracts. The Company is subject to substantive statefranchise regulations and federal and state uniform franchise disclosure lawsin connection with the offering of PacLease full-service truck leasing andrental franchises to PACCAR truck dealers. The Company also owns and operatesseveral truck leasing and rental business locations, which are subject to applicablestate licensing laws. The Company is also subject to certain provisions offederal law relating to non-discrimination in the granting of credit.

 

SOURCES OF FUNDS

 

TheCompany’s primary sources of funds are commercial paper and medium-term noteborrowings in the public capital markets, collections on loans and leases,retained earnings and to a lesser extent bank loans and capital contributionsfrom PFSC. The Company’s investment in additional receivables is dependent uponits ability to raise funds at competitive rates in the public and private debtmarkets. The receivables and leases that are financed are either fixed rate orfloating rate with terms that range from 12 to 85 months.

 

Toreduce the risk of changes in interest rates that could affect interestmargins, the Company obtains funds with interest rate characteristics similarto the corresponding assets. Fixed rate assets are primarily funded with fixedand floating rate medium-term notes and commercial paper. Interest rate swapsare combined with commercial paper or floating rate medium-term notes toconvert floating rate debt to fixed rate debt. Floating rate assets are fundedprimarily with commercial paper with maturities of three months or less andfloating rate medium-term notes.

 

7

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**PACCAR Financial Corp.**

(Millions of Dollars)

 

TheCompany enters into interest rate swap contracts to achieve its matched fundingobjectives relative to its primary borrowing sources – commercial paper andmedium-term notes. Fixed rate swaps, matched to floating rate borrowings, areused to lock in the funding cost of fixed rate assets. As of December 31,2008, the total notional principal amount of interest rate swap contractsoutstanding was $2,448.4, all of which result in a fixed rate paymentobligation. The notional amount is used to measure the volume of thesecontracts and does not represent exposure to credit loss. The permitted typesof interest rate swap contracts, counterparties’ transaction limits and relatedapproval authorizations have been established by the Company’s seniormanagement and Board of Directors. The interest rate contracts outstanding areregularly reported to, and reviewed by, the Company’s senior management.

 

TheCompany participates with PACCAR and certain other PACCAR affiliates insyndicated credit facilities of $3,000 at December 31, 2008. Of thisamount, $2,000 expires in June 2009 and $1,000 expires in 2012.PACCAR intends to replace these credit facilities as they expire with facilitiesof similar amounts.

 

Creditfacilities of $2,040 are available for use by the Company and/or PACCAR andcertain other PACCAR affiliates. The remaining $960 is allocated to thefollowing subsidiaries: $455 is available for use by PACCAR’s Canadian financialsubsidiary, $400 is available for use by PACCAR’s Mexican subsidiary, and$105 is available for use by PACCAR’s Australian financial subsidiary.These credit facilities are used to provide backup liquidity for the Company’scommercial paper and maturing medium-term notes. The Company is liable only forits own borrowings under these credit facilities. There were no borrowingsunder these credit facilities in the years ended December 31, 2008 and2007.

 

Asof December 31, 2008, the Company had $2,270.0 of medium-term notesoutstanding under two shelf registration statements, of which $1,550.0 are duewithin 12 months. See “Note F – Borrowings” in the Notes to FinancialStatements for further information on medium-term notes.

 

Anindenture of the Company dated as of December 1, 1983, as amended by afirst supplemental indenture dated June 19, 1989 (Exhibit 4.1), withrespect to the Company’s medium-term notes which are publicly issued from timeto time, contains restrictions limiting secured debt which may be incurred bythe Company and any subsidiary.

 

RELATIONSHIP WITH PACCARAND AFFILIATES

 

General

 

The operations of the Company arefundamentally affected by its relationship with PACCAR. Sales of PACCARproducts are the Company’s principal source of its financing business. TheCompany receives administrative support from and pays dividends to PFSC andperiodically borrows funds from or lends money to PACCAR and/or its affiliates.The Company’s principal office is located in the corporate headquartersbuilding of PACCAR (owned by PACCAR). The Company also leases office space fromthree facilities owned by PACCAR and five facilities leased by PACCAR. Sincethe directors of the Company are all executives of PACCAR and PACCAR is thesole owner of PFSC’s outstanding voting common stock, PACCAR can determine thecourse of the Company’s business.

 

Periodically, the Company makes loans to, borrows from and hasintercompany transactions with PACCAR. The Company had $814.5 outstanding inloans to PACCAR as of December 31, 2008. In addition, the Company loansfunds to certain foreign finance and leasing affiliates of PACCAR. Thesevarious affiliates have Support Agreements with PACCAR, similar to the Company’sSupport Agreement. The foreign affiliates operate in the United Kingdom, TheNetherlands, Mexico, Canada and Australia, and any resulting currency exposureis fully hedged. The foreign affiliates primarily provide financing and leasingof PACCAR-manufactured trucks and related equipment sold through PACCAR’s independentdealer networks in Europe, Mexico, Canada and Australia. The Company will notmake loans to the foreign affiliates in excess of the equivalent of $500.0United States dollars, unless the amount in excess of such limit is guaranteedby PACCAR. The Company periodically reviews the funding alternatives for theseaffiliates, and these limits may be revised in the future.

 

8

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**PACCAR Financial Corp.**

(Millions of Dollars)

 

PFSCcharges the Company for certain administrative services it provides and certainservices the Company receives indirectly from PACCAR. As of December 31,2008, PFSC employed 159 full-time employees, none of whom are represented by acollective bargaining agent. The costs are charged to the Company based uponthe Company’s specific use of the services at PFSC’s or PACCAR’s cost.Management considers these charges reasonable and similar to the costs thatwould be incurred if the Company were on a stand-alone basis. See “Note D –Transactions with PACCAR and Affiliates” in the Notes to Financial Statements.

 

Support Agreement

 

TheCompany and PACCAR are parties to a Support Agreement that obligates PACCAR toprovide, when required, financial assistance to the Company to assure that theCompany maintains a ratio of net earnings available for fixed charges to fixedcharges (as defined in the Agreement) of at least 1.25 to 1 for any fiscalyear. The Support Agreement also requires PACCAR to own, directly orindirectly, all outstanding voting stock of the Company. The required ratio wasmet for the years ended December 31, 2008, 2007, and 2006 withoutassistance. See “Note D – Transactions with PACCAR and Affiliates” in the Notesto Financial Statements.

 

TheCompany and PACCAR may amend or terminate any or all of the provisions of theSupport Agreement upon 30 days notice, with copies of the notice being sent toall nationally recognized statistical rating organizations (“NRSROs”) whichhave issued ratings with respect to debt of the Company (“Rated Debt”). Suchamendment or termination will be effective only if (i) two NRSROs confirmin writing that their ratings with respect to any Rated Debt would remain thesame after such amendment or termination, or (ii) the notice of amendmentor termination provides that the Support Agreement will continue in effect withrespect to Rated Debt outstanding on the effective date of such amendment ortermination unless such debt has been paid or defeased pursuant to theindenture or other agreement applicable to such debt, or (iii) the holdersof at least two-thirds of the aggregate principal amount of all outstandingRated Debt with original maturity in excess of 270 days consent in writing tosuch amendment or termination, provided that the holders of Rated Debt havingan original maturity of 270 days or less shall continue to have the benefits ofthe Support Agreement until the maturity of such debt.

 

TheSupport Agreement expressly states that PACCAR’s commitments to the Companythereunder do not constitute a PACCAR guarantee of payment of any indebtednessor liability of the Company to others and do not create rights against PACCARin favor of persons other than the Company. There are no guarantees, direct orindirect, by PACCAR of payment of any indebtedness of the Company.

 

OTHER DISCLOSURES

 

TheCompany’s filings on Form 10-K, 10-Q and 8-K and any amendments to thosereports can be obtained through a link on the Company’s website,www.paccarfinancial.com, or PACCAR Inc’s website,www.paccar.com, free of charge as soon as reasonablypracticable after the report is electronically filed with, or furnished to, theSecurities and Exchange Commission. The information on the websites is notincorporated by reference into this report.

 

9

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**PACCAR Financial Corp.**

(Millions of Dollars)

 
| **ITEM  1B.** | **UNRESOLVED STAFF COMMENTS** |
|---------------|-------------------------------|

 

Notapplicable.

 
| **ITEM 2.** | **PROPERTIES** |
|-------------|----------------|

 

TheCompany’s principal office is located in the corporate headquarters building ofPACCAR (owned by PACCAR) at 777 106th Avenue N.E., Bellevue, Washington 98004. TheCompany owns three full-service leasing facilities in Texas and a used trucksales facility in South Carolina.

 

Otheroffices and leasing facilities of the Company are located in leased premisesincluding three facilities owned by PACCAR and five facilities leased byPACCAR. The Company considers all its properties to be suitable for theirintended purpose. Annual lease rentals for these premises in the aggregate arenot material in relation to expenses as a whole.

 
| **ITEM 3.** | **LEGAL PROCEEDINGS** |
|-------------|-----------------------|

 

TheCompany is a party to various routine legal proceedings incidental to itsbusiness involving the collection of accounts and other matters. The Companydoes not consider such matters to be material with respect to the business orfinancial condition of the Company as a whole.

 
| **ITEM 4.** | **SUBMISSION OF MATTERS TO A VOTE  OF SECURITY HOLDERS** |
|-------------|----------------------------------------------------------|

 

Notapplicable.

 

**PART II**

 
| **ITEM 5.** | **MARKET FOR REGISTRANT’S COMMON  EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES** |
|-------------|------------------------------------------------------------------------------------------------------------------------|

 

Alloutstanding common stock is owned by PFSC; therefore, there is no tradingmarket in the Company’s common stock.

 

Dividends in the amount of $100.0, $24.0and $30.0 were declared and paid to PFSC in 2008, 2007 and 2006, respectively.

 

10

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** **

**PACCAR Financial Corp.**

(Millions of Dollars)

 

**ITEM6.****                            ****SELECTED FINANCIAL DATA**

 

Thefollowing table summarizes selected financial data for the Company. Theinformation with respect to each of the five years in the period ended December 31,2008 has been derived from the Company’s audited financial statements.

