PACCAR INC (Form: 10-K, Received: 03/01/2011 13:50:22)

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

Form 10-K

Annual Report Pursuant to Section 13 or 15(d) of the

Securities Exchange Act of 1934

For the fiscal year ended December 31, 2010

Commission File No. 001-14817

PACCAR Inc

(Exact name of Registrant as specified in its charter)


Delaware		91-0351110
(State of incorporation)		(I.R.S. Employer Identification No.)

777 - 106th Ave. N.E., Bellevue, WA		98004
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code (425) 468-7400

Securities registered pursuant to Section 12(b) of the Act:


Title of Each Class		Name of Each Exchange on Which Registered
Common Stock, $1 par value		The NASDAQ Global Select Market LLC

Securities registered pursuant to Section 12(g) of the Act: NONE

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

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for at least the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

The aggregate market value of the voting stock held by non-affiliates of the registrant as of June 30, 2010:

Common Stock, $1 par value - $ 14.1 billion

The number of shares outstanding of the registrant’s classes of common stock, as of January 31, 2011:

Common Stock, $1 par value – 365,331,459 shares

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Annual Report to Stockholders for the year ended December 31, 2010 are incorporated by reference into Parts I and II.

Portions of the proxy statement for the annual stockholders meeting to be held on April 20, 2011 are incorporated by reference into Part III.

PART I

ITEM 1.

BUSINESS.

(a) General Development of Business

PACCAR Inc (the Company or PACCAR), incorporated under the laws of Delaware in 1971, is the successor to Pacific Car and Foundry Company which was incorporated in Washington in 1924. The Company traces its predecessors to Seattle Car Manufacturing Company formed in 1905.

(b) Financial Information About Industry Segments and Geographic Areas

Information about the Company’s industry segments and geographic areas in response to Items 101(b), (c)(1)(i), and (d) of Regulation S-K appears on page 74 of the Annual Report to Stockholders for the year ended December 31, 2010 and is incorporated herein by reference.

The Company has two principal industry segments, (1) design, manufacture and distribution of light-, medium- and heavy-duty trucks and related aftermarket parts and (2) finance and leasing products and services provided to customers and dealers. Light and medium-duty trucks have a gross vehicle weight (GVW) ranging from 16,000 to 33,000 lbs (Class 5 to 7) in North America and 6 to 15 metric tonnes in Europe. Heavy duty trucks have a GVW of over 33,000 lbs (Class 8 market) in North America and over 15 metric tonnes in Europe. The Company’s finance and leasing activities are principally related to Company products and associated equipment. Other manufactured products include industrial winches.

TRUCKS

The Company and its subsidiaries design and manufacture heavy-duty diesel trucks which are marketed under the Kenworth, Peterbilt and DAF nameplates. These trucks, which are built in three plants in the United States, three in Europe and one each in Australia, Canada and Mexico, are used world-wide for over-the-road and off-highway hauling of freight, petroleum, wood products, construction and other materials. The Company competes in the North American Class 5 - 7 markets primarily with conventional models. These trucks are assembled at facilities in Ste. Therese, Canada and in Mexicali, Mexico, which are operated by the Company’s wholly owned subsidiaries located in those countries. The Company competes in the European light/medium market with DAF cab-over-engine trucks assembled in the United Kingdom by Leyland, one of the Company’s wholly owned subsidiaries. Commercial trucks and related aftermarket parts comprise the largest segment of the Company’s business, accounting for 89.7% of total 2010 net sales and revenues.

Substantially all trucks and related aftermarket parts are sold to independent dealers. The Kenworth and Peterbilt nameplates are marketed and distributed by separate divisions in the U.S. and a foreign subsidiary in Canada. The Kenworth nameplate is also marketed and distributed by foreign subsidiaries in Mexico and Australia. The DAF nameplate is marketed and distributed by a foreign subsidiary headquartered in the Netherlands. A U.S. division, PACCAR International, also markets all three nameplates outside each of their primary markets. The decision to operate as a subsidiary or as a division is incidental to Truck segment operations and reflects legal, tax and regulatory requirements in the various countries where PACCAR operates.

The Truck segment utilizes centrally managed purchasing, information technology, technical research and testing, treasury and finance functions. Certain manufacturing plants in North America produce trucks for more than one nameplate in common production facilities, while other plants produce trucks for only one nameplate, depending on various factors. As a result of the close similarity of the business models employed by each nameplate, best manufacturing practices within the Company are shared on a routine basis.

The Company’s trucks have a reputation for high quality and are essentially custom products, most of which are ordered by dealers according to customer specification. Some units are ordered by dealers for stocking to meet the needs of certain customers who require immediate delivery or for customers that require chassis to be fitted with specialized bodies. For a significant portion of the Company’s truck operations, major components, such as engines, transmissions and axles, as well as a substantial percentage of other components, are purchased from component manufacturers pursuant to PACCAR and customer specifications. DAF, which is more vertically integrated, manufactures its own engines and axles and a higher percentage of other components for its heavy truck models. The material costs of trucks and parts includes raw materials, partially processed materials, such as castings, and finished components manufactured by independent suppliers. The cost of materials purchased from suppliers of raw materials, partially processed materials and finished components make up more than 85% of the cost of new trucks and parts. The value of finished truck components manufactured by independent suppliers ranges from approximately 45% in Europe to approximately 90% in North America. In addition to purchased materials, the Company’s cost of sales includes labor and factory overhead, vehicle and parts delivery, and warranty. Accordingly, except for certain factory overhead costs such as depreciation, property taxes and utilities, the Company’s cost of sales are highly variable in relation to sales.

Raw materials and other components used in the manufacture of trucks are purchased from a number of suppliers. The Company’s DAF subsidiary purchases fully assembled cabs from a competitor, Renault V.I., for its European light-duty product line pursuant to a joint product development and long-term supply contract. Sales of trucks manufactured with these cabs amounted to approximately 3% of consolidated revenues in 2010. A short-term loss of supply, and the resulting interruption in the production of these trucks, would not have a material effect on the Company’s results of operations. However, a loss of supply for an extended period of time would either require the Company to contract for an alternative source of supply or to manufacture cabs itself. Other than these components, the Company is not limited to any single source for any significant component, although the sudden inability of a supplier to deliver components could have a temporary adverse effect on production of certain products. No significant shortages of materials or components were experienced in 2010. Manufacturing inventory levels are based upon production schedules and orders are placed with suppliers accordingly.

Aftermarket truck parts are sold and delivered to the Company’s independent dealers through the Company’s parts distribution network. Parts are both manufactured by the Company and purchased from various suppliers. Aftermarket parts inventory levels are determined largely by anticipated customer demand and the need for timely delivery. As a percentage of total consolidated net sales and revenues, parts sales were 21.3% in 2010, 23.4% in 2009, and 15.1% in 2008.

Key factors affecting Truck segment earnings include the number of new trucks and aftermarket parts sold in the markets served and the margins realized on the sales. The Company’s sales of new trucks is dependent on the size of the truck markets served and the Company’s share of those markets. Aftermarket parts sales are influenced by the total number of the Company’s trucks in service and the average age and mileage of those trucks. Truck segment sales and margins tend to be cyclical related to the level of overall economic activity, the

availability of capital and the amount of freight being transported. The Company’s cost per truck and parts sold consist primarily of material costs which are influenced by commodities prices such as steel, copper, aluminum and petroleum. The Company utilizes long term supply agreements with its suppliers to reduce the variability of the unit cost of purchased materials and finished components. The Company’s spending on research and development varies based on product development cycles and government requirements such as the periodic need to meet diesel engine emissions standards in the various markets served. The Company maintains rigorous control of Selling, General and Administrative (SG&A) expenses and seeks to minimize such costs.

There were three other principal competitors in the U.S. and Canada Class 8 truck market in 2010. The Company’s share of the U.S. and Canadian market was 24.1% of retail sales in 2010. In Europe there were five other principal competitors in the commercial vehicle market in 2010, including parent companies to two competitors of the Company in the United States. In 2010, DAF had a 15.2% share of the Western and Central European heavy-duty market and a 7.7% share of the light/medium market. These markets are highly competitive in price, quality and service, and PACCAR is not dependent on any single customer for its sales. There are no significant seasonal variations in sales.

The Peterbilt, Kenworth, and DAF nameplates are recognized internationally and play an important role in the marketing of the Company’s truck products. The Company engages in a continuous program of trademark and trade name protection in all marketing areas of the world.

The Company’s truck products are subject to environmental noise and emission regulations and competing manufacturers are subject to the same regulations. The Company believes the cost of complying with noise and emission regulations will not be detrimental to its business.

The Company had a total production backlog of $3.5 billion at the end of 2010. Within this backlog, orders scheduled for delivery within three months (90 days) are considered to be firm. The 90-day backlog approximated $2.0 billion at December 31, 2010, $1.1 billion at December 31, 2009 and $0.8 billion at December 31, 2008. Production of the year-end 2010 backlog is expected to be substantially completed during 2011.

OTHER BUSINESS

The Truck and Other businesses include a division of the Company which manufactures industrial winches in two U.S. plants and markets them under the Braden, Carco, and Gearmatic nameplates. The markets for these products are highly competitive and the Company competes with a number of well established firms. Sales of industrial winches were approximately 1% of net sales and revenues in 2010, 2009, and 2008.

The Braden, Carco, and Gearmatic trademarks and trade names are recognized internationally and play an important role in the marketing of those products.

FINANCIAL SERVICES

In North America, Australia and 16 European countries, the Company provides financing and leasing arrangements, principally for its manufactured trucks, through wholly owned finance companies operating under the PACCAR Financial trade name. They provide inventory financing for independent dealers selling PACCAR products, and retail loan and lease financing for new and used trucks and other transportation equipment sold principally by its independent dealers. Receivables are secured by the products financed or leased. The terms of loan and lease contracts vary with the type and usage of equipment but generally range from three to five

years. Payment is required on dealer inventory financing when the floored truck is sold to a customer or upon maturity of the flooring loan whichever comes first. Dealer inventory loans generally mature within one to two years.

The Company also conducts full service leasing operations through wholly owned subsidiaries in North America and Germany under the PacLease trade name. Selected dealers in North America are franchised to provide full service leasing. The Company provides its franchisees equipment financing and administrative support. The Company also operates full service lease outlets on its own behalf.

The Company funds its financing activities primarily through commercial paper, bank loans and by issuing medium-term debt through public debt markets. The Company attempts to match the maturity and interest rate characteristics of the debt with the maturity and interest rate characteristics of loans and leases.

Key factors in determining the earnings of the Financial Services segment include the volume of new loans and leases, the yield earned on the loans and leases, the costs of funding investments in loans and leases and the ability to collect the amounts owed to the Company. New loan and lease volume is dependent on the volume of new trucks sold by the Company and the share of those truck sales that are financed by the Financial Services segment. Finance market share is influenced by the extent of competition in the financing market. The Company’s competitors primarily include banks and independent finance and leasing companies.

The revenue earned on loans and leases depends on market interest and lease rates and the ability of the Company to differentiate itself from the competition by superior industry knowledge and customer service. Dealer inventory loans have variable rates with rates reset monthly based on an index pertaining to the applicable local market. Retail loan and lease contracts normally have fixed rates over the contract term. The Company obtains funds either through fixed rate borrowings or through variable rate borrowings which have been effectively converted to fixed rate through the use of interest rate contracts. This enables the Company to obtain a stable spread between the cost of borrowing and the yield on fixed rate contracts over the contract term. Included in Financial Services cost of revenues is depreciation on equipment on operating leases. The amount of depreciation on operating leases principally depends on the amount of leased equipment, and the average term of the lease which ranges from two to four years and residual values which generally range from 30 to 50%. The margin earned is the difference between the revenues on loan and lease contracts and the direct costs of operation including interest and depreciation.

The Company incurs credit losses when customers are unable to pay the full amounts due under loan and finance lease contracts. The Company takes a conservative approach to underwriting new retail business in order to minimize credit losses and the related provision for losses. Retail loan and lease customers consist of medium and large commercial trucking companies, independent owner operators and other businesses that use trucks in their operations. The ability of these customers to pay their obligations to the Company depends on the state of the general economy, the extent of freight demand, freight rates and the cost of fuel. The Company limits its exposure to any one customer, with no one customer amounting to more than 2% of the aggregate portfolio. The Company generally requires a down payment and secures its interest in the underlying truck equipment collateral and may include other collateral or personal guarantees. In the event of default, the Company will repossess the vehicle and sell it in the open market primarily through its dealer network. The Company will take legal means to recover any shortfall between the amounts owed and the amounts recovered from sale of the collateral. The amount of credit losses depends on the rate of default on loans and finance leases and, in the event of repossession, the ability to recover the amount owed from sale of the collateral which is affected by used truck

prices. The Company’s experience over the last fifty years financing truck sales has been that periods of economic weakness result in higher past dues and increased rates of repossession. Used truck prices tend to fall during periods of economic weakness. As a result, credit losses tend to increase during those periods. The Company provides an allowance for credit losses based on specifically identified customer risks and an analysis of estimated losses inherent in the portfolio, considering the amount of past due accounts, the trends of used truck prices and the economic climate in each of its markets.

Financial Services selling general and administrative expenses consist primarily of personnel costs associated with originating and servicing the Company’s loan and lease portfolios. These cost vary somewhat depending on overall levels of business activity, but given the ongoing nature of servicing activities tend be relatively stable.

PATENTS

The Company owns numerous patents which relate to all product lines. Although these patents are considered important to the overall conduct of the Company’s business, no patent or group of patents is considered essential to a material part of the Company’s business.

REGULATION

As a manufacturer of highway trucks, the Company is subject to the National Traffic and Motor Vehicle Safety Act and Federal Motor Vehicle Safety Standards promulgated by the National Highway Traffic Safety Administration as well as environmental laws and regulations in the United States, and is subject to similar regulations in Canada, Mexico, Australia and Europe. In addition, the Company is subject to certain other licensing requirements to do business in the United States and Europe. The Company believes it is in compliance with laws and regulations applicable to safety standards, the environment and other licensing requirements in all countries where it has operations.

Information regarding the effects that compliance with international, federal, state and local provisions regulating the environment have on the Company’s capital and operating expenditures and the Company’s involvement in environmental cleanup activities is included in Management’s Discussion and Analysis of Financial Condition and Results of Operations and the Company’s Consolidated Financial Statements incorporated by reference in Items 7 and 8, respectively.

EMPLOYEES

On December 31, 2010, the Company had approximately 17,700 employees.

OTHER DISCLOSURES

The Company’s filings on Form 10-K, 10-Q, and 8-K and any amendments to those reports can be found on the Company’s website www.paccar.com free of charge as soon as practicable after the report is electronically filed with, or furnished to, the Securities and Exchange Commission. The information on the Company’s website is not incorporated by reference into this report.

ITEM 1A.

RISK FACTORS.

The following are significant risks which could negatively impact the Company’s financial condition or results of operations.

Business and Industry Risks

Commercial truck market demand is variable. Demand for commercial vehicles depends on economic and other conditions in a given market and the introduction of new vehicles and technologies. The yearly demand for commercial vehicles may increase or decrease more than overall gross domestic product in markets the Company serves which are principally North America

and Western Europe. Demand may also be affected by factors impacting new truck prices such as costs of raw materials and components and cost of compliance with governmental regulations (including tariffs, engine emissions regulations, import regulations and taxes).

The Financial Services industry is highly competitive. The Company competes with banks, other commercial finance companies and financial services firms which may have lower costs of borrowing, higher leverage or market share goals that result in a willingness to offer lower interest rates, which may lead to decreased margins, lower market share or both. A decline in the Company’s commercial truck unit sales, an increase in residual value risk due to lower used truck pricing and increased funding costs are also factors which may negatively affect the Company’s financial services operations.

The Financial Services segment is subject to credit risk. The Financial Services segment is exposed to the risk of loss arising from the failure of a customer, dealer or counterparty to meet the terms of the loans, leases and derivative contracts with the Company. Although the financial assets of the Financial Services segment are secured by underlying equipment collateral, in the event a customer cannot meet its obligations to the Company, there is a risk that the value of the underlying collateral will not be sufficient to recover the amounts owed to the Company resulting in credit losses.

The Financial Services segment is subject to liquidity risk . The global economy is recovering from a recession and financial markets liquidity has improved. The Company’s Financial Services segment has been able to issue commercial paper and medium-term notes and obtain bank debt. If commercial paper, medium-term notes and bank debt do not provide the necessary liquidity in the future, the Financial Services segment may limit its financing of retail and wholesale assets. This may have a negative effect on the Company’s Financial Services segment results.

Political, Regulatory and Economic Risks

The Company’s operations could be subject to currency and interest rate fluctuations. The Company’s consolidated financial statements, which are presented in U.S. dollars, are affected by foreign currency exchange fluctuations through both translation and transaction risk. The Company uses certain derivative financial instruments and localized production of its products to reduce, but not eliminate, the effects of interest rate and foreign currency exchange rate fluctuations.

The Company may be adversely affected by political instabilities, fuel shortages or interruptions in transportation systems, natural calamities, wars, terrorism and labor strikes. The Company is subject to various risks associated with conducting business worldwide.

ITEM 1B.

UNRESOLVED STAFF COMMENTS.

The Company received a comment letter from the staff of the SEC dated June 9, 2010 regarding a review of PACCAR’s December 31, 2009 Form 10-K, the March 31, 2010 Form 10-Q and the Schedule 14A filed March 10, 2010. The Company responded to that letter as well as a follow-up letter dated September 7, 2010. As of the date of this Annual Report on Form 10-K, the Company is preparing a response to a follow-up letter dated February 7, 2011 relating primarily to the level of detail of certain Financial Services disclosures.

ITEM 2.

PROPERTIES.

The Company and its subsidiaries own and operate manufacturing plants in five U.S. states, three countries in Europe, and one each in Australia, Canada and Mexico. The Company also has fourteen parts distribution centers, sales and service offices, and finance and administrative offices which are operated in owned or leased premises in these and other countries. Facilities for product testing and research and development are located in Washington state and the Netherlands. The Company’s corporate headquarters is located in owned premises in Bellevue, Washington. The Company considers all of the properties used by its businesses to be suitable for their intended purposes.

The Company continuously invests in facilities, equipment and processes to provide manufacturing and warehouse capacity to meet its customers’ needs.

The following summarizes the number of the Company’s manufacturing plants by geographical location within indicated industry segments:


	U.S.		Canada		Australia		Mexico		Europe
Truck		4		1		1		1		3
Other		2		—		—		—		—

ITEM 3.

LEGAL PROCEEDINGS.

The Company and its subsidiaries are parties to various lawsuits incidental to the ordinary course of business. Management believes that the disposition of such lawsuits will not materially affect the Company’s business or financial condition.

In January 2011, the European Union (EU) Competition Commission commenced an investigation of all major European commercial vehicle manufacturers, including subsidiaries of the Company, concerning whether such companies participated in agreements or concerted practices to coordinate their commercial policy in the EU. The Company’s subsidiaries are cooperating fully with the EU Competition Commission.

On October 28, 2010, a National Labor Relations Board (NLRB) administrative law judge issued a decision that since the Company did not provide certain information to the union representing employees at Peterbilt’s truck assembly plant in Madison, Tennessee, during collective bargaining negotiations in 2008, the employer-directed work stoppage was not in conformity with certain provisions of the National Labor Relations Act from July 16, 2008 and that the Company should reimburse approximately 300 plant employees, with interest, for wage and benefit losses incurred during the work stoppage which ended on April 6, 2009. The Company disagrees with this decision and filed its exceptions with the NLRB. The Company believes that resolution of this matter will not have a material adverse effect on its results.

In September 2010, the United Kingdom Office of Fair Trading (OFT) notified all major commercial vehicle manufacturers operating in the U.K., that it had commenced an investigation into whether such manufacturers agreed to set prices or limit supply of their commercial vehicles and spare parts. The Company’s U.K. subsidiaries are cooperating fully with the OFT.

PART II

ITEM 5.

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

(a)

Market Information, Holders, Dividends, Securities Authorized for Issuance Under Equity Compensation Plans and Performance Graph

Data regarding Market Information, Holders and Dividends are included in the Annual Report to Stockholders for the year ended December 31, 2010, under the caption “Common Stock Market Prices and Dividends” and are incorporated herein by reference.

Securities Authorized for Issuance Under Equity Compensation Plans.

The following table provides information as of December 31, 2010 regarding compensation plans under which PACCAR equity securities are authorized for issuance.


Plan Category	Number of Securities to be Issued on Exercise of Outstanding Options and Other Rights			Weighted-average Exercise Price of Outstanding Options			Securities Available for Future Grant (Excluding Shares Reflected in Column (1))
Stock compensation		(1	)		(2	)		(3	)
plans approved by stockholders		5,651,744		$	32.18			18,519,908

All stock compensation plans have been approved by the stockholders.

The number of securities to be issued includes those issuable under the PACCAR Inc Long Term Incentive Plan (LTI Plan) and the Restricted Stock and Deferred Compensation Plan for Non-Employee Directors (RSDC Plan). Securities to be issued include 369,437 shares that represent deferred cash awards payable in stock. The weighted-average exercise price does not include the securities that represent deferred cash awards.

Securities available for future grant are authorized under the following two plans: (i) 17,566,297 shares under the LTI Plan, and (ii) 953,611 shares under the RSDC Plan.

Data regarding the Performance Graph are included in the Annual Report to Stockholders for the year ended December 31, 2010, under the caption “Stockholder Return Performance Graph” and are incorporated herein by reference.

(b)

Use of Proceeds from Registered Securities

Not applicable

(c)

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

There were no repurchases of PACCAR’s common stock in the 4 ^th Quarter of 2010. On October 29, 2007, the Board of Directors approved a plan to repurchase up to $300 million of PACCAR’s outstanding common stock. As of December 31, 2010, $292 million of shares have been repurchased under this plan. On July 8, 2008, PACCAR’s Board of Directors approved a new plan to repurchase up to an additional $300 million of the Company’s outstanding common stock. No repurchases were made under this plan.

ITEM 6.

SELECTED FINANCIAL DATA.

Information in response to Item 301 of Regulation S-K appears in the Annual Report to Stockholders for the year ended December 31, 2010 under the caption “Selected Financial Data” and is incorporated herein by reference.

ITEM 7.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Information in response to Item 303 of Regulation S-K appears in the Annual Report to Stockholders for the year ended December 31, 2010 under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and is incorporated herein by reference.

ITEM 7A.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Information in response to Item 305 of Regulation S-K appears in the Annual Report to Stockholders for the year ended December 31, 2010 under the caption “Market Risks and Derivative Instruments” and is incorporated herein by reference.

ITEM 8.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

The following consolidated financial statements of the registrant, included in the Annual Report to Stockholders for the year ended December 31, 2010, are incorporated herein by reference:

Consolidated Statements of Income

— Years Ended December 31, 2010, 2009 and 2008

Consolidated Balance Sheets

— December 31, 2010 and 2009

Consolidated Statements of Cash Flows

— Years Ended December 31, 2010, 2009 and 2008

Consolidated Statements of Stockholders’ Equity

— Years Ended December 31, 2010, 2009 and 2008

Consolidated Statements of Comprehensive Income

— Years Ended December 31, 2010, 2009 and 2008

Notes to Consolidated Financial Statements

— December 31, 2010, 2009 and 2008

Information in response to Item 302(A) of Regulation S-K appears in the Annual Report to Stockholders for the year ended December 31, 2010 under the caption “Quarterly Results (Unaudited)” and is incorporated herein by reference.

ITEM 9.

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

The registrant has not had any disagreements with its independent auditors on accounting or financial disclosure matters.

ITEM 9A.

CONTROLS AND PROCEDURES.

Disclosure Controls and Procedures.

The Company’s management, with the participation of the Principal Executive Officer and Principal Financial Officer, conducted an evaluation of the effectiveness of the Company’s disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) as of the end of the period covered by this report. Based on that evaluation, the Principal Executive Officer and Principal Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this report.

Management’s Report on Internal Control over Financial Reporting.

Management’s Report on Internal Control over Financial Reporting on page 76 and Report of Independent Registered Public Accounting Firm on the Company’s Internal Control over Financial Reporting on page 77 of the Annual Report to Stockholders for the year ended December 31, 2010, are incorporated herein by reference.

There have been no changes in the Company’s internal controls over financial reporting during the fourth quarter of 2010 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

ITEM 9B.

OTHER INFORMATION.

Not applicable.

PART III

ITEM 10.

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.

Item 401(a), (d), and (e) of Regulation S-K:

The following information is included in the proxy statement for the annual stockholders meeting of April 20, 2011 and is incorporated herein by reference:

•

Identification of directors, family relationships, and business experience is included under the caption “ITEM 1: ELECTION OF DIRECTORS.”

Item 401(b) of Regulation S-K:

Executive Officers of the registrant as of March 1, 2011:


Name and Age		Present Position and Other Position(s) Held During Last Five Years

Mark C. Pigott (57)		Chairman and Chief Executive Officer since 1997. Mr. Pigott is the brother of John M. Pigott, a director of the Company.

Thomas E. Plimpton (61)		Vice Chairman; President from January 2003 to September 2008.

Ronald E. Armstrong (55)		President; Executive Vice President from August 2010 to December 2010; Senior Vice President from December 2007 to July 2010; Vice President from January 2007 to November 2007; Vice President and Controller from November 2002 to December 2006.



Daniel D. Sobic (57)		Executive Vice President; Senior Vice President from January 2007 to October 2008; Vice President of PACCAR and General Manager of Peterbilt from October 2003 to December 2006.

Robert J. Christensen (54)		Executive Vice President; Senior Vice President from November 2008 to July 2010; Vice President of PACCAR and General Manager of Kenworth from July 2002 to October 2008.

David C. Anderson (57)		Vice President and General Counsel; Counsel since December 2004.

Michael T. Barkley (55)		Vice President and Controller; Operations Controller from January 2000 to December 2006.

T. Kyle Quinn (49)		Vice President and Chief Information Officer; General Manager and Chief Information Officer from September 2008 to December 2009; Senior Director Applications and Global Operations from May 2005 to August 2008.

Harrie C.A.M. Schippers (50)		Vice President, Finance Director, DAF Trucks N.V. from August 2003 to March 2010

Samuel Means III (69)		Vice President; Director General Mexico from January 1993 to December 2010

Robert A. Bengston (55)		Vice President; Managing Director PACCAR Financial Europe from January 2004 to December 2008

Officers are elected annually but may be appointed or removed on interim dates.

Item 405 of Regulation S-K:

The information required by this item is included in the proxy statement for the annual stockholders meeting of April 20, 2011 and is incorporated herein by reference.

Item 406 of Regulation S-K:

The Company has adopted a Code of Ethics applicable to the registrant’s senior financial officers including the Chief Executive Officer and Principal Financial Officer. The Company, in accordance with Item 406 of Regulation S-K, has posted this Code of Ethics on its website at www.paccar.com. The Company intends to disclose on its website any amendments to, or waivers from, its Code of Ethics that are required to be publicly disclosed pursuant to the rules of the Securities and Exchange Commission. The information on the Company’s website is not incorporated by reference into this report.

Item 407(d)(4) and 407(d)(5) of Regulation S-K:

The following information is included in the proxy statement for the annual stockholders meeting of April 20, 2011 and is incorporated herein by reference:

•

Identification of the audit committee is included under the caption “THE AUDIT COMMITTEE.”

•

Identification of audit committee financial experts is included under the caption “AUDIT COMMITTEE REPORT.”

ITEM 11.

EXECUTIVE COMPENSATION.

The following information is included in the proxy statement for the annual stockholders meeting of April 20, 2011 and is incorporated herein by reference:

•

Compensation of Directors is included under the caption “COMPENSATION OF DIRECTORS.”

•

Compensation of Executive Officers and Related Matters is included under the caption “COMPENSATION OF EXECUTIVE OFFICERS.”

•

Compensation Committee Report is under the caption “COMPENSATION COMMITTEE REPORT.”

ITEM 12.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.

Stock ownership information is included under the captions “STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS” and “STOCK OWNERSHIP OF OFFICERS AND DIRECTORS” in the proxy statement for the annual stockholders meeting of April 20, 2011 and is incorporated herein by reference.

Information regarding equity compensation plans required by Regulation S-K Item 201(d) is provided in Item 5 of this
Form 10-K.

ITEM 13.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.

No transactions with management and others as defined by Item 404 of Regulation S-K occurred in 2010.

Information concerning director independence is included under the caption “BOARD GOVERNANCE” in the proxy statement for the annual stockholders meeting of April 20, 2011 and is incorporated herein by reference.

ITEM 14.

PRINCIPAL ACCOUNTANT FEES AND SERVICES.

Principal accountant fees and services information is included under the caption “INDEPENDENT AUDITORS” in the proxy statement for the annual stockholders meeting of April 20, 2011 and is incorporated herein by reference.

PART IV

ITEM 15.

EXHIBITS, FINANCIAL STATEMENT SCHEDULES.


(a)	(1)	Listing of financial statements

		The following consolidated financial statements of PACCAR Inc, included in the Annual Report to Stockholders for the year ended December 31, 2010, are incorporated by reference in Item 8:

		Consolidated Statements of Income
		— Years Ended December 31, 2010, 2009 and 2008

		Consolidated Balance Sheets
		— December 31, 2010 and 2009


	Consolidated Statements of Cash Flows
	— Years Ended December 31, 2010, 2009 and 2008

	Consolidated Statements of Stockholders’ Equity
	— Years Ended December 31, 2010, 2009 and 2008

	Consolidated Statements of Comprehensive Income
	— Years Ended December 31, 2010, 2009 and 2008

	Notes to Consolidated Financial Statements
	— December 31, 2010, 2009 and 2008

(2)	Listing of financial statement schedules

	All schedules are omitted because the required matter or conditions are not present or because the information required by the schedules is submitted as part of the consolidated financial statements and notes thereto.

(3)	Listing of Exhibits (in order of assigned index numbers):

	(3)	(i)	Articles of incorporation:

			a.	Restated Certificate of Incorporation of PACCAR Inc (incorporated by reference to Exhibit 99.3 of the Current Report on Form 8-K of PACCAR Inc dated September 19, 2005).

			b.	Certificate of Amendment of Certificate of Incorporation of PACCAR Inc dated April 28, 2008 (incorporated by reference to Exhibit (3)(b) of the Quarterly Report on Form 10-Q for the period ended March 31, 2008).

		(ii)	Amended and Restated Bylaws of PACCAR Inc (incorporated by reference to Exhibit 99.4 of the Current Report on Form 8-K of PACCAR Inc dated September 19, 2005).

