**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

# **FORM 10-K**

# ** **

**FOR ANNUAL AND TRANSITION REPORTS**

**PURSUANT TO SECTIONS 13 OR 15(d) OF THE**

**SECURITIES EXCHANGE ACT OF 1934**

 

**(MarkOne)**
| **x** | **ANNUAL  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |
|-------|------------------------------------------------------------------------------------------------------|

 

# **Forthe fiscal year ended December 31, 2007**

**OR**
| **o** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|-------|-----------------------------------------------------------------------------------------------|

 

**For transition period from                to                 **

**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) |

 

**(425) 468-7100**

(Registrant’s telephone number, including area code)

 

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**                    |

 

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

 

**None**

(Title of Class)

 

Indicateby check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405of the Securities Act.Yes: x   No:  o

Indicateby check mark if the registrant is not required to file reports pursuant to Section 13or Section 15(d) of the Act.Yes: o   No:  x

Note-Checking the mark above will not relieve any registrant required to filereports pursuant to Section 13 or Section 15(d) of the ExchangeAct from their obligations under those sections.

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 90days.                Yes:x   No:  o

Indicate by check mark if disclosure of delinquentfilers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is notcontained herein, and will not be contained, to the best of registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer. See definition of “acceleratedfiler and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer:  o               Acceleratedfiler:  o               Non-acceleratedfiler:  x             Smallerreporting company  o

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

Theaggregate market value of the voting stock held by non-affiliates of theregistrant as of June 30, 2007:   None

Thenumber of shares outstanding of the registrant’s classes of common stock as of January 31,2008:

###### Common Stock, $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.

 

 

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**PACCAR Financial Corp.**

 

**INDEX**

 
| **PART I**   |                       |                                                                                                                |
|-------------------|----------------------------|---------------------------------------------------------------------------------------------------------------------|
| ** **        | ** **                 | ** **                                                                                                          | ** ** |
| ** **        | **Item 1.**                | **Business**                                                                                                        | **2** |
| ** **        | **Item 1A.**               | **Risk Factors**                                                                                                    | **3** |
| ** **        | **Item 1B.**               | **Unresolved Staff Comments**                                                                                       | **9** |
|              | Item  2.                   | Properties                                                                                                          | 9 |
|              | Item  3.                   | Legal  Proceedings                                                                                                  | 9 |
|              | Item 4.                    | Submission of Matters to a  Vote of Security Holders                                                                | 9 |
| ** **        |                       |                                                                                                                |
| **PART II**  |                       |                                                                                                                |
|              |                       |                                                                                                                |   |
|              | Item 5.                    | Market for Registrant’s  Common Equity, Related Stockholder Matters and Issuer Purchases of Equity  Securities | 9 |
|              | Item 6.                    | Selected Financial  Data                                                                                            | 10 |
|              | Item 7.                    | Management’s  Discussion and Analysis of Financial Condition and Results of Operation                          | 11 |
|              | Item 7A.                   | Quantitative  and Qualitative Disclosures about Market Risk                                                         | 15 |
|              | Item 8.                    | Financial  Statements and Supplementary Data                                                                        | 15 |
|              | Item 9.                    | Changes in and  Disagreements with Accountants on Accounting and Financial Disclosure                               | 32 |
|              | Item  9A & 9A(T). | Controls and  Procedures                                                                                            | 32 |
|              | Item 9B.                   | Other Information                                                                                                   | 32 |
| ** **        |                       |                                                                                                                |
| **PART III** |                       |                                                                                                                |
|              |                       |                                                                                                                |   |
|              | Item 10.                   | Directors, Executive Officers  and Corporate Governance                                                             | 33 |
|              | Item 11.                   | Executive Compensation                                                                                              | 33 |
|              | Item 12.                   | Security Ownership of Certain  Beneficial Owners and Management and Related Stockholder Matters                     | 33 |
|              | Item 13.                   | Certain Relationships and  Related Transactions, and Director Independence                                          | 33 |
|              | Item 14.                   | Principal  Accounting Fees and Services                                                                             | 33 |
|              |                       |                                                                                                                |   |
| **PART IV**  |                       |                                                                                                                |
|              |                       |                                                                                                                |   |
|              | Item 15.                   | Exhibits, Financial  Statement Schedules                                                                            | 34 |

 

1

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**PART I**

 

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

 

## GENERAL

 

PACCAR FinancialCorp.

 

PACCAR Financial Corp. (the “Company”), aWashington corporation, was organized in 1961 as a wholly-owned subsidiary ofPACCAR Inc (“PACCAR”) to finance the sale of PACCAR products. In 2000, PACCARtransferred the stock of the Company to PACCAR Financial Services Corporation (“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 91% of total 2007 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 2007. PACCAR’s share of that market was 26.4% of retail salesin 2007. In Europe there were five other principal competitors in thecommercial vehicle market in 2007, including parent companies to twocompetitors of PACCAR in the United States. In 2007, PACCAR’s subsidiary DAFhad a 13.9% share of the Western and Central European heavy-duty market and a8.3% share of the light/medium market. These markets are highly competitive inprice, quality and service, and PACCAR is not dependent on any single customerfor its sales. There are no significant seasonal variations.

 

2

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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 thirteen other countries in Europe.PACCAR also conducts full-service leasing operations through wholly-ownedsubsidiaries in Canada, Mexico, and Germany.

 

PACCAR’s common stock is traded on the NASDAQ GlobalSelect Market under the symbol PCAR. PACCAR and the Company are subject to theinformational requirements of the Securities Exchange Act of 1934 and, inaccordance therewith, file reports and other information with the Securitiesand Exchange Commission (the “Commission”). All reports, proxy statements andother information filed by PACCAR and the Company with the Commission may beinspected and copied at the public reference facility maintained by theCommission at 100 F Street, N.E., Washington, D.C. 20549 or through theCommission’s internet site at www.sec.gov.

 

BUSINESSOF 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, 2007, the Company employed 296 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 “Relationships 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 this risk.

 

3

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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 is less than its contractual residual value, the equipmentwill be returned and there is a greater risk of loss on the sales of thereturned equipment. Refer to the Critical Accounting Policy on “Equipment onOperating Leases” in the MD&A section for further discussion regarding theCompany’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 income and capital structure. Policies governing marketrisk exposure are established and periodically reviewed by the Company’s seniormanagement. Refer to Item 7A. “Quantitative and Qualitative Disclosures aboutMarket Risk” for further discussion regarding the Company’s exposure to thisrisk.

 

**THE COMPANY’S PRODUCTS**

 

The Company offers thefollowing products to retail customers:

 

Retail Contracts andLoans The Company purchasescontracts from dealers and receives assignments of the contracts and a firstlien security interest in the vehicles financed (“Retail Contracts”). CertainRetail Contracts with third party leasing companies may also include anassignment to the Company of the related lease and rental payments due. RetailContracts purchased by the Company have fixed or floating interest rates.

 

TheCompany also makes loans to the end users of the vehicles financed that aresecured by a first lien security interest in the vehicles (“Loans”). Loans havefixed or floating interest rates.

 

Direct Financing LeasesThe Company offers direct financing lease contracts where it is treated as theowner of the equipment for tax purposes and generally retains the taxdepreciation (“Direct Financing Leases”). The lessee is responsible for thepayment of property and sales taxes, licenses, maintenance and other operatingcosts. The lessee is obligated to maintain the equipment and to insure theequipment against casualty 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 LeasesThe Company offers operating lease contracts (“Operating Leases”) where theCompany owns the equipment. The lessee is responsible for the payment ofproperty and sales taxes, licenses, maintenance and other operating items. Thelessee is obligated to maintain the equipment and to insure the equipmentagainst casualty and liability 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.

 

InsuranceThe Company sells physical damage insurance through PACCAR dealers who arelicensed insurance agents as well as through licensed agents of the Company.The Company retains the premium revenues and loss exposure for the policies,which are issued through an unrelated regulated insurance carrier.

 

TheCompany offers physical damage and liability insurance on new and used trucksand trailers to its full-service lease customers. The Company retains premiumand loss exposure for the policies that are issued through an unrelatedregulated insurance carrier. To limit its exposure the Company has acquiredinsurance coverage for losses above specified levels from a third partyinsurance carrier.

 

4

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

 

Master NotesMaster note contracts (“Master Notes”) are offered to select dealers for newand used trucks. Retail installment contracts originated by the dealer for newor used trucks which meet the Company’s requirement as to form, terms andcreditworthiness for Retail Contracts are pledged to the Company as collateralfor direct, full recourse loans by the Company to the dealer. Master Notes havefixed or floating interest rates.

 

Wholesale ContractsThe Company provides wholesale financing for new and used truck and trailerinventories for dealers (“Wholesale Contracts”). Wholesale Contracts aresecured by the inventories financed. The amount of credit extended by theCompany for each truck is generally limited to the invoice price of newequipment and to the wholesale value of used equipment. Interest charged underWholesale Contracts is based upon floating interest rates.

 

Dealer LoansThe Company makes secured loans to selected Peterbilt and Kenworth dealers (“DealerLoans”). The purpose of these loans includes the financing of real estate,fixed assets, working capital and dealership acquisitions. Dealer Loans havefixed or floating interest rates.

 

Full-Service LeasingThe Company also conducts full-service leasing operations under the PacLeasetrade name. Selected dealers are franchised to provide full-service leasing,which includes the equipment, maintenance, parts, taxes and licenses all in acombined contract with the customer. The Company provides the franchisees withequipment financing and managerial support. The Company also operatesfull-service lease outlets in selected markets on its own behalf.

 

InsuranceThe Company charges a fee to provide insurance coverage, through an unrelatedregulated insurance carrier, on new trucks, used trucks and trailer inventoryto dealers having Wholesale Contracts with the Company.