 

**Balance Sheet Data**

 
| ** **                       | ** ** | **As of December 31** | ** **  |
|----------------------------------|------------|--------------------------------------|-------------|
| ** **                       | ** ** | **2008**                             | ** **  | 2007 |   | 2006 |   | 2005 |   | 2004 |   |
|                             |       |                                 |        |   |   |   |   |   |   |   |   |
| Total Assets                     | ** ** | **$**                                | **5,739.4** |   | $ | 5,507.6 |   | $ | 5,508.3 |   | $ | 4,778.7 |   | $ | 3,970.7 |   |
| Total  Liabilities               | ** ** | **4,976.2**                          |        | 4,683.0 |   | 4,727.3 |   | 4,066.1 |   | 3,295.6 |   |
| Total  Stockholder’s Equity | ** ** | **763.2**                            |        | 824.6 |   | 781.0 |   | 712.6 |   | 675.1 |   |
|                                  |            |                                      |             |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**Income Statement Data**

 
| ** **                                                                     | ** ** | **Year ended December 31** | ** ** |
|--------------------------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                     | ** ** | **2008**                                  | ** ** | 2007 |   | 2006 |   | 2005 |   | 2004 |   |
| Total interest  and other revenue                                              | ** ** | **$**                                     | **509.6**  |   | $ | 573.0 |   | $ | 509.6 |   | $ | 409.3 |   | $ | 320.9 |   |
|                                                                           |       |                                      |       |   |   |   |   |   |   |   |   |
| Total expenses                                                                 | ** ** | **438.0**                                 |       | 439.6 |   | 373.3 |   | 289.3 |   | 209.5 |   |
|                                                                           |       |                                      |       |   |   |   |   |   |   |   |   |
| Income before  income taxes                                                    | ** ** | **71.6**                                  |       | 133.4 |   | 136.3 |   | 120.0 |   | 111.4 |   |
|                                                                           |       |                                      |       |   |   |   |   |   |   |   |   |
| Income taxes                                                                   | ** ** | **27.4**                                  |       | 51.1 |   | 51.8 |   | 46.0 |   | 42.2 |   |
|                                                                           |       |                                      |       |   |   |   |   |   |   |   |   |
| Net income                                                                     | ** ** | **$**                                     | **44.2**   |   | $ | 82.3 |   | $ | 84.5 |   | $ | 74.0 |   | $ | 69.2 |   |
|                                                                           |       |                                      |       |   |   |   |   |   |   |   |   |
| Ratio of  Earnings to Fixed Charges Pursuant to SEC Reporting Requirements (1) | ** ** | **1.44x**                                 |       | 1.67x |   | 1.82x |   | 2.17x |   | 2.61x |   |
|                                                                           |       |                                      |       |   |   |   |   |   |   |   |   |
| Ratio of  Earnings to Fixed Charges Pursuant to the Support Agreement          | ** ** | **2.10x**                                 |       | 2.11x |   | 2.30x |   | 2.83x |   | 3.26x |   |

 

(1)          Forthe purposes of this ratio, earnings consist of income before income taxes plusfixed charges. Fixed charges consist of interest expense plus a portion of rentexpense (which is considered representative of an interest factor). The methodof computing the ratio of earnings to fixed charges shown above complies withSEC reporting requirements (see Exhibit 12(a)) but differs from the methodcalled for in the Support Agreement between the Company and PACCAR (see Exhibit 12(b)).

 

11

----

 

**PACCAR Financial Corp.**

(Millions of Dollars)

 

**ITEM7.****                            ****MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND****RESULTS OFOPERATION**(Millions of Dollars)

 

**Results of Operations**

 
| ** **                                                                                                                                            | ** ** | **Year ended December 31** | ** **  |
|-------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------|-------------|
| ** **                                                                                                                                            | ** ** | **2008**                                  | ** **  | 2007 |   | 2006 |   |
| Average earning  assets (including operating leases)                                                                                                  | ** ** | **$**                                     | **4,661.6** |   | $ | 5,240.1 |   | $ | 4,881.5 |   |
| Interest and  other revenue                                                                                                                           | ** ** | **509.6**                                 |        | 573.0 |   | 509.6 |   |
| Income before  taxes                                                                                                                                  | ** ** | **71.6**                                  |        | 133.4 |   | 136.3 |   |
| Net income                                                                                                                                            | ** ** | **44.2**                                  |        | 82.3 |   | 84.5 |   |
|                                                                                                                                                  |       |                                      |        |   |   |   |   |
| Allowance for  Losses:                                                                                                                                |       |                                      |        |   |   |   |   |
| Balance at  beginning of year                                                                                                                         | ** ** | **$**                                     | **92.6**    |   | $ | 86.9 |   | $ | 77.3 |   |
| Provision for  losses                                                                                                                                 | ** ** | **68.2**                                  |        | 24.4 |   | 14.9 |   |
| Credit losses                                                                                                                                         | ** ** | **(75.2**                                 | **)**       | (20.7 | ) | (8.4 | ) |
| Recoveries                                                                                                                                            | ** ** | **2.0**                                   |        | 2.0 |   | 3.1 |   |
| Balance at end  of year                                                                                                                               | ** ** | **$**                                     | **87.6**    |   | $ | 92.6 |   | $ | 86.9 |   |
|                                                                                                                                                  |       |                                      |        |   |   |   |   |
| Ratios:                                                                                                                                               |       |                                      |        |   |   |   |   |
| Credit losses  net of recoveries ($73.2 in 2008) to average total portfolio ($4,133.7 in  2008)                                                       | ** ** | **1.77%**                                 |        | .39% |   | .12% |   |
|                                                                                                                                                  | ** ** | ** **                                |        |   |   |   |   |
| Allowance for  losses ($87.6 in 2008) to year-end total portfolio ($3,871.4 in 2008)                                                                  | ** ** | **2.26%**                                 |        | 1.99% |   | 1.73% |   |
|                                                                                                                                                  | ** ** | ** **                                |        |   |   |   |   |
| Year-end retail  loan and lease receivables past due, over 30 days, ($75.6 in 2008) to  year-end retail loan and lease receivables ($3,326.6 in 2008) | ** ** | **2.27%**                                 |        | 2.80% |   | .91% |   |

 

TheCompany’s portfolio is concentrated with customers in the heavy and medium dutytruck transportation industry. The portfolio is comprised of retail loans andleases, dealer wholesale financing and dealer master notes as follows:

 
|                        | ** ** | **As of December 31** |        |
|-----------------------------|------------|--------------------------------------|-------------|
|                        | ** ** | **2008**                             |        | 2007 |   | 2006 |   |
| Retail loans                | ** ** | **$**                                | **2,193.1** | ** ** | **57%** |   | $ | 2,667.8 |   | 57% |   | $ | 2,798.4 |   | 56% |   |
| Retail leases               | ** ** | **1,133.5**                          | ** **  | **29%** |   | 1,219.5 |   | 27% |   | 1,203.9 |   | 24% |   |
| Dealer wholesale  financing | ** ** | **352.9**                            | ** **  | **9%** |   | 454.0 |   | 10% |   | 716.4 |   | 14% |   |
| Dealer master  notes        | ** ** | **191.9**                            | ** **  | **5%** |   | 301.6 |   | 6% |   | 301.5 |   | 6% |   |
| Total portfolio             | ** ** | **$**                                | **3,871.4** | ** ** | **100%** |   | $ | 4,642.9 |   | 100% |   | $ | 5,020.2 |   | 100% |   |

 

12

----

** **

**PACCAR Financial Corp.**

(Millions of Dollars)

 

In2008, an economic slowdown together with higher fuel costs have resulted inincreases in credit losses as some truck owners have experienced loweroperating profits and cashflows which have impacted their ability to maketimely payments.   In 2008, credit lossesnet of recoveries increased to $73.2 compared to $18.7 in 2007, as a result ofan increase in repossession activity and lower used truck resale prices. As apercentage of the total portfolio, net credit losses increased for the yearended December 31, 2008 to 1.77% compared to .39% at December 31,2007.  The percentage of retail loan andlease receivables past due over 30 days decreased to 2.27% as of December 31,2008 compared to 2.80% at December 31, 2007 primarily as a result of lowerfuel prices in the latter half of 2008 which improved cash flow of someoperators. The allowance for losses as a percentage of the total portfolioincreased to 2.26% at December 31, 2008 from 1.99% as of December 31,2007.  See “Critical Accounting Policies,Note A – Significant Accounting Policies, and Note B – Finance and OtherReceivables” for additional discussion regarding the Allowance for Losses.

 

Retailloans and dealer master notes decreased to $2,193.1 and $191.9, compared to$2,667.8 and $301.6, at December 31, 2008 and 2007, respectively, due todeclines in new business volume related to lower new truck retail sales.

 

Dealerwholesale financing balances decreased in 2008 to $352.9 at December 31,2008 compared to $454.0 at December 31, 2007, as dealers reduced new truckinventory balances.

 

Theestimation methods and factors considered for determining the allowance duringthe periods included in this filing have been consistently applied and arediscussed further under Critical Accounting Policies. There have been nosignificant changes in customer contract terms during the periods.

 

**2008 Compared to 2007:**

 

**Netincome**

 

TheCompany’s net income of $44.2 in 2008 decreased from $82.3 in 2007.  The lower net income was primarily the resultof lower interest and fee income and an increase in the provision for losses onreceivables due to higher net credit losses. This was partially offset by a decrease in interest and other borrowingexpenses from both lower interest rates and lower debt balances.

 

**Revenue**

 

Interestand other revenue in 2008 decreased $63.4 to $509.6 from $573.0 in 2007.  The decrease was due to declines in interestand fee income of $57.6 and lower insurance premiums partially offset by higherrevenue from operating lease assets. The Company discontinued originatingphysical damage insurance on new retail loan business as it was not integral toits finance business.  The existingphysical damage contracts will remain in effect until maturity.

 

Thefollowing table summarizes the changes in interest and fee income:

 
| ** **                           | ** ** | Year ended   December 31 | ** ** |
|--------------------------------------|------------|-----------------------------------------|------------|
|                                 |       |                                    |       |
| Interest and fee  income – 2007 |       | $                                       | 366.9      |   |
|                                 |       |                                    |       |
| Lower average  balances              |       | (50.4                                   | )          |
| Change in yield                      |       | (7.2                                    | )          |
|                                 |       |                                    |       |
| Interest and fee  income – 2008 |       | $                                       | 309.3      |   |

 

Financereceivables declined due to lower new loan volume related to lower dealer trucksales.  The reduction in average loanyields during 2008 was due to lower market interest rates.  Operating lease and rental income increasedover the periods due to higher operating lease assets.

 

13

----

 

**PACCAR Financial Corp.**

(Millions of Dollars)

**Expenses**

 

Interestand other borrowing expenses in 2008 decreased $38.6 to $164.4 from $203.0 in2007. This decrease is summarized in the table below:

 
| ** **                                   | ** ** | Year ended   December 31 | ** ** |
|----------------------------------------------|------------|-----------------------------------------|------------|
|                                         |       |                                    |       |
| Interest and  borrowing expenses – 2007 |       | $                                       | 203.0      |   |
|                                         |       |                                    |       |
| Lower borrowing  rates                       |       | (21.3                                   | )          |
| Lower average  balances                      |       | (17.3                                   | )          |
|                                         |       |                                    |       |
| Interest and  borrowing expenses – 2008 |       | $                                       | 164.4      |   |

 

Thereduction in borrowing rates was due to lower market interest rates and thedecline in average debt balances was due to a reduction in required fundinglevels.  Depreciation and other rentalexpenses increased in 2008 due to an increase in operating lease assets.  Insurance claims and other expenses decreasedin 2008 as a result of fewer contracts outstanding.  Provision for losses on receivables in 2008increased $43.8 due to higher net credit losses as a slowing economy and highfuel prices negatively affected truck operators in the U.S.

 

The Company’s effective income tax rate was38.3% in 2008 and 2007.

 

**2007 Compared to 2006:**

 

The Company’s net income of $82.3 in 2007decreased slightly from $84.5 in 2006. Increased finance gross profit (revenues minus borrowing, depreciationand other rental expenses) generated from an increase in average earning assetsin 2007 was more than offset by an increase in the provision for losses onreceivables ($14.9 in 2006 versus $24.4 in 2007) from higher credit losses andhigher insurance claim expenses. Interest and fee income in 2007 increased$44.0 to $366.9 from $322.9 in 2006. Higher earning assets and higher interest rates contributed $28.4 and$15.6, respectively, to the increase. Operating lease and rental income, and the related depreciation andother rental expenses for 2007 increased due to higher average balances ofoperating lease assets.

 

Interest and other borrowing expenses in 2007increased $34.2 to $203.0 from $168.8 in 2006. Higher average debt balances contributed $13.4 and higher interest ratescontributed $20.8 to the increase. The Company’s effective income tax rate of38.3% in 2007 was comparable to 2006.