(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 September 19, 1989 between PACCAR Financial Corp. and Wilmington Trust Company (incorporated by reference to Exhibit 4.1 of PACCAR Financial Corp.’s Annual Report on Form 10-K dated March 26, 1984, File Number 001-11677 and Exhibit 4.2 of PACCAR Financial Corp.’s Registration Statement on Form S-3 dated September 23, 1989, Registration Number 33-29434), and the Agreement of Resignation, Appointment and Acceptance, dated as of October 31, 2006 (incorporated by reference to PACCAR Financial Corp.’s Form 8-K dated November 3, 2006).

		b.	Forms of Medium-Term Note, Series L (incorporated by reference to Exhibits 4.2A and 4.2B to PACCAR Financial Corp.’s Registration Statement on Form S-3 dated November 7, 2006, Registration Number 333-138464).

		c.	Indenture for Senior Debt Securities dated as of November 20, 2009 between the PACCAR Financial Corp. and The Bank of New York Mellon Trust Company, N.A. (incorporated by reference to Exhibit 4.1 to the Company’s Registration Statement on Form S-3 dated November 20, 2009, Registration Number 333-163273).


		d.	Forms of Medium-Term Note, Series M (incorporated by reference to Exhibits 4.2 and 4.3 to PACCAR Financial Corp’s Registration Statement on Form S-3 dated November 20, 2009, Registration Number 333-163273).

		e.	Form of InterNotes (incorporated by reference to Exhibit 4.4 to PACCAR Financial Corp.’s Registration Statement on Form S-3 dated November 20, 2009, Registration Number 333-163273).

		f.	Indenture for Senior Debt Securities dated as of November 18, 2008 between PACCAR Inc and Wilmington Trust Company (incorporated by reference to Exhibit 4.1 of PACCAR Inc.’s Registration Statement on Form S-3 dated November 18, 2008, Registration Number 333-155429).

		g.	Forms of Medium-Term Note, Series A (incorporated by reference to Exhibits 4.2A and 4.2B to PACCAR Inc’s Registration Statement on Form S-3 dated November 18, 2008, Registration Number 333-155429).

		h.	Terms and Conditions of the Notes applicable to the €1,500,000,000 Euro Medium Term Note Programme of PACCAR Financial Europe B.V. and PACCAR Financial PLC.

		i.	Pursuant to the Instructions to Exhibits, certain instruments defining the rights of holders of long-term debt securities of the Company and its wholly owned subsidiaries are not filed because the total amount of securities authorized under any such instrument does not exceed 10 percent of the Company’s total assets. The Company will file copies of such instruments upon request of the Commission.

(10)	Material Contracts:

		a.	PACCAR Inc Amended and Restated Supplemental Retirement Plan (incorporated by reference to Exhibit 10(a) of the Annual Report on Form 10-K dated February 27, 2009, File Number 001-14817).

		b.	Amended and Restated Deferred Compensation Plan (incorporated by reference to Exhibit 10(b) of the Annual Report on Form 10-K dated February 27, 2009, File Number 001-14817).

		c.	Deferred Incentive Compensation Plan (Amended and Restated as of December 31, 2004. Incorporated by reference to Exhibit 10(b) of the Annual Report on Form 10-K for the year ended December 31, 2005).

		d.	Amended and Restated PACCAR Inc Restricted Stock and Deferred Compensation Plan for Non-employee Directors (incorporated by reference to Exhibit 10(d) of the Annual Report on Form 10-K dated February 27, 2009, File Number 001-14817).

		e.	PACCAR Inc Restricted Stock and Deferred Compensation Plan for Non-Employee Directors, Form of Restricted Stock Agreement for Non-Employee Directors (incorporated by reference to Exhibit 10(e) of the Annual Report on Form 10-K dated February 27, 2009, File Number 001-14817).

		f.	PACCAR Inc Restricted Stock and Deferred Compensation Plan for Non-Employee Directors, Form of Deferred Restricted Stock Unit Agreement For Non-Employee Directors (incorporated by reference as Exhibit 99.3 to Current Report on Form 8-K of PACCAR Inc dated December 10, 2007).


						g.		Amendment to compensatory arrangement with non-employee directors (incorporated by reference to Exhibit (10)(h) of the Quarterly Report on Form 10-Q of PACCAR Inc for the quarter ended September 30, 2005).

						h.		PACCAR Inc Senior Executive Yearly Incentive Compensation Plan (incorporated by reference to Appendix B of the 2006 Proxy Statement, dated March 14, 2006).

						i.		PACCAR Inc Long Term Incentive Plan (incorporated by reference to Appendix A of the 2006 Proxy Statement, dated March 14, 2006).

						j.		PACCAR Inc Long Term Incentive Plan, Nonstatutory Stock Option Agreement and Form of Option Grant Agreement (incorporated by reference to Exhibit 99.1 of the Current Report on Form 8-K of PACCAR Inc dated January 20, 2005 and filed January 25, 2005).

						k.		PACCAR Inc Long Term Incentive Plan, Amended Form of 2006 Restricted Stock Award Agreement (incorporated by reference as Exhibit 99.2 of the Current Report on Form 8-K of PACCAR Inc dated January 31, 2007 and filed February 5, 2007).

						l.		PACCAR Inc Long Term Incentive Plan, Form of Restricted Stock Award Agreement (incorporated by reference as Exhibit 99.1 of the Current Report on Form 8-K of PACCAR Inc dated January 31, 2007 and filed February 5, 2007).

						m.		PACCAR Inc Long Term Incentive Plan, 2010 Form of Restricted Stock Award Agreement. (incorporated by reference to Exhibit 10(m) of the Annual Report on Form 10-K dated February 26, 2010, File Number 001-14817).

						n.		PACCAR Inc Long Term Incentive Plan, Alternate Form Restricted Stock Award Agreement

						o.		PACCAR Inc Long Term Incentive Plan, Amended Form of Share Match Restricted Stock Award Agreement (incorporated by reference as Exhibit 99.3 of the Current Report on Form 8-K of PACCAR Inc dated January 31, 2007 and filed February 5, 2007).

						p.		PACCAR Inc Long Term Incentive Plan, 2008 Form of Share Match Restricted Stock Award Agreement (incorporated by reference as Exhibit 99.1 to the Current Report on Form 8-K of PACCAR Inc dated February 5, 2008).

						q.		PACCAR Inc Long Term Incentive Plan, 2011 Form of Share Match Restricted Stock Award Agreement.

						r.		Savings Investment Plan, Amendment and Restatement Effective January 1, 2009.

						s.		Memorandum of Understanding, dated as of May 11, 2007, by and among PACCAR Engine Company, the State of Mississippi and certain state and local supporting government entities (incorporated by reference as Exhibit 10.1 to the Current Report on Form 8-K of PACCAR Inc filed May 16, 2007).

						t.		Letter Waiver Dated as of July 22, 2008 amending the Memorandum of Understanding, dated as of May 11, 2007, by and among PACCAR Engine


			Company, the State of Mississippi and certain state and local supporting governmental entities; (Incorporated by reference as Exhibit 10(o) of the Quarterly Report on Form 10-Q of PACCAR Inc for the quarter ended September 30, 2008).

(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, 2006–2010.

(13)	Annual report to security holders

	Portions of the 2010 Annual Report to Stockholders have been incorporated by reference and are filed herewith.

(21)	Subsidiaries of the registrant

(23)	Consent of independent registered public accounting firm

(24)	Power of attorney

	Powers of attorney of certain directors

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

	a.	Certification of Principal Executive Officer.

	b.	Certification of Principal Financial Officer.

(32)	Section 1350 Certifications:

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

	b.	Exhibits (Exhibits filed with the Securities and Exchange Commission are not included herein. Copies of exhibits will be furnished to stockholders at a cost of 25¢ per page upon written request addressed to Corporate Secretary, PACCAR Inc, P.O. Box 1518, Bellevue, Washington 98009.)

	c.	Financial Statement Schedules

		All schedules are omitted because the required matter or conditions are not present or because the information required by the schedules is submitted as part of the consolidated financial statements and notes thereto.


(101.INS)		XBRL Instance Document.

(101.SCH)		XBRL Taxonomy Extension Schema Document.

(101.CAL)		XBRL Taxonomy Extension Calculation Linkbase Document.

(101.DEF)		XBRL Taxonomy Extension Definition Linkbase Document.

(101.LAB)		XBRL Taxonomy Extension Label Linkbase Document.

(101.PRE)		XBRL Taxonomy Extension Presentation Linkbase Document

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


				PACCAR Inc
				Registrant

Date: March 1, 2011				/s/ M. C. Pigott
				M. C. Pigott, Chairman
				Chief Executive Officer and Director

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated.


Signature		Title

/s/ M. C. Pigott		Chief Executive Officer and Director
M.C. Pigott		(Principal Executive Officer)

/s/ T. E. Plimpton		Vice Chairman and Director
T. E. Plimpton		(Principal Financial Officer)

/s/ M. T. Barkley		Vice President and Controller
M. T. Barkley		(Principal Accounting Officer)

*/s/ A. J. Carnwath		Director
A. J. Carnwath

*/s/ J. M. Fluke, Jr.		Director
J. M. Fluke, Jr.

*/s/ K. S. Hachigian		Director
K. S. Hachigian

*/s/ S. F. Page		Director
S. F. Page

*/s/ R. T. Parry		Director
R. T. Parry

*/s/ J. M. Pigott		Director
J. M. Pigott

*/s/ W. G. Reed, Jr.		Director
W. G. Reed, Jr.

*/s/ G. M. E. Spierkel		Director
G. M. E. Spierkel

*/s/ W. R. Staley		Director
W. R. Staley

*/s/ C. R. Williamson		Director
C. R. Williamson

*By	/s/ M. C. Pigott
	M. C. Pigott
	Attorney-in-Fact

ANNUAL REPORT ON FORM 10-K

ITEM 15(c)

CERTAIN EXHIBITS

YEAR ENDED DECEMBER 31, 2010

PACCAR Inc

BELLEVUE, WASHINGTON

EXHIBIT 4(h)

TERMS AND CONDITIONS OF THE NOTES

The following is the text of the terms and conditions which, as supplemented, amended and/or replaced by the relevant Final Terms, will be endorsed on each Note in definitive form issued under the Programme. The terms and conditions applicable to any Note in global form will differ from those terms and conditions which would apply to the Note were it in definitive form to the extent described under “Summary of Provisions Relating to the Notes while in Global Form” below. All capitalised terms that are not defined in the terms and conditions shall have the meanings given to them in the relevant Final Terms. References in the terms and conditions to “Notes” are to the Notes of one Series only, not to all Notes that may be issued under the Programme.

1.	Introduction

(a)

Programme : PACCAR Financial Europe B.V., a private company with limited liability ( besloten vennootschap met beperkte aansprakelijkheid ) incorporated under the laws of The Netherlands, having its corporate seat at Eindhoven (“ PFE ”) and PACCAR Financial PLC, a public limited company incorporated under the laws of England and Wales (“ PFP) have established a Euro Medium Term Note Programme (the “ Programme ”) for the issuance of up to €1,500,000,000 in aggregate principal amount of notes (the “ Notes ”).

(b)

Final Terms : Notes issued under the Programme are issued in series (each a “ Series ”) and each Series may comprise one or more tranches (each a “ Tranche ”) of Notes. Each Tranche is the subject of Final Terms (the “ Final Terms ”) which supplements these terms and conditions (the “ Conditions ”). The terms and conditions applicable to any particular Tranche of Notes are these Conditions as supplemented, amended and/or replaced by the relevant Final Terms. In the event of any inconsistency between these Conditions and the relevant Final Terms, the relevant Final Terms shall prevail.

(c)

Agency Agreement : The Notes are the subject of and issued pursuant to an amended and restated agency agreement dated 12 August 2009 (the “ Agency Agreement ”) between PFE, PFP, Citibank, N.A., London Branch as fiscal agent (the “ Fiscal Agent ,” which expression includes any successor fiscal agent appointed from time to time in connection with the Notes) and the paying agents named therein (together with the Fiscal Agent, the “ Paying Agents ,” which expression includes any successor or additional paying agents appointed from time to time in connection with the Notes) and with the benefit of a deed of covenant executed by PFE dated 12 August 2009 and a deed of covenant executed by PFP dated 12 August 2009 (each a “ Deed of Covenant ” and together the “ Deeds of Covenant ”) in relation to the Notes.

(d)

The Notes : All subsequent references in these Conditions to “Notes” are to the Notes which are the subject of the relevant Final Terms. Copies of the relevant Final Terms are available during normal business hours at the Specified Office of the Fiscal Agent or at the office of the Paying Agent in London, the initial Specified Offices of which are set out below.

(e)

Summaries : Certain provisions of these Conditions are summaries of the Agency Agreement and are subject to their detailed provisions. The holders of the Notes (the “ Noteholders ”) and the holders of the related interest coupons, if any, (the “ Couponholders ” and the “ Coupons ,” respectively) are bound by, and are deemed to have notice of, all the provisions of the Agency Agreement applicable to them. Copies of the Agency Agreement and the Deed of Covenant are available for inspection during normal business hours at the Specified Offices of each of the Paying Agents, the initial Specified Offices of which are set out below.

2.	Interpretation

(a)	Definitions : In these Conditions the following expressions have the following meanings:

“ Accrual Yield ” has the meaning given in the relevant Final Terms;

“ Additional Business Centre(s) ” means the city or cities specified as such in the relevant Final Terms;

“ Additional Financial Centre(s) ” means the city or cities specified as such in the relevant Final Terms;

“ Business Day ” means:

(i)

in relation to any sum payable in euro, a TARGET Settlement Day and a day on which commercial banks and foreign exchange markets settle payments generally in each (if any) Additional Business Centre; and

(ii)

in relation to any sum payable in a currency other than euro, a day on which commercial banks and foreign exchange markets settle payments generally in London, in the Principal Financial Centre of the relevant currency and in each (if any) Additional Business Centre;

“ Business Day Convention ,” in relation to any particular date, has the meaning given in the relevant Final Terms and, if so specified in the relevant Final Terms, may have different meanings in relation to different dates and, in this context, the following expressions shall have the following meanings:

(i)

“ Following Business Day Convention ” means that the relevant date shall be postponed to the first following day that is a Business Day;

(ii)

“ Modified Following Business Day Convention ” or “ Modified Business Day Convention ” means that the relevant date shall be postponed to the first following day that is a Business Day unless that day falls in the next calendar month in which case that date will be the first preceding day that is a Business Day;

(iii)

“ Preceding Business Day Convention ” means that the relevant date shall be brought forward to the first preceding day that is a Business Day;

(iv)

“FRN Convention,” “Floating Rate Convention” or “Eurodollar Convention” means that each relevant date shall be the date which numerically corresponds to the preceding such date in the calendar month which is the number of months specified in the relevant Final Terms as the Specified Period after the calendar month in which the preceding such date occurred provided, however, that :

(A)

if there is no such numerically corresponding day in the calendar month in which any such date should occur, then such date will be the last day which is a Business Day in that calendar month;

(B)

if any such date would otherwise fall on a day which is not a Business Day, then such date will be the first following day which is a Business Day unless that day falls in the next calendar month, in which case it will be the first preceding day which is a Business Day; and

(C)

if the preceding such date occurred on the last day in a calendar month which was a Business Day, then all subsequent such dates will be the last day which is a Business Day in the calendar month which is the specified number of months after the calendar month in which the preceding such date occurred; and

(v)

“ No Adjustment ” means that the relevant date shall not be adjusted in accordance with any Business Day Convention;

“ Calculation Agent ” means the Fiscal Agent or such other Person specified in the relevant Final Terms as the party responsible for calculating the Rate(s) of Interest and Interest Amount(s) and/or such other amount(s) as may be specified in the relevant Final Terms;

“ Calculation Amount ” has the meaning given in the relevant Final Terms;

“ Consolidated Assets ” means the aggregate amount of assets (less applicable reserves for depreciation, amortisation, unearned finance charges, allowance for credit losses and other properly deductible items) after deducting therefrom all goodwill, trade names, trademarks, patents, organisation expenses and other like intangibles, all as set forth on the most recent balance sheet of the Issuer and its Subsidiaries and computed in accordance with generally accepted accounting principles;

“ Coupon Sheet ” means, in respect of a Note, a coupon sheet relating to the Note;

“ Day Count Fraction ” means, in respect of the calculation of an amount for any period of time (the “ Calculation Period ”), such day count fraction as may be specified in these Conditions or the relevant Final Terms and:

(i)

if “ Actual/Actual (ICMA) ” is so specified, means:

(a)

where the Calculation Period is equal to or shorter than the Regular Period during which it falls, the actual number of days in the Calculation Period divided by the product of (1) the actual number of days in such Regular Period and (2) the number of Regular Periods in any year; and

(b)

where the Calculation Period is longer than one Regular Period, the sum of:

(A)

the actual number of days in such Calculation Period falling in the Regular Period in which it begins divided by the product of (1) the actual number of days in such Regular Period and (2) the number of Regular Periods in any year; and

(B)

the actual number of days in such Calculation Period falling in the next Regular Period divided by the product of (a) the actual number of days in such Regular Period and (2) the number of Regular Periods in any year;

(ii)

if “ Actual/365 ” or “ Actual/Actual (ISDA) ” is so specified, means the actual number of days in the Calculation Period divided by 365 (or, if any portion of the Calculation Period falls in a leap year, the sum of (A) the actual number of days in that portion of the Calculation Period falling in a leap year divided by 366 and (B) the actual number of days in that portion of the Calculation Period falling in a non-leap year divided by 365);

(iii)

if “ Actual/365 (Fixed) ” is so specified, means the actual number of days in the Calculation Period divided by 365;

(iv)

if “ Sterling/FRN ” is so specified, means the actual number of days in the Interest Period divided by 365 or, in the case of an Interest Payment Date falling in a leap year, 366;

(v)

if “ Actual/360 ” is so specified, means the actual number of days in the Calculation Period divided by 360;

(vi)

if “ 30/360 ” is so specified, means the number of days in the Calculation Period divided by 360 (the number of days to be calculated on the basis of a year of 360 days with 12 30-day months (unless (i) the last day of the Calculation Period is the 31st day of a month but the first day of the Calculation Period is a day other than the 30th or 31st day of a month, in which case the month that includes that last day shall not be considered to be shortened to a 30-day month, or (ii) the last day of the Calculation Period is the last day of the month of February, in which case the month of February shall not be considered to be lengthened to a 30-day month)); and

(vii)

if “ 30E/360 ” or “ Eurobond Basis ” is so specified means, the number of days in the Calculation Period divided by 360 (the number of days to be calculated on the basis of a year of 360 days with 12 30-day months, without regard to the date of the first day or last day of the Calculation Period unless, in the case of the final Calculation Period, the date of final maturity is the last day of the month of February, in which case the month of February shall not be considered to be lengthened to a 30-day month);

“ Early Redemption Amount (Tax) ” means, in respect of any Note, its principal amount or such other amount as may be specified in, or determined in accordance with, the relevant Final Terms;

“ Early Termination Amount ” means, in respect of any Note, its principal amount or such other amount as may be specified in, or determined in accordance with, these Conditions or the relevant Final Terms;

“ Extraordinary Resolution ” has the meaning given in the Agency Agreement;

“ Final Redemption Amount ” means, in respect of any Note, its principal amount or such other amount as may be specified in, or determined in accordance with, the relevant Final Terms;

“ First Interest Payment Date ” means the date specified in the relevant Final Terms;

“ Fixed Coupon Amount ” has the meaning given in the relevant Final Terms;

“ Indebtedness ” means any mortgage, indenture or instrument under which there may be issued or by which there may be secured or evidenced any indebtedness for money borrowed by the Issuer;

“ Interest Amount ” means, in relation to a Note and an Interest Period, the amount of interest payable in respect of that Note for that Interest Period;

“ Interest Commencement Date ” means the Issue Date of the Notes or such other date as may be specified as the Interest Commencement Date in the relevant Final Terms;

“ Interest Determination Date ” has the meaning given in the relevant Final Terms;

“ Interest Payment Date ” means the First Interest Payment Date and any other date or dates specified as such in, or determined in accordance with the provisions of, the relevant Final Terms and, if a Business Day Convention is specified in the relevant Final Terms:

(i)

as the same may be adjusted in accordance with the relevant Business Day Convention; or

(ii)

if the Business Day Convention is the FRN Convention, Floating Rate Convention or Eurodollar Convention and an interval of a number of calendar months is specified in the relevant Final Terms as being the Specified Period, each of such dates as may occur in accordance with the FRN Convention, Floating Rate Convention or Eurodollar Convention at such Specified Period of calendar months following the Interest Commencement Date (in the case of the First Interest Payment Date) or the previous Interest Payment Date (in any other case);

“ Interest Period ” means each period beginning on (and including) the Interest Commencement Date or any Interest Payment Date and ending on (but excluding) the next Interest Payment Date;

“ ISDA Definitions ” means the 2000 ISDA Definitions (as amended and updated as at the date of issue of the first Tranche of the Notes of the relevant Series (as specified in the relevant Final Terms) as published by the International Swaps and Derivatives Association, Inc.) or, if so specified in the relevant Final Terms, the 2006 ISDA Definitions (as amended and updated as at the date of issue of the first Tranche of the Notes of the relevant Series (as specified in the relevant Final Terms) as published by the International Swaps and Derivatives Association, Inc.);

“ Issuer ” means PFE or PFP, as may be specified in the Final Terms;

“ Issue Date ” has the meaning given in the relevant Final Terms;

“ Liens ” means any interest in Property securing an obligation owed to, or a claim by, a Person other than the owner of the Property, including but not limited to a security interest arising from a mortgage, encumbrance, pledge, conditional sale or trust receipt, or a lease, consignment or bailment for security purposes. For the purposes of this definition, a Person shall be deemed to be the owner of any Property which it has or holds subject to a conditional sale arrangement, financing lease or other arrangement pursuant to which title to the Property has been retained by or is vested in some other Person for security purposes;

“ Margin ” has the meaning given in the relevant Final Terms;

“ Maturity Date ” has the meaning given in the relevant Final Terms;

“ Maximum Redemption Amount ” has the meaning given in the relevant Final Terms;

“ Minimum Redemption Amount ” has the meaning given in the relevant Final Terms;

“ Optional Redemption Amount (Call) ” means, in respect of any Note, its principal amount or such other amount as may be specified in, or determined in accordance with, the relevant Final Terms;

“ Optional Redemption Amount (Put) ” means, in respect of any Note, its principal amount or such other amount as may be specified in, or determined in accordance with, the relevant Final Terms;

“ Optional Redemption Date (Call) ” has the meaning given in the relevant Final Terms;

“ Optional Redemption Date (Put) ” has the meaning given in the relevant Final Terms;

“ Participating Member State ” means a Member State of the European Communities which adopts the euro as its lawful currency in accordance with the Treaty;

“ Payment Business Day ” means:

(i)

if the currency of payment is euro, any day which is:

(A)

a day on which banks in the relevant place of presentation are open for presentation and payment of bearer debt securities and for dealings in foreign currencies; and

(B)

in the case of payment by transfer to an account, a TARGET Settlement Day and a day on which dealings in foreign currencies may be carried on in each (if any) Additional Financial Centre; or

(ii)

if the currency of payment is not euro, any day which is:

(A)

a day on which banks in the relevant place of presentation are open for presentation and payment of bearer debt securities and for dealings in foreign currencies; and

(B)

in the case of payment by transfer to an account, a day on which dealings in foreign currencies may be carried on in the Principal Financial Centre of the currency of payment and in each (if any) Additional Financial Centre;

“ Person ” means any individual, company, corporation, firm, partnership, joint venture, association, organisation, state or agency of a state or other entity, whether or not having separate legal personality;

“ Principal Financial Centre ” means, in relation to any currency, the principal financial centre for that currency provided, however, that in relation to euro, it means the principal financial centre of such Member State of the European Communities as is selected (in the case of a payment) by the payee or (in the case of a calculation) by the Calculation Agent;

“ Property ” means any kind of property or asset, whether real, personal or mixed, tangible or intangible;

“ Put Option Notice ” means a notice which must be delivered to a Paying Agent by any Noteholder wanting to exercise a right to redeem a Note at the option of the Noteholder;

“ Put Option Receipt ” means a receipt issued by a Paying Agent to a depositing Noteholder upon deposit of a Note with such Paying Agent by any Noteholder wanting to exercise a right to redeem a Note at the option of the Noteholder;

“ Rate of Interest ” means the rate or rates (expressed as a percentage per annum) of interest payable in respect of the Notes specified in the relevant Final Terms or calculated or determined in accordance with the provisions of these Conditions and/or the relevant Final Terms;

“ Redemption Amount ” means, as appropriate, the Final Redemption Amount, the Early Redemption Amount (Tax), the Optional Redemption Amount (Call), the Optional Redemption Amount (Put), the Early Termination Amount or such other amount in the nature of a redemption amount as may be specified in, or determined in accordance with the provisions of, the relevant Final Terms;

“ Reference Banks ” has the meaning given in the relevant Final Terms or, if none, four major banks selected by the Calculation Agent in the market that is most closely connected with the Reference Rate;

“ Reference Price ” has the meaning given in the relevant Final Terms;

“ Reference Rate ” has the meaning given in the relevant Final Terms;

“ Regular Period ” means:

(i)

in the case of Notes where interest is scheduled to be paid only by means of regular payments, each period from and including the Interest Commencement Date to but excluding the First Interest Payment Date and each successive period from and including one Interest Payment Date to but excluding the next Interest Payment Date;

(ii)

in the case of Notes where, apart from the first Interest Period, interest is scheduled to be paid only by means of regular payments, each period from and including a Regular Date falling in any year to but excluding the next Regular Date, where “ Regular Date ” means the day and month (but not the year) on which any Interest Payment Date falls; and

(iii)

in the case of Notes where, apart from one Interest Period other than the first Interest Period, interest is scheduled to be paid only by means of regular payments, each period from and including a Regular Date falling in any year to but excluding the next Regular Date, where “ Regular Date ” means the day and month (but not the year) on which any Interest Payment Date falls other than the Interest Payment Date falling at the end of the irregular Interest Period;

“ Relevant Date ” means, in relation to any payment, whichever is the later of (a) the date on which the payment in question first becomes due and (b) if the full amount payable has not been received in the Principal Financial Centre of the currency of payment by the Fiscal Agent on or prior to such due date, the date on which (the full amount having been so received) notice to that effect has been given to the Noteholders;

“ Relevant Financial Centre ” has the meaning given in the relevant Final Terms;

“ Relevant Screen Page ” means the page, section or other part of a particular information service (including, without limitation, the Reuter Money 3000 Service and the Telerate Service) specified as the Relevant Screen Page in the relevant Final Terms, or such other page, section or other part as may replace it on that information service or such other information service, in each case, as may be nominated by the Person providing or sponsoring the information appearing there for the purpose of displaying rates or prices comparable to the Reference Rate;

“ Relevant Time ” has the meaning given in the relevant Final Terms;

“ Reserved Matter ” means any proposal

(i)

to change any date fixed for payment of principal or interest in respect of the Notes, to reduce the amount of principal or interest payable on any date in respect of the Notes, to alter the method of calculating the amount of any payment in respect of the Notes or the date for any such payment;

(ii)

to effect the exchange or substitution of the Notes for, or the conversation of the Notes into, shares bonds or other obligations or securities of the Issuer or any other Person or body corporate formed or to be formed;

(iii)

to change the currency in which amounts due in respect of the Notes are payable;

(iv)

to change the quorum required at any Meeting or the majority required to pass an Extraordinary Resolution; or

(v)

to amend this definition;

“ Restricted Debt ” when used with respect to the Issuer or any Subsidiary of the Issuer, means any present or future indebtedness for money borrowed evidenced by any note, bond, debenture or other evidence of indebtedness for money borrowed which is, or is capable of being, listed, quoted or traded on any stock exchange or in any securities market (including, without limitation, any over-the counter market), for which the Issuer or such Subsidiary of the Issuer is liable, directly or indirectly, absolutely or contingently. Restricted Debt shall not include any indebtedness for the payment, redemption or satisfaction of which money (or other Property permitted under the instrument creating or evidencing such indebtedness) in the necessary amount shall have been deposited in trust with a trustee or proper depository at or before the maturity or redemption date thereof. For the purposes of this definition, “indebtedness for money borrowed” shall include, without limitation, obligations created or arising under any conditional sale, financing lease, or other title retention agreement and obligations to pay for Property;

“ Specified Currency ” has the meaning given in the relevant Final Terms;

“ Specified Denomination(s) ” has the meaning given in the relevant Final Terms;

“ Specified Office ” has the meaning given in the Agency Agreement;

“ Specified Period ” has the meaning given in the relevant Final Terms;

“ Subsidiary ” means, in relation to any Person (the “ first Person ”) at any particular time, any other Person (the “ second Person ”):

(i)

whose affairs and policies the first Person controls or has the power to control, whether by ownership of share capital, contract, the power to appoint or remove members of the governing body of the second Person or otherwise; or

(ii)

whose financial statements are, in accordance with applicable law and generally accepted accounting principles, consolidated with those of the first Person;

“ Talon ” means a talon for further Coupons;

“ TARGET2 ” means the Trans-European Automated Real-Time Gross Settlement Express Transfer payment system which utilises a single shared platform and which was launched on 19 November 2007;

“ TARGET Settlement Day ” means any day on which TARGET2 is open for the settlement of payments in euro;

“ Treaty ” means the Treaty establishing the European Communities, as amended; and

“ Zero Coupon Note ” means a Note specified as such in the relevant Final Terms.

(b)	Interpretation : In these Conditions:

(i)

if the Notes are Zero Coupon Notes, references to Coupons and Couponholders are not applicable;

(ii)

if Talons are specified in the relevant Final Terms as being attached to the Notes at the time of issue, references to Coupons shall be deemed to include references to Talons;

(iii)

if Talons are not specified in the relevant Final Terms as being attached to the Notes at the time of issue, references to Talons are not applicable;

(iv)

any reference to principal shall be deemed to include the Redemption Amount, any additional amounts in respect of principal which may be payable under Condition 12 ( Taxation ), any premium payable in respect of a Note and any other amount in the nature of principal payable pursuant to these Conditions;

(v)

any reference to interest shall be deemed to include any additional amounts in respect of interest which may be payable under Condition 12 ( Taxation ) and any other amount in the nature of interest payable pursuant to these Conditions;

(vi)

references to Notes being “outstanding” shall be construed in accordance with the Agency Agreement;

(vii)

if an expression is stated in Condition 2(a) to have the meaning given in the relevant Final Terms, but the relevant Final Terms gives no such meaning or specifies that such expression is “not applicable” then such expression is not applicable to the Notes; and

(viii)

any reference to the Agency Agreement shall be construed as a reference to the Agency Agreement as amended and/or supplemented up to and including the Issue Date of the Notes.