 

CUSTOMER CONCENTRATION,PAST DUE 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, 2007,2006 and 2005.

 

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 generally increase.

 

TheCompany maintains an allowance for losses on receivables at a level that itconsiders to be adequate to cover management’s estimates of losses inherent inthe portfolio.

 

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

 

5

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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 toapplicable state licensing laws. The Company is subject to state insuranceregulations in connection with its licensed insurance salesmen. The Company isalso subject to certain provisions of federal law relating tonon-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 84 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. As a result, the Company’s interest margin onexisting business does not change significantly due to changes in interestrates.

 

6

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TheCompany enters into interest rate swap contracts to achieve its matched fundingobjectives and to reduce total borrowing costs relative to its primaryborrowing sources – commercial paper and medium-term notes. Fixed rate swaps,matched to floating rate borrowings, are used to lock in the funding cost offixed rate assets. As of December 31, 2007, the total notional principalamount of interest rate swap contracts outstanding was $2,894.3, all of whichresult in a fixed rate payment obligation. The notional amount is used tomeasure the volume of these contracts and does not represent exposure to creditloss. In the event of default by a counterparty, the risk in these transactionsis the cost of replacing the interest-rate contract at current market rates.Management believes the risk of incurring such losses is remote and any losseswould not be significant. The permitted types of interest rate swap contracts,their transaction limits and related approval authorizations have beenestablished by the Company’s senior management and Board of Directors. Theinterest rate contracts outstanding are regularly reported to, and reviewed by,the Company’s senior management.

 

The Company participates with PACCAR and certain otherPACCAR affiliates in syndicated credit facilities of $2,700.0 at December 31,2007. Of this amount, $1,700.0 expires in June 2008 and $1,000.0 expiresin June 2012. PACCAR intends to replace these credit facilities as theyexpire with facilities of similar amounts.

 

Of the credit facilities, $1,780.5 is available for useby the Company and/or PACCAR and certain other PACCAR affiliates. Of theremaining $919.5, $432.0 is only available for use by PACCAR’s Canadiansubsidiaries, $350.0 is only available for use by PACCAR’s Mexican financialsubsidiary, and $137.5 is only available for use by PACCAR’s Australianfinancial subsidiary. These credit facilities are used to provide backupliquidity for the Company’s commercial paper and maturing medium-term notes.The Company is liable only for its own borrowings under these creditfacilities. There were no borrowings under these credit facilities in the yearsended December 31, 2007 and 2006.

 

Asof December 31, 2007, the Company had $2,625.0 of medium-term notesoutstanding under two shelf registration statements, of which $500.0 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 and mayoccasionally borrow funds from or lend 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 fromtwo facilities owned by PACCAR and five facilities leased by PACCAR. Since thedirectors of the Company are all executives of PACCAR and PACCAR is the soleowner of PFSC’s outstanding voting common stock, PACCAR can determine thecourse of the Company’s business.

 

TheCompany periodically loans funds to certain foreign finance and leasingaffiliates of PACCAR. These foreign affiliates have Support Agreements withPACCAR, similar to the Company’s Support Agreement described below. The foreignaffiliates operate in the United Kingdom, The Netherlands, Mexico, Canada andAustralia. The foreign affiliates primarily provide financing and leasing ofPACCAR-manufactured trucks and related equipment sold through PACCAR’sindependent dealer networks in Europe, Mexico, Canada and Australia.

 

7

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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 limits is guaranteedby PACCAR.  There was a total of $371.2in loans outstanding to foreign affiliates operating in the Netherlands, Mexicoand Canada at December 31, 2007. The Company periodically reviews thefunding alternatives for these affiliates, and these limits may be revised inthe future.

 

PFSCcharges the Company for certain administrative services it provides and certainservices the Company receives indirectly from PACCAR. As of December 31,2007, PFSC employed 175 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, 2007, 2006 and 2005 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 reasonably practicable after the report is electronicallyfiled with, or furnished to, the Securities and Exchange Commission. Theinformation on the websites is not incorporated by reference into this report.

 

8

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**ITEM 1B.     UNRESOLVEDSTAFF COMMENTS**

 

Notapplicable.

 

**ITEM2.        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.The Company owns two full-service leasing facilities in Texas.

 

Otheroffices and leasing facilities of the Company are located in leased premisesincluding two facilities owned by PACCAR and five facilities leased by PACCAR.The Company considers all its properties to be suitable for their intendedpurpose. Annual lease rentals for these premises in the aggregate are notmaterial in relation to expenses as a whole.

 

**ITEM3.        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.

 

**ITEM4.        SUBMISSION OF MATTERS TO A VOTEOF SECURITY HOLDERS**

 

Notapplicable.

 

**PART II**

 

**ITEM5.        MARKET FOR REGISTRANT’S COMMONEQUITY, 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 $24.0, $30.0and $70.0 were declared and paid to PFSC in 2007, 2006 and 2005, respectively.

 

9

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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 31,2007 has been derived from the Company’s audited financial statements.

 

**Balance Sheet Data**

** **
| ** **                       | ** ** | **As of December 31** | ** **  |
|----------------------------------|------------|--------------------------------------|-------------|
| ** **                       | ** ** | **2007**                             | ** **  | 2006 |   | 2005 |   | 2004 |   | 2003 | ** ** |
|                             |       |                                 |        |   |   |   |   |   |   |   |   |
| Total Assets                     | ** ** | **$**                                | **5,507.6** |   | $ | 5,508.3 |   | $ | 4,778.7 |   | $ | 3,970.7 |   | $ | 3,473.3 |   |
| Total  Liabilities               | ** ** | **4,683.0**                          |        | 4,727.3 |   | 4,066.1 |   | 3,295.6 |   | 2,834.8 |   |
| Total  Stockholder’s Equity | ** ** | **824.6**                            |        | 781.0 |   | 712.6 |   | 675.1 |   | 638.5 |   |
|                                  |            |                                      |             |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**Income Statement Data**
| ** **                                                                     | ** ** | **Year ended December 31** | ** ** |
|--------------------------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                     | ** ** | **2007**                                  | ** ** | 2006 |   | 2005 |   | 2004 |   | 2003 | ** ** |
| Total interest  and other revenue                                              | ** ** | **$**                                     | **573.0**  |   | $ | 509.6 |   | $ | 409.3 |   | $ | 320.9 |   | $ | 285.0 |   |
|                                                                           |       |                                      |       |   |   |   |   |   |   |   |   |
| Total expenses                                                                 | ** ** | **439.6**                                 |       | 373.3 |   | 289.3 |   | 209.5 |   | 206.9 |   |
|                                                                           |       |                                      |       |   |   |   |   |   |   |   |   |
| Income before  income taxes                                                    | ** ** | **133.4**                                 |       | 136.3 |   | 120.0 |   | 111.4 |   | 78.1 |   |
|                                                                           |       |                                      |       |   |   |   |   |   |   |   |   |
| Income taxes                                                                   | ** ** | **51.1**                                  |       | 51.8 |   | 46.0 |   | 42.2 |   | 30.8 |   |
|                                                                           |       |                                      |       |   |   |   |   |   |   |   |   |
| Net income                                                                     | ** ** | **$**                                     | **82.3**   |   | $ | 84.5 |   | $ | 74.0 |   | $ | 69.2 |   | $ | 47.3 |   |
|                                                                           |       |                                      |       |   |   |   |   |   |   |   |   |
| Ratio of  Earnings to Fixed Charges Pursuant to SEC Reporting Requirements (1) | ** ** | **1.67**                                  | **x**      | 1.82 | x | 2.17 | x | 2.61 | x | 1.98 | x |
|                                                                           |       |                                      |       |   |   |   |   |   |   |   |   |
| Ratio of  Earnings to Fixed Charges Pursuant to the Support Agreement          | ** ** | **2.11**                                  | **x**      | 2.30 | x | 2.83 | x | 3.26 | x | 2.33 | x |

 

(1)         For thepurposes 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 deemed representative of an interest factor). The method ofcomputing the ratio of earnings to fixed charges shown above complies with SECreporting requirements (see Exhibit 12.1) but differs from the methodcalled for in the Support Agreement between the Company and PACCAR (see Exhibit 12.2).

 

10

----

 

**PACCAR Financial Corp.**

(Millions of Dollors)

 

**ITEM7.        MANAGEMENT’S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND****RESULTS OF OPERATION**(Millions of Dollars)

 