 

**Company Outlook**

 

Company resultsare principally dependent on the generation of loans and leases and the relatedspread between the yields on loans and leases and borrowing costs and the levelof credit losses. A reduction in average earning assets is expected as lowerforecasted PACCAR truck sales will likely result in lower new business volumein 2009.  The Company continues tobe exposed to the risk that economic weakness may continue to exert pressure onthe profit margins of truck operators and result in higher past-due accountsand repossessions.

 

**Funding and Liquidity**

 

TheCompany periodically registers debt securities under the Securities Act of 1933for offering to the public. In 2006,the Company filed a new shelf registration statement. The registration expiresin November 2009 and does not limit the principal amount of debtsecurities that may be issued during the period.

 

On October 20, 2008, the Company was approvedto participate in the Commercial Paper Funding Facility offered by the FederalReserve Bank of New York.  Under thisfunding facility, the Company may issue 90-day commercial paper through October 30,2009.  The maximum amount of commercialpaper that the Company may have outstanding under this program is $1,456.8 million.  As of December 31, 2008, the Company had$735.0 million of commercial paper outstanding under this program.

 

14

----

 

**PACCAR Financial Corp.**

(Millions of Dollars)

 

During the year ended December 31, 2008,the Company maintained its Moody’s and Standard & Poor’s short-andlong-term debt ratings.  The current disruption in world wide creditmarkets has affected the ability of many financial institutions and othercompanies to access liquidity. The Company cannot predict the impact thatfurther disruptions in the credit markets will have on its liquidity. TheCompany believes it will be able to fund receivables, service debtand meet its other payment obligations through internally generated funds,access to public and private debt markets, and advances from PACCAR Inc.

 

The Company’sdebt ratings at December 31,2008****areas follows:

 
|                   |   | **Moody’s** | ** ** | **Standard   and Poor’s** | ** ** |
|------------------------|--------|------------------|------------|------------------------------------------|------------|
| Commercial paper       |   | P-1              |       | A-1+                                     |       |
| Senior unsecured  debt |   | A1               |       | AA-                                      |       |

 

The Company’s strong credit ratings areprimarily based on PACCAR’s operating cash flow, demand for its qualityproducts and substantial financial assets.

 

The Company had $814.5 in loans due from PACCARInc as of December 31, 2008.  TheCompany expects this balance to be substantially repaid during 2009.

 

The followingsummarizes the Company’s contractual cash commitments at December 31, 2008:

 
| ** **       | ** ** | **Maturity**                            | ** ** | ** **                              | ** ** |
|------------------|------------|-----------------------------------------|------------|-----------------------------------------|------------|
| ** **       | ** ** | **Less than   One Year** | ** ** | **More than   One Year** | ** ** | **Total** | ** ** |
| Borrowings       |       | $                                       | 3,613.6    |                                    | $          | 720.0 |   | $ | 4,333.6 |   |
| Operating Leases |       | .8                                      |       | 1.5                                     |       | 2.3 |   |
| Total            |       | $                                       | 3,614.4    |                                    | $          | 721.5 |   | $ | 4,335.9 |   |

 

As described inNote F to the financial statements, borrowings consist of medium-term notes andcommercial paper. The Company has operating leases for office space, truckleasing facilities and office equipment.

 

In addition,the Company had loan and lease commitments of $103.8 expiring within one year. Thesecommitments represent commitments to fund new retail loan and lease contracts.

 

**Critical Accounting Policies:**

 

In the preparation of the Company’sfinancial statements, in accordance with U.S. generally acceptedaccounting principles, management uses estimates and makes judgments andassumptions that affect asset and liability values and the amountsreported as income and expense during the periods presented. The followingare accounting policies which, in the opinion of management, are particularlysensitive and which, if actual results are different from estimatesused by management, may have a material impact on the financial statements.

 

15

----

 

**PACCAR Financial Corp.**

(Millions of Dollars)

 

Equipmenton Operating Leases

 

In determining the estimated residualvalues for equipment on operating leases, and certain direct financing leases,the Company considers the length of the lease term, the truck model andanticipated market demand and the expected usage of the truck. If the salesprice of the trucks at the end of the lease term differs significantly from theCompany’s estimate, a gain or loss will result. The Company believes itsresidual setting policies are appropriate; however, future market conditions,changes in government regulations and other factors outside the Company’scontrol can impact the ultimate sales price of trucks returned under these contracts.Residual values are reviewed regularly and adjusted if market conditionswarrant. See “Note A – Significant Accounting Policies” in the Notes toFinancial Statements.

 

Allowancefor Credit Losses

 

The Companydetermines the allowance for credit losses on its retail loan and lease,wholesale and master note portfolios based on a combination of historicalinformation and current market conditions. This analysis is dependent onestimates, including assumptions regarding collectibility of past-due accounts,repossession rates and the recovery rate on the underlying collateral. Lossestimates have been established from historical collection and loss informationusing past due account data which has demonstrated a correlation to futurecredit losses.

 

The Company individuallyevaluates bankrupt accounts, accounts which have significant amounts past dueand other large current accounts with higher risk ($112.9 million at December 31,2008 or 3.4% of the total outstanding retail loan and lease receivables). Itevaluates all other customers as a group based on past due categories (i.e.,90+, 60-90, 30-59 and less than 30 days past due), as well as current accountbalances. The Company has developed a range of specific loss estimates for eachof its retail, wholesale and dealer master note portfolios based on historicalexperience, taking into account loss frequency and severity in both strong andweak truck market conditions. Loss estimates at December 31, 2008 rangefrom less than 1% on current accounts to 30% on certain accounts over 90 dayspast due. A projection is made of the range of estimated credit losses inherentin the portfolio from which an amount is determined as probable based oncurrent market conditions, including diesel prices, freight tonnage levels,interest rates and other factors representing leading indicators impacting thecreditworthiness of the Company’s borrowers and their ability to repay. TheCompany further considers the impact of dealer recourse, cash recoveries andused equipment collateral recoveries. The projected amount is then compared tothe allowance for credit loss balance and an appropriate adjustment is made.

 

Although certainretail contracts acquired from dealers include full or partial dealer recoursefor the credit loss, this is a minor and decreasing component of the portfolio(5% of the retail portfolio at December 31, 2008). For wholesale anddealer master note portfolios, dealer recourse is present in substantially allthe loan arrangements. Cash recoveries and used equipment collateral recoveriesgenerally vary with market conditions.

 

DerivativeFinancial Instruments

 

The Company usesderivative financial instruments to minimize risk exposures from thefluctuations in interest rates.  Allderivative financial instruments are recorded at fair value as either assets orliabilities on the Balance Sheet. The Company designates its derivativefinancial instruments as qualifying hedges under accounting standards. Thechanges in the fair value of derivative financial instruments, to the extentthey are considered to be effective cash flow hedges, are initially reported inother comprehensive income and reclassified into earnings in the period thehedged item affects earnings.  The determinationof the fair value of derivatives and whether hedge relationships qualify forhedge accounting is complex and requires management estimates and involves judgment.Changes in the fair value of economic hedges that do not qualify for hedgeaccounting are recorded in earnings in the period in which the change occurs.

 

16

----

 

**PACCAR Financial Corp.**

(Millions of Dollars)

 

**Forward Looking Statements**

 

Certain information presented in this Form 10-Kcontains forward-looking statements made pursuant to the Private SecuritiesLitigation Reform Act of 1995, which are subject to risks and uncertaintiesthat may affect actual results. Risks and uncertainties include, but are notlimited to: national and local economic, political and industry conditions; changesin the levels of new business volume due to unit fluctuations in new PACCARtruck sales; changes in competitive factors; changes affecting theprofitability of truck owners and operators; price changes impacting equipmentcosts and residual values; changes in costs and insufficient liquidity in thecapital markets and availability of other funding sources; and legislation andgovernmental regulation.

 

**ITEM7A.****                   ****QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUTMARKET RISK**

 

Market Risk andDerivative Financial Instruments

 

Inthe normal course of business, the Company issues various financial instrumentsthat expose the Company to market risk associated with market interest rates.Policies and procedures have been established by the Company to manage these marketrisks through the use of various derivative financial instruments. The Companydoes not engage in derivatives trading, market-making or other speculativeactivities.

 

Thefollowing is a sensitivity analysis for the Company’s assets and liabilitiesthat have interest rate risk. The gains or losses in the table represent thechanges in the financial instruments’ fair values that would result from a 100basis point increase from the current market rate at December 31, 2008 and2007.

 
| **Fair Value Gains (Losses)** | ** ** | **Year ended December 31** | ** ** |
|----------------------------------------------|------------|-------------------------------------------|------------|
| (Millions of Dollars)              | ** ** | **2008**                                  | ** ** | 2007 | ** ** |
|                                         |       |                                      |       |   |   |
| Assets                                       |       |                                      |       |   |   |
| Fixed rate loans                             | ** ** | **$**                                     | **(35.2**  | **)** | $ | (44.3 | ) |
|                                         |       |                                      |       |   |   |
| Liabilities                                  |       |                                      |       |   |   |
| Interest rate  swaps related to debt         | ** ** | **29.7**                                  |       | 41.6 |   |
|                                         |       |                                      |       |   |   |
| Total                                        | ** ** | **$**                                     | **(5.5**   | **)** | $ | (2.7 | ) |

 

TheCompany’s debt as of December 31, 2008 and 2007 consists of commercialpaper and floating rate medium-term notes.

 

**ITEM8.****                            ****FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA**

 

Thefinancial statements of the Company and related schedules described under Item15, “Exhibits, Financial Statement Schedules” are included following this page.

 

17

----

 

Report of IndependentRegistered Public Accounting Firm

 

Board of Directors

PACCAR FinancialServices Corporation and PACCAR Financial Corp.

 

We have audited theaccompanying balance sheets of PACCAR Financial Corp. (a wholly-ownedsubsidiary of PACCAR Financial Services Corporation) as of December 31,2008 and 2007, and the related statements of income, cash flows, stockholder’sequity and comprehensive income for each of the three years in the period endedDecember 31, 2008. These financial statements are the responsibility ofthe Company’s management. Our responsibility is to express an opinion on thesefinancial statements based on our audits.

 

We conducted our auditsin accordance with the standards of the Public Company Accounting OversightBoard (United States). Those standards require that we plan and perform theaudit to obtain reasonable assurance about whether the financial statements arefree of material misstatement. We were not engaged to perform an audit of theCompany’s internal control over financial reporting. Our audits includedconsideration of internal control over financial reporting as a basis fordesigning audit procedures that are appropriate in the circumstances, but notfor the purpose of expressing an opinion on the effectiveness of the Company’sinternal control over financial reporting. Accordingly, we express no suchopinion. An audit also includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements, assessing theaccounting principles used and significant estimates made by management, andevaluating the overall financial statement presentation. We believe that ouraudits provide a reasonable basis for our opinion.

 

In our opinion, thefinancial statements referred to above present fairly, in all materialrespects, the financial position of PACCAR Financial Corp. at December 31,2008 and 2007, and the results of its operations and its cash flows for each ofthe three years in the period ended December 31, 2008 in conformity withU.S. generally accepted accounting principles.