3.	Form Denomination and Title

The Notes are in bearer form in the Specified Denomination(s) with Coupons and, if specified in the relevant Final Terms, Talons attached at the time of issue. In the case of a Series of Notes with more than one Specified Denomination, Notes of one Specified Denomination will not be exchangeable for Notes of another Specified Denomination. In the case of any Notes which are to be admitted to trading on a regulated market within the European Economic Area or offered to the public in a Member State of the European Economic Area in circumstances which require the publication of a prospectus under the Prospectus Directive, the minimum Specified Denomination shall be €100,000 (or its equivalent in any other currency as at the date of issue of the relevant Notes). Title to the Notes and the Coupons will pass by delivery. The holder of any Note or Coupon shall (except as otherwise required by law) be treated as its absolute owner for all purposes (whether or not it is overdue and regardless of any notice of ownership, trust or any other interest therein, any writing thereon or any notice of any previous loss or theft thereof) and no Person shall be liable for so treating such holder. No Person shall have any right to enforce any term or condition of any Note under the Contracts (Rights of Third Parties) Act 1999.

4.	Status of Notes

The Notes constitute direct, general, unconditional, unsubordinated and (without prejudice to the provisions of Condition 5 (Negative Pledge)) unsecured obligations of the Issuer which will at all times rank pari passu among themselves and at least pari passu with all other present and future unsecured and unsubordinated obligations of the Issuer, save for such obligations as may be preferred by provisions of law that are both mandatory and of general application and subject to Condition 5 ( Negative Pledge ).

5.	Negative Pledge

After the date hereof, the Issuer will not itself, and will not permit any Subsidiary of the Issuer to, create, incur or suffer to exist, any Lien on any Property of the Issuer or any Subsidiary of the Issuer securing any Restricted Debt, without effectively providing that the Notes (together with, if the Issuer shall so determine, any other indebtedness of the Issuer or such Subsidiary then existing or thereafter created) shall be secured equally and rateably with (or, at the option of the Issuer, prior to) such secured Restricted Debt, so long as such secured Restricted Debt shall be so secured, unless, after giving effect thereto, the aggregate amount of

all Restricted Debt of the Issuer and its Subsidiaries secured by Liens on Property of the Issuer and its Subsidiaries would not exceed 15% of Consolidated Assets; provided, however, that this Condition 5 shall not apply to, and there shall be excluded from Restricted Debt secured by Liens in any computation under this Condition 5, Restricted Debt secured only by:

(i)

Liens on Property of, or on any shares of capital stock of, any corporation existing at the time such corporation becomes a Subsidiary of the Issuer;

(ii)

Liens in favour of the Issuer or any Subsidiary of the Issuer or Liens securing any indebtedness of a Subsidiary to the Issuer or of the Issuer or a Subsidiary to a Subsidiary of the Issuer;

(iii)

Liens in favour of any governmental body (or surety for any governmental body) to secure progress, advance or other payments pursuant to any contract or provision of any statute or rule of court;

(iv)

Liens of any other creditors on Property repossessed in the ordinary course of business which comprises collateral security for defaulted indebtedness or additional Liens created on any such Property for the purpose of protecting the interest of the Issuer therein;

(v)

A banker’s Lien or other right of offset in favour of any lender or other holder of Restricted Debt on money deposited with such lender or holder in the ordinary course of business;

(vi)

Liens on Property and rentals therefrom existing at the time of acquisition thereof, or to secure the payment of all or any part of the purchase price thereof or construction thereon or to secure any Restricted Debt incurred prior to, at the time of, or within 180 days after the later of the acquisition of such Property of the completion of construction for the purpose of financing all or any part of the purchase price thereof or construction thereon; or

(vii)

Any extension, renewal or replacement (or successive extensions, renewals or replacements), as a whole or in part, of any Lien referred to in the foregoing clauses (i) through (vi), inclusive; provided, however, that such extension, renewal or replacement Lien shall be limited to all or part of the same Property that secured the Lien extended, renewed or replaced (plus improvements on such Property).

For purposes of this Condition 5 an “acquisition” of Property shall include any transaction or Series of transactions by which the Issuer or a Subsidiary of the Issuer acquires, directly or indirectly, an interest, or an additional interest (to the extent thereof), in such Property, including without limitation an acquisition through merger or consolidation with, or an acquisition of an interest in, a Person owning an interest in such Property.

6.	Fixed Rate Note Provisions

(a)	Application: This Condition 6 ( Fixed Rate Note Provisions ) is applicable to the Notes only if the Fixed Rate Note Provisions are specified in the relevant Final Terms as being applicable.

(b)

Accrual of interest: The Notes bear interest from the Interest Commencement Date at the Rate of Interest payable in arrear on each Interest Payment Date, subject as provided in Condition 11 ( Payments ). Each Note will cease to bear interest from the due date for final redemption unless, upon due presentation, payment of the Redemption Amount is improperly withheld or refused, in which case it will continue to bear interest in accordance with this Condition 6 (as well after as before judgment) until whichever is the earlier of (i) the day on which all sums due in respect of such Note up to that day are received by or on behalf of the relevant Noteholder and (ii) the day which is seven days after the Fiscal Agent has notified the Noteholders that it has received all sums due in respect of the Notes up to such seventh day (except to the extent that there is any subsequent default in payment).

(c)	Fixed Coupon Amount: The amount of interest payable in respect of each Note for any Interest Period shall be the relevant Fixed Coupon Amount and, if the Notes are in more than one Specified Denomination, shall be the relevant Fixed Coupon Amount in respect of the relevant Specified Denomination.

(d)

Calculation of interest amount: The amount of interest payable in respect of each Note for any period for which a Fixed Coupon Amount is not specified shall be calculated by applying the Rate of Interest to the Calculation Amount, multiplying the product by the relevant Day Count Fraction and rounding the resulting figure to the nearest sub-unit of the Specified Currency (half a sub-unit being rounded upwards) and multiplying such rounded figure by a fraction equal to the Specified Denomination of such Note divided by the Calculation Amount. For this purpose a “ sub-unit ” means, in the case of any currency other than euro, the lowest amount of such currency that is available as legal tender in the country of such currency and, in the case of euro, means one cent.

7.	Floating Rate Note and Index-Linked Interest Note Provisions

(a)	Application: This Condition 7 ( Floating Rate Note and Index-Linked Interest Note Provisions ) is applicable to the Notes only if the Floating Rate Note Provisions or the Index-Linked Interest Note Provisions are specified in the relevant Final Terms as being applicable.

(b)

Accrual of interest: The Notes bear interest from the Interest Commencement Date at the Rate of Interest payable in arrear on each Interest Payment Date, subject as provided in Condition 11 ( Payments ). Each Note will cease to bear interest from the due date for final redemption unless, upon due presentation, payment of the Redemption Amount is improperly withheld or refused, in which case it will continue to bear interest in accordance with this Condition (as well after as before judgment) until whichever is the earlier of (i) the day on which all sums due in respect of such Note up to that day are received by or on behalf of the relevant Noteholder and (ii) the day which is seven days after the Fiscal Agent has notified the Noteholders that it has received all sums due in respect of the Notes up to such seventh day (except to the extent that there is any subsequent default in payment).

(c)

Screen Rate Determination : If Screen Rate Determination is specified in the relevant Final Terms as the manner in which the Rate(s) of Interest is/are to be determined, the Rate of Interest applicable to the Notes for each Interest Period will be determined by the Calculation Agent on the following basis:

(i)

if the Reference Rate is a composite quotation or customarily supplied by one entity, the Calculation Agent will determine the Reference Rate which appears on the Relevant Screen Page as of the Relevant Time on the relevant Interest Determination Date;

(ii)

in any other case, the Calculation Agent will determine the arithmetic mean of the Reference Rates which appear on the Relevant Screen Page as of the Relevant Time on the relevant Interest Determination Date;

(iii)

if, in the case of (i) above, such rate does not appear on that page or, in the case of (ii) above, fewer than two such rates appear on that page or if, in either case, the Relevant Screen Page is unavailable, the Calculation Agent will:

(A)

request the principal Relevant Financial Centre office of each the Reference Banks to provide a quotation of the Reference Rate at approximately the Relevant Time on the Interest Determination Date to prime banks in the Relevant Financial Centre interbank market in an amount that is representative for a single transaction in that market at that time; and

(B)

determine the arithmetic mean of such quotations; and

(iv)

if fewer than two such quotations are provided as requested, the Calculation Agent will determine the arithmetic mean of the rates (being the nearest to the Reference Rate, as determined by the Calculation Agent) quoted by major banks in the Principal Financial Centre of the Specified Currency, selected by the Calculation Agent, at approximately 11.00 a.m. (local time in the

Principal Financial Centre of the Specified Currency) on the first day of the relevant Interest Period for loans in the Specified Currency to leading European banks for a period equal to the relevant Interest Period and in an amount that is representative for a single transaction in that market at that time,

and the Rate of Interest for such Interest Period shall be the sum of the Margin and the rate or (as the case may be) the arithmetic mean so determined; provided, however, that if the Calculation Agent is unable to determine a rate or (as the case may be) an arithmetic mean in accordance with the above provisions in relation to any Interest Period, the Rate of Interest applicable to the Notes during such Interest Period will be the sum of the Margin and the rate or (as the case may be) the arithmetic mean last determined in relation to the Notes in respect of a preceding Interest Period.

(d)

ISDA Determination: If ISDA Determination is specified in the relevant Final Terms as the manner in which the Rate(s) of Interest is/are to be determined, the Rate of Interest applicable to the Notes for each Interest Period will be the sum of the Margin and the relevant ISDA Rate where “ISDA Rate” in relation to any Interest Period means a rate equal to the Floating Rate (as defined in the ISDA Definitions) that would be determined by the Calculation Agent under an interest rate swap transaction if the Calculation Agent were acting as Calculation Agent for that interest rate swap transaction under the terms of an agreement incorporating the ISDA Definitions and under which:

(i)

the Floating Rate Option (as defined in the ISDA Definitions) is as specified in the relevant Final Terms;

(ii)

the Designated Maturity (as defined in the ISDA Definitions) is a period specified in the relevant Final Terms; and

(iii)

the relevant Reset Date (as defined in the ISDA Definitions) is either (A) if the relevant Floating Rate Option is based on the London inter-bank offered rate (LIBOR) for a currency, the first day of that Interest Period or (B) in any other case, as specified in the relevant Final Terms.

(e)	Index-Linked Interest: If the Index-Linked Interest Note Provisions are specified in the relevant Final Terms as being applicable, the Rate(s) of Interest applicable to the Notes for each Interest Period will be determined in the manner specified in the relevant Final Terms.

(f)	Maximum or Minimum Rate of Interest: If any Maximum Rate of Interest or Minimum Rate of Interest is specified in the relevant Final Terms, then the Rate of Interest shall in no event be greater than the maximum or be less than the minimum so specified.

(g)

Calculation of Interest Amount: The Calculation Agent will, as soon as practicable after the time at which the Rate of Interest is to be determined in relation to each Interest Period, calculate the Interest Amount payable in respect of each Note for such Interest Period. The Interest Amount will be calculated by applying the Rate of Interest for such Interest Period to the Calculation Amount, multiplying the product by the relevant Day Count Fraction, rounding the resulting figure to the nearest sub-unit of the Specified Currency (half a sub-unit being rounded upwards) and multiplying such rounded figure by a fraction equal to the Specified Denomination of the relevant note divided by the Calculation amount. For this purpose a “ sub-unit ” means, in the case of any currency other than euro, the lowest amount of such currency that is available as legal tender in the country of such currency and, in the case of euro, means one cent.

(h)

Calculation of other amounts: If the relevant Final Terms specifies that any other amount is to be calculated by the Calculation Agent, the Calculation Agent will, as soon as practicable after the time or times at which any such amount is to be determined, calculate the relevant amount. The relevant amount will be calculated by the Calculation Agent in the manner specified in the relevant Final Terms.

(i)

Publication: The Calculation Agent will cause each Rate of Interest and Interest Amount determined by it, together with the relevant Interest Payment Date, and any other amount(s) required to be determined by it together with any relevant payment date(s) to be notified to the Paying Agents and each listing authority, stock exchange and/or quotation system (if any) by which the Notes have then been admitted to listing,

trading and/or quotation as soon as practicable after such determination but (in the case of each Rate of Interest, Interest Amount and Interest Payment Date) in any event not later than the first day of the relevant Interest Period. Notice thereof shall also promptly be given to the Noteholders. The Calculation Agent will be entitled to recalculate any Interest Amount (on the basis of the foregoing provisions) in the event of an extension or shortening of the relevant Interest Period. If the Calculation Amount is less than the minimum Specified Denomination the Calculation Agent shall not be obliged to publish each Interest Amount but instead may publish only the Calculation Amount and the Interest Amount in respect of a Note having the minimum Specified Denomination.

(j)

Notifications etc: All notifications, opinions, determinations, certificates, calculations, quotations and decisions given, expressed, made or obtained for the purposes of this Condition by the Calculation Agent will (in the absence of manifest error) be binding on the Issuer, the Paying Agents, the Noteholders and the Couponholders and (subject as aforesaid) no liability to any such Person will attach to the Calculation Agent in connection with the exercise or non-exercise by it of its powers, duties and discretions for such purposes.

8.	Zero Coupon Note Provisions

(a)	Application: This Condition 8 ( Zero Coupon Note Provisions ) is applicable to the Notes only if the Zero Coupon Note Provisions are specified in the relevant Final Terms as being applicable.

(b)	Late payment on Zero Coupon Notes: If the Redemption Amount payable in respect of any Zero Coupon Note is improperly withheld or refused, the Redemption Amount shall thereafter be an amount equal to the sum of:

(i)

the Reference Price; and

(ii)

the product of the Accrual Yield (compounded annually) being applied to the Reference Price on the basis of the relevant Day Count Fraction from (and including) the Issue Date to (but excluding) whichever is the earlier of (i) the day on which all sums due in respect of such Note up to that day are received by or on behalf of the relevant Noteholder and (ii) the day which is seven days after the Fiscal Agent has notified the Noteholders that it has received all sums due in respect of the Notes up to such seventh day (except to the extent that there is any subsequent default in payment).

9.	Dual Currency Note Provisions

(a)	Application: This Condition 9 ( Dual Currency Note Provisions ) is applicable to the Notes only if the Dual Currency Note Provisions are specified in the relevant Final Terms as being applicable.

(b)	Rate of Interest: If the rate or amount of interest falls to be determined by reference to an exchange rate, the rate or amount of interest payable shall be determined in the manner specified in the relevant Final Terms.

10.	Redemption and Purchase

(a)	Scheduled redemption : Unless previously redeemed, or purchased and cancelled, the Notes will be redeemed at their Final Redemption Amount on the Maturity Date, subject as provided in Condition 11 ( Payments ).

(b)	Redemption for tax reasons: The Notes may be redeemed at the option of the Issuer in whole, but not in part:

(i)

at any time (if neither the Floating Rate Note Provisions or the Index-Linked Interest Note Provisions are specified in the relevant Final Terms as being applicable); or

(ii)

on any Interest Payment Date (if the Floating Rate Note Provisions or the Index-Linked Interest Note Provisions are specified in the relevant Final Terms as being applicable),

on giving not less than 30 nor more than 60 days’ notice to the Noteholders (which notice shall be irrevocable), at their Early Redemption Amount (Tax), together with interest accrued (if any) to the date fixed for redemption, if:

(A)

(x) the Issuer has or will become obliged to pay additional amounts as provided or referred to in Condition 12 ( Taxation ) as a result of any change in, or amendment to, the laws or regulations of The Netherlands or the United States of America or the United Kingdom or any political subdivision or any authority thereof or therein having power to tax, or any change in the application or official interpretation of such laws or regulations (including a holding by a court of competent jurisdiction), which change or amendment becomes effective on or after the date of issue of the first Tranche of the Notes; and (y) such obligation cannot be avoided by the Issuer taking reasonable measures available to it; or

(B)

the Issuer shall determine that any payment made outside the United States by the Issuer or any Paying Agents in respect of any Note or Coupon appertaining thereto would, under any present or future laws or regulations of the United States affecting taxation or otherwise, be subject to any certification, information or other reporting requirement of U.S. law or regulation with regard to the nationality, residence or identity of a beneficial owner, who is not a U.S. Person, of such instrument or Coupon (other than a requirement that: (x) would not be applicable to a payment made (1) directly to the beneficial owner or (2) to a custodian, nominee or other agent of the beneficial owner; or (y) could be satisfied by the holder, custodian, nominee or other agent certifying that the beneficial owner is not a U.S. Person, provided, however, that in each case referred to in (x)(2) or (y) payment by any such custodian, nominee or agent to the beneficial owner is not otherwise subject to any requirement referred to in this sentence; or (z) would not be applicable to a payment made by at least one paying agent),

provided, however, that no such notice of redemption shall be given earlier than:

(1)

where the Notes may be redeemed at any time, 90 days prior to the earliest date on which the Issuer would be obliged to pay such additional amounts if a payment in respect of the Notes were then due; or

(2)

where the Notes may be redeemed only on an Interest Payment Date, 60 days prior to the Interest Payment Date occurring immediately before the earliest date on which the Issuer would be obliged to pay such additional amounts if a payment in respect of the Notes were then due.

Prior to the publication of any notice of redemption pursuant to this paragraph, the Issuer shall deliver to the Fiscal Agent (A) a certificate signed by two members of the Board of Management of the Issuer stating that the Issuer is entitled to effect such redemption and setting forth a statement of facts showing that the conditions precedent to the right of the Issuer so to redeem have occurred and (B) (in the case of redemption under Condition 10(b)(A)) an opinion of independent legal advisers of recognised standing to the effect that the Issuer has or will become obliged to pay such additional amounts as a result of such change or amendment. Upon the expiry of any such notice as is referred to in this Condition 10(b), the Issuer shall be bound to redeem the Notes in accordance with this Condition 10(b).

(c)

Redemption at the option of the Issuer: If the Call Option is specified in the relevant Final Terms as being applicable, the Notes may be redeemed at the option of the Issuer in whole or, if so specified in the relevant Final Terms, in part on any Optional Redemption Date (Call) at the relevant Optional Redemption Amount (Call) on the Issuer giving not less than 30 nor more than 60 days’ notice to the Noteholders (which notice shall be irrevocable and shall oblige the Issuer to redeem the Notes or, as the case may be, the Notes specified in such notice on the relevant Optional Redemption Date (Call) at the Optional Redemption Amount (Call) plus accrued interest (if any) to such date).

(d)

Partial redemption: If the Notes are to be redeemed in part only on any date in accordance with Condition 10(c) ( Redemption at the option of the Issuer ), the Notes to be redeemed shall be selected by the drawing of lots in such place and in such manner as may be fair and reasonable in the circumstances, taking into

account prevailing market practices, subject to compliance with applicable law and the rules of each listing authority, stock exchange and/or quotation system (if any) by which the Notes have then been admitted to listing, trading and/or quotation, and the notice to Noteholders referred to in Condition 10(c) ( Redemption at the option of the Issuer ) shall specify the serial numbers of the Notes so to be redeemed. If any Maximum Redemption Amount or Minimum Redemption Amount is specified in the relevant Final Terms, then the Optional Redemption Amount (Call) shall in no event be greater than the maximum or be less than the minimum so specified.

(e)

Redemption at the option of Noteholders: If the Put Option is specified in the relevant Final Terms as being applicable, the Issuer shall, at the option of the holder of any Note, redeem such Note on the Optional Redemption Date (Put) specified in the relevant Put Option Notice at the relevant Optional Redemption Amount (Put) together with interest (if any) accrued to such date. In order to exercise the option contained in this Condition 10(e), the holder of a Note must, not less than 30 nor more than 60 days before the relevant Optional Redemption Date (Put), deposit with any Paying Agent such Note together with all unmatured Coupons relating thereto and a duly completed Put Option Notice in the form obtainable from any Paying Agent. The Paying Agent with which a Note is so deposited shall deliver a duly completed Put Option Receipt to the depositing Noteholder. No Note, once deposited with a duly completed Put Option Notice in accordance with this Condition 10(e), may be withdrawn; provided, however, that if, prior to the relevant Optional Redemption Date (Put), any such Note becomes immediately due and payable or, upon due presentation of any such Note on the relevant Optional Redemption Date (Put), payment of the redemption moneys is improperly withheld or refused, the relevant Paying Agent shall mail notification thereof to the depositing Noteholder at such address as may have been given by such Noteholder in the relevant Put Option Notice and shall hold such Note at its Specified Office for collection by the depositing Noteholder against surrender of the relevant Put Option Receipt. For so long as any outstanding Note is held by a Paying Agent in accordance with this Condition 10(e), the depositor of such Note and not such Paying Agent shall be deemed to be the holder of such Note for all purposes.

(f)	No other redemption: The Issuer shall not be entitled to redeem the Notes otherwise than as provided in paragraphs (a) to (e) above.

(g)	Early redemption of Zero Coupon Notes: Unless otherwise specified in the relevant Final Terms, the Redemption Amount payable on redemption of a Zero Coupon Note at any time before the Maturity Date shall be an amount equal to the sum of:

(i)

the Reference Price; and

(ii)

the product of the Accrual Yield (compounded annually) being applied to the Reference Price from (and including) the Issue Date to (but excluding) the date fixed for redemption or (as the case may be) the date upon which the Note becomes due and payable.

Where such calculation is to be made for a period which is not a whole number of years, the calculation in respect of the period of less than a full year shall be made on the basis of such Day Count Fraction as may be specified in the Final Terms for the purposes of this Condition 10(g) or, if none is so specified, a Day Count Fraction of 30E/360.

(h)	Purchase: The Issuer or any of its Subsidiaries may at any time purchase Notes in the open market or otherwise and at any price, provided that all unmatured Coupons are purchased therewith.

(i)	Cancellation: All Notes so redeemed or purchased by the Issuer or any of its Subsidiaries and any unmatured Coupons attached to or surrendered with them shall be cancelled and may not be reissued or resold.

11.	Payments

(a)

Principal: Payments of principal shall be made only against presentation and (provided that payment is made in full) surrender of Notes at the Specified Office of any Paying Agent outside the United States by cheque drawn in the currency in which the payment is due on, or by transfer to an account denominated in

that currency (or, if that currency is euro, any other account to which euro may be credited or transferred) and maintained by the payee with, a bank in the Principal Financial Centre of that currency (in the case of a sterling cheque, a town clearing branch of a bank in the City of London). No payments on Notes will be made by mail to an address in the United States of America or by transfer to an account maintained in the United States of America.

(b)

Interest: Payments of interest shall, subject to paragraph (h) below, be made only against presentation and (provided that payment is made in full) surrender of the appropriate Coupons at the Specified Office of any Paying Agent outside the United States in the manner described in paragraph (a) above.

(c)

Payments in The City of New York: Payments of principal or interest in U.S. dollars may be made at the Specified Office of a Paying Agent in The City of New York if (i) the Issuer has appointed Paying Agents outside the United States with the reasonable expectation that such Paying Agents will be able to make payment of the full amount of the interest on the Notes in U.S. dollars when due, (ii) payment of the full amount of such interest in U.S. dollars at the offices of all such Paying Agents is illegal or effectively precluded by exchange controls or other similar restrictions and (iii) payment is permitted by applicable United States law.

(d)

Payments subject to fiscal laws: All payments in respect of the Notes are subject in all cases to any applicable fiscal or other laws and regulations in the place of payment, but without prejudice to the provisions of Condition 12 ( Taxation ). No commissions or expenses shall be charged to the Noteholders or Couponholders in respect of such payments.

(e)	Deductions for unmatured Coupons: If the relevant Final Terms specifies that the Fixed Rate Note Provisions are applicable and a Note is presented without all unmatured Coupons relating thereto:

(i)

if the aggregate amount of the missing Coupons is less than or equal to the amount of principal due for payment, a sum equal to the aggregate amount of the missing Coupons will be deducted from the amount of principal due for payment; provided, however, that if the gross amount available for payment is less than the amount of principal due for payment, the sum deducted will be that proportion of the aggregate amount of such missing Coupons which the gross amount actually available for payment bears to the amount of principal due for payment;

(ii)

if the aggregate amount of the missing Coupons is greater than the amount of principal due for payment:

(A)

so many of such missing Coupons shall become void (in inverse order of maturity) as will result in the aggregate amount of the remainder of such missing Coupons (the “ Relevant Coupons ”) being equal to the amount of principal due for payment; provided, however, that where this sub-paragraph would otherwise require a fraction of a missing Coupon to become void, such missing Coupon shall become void in its entirety; and

(B)

a sum equal to the aggregate amount of the Relevant Coupons (or, if less, the amount of principal due for payment) will be deducted from the amount of principal due for payment; provided, however, that , if the gross amount available for payment is less than the amount of principal due for payment, the sum deducted will be that proportion of the aggregate amount of the Relevant Coupons (or, as the case may be, the amount of principal due for payment) which the gross amount actually available for payment bears to the amount of principal due for payment.

Each sum of principal so deducted shall be paid in the manner provided in paragraph (a) above against presentation and (provided that payment is made in full) surrender of the relevant missing Coupons.

(f)

Unmatured Coupons void : If the relevant Final Terms specifies that this Condition 11(f) is applicable or that the Floating Rate Note Provisions or the Index-Linked Interest Note Provisions are applicable, on the due date for final redemption of any Note or early redemption of such Note pursuant to Condition 10(b) ( Redemption for tax reasons ), Condition 10(e) ( Redemption at the option of Noteholders ), Condition 10(c)

( Redemption at the option of the Issuer ) or Condition 13 ( Events of Default ), all unmatured Coupons relating thereto (whether or not still attached) shall become void and no payment will be made in respect thereof.

(g)

Payments on Business Days: If the due date for payment of any amount in respect of any Note or Coupon is not a Payment Business Day in the place of presentation, the holder shall not be entitled to payment in such place of the amount due until the next succeeding Payment Business Day in such place and shall not be entitled to any further interest or other payment in respect of any such delay.

(h)

Payments other than in respect of matured Coupons: Payments of interest other than in respect of matured Coupons shall be made only against presentation of the relevant Notes at the Specified Office of any Paying Agent outside the United States (or in The City of New York if permitted by paragraph (c) above).

(i)	Partial payments: If a Paying Agent makes a partial payment in respect of any Note or Coupon presented to it for payment, such Paying Agent will endorse thereon a statement indicating the amount and date of such payment.

(j)

Exchange of Talons: On or after the maturity date of the final Coupon which is (or was at the time of issue) part of a Coupon Sheet relating to the Notes, the Talon forming part of such Coupon Sheet may be exchanged at the Specified Office of the Fiscal Agent or at the office of the Paying Agent in London for a further Coupon Sheet (including, if appropriate, a further Talon but excluding any Coupons in respect of which claims have already become void pursuant to Condition 14 ( Prescription )). Upon the due date for redemption of any Note, any unexchanged Talon relating to such Note shall become void and no Coupon will be delivered in respect of such Talon.

12.	Taxation

(a)

Gross up: All payments of principal and interest in respect of the Notes and the Coupons by or on behalf of the Issuer shall be made free and clear of, and without withholding or deduction for or on account of, any present or future taxes, duties, assessments or governmental charges of whatever nature imposed, levied, collected, withheld or assessed by or on behalf of The Netherlands, the United States of America or the United Kingdom or any political subdivision therein or any authority therein or thereof having power to tax, unless the withholding or deduction of such taxes, duties, assessments, or governmental charges is required by law. In that event, the Issuer shall pay such additional amounts as will result in receipt by the Noteholders and the Couponholders of such amounts as would have been received by them had no such withholding or deduction been required, except that no such additional amounts shall be payable in respect of any Note or Coupon presented for payment:

(i)

by or on behalf of a holder which is liable for such taxes, duties, assessments or governmental charges in respect of such Note or Coupon by reason of its having some connection with the jurisdiction by which such taxes, duties, assessments or charges have been imposed, levied, collected, withheld or assessed other than the mere holding of the Note or Coupon; or

(ii)

where such withholding or deduction is required to be made pursuant to European Council Directive 2003/48/EC or any other Directive implementing the conclusions of the ECOFIN Council meeting of 26-27 November 2000 on the taxation of savings income or any law implementing or complying with, or introduced in order to conform to, such Directive; or

(iii)

by or on behalf of a holder who would have been able to avoid such withholding or deduction by presenting the relevant Note or Coupon to another Paying Agent in a Member State of the EU; or

(iv)

more than 30 days after the Relevant Date except to the extent that the holder of such Note or Coupon would have been entitled to such additional amounts on presenting such Note or Coupon for payment on the last day of such period of 30 days;

(v)

where such withholding or deduction would not have been imposed but for the holder’s past or present status as a personal holding company, foreign personal holding company or passive foreign investment company with respect to the United States or a corporation that accumulates earnings to avoid U.S. federal income tax; or

(vi)

where such withholding or deduction would not have been imposed but for the holder’s past or present status as a “10 per cent. shareholder” of the obligor of the Note as defined in Section 871(h)(3) of the U.S. Internal Revenue Code or any successor provisions, a controlled foreign corporation related to the obligor of the Note or a bank that has invested in the Note as an extension of credit in the ordinary course of its trade or business.

(b)

Taxing jurisdiction: If the Issuer becomes subject at any time to any taxing jurisdiction other than The Netherlands (in the case of PFE) or the United Kingdom (in the case of PFP) references in these Conditions to The Netherlands or the United Kingdom (as relevant) shall be construed as references to The Netherlands or the United Kingdom and/or such other jurisdiction.