**Results of Operations**

 
| ** **                                                                                                                                             | ** ** | **Year ended December 31** | ** **  |
|--------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------|-------------|
| ** **                                                                                                                                             | ** ** | **2007**                   | ** **  | 2006 | ** ** | 2005 | ** ** |
| Average earning  assets (including operating leases)                                                                                                   | ** ** | **$**                      | **5,240.1** |   | $ | 4,881.5 |   | $ | 4,121.6 |   |
| Interest and  other revenue                                                                                                                            | ** ** | **573.0**                  |        | 509.6 |   | 409.3 |   |
| Income before  taxes                                                                                                                                   | ** ** | **133.4**                  |        | 136.3 |   | 120.0 |   |
| Net income                                                                                                                                             | ** ** | **82.3**                   |        | 84.5 |   | 74.0 |   |
|                                                                                                                                                   |       |                       |        |   |   |   |   |
| Allowance for  Losses:                                                                                                                                 |       |                       |        |   |   |   |   |
| Balance at  beginning of year                                                                                                                          | ** ** | **$**                      | **86.9**    |   | $ | 77.3 |   | $ | 67.1 |   |
| Provision for  losses                                                                                                                                  | ** ** | **24.4**                   |        | 14.9 |   | 14.2 |   |
| Credit losses                                                                                                                                          | ** ** | **(20.7**                  | **)**       | (8.4 | ) | (7.3 | ) |
| Recoveries                                                                                                                                             | ** ** | **2.0**                    |        | 3.1 |   | 3.3 |   |
| Balance at end  of year                                                                                                                                | ** ** | **$**                      | **92.6**    |   | $ | 86.9 |   | $ | 77.3 |   |
|                                                                                                                                                   |       |                       |        |   |   |   |   |
| Ratios:                                                                                                                                                |       |                       |        |   |   |   |   |
| Credit losses  net of recoveries ($18.7 in 2007) to average total portfolio ($4,780.5 in  2007)                                                        | ** ** | **.39%**                   | ** **  | .12% |   | .11% |   |
|                                                                                                                                                   | ** ** | ** **                 | ** **  |   |   |   |   |
| Allowance for  losses ($92.6 in 2007) to year-end total portfolio ($4,642.9 in 2007)                                                                   | ** ** | **1.99%**                  | ** **  | 1.73% |   | 1.80% |   |
|                                                                                                                                                   | ** ** | ** **                 | ** **  |   |   |   |   |
| Year-end retail  loan and lease receivables past due, over 30 days, ($109.0 in 2007) to  year-end retail loan and lease receivables ($3,887.3 in 2007) | ** ** | **2.80%**                  | ** **  | .91% |   | .86% |   |

 

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** | ** **  |
|-----------------------------|------------|-----------------------|-------------|
| ** **                  | ** ** | **2007**              | ** **  | 2006 | ** ** | 2005 | ** ** |
| Retail loans                | ** ** | **$**                 | **2,667.8** | ** ** | **57** | **%** |   | $ | 2,798.4 |   | 56 | % |   | $ | 2,481.8 |   | 58 | % |   |
| Retail leases               | ** ** | **1,219.5**           | ** **  | **27** | **%** |   | 1,203.9 |   | 24 | % |   | 977.3 |   | 23 | % |   |
| Dealer wholesale  financing | ** ** | **454.0**             | ** **  | **10** | **%** |   | 716.4 |   | 14 | % |   | 626.9 |   | 14 | % |   |
| Dealer master  notes        | ** ** | **301.6**             | ** **  | **6** | **%** |   | 301.5 |   | 6 | % |   | 206.0 |   | 5 | % |   |
| Total portfolio             | ** ** | **$**                 | **4,642.9** | ** ** | **100** | **%** |   | $ | 5,020.2 |   | 100 | % |   | $ | 4,292.0 |   | 100 | % |   |

 

In2007, an economic slowdown affecting industries such as residentialconstruction together with generally lower freight demand and high fuel costshave resulted in increases in past due receivables and credit losses as certaintruck owners have experienced diminished operating profits and cashflows thathave decreased some customers ability to make timely payments.

 

11

----

 

**PACCAR Financial Corp.**

(Millions of Dollars)

 

In2007, credit losses increased to $20.7 compared to $8.4 and $7.3 in 2006 and2005, respectively, as a result of an increase in repossession activity. As apercentage of the total portfolio, net credit losses increased for the yearended December 2007 to .39% compared to .12% and .11% at December 2006and 2005, respectively.   A slowness incustomers making timely payments resulted in year-end retail loan and leasereceivables past due over 30 days to increase to 2.80% at December 31,2007 compared to .91% and .86% at December 31, 2006 and 2005,respectively.  The allowance for lossesas a percentage of the total portfolio increased to 1.99% at December 31,2007 as a result of the increases in past due accounts and credit losses.  See “Critical Accounting Policies, Note A –Significant Accounting Policies, and Note B – Finance and Other Receivables”for additional discussion regarding the Allowance for Losses.

 

In2007, recoveries of accounts previously written off of $2.0 decreased from $3.1and $3.3 in 2006 and 2005, respectively. This was primarily due to lower creditlosses experienced in prior years.

 

Dealerwholesale financing balances decreased in 2007 to $454.0 at December 2007compared to $716.4 and $626.9 at December 2006 and 2005, respectively, asdealer new truck inventory balances decreased due to the slowness in the newtruck market.

 

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.

 

**2007 Compared to 2006:**

 

TheCompany’s net income of $82.3 in 2007 decreased from $84.5 in 2006.  The increased finance gross profit (revenuesminus borrowing, depreciation and other rental expenses) generated from anincrease in average earning assets in 2007 was offset by an increase in the provisionfor losses on receivables ($14.9 in 2006 versus $24.4 in 2007) due to highercredit losses and an increase in insurance claims. Interest and fee income in2007 increased $44.0 to $366.9 from $322.9 in 2006.  Higher earning assets and higher interestrates contributed $28.4 and $15.6, respectively, to the increase.  Operating lease and rental income, and therelated depreciation and other rental expenses for 2007 increased due to higheraverage balances of operating lease assets.

 

Interestand other borrowing expenses in 2007 increased $34.2 to $203.0 from $168.8 in2006.  Higher average debt balancescontributed $13.4 and higher interest rates contributed $20.8 to the increase.The Company’s effective income tax rate of 38.3% in 2007 was comparable to2006.

 

**2006 Compared to 2005:**

 

TheCompany’s net income of $84.5 in 2006 increased 14% from $74.0 in 2005. Theprofit improvement primarily resulted from an increased finance gross profit(revenues minus borrowing, lease and insurance expenses). Interest and feeincome increased to $322.9 from $248.6 in 2005 due to higher earning assets andhigher interest rates. Higher earning assets and higher interest ratescontributed $49.2 and $25.1, respectively, to the increase. Average earningassets increased due to higher new loan and lease volume from increased PACCARtruck production.

 

Interestand other borrowing expenses increased to $168.8 in 2006 due to an increase inaverage debt balances and higher interest rates. Higher average debt balancescontributed $29.1 and higher interest rates contributed $33.3 to theincrease.  Depreciation and otheroperating lease and rental expenses increased 11% to $109.7 in 2006 from $98.7in 2005 primarily due to continued growth in operating lease assets. Theprovision for losses in 2006 of $14.9 increased slightly from the $14.2 in2005, reflecting the impact of a growing portfolio and higher credit losses.The Company’s 2006 income tax rate of 38.0% was comparable to 2005.

 

12

----

 

**PACCAR Financial Corp.**

(Millions of Dollors)

 

**Company Outlook**

 

The future profitability of the Companyis principally dependent on the generation of new business volume and therelated spread between the asset yields and the borrowing costs on newbusiness, as well as the level of credit losses experienced. Assets are notlikely to increase until the new truck market recovers. The Company is exposedto reduced liquidity in the capital markets but does not anticipate the impactof reduced liquidity to materially impact its ability to generate new businessvolume. The Company continues to be exposed to the risk that serious economicweakness and higher fuel costs may continue to exert negative pressure on theprofit margins of truck operators and result in higher past-due accounts andincreased repossessions.

 

**Funding and Liquidity**

 

The Company periodically registers debtsecurities under the Securities Act of 1933 for offering to the public. In November 2006, the Company filed anew shelf registration statement. The registration expires in 2009 and does notlimit the principal amount of debt securities that may be issued during theperiod.

 

The Company’sinvestment grade credit ratings continue to provide access to capital marketsat competitive interest rates. During 2007, the Company’s credit ratingsenabled it to meet its funding requirements despite a disturbance in certaincredit markets during the second half of the year. TheCompany believes it will be able to fund receivables, service debt and paydividends through internally generated funds, and access to public and privatedebt markets.

 

The Company’sdebt ratings at December 31, 2007****are asfollows:

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

 

The Company’sstrong credit ratings are primarily based on PACCAR’s operating cash flow,demand for its quality products and substantial financial assets. Access tofinancing at competitive rates would be negatively impacted by a downgrade inthese credit ratings.

 

The followingsummarizes the Company’s contractual cash commitments at December 31, 2007:

 
| ** **       | ** ** | **Maturity**                      | ** ** | ** **                        | ** ** |
|------------------|------------|-----------------------------------|------------|-----------------------------------|------------|
| ** **       | ** ** | **Less than  One Year** | ** ** | **More than  One Year** | ** ** | **Total** | ** ** |
| Borrowings       |       | $                                 | 1,953.7    |                              | $          | 2,125.0 |   | $ | 4,078.7 |   |
| Operating Leases |       | .7                                |       | .9                                |       | 1.6 |   |
| Total            |       | $                                 | 1,954.4    |                              | $          | 2,125.9 |   | $ | 4,080.3 |   |

 

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 $144.8 expiringwithin one year. These commitments represent commitments to fund new retailloan and lease contracts.

 

13

----

 

**PACCAR Financial Corp.**

(Millions of Dollors)

 

**Critical Accounting Policies:**

 

Inthe preparation of the Company’s financial statements, in accordance with U.S.generally accepted accounting principles, management uses estimates and makesjudgments and assumptions that affect asset and liability values and theamounts reported as income and expense during the periods presented. Thefollowing are accounting policies which, in the opinion of management, areparticularly sensitive and which, if actual results are different, may have amaterial impact on the financial statements.

 

Equipmenton Operating Leases

 

Indetermining the estimated residual values for equipment on operating leases,and certain direct financing leases, the Company considers the length of thelease term, the truck model and anticipated market demand and the expectedusage of the truck. If the sales price of the trucks at the end of the leaseterm differs significantly from the Company’s estimate, a gain or loss willresult. The Company believes its residual setting policies are appropriate;however, future market conditions, changes in government regulations and otherfactors outside the Company’s control can impact the ultimate sales price oftrucks returned under these contracts. Residual values are reviewed regularlyand adjusted if market conditions warrant. See “Note A – Significant AccountingPolicies” in the Notes to Financial 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 ($134.0 million at December 31,2007 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, 2007 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 trends,interest rates and other factors representing leading indicators impacting thecreditworthiness of our borrowers and their ability to repay. The Companyfurther considers the impact of dealer recourse, cash recoveries and usedequipment collateral recoveries. The projected amount is then compared to thebalance in the allowance and appropriate adjustments are 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, 2007). 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.