 

 
|                   | /s/ Ernst & Young LLP |
|------------------------|--------------------------------|
|                   |                           |
|                   |                           |
| Seattle, Washington    |                           |
| February 13, 2009 |                           |

 

18

----

 

**PACCAR Financial Corp.**

 

**STATEMENTS OF INCOME**

(Millions of Dollars)

 
| ** **                                    | ** ** | **Year ended December 31** | ** ** |
|-----------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                    | ** ** | **2008**                                  | ** ** | 2007 |   | 2006 |   |
|                                          |       |                                      |       |   |   |   |   |
| Interest and  fees                            | ** ** | **$**                                     | **309.3**  |   | $ | 366.9 |   | $ | 322.9 |   |
| Operating lease  and rental income            | ** ** | **171.5**                                 |       | 150.7 |   | 135.2 |   |
| Insurance  premiums and other                 | ** ** | **28.8**                                  |       | 55.4 |   | 51.5 |   |
| **TOTAL  INTEREST AND OTHER REVENUE**         | ** ** | **$**                                     | **509.6**  |   | $ | 573.0 |   | $ | 509.6 |   |
|                                          |       |                                      |       |   |   |   |   |
| Interest and  other borrowing expenses        | ** ** | **164.4**                                 |       | 203.0 |   | 168.8 |   |
| Depreciation and  other rental expenses       | ** ** | **143.6**                                 |       | 121.8 |   | 109.7 |   |
| Insurance claims  and other expenses          | ** ** | **9.8**                                   |       | 37.5 |   | 29.6 |   |
| Selling, general  and administrative expenses | ** ** | **52.0**                                  |       | 52.9 |   | 50.3 |   |
| Provision for  losses on receivables          | ** ** | **68.2**                                  |       | 24.4 |   | 14.9 |   |
| **TOTAL  EXPENSES**                           | ** ** | **$**                                     | **438.0**  |   | $ | 439.6 |   | $ | 373.3 |   |
| ** **                                    | ** ** | ** **                                |       |   |   |   |   |
| **INCOME  BEFORE INCOME TAXES**               | ** ** | **$**                                     | **71.6**   |   | $ | 133.4 |   | $ | 136.3 |   |
|                                          | ** ** | ** **                                |       |   |   |   |   |
| Income taxes                                  | ** ** | **27.4**                                  |       | 51.1 |   | 51.8 |   |
| ** **                                    | ** ** | ** **                                |       |   |   |   |   |
| **NET  INCOME**                               | ** ** | **$**                                     | **44.2**   |   | $ | 82.3 |   | $ | 84.5 |   |

 

Earnings per share anddividends per share are not reported because the Company is a wholly-ownedsubsidiary of PACCAR Financial Services Corporation.

 

19

----

 

**PACCAR Financial Corp.**

 

**BALANCE SHEETS**

(Millions of Dollars)

 
| ** **                                                                                                                                    | ** ** | **As of December 31** | ** **  |
|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------|-------------|
| ** **                                                                                                                                    | ** ** | **2008**                             | ** **  | 2007 | ** ** |
|                                                                                                                                          |       |                                 |        |   |   |
| **ASSETS**                                                                                                                                    |       |                                 |        |   |   |
|                                                                                                                                          |       |                                 |        |   |   |
| Cash                                                                                                                                          | ** ** | **$**                                | **19.9**    |   | $ | 25.6 |   |
| Finance and  other receivables, net of allowance for losses (2008 - $87.6 and 2007 -  $92.6)                                                  | ** ** | **3,783.8**                          |        | 4,550.3 |   |
| Due from PACCAR  Inc and affiliates                                                                                                           | ** ** | **1,211.6**                          |        | 402.8 |   |
| Equipment on  operating leases, net of accumulated depreciation (2008 - $203.8 and 2007 -  $189.2)                                            | ** ** | **637.7**                            |        | 475.5 |   |
| Other assets                                                                                                                                  | ** ** | **86.4**                             |        | 53.4 |   |
|                                                                                                                                          |       |                                 |        |   |   |
| **TOTAL  ASSETS**                                                                                                                             | ** ** | **$**                                | **5,739.4** |   | $ | 5,507.6 |   |
|                                                                                                                                          |       |                                 |        |   |   |
| **LIABILITIES**                                                                                                                               |       |                                 |        |   |   |
|                                                                                                                                          |       |                                 |        |   |   |
| Accounts payable,  accrued expenses and other                                                                                                 | ** ** | **$**                                | **242.0**   |   | $ | 239.3 |   |
| Due to PACCAR  Inc and affiliates                                                                                                             | ** ** | **47.3**                             |        | 10.1 |   |
| Commercial paper                                                                                                                              | ** ** | **2,063.6**                          |        | 1,453.7 |   |
| Medium-term  notes                                                                                                                            | ** ** | **2,270.0**                          |        | 2,625.0 |   |
| Income taxes –  current and deferred                                                                                                     | ** ** | **353.3**                            |        | 354.9 |   |
|                                                                                                                                          |       |                                 |        |   |   |
| **TOTAL  LIABILITIES**                                                                                                                        | ** ** | **$**                                | **4,976.2** |   | $ | 4,683.0 |   |
|                                                                                                                                          |       |                                 |        |   |   |
| **STOCKHOLDER’S  EQUITY**                                                                                                                |       |                                 |        |   |   |
|                                                                                                                                          |       |                                 |        |   |   |
| Preferred stock,  par value $100 per share, 6% noncumulative and nonvoting, 450,000 shares  authorized, 310,000 shares issued and outstanding | ** ** | **$**                                | **31.0**    |   | $ | 31.0 |   |
| Common stock,  par value $100 per share, 200,000 shares authorized, 145,000 shares issued  and outstanding                                    | ** ** | **14.5**                             |        | 14.5 |   |
| Additional  paid-in capital                                                                                                                   | ** ** | **237.8**                            |        | 215.1 |   |
| Retained  earnings                                                                                                                            | ** ** | **534.5**                            |        | 590.3 |   |
| Accumulated  other comprehensive loss                                                                                                         | ** ** | **(54.6**                            | **)**       | (26.3 | ) |
|                                                                                                                                          |       |                                 |        |   |   |
| **TOTAL  STOCKHOLDER’S EQUITY**                                                                                                          | ** ** | **$**                                | **763.2**   |   | $ | 824.6 |   |
|                                                                                                                                          |       |                                 |        |   |   |
| **TOTAL  LIABILITIES AND STOCKHOLDER’S EQUITY**                                                                                          | ** ** | **$**                                | **5,739.4** |   | $ | 5,507.6 |   |

 

See Notes to FinancialStatements

 

20

----

 

**PACCAR Financial Corp.**

 

**STATEMENTS OF CASH FLOWS**

(Millionsof Dollars)

 
| ** **                                                                | ** ** | **Year ended December 31** | ** ** |
|---------------------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                | ** ** | **2008**                                  | ** ** | 2007 |   | 2006 | ** ** |
|                                                                      |       |                                      |       |   |   |   |   |
| **OPERATING  ACTIVITIES**                                                 |       |                                      |       |   |   |   |   |
|                                                                      |       |                                      |       |   |   |   |   |
| Net income                                                                | ** ** | **$**                                     | **44.2**   | ** ** | $ | 82.3 |   | $ | 84.5 |   |
| Items included  in net income not affecting cash:                         |       |                                      | ** ** |   |   |   |   |
| Depreciation and  amortization                                            | ** ** | **111.3**                                 | ** ** | 94.5 |   | 84.8 |   |
| Provision for  losses on receivables                                      | ** ** | **68.2**                                  | ** ** | 24.4 |   | 14.9 |   |
| Deferred tax  provision                                                   | ** ** | **102.4**                                 | ** ** | 32.0 |   | 39.1 |   |
| Administrative  fees for services from PFSC                               | ** ** | **22.7**                                  | ** ** | 22.7 |   | 22.4 |   |
| Decrease in  payables and other                                           | ** ** | **(93.6**                                 | **)**      | (17.4 | ) | (13.9 | ) |
|                                                                      |       |                                      | ** ** |   |   |   |   |
| **NET  CASH PROVIDED BY OPERATING ACTIVITIES**                            | ** ** | **255.2**                                 | ** ** | 238.5 |   | 231.8 |   |
|                                                                      |       |                                      | ** ** |   |   |   |   |
| **INVESTING  ACTIVITIES**                                                 |       |                                      | ** ** |   |   |   |   |
|                                                                      |       |                                      | ** ** |   |   |   |   |
| Finance and  other receivables originated                                 | ** ** | **(1,053.6**                              | **)**      | (1,665.5 | ) | (2,286.7 | ) |
| Collections on  finance and other receivables                             | ** ** | **1,622.2**                               | ** ** | 1,720.3 |   | 1,727.2 |   |
| Net decrease  (increase) in wholesale receivables                         | ** ** | **101.1**                                 | ** ** | 262.4 |   | (89.5 | ) |
| Net (increase)  decrease in loans and leases to PACCAR Inc and affiliates | ** ** | **(809.7**                                | **)**      | (384.5 | ) | 35.7 |   |
| Acquisition of  equipment on operating leases, primarily from PACCAR Inc  | ** ** | **(340.1**                                | **)**      | (159.1 | ) | (177.7 | ) |
| Proceeds from  disposal of equipment                                      | ** ** | **68.9**                                  | ** ** | 74.3 |   | 66.4 |   |
| Other                                                                     | ** ** | **(5.2**                                  | **)**      | 13.2 |   | (19.1 | ) |
|                                                                      |       |                                      | ** ** |   |   |   |   |
| **NET  CASH USED IN INVESTING ACTIVITIES**                                | ** ** | **(416.4**                                | **)**      | (138.9 | ) | (743.7 | ) |
|                                                                      |       |                                      | ** ** |   |   |   |   |
| **FINANCING  ACTIVITIES**                                                 |       |                                      | ** ** |   |   |   |   |
|                                                                      | ** ** | ** **                                | ** ** |   |   |   |   |
| Net increase  (decrease) in commercial paper                              | ** ** | **609.9**                                 | ** ** | (627.4 | ) | 275.5 |   |
| Proceeds from  medium-term notes                                          | ** ** | **145.0**                                 | ** ** | 825.0 |   | 1,500.0 |   |
| Payments of  medium-term notes                                            | ** ** | **(500.0**                                | **)**      | (250.0 | ) | (1,250.0 | ) |
| Dividends paid                                                            | ** ** | **(100.0**                                | **)**      | (24.0 | ) | (30.0 | ) |
| Payment of  advances from (to) PACCAR Inc                                 | ** ** | **.6**                                    | ** ** | (11.5 | ) | 11.3 |   |
|                                                                      |       |                                      | ** ** |   |   |   |   |
| **NET  CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES**                  | ** ** | **155.5**                                 | ** ** | (87.9 | ) | 506.8 |   |
|                                                                      |       |                                      | ** ** |   |   |   |   |
| **NET  (DECREASE) INCREASE IN CASH**                                      | ** ** | **(5.7**                                  | **)**      | 11.7 |   | (5.1 | ) |
|                                                                      |       |                                      | ** ** |   |   |   |   |
| **CASH AT  BEGINNING OF YEAR**                                            | ** ** | **25.6**                                  | ** ** | 13.9 |   | 19.0 |   |
|                                                                      |       |                                      | ** ** |   |   |   |   |
| **CASH AT  END OF YEAR**                                                  | ** ** | **$**                                     | **19.9**   | ** ** | $ | 25.6 |   | $ | 13.9 |   |

 

See Notes to FinancialStatements

 

21

----

 

**PACCAR Financial Corp.**

 