13.	Events of Default

If any of the following events occurs and is continuing:

(a)	Non-payment: the Issuer fails to pay any amount of principal in respect of the Notes on the due date for payment thereof or fails to pay any amount of interest in respect of the Notes within 14 days of the due date for payment thereof; or

(b)

Breach of other obligations: the Issuer defaults in the performance or observance of any of its other obligations under or in respect of the Notes and such default remains unremedied for 30 days after written notice thereof, addressed to the Issuer by any Noteholder has been delivered to the Issuer or to the Specified Office of the Fiscal Agent; or

(c)

Cross-default of Issuer: the Issuer defaults under any Indebtedness, whether such Indebtedness now exists or shall hereafter be created, which default shall have resulted in Indebtedness in an aggregate principal amount exceeding €10,000,000 (or its equivalent in any other currency or currencies) (except that such euro amount shall not apply with respect to a default with respect to Notes of any other Series), becoming or being declared due and payable prior to the date on which it would otherwise have become due and payable, without such acceleration having been rescinded or annulled or such Indebtedness having been discharged within a period of 30 days after there shall have been given, by registered or certified mail, to the Issuer by any Noteholder, a written notice specifying such default and requiring the Issuer to cause such acceleration to be rescinded or annulled or such Indebtedness to be discharged and stating that such notice is a “Notice of Default” under this Condition 13(c); or

(d)	Security enforced: a secured party or encumbrancer takes possession, or a receiver, manager or other similar officer is appointed, of the whole or a substantial part of the undertaking, assets and revenues of the Issuer or any of its Subsidiaries; or

(e)

Insolvency etc: (i) the Issuer becomes insolvent or admits in writing that it is unable to pay its debts as they fall due, (ii) an administrator (including a bewindvoerder ) or liquidator (including a curator) of the Issuer or the whole or a substantial part of the undertaking, assets and revenues of the Issuer is appointed (or application for any such appointment is made including an application for the Issuer to be declared bankrupt ( failliet ) or to be granted a moratorium of payments ( surseance van betaling ), unless such application is contested by the Issuer and/or discharged or stayed within 90 days or is cancelled or withdrawn within 90 days after the making thereof), (iii) the Issuer takes any action for a readjustment or deferment of any of its obligations or makes a general assignment or an arrangement or composition ( verag ) with or for the benefit of its creditors or declares a moratorium in respect of any of its Indebtedness; or

(f)

Winding up etc: an order is made or an effective resolution is passed for the winding up, liquidation or dissolution ( ontbinding en vereffening ) of the Issuer or any of its Subsidiaries (otherwise than, in the case of a Subsidiary of the Issuer, for the purposes of or pursuant to an amalgamation, reorganisation or restructuring whilst solvent); or

(g)

Attachment etc: an executory attachment ( executorial beslag ) or interlocutory attachment ( conservatoir beslag ) is made on all or a substantial part of the assets of the Issuer, or a similar measure under foreign law is made, unless such application is contested by the Issuer and/or discharged or stayed within 90 days, or is cancelled or withdrawn within 90 days after the making thereof; or

(h)	Enforcement proceedings: a distress, attachment, execution or other legal process is levied, enforced or sued out on or against the whole or a substantial part of the property, assets or revenues of the Issuer or any of its Subsidiaries and is not discharged or stayed within 90 days,

(i)

Keep Well Agreement etc. not in force: the Keep Well Agreement is not (or is claimed by either party thereto not to be) in full force and effect or is modified, amended or terminated in contravention of the provisions thereof, or the Issuer waives, or fails to take all reasonable steps to exercise, any of its rights under the Keep Well Agreement or PACCAR or the Issuer fails to perform or observe any obligation on its part under the Keep Well Agreement so as to affect materially and adversely the interests of any Noteholder or Couponholder;

then any outstanding Notes of a particular Series may by written notice, addressed by any Noteholder, delivered to the Issuer or to the Specified Office of the Fiscal Agent, be declared immediately due and payable, whereupon they shall become immediately due and payable at their Early Termination Amount together with accrued interest (if any) without further action or formality. Upon payment of the Early Termination Amount, all obligations of the Issuer in respect of payment of the principal amount of the Notes of such Series shall terminate.

14.	Prescription

Claims for principal shall become void unless the relevant Notes are presented for payment within ten years of the appropriate Relevant Date. Claims for interest shall become void unless the relevant Coupons are presented for payment within five years of the appropriate Relevant Date.

15.	Replacement of Notes and Coupons

If any Note or Coupon is lost, stolen, mutilated, defaced or destroyed, it may be replaced at the Specified Office of the Fiscal Agent (and, if the Notes are then admitted to listing, trading and/or quotation by any listing authority, stock exchange and/or quotation system which requires the appointment of a Paying Agent in any particular place, the Paying Agent having its Specified Office in the place required by such listing authority, stock exchange and/or quotation system), subject to all applicable laws and listing authority, stock exchange and/or quotation system requirements, upon payment by the claimant of the expenses incurred in connection with such replacement and on such terms as to evidence, security, indemnity and otherwise as the Issuer may reasonably require. Mutilated or defaced Notes or Coupons must be surrendered before replacements will be issued.

16.	Agents

In acting under the Agency Agreement and in connection with the Notes and the Coupons, the Paying Agents act solely as agents of the Issuer and do not assume any obligations towards or relationship of agency or trust for or with any of the Noteholders or Couponholders.

The initial Paying Agents and their initial Specified Offices are listed below. The initial Calculation Agent (if any) is specified in the relevant Final Terms. The Issuer reserves the right at any time to vary or terminate the appointment of any Paying Agent and to appoint a successor fiscal agent or Calculation Agent and additional or successor paying agents; provided, however, that :

(a)

the Issuer shall at all times maintain a Fiscal Agent; and

(b)

the Issuer undertakes that it will ensure that it maintains a paying agent in an EU Member State that will not be obliged to withhold or deduct tax pursuant to European Council Directive 2003/48/EC or any other Directive implementing the conclusions of the ECOFIN Council meeting of 26-27 November 2000 or any law implementing or complying with, or introduced in order to conform to, such Directive; and

(c)

if a Calculation Agent is specified in the relevant Final Terms, the Issuer shall at all times maintain a Calculation Agent; and

(d)

if and for so long as the Notes are admitted to listing, trading and/or quotation by any listing authority, stock exchange and/or quotation system which requires the appointment of a Paying Agent in any particular place, the Issuer shall maintain a Paying Agent having its Specified Office in the place required by such listing authority, stock exchange and/or quotation system.

In addition, the Issuer shall forthwith appoint a Paying Agent in New York City in respect of any Notes denominated in U.S. dollars in the circumstances described in Condition 11(c).

Notice of any change in any of the Paying Agents or in their Specified Offices shall promptly be given to the Noteholders.

17.	Meetings of Noteholders; Modification and Waiver

(a)

Meetings of Noteholders : The Agency Agreement contains provisions for convening meetings of Noteholders to consider matters relating to the Notes, including the modification of any provision of these Conditions. Any such modification may be made if sanctioned by an Extraordinary Resolution. Such a meeting may be convened by the Issuer and shall be convened by them upon the request in writing of Noteholders holding not less than one-tenth of the aggregate principal amount of the outstanding Notes. The quorum at any meeting convened to vote on an Extraordinary Resolution will be two or more Persons holding or representing one more than half of the aggregate principal amount of the outstanding Notes or, at any adjourned meeting, two or more Persons being or representing Noteholders whatever the principal amount of the Notes held or represented; provided, however, that Reserved Matters may only be sanctioned by an Extraordinary Resolution passed at a meeting of Noteholders at which two or more Persons holding or representing not less than three-quarters or, at any adjourned meeting, one quarter of the aggregate principal amount of the outstanding Notes form a quorum. Any Extraordinary Resolution duly passed at any such meeting shall be binding on all the Noteholders and Couponholders, whether present or not.

In addition, a resolution in writing signed by or on behalf of all Noteholders who for the time being are entitled to receive notice of a meeting of Noteholders will take effect as if it were an Extraordinary Resolution. Such a resolution in writing may be contained in one document or several documents in the same form, each signed by or on behalf of one or more Noteholders.

(b)

Modification: The Notes and these Conditions may be amended without the consent of the Noteholders or the Couponholders to correct a manifest error. In addition, the parties to the Agency Agreement may agree to modify any provision thereof, but the Issuer shall not agree, without the consent of the Noteholders, to any such modification unless it is of a formal, minor or technical nature, it is made to correct a manifest error or it is, in the opinion of the Issuer, not materially prejudicial to the interests of the Noteholders.

18.	Further Issues

The Issuer may from time to time, without the consent of the Noteholders or the Couponholders, create and issue further notes having the same terms and conditions as the Notes in all respects (or in all respects except for the first payment of interest) so as to form a single series with the Notes.

19.	Notices

Notices to the Noteholders shall be valid if published in a leading English language daily newspaper published in London (which is expected to be the Financial Times) or, if such publication is not practicable, in a leading English language daily newspaper having general circulation in Europe. Any such notice shall be deemed to have been given on the date of first publication. Couponholders shall be deemed for all purposes to have notice of the contents of any notice given to the Noteholders.

20.	Currency Indemnity

If any sum due from the Issuer in respect of the Notes or the Coupons or any order or judgment given or made in relation thereto has to be converted from the currency (the “ first currency ”) in which the same is payable under these Conditions or such order or judgment into another currency (the “ second currency ”) for the purpose of (a) making or filing a claim or proof against the Issuer, (b) obtaining an order or judgment in any court or other tribunal or (c) enforcing any order or judgment given or made in relation to the Notes, the Issuer shall indemnify each Noteholder, on the written demand of such Noteholder addressed to the Issuer and delivered to the Issuer or to the Specified Office of the Fiscal Agent, against any loss suffered as a result of any discrepancy between (i) the rate of exchange used for such purpose to convert the sum in question from the first currency into the second currency and (ii) the rate or rates of exchange at which such Noteholder may in the ordinary course of business purchase the first currency with the second currency upon receipt of a sum paid to it in satisfaction, in whole or in part, of any such order, judgment, claim or proof.

This indemnity constitutes a separate and independent obligation of the Issuer, shall give rise to a separate and independent cause of action and shall continue in full force and effect despite any other judgment, order, claim or proof for a liquidated amount in respect of any sum due under the Note or Coupon or any other judgment or order.

21.	Rounding

For the purposes of any calculations referred to in these Conditions (unless otherwise specified in these Conditions or the relevant Final Terms), (a) all percentages resulting from such calculations will be rounded, if necessary, to the nearest one hundred-thousandth of a percentage point, (b) U.S. dollar amounts used in or resulting from such calculations will be rounded to the nearest cent (with one half cent being rounded up), (c) all Japanese Yen amounts used in or resulting from such calculations will be rounded downwards to the next lower whole Japanese Yen amount, and (d) all amounts denominated in any other currency used in or resulting from such calculations will be rounded to the nearest two decimal places in such currency, with 0.005 being rounded upwards.

22.	Governing Law and Jurisdiction

(a)	Governing law : The Notes and any non-contractual obligations arising out of or in connection with the Notes are governed by English law.

(b)

English courts : The courts of England have exclusive jurisdiction to settle any dispute (a “ Dispute ”) arising from or connected with the Notes (including a dispute relating to the existence, validity or termination of the Notes or any non-contractual obligation arising out of or in connection with the Notes) or the consequences of their nullity.

(c)	Appropriate forum : The Issuer agrees that the courts of England are the most appropriate and convenient courts to settle any Dispute and, accordingly, that it will not argue to the contrary.

(d)

Rights of the Noteholders to take proceedings outside England : Condition 22(b) ( English courts ) is for the benefit of the Noteholders only. As a result, nothing in this Condition 22 ( Governing law and jurisdiction ) prevents any Noteholder from taking proceedings relating to a Dispute (“ Proceedings ”) in any other courts with jurisdiction. To the extent allowed by law, Noteholders may take concurrent Proceedings in any number of jurisdictions.

(e)

Process agent : PFE agrees that the documents which start any Proceedings and any other documents required to be served in relation to those Proceedings may be served on it by being delivered to PFP at Croston Road, Leyland, Preston, Lancs PR5 3LZ, United Kingdom or, if different, its registered office for the time being or at any address of PFE in Great Britain at which process may be served on it in accordance with Part XXIII of the Companies Act 1985. If such Person is not or ceases to be effectively appointed to accept service of process on behalf of PFE, PFE shall, on the written demand of any Noteholder addressed and delivered to PFE or to the Specified Office of the Fiscal Agent appoint a further Person in England to

accept service of process on its behalf and, failing such appointment within 15 days, any Noteholder shall be entitled to appoint such a Person by written notice addressed to PFE and delivered to PFE or to the Specified Office of the Fiscal Agent. Nothing in this paragraph shall affect the right of any Noteholder to serve process in any other manner permitted by law. This Condition applies to Proceedings in England and to Proceedings elsewhere.

EXHIBIT 10(n)

PACCAR Inc

LONG TERM INCENTIVE PLAN

ALTERNATE FORM RESTRICTED STOCK AWARD AGREEMENT

THIS PERFORMANCE-BASED RESTRICTED STOCK AWARD AGREEMENT (the “Agreement”), is entered into as of <<<Date>>>, (the “Award Date”) between PACCAR Inc, a Delaware corporation (the “Company”), and <<<Key Employee>>> (the “Recipient”).

WHEREAS, The Company has established the PACCAR Inc Long Term Incentive Plan (the “LTIP”) in order to provide key employees of the Company and its subsidiaries with an opportunity to acquire shares of the Company’s common stock, par value $1 per share (the “Common Shares”); and

WHEREAS, the Compensation Committee of the Board of Directors charged with administering the LTIP (the “Committee”) has determined that it would be in the best interests of the Company and its stockholders to grant the Restricted Stock described in this Agreement to the Recipient as an inducement to enter into or remain in the service of the Company and as an incentive for extraordinary efforts during such service;

NOW, THEREFORE, in consideration of the mutual covenants herein contained, it is agreed as follows:

1.	Award . The Company hereby grants the Recipient <<<Number>>> Common Shares (the “Restricted Stock”), subject to the terms and conditions of the LTIP and this Agreement. The provisions of the LTIP are incorporated into this Agreement by this reference.

Rights as Stockholder . On and after the Award Date, and except to the extent otherwise provided in the LTIP and this Agreement, the Recipient will be entitled to all of the rights of a stockholder with respect to the Restricted Stock, including the right to vote the Restricted Stock and to receive dividends and other distributions payable with respect to the Restricted Stock.

3.	Performance Goal . The Committee established the amount of the award of Restricted Stock and a performance goal (the “Performance Goal”) for the award within the first ninety (90) days of the calendar year. The measurement period for

the Performance Goal commences on January 1 and ends on December 31 of the calendar year (the “Performance Period”). The Performance Goal is based on a designated percent return on the Company’s revenue over the Performance Period. Return on revenue will be measured by dividing the Company’s total net income (less preferred dividends) over the Performance Period by total truck and other and financial services revenues over the Performance Period.

Performance Evaluation . Within sixty (60) days after the end of the Performance Period, the Committee will certify in writing whether the Performance Goal has been achieved. If the Performance Goal has been achieved, the Restricted Stock shall vest in accordance with the vesting provisions of Section 6. If the Performance Goal was not achieved, the Restricted Stock shall be immediately forfeited (except as set forth in Section 6(c)).

No Transfer before Vesting . Until the Performance Goal has been satisfied and the Restricted Stock otherwise vests, the Restricted Stock may not be transferred, pledged, alienated, attached or otherwise encumbered; any purported pledge, alienation, attachment or encumbrance shall be void and unenforceable against the Company; and no attempt to transfer the unvested Restricted Stock, whether voluntary or involuntary, by operation of law or otherwise, shall vest the purported transferee with any interest or right in or with respect to such Restricted Stock. Notwithstanding the foregoing, the Restricted Stock may be transferred by will or the laws of descent and distribution or pursuant to a trust created for the benefit of the Recipient or their family as provided Section 14 of the LTIP. The restrictions set forth in the LTIP and this Agreement shall apply to the Restricted Stock in the hands of any transferee.

Vesting .

(a)

The Restricted Stock shall vest in full on the first day of the month following Committee certification that the Performance Goal has been achieved (“the Vesting Date”) provided that the Recipient has been continuously employed by the Company in an LTIP-eligible position through the vesting date.

(b)

Retirement, Disability, Death . If the Committee certifies that the Performance Goal has been achieved

Alternate Form Restricted Stock Award Agreement – Page 2

and Recipient’s employment with the Company terminates by reason of Recipient’s retirement on or after age 62 (determined in accordance with the terms of the Company’s defined benefit plan) disability (determined in accordance with the Company’s long-term disability plan), or death, then the Restricted Stock will fully vest notwithstanding the provisions of Section 6(a).

(c)

Change in Control . Notwithstanding anything in this Agreement to the contrary, in the event of a Change in Control as provided in Section 16.4 of the LTIP, whether or not the Performance Goal has been satisfied, the Restricted Stock shall immediately vest in full.

(d)

Ownership . On the Vesting Date, the Recipient shall own the vested shares of Restricted Stock free and clear of all restrictions imposed by this Agreement (except those imposed by Section 12).

7.	Forfeiture of Restricted Shares . The Restricted Stock that has not vested in accordance with Section 6 shall be immediately and irrevocably forfeited as follows:

(a)

If the Performance Goal is not achieved, all Restricted Stock will be immediately forfeited.

(b)

If the Recipient resigns or is terminated by the Company voluntarily or involuntarily other than by death, disability or retirement as provided in Section 6(b), all Restricted Stock will be immediately forfeited.

Terms and Conditions of Distribution . The Company is not required to issue or deliver any certificates for the Restricted Stock before completing the steps necessary to comply with applicable federal and state securities laws (including any registration requirements and regulations governing short swing trading of securities) and applicable stock exchange rules and practices. The Company will use commercially reasonable efforts to cause compliance with those laws, rules and practices.

If the Recipient dies before the Company has distributed vested shares of Restricted Stock, the Company will distribute certificates to the beneficiary or beneficiaries the Recipient has designated, in the proportions the Recipient specified. To be effective, a beneficiary

Alternate Form Restricted Stock Award Agreement – Page 3

designation must be made in writing and filed with the Company. If the Recipient failed to designate a beneficiary or beneficiaries, the Company will distribute certificates for the vested shares of Restricted Stock to the Recipient’s surviving spouse or, if there is none, to their estate.

Stock Certificates . The Company will set up a book entry account for the Recipient with the Company’s transfer agent for the Restricted Stock. The Company will distribute share certificates to the Recipient or, if applicable, his or her beneficiary, upon request when the Restricted Stock becomes vested in accordance with Section 6.

10.	Payment for Shares . The Committee has determined that the services rendered by Recipient to the Company provided value equal to the $1.00 par value of the award of Restricted Stock and, therefore, no cash payment to the Company is required.

11.

Withholding of Tax . To the extent that the receipt of the Restricted Shares or dividends results in income to the Recipient for any federal or state income tax purposes, no later than the date as of which such tax withholding is first required, Recipient shall pay to the Company any federal or state income tax required to be withheld with respect to such amount. If the Recipient fails to do so, the Company will withhold a portion of the dividends to be paid and/or Common Shares having a fair market value on the date of withholding equal to the minimum tax withholding obligation.

12.	Legality of Issuance; Restrictions on Transfer . No Common Shares shall be issued unless and until the Company has determined that:

(a)

it and the Recipient have taken any actions required to register the Common Shares under the Securities Act of 1933, as amended (the “Securities Act”) or to perfect an exemption from the registration requirements thereof;

(b)

any applicable listing requirement of any stock exchange on which Common Shares are listed has been satisfied; and

(c)

any other applicable provision of state or federal law has been satisfied.

Alternate Form Restricted Stock Award Agreement – Page 4

Regardless of whether the offering and sale of Common Shares under the LTIP have been registered under the Securities Act or have been registered or qualified under the securities laws of any state, the Company may impose restrictions upon the sale, pledge or other transfer of such Common Shares (including the placement of appropriate legends on stock certificates) if, in the judgment of the Company and its counsel, such restrictions are necessary or desirable in order to achieve compliance with the Securities Act, the securities laws of any state or any other law or with restrictions imposed by the Company’s underwriters.

13.

No Registration Rights . The Company may, but shall not be obligated to, register or qualify the Restricted Stock under the Securities Act or any other applicable law. The Company shall not be obligated to take any affirmative action in order to cause the issuance of Restricted Stock under this Agreement to comply with any law.

14.

Removal of Legends . If, in the opinion of the Company and its counsel, any legend placed on a stock certificate representing Restricted Stock is no longer required, the holder of such certificate shall be entitled to exchange such certificate for a certificate representing the same number of Common Shares but lacking such legend.

15.

Investment Intent . In the event that the issuance of Restricted Stock is not registered under the Securities Act but an exemption is available which requires an investment representation or other representation, the Recipient shall represent and agree at the time of exercise that the Common Shares being acquired are being acquired for investment, and not with a view to the sale or distribution thereof, and shall make such other representations as are deemed necessary or appropriate by the Company and its counsel.

16.	No Employment Rights . Nothing in this Agreement shall be construed as giving the Recipient the right to be retained as an employee. The Company reserves the right to terminate the Recipient’s service at any time, with or without cause.

17.	Administration . The Committee administers the LTIP and this Agreement. The Committee shall have sole discretion to interpret the LTIP and this Agreement, amend and rescind rules relating to its implementation and make all determinations necessary for administration of the LTIP and

Alternate Form Restricted Stock Award Agreement – Page 5

this Agreement. The Recipient’s rights under this Agreement are expressly subject to the terms and conditions of the LTIP, including continued shareholder approval of the LTIP, and to any guidelines the Company adopts from time to time.

18.

Entire Agreement . The Award is in all respects subject to the provisions set forth in the LTIP to the same extent and with the same effect as if the provisions of the LTIP were set forth fully herein. In the event that the terms of this Award conflict with the terms of the LTIP, the LTIP shall control. This Agreement is the entire Agreement between the parties to it, and any and all prior oral and written representations are merged into and superseded by this Agreement. This Agreement may be amended only by written agreement between the Recipient and the Company.

19.

No Limitation on Rights of the Company . The award of Restricted Stock does not and will not in any way affect the right or power of the Company to make adjustments, reclassifications or changes in its capital or business structure, or to merge, consolidate, dissolve, liquidate, sell or transfer all or any part of its business or assets.

20.

Share Adjustments . If there are any changes in the number or value of shares of Restricted Stock by reason of stock dividends, stock splits, reverse stock splits, recapitalizations, mergers or other events as stated in Article 10 of the LTIP, the Board of Directors or Committee may make such adjustments as it deems appropriate in order to prevent dilution or enlargement of rights. This provision does not, however, authorize the delivery of fractional Common Shares under the LTIP.

21.

Notices . Any notice or other communication required or permitted under the LTIP or this Agreement must be in writing and must be delivered either personally, electronically, by certified, registered or express mail or by overnight courier, at the sender’s expense. Notice will be deemed given when delivered personally or electronically or, if mailed, three days after the date of deposit in the United States mail or, if sent by overnight courier, on the regular business day following the date sent. Notice to the Company should be sent to PACCAR Inc, Attention: Corporate Secretary. Notice to the Recipient should be sent to his or her business address.

22.	Data Privacy . By entering into this Agreement, Recipient:

(a)

agrees to disclose certain personal data requested by the Company to administer the LTIP and expressly consents to the Company’s processing such data for purposes of the implementation or administration of the LTIP and this Agreement;

Alternate Form Restricted Stock Award Agreement – Page 6

(b)

waives any data privacy rights Recipient may have with respect to such data; and

(c)

authorizes the Company and any of its authorized agents to store and transmit such information in electronic form.

23.

Successors . All obligations of the Company under this Agreement will be binding on any successor to the Company, whether the existence of the successor results from a direct or indirect purchase of all or substantially all of the business and/or assets of the Company, or a merger, consolidation, or other event.

24.	Governing Law . To the extent not preempted by federal law, this Agreement will be construed and enforced in accordance with, and governed by, the laws of the State of Washington as such laws are applied to contracts entered into and performed in such State.

25.	Limitation on Rights; No Right to Future Awards; Extraordinary Item of Compensation . By entering into this Agreement and accepting the grant of an award evidenced hereby, Recipient acknowledges:

(a)

that the LTIP is discretionary in nature and may be suspended or terminated by the Company at any time;

(b)

that the Award of Restricted Stock is a one-time benefit which does not create any contractual or other right to receive future awards, grants of stock options, or benefits in lieu thereof;

(c)

that all determinations with respect to any future awards of Restricted Stock, including, but not limited to, the times when awards shall be made, the number of Common Shares to be awarded, and the vesting of any Restricted Stock thereunder, will be at the sole discretion of the Company;

(d)

that the Recipient’s participation in the LTIP is voluntary;

Alternate Form Restricted Stock Award Agreement – Page 7

(e)

that the value of the Restricted Stock is an extraordinary item of compensation which is outside the scope of the Recipient’s employment contract, if any;

(f)

that the award of Restricted Stock is not part of normal or expected compensation for purposes of calculating any severance, resignation, redundancy, end of service payments, bonuses, long-service awards, pension or retirement benefits or similar payments; and

(g)

that the future value of the Restricted Stock is unknown and cannot be predicted with certainty.

I agree to the terms and conditions of this Agreement and acknowledge having received the PACCAR Long Term Incentive Plan and the Plan Information Statement.

Alternate Form Restricted Stock Award Agreement – Page 8

EXHIBIT 10(q)

PACCAR Inc

LONG TERM INCENTIVE PLAN

2011 FORM SHARE MATCH RESTRICTED STOCK AWARD AGREEMENT

THIS SHARE MATCH RESTRICTED STOCK AWARD AGREEMENT (the “Agreement”), is entered into as of the (day) of (month) (year) (the “Award Date”), between PACCAR Inc, a Delaware corporation (the “Company”), and Mark C. Pigott (the “Recipient”).

WHEREAS, the Compensation Committee of the Board of Directors charged with administering the LTIP (the “Committee”) has determined that it would be in the best interests of the Company and its stockholders to match the shares of PACCAR stock the Recipient has purchased in the ( ) calendar quarter of (year) (through the exercise of stock options or open market purchases) with a grant of the Restricted Shares described in this Agreement in recognition of superior accomplishments, as an inducement to remain in the service of the Company and as an incentive for extraordinary efforts during such service;

NOW, THEREFORE, in consideration of the mutual covenants herein contained, it is agreed as follows:

1.	Award . The Company hereby grants the Recipient (number) of Common Shares (the “Restricted Shares”) subject to the terms and conditions of the LTIP and this Agreement (the “Award”). The provisions of the LTIP are incorporated into this Agreement by this reference.

Rights as Stockholder . On and after the Award Date, and except to the extent provided in the LTIP and this Agreement, the Recipient will be entitled to all of the rights of a stockholder with respect to the Restricted Shares, including the right to vote the Restricted Shares and to receive dividends and other distributions payable with respect to the Restricted Shares.

Performance Goal . Vesting of the Award is subject to attaining a performance goal (the “Performance Goal”) in addition to the vesting provisions of Section 7. The Performance Goal will be attained if the Company’s EPS growth meets or exceeds the EPS growth of at least fifty percent (50%) of the Peer Companies for the Performance Period, where:

“EPS” means fully diluted earnings per share, adjusted to take into account stock splits, dividends or similar transactions. Earnings of the peer companies are adjusted for the effect of post-retirement benefit expense to be consistent with the method used by PACCAR. Restatements of prior period amounts by PACCAR or the peer companies will be reflected in the computation.

“EPS growth” means the percentage increase in total EPS over the Performance Period compared to total EPS over the immediately prior period of the same length.

“Peer Companies” means Agco Corporation, Arvin-Meritor Inc, Caterpillar Inc, Cummins, Inc, Dana Holding Corporation, Deere & Co, Eaton Corp., Navistar International Corporation, Oshkosh Corporation, Scania AB and AB Volvo.

Performance Period. The period for the Performance Goal commences on the first day of the calendar quarter in which the Award Date occurs and ends on the last day of the 19 ^th calendar quarter following this Award (the “Performance Period”).

Performance Evaluation . The Committee will certify in writing whether the Performance Goal has been achieved as soon as possible after the end of the Performance Period. If the Performance Goal has been achieved, the Award shall vest in accordance with the vesting provisions of Section 7. If the Performance Goal was not achieved, the Award shall be immediately forfeited (except as stated in Section 7(c)).

No Transfer before Vesting . Until the Performance Goal has been satisfied and the Restricted Shares otherwise vest, the Restricted Shares may not be transferred, pledged, alienated, attached or otherwise encumbered; any purported pledge, alienation, attachment or encumbrance shall be void and unenforceable against the Company; and no attempt to transfer the unvested portion of the Award covering any of the Restricted Shares or the Restricted Shares, whether

2011 Share Match Restricted Stock Award Agreement – Page 2

voluntary or involuntary, by operation of law or otherwise, shall vest the purported transferee with any interest or right in or with respect to such Award or Restricted Shares. Notwithstanding the foregoing, the Restricted Shares may be transferred by will or the laws of descent and distribution or pursuant to a trust created for the benefit of the Recipient or his family as provided in the Section 14 of the LTIP. The restrictions set forth in the LTIP and this Agreement shall apply to the Restricted Shares in the hands of any transferee.

Vesting .

(a)

Conditions . Subject to Section 8(b), the Restricted Shares shall vest in full provided each of the following conditions has been satisfied:

(i)

the Committee certifies, after the end of the Performance Period, that the Performance Goal for the Award has been achieved; and

(ii)

the Recipient retained, through the end of the Performance Period, the shares of PACCAR Inc common stock he purchased in the calendar quarter in which the Award was made and upon which the Award is based (the “Underlying Shares”); and

(iii)

at the end of the Performance Period, either

(1)

Recipient has been continuously employed by the Company since the Award Date in an LTIP eligible position; or

(2)

Recipient’s employment with the Company terminated by reason of Recipient’s retirement at or after age 65, early retirement (as determined under the Company’s defined benefit plan), disability (determined under the Company’s long-term disability plan) or death.

(b)

Vesting Date . The restrictions stated in Section 6 shall lapse on the date the Committee certifies that all of the vesting conditions set forth in Section 7(a) have been satisfied.

(c)

Change in Control . Notwithstanding anything in this Agreement to the contrary, in the event of a Change in Control as provided in Section 16.4 of the LTIP,

2011 Share Match Restricted Stock Award Agreement – Page 3

whether or not the Performance Goal has been satisfied, the Restricted Shares shall immediately vest in full.

7.	Forfeiture of Restricted Shares . The Recipient’s Restricted Shares that have not vested in accordance with Section 7 shall be immediately and irrevocably forfeited as follows:

(a)

If the Performance Goal is not achieved, all Restricted Shares will be immediately forfeited.

(b)

If Recipient sells any of the Underlying Shares prior to vesting it shall result in the immediate forfeiture of an equal number of the Restricted Shares from that Award.

(c)

If Recipient resigns or is terminated by the Company voluntarily or involuntarily other than by death, disability or retirement as provided in Section 7, all Restricted Shares will be immediately forfeited.

Terms and Conditions of Distribution . The Company is not required to issue or deliver any certificates for the Vested Shares before completing the steps necessary to comply with applicable federal and state securities laws (including any registration requirements and regulations governing short swing trading of securities) and applicable stock exchange rules and practices. The Company will use commercially reasonable efforts to cause compliance with those laws, rules and practices.

If the Recipient dies before the Company has distributed any vested Shares, the Company will distribute the shares to the beneficiary or beneficiaries the Recipient designated, in the proportions the Recipient specified. To be effective, a beneficiary designation must be made in writing and filed with the Company. If the Recipient failed to designate a beneficiary or beneficiaries, the Company will distribute the stock to the Recipient’s surviving spouse or, if there is none, to his estate consistent with the terms of the LTIP.

Stock Certificates . The Company will set up a book entry Restricted Shares account for the Recipient with the Company’s transfer agent for the Restricted Shares as soon as practicable. The Company will distribute share certificates to the Recipient or, if applicable, his or her beneficiary, when the Restricted Stock becomes vested in accordance with Section 6.

2011 Share Match Restricted Stock Award Agreement – Page 4

10.	Payment for Shares . The Committee has determined that the services rendered by Recipient to the Company provided value equal to the $1.00 par value of the vested shares awarded and, therefore, no cash payment to the Company is required.

11.