 

14

----

 

**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;changes in the levels of new business volume due to unit fluctuations in newPACCAR truck 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 QUALITATIVEDISCLOSURES ABOUT MARKET RISK**

 

Market Risk andDerivative Financial Instruments

 

In the normal course ofbusiness, the Company issues various financial instruments that expose theCompany to market risk associated with market interest rates. Policies andprocedures have been established by the Company to manage these market risksthrough the use of various derivative financial instruments. The Company doesnot engage in derivatives trading, market-making or other speculativeactivities.

 

The following is asensitivity analysis for the Company’s assets and liabilities that haveinterest rate risk. The gains or losses in the table represent the changes inthe financial instruments’ fair values that would result from a 100 basis pointincrease from the current market rate at December 31, 2007 and 2006.

 
| **Fair Value Gains (Losses)** | ** ** | **Year ended December 31** | ** ** |
|----------------------------------------------|------------|-------------------------------------------|------------|
| **(Millions of Dollars)**          | ** ** | **2007**                                  | ** ** | 2006 | ** ** |
|                                         |       |                                      |       |   |   |
| Assets                                       |       |                                      |       |   |   |
| Fixed rate loans                             | ** ** | **$**                                     | **(44.3**  | **)** | $ | (42.6 | ) |
|                                         |       |                                      | ** ** |   |   |
| Liabilities                                  |       |                                      | ** ** |   |   |
| Interest rate  swaps related to debt         | ** ** | **41.6**                                  | ** ** | 44.3 |   |
|                                         |       |                                      | ** ** |   |   |
| Total                                        | ** ** | **$**                                     | **(2.7**   | **)** | $ | 1.7 |   |

 

The Company’s debt as ofDecember 31, 2007 and 2006 consists of commercial paper and floating ratemedium-term notes.

 

**ITEM8.        FINANCIAL STATEMENTS ANDSUPPLEMENTARY DATA**

 

The financial statementsof the Company and related schedules described under Item 15, “Exhibits,Financial Statement Schedules” are included following this page.

 

15

----

 

**PACCAR Financial Corp.**

 

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 31,2007 and 2006, and the related statements of income, cash flows, stockholder’sequity and comprehensive income for each of the three years in the period endedDecember 31, 2007. 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 31,2007 and 2006, and the results of its operations and its cash flows for each ofthe three years in the period ended December 31, 2007 in conformity withU.S. generally accepted accounting principles.

 

 
|                   |   | /s/ Ernst & Young LLP |
|------------------------|--------|--------------------------------|
|                   |   |                           |
|                   |   |                           |
| Seattle, Washington    |   |                           |
| February 14, 2008 |   |                           |

 

16

----

 

**PACCAR Financial Corp.**

 

**STATEMENTS OF INCOME**

**(Millions of Dollars)**

 
| ** **                                    | ** ** | **Year ended December 31** | ** ** |
|-----------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                    | ** ** | **2007**                                  | ** ** | 2006 | ** ** | 2005 | ** ** |
|                                          |       |                                      |       |   |   |   |   |
| Interest and fee  income                      | ** ** | **$**                                     | **366.9**  |   | $ | 322.9 |   | $ | 248.6 |   |
| Operating lease  and rental income            | ** ** | **150.7**                                 |       | 135.2 |   | 120.1 |   |
| Insurance  premiums and other revenue         | ** ** | **55.4**                                  |       | 51.5 |   | 40.6 |   |
| **TOTAL  INTEREST AND OTHER REVENUE**         | ** ** | **$**                                     | **573.0**  |   | $ | 509.6 |   | $ | 409.3 |   |
|                                          |       |                                      |       |   |   |   |   |
| Interest and  other borrowing expenses        | ** ** | **203.0**                                 |       | 168.8 |   | 106.4 |   |
| Depreciation and  other rental expenses       | ** ** | **121.8**                                 |       | 109.7 |   | 98.7 |   |
| Insurance claims  and other expenses          | ** ** | **37.5**                                  |       | 29.6 |   | 22.7 |   |
| Selling, general  and administrative expenses | ** ** | **52.9**                                  |       | 50.3 |   | 47.3 |   |
| Provision for  losses on receivables          | ** ** | **24.4**                                  |       | 14.9 |   | 14.2 |   |
| **TOTAL  EXPENSES**                           | ** ** | **$**                                     | **439.6**  |   | $ | 373.3 |   | $ | 289.3 |   |
| ** **                                    | ** ** | ** **                                |       |   |   |   |   |
| **INCOME  BEFORE INCOME TAXES**               | ** ** | **$**                                     | **133.4**  |   | $ | 136.3 |   | $ | 120.0 |   |
| ** **                                    | ** ** | ** **                                |       |   |   |   |   |
| Income taxes                                  | ** ** | **51.1**                                  |       | 51.8 |   | 46.0 |   |
|                                          | ** ** | ** **                                |       |   |   |   |   |
| **NET  INCOME**                               | ** ** | **$**                                     | **82.3**   |   | $ | 84.5 |   | $ | 74.0 |   |

 

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

 

17

----

 

**PACCAR Financial Corp.**

 

**BALANCE SHEETS**

**(Millions of Dollars)**

 
| ** **                                                                                                                                    | ** ** | **As of December 31** | ** **  |
|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------|-------------|
| ** **                                                                                                                                    | ** ** | **2007**                             | ** **  | 2006 | ** ** |
|                                                                                                                                          |       |                                 |        |   |   |
| **ASSETS**                                                                                                                                    |       |                                 |        |   |   |
|                                                                                                                                          |       |                                 |        |   |   |
| Cash                                                                                                                                          | ** ** | **$**                                | **25.6**    |   | $ | 13.9 |   |
| Finance and  other receivables, net of allowance for losses (2007 - $92.6 and 2006 -  $86.9)                                                  | ** ** | **4,550.3**                          |        | 4,933.3 |   |
| Due from PACCAR  Inc and affiliates                                                                                                           | ** ** | **402.8**                            |        | 14.6 |   |
| Equipment on  operating leases, net of depreciation (2007 - $189.2 and 2006 - $151.1)                                                         | ** ** | **475.5**                            |        | 461.4 |   |
| Other assets                                                                                                                                  | ** ** | **53.4**                             |        | 85.1 |   |
|                                                                                                                                          |       |                                 |        |   |   |
| **TOTAL  ASSETS**                                                                                                                             | ** ** | **$**                                | **5,507.6** |   | $ | 5,508.3 |   |
|                                                                                                                                          |       |                                 |        |   |   |
| **LIABILITIES**                                                                                                                               |       |                                 |        |   |   |
|                                                                                                                                          |       |                                 |        |   |   |
| Accounts  payable, accrued expenses and other                                                                                                 | ** ** | **$**                                | **239.3**   |   | $ | 218.5 |   |
| Due to PACCAR  Inc and affiliates                                                                                                             | ** ** | **10.1**                             |        | 46.4 |   |
| Commercial paper                                                                                                                              | ** ** | **1,453.7**                          |        | 2,081.1 |   |
| Medium-term  notes                                                                                                                            | ** ** | **2,625.0**                          |        | 2,050.0 |   |
| Income taxes –  current and deferred                                                                                                     | ** ** | **354.9**                            |        | 331.3 |   |
|                                                                                                                                          |       |                                 |        |   |   |
| **TOTAL  LIABILITIES**                                                                                                                        | ** ** | **$**                                | **4,683.0** |   | $ | 4,727.3 |   |
|                                                                                                                                          |       |                                 |        |   |   |
| **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 $100 per share, 200,000 shares authorized, 145,000 shares issued  and outstanding                                    | ** ** | **14.5**                             |        | 14.5 |   |
| Additional  paid-in capital                                                                                                                   | ** ** | **215.1**                            |        | 192.4 |   |
| Retained  earnings                                                                                                                            | ** ** | **590.3**                            |        | 532.0 |   |
| Accumulated  other comprehensive (loss) income                                                                                                | ** ** | **(26.3**                            | **)**       | 11.1 |   |
|                                                                                                                                          |       |                                 |        |   |   |
| **TOTAL  STOCKHOLDER’S EQUITY**                                                                                                          | ** ** | **$**                                | **824.6**   |   | $ | 781.0 |   |
|                                                                                                                                          |       |                                 |        |   |   |
| **TOTAL  LIABILITIES AND STOCKHOLDER’S EQUITY**                                                                                          | ** ** | **$**                                | **5,507.6** |   | $ | 5,508.3 |   |

 

See Notes to FinancialStatements

 

18

----

 

**PACCAR Financial Corp.**

 