**STATEMENTS OF STOCKHOLDER’SEQUITY**

(Millions of Dollars)

 
| ** **                                                       | ** ** | **Year ended December 31** | ** ** |
|------------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                       | ** ** | **2008**                                  | ** ** | 2007 | ** ** | 2006 | ** ** |
|                                                             |       |                                      |       |   |   |   |   |
| **PREFERRED  STOCK,**$100 par value                              |       |                                      |       |   |   |   |   |
|                                                             |       |                                      |       |   |   |   |   |
| Balance at  beginning of year                                    | ** ** | **$**                                     | **31.0**   | ** ** | $ | 31.0 |   | $ | 31.0 |   |
| Balance at end  of year                                          | ** ** | **31.0**                                  | ** ** | 31.0 |   | 31.0 |   |
|                                                             |       |                                      | ** ** |   |   |   |   |
| **COMMON  STOCK,**$100 par value                                 |       |                                      | ** ** |   |   |   |   |
|                                                             |       |                                      | ** ** |   |   |   |   |
| Balance at  beginning of year                                    | ** ** | **14.5**                                  | ** ** | 14.5 |   | 14.5 |   |
| Balance at end  of year                                          | ** ** | **14.5**                                  | ** ** | 14.5 |   | 14.5 |   |
|                                                             |       |                                      | ** ** |   |   |   |   |
| **ADDITIONAL  PAID-IN CAPITAL**                                  |       |                                      | ** ** |   |   |   |   |
|                                                             |       |                                      | ** ** |   |   |   |   |
| Balance at  beginning of year                                    | ** ** | **215.1**                                 | ** ** | 192.4 |   | 170.0 |   |
| Investments from  PACCAR Financial Services Corporation          | ** ** | **22.7**                                  | ** ** | 22.7 |   | 22.4 |   |
| Balance at end  of year                                          | ** ** | **237.8**                                 | ** ** | 215.1 |   | 192.4 |   |
|                                                             |       |                                      | ** ** |   |   |   |   |
| **RETAINED  EARNINGS**                                           |       |                                      | ** ** |   |   |   |   |
|                                                             |       |                                      | ** ** |   |   |   |   |
| Balance at  beginning of year                                    | ** ** | **590.3**                                 | ** ** | 532.0 |   | 477.5 |   |
| Net income                                                       | ** ** | **44.2**                                  | ** ** | 82.3 |   | 84.5 |   |
| Dividends paid                                                   | ** ** | **(100.0**                                | **)**      | (24.0 | ) | (30.0 | ) |
| Balance at end  of year                                          | ** ** | **534.5**                                 | ** ** | 590.3 |   | 532.0 |   |
|                                                             |       |                                      | ** ** |   |   |   |   |
| **ACCUMULATED  OTHER COMPREHENSIVE INCOME (LOSS)**               |       |                                      | ** ** |   |   |   |   |
|                                                             | ** ** | ** **                                | ** ** |   |   |   |   |
| Accumulated  unrealized net gain (loss) on derivative contracts: | ** ** | ** **                                | ** ** |   |   |   |   |
| Balance at  beginning of year                                    | ** ** | **(26.3**                                 | **)**      | 11.1 |   | 19.6 |   |
| Net unrealized  loss                                             | ** ** | **(28.3**                                 | **)**      | (37.4 | ) | (8.5 | ) |
| Balance at end  of year                                          | ** ** | **(54.6**                                 | **)**      | (26.3 | ) | 11.1 |   |
|                                                             |       |                                      | ** ** |   |   |   |   |
| **TOTAL  STOCKHOLDER’S EQUITY**                             | ** ** | **$**                                     | **763.2**  | ** ** | $ | 824.6 |   | $ | 781.0 |   |

 

See Notes to FinancialStatements

 

22

----

 

**PACCAR Financial Corp.**

 

**STATEMENTS OF COMPREHENSIVEINCOME**

(Millions of Dollars)

 
| ** **                                   | ** ** | **Year ended December 31** | ** ** |
|----------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                   | ** ** | **2008**                                  | ** ** | 2007 |   | 2006 | ** ** |
|                                         |       |                                      |       |   |   |   |   |
| Net income                                   | ** ** | **$**                                     | **44.2**   | ** ** | $ | 82.3 |   | $ | 84.5 |   |
| Other  comprehensive income, net of tax      |       |                                      | ** ** |   |   |   |   |
| Net unrealized  loss on derivative contracts | ** ** | **(28.3**                                 | **)**      | (37.4 | ) | (8.5 | ) |
| Net other  comprehensive loss                | ** ** | **(28.3**                                 | **)**      | (37.4 | ) | (8.5 | ) |
|                                         |       |                                      | ** ** |   |   |   |   |
| **TOTAL  COMPREHENSIVE INCOME**              | ** ** | **$**                                     | **15.9**   | ** ** | $ | 44.9 |   | $ | 76.0 |   |

 

See Notes to FinancialStatements

 

23

----

 

**PACCARFinancial Corp.**

 

**NOTES TOFINANCIAL STATEMENTS**

(Millions of Dollars)

 

**NOTE A – SIGNIFICANT ACCOUNTINGPOLICIES**

 

Descriptionof Operations: PACCAR Financial Corp. (the “Company”),is a wholly-owned subsidiary of PACCAR Financial Services Corporation (“PFSC”).PFSC is a wholly-owned subsidiary of PACCAR Inc (“PACCAR”). The Companyprimarily provides financing of PACCAR-manufactured trucks and relatedequipment sold by authorized dealers. The Company also finances dealerinventories of transportation equipment and franchises PACCAR dealerships toengage in full-service and finance leasing. The operations of the Company arefundamentally affected by its relationship with PACCAR.

 

Due to the nature of theCompany’s business, customers are concentrated in the transportation industrythroughout the United States. Generally, all receivables are collateralized bythe equipment being financed. The risk of credit losses related to thisconcentration has been considered in establishing the allowance for losses.

 

Useof Estimates: The preparation of financial statementsin conformity with accounting principles generally accepted in the UnitedStates requires management to make estimates and assumptions that affect theamounts reported in the financial statements and accompanying notes. Actualresults could differ from those estimates.

 

FairValue of Certain Financial Instruments:  Fairvalue represents the price that would be received to sell an asset or paid totransfer a liability in an orderly transaction between market participants atthe measurement date. Generally, the Company uses quoted market prices orinputs that are available in the marketplace to estimate the fair value of itsassets or liabilities, which does not require significant judgment.

 

Allowance for Losses:Receivablesare charged to this allowance when, in the judgment of management, they aredeemed uncollectible (generally upon repossession of the collateral). TheCompany determines the allowance for credit losses on receivables based ona combination of historical information and current marketconditions.  This determination is dependent on estimates, includingassumptions regarding the likelihood of collecting current and past-dueaccounts, repossession rates and the recovery rate on the underlying collateralbased on used truck values and other pledged collateral or recourse.  TheCompany believes its reserve-setting policies adequately take into account theknown risks inherent in the financial services portfolio.  If there aresignificant variations in the actual results from those estimates, theprovision for credit losses and operating earnings may be materially impacted.

 

RevenueRecognition: Interest income from financereceivables and other receivables is recognized using the interest method.Certain loan origination costs are deferred and amortized to interest incomeover the term of the loan. For operating leases, rental revenue is recognizedon a straight-line basis over the lease term.

 

Recognition of interestincome and rental revenue are suspended when management determines thatcollection is not probable (generally after 90 days past due). Recognition isresumed if the receivable becomes contractually current and the collection ofamounts is again considered probable.

 

Equipmenton Operating Leases: Equipment on operating leases isrecorded at cost and is depreciated on the straight-line basis to its estimatedresidual value. Residual values are reviewed regularly and adjusted if marketconditions warrant.

 

IncomeTaxes: The Company is included in the consolidated federal incometax return of PACCAR. Income taxes for the Company are determined on a separatereturn basis, and any related tax liability is paid by the Company to PACCARand any related tax benefit is paid by PACCAR to the Company.

 

24

----

 

**PACCARFinancial Corp.**

 

**NOTES TOFINANCIAL STATEMENTS**

(Millions of Dollars)

 

**New Accounting Pronouncements**

 

TheCompany adopted FASB Statement No. 159, *The FairValue Option for Financial Assets and Financial Liabilities* (FAS159) effective January 1, 2008.  FAS159 permits entities to measure most financial instruments at fair value ifdesired and requires that unrealized gains and losses on instruments for whichthe option has been elected to be reported in earnings.  During 2008, the Company did not elect thefair value option for any financial instruments.

 

TheCompany adopted FASB Statement No.157, *Fair Value Measurements*(FAS 157) effective January 1, 2008 with no significant effect on thefinancial statements. See Note I.

 

InMarch 2008, the FASB issued Statement No. 161, *Disclosuresabout Derivative Instruments and Hedging Activities* (FAS 161).  FAS 161, which is effective January 1,2009, amends and expands the disclosure requirements for derivative instrumentsand hedging activities.

 

25

----

 

**PACCARFinancial Corp.**

 

**NOTES TOFINANCIAL STATEMENTS**

(Millions of Dollars)

 

**NOTE B – FINANCE AND OTHERRECEIVABLES**

 

Terms for finance andother receivables at origination generally range from 12 to 60 months.Repayment experience indicates some receivables will be paid prior to contractmaturity, while some others will be extended or renewed. Accordingly, thematurities of receivables presented here should not be regarded as a forecastof future collections.

 

Loans are reported atthe principal amount outstanding, net of unearned income.

 

Direct financing leasesare carried at the aggregate of lease payments receivable plus estimatedresidual value of the leased property, less unearned income.

 

The Company’s financeand other receivables are as follows:

 
| ** **                                                                                            | ** ** | **Year ended December 31** | ** **  |
|-------------------------------------------------------------------------------------------------------|------------|-------------------------------------------|-------------|
| ** **                                                                                            | ** ** | **2008**                                  | ** **  | 2007 | ** ** |
| Retail contracts  and loans due within:                                                               |       |                                      |        |   |   |
| One year                                                                                              | ** ** | **$**                                     | **859.9**   | ** ** | $ | 1,059.6 |   |
| Two years                                                                                             | ** ** | **637.6**                                 | ** **  | 733.3 |   |
| Three years                                                                                           | ** ** | **477.9**                                 | ** **  | 585.7 |   |
| Four years                                                                                            | ** ** | **251.3**                                 | ** **  | 367.7 |   |
| Five years                                                                                            | ** ** | **106.0**                                 | ** **  | 159.9 |   |
| Six years and  beyond                                                                                 | ** ** | **9.7**                                   | ** **  | 17.6 |   |
| ** **                                                                                            |       | **2,342.4**                               | ** **  | 2,923.8 |   |
|                                                                                                  |       |                                      | ** **  |   |   |
| Wholesale  financing                                                                                  | ** ** | **352.9**                                 | ** **  | 454.0 |   |
| Direct financing  leases (including unguaranteed residual values of $38.9 in 2008 and $42.8 in  2007) | ** ** | **1,291.0**                               | ** **  | 1,411.5 |   |
| Interest and  other receivables                                                                       | ** ** | **42.6**                                  | ** **  | 45.6 |   |
| Unearned  interest on direct financing leases                                                         | ** ** | **(157.5**                                | **)**       | (192.0 | ) |
|                                                                                                  |       |                                      | ** **  |   |   |
| ** **                                                                                            |       | **3,871.4**                               | ** **  | 4,642.9 |   |
|                                                                                                  |       |                                      | ** **  |   |   |
| Less allowance  for losses                                                                            | ** ** | **(87.6**                                 | **)**       | (92.6 | ) |
|                                                                                                  |       |                                      | ** **  |   |   |
| Finance and  other receivables                                                                        | ** ** | **$**                                     | **3,783.8** | ** ** | $ | 4,550.3 |   |

 

Future minimum leasepayments on direct financing leases totaled $1,252.1 at December 31, 2008and are due as follows: $350.7 in 2009; $319.2 in 2010; $259.8 in 2011; $165.9in 2012; $100.4 in 2013 and $56.1 in 2014 and beyond.