Withholding of Tax . To the extent that the receipt of the Restricted Shares or dividends results in income to the Employee for any federal or state income tax purposes, no later than the date as of which such tax withholding is first required, Recipient shall pay to the Company any federal or state income tax required to be withheld with respect to such amount. If the Recipient fails to do so, the Company will withhold shares of common stock having a fair market value on the date of withholding equal to the minimum tax withholding obligation.

12.	Legality of Issuance; Restrictions on Transfer . No Vested Shares shall be issued unless and until the Company has determined that:

(a)

(b)

any applicable listing requirement of any stock exchange on which Common Shares are listed has been satisfied; and

(c)

any other applicable provision of state or federal law has been satisfied.

2011 Share Match Restricted Stock Award Agreement – Page 5

13.

Registration Rights . The Company may, but shall not be obligated to, register or qualify the issuance of Restricted Shares under the Securities Act or any other applicable law. The Company shall not be obligated to take any affirmative action in order to cause the issuance of Restricted Shares under this Agreement to comply with any law.

14.

Removal of Legends . If, in the opinion of the Company and its counsel, any legend placed on a stock certificate representing Common Shares is no longer required, the holder of such certificate shall be entitled to exchange such certificate for a certificate representing the same number of Common Shares but lacking such legend.

15.

Investment Intent . In the event that the issuance of Restricted Shares under the LTIP is not registered under the Securities Act but an exemption is available which requires an investment representation or other representation, the Recipient shall represent and agree at the time of exercise that the Common Shares being acquired upon exercising this option are being acquired for investment, and not with a view to the sale or distribution thereof, and shall make such other representations as are deemed necessary or appropriate by the Company and its counsel.

16.

No Employment Rights . Nothing in this Agreement shall be construed as giving the Recipient the right to be retained as an employee. The Company reserves the right to terminate the Recipient’s service at any time, with or without cause (subject to any employment agreement between the Recipient and the Company).

17.

Administration . The Committee administers the LTIP and this Agreement. The Committee shall have sole discretion to interpret the LTIP and this Agreement, amend and rescind rules relating to its implementation and make all determinations necessary for administration of the LTIP and this Agreement. The Recipient’s rights under this Agreement are expressly subject to the terms and conditions of the LTIP, including continued shareholder approval of the LTIP, and to any guidelines the Company adopts from time to time.

18.	Entire Agreement . The Award is in all respects subject to the provisions set forth in the LTIP to the same extent and with the same effect as if the provisions of the LTIP were

2011 Share Match Restricted Stock Award Agreement – Page 6

set forth fully herein. In the event that the terms of this Award conflict with the terms of the LTIP, the LTIP shall control. This Agreement is the entire Agreement between the parties to it, and any and all prior oral and written representations are merged into and superseded by this Agreement. This Agreement may be amended only by written agreement between the Recipient and the Company.

19.

No Limitation on Rights of the Company . The award of Restricted Shares does not and will not in any way affect the right or power of the Company to make adjustments, reclassifications or changes in its capital or business structure, or to merge, consolidate, dissolve, liquidate, sell or transfer all or any part of its business or assets.

20.

Share Adjustments . If there are any changes in the number or value of shares of Common Shares by reason of stock dividends, stock splits, reverse stock splits, recapitalizations, mergers or other events as stated in Article 10 of the LTIP then proportionate adjustments shall be made to the number of shares of Common Stock (i) issued pursuant to Section 1 and (ii) covered by an unvested grant of restricted stock, in order to prevent dilution or enlargement of rights. This provision does not, however, authorize the delivery of fractional Common Shares under the LTIP.

21.

Notices . Any notice or other communication required or permitted under the LTIP or this Agreement must be in writing and must be delivered personally, sent by certified, registered or express mail, or sent by overnight courier, at the sender’s expense. Notice will be deemed given when delivered personally or, if mailed, three days after the date of deposit in the United States mail or, if sent by overnight courier, on the regular business day following the date sent. Notice to the Company should be sent to PACCAR Inc, Attention: Corporate Secretary. Notice to the Recipient should be sent to his or her business address.

22.	Data Privacy . By entering into this Agreement, Recipient:

(a)

2011 Share Match Restricted Stock Award Agreement – Page 7

(b)

waives any data privacy rights Recipient may have with respect to such data; and

(c)

authorizes the Company and any of its authorized agents to store and transmit such information in electronic form.

23.

24.	Governing Law . To the extent not preempted by federal law, this Agreement will be construed and enforced in accordance with, and governed by, the laws of the State of Washington as such laws are applied to contracts entered into and performed in such State.

25.	Limitation on Rights; No Right to Future Awards; Extraordinary Item of Compensation . By entering into this Agreement and accepting the grant of an award evidenced hereby, Recipient acknowledges:

(a)

that the LTIP is discretionary in nature and may be suspended or terminated by the Company at any time;

(b)

that the Award of Restricted Stock is a one-time benefit which does not create any contractual or other right to receive future awards, grants of stock options, or benefits in lieu thereof;

(c)

that all determinations with respect to any such future Awards, including, but not limited to, the times when Awards shall be made, the number of Common Shares to be awarded, and the vesting of any Restricted Stock thereunder, will be at the sole discretion of the Company;

(d)

that the Recipient’s participation in the LTIP is voluntary;

(e)

that the value of the Award is an extraordinary item of compensation which is outside the scope of the Recipient’s employment contract, if any;

2011 Share Match Restricted Stock Award Agreement – Page 8

(f)

that the Award is not part of normal or expected compensation for purposes of calculating any severance, resignation, redundancy, end of service payments, bonuses, long-service awards, pension or retirement benefits or similar payments; and

(g)

that the future value of the Commons Shares is unknown and cannot be predicted with certainty.

I agree to the terms and conditions of this restricted stock agreement and acknowledge having received the following documents:

•

PACCAR Long Term Incentive Plan

•

LTIP Administrative Guidelines Section 5.1

•

Plan Information Statement

2011 Share Match Restricted Stock Award Agreement – Page 9

Exhibit 10(r)

AMENDMENT TO THE PACCAR INC SAVINGS INVESTMENT PLAN

(Amendment and Restatement Effective January 1, 2009)

Effective January 1, 2007, Section 14.2 of the PACCAR Inc Savings Investment Plan (the “SIP”) shall be amended to read in its entirety as follows:

“14.2 Compliance With USERRA

(a)

Any other provision of the Plan notwithstanding, with regard to an Employee who after serving in the uniformed services is reemployed within the time required by USERRA, contributions shall be made and benefits and service credit shall be provided under the Plan with respect to his or her qualified military service (as defined in section 414(u)(5) of the IRC) in accordance with section 414(u) of the IRC. Furthermore, notwithstanding any provision of the Plan to the contrary, Member loan payments may be suspended during a period of qualified military service.

(b)

In the case of a Member who dies on or after January 1, 2007 while performing qualified military service (as defined in section 414(u) of the IRC), the Member’s Beneficiary shall be entitled to any additional benefits (other than contributions relating to the period of qualified military service) provided under the Plan as if the Member had resumed employment immediately prior to his or her death.”

Effective January 1, 2009, Section 8.3 of the SIP shall be amended to read in its entirety as follows:

“8.3	Time of Distribution

A Member who is Totally Disabled may elect to receive his Plan Benefit in accordance with the Company’s written procedures. In the case of a Member who is not Totally Disabled, the Benefit shall not be distributed before the later of the following dates:

(a)

The date when the Member ceases to be an Employee; or

(b)

The date when the Company receives the election.

Notwithstanding Section 14.2(c), for purposes of Plan distributions, a Member shall be treated as having ceased to be an Employee under the Plan during any period in which the Member is performing service in the uniformed services while on active duty for a period of more than thirty (30) days (as described in section 3401(h)(2)(A) of the IRC). If a Member elects to receive a distribution by reason of such deemed cessation of employment, and the Member otherwise would not have been treated as having ceased to be an Employee under the Plan, the Member may not make Salary Deferrals during the 6-month period beginning on the date of the distribution.

Notwithstanding the preceding provisions of this Section 8.3 and subject to Section 8.4, a Member’s Benefit shall be paid or commence by his Required Beginning Date. If the Member fails to file a timely distribution election form, Section 8.7 shall apply and Section 8.12 (relating to unclaimed Benefits) may apply.”

Effective January 1, 2009, Section 8.4 of the SIP shall be amended to read in its entirety as follows:

“8.4	Special Rules Regarding Distribution

(a)

If a Member other than a five-percent owner (as defined in section 416 of the IRC and taking into account any modifications under section 401(a)(9) of the IRC) is still an Employee as of his Required Beginning Date, he may elect (in the manner specified under the Company’s written procedures) to defer payment or commencement of his Benefit to the date he ceases to be an Employee, in which case the Company shall pay or commence his Benefit as soon as reasonably practicable thereafter, but not later than April 1 of the calendar year following the calendar year in which he ceases to be an Employee.

(b)

Notwithstanding the foregoing, distributions otherwise required by this Section 8.4 and section 401(a)(9) of the IRC shall be waived with respect to the 2009 calendar year in accordance with the Worker, Retiree, and Employer Recovery Act of 2008, unless the Member elects to continue them. If a Member elects to receive a distribution that would have been required by this Section 8.4 and section 401(a)(9) of the IRC with respect to the 2009 calendar year without regard to this paragraph, such distribution will be treated as an eligible rollover distribution subject to Section 8.14.

(c)

All distributions under the Plan shall be made in accordance with section 401(a)(9) of the IRC and the regulations thereunder, including Income Tax Regulation sections 1.401(a)(9)-1 through 9. Such regulations are incorporated in the Plan by reference and shall override any inconsistent provisions of the Plan. For purposes of section 401(a)(9), life expectancy(ies) under this Plan shall not be recalculated.”

Effective January 1, 2009, Section 8.9(a) of the SIP shall be amended to read in its entirety as follows:

“(a)

Member Dies Before Benefit Distribution

This Subsection (a) shall apply in the event that a Member dies before his Benefit has commenced. Such Member’s Benefit ordinarily shall be paid to his Beneficiary in the form of a single lump sum in cash, and the distribution ordinarily shall be made as soon as reasonably practicable after the Member’s death. A Beneficiary may, however, make request to defer the distribution of the Benefit to which such Beneficiary is entitled. However, the distribution shall in no event be made later than five years after the Member’s death. A Beneficiary

-2-

shall make the request to receive the Benefit to which such Beneficiary is entitled or to defer receipt in accordance with the Company’s written procedures.”

Effective January 1, 2009, a new Section 14.2(c) of the SIP shall be added to read as follows

“(c)

(i) An individual receiving “Differential Wage Payments” (as defined in section 3401(h)(2) of the IRC) shall be treated as an Employee, and (ii) the Differential Wage Payments shall be treated as Compensation and as compensation under section 415(c)(3) of the IRC.”

Witness the execution of this Amendment to the PACCAR Inc Savings Investment Plan (Amendment and Restatement Effective January 1, 2009).


PACCAR Inc

By:		/s/ Mark C. Pigott

Title:		Chairman and Chief Executive Officer

Dated:		December 13, 2010

-3-

Exhibit 12(a)

PACCAR Inc

COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES

PURSUANT TO SEC REPORTING REQUIREMENTS

(Millions of Dollars)


	Year ended December 31
	2010		2009		2008		2007		2006
FIXED CHARGES
Interest expense	$	208.4	$	291.3	$	391.1	$	387.0	$	303.6
Portion of rentals deemed interest		6.5		16.8		17.9		17.5		17.4


TOTAL FIXED CHARGES	$	214.9	$	308.1	$	409.0	$	404.5	$	321.0


EARNINGS
Income before taxes	$	660.3	$	175.0	$	1,464.0	$	1,764.3	$	2,175.3
FIXED CHARGES		214.9		308.1		409.0		404.5		321.0


EARNINGS AS DEFINED	$	875.2	$	483.1	$	1,873.0	$	2,168.8	$	2,496.3


RATIO OF EARNINGS TO FIXED CHARGES		4.07x		1.57x		4.58x		5.36x		7.78x

S TOCKHOLDER RETURN PERFORMANCE GRAPH

The following line graph compares the yearly percentage change in the cumulative total stockholder return on the Company’s common stock, to the cumulative total return of the Standard & Poor’s Composite 500 Stock Index and the return of the industry peer group of companies identified in the graph (the Peer Group Index) for the last five fiscal years ending December 31, 2010. Standard & Poor’s has calculated a return for each company in the Peer Group Index weighted according to its respective capitalization at the beginning of each period with dividends reinvested on a monthly basis. Management believes that the identified companies and methodology used in the graph for the peer group indices provides a better comparison than other indices available. The Peer Group Index consists of Caterpillar Inc., Cummins Inc., Danaher Corporation, Deere & Company, Dover Corporation, Eaton Corporation, Harley-Davidson, Inc., Honeywell International Inc., Illinois Tool Works Inc., Ingersoll-Rand Company Ltd. and United Technologies Corporation. The comparison assumes that $100 was invested on December 31, 2005 in the Company’s common stock and in the stated indices and assumes reinvestment of dividends.


	2005		2006		2007		2008		2009		2010
PACCAR Inc		100		147.02		190.84		102.37		132.19		212.01
S&P 500 Index		100		115.79		122.16		76.96		97.33		111.99
Peer Group Index		100		117.86		151.14		89.06		122.68		171.86

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

(tables in millions, except truck unit and per share data)

OVERVIEW:

PACCAR is a global technology company whose Truck segment includes the design, manufacture and distribution of high-quality, light-, medium- and heavy-duty commercial trucks and related aftermarket parts. In North America, trucks are sold under the Kenworth and Peterbilt nameplates, in Europe, under the DAF nameplate and in Australia under the Kenworth and DAF nameplates. The Company’s Financial Services segment (PFS) derives its earnings primarily from financing or leasing PACCAR products in the U.S., Canada, Mexico, Europe and Australia. The Company’s Other business is the manufacturing and marketing of industrial winches.

Consolidated net sales and revenues were $10.29 billion in 2010, an increase from the $8.09 billion in 2009, due to higher truck deliveries and aftermarket parts sales as the Company’s primary markets began to recover from economic recession. Truck unit sales increased in 2010 to 79,000 units from 61,000 units in 2009, still well below the record levels achieved in 2006 of 167,000 due to uneven economic conditions around the world.

In 2010, PACCAR achieved net income for the 72nd consecutive year due to higher sales and margins in the Truck segment and improved Financial Services segment results. Net income in 2010 was $457.6 million ($1.25 per diluted share) an increase from $111.9 million ($.31 per diluted share) in 2009. Included in 2009 net income was $41.5 million ($.11 per diluted share) of curtailment gains related to postretirement health care plans ($66.0 million pretax included in Other income before income taxes).

PACCAR enhanced its manufacturing capability with the opening of the new engine plant in Columbus, Mississippi. This world-class facility provides a North American platform for the manufacture of the 12.9 liter MX diesel engine. The Company also introduced a new MX engine for the North America market that is fully compliant with new 2010 EPA emissions standards. Over 10,000 orders for Kenworth and Peterbilt trucks equipped with the new MX engine have been received since the introduction in June 2010. This is the first time PACCAR has installed its own engines in North America. The Company sold its truck assembly plant in Tennessee to align production capacity with market demand. Other projects included the launch of new Peterbilt, Kenworth and DAF trucks and the opening of a new parts distribution center (PDC) in Santiago, Chile. The Company now has fourteen PDCs strategically located in North America, Europe, Australia and South America.

The PACCAR Financial Services group of companies has operations covering three continents and 20 countries. The global breadth of PFS and its rigorous credit application process support a portfolio of loans and leases with total assets of $7.9 billion that earned a pretax profit of $153.5 million. PACCAR issued $683.4 million in medium-term notes during the year.

Truck Outlook

Heavy duty truck industry sales in 2011 in the U.S. and Canada are expected to be in the range of 180,000–200,000 units, up 40% to 60% from 2010, reflecting continued economic recovery, increased freight movement and an aging truck fleet. In Europe, the 2011 annual market size of above 15-tonne vehicles is expected to be in the range of 220,000–240,000 units, up 20% to 30% from 2010, also reflecting continued economic recovery. Capital spending in 2011 is expected to increase to approximately $400 to $500 million, accelerating product development programs and South American expansion. Spending on research and development (R&D) in 2011 is expected to be $250 to $300 million, focusing on manufacturing efficiency improvements, engine development and new product programs. See the Forward Looking Statement section of Management’s Discussion and Analysis for factors that may affect this outlook.

Financial Services Outlook

Earning assets in 2011 are expected to increase approximately 5-10% from increased new business financing from higher truck sales due to improving global truck markets. Economic conditions are recovering and contributing to improving freight rates and freight tonnage hauled. This is improving the profit margins of truck operators and customers’ ability to make timely payments to the Company. If economic conditions continue to improve, it should lead to lower levels of past-due accounts, truck repossessions and net charge-offs. See the Forward Looking Statement section of Management’s Discussion and Analysis for factors that may affect this outlook.

RESULTS OF OPERATIONS


	2010			2009			2008
Net sales and revenues:
Truck	$	9,237.3		$	6,994.0		$	13,547.4
Other		87.8			82.7			162.2

Truck and Other		9,325.1			7,076.7			13,709.6
Financial Services		967.8			1,009.8			1,262.9

	$	10,292.9		$	8,086.5		$	14,972.5


Income/(loss) before income taxes:
Truck	$	501.0		$	25.9		$	1,156.5
Other		(15.3	)		42.2			6.0

Truck and Other		485.7			68.1			1,162.5
Financial Services		153.5			84.6			216.9
Investment income		21.1			22.3			84.6
Income taxes		(202.7	)		(63.1	)		(446.1	)

Net Income	$	457.6		$	111.9		$	1,017.9

Diluted Earnings Per Share	$	1.25		$	.31		$	2.78


Return on Revenues		4.4	%		1.4	%		6.8	%

The following provides an analysis of the results of operations for the two reportable segments. Where possible, the Company has quantified the factors identified in the following discussion and analysis. In cases where it is not possible to quantify the impact of factors, the Company lists them in estimated order of importance. Factors for which the Company is unable to specifically quantify the impact include market demand, fuel prices, freight tonnage and economic conditions affecting the Company’s results of operations.

2010 Compared to 2009:

Truck

PACCAR’s Truck segment accounted for 90% and 86% of revenues in 2010 and 2009, respectively.


	2010		2009		% change
Truck net sales and revenues:
U.S. and Canada	$	4,419.2	$	3,566.0		24
Europe		3,190.2		2,520.2		27
Mexico, Australia and other		1,627.9		907.8		79

	$	9,237.3	$	6,994.0		32

Truck income before income taxes	$	501.0	$	25.9			*

Percentage not meaningful

PACCAR’s worldwide truck sales and revenues increased to $9.24 billion in 2010 from $6.99 billion in 2009 due to higher market demand in all markets attributable to improving global economic conditions.

Truck segment income before income taxes increased to $501.0 million in 2010 from $25.9 million in 2009 from higher truck unit and aftermarket parts sales and margins in all markets, partially offset by increased R&D and higher selling, general and administrative (SG&A) spending. 2010 truck income before income taxes was also affected by the translation of stronger foreign currencies, primarily the Canadian and Australian dollars offset by a weaker euro and British pound. The translation effect of all currencies increased 2010 income before income taxes by $15.1 million compared to 2009.

The Company’s new truck deliveries are summarized below:


	2010		2009		% change
United States		29,100		28,300		3
Canada		6,100		4,400		39

U.S. and Canada		35,200		32,700		8
Europe		31,200		22,200		41
Mexico, Australia and other		12,400		6,100		103

Total units		78,800		61,000		29

In the U.S. and Canada, 2010 net sales and revenues increased to $4.42 billion from $3.57 billion in 2009. Industry retail sales in the heavy-duty market in U.S. and Canada increased 17% to 126,000 units in 2010 compared to 108,000 units in 2009. The Company’s market share was 24.1% in 2010 and 25.1% in 2009. The medium-duty market was 41,000 units in 2010 and 2009. The Company’s medium-duty market share was 13.5% in 2010 compared to 15.9% in 2009.

In Europe, 2010 net sales and revenues increased to $3.19 billion from $2.52 billion in 2009. The 15- tonne and above truck market in Western and Central Europe was 183,000 units compared to 168,000 units in 2009. The Company’s market share was 15.2% in 2010 compared to 14.8% in 2009. DAF market share in the 6- to 15- tonne market in 2010 was 7.7%, compared to 9.3% in 2009. The 6- to 15-tonne market in 2010 was 51,000 units, comparable to 2009.

Net sales and revenues in Mexico, Australia and other countries outside the Company’s primary markets increased to $1.63 billion in 2010 from $.91 billion in 2009 primarily due to higher sales from new truck deliveries in Mexico ($.44 billion) and Australia ($.19 billion) reflecting higher market demand.

The major factors for the change in net sales and revenues, cost of sales and revenues and gross margin between 2010 and 2009 follow:


	Net Sales			Cost of Sales			Gross Margin

2009	$	6,994.0		$	6,414.9		$	579.1
Increase/(decrease)
Truck delivery volume		1,410.7			1,189.3			221.4
Average truck sales prices		523.1						523.1
Average per truck material, labor and other direct costs					256.5			(256.5	)
Factory overhead, warehouse and other indirect costs					89.7			(89.7	)
Aftermarket parts volume		266.7			176.0			90.7
Average aftermarket parts sales prices		51.3						51.3
Average aftermarket parts direct costs					12.5			(12.5	)
Currency translation		(8.5	)		(13.4	)		4.9

Total increase		2,243.3			1,710.6			532.7


2010	$	9,237.3		$	8,125.5		$	1,111.8

Truck delivery volume increased to 78,800 units in 2010 compared to 61,000 units in 2009 which resulted in $1.41 billion in higher sales and $1.19 billion in higher cost of sales. The higher truck delivery volume reflects improved market demand which also resulted in an increase of $523.1 million from higher average truck sales prices. In addition, there was an increase in cost of sales of $256.5 million due to a higher average cost per truck, primarily from the effect of higher content EPA 2010 emission vehicles in the U.S. and Canada. Factory overhead, warehouse and other indirect costs increased $89.7 million primarily due to higher supplies and maintenance ($38.6 million) and salaries and related costs ($16.5 million) to support higher production levels. Higher market demand also improved aftermarket parts sales volume by $266.7 million and related cost of sales by $176.0 million. Average aftermarket parts sales prices increased by $51.3 million reflecting improved price realization. The currency translation effect on sales and cost of sales was not significant as a weaker euro and British pound was offset by stronger Canadian and Australian dollars.

Net sales and revenues and gross margins for truck units and aftermarket parts are summarized below. The aftermarket parts gross margin includes direct revenues and costs, but excludes certain truck costs.


	2010			2009			% change
Truck net sales and revenues:
Trucks	$	7,042.9		$	5,103.3			38
Aftermarket parts		2,194.4			1,890.7			16

	$	9,237.3		$	6,994.0			32
Gross margin:
Trucks	$	366.1		$	(46.6	)		*
Aftermarket parts		745.7			625.7			19

	$	1,111.8		$	579.1			92
Gross margin %:
Trucks		5.2	%		(.9	)%
Aftermarket parts		34.0	%		33.1	%

		12.0	%		8.3	%

Percentage not meaningful

Total truck segment gross margins for 2010 increased to 12.0% from 8.3% in 2009, primarily the result of higher truck gross margins. Gross margins on trucks increased to 5.2% in 2010, reflecting higher average truck selling prices from increased market demand and increased absorption of fixed costs resulting from the increase in truck production. 2010 aftermarket parts gross margins of 34.0% increased from the 33.1% in the prior year primarily due to improved price realization.

Truck R&D expenditures increased to $238.2 million in 2010 from $198.5 million in 2009. The higher spending reflects increased new product development activities, primarily new truck products for North America and Europe.

Truck SG&A was $368.3 million in 2010 compared to $341.3 million in 2009. The higher spending is primarily due to higher salaries and related expenses ($22.8 million) and sales and marketing activities ($3.4 million), partially offset by lower severance costs ($5.0 million). As a percentage of sales, SG&A decreased to 4.0% in 2010 from 4.9% in 2009 due to higher sales volumes.

Financial Services


	2010		2009		% change
New loan and lease volume:
U.S. and Canada	$	1,409.4	$	1,175.0		20
Europe		593.7		433.5		37
Mexico and Australia		473.0		306.1		55

	$	2,476.1	$	1,914.6		29
New loan and lease volume by product:
Loans and finance leases	$	1,975.1	$	1,395.1		42
Equipment on operating lease		501.0		519.5		(4	)

	$	2,476.1	$	1,914.6		29
New loan and lease unit volume:
Loans and finance leases		24,046		18,295		31
Equipment on operating lease		5,632		5,928		(5	)

		29,678		24,223		23
Average earning assets:
U.S. and Canada	$	4,320.6	$	4,795.5		(10	)
Europe		1,944.5		2,535.9		(23	)
Mexico and Australia		1,303.2		1,321.9		(1	)

	$	7,568.3	$	8,653.3		(13	)
Average earning assets by product:
Loans and finance leases	$	5,119.9	$	5,904.1		(13	)
Dealer wholesale financing		899.1		1,221.2		(26	)
Equipment on operating lease		1,549.3		1,528.0		1

	$	7,568.3	$	8,653.3		(13	)
Revenues:
U.S. and Canada	$	491.6	$	501.8		(2	)
Europe		286.6		318.5		(10	)
Mexico and Australia		189.6		189.5

	$	967.8	$	1,009.8		(4	)
Revenue by product:
Loans and finance leases	$	383.8	$	449.3		(15	)
Dealer wholesale financing		37.8		52.5		(28	)
Equipment on operating lease and other		546.2		508.0		8

	$	967.8	$	1,009.8		(4	)

Income before income taxes	$	153.5	$	84.6		81

In 2010, new loan and lease volume increased to $2.48 billion from $1.91 billion in 2009 primarily due to higher retail truck sales ($313.4 million) as well as higher average amounts financed per unit ($130.3 million). PFS increased its finance market share on new PACCAR trucks to 28% in 2010 from 26% in the prior year.

Financial Services revenues decreased to $.97 billion in 2010 from $1.01 billion in 2009. The decreased revenues in 2010 primarily resulted from lower average earning asset balances in all markets. Financial Services income before income taxes increased to $153.5 million in 2010 compared to $84.6 million in 2009. The increase of $68.9 million was primarily due to higher lease margin of $42.7 million and a lower provision for losses on receivables of $29.8 million.

The change in finance and lease margin is outlined in the tables below:


	Interest and fees			Interest and other borrowing expenses			Finance margin

2009	$	501.8		$	291.8		$	210.0
Increase/(decrease)
Average finance receivables		(86.2	)					(86.2	)
Yields		(3.0	)					(3.0	)
Average debt balances					(58.9	)		58.9
Borrowing rates					(23.9	)		23.9
Currency translation		9.0			4.0			5.0

Total decrease		(80.2	)		(78.8	)		(1.4	)

2010	$	421.6		$	213.0		$	208.6

Lower average finance receivables in 2010 ($1.11 billion) resulted in $86.2 million of lower interest and fee income. The lower finance receivables results from retail portfolio repayments exceeding new business volume as well as a decrease in average wholesale financing ($322.1 million) due to lower dealer inventory balances. Average debt balances declined in 2010 by $1.35 billion resulting in $58.9 million of lower interest and other borrowing expenses. The lower average debt balances reflect a lower level of funding needed for a smaller financial services portfolio. Borrowing rates declined in 2010 due to lower market interest rates. Currency translation, primarily the stronger Australian and Canadian dollars, increased interest and fees by $9.0 million and interest and other borrowing expense by $4.0 million, respectively. Overall, 2010 finance margin decreased $1.4 million to $208.6 million primarily due to lower average finance receivables, partially offset by lower average debt and lower interest rates on borrowings.


	Operating lease, rental and other income			Depreciation and other			Lease margin

2009	$	508.0		$	456.1		$	51.9
Increase/(decrease)
Operating lease impairments					(23.9	)		23.9
Losses on returned lease assets					(16.3	)		16.3
Used trucks taken on trade package		12.7			12.6			.1
Average operating lease assets		3.4			2.9			.5
Revenue and cost per asset		29.7			27.4			2.3
Currency translation		(5.6	)		(4.6	)		(1.0	)
Insurance and other		(2.0	)		(2.6	)		.6

Total increase		38.2			(4.5	)		42.7

2010	$	546.2		$	451.6		$	94.6

Operating lease impairments decreased $23.9 million in 2010 due to improving used truck prices ($17.5 million) and fewer losses on repossessed operating lease equipment ($6.4 million). Losses on sales of trucks returned from leases decreased $16.3 million in 2010 also reflecting higher used truck prices as a result of the increased demand for used trucks in an improving global economy. The $12.7 million increase in trucks taken on trade and associated cost of $12.6 million are due to an increase in the volume of trucks sold. Higher average operating lease assets in 2010 ($21.3 million) increased income by $3.4 million and related depreciation on operating leases by $2.9 million. Higher truck market demand resulted in an increase in revenues per asset in 2010 of $29.7 million. The increase in revenue consisted of higher asset utilization (the proportion of available operating lease units that are being leased) of $13.5 million, higher lease rates of $10.7 million and higher fuel and service revenue of $5.5 million. The 2010 increase in costs per asset of $27.4 million is due to higher vehicle operating expenses, including higher fuel costs and variable costs from higher asset utilization levels. Overall, 2010 lease margin increased $42.7 million to $94.6 million from $51.9 million in 2009 primarily due to lower operating lease impairments and lower losses on the sale of returned lease assets.

The following tables summarize the provision for losses on receivables and net charge-offs.


	2010				2009
	Net Charge-offs		Provision for losses on receivables		Net Charge-offs		Provision for losses on receivables
U.S. and Canada	$	35.7	$	21.0	$	63.1	$	49.0
Europe		27.2		20.9		30.8		28.8
Mexico and Australia		20.4		19.1		14.3		13.0

	$	83.3	$	61.0	$	108.2	$	90.8

The provision for losses on receivables for 2010 of $61.0 million declined $29.8 million compared to 2009, primarily from improvements in portfolio quality as well as a decline in the receivable balances. Charge-offs declined in the U.S. and Canada and Europe due to improvements in economic conditions. Charge-offs increased in Mexico and Australia due to weakness in the transport industry in Mexico during much of the year. Past-due percentages are noted below.