**STATEMENTS OF CASH FLOWS**

**(Millions of Dollars)**

 
| ** **                                                                           | ** ** | **Year ended December 31** | ** ** |
|--------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                           | ** ** | **2007**                                  | ** ** | 2006 | ** ** | 2005 | ** ** |
|                                                                                 |       |                                      |       |   |   |   |   |
| **OPERATING  ACTIVITIES**                                                            |       |                                      |       |   |   |   |   |
|                                                                                 |       |                                      |       |   |   |   |   |
| Net income                                                                           | ** ** | **$**                                     | **82.3**   |   | $ | 84.5 |   | $ | 74.0 |   |
| Items included  in net income not affecting cash:                                    |       |                                      |       |   |   |   |   |
| Depreciation and  amortization                                                       | ** ** | **94.5**                                  |       | 84.8 |   | 73.8 |   |
| Provision for  losses on receivables                                                 | ** ** | **24.4**                                  |       | 14.9 |   | 14.2 |   |
| Increase  (decrease) deferred tax liability                                          | ** ** | **32.0**                                  |       | 39.1 |   | (.2 | ) |
| Administrative  fees for services from PFSC                                          | ** ** | **22.7**                                  |       | 22.4 |   | 19.3 |   |
| (Decrease)  increase in payables and other                                           | ** ** | **(17.4**                                 | **)**      | (13.9 | ) | 27.0 |   |
|                                                                                 |       |                                      |       |   |   |   |   |
| **NET  CASH PROVIDED BY OPERATING ACTIVITIES**                                       | ** ** | **238.5**                                 |       | 231.8 |   | 208.1 |   |
|                                                                                 |       |                                      |       |   |   |   |   |
| **INVESTING  ACTIVITIES**                                                            |       |                                      |       |   |   |   |   |
|                                                                                 |       |                                      |       |   |   |   |   |
| Finance and  other receivables originated                                            | ** ** | **(1,665.5**                              | **)**      | (2,286.7 | ) | (1,980.6 | ) |
| Collections on  finance and other receivables                                        | ** ** | **1,720.3**                               |       | 1,727.2 |   | 1,428.6 |   |
| Net decrease  (increase) in wholesale receivables                                    | ** ** | **262.4**                                 |       | (89.5 | ) | (253.3 | ) |
| Net (increase)  decrease in due from loans and leases from PACCAR Inc and affiliates | ** ** | **(384.5**                                | **)**      | 35.7 |   | 79.0 |   |
| Acquisition of  equipment on operating leases, primarily from PACCAR Inc             | ** ** | **(159.1**                                | **)**      | (177.7 | ) | (165.9 | ) |
| Proceeds from  disposal of equipment                                                 | ** ** | **74.3**                                  |       | 66.4 |   | 35.5 |   |
| Other                                                                                | ** ** | **13.2**                                  |       | (19.1 | ) | (4.6 | ) |
|                                                                                 |       |                                      |       |   |   |   |   |
| **NET  CASH USED IN INVESTING ACTIVITIES**                                           | ** ** | **(138.9**                                | **)**      | (743.7 | ) | (861.3 | ) |
|                                                                                 |       |                                      |       |   |   |   |   |
| **FINANCING  ACTIVITIES**                                                            |       |                                      |       |   |   |   |   |
|                                                                                 | ** ** | ** **                                | ** ** |   |   |   |   |
| Net (decrease)  increase in commercial paper                                         | ** ** | **(627.4**                                | **)**      | 275.5 |   | 754.8 |   |
| Proceeds from  medium-term notes                                                     | ** ** | **825.0**                                 |       | 1,500.0 |   | 550.0 |   |
| Payments of  medium-term notes                                                       | ** ** | **(250.0**                                | **)**      | (1,250.0 | ) | (580.0 | ) |
| Dividends paid                                                                       | ** ** | **(24.0**                                 | **)**      | (30.0 | ) | (70.0 | ) |
| Payment of  advances (to) from PACCAR Inc                                            | ** ** | **(11.5**                                 | **)**      | 11.3 |   | (.8 | ) |
|                                                                                 |       |                                      |       |   |   |   |   |
| **NET  CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES**                             | ** ** | **(87.9**                                 | **)**      | 506.8 |   | 654.0 |   |
|                                                                                 |       |                                      |       |   |   |   |   |
| **NET  INCREASE (DECREASE) IN CASH**                                                 | ** ** | **11.7**                                  |       | (5.1 | ) | .8 |   |
|                                                                                 |       |                                      |       |   |   |   |   |
| **CASH AT  BEGINNING OF YEAR**                                                       | ** ** | **13.9**                                  |       | 19.0 |   | 18.2 |   |
|                                                                                 |       |                                      |       |   |   |   |   |
| **CASH AT  END OF YEAR**                                                             | ** ** | **$**                                     | **25.6**   |   | $ | 13.9 |   | $ | 19.0 |   |

 

See Notes to FinancialStatements

 

19

----

 

**PACCAR Financial Corp.**

 

**STATEMENTS OF STOCKHOLDER’S EQUITY**

**(Millions of Dollars)**

 
| ** **                                                       | ** ** | **Year ended December 31** | ** ** |
|------------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                       | ** ** | **2007**                                  | ** ** | 2006 |   | 2005 | ** ** |
|                                                             |       |                                      |       |   |   |   |   |
| **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                                    | ** ** | **192.4**                                 |       | 170.0 |   | 150.7 |   |
| Investments from  PACCAR Financial Services Corporation          | ** ** | **22.7**                                  |       | 22.4 |   | 19.3 |   |
| Balance at end  of year                                          | ** ** | **215.1**                                 |       | 192.4 |   | 170.0 |   |
|                                                             |       |                                      |       |   |   |   |   |
| **RETAINED  EARNINGS**                                           |       |                                      |       |   |   |   |   |
|                                                             |       |                                      |       |   |   |   |   |
| Balance at  beginning of year                                    | ** ** | **532.0**                                 |       | 477.5 |   | 473.5 |   |
| Net income                                                       | ** ** | **82.3**                                  |       | 84.5 |   | 74.0 |   |
| Dividends paid                                                   | ** ** | **(24.0**                                 | )          | (30.0 | ) | (70.0 | ) |
| Balance at end  of year                                          | ** ** | **590.3**                                 |       | 532.0 |   | 477.5 |   |
|                                                             |       |                                      |       |   |   |   |   |
| **ACCUMULATED  OTHER COMPREHENSIVE INCOME (LOSS)**               |       |                                      |       |   |   |   |   |
| ** **                                                       |       |                                      |       |   |   |   |   |
| Accumulated  unrealized net gain (loss) on derivative contracts: |       |                                      |       |   |   |   |   |
| Balance at  beginning of year                                    | ** ** | **11.1**                                  |       | 19.6 |   | 5.4 |   |
| Net unrealized  (loss) gain                                      | ** ** | **(37.4**                                 | )          | (8.5 | ) | 14.2 |   |
| Balance at end of  year                                          | ** ** | **(26.3**                                 | )          | 11.1 |   | 19.6 |   |
|                                                             |       |                                      |       |   |   |   |   |
| **TOTAL  STOCKHOLDER’S EQUITY**                             | ** ** | **$**                                     | **824.6**  |   | $ | 781.0 |   | $ | 712.6 |   |

 

See Notes to FinancialStatements

 

20

----

 

**PACCAR Financial Corp.**

 

**STATEMENTS OF COMPREHENSIVE INCOME**

**(Millions of Dollars)**

 
| ** **                                          | ** ** | **Year ended December 31** | ** ** |
|-----------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                          | ** ** | **2007**                                  | ** ** | 2006 |   | 2005 | ** ** |
|                                                |       |                                      |       |   |   |   |   |
| Net income                                          | ** ** | **$**                                     | **82.3**   |   | $ | 84.5 |   | $ | 74.0 |   |
| Other  comprehensive income, net of tax             |       |                                      |       |   |   |   |   |
| Unrealized net  (loss) gain on derivative contracts | ** ** | **(37.4**                                 | )          | (8.5 | ) | 14.2 |   |
| Net other comprehensive  (loss) income              | ** ** | **(37.4**                                 | )          | (8.5 | ) | 14.2 |   |
|                                                |       |                                      |       |   |   |   |   |
| TOTAL  COMPREHENSIVE INCOME                         | ** ** | **$**                                     | **44.9**   |   | $ | 76.0 |   | $ | 88.2 |   |

 

See Notes to FinancialStatements

 

21

----

 

**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.

 

Allowance forLosses: The provision forlosses on finance and other receivables is charged to income in an amountsufficient to maintain the allowance for losses at a level considered adequateto cover estimated credit losses, net of recoveries, inherent in the portfolio.Receivables are charged to this allowance when, in the judgment of management,they are deemed uncollectible (generally upon repossession of the collateral).With respect to certain retail contracts acquired from dealers, the dealerretains liability, up to specified limits, for the credit loss.

 

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 using the effective yield method. For operatingleases, rental revenue is recognized on a straight-line basis over the leaseterm.

 

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.

 

Reclassifications: Certainprior-year amounts have been reclassified to conform to the 2007 presentation.

 

**NewAccounting Pronouncements**

 

The Company adopted FASBInterpretation No. 48, *Accounting for Uncertaintyin Income Taxes* (FIN 48) effective January 1, 2007 with nomaterial effect on the Company’s financial statements. See Note H for furtherinformation concerning income taxes.

 

In September 2006,the FASB issued Statement No. 157, *Fair Value Measurements*(FAS 157). FAS 157 defines fair value and expands disclosures about fair valuemeasurements and is effective January 1, 2008. Adoption of FAS 157 is notexpected to have a material effect on the Company’s financial statements.

 

22

----

 

**PACCARFinancial Corp.**

 

**NOTES TOFINANCIAL STATEMENTS**

(Millions of Dollars)

 

In February 2007,the FASB issued Statement No. 159, *The Fair Value Option forFinancial Assets and Financial Liabilities* (FAS 159). ThisStatement, which is effective January 1, 2008 for the Company, permitsentities to measure most financial instruments at fair value if desired andrequires that unrealized gains and losses on items for which the option hasbeen elected to be reported in earnings. The Company does not expect theadoption of FAS 159 to have a material effect on its financial statements.

 

**NOTE B – FINANCE AND OTHERRECEIVABLES**

 

Terms for finance andother receivables at origination range from 12 to 84 months. Repaymentexperience indicates some receivables will be paid prior to contract maturity,while some others will be extended or renewed. Accordingly, the maturities ofreceivables presented here should not be regarded as a forecast of futurecollections.