 

26

----

 

**PACCARFinancial Corp.**

 

**NOTES TOFINANCIAL STATEMENTS**

(Millions of Dollars)

 

The allowance for losseson finance and other receivables is summarized as follows:

 
| ** **                        | ** ** | **Year ended December 31** | ** ** |
|-----------------------------------|------------|-------------------------------------------|------------|
| ** **                        | ** ** | **2008**                                  | ** ** | 2007 | ** ** |
|                              |       |                                      | ** ** |   |   |
| Balance at  beginning of year     | ** ** | **$**                                     | **92.6**   | ** ** | $ | 86.9 |   |
| Provision for  losses             | ** ** | **68.2**                                  | ** ** | 24.4 |   |
| Credit losses,  net of recoveries | ** ** | **(73.2**                                 | **)**      | (18.7 | ) |
|                              |       |                                      | ** ** |   |   |
| Balance at end  of year           | ** ** | **$**                                     | **87.6**   | ** ** | $ | 92.6 |   |

 

At December 31,2008 and 2007, the recorded investments in retail contracts and loans that wereconsidered to be impaired were $91.4 and $101.3, respectively. Included in theallowance for losses were specific reserves of $36.1 and $15.2 on theseimpaired retail contracts and loans. The average recorded investment inimpaired retail contracts and loans during the years ended December 31,2008, 2007 and 2006, was $85.5, $53.0 and $17.9, respectively. The Companyrecognized interest income of $2.7, $2.2 and $.6 for the years ended December 31,2008, 2007 and 2006, respectively, on those impaired retail contracts andloans, all of which were recognized in income upon receipt of cash.

 

**NOTE C – EQUIPMENT ON OPERATINGLEASES**

 

Terms of operatingleases at origination and the related depreciation, generally range from 24 to85 months. The total future annual minimum rental payments to be received forequipment on non-cancelable operating leases beginning January 1, 2009 of$304.7 are due as follows: $138.2 in 2009; $76.2 in 2010; $54.6 in 2011; $25.1in 2012 and $10.6 in 2013 and beyond. Depreciation expense related to equipmenton operating leases was $106.8, $89.2 and $78.1 in 2008, 2007 and 2006,respectively. Substantially all equipment on operating leases is manufacturedby PACCAR.

 

**NOTE D – TRANSACTIONS WITH PACCARAND AFFILIATES**

 

The Company and PACCARare parties to a Support Agreement that obligates PACCAR to provide, whenrequired, financial assistance to the Company to ensure that the Companymaintains a ratio of net earnings available for fixed charges to fixed charges(as defined in the Agreement) of at least 1.25 to 1 for any fiscal year. Therequired ratio for the years ended December 31, 2008, 2007 and 2006 wasmet without assistance. The Support Agreement also requires PACCAR to own,directly or indirectly, all outstanding voting stock of the Company.

 

PFSCcharges the Company for certain administrative services it provides and certainservices the Company receives indirectly from PACCAR. The costs are charged tothe Company based upon the Company’s specific use of the services at PFSC’s orPACCAR’s cost. Management considers these charges similar to the costs thatwould be incurred if the Company were on a stand-alone basis. Fees for servicesof $22.7, $22.7 and $22.4 in 2008, 2007 and 2006, respectively, were charged tothe Company. PFSC recognizes these administrative services as an additionalinvestment in the Company. The Company records the investment as additionalpaid-in capital.

 

Dividendsin the amount of $100.0, $24.0 and $30.0 were declared and paid in 2008, 2007and 2006, respectively.

 

TheCompany’s principal office is located in the corporate headquarters building ofPACCAR (owned by PACCAR). The Company also leases office space from threefacilities owned by PACCAR and five facilities leased by PACCAR.

 

27

----

 

**PACCARFinancial Corp.**

 

**NOTES TOFINANCIAL STATEMENTS**

(Millions of Dollars)

 

The Company’s employeesand PACCAR employees are covered by a defined benefit pension plan and anunfunded post-retirement medical and life insurance plan, both sponsored byPACCAR. The assets and liabilities of these plans are reflected on the balancesheets of PACCAR. PACCAR contributes to the plans and allocates the expenses tothe Company based principally on the number of eligible plan participants.Expenses charged to the Company by PACCAR for the defined benefit pension planand the unfunded post-retirement medical and life insurance plan were $1.7,$1.7 and $1.7 for years 2008, 2007 and 2006, respectively.

 

Company employees andPACCAR employees are also covered by a defined contribution plan, sponsored byPACCAR. Expenses incurred by the Company for the defined contribution plan were$1.2, $1.2 and $1.1 for years 2008, 2007 and 2006, respectively.

 

Expenses for the definedbenefit pension plan, the unfunded post-retirement medical and life insuranceplan and the defined contribution plan are included in selling, general andadministrative expenses.

 

Periodically, theCompany makes loans to, borrows from and has intercompany transactions withPACCAR. In addition, the Company periodically loans funds to certain foreignfinance and leasing affiliates of PACCAR. These various affiliates have SupportAgreements with PACCAR, similar to the Company’s Support Agreement. The foreignaffiliates operate in the United Kingdom, The Netherlands, Mexico, Canada andAustralia, and any resulting currency exposure is fully hedged. The foreignaffiliates primarily provide financing and leasing of PACCAR-manufacturedtrucks and related equipment sold through PACCAR’s independent dealer networksin Europe, Mexico, Canada and Australia. The Company will not make loans to theforeign affiliates in excess of the equivalent of $500.0 United States dollars,unless the amount in excess of such limit is guaranteed by PACCAR. The Companyperiodically reviews the funding alternatives for these affiliates, and theselimits may be revised in the future.

 

Amountsoutstanding at December 31, 2008 and 2007, including foreign financeaffiliates operating in The Netherlands, Mexico, Australia and Canada, aresummarized below:

 
| ** **                                    | ** ** | **December 31** | ** **  | December 31 | ** ** |
|-----------------------------------------------|------------|----------------------|-------------|------------------|------------|
|                                          | ** ** | **2008**             | ** **  | 2007             | ** ** |
| Due from PACCAR  Inc and affiliates           | ** ** | ** **           | ** **  |             |       |   |   |
| Loans due from PACCAR Inc | ** ** | **$**                | **814.5**   |             | $          | 11.5 |   |
| Loans due from  foreign finance affiliates    | ** ** | **378.9**            |        | 371.2            |       |
| Direct financing  leases due from affiliate   | ** ** | **15.2**             |        | 16.2             |       |
| Receivables                                   | ** ** | **3.0**              |        | 3.9              |       |
| Total                                         | ** ** | **$**                | **1,211.6** |             | $          | 402.8 |   |
|                                          |       |                 |        |             |       |
| Due to PACCAR  Inc and affiliates             |       |                 |        |             |       |
| Loans due to  PACCAR Inc                      | ** ** | **$**                | **.6**      |             | $          |   |
| Payables                                      | ** ** | **46.7**             |        | 10.1             |       |
| Total                                         | ** ** | **$**                | **47.3**    |             | $          | 10.1 |   |
|                                               |            |                      |             |                  |            |  |  |  |  |

 

The Companyprovides direct financing leases to a certain dealer location operated by asubsidiary of PACCAR.

 

PACCAR has issuedletters of credit as of December 31, 2008 in the amount of $5.1 on behalfof the Company to guarantee funds for payment to insured franchisees andcustomers for any future insurance losses.

 

28

----

 

**PACCARFinancial Corp.**

 

**NOTES TOFINANCIAL STATEMENTS**

(Millions of Dollars)

 

**NOTE E – DERIVATIVE FINANCIALINSTRUMENTS**

 

Derivativefinancial instruments are used as hedges to manage exposures to fluctuations ininterest rates. They are designated as cash flow hedges and may qualify forhedge accounting. Derivative instruments that do not qualify for hedgeaccounting are held as economic hedges. The Company’s policies prohibit the useof derivatives for speculation or trading. At inception of each hedgerelationship, the Company documents its risk management objectives, proceduresand accounting treatment. Exposure limits and minimum credit rating are used tominimize the risks of counterparty default. The Company had no materialexposures to default at December 31, 2008.

 

The Company enters intointerest-rate contracts, including cap agreements. Interest-rate contractsgenerally involve the exchange of fixed and floating rate interest payments.These contracts are used to manage exposures to fluctuation in interest rates.Net amounts paid or received are reflected as adjustments to interest expense.At December 31, 2008, the Company had 150 interest-rate swaps and oneinterest-rate cap agreement outstanding. The notional amount of these contractstotaled $2,448.4 with amounts expiring annually over the next six years. Thenotional amount is used to measure the volume of these contracts and does notrepresent exposure to credit loss. In the event of default by counterparty, therisk in these transactions is the cost of replacing the interest-rate contractat current market rates. The total fair value of all interest-rate contractsamounted to a liability of $88.3 at December 31, 2008. Fair values at December 31,2007 amounted to an asset of $1.5 and a liability of $44.2.

 

Notional maturitiesfor all interest-rate contracts for the five years beginning January 1,2009 are $997.4, $814.0, $425.0, $204.0 and $8.0 in year 2013. These contractsare floating to fixed swaps that effectively convert an equivalent amount ofcommercial paper and other variable rate debt to fixed rates.

 

Derivative assets areincluded in the consolidated balance sheets in “Other assets.” Derivativeliabilities are included in “Accounts payable, accrued expenses and other.”

 

All of the Company’sinterest-rate contracts have been designated as cash flow hedges. The Companyuses regression and the change in variable cash flows method to assess andmeasure effectiveness of interest-rate contracts. Gains or losses on theeffective portion of derivatives designated and qualifying as cash flow hedgesthat arise from changes in fair value are initially reported in othercomprehensive income. Gains or losses on the ineffective portion of cash flowhedges are recognized currently in earnings and were immaterial for each of thethree years ended December 31, 2008.

 

Amounts in accumulatedother comprehensive income are reclassified into net income in the same periodin which the hedged transaction affects earnings. Net realized gains and lossesfor interest-rate contracts are recognized as an adjustment to interestexpense. Of the accumulated net loss included in other comprehensiveincome as of December 31, 2008, $27.0, net of tax, is expected to bereclassified to interest expense in 2009. The fixed interest earned on finance receivableswill offset the amount recognized in interest expense, resulting in a stableinterest margin consistent with the Company’s interest-rate risk managementstrategy.

 

29

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**PACCARFinancial Corp.**

 

**NOTES TOFINANCIAL STATEMENTS**

(Millions of Dollars)

 

**NOTE F – BORROWINGS**

 

Borrowings aresummarized as follows:

 
| ** **                       | ** ** | **Effective** | ** ** | **As of December 31,** | ** **  |
|----------------------------------|------------|---------------|------------|---------------------------------------|-------------|
| ** **                       | ** ** | **Rate***     | ** ** | **2008**                              | ** **  | 2007 | ** ** |
|                             |       |          |       |                                  |        |   |   |
| Commercial paper                 | ** ** | **2.45%**     | ** ** | **$**                                 | **2,063.6** |   | $ | 1,453.7 |   |
| Floating rate  medium-term notes | ** ** | **4.18%**     | ** ** | **2,270.0**                           |        | 2,625.0 |   |
| ** **                       | ** ** | **3.36%**     | ** ** | **$**                                 | **4,333.6** |   | $ | 4,078.7 |   |

 

*The effective rate isthe weighted average rate as of December 31, 2008 and includes the effectsof interest rate swap agreements.

 

Interest expense onborrowings amounted to $160.1, $199.0 and $163.9 for 2008, 2007 and 2006,respectively.

 

Cash paid for interestwas $155.7 in 2008, $192.8 in 2007 and $162.4 in 2006.

 

Principal amounts ofmedium-term notes due over the next three years beginning January 1, 2009are $1,550.0 in 2009, $575.0 in 2010 and $145.0 in 2011.