At December 31,	2010			2009
Percentage of retail loan and lease accounts 30+ days past-due:
U.S. and Canada		2.1	%		1.8	%
Europe		2.5	%		4.4	%
Mexico and Australia		5.8	%		9.5	%
Total		3.0	%		3.8	%

Worldwide PFS accounts 30+ days past-due at December 31, 2010 of 3.0% improved from 3.8% at December 31, 2009, reflecting improvements in Europe, Mexico and Australia, partially offset by a slight increase in the U.S. and Canada. Included in the U.S. and Canada past-due percentage of 2.1% is 1.1% from one large customer. Excluding that customer, worldwide PFS accounts 30+ days past-due at December 31, 2010 would have been 2.3%. At December 31, 2010, the Company had $34.9 million of specific loss reserves for this large customer and other accounts considered to have a high risk of loss. The Company continues to focus on reducing past-due balances. Improving economic conditions will likely result in slightly lower past-due balances in 2011. When the Company modifies a 30+ days past-due account, the customer is considered current under the revised contractual terms. The effect on total 30+ days past-dues from such modifications was not significant at December 31, 2010 and 2009.

The Company’s 2010 pretax return on revenue for financial services increased to 15.9 % from 8.4% in 2009 primarily due to higher lease margin from lower operating lease impairments and a decline in losses on the sale of lease returns, and a lower provision for losses from improving portfolio quality.

Other

Other includes the winch business as well as sales, income and expenses not attributable to a reportable segment, including a portion of corporate expense. Sales represent approximately 1% of consolidated net sales and revenues for 2010 and 2009. Other SG&A was $24.5 million in 2010 and $7.1 million in 2009. The increase is primarily due to higher salaries and related expenses ($5.7 million), higher charitable contributions ($5.2 million), increased professional fees ($2.7 million) and higher travel and related costs of ($1.2 million). Other income (loss) before tax was a loss of $15.3 million in 2010 compared to income of $42.2 million in 2009, primarily due to a one-time $66.0 million gain from the curtailment of postretirement benefits, partially offset by higher expense from economic hedges of $21.2 million in 2009 and higher SG&A in 2010.

The 2010 effective income tax rate was 30.7% compared to 36.1% in 2009. In 2009, a retroactive tax law change in Mexico increased income tax expense by $11.4 million and the effective tax rate by 6.6 percentage points. Excluding the Mexican tax law change, the effective tax rate in 2009 was 29.5%. The higher rate in 2010 reflects a lower proportion of tax benefits for research and development and other permanent differences.

Consolidated pretax return on revenues was 6.4% in 2010 compared to 2.2% in 2009. The increase was primarily due to higher returns in foreign operations. Foreign income before income taxes was $474.0 million in 2010 compared to $95.9 million in 2009. The ratio of foreign income before tax to revenues was 7.8% in 2010 compared to 2.1% in 2009. The improvement was primarily due to a higher return on revenues in foreign truck operations.

2009 Compared to 2008:

In 2009, consolidated net sales and revenues were $8.09 billion compared to $14.97 billion in 2008. The lower net sales and revenues reflected the severe economic recession that dampened demand for the Company’s products throughout the world.

In 2009, net income of $111.9 million ($.31 per diluted share) declined from $1.02 billion ($2.78 per diluted share) in 2008. 2009 net income included $41.5 million ($.11 per diluted share) of curtailment gains related to postretirement healthcare plans ($66.0 million pretax) and $11.4 million ($.03 per diluted share) of income tax expense from the retroactive effects of a new income tax law in Mexico.

Truck

PACCAR’s Truck segment accounted for 86% and 90% of revenues in 2009 and 2008, respectively.


	2009		2008		% change
Truck net sales and revenues:
U.S. and Canada	$	3,566.0	$	4,823.7		(26	)
Europe		2,520.2		6,624.8		(62	)
Mexico, Australia and other		907.8		2,098.9		(57	)

	$	6,994.0	$	13,547.4		(48	)

Truck income before income taxes	$	25.9	$	1,156.5		(98	)

PACCAR’s worldwide truck sales and revenues were $6.99 billion in 2009 compared to $13.55 billion in 2008 due to lower market demand worldwide attributable to global recessionary conditions. 2009 truck net sales and revenues and income before income taxes were also affected by the translation of weaker foreign currencies, primarily the euro and British pound. The translation effect of all currencies decreased 2009 sales and revenues by $260.9 million and income before income taxes by $30.9 million compared to 2008.

Truck segment income before income taxes decreased to $25.9 million in 2009 from $1.16 billion in 2008 from lower truck unit and aftermarket parts sales and margins in all markets, partially offset by lower R&D spending as well as lower SG&A spending.

The Company’s new truck deliveries are summarized below:


	2009		2008		% change
United States		28,300		38,200		(26	)
Canada		4,400		6,700		(34	)

U.S. and Canada		32,700		44,900		(27	)
Europe		22,200		63,700		(65	)
Mexico, Australia and other		6,100		17,300		(65	)

Total units		61,000		125,900		(52	)

In the U.S. and Canada, 2009 net sales and revenues decreased to $3.57 billion compared to $4.82 billion in 2008. Industry retail sales in the heavy-duty market in U.S. and Canada declined 29% to 108,000 units in 2009 compared to 153,000 units in 2008 and were at their lowest levels since 1991. The Company’s market share was 25.1% in 2009 and 26.0% in 2008. The medium-duty market was 41,000 units in 2009 compared to 63,000 units in 2008. The Company achieved record medium-duty market share of 15.9% in 2009 compared to 14.1% in 2008.

In Europe, 2009 net sales and revenues decreased to $2.52 billion compared to $6.62 billion in 2008. The 15-tonne and above truck market in Western and Central Europe was 168,000 units compared to 330,000 units in 2008. The Company’s market share was a record 14.8% in 2009 compared to 14.2% in 2008. DAF market share in the 6- to 15-tonne market in 2009 was 9.3%, the same as in 2008. The 6- to 15-tonne market was 51,000 units in 2009, compared to 79,000 units in 2008.

Net sales and revenues in Mexico, Australia and other countries outside the Company’s primary markets declined to $.91 billion in 2009 from $2.10 billion in 2008 due to lower new truck deliveries reflecting lower overall market demand.

The major factors for the change in net sales and revenues, cost of sales and revenues and gross margin between 2009 and 2008 follow:


	Net Sales			Cost of Sales			Gross Margin

2008	$	13,547.4		$	11,610.5		$	1,936.9
Increase/(decrease)
Truck delivery volume		(5,666.7	)		(4,518.3	)		(1,148.4	)
Average truck sales prices		(321.5	)					(321.5	)
Average per truck material, labor and other direct costs					(8.6	)		8.6
Factory overhead, warehouse and other indirect costs					(283.9	)		283.9
Aftermarket part sales and direct costs		(304.3	)		(187.2	)		(117.1	)
Currency translation		(260.9	)		(197.6	)		(63.3	)

Total decrease		(6,553.4	)		(5,195.6	)		(1,357.8	)


2009	$	6,994.0		$	6,414.9		$	579.1

Lower market demand in all the Company’s primary markets related to the global economic recession resulted in lower truck deliveries including decreases of 65% in Europe, 27% in the combined U.S. and Canadian markets and 65% in the Company’s other markets. The lower market demand also resulted in lower average truck selling prices and lower aftermarket part sales. Factory overhead, warehouse and other indirect costs decreased due to lower staffing ($157.7 million), supplies and maintenance ($90.7 million), utilities ($28.8 million) and other indirect costs needed to support lower production volumes. Currency translation reduced sales and cost of sales primarily due to a weaker euro relative to the U.S. dollar.


	2009			2008			% change
Truck net sales and revenues:
Trucks	$	5,103.3		$	11,281.3			(55	)
Aftermarket parts		1,890.7			2,266.1			(17	)

	$	6,994.0		$	13,547.4			(48	)
Gross margin:
Trucks	$	(46.6	)	$	1,141.7			(104	)
Aftermarket parts		625.7			795.2			(21	)

	$	579.1		$	1,936.9			(70	)
Gross margin %:
Trucks		(.9	)%		10.1	%
Aftermarket parts		33.1	%		35.1	%

		8.3	%		14.3	%

Total Truck segment gross margins for 2009 decreased to 8.3% from 14.3% in 2008. The lower gross margins were primarily the result of lower truck gross margins. Gross margins on trucks declined to negative .9% in 2009, reflecting lower industry demand and reduced absorption of fixed costs resulting from the decline in truck production. 2009 aftermarket parts gross margins declined from the prior year primarily due to a sales mix shift to lower margin maintenance parts due to efforts by customers to limit costs during recessionary economic conditions.

Truck R&D expenditures declined to $198.5 million in 2009 from $341.3 million in 2008, primarily due to lower spending on engine development and reduced spending for new vehicle development.

Truck SG&A expense in 2009 declined to $341.3 million compared to $442.7 million in 2008. The lower spending was a result of focused efforts to reduce costs in response to the global economic recession and consisted primarily of reduced staffing of $36.6 million, sales and marketing of $28.8 million and travel costs of $7.1 million. Foreign currency translation effects reduced SG&A by $10.7 million. Severance costs included in SG&A were $5.7 million in 2009 compared to $2.6 million in 2008. As a percentage of sales, SG&A increased to 4.9% in 2009 from 3.3% in 2008 due to lower sales volumes.

Financial Services


	2009		2008		% change
New loan and lease volume:
U.S. and Canada	$	1,175.0	$	1,674.0		(30	)
Europe		433.5		947.6		(54	)
Mexico and Australia		306.1		728.6		(58	)

	$	1,914.6	$	3,350.2		(43	)
New loan and lease volume by product:
Loans and finance leases	$	1,395.1	$	2,607.7		(47	)
Equipment on operating lease		519.5		742.5		(30	)

	$	1,914.6	$	3,350.2		(43	)
New loan and lease unit volume:
Loans and finance leases		18,295		31,547		(42	)
Equipment on operating lease		5,928		8,543		(31	)

		24,223		40,090		(40	)
Average earning assets:
U.S. and Canada	$	4,795.5	$	5,692.4		(16	)
Europe		2,535.9		3,065.6		(17	)
Mexico and Australia		1,321.9		1,621.0		(18	)

	$	8,653.3	$	10,379.0		(17	)
Average earning assets by product:
Loans and finance leases	$	5,904.1	$	7,139.1		(17	)
Dealer wholesale financing		1,221.2		1,693.0		(28	)
Equipment on operating lease		1,528.0		1,546.9		(1	)

	$	8,653.3	$	10,379.0		(17	)
Revenues:
U.S. and Canada	$	501.8	$	602.9		(17	)
Europe		318.5		429.3		(26	)
Mexico and Australia		189.5		230.7		(18	)

	$	1,009.8	$	1,262.9		(20	)
Revenue by product:
Loans and finance leases	$	449.3	$	567.3		(21	)
Dealer wholesale financing		52.5		116.1		(55	)
Equipment on operating lease and other		508.0		579.5		(12	)

	$	1,009.8	$	1,262.9		(20	)

Income before income taxes	$	84.6	$	216.9		(61	)

In 2009, new loan and lease volume was $1.91 billion compared to $3.35 billion in 2008 primarily due to lower retail truck sales ($1.24 billion) from worldwide recessionary conditions. PFS finance market share was 26% in 2009 compared to 28% in 2008.

Financial Services revenues decreased to $1.01 billion in 2009 from $1.26 billion in 2008. The decreased revenues in 2009 resulted from lower earning asset balances in all markets and lower yields in North America and Europe. Financial Services income before income taxes was $84.6 million in 2009 compared to $216.9 million in 2008. The decrease of $132.3 million was primarily due to lower finance margin of $79.3 million and lease margin of $86.1 million, partially offset by a decline in SG&A expense of $24.7 million from cost reduction efforts from the global economic recession consisting primarily of lower staffing and travel costs.

The change in finance and lease margin is outlined in more detail in the tables below:


	Interest and fees			Interest and other borrowing expenses			Finance margin

2008	$	683.4		$	394.1		$	289.3
Increase/(decrease)
Average finance receivables		(113.4	)					(113.4	)
Yields		(53.4	)					(53.4	)
Average debt balances					(67.6	)		67.6
Borrowing rates					(26.8	)		26.8
Currency translation		(14.8	)		(7.9	)		(6.9	)

Total decrease		(181.6	)		(102.3	)		(79.3	)

2009	$	501.8		$	291.8		$	210.0

The lower average finance receivables reflect portfolio runoff from decreased retail loan and finance lease new business volume resulting from fewer retail sales of trucks, as well as lower dealer wholesale financing from dealer inventory reductions in Europe. Average debt balances declined reflecting a lower level of funding needed to fund the smaller financial services portfolio. Yields and borrowing rates declined due to lower market interest rates. Currency translation effects resulted primarily from a lower euro vs. the U.S. dollar. Overall, 2009 finance margin decreased to $210 million primarily due to lower average finance receivables and lower market interest rates.


	Operating lease, rental and other income			Depreciation and other			Lease margin

2008	$	579.5		$	441.5		$	138.0
Increase/(decrease)
Operating lease impairments					29.5			(29.5	)
(Gains) losses on returned lease assets		(9.1	)		20.1			(29.2	)
Used trucks taken on trade package		12.7			16.3			(3.6	)
Average operating lease assets		(3.7	)		(3.1	)		(.6	)
Revenue and cost per asset		(36.0	)		(17.4	)		(18.6	)
Currency translation		(14.5	)		(12.6	)		(1.9	)
Insurance and other		(20.9	)		(18.2	)		(2.7	)

Total (decrease)/increase		(71.5	)		14.6			(86.1	)

2009	$	508.0		$	456.1		$	51.9

Operating lease impairments increased $29.5 million in 2009 due to declining used truck prices ($19.6 million) and higher losses on repossessed operating lease equipment ($9.9 million). There were lower gains on sales of trucks returned from leases ($9.1 million) and higher losses on sales of trucks returned from leases of $20.1 million due to lower used truck prices as a result of the global economic recession. In 2009, the Financial Services segment began taking used trucks on trade packages resulting in higher revenues of $12.7 million from the sale of these trucks. The loss of $3.6 million is due to declining used truck prices and higher than anticipated costs to sell. Revenue and depreciation from operating leases decreased from lower average assets in the operating lease portfolio. Lower market demand resulted in a decrease in revenues and cost per asset of $36.0 million and $17.4 million, respectively. The decrease in revenue consisted of lower asset utilization (the proportion of available operating lease units that are being leased) of $10.2 million, lower lease rates of $13.2 million and lower fuel and service revenue of $12.6 million. The decrease in costs per asset are due to lower vehicle operating expenses (including lower fuel costs of $8.3 million) reflecting lower asset utilization levels. Currency translation effects resulted primarily from a lower euro vs. the U.S. dollar. Insurance and other revenues and costs decreased primarily due to a reduction in the insurance portfolio. Overall, lease margin declined $86.1 million to $51.9 million from $138.0 million in 2008.

The following table summarizes the provision for losses on receivables and net charge-offs.


	2009				2008
	Net Charge-offs		Provision for losses on receivables		Net Charge-offs		Provision for losses on receivables
U.S. and Canada	$	63.1	$	49.0	$	85.4	$	79.6
Europe		30.8		28.8		8.4		11.6
Mexico and Australia		14.3		13.0		7.3		8.0

	$	108.2	$	90.8	$	101.1	$	99.2

The provision for losses on receivables in 2009 of $90.8 million decreased from $99.2 million in 2008 as higher net charge-offs were mostly offset by a decline in the receivable balances. Higher net portfolio charge-offs in Europe, Mexico and Australia were somewhat offset by lower net charge-offs in the U.S. and Canada.


At December 31,	2009			2008
Percentage of retail loan and lease accounts 30+ days past-due:
U.S. and Canada		1.8	%		2.6	%
Europe		4.4	%		2.8	%
Mexico and Australia		9.5	%		6.2	%
Total		3.8	%		3.3	%

Worldwide PFS accounts 30+ days past-due at December 31, 2009, were 3.8% of portfolio balances compared to 3.3% at December 31, 2008, due to a decline in freight tonnage, freight rates and customer cash flows in Europe and Mexico. When the Company modifies a 30+ days past-due account, the customer is considered current under the revised contractual terms. The effect on total 30+ days past-dues from such modifications was not significant at December 31, 2009 and 2008.

The Company’s 2009 percentage pretax return on revenue for financial services decreased to 8.4% from 17.2% in 2008 primarily due to higher impairment charges and losses on the sale of operating lease assets and a higher provision for losses on receivables.

Other

Other includes the winch business as well as sales, income and expenses not attributable to a reportable segment, including a portion of corporate expense. Other SG&A was $7.1 million in 2009 and $27.5 million in 2008. The decrease is primarily due to lower salaries and related expenses of $21.3 million due to cost cutting efforts from the difficult economic recession. Sales of the Winch business represent approximately 1% of consolidated net sales and revenues for 2009 and 2008. Other income before tax was $42.2 million in 2009 and $6.0 million in 2008. The increase was primarily due to a $66.0 million gain from the curtailment of postretirement benefits partially offset by $23.0 million higher expense from changes in fair value of economic hedges.

Investment income declined to $22.3 million in 2009 compared to $84.6 million in 2008 primarily due to lower market interest rates.

The 2009 effective income tax rate was 36.1% compared to 30.5% in 2008. The higher rate in 2009 was primarily due to the tax law change in Mexico. Excluding the Mexico tax law change, the effective tax rate was 29.5%.

Consolidated pretax return on revenues was 2.2% in 2009 compared to 9.8% in 2008. The decrease was primarily due to lower returns in foreign operations. Foreign income before income taxes was $95.9 million in 2009 compared to $1,368.0 million in 2008. The ratio of foreign income before tax to revenues was 2.1% in 2009 compared to 13.4% in 2008. The decrease was primarily due to a lower return on revenues in foreign truck operations.

LIQUIDITY AND CAPITAL RESOURCES:


At December 31	2010		2009		2008
Cash and cash equivalents	$	2,040.8	$	1,912.0	$	1,955.2
Marketable debt securities		450.5		219.5		175.4

	$	2,491.3	$	2,131.5	$	2,130.6

The Company’s total cash and marketable debt securities increased $359.8 million for the year ended December 31, 2010 from increases in both cash and cash equivalents of $128.8 million and marketable securities of $231.0 million.

The change in cash and cash equivalents is summarized below.


For Years Ended December 31,	2010			2009			2008
Operating Activities:
Net Income	$	457.6		$	111.9		$	1,017.9
Net income items not affecting cash		742.1			874.3			882.2
Changes in operating assets and liabilities		351.7			387.1			(595.2	)

Net cash provided by operating activities		1,551.4			1,373.3			1,304.9
Net cash (used in) provided by investing activities		(467.1	)		310.6			(251.9	)
Net cash used in financing activities		(960.4	)		(1,816.2	)		(868.1	)
Effect of exchange rate changes on cash		4.9			89.1			(87.8	)

Net increase (decrease) in cash and cash equivalents		128.8			(43.2	)		97.1
Cash and cash equivalents at beginning of the year		1,912.0			1,955.2			1,858.1

Cash and cash equivalents at end of the year	$	2,040.8		$	1,912.0		$	1,955.2

2010 Compared to 2009:

Operating activities: Cash provided by operations increased $178.1 million to $1,551.4 million in 2010 compared to $1,373.3 million in 2009. The higher operating cash flow was primarily due to higher net income of $345.7 million and, $493.1 million from higher purchases of goods and services in accounts payable and accrued expenses greater than payments compared to 2009. Also, due to the improved funded status of its pension plans pension contributions in 2010 were $112.7 million lower than in 2009. In addition, $113.3 million of additional operating cash flow was provided from higher income tax liabilities compared to payments in 2010 as opposed to a decrease in income tax liabilities compared to payments in 2009. This was partially offset by a lower amount of cash provided from Truck segment trade receivables ($205.5 million) and Financial Services segment wholesale receivables ($642.9 million) in 2010 reflecting higher truck production compared to 2009.

Investing activities: Cash used in investing activities of $467.1 million in 2010 decreased $777.7 million from the $310.6 million provided in 2009. In 2010, there were higher new loan and lease originations of $507.0 million in the Financial Services segment compared to the prior year due to increased new truck demand. In addition, proceeds from asset disposals were $128.0 million lower in 2010, reflecting fewer used truck unit sales, and net purchases of marketable securities were $190.9 million higher in 2010 compared to the prior year.

Financing activities: The cash outflow from financing activities in 2010 of $960.4 million was $855.8 million lower than in 2009. This was primarily due to lower repayments of long-term debt of $1,295.3 million and net repayments of commercial paper and bank loans of $241.7 million, partially offset by lower proceeds from term debt of $666.0 million. The lower overall cash outflow in financing reflects a smaller funding reduction in the financial services asset portfolio.

2009 Compared to 2008:

Operating activities: The Company’s operating cash flow increased $68.4 million compared to 2008. A decrease in net income of $906.0 million was more than offset by a reduction in receivables of $1,135.6 million primarily related to $888.1 million of higher collections of wholesale receivables reflecting a reduction in funding of dealer new truck inventory, predominately in Europe. In addition there was a reduction of trade receivables of $218.7 million as a result of lower sales levels.

Investing activities: Cash provided by investing activities increased by $562.5 million to $310.6 million in 2009 compared to 2008. Cash was provided by a larger decrease in the retail loan and lease portfolio of $491.6 million as collections on outstanding balances exceeded net new loan and lease volume reflecting lower new truck sales. Investments in capital equipment decreased $579.0 million, primarily due to reduced expenditures related to the current economic environment offset by $614.9 million of lower cash provided by net purchases and sales of marketable securities compared to 2008.

Financing activities: The cash used in financing activities increased $948.1 million to $1,816.2 million in 2009 due to higher net debt repayments of $1,601.7 million related to lower funding needed to finance a smaller financial services asset base. This was partially offset by no stock repurchases in 2009 compared to $230.6 million in 2008 and a lower dividend of $232.1 million compared to $629.2 million in 2008.

Credit Lines and Other:

The Company has line of credit arrangements of $3.65 billion, of which $3.40 billion was unused at the end of December 2010. Included in these arrangements are $3.0 billion of syndicated bank facilities. Of the $3.0 billion bank facilities, $1.0 billion matures in June 2011, $1.0 billion matures in June 2012 and $1.0 billion matures in June 2013. The Company intends to replace these credit facilities as they expire with facilities of similar amounts and duration. These credit facilities are maintained primarily to provide backup liquidity for commercial paper borrowings and maturing medium-term notes. There were no borrowings under the syndicated bank facilities for the year ended December 31, 2010.

PACCAR Inc periodically files shelf registrations under the Securities Act of 1933. The total amount of medium-term notes outstanding for PACCAR Inc as of December 31, 2010 is $870.0 million. The current registration expires in the fourth quarter of 2011 and does not limit the principal amount of debt securities that may be issued during the period.

In October 2007, PACCAR’s Board of Directors approved the repurchase of $300 million of the Company’s common stock. Through December 31, 2010, $292 million of shares have been repurchased. In July 2008, PACCAR’s Board of Directors approved the repurchase of an additional $300 million of the Company’s common stock. No shares have been repurchased pursuant to the July 2008 authorization.

Truck and Other

The Company provides funding for working capital, capital expenditures, research and development, dividends, stock repurchases and other business initiatives and commitments primarily from cash provided by operations. Management expects this method of funding to continue in the future. Long-term debt totaled $173.5 million as of December 31, 2010, of which $23.5 million is due in September 2011.

Expenditures for property, plant and equipment in 2010 totaled $168.4 million compared to $127.7 million in 2009 as the Company increased its spending for new products. Over the last ten years, the Company's combined investments in worldwide capital projects and research and development totaled $3.93 billion which have significantly increased capacity, efficiency and quality of the Company’s premium products.

Capital spending in 2011 is expected to increase to approximately $400 to $500 million. The increased capital spending will accelerate comprehensive product development programs, including South American expansion. Spending on research and development in 2011 is expected to be $250 to $300 million. PACCAR will continue to focus on new product programs, engine development and manufacturing efficiency improvements.

Financial Services

The Company funds its financial services activities primarily from collections on existing finance receivables and borrowings in the capital markets. An additional source of funds is loans from other PACCAR companies.

The primary sources of borrowings in the capital markets are commercial paper and medium-term notes issued in the public markets and, to a lesser extent, bank loans.

The Company issues commercial paper for a portion of its funding in its Financial Services segment. Some of this commercial paper is converted to fixed interest rate debt through the use of interest rate swaps, which are used to manage interest rate risk. In the event of future disruption in the financial markets, the Company may not be able to issue replacement commercial paper. As a result, the Company is exposed to liquidity risk from the shorter maturity of short-term borrowings paid to lenders compared to the longer timing of receivable collections from customers. The Company believes its cash balances and investments, syndicated bank lines and current investment-grade credit ratings of A+/A1 will continue to provide it with sufficient resources and access to capital markets at competitive interest rates and therefore contribute to the Company maintaining its liquidity and financial stability. A decrease in these credit ratings could negatively impact the Company’s ability to access capital markets at competitive interest rates and the Company’s ability to maintain liquidity and financial stability.

In November 2009, the Company’s U.S. finance subsidiary, PACCAR Financial Corp. (PFC), filed a shelf registration under the Securities Act of 1933. The total amount of medium-term notes outstanding for PFC as of December 31, 2010 was $1,123.5 million. The registration expires in 2012 and does not limit the principal amount of debt securities that may be issued during the period.

As of December 31, 2010, the Company’s European finance subsidiary, PACCAR Financial Europe, had €900 million available for issuance under a €1.5 billion medium-term note program registered with the London Stock Exchange. The program was renewed in the fourth quarter of 2010 and is renewable annually through the filing of a new prospectus.

In June 2008, PACCAR Mexico registered a 7.0 billion peso medium-term note program with the Comision Nacional Bancaria y de Valores. The registration expires in 2012 and at December 31, 2010, 6.1 billion pesos remained available for issuance.

PACCAR believes its Financial Services companies will be able to continue funding receivables, servicing debt and paying dividends through internally generated funds, access to public and private debt markets and lines of credit.

Commitments

The following summarizes the Company’s contractual cash commitments at December 31, 2010:


	Maturity
	Within 1 Year		1-3 Years		3-5 Years		More than 5 Years		Total
Borrowings*	$	3,391.9	$	1,240.6	$	633.8			$	5,266.3
Interest on term debt**		97.8		96.2		8.2				202.2
Operating leases		18.1		18.4		6.8	$	.8		44.1
Purchase obligations		159.1		115.5						274.6
Other obligations		9.1		4.4		2.4		17.2		33.1

	$	3,676.0	$	1,475.1	$	651.2	$	18.0	$	5,820.3

*	Borrowings also include commercial paper and other short-term debt.

**	Includes interest on fixed- and floating-rate term debt. Interest on floating-rate debt is based on the applicable market rates at December 31, 2010.

The Company had $5.82 billion of cash commitments. Of the total cash commitments for borrowings and interest on term debt, $5.26 billion were related to the Financial Services segment. As described in Note I of the consolidated financial statements, borrowings consist primarily of term notes and commercial paper issued by the Financial Services segment. The Company expects to fund its maturing Financial Services debt obligations principally from funds provided by collections from customers on loans and lease contracts, as well as from the proceeds of commercial paper and medium-term note borrowings. Purchase obligations are the Company’s contractual commitment to acquire future production inventory and capital equipment. Other obligations include deferred cash compensation.

The Company’s other commitments include the following at December 31, 2010:


	Commitment Expiration
	Within 1 Year		1-3 Years		3-5 Years		More than 5 Years		Total
Letters of credit	$	19.7	$	.1					$	19.8
Loan and lease commitments		157.9								157.9
Equipment acquisition commitments		53.4								53.4
Residual value guarantees		80.3		135.2	$	85.1	$	12.6		313.2

	$	311.3	$	135.3	$	85.1	$	12.6	$	544.3

Loan and lease commitments are for funding new retail loan and lease contracts. Equipment acquisition commitments require the Company, under specified circumstances, to purchase equipment. Residual value guarantees represent the Company’s commitment to acquire trucks at a guaranteed value if the customer decides to return the truck at a specified date in the future .

IMPACT OF ENVIRONMENTAL MATTERS:

The Company, its competitors and industry in general are subject to various domestic and foreign requirements relating to the environment. The Company believes its policies, practices and procedures are designed to prevent unreasonable risk of environmental damage and that its handling, use and disposal of hazardous or toxic substances have been in accordance with environmental laws and regulations enacted at the time such use and disposal occurred.

The Company is involved in various stages of investigations and cleanup actions in different countries related to environmental matters. In certain of these matters, the Company has been designated as a “potentially responsible party” by domestic and foreign environmental agencies. The Company has provided an accrual for the estimated costs to investigate and complete cleanup actions where it is probable that the Company will incur such costs in the future. Expenditures related to environmental activities in 2010, 2009 and 2008 were $1.3 million, $1.3 million and $3.8 million, respectively. Management expects that these matters will not have a significant effect on the Company's consolidated cash flow, liquidity or financial condition.

C RITICAL A CCOUNTING P OLICIES :

In the preparation of the Company’s financial statements, in accordance with U.S. generally accepted accounting principles, management uses estimates and makes judgments and assumptions that affect asset and liability values and the amounts reported as income and expense during the periods presented. The following are accounting policies which, in the opinion of management, are particularly sensitive and which, if actual results are different from estimates used by management, may have a material impact on the financial statements.

Operating Leases

The accounting for trucks sold pursuant to agreements accounted for as operating leases is discussed in Notes A and E of the consolidated financial statements. In determining its estimate of the residual value of such vehicles, the Company considers the length of the lease term, the truck model, the expected usage of the truck and anticipated market demand. Operating lease terms generally range from three to seven years. The resulting residual values on operating leases generally range between 30% and 50% of original equipment cost. If the sales price of the trucks at the end of the term of the agreement differs from the Company’s estimate, a gain or loss will result.

Future market conditions, changes in government regulations and other factors outside the Company’s control could impact the ultimate sales price of trucks returned under these contracts. Residual values are reviewed regularly and adjusted if market conditions warrant. A decrease in the estimated equipment residual values would increase annual depreciation expense over the remaining lease term.

During 2008, market values on vehicles returning upon operating lease maturity were generally higher than the residual values on these vehicles resulting in a decrease of depreciation expense of $3.2 million. During 2009 and 2010 lower market values on trucks returning upon lease maturity, as well as impairments on existing operating leases resulted in additional depreciation expense of $59.2 million and $13.1 million, respectively.

At December 31, 2010, the aggregate residual value of equipment on operating leases in the Financial Services segment and residual value guarantee on trucks accounted for as operating leases in the Truck segment was $1.15 billion. A 10% decrease in used truck values worldwide, expected to persist over the remaining maturities of the Company’s operating leases, would reduce residual values estimates and result in the Company recording approximately $30 million of additional depreciation per year.