 

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** | ** **  |
|-------------------------------------------------------------------------------------------------------|------------|-------------------------------------------|-------------|
| ** **                                                                                            | ** ** | **2007**                                  | ** **  | 2006 | ** ** |
| Retail contracts  and loans due within:                                                               |       |                                      |        |   |   |
| One year                                                                                              | ** ** | **$**                                     | **1,059.6** |   | $ | 1,109.3 |   |
| Two years                                                                                             | ** ** | **733.3**                                 |        | 719.7 |   |
| Three years                                                                                           | ** ** | **585.7**                                 |        | 590.9 |   |
| Four years                                                                                            | ** ** | **367.7**                                 |        | 394.1 |   |
| Five years                                                                                            | ** ** | **159.9**                                 |        | 189.1 |   |
| Six years and  beyond                                                                                 | ** ** | **17.6**                                  |        | 30.6 |   |
| ** **                                                                                            |       | **2,923.8**                               |        | 3,033.7 |   |
|                                                                                                  |       |                                      |        |   |   |
| Wholesale  financing                                                                                  | ** ** | **454.0**                                 |        | 716.4 |   |
| Direct financing  leases (including unguaranteed residual values of $42.8 in 2007 and $38.0 in  2006) | ** ** | **1,411.5**                               |        | 1,399.8 |   |
| Interest and  other receivables                                                                       | ** ** | **45.6**                                  |        | 66.2 |   |
| Unearned  interest on direct financing leases                                                         | ** ** | **(192.0**                                | )           | (195.9 | ) |
|                                                                                                  |       |                                      |        |   |   |
| ** **                                                                                            |       | **4,642.9**                               |        | 5,020.2 |   |
|                                                                                                  |       |                                      |        |   |   |
| Less allowance  for losses                                                                            | ** ** | **(92.6**                                 | )           | (86.9 | ) |
|                                                                                                  |       |                                      |        |   |   |
| Finance and  other receivables                                                                        | ** ** | **$**                                     | **4,550.3** |   | $ | 4,933.3 |   |

 

Future minimum leasepayments on direct financing leases totaled $1,368.7 at December 31, 2007and are due as follows: $335.7 in 2008; $334.5 in 2009; $288.6 in 2010; $215.4in 2011; $116.7 in 2012 and $77.8 in 2013 and beyond.

 

23

----

 

**PACCARFinancial Corp.**

 

**NOTES TOFINANCIAL STATEMENTS**

(Millions of Dollars)

 

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

 
| ** **                        | ** ** | **Year ended December 31** | ** ** |
|-----------------------------------|------------|-------------------------------------------|------------|
| ** **                        | ** ** | **2007**                                  | ** ** | 2006 | ** ** |
|                              |       |                                      |       |   |   |
| Balance at  beginning of year     | ** ** | **$**                                     | **86.9**   |   | $ | 77.3 |   |
| Provision for  losses             | ** ** | **24.4**                                  |       | 14.9 |   |
| Credit losses,  net of recoveries | ** ** | **(18.7**                                 | )          | (5.3 | ) |
|                              |       |                                      |       |   |   |
| Balance at end  of year           | ** ** | **$**                                     | **92.6**   |   | $ | 86.9 |   |

 

At December 31,2007 and 2006, the recorded investments in retail contracts and loans that wereconsidered to be impaired were $101.3 and $21.5, respectively. Included in theallowance for losses were specific reserves of $15.2 and $3.6 on these impairedretail contracts and loans. The average recorded investment in impaired retailcontracts and loans during the years ended December 31, 2007, 2006 and2005, was $53.0, $17.9 and $19.6, respectively. The Company recognized interestincome of $2.2, $.6 and $.5 for the years ended December 31, 2007, 2006and 2005, respectively, on those impaired retail contracts and loans, all ofwhich were recognized in income upon receipt of cash.

 

**NOTE C – EQUIPMENT ON OPERATINGLEASES**

 

Terms of operatingleases at origination generally range from 24 to 72 months. The total futureannual minimum rental payments to be received for equipment on non-cancelableoperating leases beginning January 1, 2008 of $207.5 are due as follows:$95.1 in 2008; $61.6 in 2009; $34.3 in 2010; $14.9 in 2011 and $1.6 in 2012.Depreciation expense related to equipment on operating leases was $89.2, $78.1,and $67.1 in 2007, 2006 and 2005, respectively. Substantially all equipment onoperating leases is manufactured by 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, 2007, 2006 and 2005 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, $22.4 and $19.3 in 2007, 2006, and 2005, respectively, were chargedto the 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 $24.0, $30.0 and $70.0 were declared and paid in 2007, 2006and 2005, respectively.

 

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

 

24

----

 

**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 $1.1 for years 2007, 2006 and 2005, respectively.

 

Company employees andPACCAR employees are also covered by a defined contribution plan, sponsored byPACCAR. Expenses incurred by the Company for the defined contribution planbenefits were $1.2, $1.1 and $1.1 for years 2007, 2006 and 2005, 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 limits is guaranteed by PACCAR. The Companyperiodically reviews the funding alternatives for these affiliates, and theselimits may be revised in the future. There was a total of $371.2 in loansoutstanding to foreign affiliates operating in The Netherlands, Mexico andCanada at December 31, 2007. There were no loans outstanding to foreignaffiliates at December 31, 2006.

 

The Company providesdirect financing leases to a certain dealer location owned directly by anaffiliate of PACCAR.

 

Amounts outstanding at December 31,2007 are summarized below:

 
| **Due from PACCAR Inc and affiliates** | ** ** | **December 31  2007** | ** ** | December 31  2006 | ** ** |
|-----------------------------------------------------------------|------------|----------------------------|------------|------------------------|------------|
| Loans due from  PACCAR Inc                                      | ** ** | **$**                      | **11.5**   |                   | $          | 14.4 |   |
| Loans due from  affiliates                                      | ** ** | **371.2**                  |       |                   |       |
| Direct financing  leases due from affiliate                     | ** ** | **16.2**                   |       |                   |       |
| Receivables                                                     | ** ** | **3.9**                    |       | .2                     |       |
| Total                                                           | ** ** | **$**                      | **402.8**  |                   | $          | 14.6 |   |
|                                                            |       |                       |       |                   |       |
| Due to PACCAR  Inc and affiliates                               |       |                       |       |                   |       |
| Loans to PACCAR  Inc                                            | ** ** | **$**                      | ** ** | **$**                  | 11.5       |   |
| Payables                                                        | ** ** | **10.1**                   |       | 34.9                   |       |
| Total                                                           | ** ** | **$**                      | **10.1**   |                   | $          | 46.4 |   |

 

PACCAR has issuedletters of credit as of December 31, 2007 in the amount of $4.9 on behalfof the Company to guarantee funds for payment to insured franchises and theircustomers for any future insurance losses.

 

25

----

 

**PACCARFinancial Corp.**

 

**NOTES TOFINANCIAL STATEMENTS**

(Millions of Dollars)

 

**NOTE E – DERIVATIVE FINANCIALINSTRUMENTS**

 

Derivative financialinstruments are used as hedges to manage exposures to fluctuations in interestrates. The Company’s policies prohibit the use of derivatives for speculationor trading. The Company documents its hedge objectives, procedures andaccounting treatment at the inception of and during the term of each hedge.Exposure limits and minimum credit ratings are used to minimize the risks ofcounterparty default, and the Company had no material exposures to default at December 31,2007.

 

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, 2007, the Company had 174 interest-rate swaps and oneinterest-rate cap agreement outstanding. The notional amount of these contractstotaled $2,894.3 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 an asset of $1.5 and a liability of $44.2 at December 31,2007. Fair values at December 31, 2006 amounted to an asset of $21.8 and aliability of $3.9.

 

Notional maturitiesfor all interest-rate contracts for the five years beginning January 1,2008, are $868.0, $997.3, $719.0, $269.5, and $40.5 in year 2012. Thesecontracts are floating to fixed swaps that effectively convert an equivalentamount of commercial 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, 2007.

 

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, 2007, $6.9, net of tax, is expected to bereclassified to interest expense in 2008. The fixed interest earned on financereceivables will offset the amount recognized in interest expense, resulting ina stable interest margin consistent with the Company’s interest-rate riskmanagement strategy.

 

26

----

 

**PACCARFinancial Corp.**

 

**NOTES TOFINANCIAL STATEMENTS**

(Millions of Dollars)

 

**NOTE F – BORROWINGS**

 

Borrowings aresummarized as follows:

 
| ** **                       | ** ** | **Effective** | ** ** | **As of December 31,** | ** **  |
|----------------------------------|------------|---------------|------------|---------------------------------------|-------------|
| ** **                       | ** ** | **Rate***     | ** ** | **2007**                              | ** **  | 2006 | ** ** |
|                             |       |          |       |                                  |        |   |   |
| Commercial paper                 | ** ** | **4.36%**     | ** ** | **$**                                 | **1,453.7** |   | $ | 2,081.1 |   |
| Floating rate  medium-term notes | ** ** | **5.08%**     | ** ** | **2,625.0**                           |        | 2,050.0 |   |
| Total                            | ** ** | **4.82%**     | ** ** | **$**                                 | **4,078.7** |   | $ | 4,131.1 |   |

 

*The effective rate isthe weighted average rate as of December 31, 2007 and includes the effectsof interest rate swap agreements.

 

Interest expense onborrowings amounted to $199.0, $163.9, and $101.2 for 2007, 2006 and 2005,respectively.

 

Cash paid for interestwas $192.8 in 2007, $162.4 in 2006, and $106.1 in 2005.