 

**NOTE G – CREDIT ARRANGEMENTS**

 

TheCompany participates with PACCAR and certain other PACCAR affiliates insyndicated credit facilities of $3,000 at December 31, 2008. Of thisamount, $2,000 expires in June 2009 and $1,000 expires in 2012.PACCAR intends to replace these credit facilities as they expire withfacilities of similar amounts.

 

Creditfacilities of $2,040 are available for use by the Company and/or PACCAR andcertain other PACCAR affiliates. The remaining $960 is allocated to thefollowing subsidiaries: $455 is available for use by PACCAR’s Canadianfinancial subsidiary, $400 is available for use by PACCAR’s Mexican subsidiary,and $105 is available for use by PACCAR’s Australian financial subsidiary.These credit facilities are used to provide backup liquidity for the Company’scommercial paper and maturing medium-term notes. The Company is liable only forits own borrowings under these credit facilities. There were no borrowingsunder these credit facilities in the years ended December 31, 2008 and2007.

 

30

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**PACCARFinancial Corp.**

 

**NOTES TOFINANCIAL STATEMENTS**

(Millions of Dollars)

 

**NOTE H – INCOME TAXES**

 

The provision for incometaxes consisted of the following:

 
| ** **                   | ** ** | **Year ended December 31** | ** ** |
|------------------------------|------------|-------------------------------------------|------------|
| ** **                   | ** ** | **2008**                                  | ** ** | 2007 | ** ** | 2006 | ** ** |
| Current  (benefit) provision |       |                                      |       |   |   |   |   |
| Federal                      | ** ** | **$**                                     | **(64.8**  | **)** | $ | 17.3 |   | $ | 12.3 |   |
| State                        | ** ** | **(10.2**                                 | **)**      | 1.8 |   | .4 |   |
| ** **                   |       | **(75.0**                                 | **)**      | 19.1 |   | 12.7 |   |
|                         |       |                                      | ** ** |   |   |   |   |
| Deferred  provision          |       |                                      | ** ** |   |   |   |   |
| Federal                      | ** ** | **$**                                     | **89.0**   | ** ** | $ | 28.0 |   | $ | 35.8 |   |
| State                        | ** ** | **13.4**                                  | ** ** | 4.0 |   | 3.3 |   |
| ** **                   |       | **102.4**                                 | ** ** | 32.0 |   | 39.1 |   |
|                         |       |                                      | ** ** |   |   |   |   |
| ** **                   |       | **$**                                     | **27.4**   | ** ** | $ | 51.1 |   | $ | 51.8 |   |

 

A reconciliation betweenthe statutory federal income tax rate to the actual provision for income taxesis shown below:

 
| ** **                        | ** ** | **Year ended December 31** | ** ** |
|-----------------------------------|------------|-------------------------------------------|------------|
| ** **                        | ** ** | **2008**                                  | ** ** | 2007 | ** ** | 2006 | ** ** |
|                              |       |                                      |       |   |   |   |   |
| Tax at the  statutory rate of 35% | ** ** | **$**                                     | **25.1**   |   | $ | 46.7 |   | $ | 47.7 |   |
| Effect of state  income taxes     | ** ** | **2.3**                                   |       | 4.3 |   | 4.4 |   |
| Other                             |       |                                      |       | .1 |   | (.3 | ) |
| ** **                        |       | **$**                                     | **27.4**   |   | $ | 51.1 |   | $ | 51.8 |   |

 

Cash paid for incometaxes was $11.6 in 2008, $4.4 in 2007 and $18.9 in 2006.

 

Deferred income taxassets and liabilities consisted of the following:

 
| ** **                             | ** ** | **As of December 31** | ** ** |
|----------------------------------------|------------|--------------------------------------|------------|
| ** **                             | ** ** | **2008**                             | ** ** | 2007 | ** ** |
| Deferred tax  liability:               |       |                                 |       |   |   |
| Asset  capitalization and depreciation | ** ** | **$**                                | **504.1**  | ** ** | $ | 406.9 |   |
| Other                                  | ** ** | **2.4**                              | ** ** | 1.6 |   |
|                                   |       |                                 | ** ** |   |   |
| Deferred tax  assets:                  |       |                                 | ** ** |   |   |
| Allowance for  losses on receivables   | ** ** | **(33.5**                            | **)**      | (35.4 | ) |
| Derivative  liability                  | ** ** | **(35.9**                            | **)**      | (16.9 | ) |
| Other                                  | ** ** | **(9.2**                             | **)**      | (13.3 | ) |
|                                   |       |                                 | ** ** |   |   |
| Net deferred tax  liability            | ** ** | **$**                                | **427.9**  | ** ** | $ | 342.9 |   |

 

31

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**PACCARFinancial Corp.**

 

**NOTES TOFINANCIAL STATEMENTS**

(Millions of Dollars)

 

**NOTE I – FAIR VALUES OF FINANCIALINSTRUMENTS**

 

Fair valuerepresents the price that would be received to sell an asset or paid totransfer a liability in an orderly transaction between market participants atthe measurement date.  The hierarchy offair value measurements is described below:

 

Level 1 –Valuations are based on quoted prices that the Company has the ability toobtain in actively traded markets for identical assets or liabilities. Sincevaluations are based on quoted prices that are readily and regularly availablein an active market or exchange traded market, valuation of these instrumentsdoes not require a significant degree of judgment.

 

Level 2 –Valuations are based on quoted prices for similar instruments in activemarkets, quoted prices for identical or similar instruments in markets that arenot active, and model-based valuation techniques for which all significantassumptions are observable in the market.

 

Level 3 –Valuations are based on model-based techniques for which some or all of theassumptions are obtained from indirect market information that is significantto the overall fair value measurement and which require a significant degree ofmanagement judgment.

 

The Company’sderivative contracts consist of interest rate contracts. These derivativecontracts are over the counter and their fair value is determined usingmodeling techniques that include market inputs such as interest rates and yieldcurves.  At December 31, 2008 theCompany’s liability related to these interest rate derivatives totaled $88.3and were the only instruments categorized as Level 2. There were no Level 1 or3 assets or liabilities.

 

The following methodsand assumptions were used by the Company in estimating its fair valuedisclosures for financial instruments:

 

Cash: Thecarrying amount reported in the balance sheets is stated at fair value.

 

NetReceivables: For floating rate loans, wholesalefinancing, and interest and other receivables, fair values approximate carryingvalues. For fixed rate loans, fair values are estimated using discounted cashflow analysis based on current rates for comparable loans. Finance leasereceivables and the related loss provisions have been excluded from theaccompanying table.

 

CommercialPaper and Medium-Term Notes: The carrying amounts of the Company’scommercial paper and floating rate medium-term notes approximate their fairvalue.

 

Derivative FinancialInstruments*:* Derivativefinancial instruments, including interest rate contracts, are carried atfair value. Fair values are based on quoted market prices or pricing modelsusing current market rates.

 

Accounts Payable, AccruedExpenses and Other:**Carryingamounts approximate fair value and have been excluded from the accompanyingtable.

 

32

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**PACCARFinancial Corp.**

 

**NOTES TOFINANCIAL STATEMENTS**

(Millions of Dollars)

 

Fixed rate loans thatare not carried at approximate fair value are as follows:

 
| ** **       | ** ** | **As of December 31** | ** **  |
|------------------|------------|--------------------------------------|-------------|
| ** **       | ** ** | **2008**                             | ** **  | 2007 | ** ** |
| ** **       | ** ** | **Carrying  Amount**                 | ** **  | **Fair Value** | ** ** | Carrying  Amount |   | Fair Value | ** ** |
| Fixed rate loans | ** ** | **$**                                | **2,145.6** | ** ** | **$** | **2,137.3** |   | $ | 2,596.7 |   | $ | 2,576.1 |   |
|                  |            |                                      |             |  |  |  |  |  |  |  |  |  |  |

 

**NOTE J – STOCKHOLDER’S EQUITY**

 

**Preferred Stock**

 

The Company’s Articlesof Incorporation provide that the 6%, noncumulative, nonvoting preferred stock(100% owned by PFSC) is redeemable only at the option of the Company’s Board ofDirectors.

 

**Other Comprehensive Income**

 

The components of othercomprehensive income (loss) with the related tax effects are as follows:

 
| ** **                                | ** ** | **Pretax  Amount** | ** ** | **Tax Effect** | ** ** | **Net Amount** | ** ** |
|-------------------------------------------|------------|--------------------|------------|---------------------|------------|---------------------|------------|
| **2008**                                  |       |               |       |                |       |                |       |
| ** **                                |       |               |       |                |       |                |       |
| Other  comprehensive income:              | ** ** | ** **         | ** ** | ** **          | ** ** | ** **          | ** ** |
| Net holding loss  on derivative contracts | ** ** | **$**              | **(56.8**  | **)**               | **$**      | **21.7**            | ** ** | **$** | **(35.1** | **)** |
| Reclassification  adjustment              | ** ** | **11.1**           | ** ** | **(4.3**            | **)**      | **6.8**             | ** ** |
| Net other  comprehensive (loss) income    | ** ** | **$**              | **(45.7**  | **)**               | **$**      | **17.4**            | ** ** | **$** | **(28.3** | **)** |
|                                      |       |               |       |                |       |                |       |
| 2007                                      |       |               |       |                |       |                |       |
| ** **                                |       |               |       |                |       |                |       |
| Other  comprehensive income:              | ** ** | ** **         | ** ** | ** **          | ** ** | ** **          | ** ** |
| Net holding loss  on derivative contracts |       | $                  | (44.6      | )                   | $          | 17.1                |       | $ | (27.5 | ) |
| Reclassification  adjustment              |       | (16.0              | )          | 6.1                 |       | (9.9                | )          |
| Net other  comprehensive (loss) income    |       | $                  | (60.6      | )                   | $          | 23.2                |       | $ | (37.4 | ) |
|                                      |       |               |       |                |       |                |       |
| 2006                                      |       |               |       |                |       |                |       |
| ** **                                |       |               |       |                |       |                |       |
| Other comprehensive  income:              |       |               |       |                |       |                |       |
| Net holding gain  on derivative contracts |       | $                  | 4.1        |                | $          | (1.6                | )          | $ | 2.5 |   |
| Reclassification  adjustment              |       | (17.9              | )          | 6.9                 |       | (11.0               | )          |
| Net other  comprehensive (loss) income    |       | $                  | (13.8      | )                   | $          | 5.3                 |       | $ | (8.5 | ) |

 

33

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**PACCARFinancial Corp.**

 

**NOTES TOFINANCIAL STATEMENTS**

(Millions of Dollars)

 

**NOTE K – QUARTERLY RESULTS** (Unaudited)

 
| ** **                  | ** ** | **QUARTER** | ** ** |
|-----------------------------|------------|-------------|------------|
| ** **                  | ** ** | **First**   | ** ** | **Second** | ** ** | **Third** | ** ** | **Fourth** | ** ** |
| **2008**                    |       |        |       |   |   |   |   |   |   |
|                        |       |        |       |   |   |   |   |   |   |
| Interest and  other revenue | ** ** | **$**       | **133.3**  | ** ** | **$** | **127.3** | ** ** | **$** | **123.8** | ** ** | **$** | **125.2** | ** ** |
| Income before  income taxes | ** ** | **24.9**    | ** ** | **17.5** | ** ** | **8.9** | ** ** | **20.3** | ** ** |
| Net income                  | ** ** | **15.4**    | ** ** | **10.8** | ** ** | **5.5** | ** ** | **12.5** | ** ** |
|                        |       |        |       |   |   |   |   |   |   |
| 2007                        |       |        |       |   |   |   |   |   |   |
|                        |       |        |       |   |   |   |   |   |   |
| Interest and  other revenue |       | $           | 139.3      |   | $ | 144.2 |   | $ | 147.3 |   | $ | 142.2 |   |
| Income before  income taxes |       | 33.1        |       | 33.5 |   | 36.6 |   | 30.2 |   |
| Net income                  |       | 20.4        |       | 20.7 |   | 22.6 |   | 18.6 |   |

 

**NOTE L – COMMITMENTS ANDCONTINGENCIES**

 

The Company is a partyto various routine legal proceedings incidental to its business involving thecollection of accounts and other matters. The Company does not consider suchmatters to be material with respect to the business or financial condition ofthe Company as a whole. In addition, at December 31, 2008, the Company hasloan and lease commitments of $103.8 expiring within one year. Thesecommitments represent commitments to fund new retail loan and lease contracts.