Allowance for Credit Losses

The accounting for allowance for credit losses related to the Company’s loans and finance leases is discussed in Note A of the consolidated financial statements. The Company collectively and individually evaluates its finance receivables and the allowance for credit losses consists of both a general and specific reserve. The Company individually evaluates certain finance receivables for impairment. Finance receivables which are evaluated individually consist of customers on non-accrual status, all wholesale accounts and certain large retail accounts with past-due balances or that otherwise are deemed to be at a higher risk of credit loss and loans which have been modified as troubled debt restructurings. A receivable is considered impaired if it is probable the Company will be unable to collect all contractual interest and principal payments as scheduled. Impaired receivables are individually evaluated to determine the amount of impairment and these receivables are considered collateral dependent. Accordingly, the evaluation of individual reserves is based on the fair value less costs to sell the associated collateral. When the underlying collateral fair value exceeds the Company’s loss exposure, no individual reserve is recorded. The Company uses a pricing model to value the underlying collateral on a quarterly basis. The fair value of the collateral is determined based on management’s evaluation of numerous factors such as the make, model and year of the equipment, overall condition of the equipment, primary method of distribution for the equipment, recent sales prices of comparable equipment and economic trends affecting used equipment values.

For finance receivables that are evaluated collectively, the Company determines the allowance for credit losses for both retail and wholesale receivables based on historical loss information, using past-due account data and current market conditions. Information used includes assumptions regarding the likelihood of collecting current and past-due accounts, repossession rates and the recovery rate on the underlying collateral based on used truck values and other pledged collateral or recourse. The Company has developed a range of loss estimates for each of its country portfolios based on historical experience, taking into account loss frequency and severity in both strong and weak truck market conditions. A projection is made of the range of estimated credit losses inherent in the portfolio from which an amount is determined as probable based on current market conditions and other factors impacting the creditworthiness of the Company’s borrowers and their ability to repay. The projected amount is then compared to the allowance for credit loss balance and an appropriate adjustment is made.

The adequacy of the allowance is evaluated quarterly based on the most recent information. As accounts become past-due, the likelihood increases they will not be fully collected. The Company’s experience indicates the probability of not fully collecting past-due accounts range between 20% and 80%. Over the past three years, the Company’s year-end 30+ days past-due accounts have ranged between 3.0% and 3.8% of average loan and lease receivables. Historically, a 100 basis point increase in the 30+ days past-due percentage has resulted in an increase in future credit losses of 10 to 35 basis points of average receivables. Past-dues were 3.0% at December 31, 2010. If past-dues were 100 basis points higher or 4.0% as of December 31, 2010, the Company’s estimate of future credit losses would likely have increased by approximately $5 to $20 million depending on the extent of the past-dues, the estimated value of the collateral as compared to amounts owed and general economic factors.

Product Warranty

The accounting for product warranty is discussed in Note H of the consolidated financial statements. The expenses related to product warranty are estimated and recorded at the time products are sold based on historical and current data and reasonable expectations for the future regarding the frequency and cost of warranty claims, net of recoveries. Management takes actions to minimize warranty costs through quality-improvement programs; however, actual claim costs incurred could materially differ from the estimated amounts and require adjustments to the reserve. Historically those adjustments have not been material. Over the past three years, warranty expense as a percentage of net sales and revenues has ranged between 1.1% and 1.2%. For 2010, warranty expense was 1.1% of net sales and revenues. If warranty expense were .2% higher as a percentage of truck net sales and revenues in 2010, warranty expense would have increased by approximately $22 million.

Pension Benefits

The Company’s accounting for employee pension benefit costs and obligations is based on management assumptions about the future used by actuaries to estimate net costs and liabilities. These assumptions include discount rates, long-term rates of return on plan assets, inflation rates, retirement rates, mortality rates and other factors. Management bases these assumptions on historical results, the current environment and reasonable estimates of future events.

The discount rate for pension benefits is based on market interest rates of high-quality corporate bonds with a maturity profile that matches the timing of the projected benefit payments of the plans. Changes in the discount rate affect the valuation of the plan benefits obligation and funded status of the plans. The long-term rate of return on plan assets is based on projected returns for each asset class and relative weighting of those asset classes in the plans.

Because differences between actual results and the assumptions for returns on plan assets, retirement rates and mortality rates are accumulated and amortized into expense over future periods, management does not believe these differences or a typical percentage change in these assumptions worldwide would have a material effect on its financial results in the next year. The most significant assumption which could negatively affect pension expense is a decrease in the discount rate. If the discount rate was to decrease .5%, 2010 net pension expense would increase to $44.8 million from $32.3 million, and the projected benefit obligation would increase $109.1 million to $1,594.7 million from $1,485.6 million.

Income Taxes

The accounting for income taxes is discussed in Note M of the consolidated financial statements. The Company calculates income tax expense on pretax income based on current tax law. Deferred tax assets and liabilities are recorded for future tax consequences on temporary differences between recorded amounts in the financial statements and their respective tax basis. The determination of income tax expense requires management estimates and involves judgment regarding indefinitely reinvested foreign earnings, jurisdictional mix of earnings and future outcomes regarding tax law issues included in tax returns. The Company updates its assumptions based on all of these factors each quarter as well as new information on tax laws and differences between estimated tax returns and actual returns when filed. If the Company’s assessment of these matters changes, the effect is accounted for in earnings in the period the change is made.

F ORWARD - LOOKING STATEMENTS : Certain information presented in this report contains forward-looking statements made pursuant to the Private Securities Litigation Reform Act of 1995, which are subject to risks and uncertainties that may affect actual results. Risks and uncertainties include, but are not limited to: a significant decline in industry sales; competitive pressures; reduced market share; reduced availability of or higher prices for fuel; increased safety, emissions, or other regulations resulting in higher costs and/or sales restrictions; currency or commodity price fluctuations; lower used truck prices; insufficient or under-utilization of manufacturing capacity; supplier interruptions; insufficient liquidity in the capital markets; fluctuations in interest rates; changes in the levels of the Financial Services segment new business volume due to unit fluctuations in new PACCAR truck sales; changes affecting the profitability of truck owners and operators; price changes impacting equipment costs and residual values; insufficient supplier capacity or access to raw materials; labor disruptions; shortages of commercial truck drivers; increased warranty costs or litigation; or legislative and governmental regulations. A more detailed description of these and other risks is included under the heading Part 1, Item 1A, “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.

C ONSOLIDATED STATEMENTS OF INCOME


Year Ended December 31,	2010		2009			2008
	(millions except per share data)
TRUCK AND OTHER:
Net sales and revenues	$	9,325.1	$	7,076.7		$	13,709.6

Cost of sales and revenues		8,198.8		6,483.4			11,736.9
Research and development		238.5		199.2			341.8
Selling, general and administrative		392.8		348.4			470.2
Curtailment gain				(66.0	)
Interest and other expense (income), net		9.3		43.6			(1.8	)

		8,839.4		7,008.6			12,547.1

Truck and Other Income Before Income Taxes		485.7		68.1			1,162.5

FINANCIAL SERVICES:
Interest and fees		421.6		501.8			683.4
Operating lease, rental and other income		546.2		508.0			579.5

Revenues		967.8		1,009.8			1,262.9


Interest and other borrowing expenses		213.0		291.8			394.1
Depreciation and other		451.6		456.1			441.5
Selling, general and administrative		88.7		86.5			111.2
Provision for losses on receivables		61.0		90.8			99.2

		814.3		925.2			1,046.0

Financial Services Income Before Income Taxes		153.5		84.6			216.9

Investment income		21.1		22.3			84.6

Total Income Before Income Taxes		660.3		175.0			1,464.0
Income taxes		202.7		63.1			446.1

Net Income	$	457.6	$	111.9		$	1,017.9


Net Income Per Share
Basic	$	1.25	$	.31		$	2.79

Diluted	$	1.25	$	.31		$	2.78


Weighted average number of common shares outstanding
Basic		365.0		363.8			364.2

Diluted		366.2		364.9			365.9

See notes to consolidated financial statements.

C ONSOLIDATED BALANCE SHEETS

ASSETS


December 31,	2010		2009
	(millions of dollars)
TRUCK AND OTHER:
Current Assets
Cash and cash equivalents	$	1,982.0	$	1,836.5
Trade and other receivables, net		610.4		554.7
Marketable debt securities		450.5		219.5
Inventories		534.0		632.1
Other current assets		218.6		224.3

Total Truck and Other Current Assets		3,795.5		3,467.1

Equipment on operating leases, net		536.2		503.8
Property, plant and equipment, net		1,673.7		1,757.7
Other noncurrent assets		350.5		409.1

Total Truck and Other Assets		6,355.9		6,137.7


FINANCIAL SERVICES:
Cash and cash equivalents		58.8		75.5
Finance and other receivables, net		6,070.9		6,497.7
Equipment on operating leases, net		1,483.1		1,513.2
Other assets		265.4		344.9

Total Financial Services Assets		7,878.2		8,431.3

	$	14,234.1	$	14,569.0

L IABILITIES AND STOCKHOLDERS ’ EQUITY


December 31,	2010		2009
	(millions of dollars)

TRUCK AND OTHER:
Current Liabilities
Accounts payable, accrued expenses and other	$	1,676.5	$	1,490.0
Current portion of long-term debt		23.5

Total Truck and Other Current Liabilities		1,700.0		1,490.0
Long-term debt		150.0		172.3
Residual value guarantees and deferred revenues		563.8		547.2
Other liabilities		370.3		405.3

Total Truck and Other Liabilities		2,784.1		2,614.8


FINANCIAL SERVICES:
Accounts payable, accrued expenses and other		275.9		215.2
Commercial paper and bank loans		2,371.7		3,011.2
Term notes		2,730.8		2,889.3
Deferred taxes and other liabilities		713.8		734.8

Total Financial Services Liabilities		6,092.2		6,850.5


STOCKHOLDERS’ EQUITY
Preferred stock, no par value - authorized 1.0 million shares, none issued
Common stock, $1 par value - authorized 1.2 billion shares; issued 365.3 million and 364.4 million shares		365.3		364.4
Additional paid-in capital		105.1		80.0
Treasury stock, at cost - 2009 - .4 million shares				(17.4	)
Retained earnings		4,846.1		4,640.5
Accumulated other comprehensive income		41.3		36.2

Total Stockholders’ Equity		5,357.8		5,103.7

	$	14,234.1	$	14,569.0

See notes to consolidated financial statements.

C ONSOLIDATED STATEMENTS OF CASH FLOWS


Year Ended December 31,	2010			2009			2008
	(millions of dollars)
OPERATING ACTIVITIES:
Net Income	$	457.6		$	111.9		$	1,017.9
Items included in net income not affecting cash:
Depreciation and amortization:
Property, plant and equipment		189.9			188.0			226.5
Equipment on operating leases and other		433.3			463.7			426.6
Provision for losses on financial services receivables		61.0			90.8			99.2
Curtailment gain					(66.0	)
Deferred taxes		46.3			159.7			131.0
Other, net		11.6			38.1			(1.1	)
Change in operating assets and liabilities:
(Increase) decrease in assets other than cash and equivalents:
Receivables:
Trade and other		(42.3	)		163.2			(55.5	)
Wholesale receivables on new trucks		(1.1	)		641.8			(246.3	)
Sales-type finance leases and dealer direct loans on new trucks		67.1			81.6			52.8
Inventories		96.6			53.4			(85.2	)
Other, net		(48.2	)		8.1			8.8
Increase (decrease) in liabilities:
Accounts payable and accrued expenses		221.3			(271.8	)		(239.3	)
Residual value guarantees and deferred revenues		79.8			48.2			118.1
Pension and post retirement contributions		(63.9	)		(176.6	)		(68.0	)
Other, net		42.4			(160.8	)		(80.6	)

Net Cash Provided by Operating Activities		1,551.4			1,373.3			1,304.9

INVESTING ACTIVITIES:
Retail loans and direct financing leases originated		(1,789.2	)		(1,282.2	)		(2,307.5	)
Collections on retail loans and direct financing leases		2,039.3			2,083.0			2,616.7
Net decrease in wholesale receivables on used equipment		8.2			3.5			10.4
Marketable securities purchases		(757.5	)		(288.3	)		(667.3	)
Marketable securities sales and maturities		523.8			245.5			1,239.4
Acquisition of property, plant and equipment		(168.4	)		(127.7	)		(462.8	)
Acquisition of equipment for operating leases		(715.4	)		(843.3	)		(1,087.2	)
Proceeds from asset disposals		392.1			520.1			393.6
Other, net								12.8

Net Cash (Used in) Provided by Investing Activities		(467.1	)		310.6			(251.9	)

FINANCING ACTIVITIES:
Cash dividends paid		(251.7	)		(232.1	)		(629.2	)
Purchase of treasury stock								(230.6	)
Stock compensation transactions		22.0			17.6			11.5
Net decrease in commercial paper and short-term bank loans		(548.1	)		(789.8	)		(482.0	)
Proceeds from long-term debt		707.0			1,373.0			1,190.9
Payments on long-term debt		(889.6	)		(2,184.9	)		(728.7	)

Net Cash Used in Financing Activities		(960.4	)		(1,816.2	)		(868.1	)
Effect of exchange rate changes on cash		4.9			89.1			(87.8	)

Net Increase (Decrease) in Cash and Cash Equivalents		128.8			(43.2	)		97.1
Cash and Cash Equivalents at beginning of year		1,912.0			1,955.2			1,858.1

Cash and Cash Equivalents at end of year	$	2,040.8		$	1,912.0		$	1,955.2

See notes to consolidated financial statements.

C ONSOLIDATED STATEMENTS OF S TOCKHOLDERS ’ EQUITY


December 31,	2010			2009			2008
	(millions except per share data)

COMMON STOCK, $1 PAR VALUE:
Balance at beginning of year	$	364.4		$	363.1		$	368.4
Treasury stock retirement		(.4	)					(5.9	)
Stock compensation		1.3			1.3			.6

Balance at end of year		365.3			364.4			363.1

ADDITIONAL PAID-IN CAPITAL:
Balance at beginning of year		80.0			46.1			37.7
Treasury stock retirement		(17.0	)					(14.0	)
Stock compensation and tax benefit		42.1			33.9			22.4

Balance at end of year		105.1			80.0			46.1

TREASURY STOCK, AT COST:
Balance at beginning of year		(17.4	)		(17.4	)		(61.7	)
Purchases, shares - 2008 - 5.1								(230.6	)
Retirements		17.4						274.9

Balance at end of year					(17.4	)		(17.4	)

RETAINED EARNINGS:
Balance at beginning of year		4,640.5			4,724.7			4,260.6
Net income		457.6			111.9			1,017.9
Cash dividends declared on common stock, per share: 2010-$.69; 2009-$.54; 2008-$.82		(252.0	)		(196.1	)		(298.8	)
Treasury stock retirement								(255.0	)

Balance at end of year		4,846.1			4,640.5			4,724.7

ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS):
Balance at beginning of year		36.2			(269.8	)		408.1
Other comprehensive income (loss)		5.1			306.0			(677.9	)

Balance at end of year		41.3			36.2			(269.8	)

Total Stockholders’ Equity	$	5,357.8		$	5,103.7		$	4,846.7

See notes to consolidated financial statements.

C ONSOLIDATED STATEMENTS OF C OMPREHENSIVE INCOME


Year Ended December 31,	2010			2009			2008
	(millions of dollars)
Net income	$	457.6		$	111.9		$	1,017.9
Other comprehensive income (loss):
Unrealized (losses) gains on derivative contracts
Losses arising during the period		(76.8	)		(71.6	)		(85.5	)
Tax effect		26.2			21.3			24.7
Reclassification adjustment		123.1			119.9			(17.4	)
Tax effect		(42.0	)		(35.7	)		4.1

		30.5			33.9			(74.1	)
Unrealized (losses) gains on investments
Net holding (loss) gain		(1.2	)		(.3	)		2.9
Tax effect		.5			.1			(.9	)
Reclassification adjustment		.6			.7			(5.1	)
Tax effect		(.3	)		(.2	)		1.8

		(.4	)		.3			(1.3	)
Pension and postretirement
(Losses) gains arising during the period		(35.9	)		73.0			(395.1	)
Tax effect		12.7			(32.1	)		144.7
Reclassification adjustment		16.5			11.2			6.0
Tax effect		(5.6	)		(3.9	)		(2.1	)

		(12.3	)		48.2			(246.5	)
Foreign currency translation (losses) gains		(12.7	)		223.6			(356.0	)

Net other comprehensive income (loss)		5.1			306.0			(677.9	)

Comprehensive Income	$	462.7		$	417.9		$	340.0

See notes to consolidated financial statements.

N OTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2010, 2009 and 2008 (currencies in millions)

A. SIGNIFICANT ACCOUNTING POLICIES

Description of Operations : PACCAR Inc (the Company or PACCAR) is a multinational company operating in two principal segments: (1) the design, manufacture and distribution of light-, medium- and heavy-duty commercial trucks and related aftermarket parts, “Truck” and (2) finance and leasing products and services provided to customers and dealers, “Financial Services”. PACCAR’s sales and revenues are derived primarily from North America and Europe. The Company also operates in Australia and South America and sells trucks and parts outside its primary markets to customers in Asia and Africa.

Principles of Consolidation: The consolidated financial statements include the accounts of the Company and its wholly owned domestic and foreign subsidiaries. All significant intercompany accounts and transactions are eliminated in consolidation.

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

Revenue Recognition:

Truck and Other : Substantially all sales and revenues of trucks and related aftermarket parts are recorded by the Company when products are shipped to dealers or customers, except for certain truck shipments that are subject to a residual value guarantee to the customer. Revenues related to these shipments are recognized on a straight-line basis

N OTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2010, 2009 and 2008 (currencies in millions)

over the guarantee period (see Note E). At the time certain truck and parts sales to a dealer are recognized, the Company records an estimate of the future sales incentive costs related to such sales. The estimate is based on historical data and announced incentive programs.

Financial Services : Interest income from finance and other receivables is recognized using the interest method. Certain loan origination costs are deferred and amortized to interest income over the expected life of the contracts, generally 36 to 60 months, using the straight-line method which approximates the interest method. For operating leases, rental revenue is recognized on a straight-line basis over the lease term. Recognition of interest income and rental revenue is suspended (put on non-accrual status) when the receivable becomes more than 90 days past the contractual due date or earlier if some other event causes the Company to determine that collection is not probable. Recognition is resumed if the receivable becomes contractually current by the payment of all amounts due under the terms of the existing contract and collection of remaining amounts is considered probable (if not modified), or after the customer has made scheduled payments for three months and collection of remaining amounts is considered probable (if contractually modified). Payments received while the finance receivable is impaired or on non-accrual status are applied to interest and principal in accordance with the contractual terms.

Cash and Cash Equivalents : Cash equivalents consist of liquid investments with a maturity at date of purchase of three months or less.

Marketable Securities : The Company’s investments in marketable securities are classified as available-for-sale. These investments are stated at fair value with any unrealized gains or losses, net of tax, included as a component of accumulated other comprehensive income.

Receivables:

Trade and Other Receivables : The Company’s trade and other receivables are recorded at cost on the balance sheet net of allowances.

Finance and Other Receivables:

Loans – Loans represent fixed- or floating-rate loans to customers collateralized by the vehicles purchased and are recorded at amortized cost.

Financing leases – Finance leases represent retail direct financing and sales-type finance lease contracts that lease equipment to retail customers and dealers, respectively. These leases are reported as the sum of minimum lease payments receivable and estimated residual value of the property subject to the contracts, reduced by unearned interest which is shown separately.

Dealer wholesale financing – Dealer wholesale financing represents floating-rate wholesale loans to PACCAR dealers for new and used trucks and are recorded at amortized cost. The loans are collateralized by the trucks being financed.

Interest and other – Interest and other receivables are interest due on loans and leases and other amounts due in the normal course of business and are due within one year.

Allowance for Credit Losses:

Truck and Other: The Company historically has not experienced significant losses related to trade and other receivables in its Truck and Other businesses. The allowance for credit losses for Truck and Other was $3.5 and $4.3 for the years ended December 31, 2010 and 2009, respectively and net charge-offs were $.2, $1.8 and $2.0 for the years ending December 31, 2010, 2009 and 2008, respectively.

N OTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2010, 2009 and 2008 (currencies in millions)

Financial Services: The Company continuously monitors the performance of all its finance receivables, by reviewing payment performance. In addition, for large customers and dealer wholesale financing accounts, the Company regularly monitors their financial statements and makes appropriate customer contact. If the Company becomes aware of circumstances with those customers or dealers that could lead to financial difficulty, whether or not they are past due, the accounts are placed on a watch list. In determining the allowance for credit losses, loans and finance leases are evaluated together since they relate to a similar customer base and their contractual terms require regular payment of principal and interest generally over 36 to 60 months and they are secured by the same type of collateral. The Company collectively and individually evaluates its finance receivables and the allowance for credit losses consists of both a general and specific reserve.

The Company individually evaluates certain finance receivables for impairment. Finance receivables which are evaluated individually consist of customers on non-accrual status, all wholesale accounts and certain large retail accounts with past-due balances or that otherwise are deemed to be at a higher risk of credit loss and loans which have been modified as troubled debt restructurings. A receivable is considered impaired if it is probable the Company will be unable to collect all contractual interest and principal payments as scheduled. Impaired receivables are individually evaluated to determine the amount of impairment and these receivables are considered collateral dependent. Accordingly, the evaluation of individual reserves is based on the fair value less costs to sell the associated collateral. When the underlying collateral fair value exceeds the Company’s loss exposure, no individual reserve is recorded. The Company uses a pricing model to value the underlying collateral on a quarterly basis. The fair value of the collateral is determined based on management’s evaluation of numerous factors such as the make, model and year of the equipment, overall condition of the equipment, primary method of distribution for the equipment, recent sales prices of comparable equipment and economic trends affecting used equipment values.

The provision for losses on finance receivables is charged to income based on management’s estimate of incurred credit losses, net of recoveries, inherent in the portfolio. Accounts are charged-off against the allowance for credit losses when, in the judgment of management, they are considered uncollectable (generally upon repossession of the collateral). Typically the timing between the repossession process and when a receivable is charged-off is not significant. In cases where repossession is delayed (i.e. for legal reasons), the Company will record partial charge-offs. The charge-off is determined by comparing the fair value of the collateral less costs to sell to the recorded investment.

Inventories : Inventories are stated at the lower of cost or market. Cost of inventories in the United States is determined principally by the last-in, first-out (LIFO) method. Cost of all other inventories is determined principally by the first-in, first-out (FIFO) method.

Equipment on Operating Leases : The Company leases equipment under operating leases to customers in the Financial Services segment. In addition, in the Truck segment, equipment sold to customers in Europe subject to a residual value guarantee (RVG) is accounted for as operating leases. Equipment is recorded at cost and is depreciated on the straight-line basis to the lower of the estimated residual value or guarantee value. Lease and guarantee periods generally range

N OTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2010, 2009 and 2008 (currencies in millions)

from three to seven years. Estimated useful lives of the equipment range from five to eight years. The Company reviews residual values of equipment on operating leases periodically to determine that recorded amounts are appropriate.

Property, Plant and Equipment : Property, plant and equipment are stated at cost. Depreciation is computed principally by the straight-line method based on the estimated useful lives of the various classes of assets. Certain production tooling is amortized on a unit of production basis.

Long-lived Assets, Goodwill and Other Intangible Assets: The Company evaluates the carrying value of property, equipment and other intangible assets when events and circumstances warrant such a review. Goodwill is tested for impairment at least on an annual basis. Impairment charges were insignificant during the three years ended December 31, 2010.

Derivative Financial Instruments : Derivative financial instruments are used to hedge exposures to fluctuations in interest rates and foreign currency exchange rates. Certain derivative instruments designated as either cash flow hedges or fair value hedges are subject to hedge accounting. Derivative instruments that are not subject to hedge accounting are held as economic hedges. The Company’s policies prohibit the use of derivatives for speculation or trading. At inception of each hedge relationship, the Company documents its risk management objectives, procedures and accounting treatment. Exposure limits and minimum credit ratings are used to minimize the risks of counterparty default. The Company had no material exposures to default at December 31, 2010.

The Company uses regression analysis to assess effectiveness of interest-rate contracts on a quarterly basis. For foreign-exchange contracts, the Company performs quarterly assessments to ensure that critical terms continue to match. All components of the derivative instrument’s gain or loss are included in the assessment of hedge effectiveness. Gains or losses on the ineffective portion of cash flow hedges are recognized currently in earnings. Hedge accounting is discontinued prospectively when the Company determines that a derivative financial instrument has ceased to be a highly effective hedge.

Foreign Currency Translation: For most of PACCAR’s foreign subsidiaries, the local currency is the functional currency. All assets and liabilities are translated at year-end exchange rates and all income statement amounts are translated at the weighted average rates for the period. Translation adjustments are recorded in accumulated other comprehensive income (loss), a component of stockholders’ equity. PACCAR uses the U.S. dollar as the functional currency for its Mexican subsidiaries. Accordingly, inventories, cost of sales, property, plant and equipment, and depreciation are remeasured at historical rates and resulting adjustments are included in net income.

Earnings per Share : Basic earnings per common share are computed by dividing earnings by the weighted average number of commons shares outstanding, plus the effect of any participating securities. Diluted earnings per common share are computed assuming that all potentially dilutive securities are converted into common shares under the treasury stock method. The dilutive and antidilutive options are shown separately in the table below.


Year Ended December 31	2010		2009		2008
Additional shares		1,339,300		1,103,600		1,721,300
Antidilutive options		1,642,600		2,290,400		1,397,800

Reclassifications: The Company has made the following reclassifications to prior years to conform to the 2010 presentation. The Company has reclassified the impairment losses related to repossessed equipment on operating lease in the Financial Services segment from “Provision for losses on receivables” to “Depreciation and other” in the Consolidated Statements of Income and Consolidated Statements of Cash flows. In addition, the Company has reclassified proceeds for the sale of repossessed assets relating to finance receivables from “Collections on retail loans and direct financing leases” to “Proceeds from asset disposals” in the Consolidated Statements of Cash Flows.

N OTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2010, 2009 and 2008 (currencies in millions)

The changes are outlined on the following table:


	2009				2008
Consolidated Statements of Income	Before		After		Before		After
Depreciation and other	$	442.5	$	456.1	$	437.8	$	441.5
Provision for losses on receivables		104.4		90.8		102.9		99.2

Consolidated Statements of Cash Flows
Operating Activities:
Depreciation on equipment on operating leases and other	$	450.1	$	463.7	$	422.9	$	426.6
Provision for losses on receivables		104.4		90.8		102.9		99.2

Investing Activities:
Collections on retail loans and direct financing leases	$	2,285.5	$	2,083.0	$	2,771.0	$	2,616.7
Proceeds from asset disposals		317.6		520.1		239.3		393.6

New Accounting Pronouncements: The Company adopted Accounting Standards Update (ASU) 2010-06 Improving Disclosures about Fair Value Measurements as of January 1, 2010 with no significant disclosure effect on the financial statements . The ASU requires disclosing the amounts of significant transfers in and out of Levels 1 and 2 of the fair value hierarchy and describing the reasons for the transfers, fair value information by class of assets and liabilities, and descriptions of valuation techniques and inputs for Level 2 and 3 measurements. The Company’s disclosure in Note P has been updated to comply with this standard.

In July 2010, the FASB issued ASU No. 2010-20 Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses. ASU 2010-20 amends FASB Accounting Standards Codification topic 310 – Receivables and expands disclosures about the credit quality of a company’s financing receivables and allowance for credit losses. ASU 2010-20 was effective for reporting periods ending after December 15, 2010. The Company’s disclosure in Note D has been updated to comply with this standard.

B. INVESTMENTS IN MARKETABLE SECURITIES

Marketable debt securities consisted of the following at December 31:


2010	AMORTIZED COST		UNREALIZED GAINS		UNREALIZED LOSSES		FAIR VALUE
U.S. government and agency securities	$	2.7					$	2.7
U.S. tax-exempt securities		364.9	$	.8	$	.3		365.4
U.S. corporate securities		27.3		.3				27.6
Non U.S. corporate securities		37.0						37.0
Other debt securities		17.8						17.8

	$	449.7	$	1.1	$	.3	$	450.5


2009	AMORTIZED COST		UNREALIZED GAINS		UNREALIZED LOSSES		FAIR VALUE
U.S. government and agency securities	$	6.5					$	6.5
U.S. tax-exempt securities		141.2	$	1.3				142.5
U.S. corporate securities		22.0		.2	$	.1		22.1
Non U.S. corporate securities		22.0						22.0
Non U.S. government securities		12.2						12.2
Other debt securities		14.2						14.2

	$	218.1	$	1.5	$	.1	$	219.5

N OTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2010, 2009 and 2008 (currencies in millions)

The cost of marketable debt securities is adjusted for amortization of premiums and accretion of discounts to maturity. Amortization, accretion, interest and dividend income and realized gains and losses are included in investment income. The cost of securities sold is based on the specific identification method. The proceeds from sales and maturities of marketable securities during 2010 were $523.8. Gross realized gains were $.7, $1.2, and $5.1, and gross realized losses were $.1, $.1 and $.1 for the years ended December 31, 2010, 2009 and 2008, respectively.

The Company evaluates its investments in marketable securities at the end of each reporting period to determine if a decline in fair value is other than temporary. The fair value of marketable debt securities that have been in an unrealized loss position for 12 months or greater at December 31, 2010 and at December 31, 2009 was nil and $27.4, respectively and their unrealized losses were nil and $.1, respectively.

Contractual maturities at December 31, 2010 were as follows:


Maturities:	AMORTIZED COST		FAIR VALUE
Within one year	$	182.9	$	183.2
One to five years		254.6		255.1
Ten or more years		12.2		12.2

	$	449.7	$	450.5

Marketable debt securities included $12.2 and $11.6 of variable-rate demand obligations (VRDOs) at December 31, 2010 and 2009, respectively. VRDOs are debt instruments with long-term scheduled maturities which have interest rates that reset periodically.

C. INVENTORIES

Inventories include the following:


At December 31,	2010			2009
Finished products	$	370.1		$	312.5
Work in process and raw materials		322.2			487.5

		692.3			800.0
Less LIFO reserve		(158.3	)		(167.9	)

	$	534.0		$	632.1

Inventories valued using the LIFO method comprised 38% and 58% of consolidated inventories before deducting the LIFO reserve at December 31, 2010 and 2009. During 2010 inventory quantities declined which provided a pretax favorable income effect from the liquidation of LIFO inventory of $15.0.

N OTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2010, 2009 and 2008 (currencies in millions)

D. FINANCE AND OTHER RECEIVABLES

Finance and other receivables include the following:


At December 31,	2010			2009
Loans	$	2,713.9		$	2,875.2
Retail direct financing leases		2,005.0			2,260.0
Sales-type finance leases		703.6			764.9
Dealer wholesale financing		983.4			1,015.2
Interest and other receivables		109.3			109.6
Unearned interest: Finance leases		(299.3	)		(359.6	)

		6,215.9			6,665.3
Less allowance for losses:
Loans, leases and other		(137.5	)		(157.1	)
Dealer wholesale financing		(7.5	)		(10.5	)

	$	6,070.9		$	6,497.7

The net activity of sales-type finance leases, dealer direct loans and wholesale financing on new trucks is shown in the operating section of the consolidated statements of cash flows since they finance the sale of Company inventory.