 

Principal amounts ofmedium-term notes due over the next five years beginning January 1, 2008are $500.0 in 2008, $1,550.0 in 2009, and $575.0 in 2010.

 

As of December 31,2007, the Company has outstanding $300.0 of extendible floating ratemedium-term notes. These extendible notes had an initial maturity of 13 months,which could be extended at the investor’s option to a final maturity of fiveyears. During 2007, the options were not extended; therefore, the finalmaturities will occur within one year. The interest rate adjustment to LIBOR onthe notes increases each year by a nominal, predetermined amount. Theseextendible medium-term notes are included in the $500.0 principal amount due in2008.

 

**NOTE G – CREDIT ARRANGEMENTS**

 

TheCompany participates with PACCAR and certain other PACCAR affiliates insyndicated credit facilities of $2,700.0 at December 31, 2007. Of thisamount, $1,700.0 expires in June 2008 and $1,000.0 expires in June 2012.PACCAR intends to replace these credit facilities as they expirewith facilities of similar amounts.

 

Ofthe facilities, $1,780.5 is available for use by the Company and/or PACCAR andcertain other PACCAR affiliates. Of the remaining $919.5, $432.0 is onlyavailable for use by PACCAR’s Canadian subsidiaries, $350.0 is only availablefor use by PACCAR’s Mexican financial subsidiary, and $137.5 is only availablefor use by PACCAR’s Australian financial subsidiary. These credit facilitiesare used to provide backup liquidity for the Company’s commercial paper andmaturing medium-term notes. The Company is liable only for its own borrowingsunder these credit facilities. There were no borrowings under these creditfacilities in the years ended December 31, 2007 and 2006.

 

27

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** **

**PACCARFinancial Corp.**

 

**NOTES TO FINANCIAL STATEMENTS**

(Millions of Dollars)

 

**NOTE H – INCOME TAXES**

 

The provision for incometaxes consisted of the following:

 
| ** **                    | ** ** | **Year ended December 31** | ** ** |
|-------------------------------|------------|-------------------------------------------|------------|
| ** **                    | ** ** | **2007**                                  | ** ** | 2006 |   | 2005 | ** ** |
|                          |       |                                      |       |   |   |   |   |
| Current  provision            |       |                                      |       |   |   |   |   |
| Federal                       | ** ** | **$**                                     | **17.3**   |   | $ | 12.3 |   | $ | 44.0 |   |
| State                         | ** ** | **1.8**                                   |       | .4 |   | 2.2 |   |
| ** **                    |       | **19.1**                                  |       | 12.7 |   | 46.2 |   |
|                          |       |                                      |       |   |   |   |   |
| Deferred  provision (benefit) | ** ** | **32.0**                                  |       | 39.1 |   | (.2 | ) |
|                          |       |                                      |       |   |   |   |   |
| ** **                    |       | **$**                                     | **51.1**   |   | $ | 51.8 |   | $ | 46.0 |   |

 

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

 
| ** **                        | ** ** | **Year ended December 31** | ** ** |
|-----------------------------------|------------|-------------------------------------------|------------|
| ** **                        | ** ** | **2007**                                  | ** ** | 2006 |   | 2005 | ** ** |
|                              |       |                                      |       |   |   |   |   |
| Tax at the  statutory rate of 35% | ** ** | **$**                                     | **46.7**   |   | $ | 47.7 |   | $ | 42.0 |   |
| Effect of state  income taxes     | ** ** | **4.3**                                   |       | 4.4 |   | 3.9 |   |
| Other                             | ** ** | **.1**                                    |       | (.3 | ) | .1 |   |
| ** **                        |       | **$**                                     | **51.1**   |   | $ | 51.8 |   | $ | 46.0 |   |

 

Cash paid for incometaxes was $4.4 in 2007, $18.9 in 2006 and $32.7 in 2005.

 

Deferred income taxassets and liabilities consisted of the following:

 
| ** **                             | ** ** | **As of December 31** | ** ** |
|----------------------------------------|------------|--------------------------------------|------------|
| ** **                             | ** ** | **2007**                             | ** ** | 2006 | ** ** |
| Deferred tax  liability:               |       |                                 |       |   |   |
| Asset  capitalization and depreciation | ** ** | **$**                                | **406.9**  |   | $ | 370.6 |   |
| Other                                  | ** ** | **1.6**                              |       | 9.5 |   |
|                                   | ** ** | ** **                           |       |   |   |
| Deferred tax  assets:                  |       |                                 |       |   |   |
| Allowance for  losses on receivables   | ** ** | **(35.4**                            | )          | (33.3 | ) |
| Other                                  | ** ** | **(30.2**                            | )          | (12.8 | ) |
|                                   |       |                                 |       |   |   |
| Net deferred tax  liability            | ** ** | **$**                                | **342.9**  |   | $ | 334.0 |   |

 

28

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** **

**PACCARFinancial Corp.**

 

**NOTES TO FINANCIAL STATEMENTS**

(Millions of Dollars)

 

**NOTE I – FAIR VALUES OF FINANCIALINSTRUMENTS**

 

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

 

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

 

NetReceivables: For floating rateloans and wholesale financing, fair values approximate carrying values. Forfixed rate loans, fair values are estimated using discounted cash flow analysisbased on interest rates currently being offered for loans with similar terms toborrowers of similar credit quality. The carrying amount of accrued interestand other receivables approximates its fair value. Direct financing leasereceivables and the related allowance for losses have been excluded from theaccompanying table.

 

CommercialPaper and Medium-Term Notes: The carrying amountsof the Company’s commercial paper and floating rate medium-term notesapproximate their fair value.

 

Derivative Instruments*:* Derivative instruments, including interest ratecontracts, are carried at fair value. Fair values are based on quotedmarket prices or pricing models using current market rates.

 

Accounts Payable, AccruedExpenses and Other:**Carrying amounts approximate fair value and have beenexcluded from the accompanying table.

 

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

 
| ** **

** ** | ** ** | **As of December 31** | ** **  |
|------------------------|------------|--------------------------------------|-------------|
| ** **             | ** ** | **2007**                             | ** **  | 2006 | ** ** |
| ** **             | ** ** | **Carrying  Amount**                 | ** **  | **Fair Value** | ** ** | Carrying  Amount |   | Fair Value | ** ** |
| Fixed rate loans       | ** ** | **$**                                | **2,596.7** | ** ** | **$** | **2,576.1** |   | $ | 2,580.6 |   | $ | 2,520.0 |   |
|                        |            |                                      |             |  |  |  |  |  |  |  |  |  |  |

 

29

----

 

**PACCARFinancial Corp.**

 

**NOTES TO FINANCIAL STATEMENTS**

(Millions of Dollars)

 

**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** | ** ** |
|-------------------------------------------|------------|--------------------|------------|---------------------|------------|---------------------|------------|
|                                      |       |               |       |                |       |                |       |
| **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 | ) |
|                                      |       |               |       |                |       |                |       |
| **2005**                                  |       |               |       |                |       |                |       |
| ** **                                |       |               |       |                |       |                |       |
| Other  comprehensive income:              |       |               |       |                |       |                |       |
| Net holding gain  on derivative contracts |       | $                  | 24.3       |                | $          | (9.3                | )          | $ | 15.0 |   |
| Reclassification  adjustment              |       | (1.3               | )          | .5                  |       | (.8                 | )          |
| Net other  comprehensive income (loss)    |       | $                  | 23.0       |                | $          | (8.8                | )          | $ | 14.2 |   |

 

30

----

 

**PACCARFinancial Corp.**

 

**NOTES TO FINANCIAL STATEMENTS**

(Millions of Dollars)

 

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

 
| ** **                  | ** ** | **QUARTER** | ** ** |
|-----------------------------|------------|-------------|------------|
| ** **                  | ** ** | **First**   | ** ** | **Second** | ** ** | **Third** | ** ** | **Fourth** | ** ** |
|                        |       |        |       |   |   |   |   |   |   |
| **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** | ** ** |
|                        |       |        |       |   |   |   |   |   |   |
| **2006**                    |       |        |       |   |   |   |   |   |   |
|                        |       |        |       |   |   |   |   |   |   |
| Interest and  other revenue |       | $           | 116.0      |   | $ | 124.0 |   | $ | 131.3 |   | $ | 138.3 |   |
| Income before  income taxes |       | 32.1        |       | 34.5 |   | 34.8 |   | 34.9 |   |
| Net income                  |       | 19.8        |       | 21.3 |   | 21.5 |   | 21.9 |   |

 

**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, 2007, the Company hasloan and lease commitments of $144.8 expiring within one year. Thesecommitments represent commitments to fund new retail loan and lease contracts.

 

31

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** **

**PACCARFinancial Corp.**

(Millions of Dollars)

 

**ITEM 9.        CHANGESIN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE**

 

        The registrant has not had anydisagreements with its independent auditors on accounting or financialdisclosure matters.

 

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

 

**Disclosure Controls and Procedures**

 

        An evaluation was performed under thesupervision and with the participation of the Company’s management, includingthe principal executive officer and principal financial officer, of theeffectiveness of the design and operation of the Company’s disclosure controlsand procedures (as defined in rules 13a-15(e) and 15d-15(e) promulgatedunder the Securities Exchange Act of 1934, as amended) as of December 31,2007 (“Evaluation Date”). Based on that evaluation, the principal executiveofficer and principal financial officer of the Company concluded that thedisclosure controls and procedures in place at the Company are effective toensure that information required to be disclosed by the Company, including itsconsolidated subsidiaries (the Company has no subsidiaries), in reports thatthe Company files or submits under the Exchange Act, is recorded, processed,summarized and reported on a timely basis in accordance with applicable rules andregulations. There have been no changes in the Company’s internal controls overfinancial reporting during the fourth quarter of 2007 that have materiallyaffected, or are reasonably likely to materially affect, the Company’s internalcontrol over financial reporting.