 

34

----

 

**PACCARFinancial Corp.**

(Millions of Dollars)

 

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

 

Theregistrant has not had any disagreements with its independent auditors onaccounting or financial disclosure matters.

 

**ITEM 9A & 9A(T).  CONTROLS AND PROCEDURES**

 

**Disclosure Controls and Procedures**

 

An evaluation was performed under the supervision and with theparticipation of the Company’s management, including the principal executiveofficer and principal financial officer, of the effectiveness of the design andoperation of the Company’s disclosure controls and procedures (as defined in rules 13a-15(e) and15d-15(e) promulgated under the Securities Exchange Act of 1934, asamended) as of December 31, 2008 (“Evaluation Date”). Based on thatevaluation, the principal executive officer and principal financial officer ofthe Company concluded that the disclosure controls and procedures in place atthe Company are effective to ensure that information required to be disclosedby the Company, including its consolidated subsidiaries (the Company has nosubsidiaries), in reports that the Company files or submits under the ExchangeAct, is recorded, processed, summarized and reported on a timely basis inaccordance with applicable rules and regulations. There have been nosignificant changes in the Company’s internal control over financial reportingduring the fourth quarter that occurred that have materially affected, or arereasonably likely to materially affect, internal control over financialreporting.

 

**Management’s Report on InternalControl over Financial Reporting**

 

Themanagement of the Company is responsible for establishing and maintainingsatisfactory internal control over financial reporting. Internal control overfinancial reporting is a process designed to provide reasonable assuranceregarding the reliability of financial reporting and the preparation offinancial statements for external purposes in accordance with generallyaccepted accounting principles.

 

Internalcontrol over financial reporting may not prevent or detect misstatementsbecause of its inherent limitations. Projections of any evaluation ofeffectiveness to future periods are subject to the risk that controls maybecome inadequate because of changes in conditions, or that the degree ofcompliance with the policies and procedures may deteriorate.

 

Managementassessed the Company’s internal control over financial reporting as of December 31,2008, based on criteria for effective internal control over financial reportingdescribed in Internal Control – Integrated Framework issued by the Committee ofSponsoring Organizations of the Treadway Commission. Based on this assessment,we concluded that the Company maintained effective internal control overfinancial reporting as of December 31, 2008.

 

This annual report does not include anattestation report of the Company’s registered public accounting firm regardinginternal control over financial reporting pursuant to temporary rules ofthe Securities and Exchange Commission that permit the Company to provide onlymanagement’s report in this annual report.

 

**ITEM 9B. OTHER INFORMATION**

 

Notapplicable.

 

35

----

 

**PACCARFinancial Corp.**

(Millions of Dollars)

 

**PART III**

 

**ITEMS 10, 11, 12 AND 13**

 

Theseitems omitted pursuant to Form 10-K General Instruction (I)(1)(a) and(b).

 

**ITEM 14.****                     ****PRINCIPAL ACCOUNTING FEES AND SERVICES**

 

Audit Fees

 

Audit fees charged to theCompany were $.6 and $.5 for 2008 and 2007, respectively.

 

Other Fees

 

The registrant has noaudit-related, tax or other fees billed and/or paid during 2008 or 2007 forservices provided by the principal accountant.

 

As a wholly-owned,indirect subsidiary of PACCAR Inc, audit and non-audit services provided by theCompany’s independent auditors are subject to PACCAR Inc’s Audit Committeepre-approval policies and procedures as described in the PACCAR Inc 2009 proxystatement. During the year ended December 31, 2008, all services providedby the independent auditor were pre-approved by the PACCAR Inc Audit Committee.

 

36

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**PACCARFinancial Corp.**

 

**PART IV**

 

**ITEM 15.****                     ****EXHIBITS, FINANCIAL STATEMENT SCHEDULES**

 

(1) Listingof financial statements

 

Thefollowing financial statements of the Company are included in Item 8:

 

Statementsof Income – Years Ended December 31, 2008, 2007 and 2006

 

BalanceSheets – December 31, 2008 and 2007

 

Statementsof Cash Flows – Years Ended December 31, 2008, 2007 and 2006

 

Statementsof Stockholder’s Equity – Years Ended December 31, 2008, 2007 and 2006

 

Statementsof Comprehensive Income – Years Ended December 31, 2008, 2007 and 2006

 

Notesto Financial Statements – December 31, 2008, 2007 and 2006

 

(2) Listing offinancial statement schedules

 

Allschedules are omitted because the required matter or conditions are not presentor because the information required by the schedules is submitted as part ofthe consolidated financial statements and notes thereto.

 

(3) Listingof Exhibits

 

Theexhibits required by Item 601 of Regulation S-K are listed in the accompanying Exhibit Index.

 

37

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**PACCARFinancial Corp.**

 

**SIGNATURES**

 

Pursuantto the requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934, the Registrant has duly caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized.

 
|   | PACCAR Financial Corp. |
|--------|------------------------|
|   |                   |
|   |                   |
|   | By                     | /s/ T. M. Henebry |
|   |                   | T. M. Henebry |

 

Date:February 27, 2009

 

Pursuantto the requirements of the Securities Exchange Act of 1934, this report hasbeen signed below by the following persons on behalf of the registrant as ofthe above date and in the capacities indicated.

 
| (1)    | Principal Executive Officer          |                |   |
|--------|--------------------------------------|---------------------|--------|
|   |                                 |                |   |
|   |                                 |                |   |
|   |                                 | /s/ M. C. Pigott    |   | Chairman |
|   |                                 | M. C. Pigott        |   |   |
|   |                                 |                |   |   |
| (2)    | Principal Financial Officer          |                |   |
|   |                                 |                |   |
|   |                                 |                |   |
|   |                                 | /s/ R. E. Armstrong |   | Vice Chairman |
|   |                                 | R. E. Armstrong     |   |   |
|   |                                 |                |   |   |
| (3)    | Principal Accounting Officer         |                |   |
|   |                                 |                |   |
|   |                                 |                |   |
|   |                                 | /s/ N. C. Anderson  |   | Controller |
|   |                                 | N. C. Anderson      |   |   |
|   |                                 |                |   |   |
| (4)    | A Majority of the Board of Directors |                |   |
|   |                                 |                |   |
|   |                                 |                |   |
|   |                                 | /s/ T. M. Henebry   |   | President and Director |
|   |                                 | T. M. Henebry       |   |   |
|   |                                 |                |   |   |
|   |                                 |                |   |   |
|   |                                 | /s/ R. E. Armstrong |   | Director |
|   |                                 | R. E. Armstrong     |   |   |
|   |                                 |                |   |   |
|   |                                 |                |   |   |
|   |                                 | /s/ T. E. Plimpton  |   | Director |
|   |                                 | T. E. Plimpton      |   |   |

 

38

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**PACCARFinancial Corp.**

 

**EXHIBITINDEX**

 

3                                          Articles ofincorporation and bylaws:

 

(a)                                  Restated Articlesof Incorporation of the Company, as amended (incorporated by reference to Exhibit 3.1to the Company’s Annual Report on Form 10-K dated March 26, 1985.Amendment incorporated by reference to Exhibit 19.1 to the Company’sQuarterly Report on Form 10-Q dated August 13, 1985, File Number0-12553).

 

(b)                                 By-laws ofthe Company, as amended (incorporated by reference to Exhibit 3.2 to the Company’sRegistration Statement on Form 10 dated October 20, 1983, File Number0-12553).

 

4                                          Instrumentsdefining the rights of security holders, including indentures:

 

(a)                                  Indenturefor Senior Debt Securities dated as of December 1, 1983 and firstSupplemental Indenture dated as of June 19, 1989 between the Company andWilmington Trust Company (incorporated by reference to Exhibit 4.1 to theCompany’s Annual Report on Form 10-K dated March 26, 1984, FileNumber 001-11677 and Exhibit 4.2 to the Company’s Registration Statementon Form S-3 dated June 23, 1989, Registration Number 33-29434), andthe Agreement of Resignation, Appointment and Acceptance, dated as of October 31,2006 (incorporated by reference to the Company’s Form 8-K dated November 3,2006).

 

(b)                                 Forms ofMedium-Term Note, Series K (incorporated by reference to Exhibits 4.2A and4.2B to the Company’s Registration Statement on Form S-3 dated December 23,2003, Registration Number 333-111504).

 

Form of Letter ofRepresentation among the Company, Citibank, N.A. and The Depository TrustCompany, Series K (incorporated by reference to Exhibit 4.3 to theCompany’s Registration Statement on Form S-3 dated December 23, 2003,Registration Number 333-111504).

 

(c)                                  Forms ofMedium-Term Note, Series L (incorporated by reference to Exhibits 4.2A and4.2B to the  Company’s RegistrationStatement on Form S-3 dated November 7, 2006, Registration Number333-138464).

 

Form of Letter ofRepresentation among the Company, Citibank, N.A. and The Depository TrustCompany, Series L (incorporated by reference to Exhibit 4.3 to theCompany’s Registration Statement on Form S-3 dated November 7, 2006,Registration Number 333-138464).

 

10                                    Materialcontracts:

 

(a)                                  SupportAgreement between the Company and PACCAR dated as of June 19, 1989(incorporated by reference to Exhibit 28.1 to the Company’s RegistrationStatement on Form S-3 dated June 23, 1989, Registration Number33-29434).

 

12                                    Statementsre computation of ratios:

 

(a)                                  Statementre: computation of ratio of earnings to fixed charges of the Company pursuantto SEC reporting requirements for each of the five years ended December 31,2004 - 2008.

 

(b)                                 Statementre: computation of ratio of earnings to fixed charges of the Company pursuantto the Support Agreement between the Company and PACCAR for each of the fiveyears ended December 31, 2004 - 2008.

 

(c)                                  Statementre: computation of ratio of earnings to fixed charges of PACCAR andsubsidiaries pursuant to SEC reporting requirements for each of the five yearsended December 31, 2004 - 2008.

 

39

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**PACCARFinancial Corp.**

 

**EXHIBITINDEX**

 

23                                    Consent ofIndependent Registered Public Accounting Firm.

 

31                                    Rule 13a-14(a)/15d-14(a) Certifications:

 

(a)                                  Rule 13a-14(a)/15d-14(a) Certification- Certification of Principal Executive Officer.

 

(b)                                 Rule 13a-14(a)/15d-14(a) Certification- Certification of Principal Financial Officer.

 

32                                    Section 1350Certifications:

 

(a)                                  Section 1350Certifications - Certification pursuant to Rule 13a-14(b) and Section 906of the Sarbanes-Oxley Act of 2002 (18 U.S.C. section 1350).

 

Other exhibits listed in Item 601 ofRegulation S-K are not applicable.

 

40

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