 

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

 

        The management of the Company is responsible for establishingand maintaining satisfactory internal control over financial reporting.Internal control over financial reporting is a process designed to providereasonable assurance regarding the reliability of financial reporting and thepreparation of financial statements for external purposes in accordance withgenerally accepted accounting principles.

 

        Internal control over financial reporting may not prevent ordetect misstatements because of its inherent limitations. Projections of anyevaluation of effectiveness to future periods are subject to the risk thatcontrols may become inadequate because of changes in conditions, or that thedegree of compliance with the policies and procedures may deteriorate.

 

        Management assessed the Company’s internal control overfinancial reporting as of December 31, 2007, based on criteria foreffective internal control over financial reporting described in InternalControl – Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission. Based on this assessment, weconcluded that the Company maintained effective internal control over financialreporting as of December 31, 2007.

 

        Thisannual report does not include an attestation report of the Company’sregistered public accounting firm regarding internal control over financialreporting. Management’s report was not subject to attestation by the Company’sregistered public accounting firm pursuant to temporary rules of theSecurities and Exchange Commission that permit the Company to provide onlymanagement’s report in this annual report.

 

**ITEM 9B. OTHER INFORMATION**

 

**       **Notapplicable.

 

32

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** **

**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 $.5 and $.5 for 2007 and 2006, respectively.

 

Other Fees

 

The registrant has noaudit-related, tax or other fees billed and/or paid during 2007 or 2006 forservices provided by the principal accountant.

 

As a wholly-owned,indirect subsidiary of PACCAR Inc, audit and non-audit services provided by theCompany’s external auditor are subject to PACCAR Inc’s Audit Committeepre-approval policies and procedures as described in the PACCAR Inc 2007 proxystatement. During the year ended December 31, 2007, all services providedby the external auditor were pre-approved by the PACCAR Inc Audit Committee.

 

33

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**PACCARFinancial Corp.**

 

**PART IV**

 

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

 

(1) Listingof financial statements

 

The following financialstatements of the Company are included in Item 8:

 

Statements of Income –Years Ended December 31, 2007, 2006 and 2005

 

Balance Sheets – December 31,2007 and 2006

 

Statements of Cash Flows– Years Ended December 31, 2007, 2006 and 2005

 

Statements ofStockholder’s Equity – Years Ended December 31, 2007, 2006 and 2005

 

Statements ofComprehensive Income – Years Ended December 31, 2007, 2006 and 2005

 

Notes to FinancialStatements – December 31, 2007, 2006 and 2005

 

(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

 

The exhibits required byItem 601 of Regulation S-K are listed in the accompanying Exhibit Index.

 

34

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**PACCAR Financial Corp.**

 

**SIGNATURES**

 

Pursuant to therequirements of Section 13 or 15(d) of the Securities Exchange Act of1934, the Registrant has duly caused this report to be signed on its behalf bythe undersigned, thereunto duly authorized.

 
|   |   |   |   | PACCAR Financial Corp. |                   |   |
|--------|--------|--------|--------|------------------------|------------------------|--------|
|   |   |   |   |                   |                   |   |
|   |   |   |   |                   |                   |   |
|   |   |   |   | By                     | /s/ Timothy M. Henebry |   |
|   |   |   |   |                   | Timothy M. Henebry     |   |   |
|   |   |   |   |                   | President              |   |   |

 

Date:February 27, 2008

 

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/ Mark C. Pigott                   |   | Chairman      |   |
|   | Mark C. Pigott                       |   |          |   |
|   |                                 |   |          |   |
| (2)    | Principal Financial Officer          |   |          |   |
|   |                                 |   |          |   |
|   | /s/ Michael A. Tembreull             |   | Vice Chairman |   |
|   | Michael A. Tembreull                 |   |          |   |
|   |                                 |   |          |   |
| (3)    | Principal Accounting Officer         |   |          |   |
|   |                                 |   |          |   |
|   |                                 |   |          |   |
|   | /s/ Nanette C. Anderson              |   | Controller    |
|   | Nanette C. Anderson                  |   |
|   |                                 |   |          |   |
| (4)    | A Majority of the Board of Directors |   |          |   |
|   |                                 |   |          |   |
|   |                                 |   |          |   |
|   | /s/ Timothy M. Henebry               |   | .             |   |
|   | Timothy M. Henebry                   |   |          |   |
|   |                                 |   |          |   |
|   | Ronald E. Armstrong*                 |   |          |   |   |
|   | Thomas E. Plimpton*                  |   |          |   |   |
|   |                                 |   |          |   |
| *By    | /s/ Timothy M. Henebry               |   |          |   |
|   | Timothy M. Henebry                   |   |          |   |
|   | Attorney-in-fact                     |   |          |   |
|        |                                      |        |               |        |  |  |  |  |  |  |

 

35

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**PACCARFinancial Corp.**

 

**EXHIBITINDEX**

 
| 3      | Articles of incorporation and bylaws:                                       |
|--------|-----------------------------------------------------------------------------|
|   |                                                                        |   |
|   | (a)                                                                         | Restated Articles of Incorporation of  the Company, as amended (incorporated by reference to Exhibit 3.1 to the  Company’s Annual Report on Form 10-K dated March 26, 1985.  Amendment incorporated by reference to Exhibit 19.1 to the Company’s  Quarterly Report on Form 10-Q dated August 13, 1985, File Number  0-12553). |
|   |                                                                        |   |
|   | (b)                                                                         | By-laws of the Company, as amended  (incorporated by reference to Exhibit 3.2 to the Company’s Registration  Statement on Form 10 dated October 20, 1983, File Number 0-12553). |
|   |                                                                        |   |
| 4      | Instruments defining the rights of  security holders, including indentures: |
|   |                                                                        |   |
|   | (a)                                                                         | Indenture for Senior Debt Securities  dated as of December 1, 1983 and first Supplemental Indenture dated as  of June 19, 1989 between the Company and Wilmington Trust Company  (incorporated by reference to Exhibit 4.1 to the Company’s Annual Report  on Form 10-K dated March 26, 1984, File Number 001-11677 and Exhibit 4.2  to the Company’s Registration Statement on Form S-3 dated June 23,  1989, Registration Number 33-29434), and the 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 of Medium-Term Note, Series K  (incorporated by reference to Exhibits 4.2A and 4.2B to the Company’s  Registration Statement on Form S-3 dated December 23, 2003,  Registration Number 333-111504). |
|   |                                                                        |   |
|   |                                                                        | Form of Letter of Representation  among the Company, Citibank, N.A. and The Depository Trust Company, Series K  (incorporated by reference to Exhibit 4.3 to the Company’s Registration  Statement on Form S-3 dated December 23, 2003, Registration Number  333-111504). |
|   |                                                                        |   |
|   | (c)                                                                         | Forms of Medium-Term Note, Series L  (incorporated by reference to Exhibits 4.2A and 4.2B to the  Company’s Registration Statement on Form S-3  dated November 7, 2006, Registration Number 333-138464). |
|   |                                                                        |   |
|   |                                                                        | Form of Letter of Representation  among the Company, Citibank, N.A. and The Depository Trust Company, Series L  (incorporated by reference to Exhibit 4.3 to the Company’s Registration  Statement on Form S-3 dated November 7, 2006, Registration Number  333-138464). |
|   |                                                                        |   |
| 10     | Material contracts:                                                         |
|   |                                                                        |   |
|   | (a)                                                                         | Support Agreement between the Company  and PACCAR dated as of June 19, 1989 (incorporated by reference to Exhibit 28.1  to the Company’s Registration Statement on Form S-3 dated June 23,  1989, Registration Number 33-29434). |
|   |                                                                        |   |
| 12     | Statements re computation of ratios:                                        |
|   |                                                                        |   |
|   | (a)                                                                         | Statement re: computation of ratio of  earnings to fixed charges of the Company pursuant to SEC reporting  requirements for each of the five years ended December 31, 2003 - 2007. |
|   |                                                                        |   |
|   | (b)                                                                         | Statement re: computation of ratio of  earnings to fixed charges of the Company pursuant to the Support Agreement  between the Company and PACCAR for each of the five years ended December 31,  2003 - 2007. |
|   |                                                                        |   |
|   | (c)                                                                         | Statement re: computation of ratio of  earnings to fixed charges of PACCAR and subsidiaries pursuant to SEC  reporting requirements for each of the five years ended December 31,  2003 - 2007. |

 

36

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**PACCARFinancial Corp.**

 

**EXHIBIT INDEX**

 
| 23     | Consent of Independent Registered  Public Accounting Firm. |
|--------|------------------------------------------------------------|
|   |                                                       |   |
| 25     | Power  of attorney:                                        |
|   |                                                       |   |
|   | (a)                                                        | Power  of attorney of certain officers and directors. |
|   |                                                       |   |
| 31     | Rule 13a-14(a)/15d-14(a) Certifications:         |
|   |                                                       |   |
|   | (a)                                                        | Power  of attorney of certain officers and directors. |
|   |                                                       |   |
|   | (b)                                                        | Rule 13a-14(a)/15d-14(a) Certification  - Certification of Principal Executive Officer. |
|   |                                                       |   |
|   | (c)                                                        | Rule 13a-14(a)/15d-14(a) Certification  - Certification of Principal Financial Officer. |
|   |                                                       |   |
| 32     | Section 1350  Certifications:                         |
|   |                                                       |   |
|   | (a)                                                        | Section 1350  Certifications - Certification pursuant to Rule 13a-14(b) and  Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. section 1350). |

 

Otherexhibits listed in Item 601 of Regulation S-K are not applicable.

 

37

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