Annual minimum payments due on finance receivables are as follows:


	LOANS		FINANCE LEASES
2011	$	1,041.7	$	1,086.8
2012		736.0		633.5
2013		496.5		418.2
2014		275.2		248.7
2015		144.0		117.4
Thereafter		20.5		38.7

	$	2,713.9	$	2,543.3

Estimated residual values included with finance leases amounted to $165.3 in 2010 and $186.8 in 2009. Repayment experience indicates the majority of dealer wholesale financing will be repaid within one year. In addition, repayment experience indicates that some loans, leases and other finance receivables will be paid prior to contract maturity, while others may be extended or modified. The Company may modify loans and finance leases for commercial reasons or for credit reasons for customers experiencing difficulty making payments under the contract terms. When customer accounts are modified the Company thoroughly evaluates the credit worthiness of the customer and only modifies accounts that the Company considers likely to perform under the modified terms. On average modifications resulted in contractual terms being extended approximately three months. Modifications did not have a significant effect on the weighted average term or interest rate of the portfolio. When granting modifications the Company rarely forgives principal or interest, or reduces interest rates below market rates. Accordingly, very few modifications result in a troubled debt restructuring (TDR). The balance of loans accounted for as TDRs was $6.5 at December 31, 2010.

Allowance for Credit Losses

The Company’s allowance for credit losses is segregated into two portfolio segments, wholesale and retail. A portfolio segment is the level at which the Company develops a systematic methodology for determining its allowance for credit losses. The wholesale segment includes wholesale financing loans to dealers that are collateralized by the trucks being financed. The retail segment includes retail loans, and direct and sales-type finance leases, net of unearned interest.

N OTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2010, 2009 and 2008 (currencies in millions)

The allowance for credit losses is summarized as follows:


	2010									2009			2008
	Wholesale			Retail			Total			Total			Total
Balance at January 1	$	10.5		$	157.1		$	167.6		$	178.3		$	193.4
Provision for losses		.2			60.8			61.0			90.8			99.2
Charge-offs		(2.9	)		(94.9	)		(97.8	)		(115.2	)		(104.8	)
Recoveries		.3			14.2			14.5			7.0			3.7
Currency translation		(.6	)		.3			(.3	)		6.7			(13.2	)

Balance at December 31	$	7.5		$	137.5		$	145.0		$	167.6		$	178.3

As described in Note A, the Company reclassified impairment losses on repossessed equipment on operating leases to Depreciation and other. As a result, the Provision for losses decreased to $90.8 and $99.2 for the years ended December 31, 2009 and 2008 from $104.4 and $102.9, respectively. Charge-offs (net of recoveries) decreased to $108.2 and $101.1 for the years ended December 31, 2009 and 2008 from $121.8 and $104.8, respectively.

Information regarding finance receivables summarized by those evaluated collectively and individually is as follows:


At December 31, 2010	Wholesale		Retail		Total
Recorded investment for impaired finance receivables evaluated individually	$	3.4	$	150.0	$	153.4
Allowance for finance receivables evaluated individually		1.3		33.6		34.9

Recorded investment for finance receivables evaluated collectively	$	980.0	$	4,973.2	$	5,953.2
Allowance for finance receivables evaluated collectively		6.2		103.9		110.1

The recorded investment of finance receivables that are on non-accrual status in the wholesale, fleet and owner/operator portfolio classes as of December 31, 2010 are $3.4, $72.2 and $33.9, respectively. The recorded investment of finance receivables on non-accrual status as of December 31, 2009 was $88.4.

Impaired Loans

The Company’s impaired loans are segregated by portfolio class. A portfolio class of receivables is a subdivision of a portfolio segment with similar measurement attributes, risk characteristics and common methods to monitor and assess credit risk. The Company’s retail segment is subdivided into the fleet and owner/operator classes. Fleet consists of retail accounts with customers operating more than five trucks. All others are owner/operator. All impaired loans have a specific reserve and are summarized as follows:


	2010												2009
At December 31,	Wholesale			Fleet			Owner / Operator			Total			Total

Impaired loans with specific reserve	$	3.4		$	21.5		$	17.8		$	42.7		$	67.2
Associated allowance		(1.3	)		(4.4	)		(3.8	)		(9.5	)		(12.0	)

Net carrying amount of impaired loans	$	2.1		$	17.1		$	14.0		$	33.2		$	55.2

Unpaid principal balance		3.4			21.5			17.8			42.7			67.2

Average recorded investment		7.8			31.7			18.8			58.3			63.4

Interest income recognized		.1			1.7			.2			2.0			3.6

N OTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2010, 2009 and 2008 (currencies in millions)

Credit Quality

The Company’s customers are principally concentrated in the transportation industry in North America, Europe and Australia. On a geographic basis, there is a proportionate concentration of credit risk in each area. The Company retains as collateral a security interest in the related equipment.

At the inception of each contract, the Company considers the credit risk based on a variety of credit quality indicators including, prior payment experience, customer financial information, credit-rating agency ratings, loan-to-value ratios, and other internal metrics. On an ongoing basis, the Company monitors the credit exposure based on past-due status and collection experience as the Company has found a meaningful correlation between the past-due status of customers and the risk of loss.

The table below summarizes the Company’s financing receivables by credit quality indicator and portfolio class. Performing accounts are paying in accordance with the contractual terms and are not considered to be of high risk. Watch accounts include past-due and large high risk accounts that are not impaired. At-risk includes customer accounts that are impaired.


At December 31, 2010	Wholesale		Fleet		Owner/ Operator		Total
Performing	$	966.2	$	3,544.0	$	1,359.4	$	5,869.6
Watch		13.8		46.6		23.2		83.6
At-risk		3.4		115.1		34.9		153.4

	$	983.4	$	3,705.7	$	1,417.5	$	6,106.6

The Company uses historical data and impairment assessment of the condition of its customers and the economy to estimate default rates for each credit quality indicator as of December 31, 2010.

The table below summarizes the Company’s financing receivables by aging category.


At December 31, 2010	Wholesale		Fleet		Owner/ Operator		Total
Current and up to 30 days past-due	$	966.2	$	3,581.1	$	1,359.5	$	5,906.8
31 - 60 days past-due		7.7		48.5		19.7		75.9
Greater than 60 days past-due		9.5		76.1		38.3		123.9

	$	983.4	$	3,705.7	$	1,417.5	$	6,106.6

Repossessions

When the Company determines a customer is not likely to meet their contractual commitments, the Company repossesses the vehicles which serve as collateral for the loans, finance leases and equipment under operating lease. The Company records the vehicles as used truck inventory included in Financial Services Other Assets on the Consolidated Balance Sheets. The balance of repossessed inventory at December 31, 2010 and 2009 is $15.6 and $28.5 respectively. Proceeds from the sales of repossessed assets were $135.3, $202.5 and $154.3 for the years ended December 31, 2010, 2009 and 2008, respectively. These amounts are included in “Proceeds from asset disposals” on the Consolidated Statements of Cash Flows. Write-downs of repossessed equipment on operating leases are recorded as impairments and included in Financial Services “Depreciation and other” on the Consolidated Statements of Income.

N OTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2010, 2009 and 2008 (currencies in millions)

E.	EQUIPMENT ON OPERATING LEASES

A summary of equipment on operating leases for the Truck and Other segment and for the Financial Services segment is as follows:


	TRUCK AND OTHER						FINANCIAL SERVICES
At December 31,	2010			2009			2010			2009
Equipment on operating leases	$	776.8		$	730.6		$	2,118.6		$	2,090.8
Less allowance for depreciation		(240.6	)		(226.8	)		(635.5	)		(577.6	)

	$	536.2		$	503.8		$	1,483.1		$	1,513.2

Annual minimum lease payments due on Financial Services operating leases beginning January 1, 2011 are $393.6, $241.6, $152.0, $75.0, $17.4 and $3.0 thereafter.

When the equipment is sold subject to an RVG, the full sales price is received from the customer. A liability is established for the residual value obligation with the remainder of the proceeds recorded as deferred lease revenue.

These amounts are summarized below:


	TRUCK AND OTHER
At December 31,	2010		2009
Deferred lease revenues	$	250.6	$	239.2
Residual value guarantees		313.2		308.0

	$	563.8	$	547.2

The deferred lease revenue is amortized on a straight-line basis over the RVG contract period. At December 31, 2010, the annual amortization of deferred revenues beginning January 1, 2011 is $64.2, $47.4, $60.9, $44.3, $23.8 and $10.0 thereafter. Annual maturities of the residual value guarantees beginning January 1, 2011 are $80.3, $59.2, $76.0, $55.4, $29.7 and $12.6 thereafter.

F.	PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment include the following:


At December 31,	USEFUL LIVES	2010			2009
Land		$	200.7		$	206.3
Buildings and improvements	10-40 years		970.5			1,007.6
Machinery, equipment and production tooling	3-12 years		2,481.0			2,489.0

			3,652.2			3,702.9
Less allowance for depreciation			(1,978.5	)		(1,945.2	)

		$	1,673.7		$	1,757.7

G.	ACCOUNTS PAYABLE, ACCRUED EXPENSES AND OTHER

Accounts payable, accrued expenses and other include the following:


At December 31,	2010		2009
Truck and Other:
Accounts payable	$	707.4	$	622.5
Accrued expenses		224.9		226.0
Salaries and wages		171.8		132.9
Product support reserves		231.3		230.8
Other		341.1		277.8

	$	1,676.5	$	1,490.0

N OTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2010, 2009 and 2008 (currencies in millions)

H.	PRODUCT SUPPORT LIABILITIES

Product support liabilities include reserves related to product warranties, optional extended warranties and repair and maintenance (R&M) contracts. The Company generally offers one-year warranties covering most of its vehicles and related aftermarket parts. Specific terms and conditions vary depending on the product and the country of sale. Optional extended warranty and R&M contracts can be purchased for periods which generally range up to five years. Warranty expenses and reserves are estimated and recorded at the time products or contracts are sold based on historical data regarding the source, frequency and cost of claims, net of any recoveries. PACCAR periodically assesses the adequacy of its recorded liabilities and adjusts them as appropriate to reflect actual experience.

Changes in warranty and R&M reserves are summarized as follows:


At December 31,	2010			2009			2008
Beginning balance	$	386.4		$	450.4		$	483.3
Cost accruals and revenue deferrals		172.4			169.0			312.3
Payments and revenue recognized		(171.3	)		(245.6	)		(304.6	)
Currency translation		(15.3	)		12.6			(40.6	)

	$	372.2		$	386.4		$	450.4

Warranty and R&M reserves are included in the accompanying Consolidated Balance Sheets as follows:


At December 31,	2010		2009
Truck and Other:
Accounts payable, accrued expenses and other	$	231.3	$	230.8
Other liabilities		83.2		84.3
Financial Services:
Deferred taxes and other liabilities		57.7		71.3

	$	372.2	$	386.4

I.	BORROWINGS AND CREDIT ARRANGEMENTS

Truck and Other long-term debt at December 31, 2010 and 2009, consisted of $150.0 of notes with an effective interest rate of 6.9% which mature in 2014 and $23.5 and $22.3, respectively of non-interest bearing notes which mature in September 2011.

Financial Services borrowings include the following:


At December 31,	EFFECTIVE RATE			2010		EFFECTIVE RATE			2009
Commercial paper		2.2	%	$	2,126.4		2.8	%	$	2,695.6
Bank loans:
Medium-term		7.8	%		245.3		7.6	%		315.6

					2,371.7					3,011.2
Term notes		4.6	%		2,730.8		4.8	%		2,889.3

		3.8	%	$	5,102.5		4.0	%	$	5,900.5

The term notes of $2,730.8 at December 31, 2010 and $2,889.3 at December 31, 2009 include an increase in fair value of $9.6 and $19.6, respectively for notes designated to fair value hedges. The effective rate is the weighted average rate as of December 31, 2010 and 2009 and includes the effects of interest rate contracts.

N OTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2010, 2009 and 2008 (currencies in millions)

The annual maturities of the financial services borrowings are as follows:


Beginning January 1, 2011	COMMERCIAL PAPER		BANK LOANS		TERM NOTES		TOTAL
2011	$	2,126.4	$	174.7	$	1,067.3	$	3,368.4
2012				51.1		620.0		671.1
2013				19.4		550.0		569.4
2014				.1		350.0		350.1
2015						133.9		133.9

	$	2,126.4	$	245.3	$	2,721.2	$	5,092.9

Interest paid on borrowings was $230.2, $267.6 and $327.1 in 2010, 2009 and 2008, respectively. For the years ended December 31, 2010, 2009 and 2008 the Company capitalized interest of $10.3, $2.3, and nil respectively, in Truck and Other.

The primary sources of borrowings are commercial paper and medium-term notes issued in the public markets. The medium-term notes are issued by PACCAR Inc, PACCAR Financial Corp. (PFC), PACCAR Financial Europe and PACCAR Mexico.

PACCAR Inc intends to periodically file shelf registrations under the Securities Act of 1933. The total amount of medium-term notes outstanding for PACCAR Inc as of December 31, 2010 is $870.0. The current registration expires in 2011 and does not limit the principal amount of debt securities that may be issued during the period.

In November 2009, the Company’s U.S. finance subsidiary, PFC, filed a shelf registration under the Securities Act of 1933. The total amount of medium-term notes outstanding for PFC as of December 31, 2010 was $1,123.5. The registration expires in 2012 and does not limit the principal amount of debt securities that may be issued during the period.

At December 31, 2010, PACCAR’s European finance subsidiary, PACCAR Financial Europe, had €900.0 available for issuance under a €1,500.0 medium-term note program registered with the London Stock Exchange. The program was renewed in the fourth quarter of 2010 and is renewable annually.

In June 2008, PACCAR Mexico registered a 7,000 peso medium-term note program with the Comision Nacional Bancaria y de Valores. The registration expires in 2012 and at December 31, 2010, 6,100 pesos remained available for issuance.

The Company has line of credit arrangements of $3,646.9, of which $3,401.6 was unused at the end of December 2010. Included in these arrangements is $3,000.0 of syndicated bank facilities, of which, $1,000.0 matures in June 2011, $1,000.0 matures in June 2012 and $1,000.0 matures in June 2013. The Company intends to replace these credit facilities as they expire with facilities of similar amounts and duration. These credit facilities are maintained primarily to provide backup liquidity for commercial paper borrowings and maturing medium-term notes. There were no borrowings under the syndicated bank facilities for the year ended December 31, 2010.

J.	LEASES

The Company leases certain facilities, computer equipment and aircraft under operating leases. Leases expire at various dates through the year 2017. Annual minimum rent payments under non-cancelable operating leases having initial or remaining terms in excess of one year at January 1, 2011 are $18.1, $10.8, $7.6, $4.1, $2.7 and $.8 thereafter. Total rental expenses under all leases amounted to $29.7, $40.6 and $43.3 for 2010, 2009 and 2008, respectively.

N OTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2010, 2009 and 2008 (currencies in millions)

K.	COMMITMENTS AND CONTINGENCIES

The Company is involved in various stages of investigations and cleanup actions in different countries related to environmental matters. In certain of these matters, the Company has been designated as a “potentially responsible party” by domestic and foreign environmental agencies. The Company has an accrual to provide for the estimated costs to investigate and complete cleanup actions where it is probable that the Company will incur such costs in the future. Expenditures related to environmental activities in 2010, 2009 and 2008 were $1.3, $1.3, and $3.8, respectively.

While the timing and amount of the ultimate costs associated with future environmental cleanup cannot be determined, management expects that these matters will not have a significant effect on the Company’s consolidated financial position.

At December 31, 2010, PACCAR had standby letters of credit of $19.8, which guarantee various insurance and financing activities. The Company is committed, under specific circumstances, to purchase equipment at a cost of $53.4 in 2011. At December 31, 2010, PACCAR’s financial services companies, in the normal course of business, had outstanding commitments to fund new loan and lease transactions amounting to $157.9. The commitments generally expire in 90 days. At December 31, 2010, the Company had commitments related to the construction of its engine facility in Columbus, Mississippi of $25.9 in 2011 and $12.5 thereafter. The Company had other commitments, primarily to purchase production inventory, amounting to $139.0 in 2011 and $103.0 thereafter.

On October 28, 2010, a National Labor Relations Board (NLRB) administrative law judge issued a decision that since the Company did not provide certain information to the union representing employees at Peterbilt’s former truck assembly plant in Madison, Tennessee, during collective bargaining negotiations in 2008, the employer-directed work stoppage was not in conformity with certain provisions of the National Labor Relations Act from July 16, 2008 and that the Company should reimburse approximately 300 plant employees, with interest, for wage and benefit losses incurred during the work stoppage which ended on April 6, 2009. The Company disagrees with this decision and filed its exceptions with the NLRB. The Company believes the range of possible outcomes is between nil and $15.0. No reserve has been provided as the Company believes it will ultimately prevail in the matter.

PACCAR is a defendant in various legal proceedings and, in addition, there are various other contingent liabilities arising in the normal course of business. After consultation with legal counsel, management does not anticipate that disposition of these proceedings and contingent liabilities will have a material effect on the consolidated financial statements.

L.	EMPLOYEE BENEFITS

Severance Costs: The Company did not incur any significant severance expense in 2010 and had $.3 accrued for future severance payments at December 31, 2010. During the years ended December 31, 2009 and 2008 the Company incurred severance costs of $25.9 and $17.3, respectively. These costs were the result of work force adjustments reflecting low truck demand, primarily in Europe.

Employee Benefit Plans: PACCAR has several defined benefit pension plans, which cover a majority of its employees. The Company evaluates its actuarial assumptions on an annual basis and considers changes based upon market conditions and other factors.

The Company funds its pensions in accordance with applicable employee benefit and tax laws. The Company contributed $61.8 to its pension plans in 2010 and $173.4 in 2009. The Company expects to contribute in the range of $20.0 to $50.0 to its pension plans in 2011 of which $18.5 is estimated to satisfy minimum funding requirements. Annual benefits expected to be paid beginning January 1, 2011 are $57.3, $62.9, $67.7, $73.2, $76.5 and for the five years thereafter, a total of $453.7.

N OTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2010, 2009 and 2008 (currencies in millions)

Plan assets are invested in global equity and debt securities through professional investment managers with the objective to achieve targeted risk adjusted returns and maintain liquidity sufficient to fund current benefit payments. Typically, each defined benefit plan has an investment policy that includes a target for asset mix including maximum and minimum ranges for allocation percentages by investment category. The actual allocation of assets may vary at times based upon rebalancing policies and other factors. The Company periodically assesses the target asset mix by evaluating external sources of information regarding the long-term historical return, volatilities and expected future returns for each investment category. In addition, the long-term rates of return assumptions for pension accounting are reviewed annually to ensure they are appropriate. Target asset mix and forecast long-term returns by asset category are considered in determining the assumed long-term rates of return, although historical returns realized are given some consideration.

The following information details the allocation of plan assets by investment type. See Note P for definitions of fair value levels.


*At December 31, 2010*	TARGET			LEVEL 1		LEVEL 2		TOTAL
*Equities:*
U.S. equities				$	38.1	$	431.3	$	469.4
Global equities							394.8		394.8

Total equities		50-70	%		38.1		826.1		864.2


*Fixed Income:*
U.S. fixed income					208.5		172.1		380.6
Non U.S. fixed income							171.0		171.0

Total fixed income		30-50	%		208.5		343.1		551.6

Cash and other					2.7		26.9		29.6

Total plan assets				$	249.3	$	1,196.1	$	1,445.4


At December 31, 2009	TARGET			LEVEL 1		LEVEL 2		TOTAL
Equities:
U.S. equities				$	29.2	$	374.2	$	403.4
Global equities					—		311.4		311.4

Total equities		50-70	%		29.2		685.6		714.8


Fixed Income:
U.S. fixed income					303.2		109.3		412.5
Non U.S. fixed income					13.8		102.4		116.2

Total fixed income		30-50	%		317.0		211.7		528.7

Cash and other					5.6		27.2		32.8

Total plan assets				$	351.8	$	924.5	$	1,276.3

The following additional data relates to all pension plans of the Company, except for certain multi-employer and foreign-insured plans:


At December 31,	2010			2009
Weighted Average Assumptions:
Discount rate		5.4	%		5.9	%
Rate of increase in future compensation levels		3.9	%		3.9	%
Assumed long-term rate of return on plan assets		7.2	%		7.4	%

N OTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2010, 2009 and 2008 (currencies in millions)

The components of the Change in Projected Benefit Obligation and Change in Plan Assets are as follows:


	2010			2009
Change in Projected Benefit Obligation:
Benefit obligation at January 1	$	1,324.8		$	1,196.4
Service cost		37.5			36.2
Interest cost		76.5			71.1
Benefits paid		(56.2	)		(59.6	)
Actuarial loss		99.7			46.7
Currency translation and other		.4			30.9
Participant contributions		2.9			3.1

Projected benefit obligation at December 31	$	1,485.6		$	1,324.8


Change in Plan Assets:
Fair value of plan assets at January 1	$	1,276.3		$	913.8
Employer contributions		61.8			173.4
Actual return on plan assets		162.6			215.9
Benefits paid		(56.2	)		(59.6	)
Currency translation and other		(2.0	)		29.7
Participant contributions		2.9			3.1

Fair value of plan assets at December 31		1,445.4			1,276.3

Funded status at December 31	$	(40.2	)	$	(48.5	)


Amounts Recorded in Balance Sheet:	2010			2009
Other noncurrent assets	$	47.1		$	59.9
Other liabilities		(87.3	)		(108.4	)
Accumulated other comprehensive loss:
Actuarial loss		303.3			291.0
Prior service cost		9.0			9.5
Net initial transition amount		.6			.5

Of the December 31, 2010 amounts in accumulated other comprehensive loss, $22.2 of unrecognized actuarial loss, $1.5 of unrecognized prior service cost are expected to be amortized into net pension expense in 2011.

The accumulated benefit obligation for all pension plans of the Company, except for certain multi-employer and foreign-insured plans was $1,350.3 at December 31, 2010 and $1,214.0 at December 31, 2009.

Information for all plans with accumulated benefit obligation in excess of plan assets is as follows:


At December 31,	2010		2009
Projected benefit obligation	$	266.5	$	429.0
Accumulated benefit obligation		253.7		418.9
Fair value of plan assets		193.9		322.9

N OTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2010, 2009 and 2008 (currencies in millions)


Year Ended December 31,	2010			2009			2008
Components of Pension Expense:
Service cost	$	37.5		$	36.2		$	46.6
Interest on projected benefit obligation		76.5			71.1			73.9
Expected return on assets		(98.2	)		(93.1	)		(92.8	)
Amortization of prior service costs		1.8			1.7			2.4
Recognized actuarial loss		14.7			9.5			3.0
Curtailment (gain) loss					(.1	)		.9

Net pension expense	$	32.3		$	25.3		$	34.0

Pension expense for multi-employer and foreign-insured plans was $33.8, $41.2, and $45.8 in 2010, 2009 and 2008.

The Company has certain defined contribution benefit plans whereby it generally matches employee contributions up to 5% of base wages. The Company match was 3%, 1% and 5% in 2010, 2009 and 2008, respectively. The majority of participants in these plans are non-union employees located in the United States. Expenses for these plans were $13.8, $6.8 and $22.1 in 2010, 2009 and 2008, respectively.

During the second quarter of 2009, the Company discontinued subsidizing postretirement medical costs for the majority of its U.S. employees and recognized a curtailment gain of $47.7. The Company also recognized a curtailment gain of $18.3 in the third quarter of 2009 for the discontinuation of postretirement healthcare related to the permanent closure of the Peterbilt facility in Madison, Tennessee.

The following data relates to unfunded postretirement medical and life insurance plans:


			2010			2009
Change in Projected Benefit Obligation:
Benefit obligation at January 1			$	6.7		$	80.9
Interest cost				.3			.5
Benefits paid				(2.1	)		(3.2	)
Curtailment gain							(66.0	)
Actuarial loss (gain)				.6			(5.5	)

Projected benefit obligation at December 31				5.5			6.7

Unfunded status at December 31			$	(5.5	)	$	(6.7	)


Amounts Recorded in Balance Sheet:
Other liabilities			$	(5.5	)	$	(6.7	)
Accumulated other comprehensive (income) loss:
Actuarial gain				(.5	)		(.9	)


Year Ended December 31,	2010		2009			2008
Components of Retiree Expense:
Service cost						$	3.2
Interest cost	$	.3	$	.5			4.7
Recognized prior service cost							.1
Curtailment gain				(66.0	)
Recognized net initial obligation							.4

Net retiree expense (income)	$	.3	$	(65.5	)	$	8.4

N OTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2010, 2009 and 2008 (currencies in millions)

M.	INCOME TAXES

The Company’s tax rate is based on income and statutory tax rates in the various jurisdictions in which the Company operates. Tax law requires items to be included in the Company’s tax returns at different times than the items reflected in the Company’s financial statements. As a result, the Company’s annual tax rate reflected in its financial statements is different than that reported in its tax returns. Some of these differences are permanent, such as expenses that are not deductible in the Company’s tax return, and some differences reverse over time, such as depreciation expense. These temporary differences create deferred tax assets and liabilities. The Company establishes valuation allowances for its deferred tax assets if, based on the available evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized.

The components of the Company’s income before income taxes include the following:


Year Ended December 31,	2010		2009		2008

Domestic	$	186.3	$	79.1	$	96.0
Foreign		474.0		95.9		1,368.0

	$	660.3	$	175.0	$	1,464.0

The components of the Company’s provision for income taxes include the following:


Year Ended December 31,	2010			2009			2008
Current provision (benefit):
Federal	$	24.5		$	(102.4	)	$	(24.7	)
State		8.2			(2.5	)		(7.9	)
Foreign		123.7			8.3			347.7

		156.4			(96.6	)		315.1

Deferred provision (benefit):
Federal		24.6			125.4			123.7
State		(7.1	)		8.2			12.5
Foreign		28.8			26.1			(5.2	)

		46.3			159.7			131.0

	$	202.7		$	63.1		$	446.1

Tax benefits recognized for net operating loss carryforwards were $9.0, $27.8 and $4.7 for the years ended 2010, 2009, and 2008, respectively.

A reconciliation of the statutory U.S. federal tax rate to the effective income tax rate is as follows:


	2010			2009			2008
Statutory rate		35.0	%		35.0	%		35.0	%
Effect of:
Mexican tax law change					6.5
Qualified dividends to defined contribution plan		(.7	)		(2.3	)		(.4	)
Research and development credit		(.5	)		(2.1	)		(.4	)
Tax on foreign earnings		(3.9	)		.8			(4.6	)
Tax contingencies		(.8	)		2.2			(.3	)
Other, net		1.6			(4.0	)		1.2

		30.7	%		36.1	%		30.5	%

N OTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2010, 2009 and 2008 (currencies in millions)

U.S. income taxes are not provided on the undistributed earnings of the Company’s foreign subsidiaries that are considered to be indefinitely reinvested. At December 31, 2010, the amount of undistributed earnings which are considered to be indefinitely reinvested is $3,146.3. Included in domestic taxable income for 2010, 2009, and 2008 are $169.0, $31.4 and $456.8 of foreign earnings, respectively, which are not indefinitely reinvested, for which domestic taxes of $16.5, $3.7 and $69.1, respectively, were provided as the difference between the domestic and foreign rate on those earnings.

At December 31, 2010, the Company had net operating loss carryforwards of $351.5, of which $222.1 were in foreign subsidiaries and $129.4 were in the U.S. The related deferred tax asset was $68.2. The carryforward periods range from five years to indefinite, subject to certain limitations under applicable laws. At December 31, 2010, the Company has U.S. tax credit carryforwards of $57.5, most of which expire in 2019. The future tax benefits of net operating loss and credit carryforwards are evaluated on a regular basis, including a review of historical and projected operating results.

The tax effects of temporary differences representing deferred tax assets and liabilities are as follows:


At December 31,	2010			2009
Assets:
Accrued expenses	$	112.8		$	123.2
Net operating loss carryforwards		68.2			70.9
Tax credit carryfowards		57.5			68.4
Allowance for losses on receivables		47.3			54.4
Postretirement benefit plans		15.8			15.6
Other		80.9			98.7

		382.5			431.2
Valuation allowance		(12.4	)		(4.0	)

		370.1			427.2
Liabilities:
Financial Services leasing depreciation		(538.7	)		(524.1	)
Depreciation and amortization		(156.0	)		(167.9	)
Other		(4.7	)		(16.9	)

		(699.4	)		(708.9	)

Net deferred tax liability	$	(329.3	)	$	(281.7	)

The balance sheet classification of the Company’s deferred tax assets and liabilities are as follows:


At December 31,	2010			2009
Truck and Other:
Other current assets	$	98.8		$	76.9
Other noncurrent assets		79.2			135.8
Accounts payable, accrued expenses and other					(.1	)
Other liabilities		(26.7	)		(35.0	)
Financial Services:
Other assets		48.9			68.0
Deferred taxes and other liabilities		(529.5	)		(527.3	)

Net deferred tax liability	$	(329.3	)	$	(281.7	)

Cash paid for income taxes was $82.9, $67.3 and $452.0 in 2010, 2009 and 2008, respectively.

N OTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2010, 2009 and 2008 (currencies in millions)

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:


	2010			2009			2008
Balance at January 1	$	37.0		$	33.0		$	48.7
Additions based on tax positions and settlements related to the current year		2.5			1.1			7.1
Additions based on tax positions and settlements related to the prior year		23.5			11.5			3.3
Reductions for tax positions of prior years		(10.7	)		(7.2	)		(19.5	)
Lapse of statute of limitations		(9.2	)		(1.4	)		(6.6	)

Balance at December 31	$	43.1		$	37.0		$	33.0

The Company had $40.6 and $20.8 of related assets at December 31, 2010 and 2009. All of the unrecognized tax benefits and related assets would impact the effective tax rate if recognized.

Interest and penalties are classified as income taxes in the accompanying statements of income and were not significant during any of the three years ended December 31, 2010, 2009, and 2008. Amounts accrued for the payment of penalties and interest at December 31, 2010 and 2009 were also not significant.

As of December 31, 2010, the United States Internal Revenue Service has completed examinations of the Company’s tax returns for all years through 2006. The Company’s tax returns for other major jurisdictions remain potentially subject to examination for the years ranging from 2004 through 2010.

N.	STOCKHOLDERS’ EQUITY

Accumulated Other Comprehensive Income (Loss): Following are the components of accumulated other comprehensive income:


At December 31,	2010			2009			2008
Unrealized gain on investments	$	.8		$	1.4		$	1.0
Tax effect		(.3	)		(.5	)		(.4	)

		.5			.9			.6

Unrealized loss on derivative contracts		(27.1	)		(73.4	)		(121.7	)
Tax effect		9.2			25.0			39.4

		(17.9	)		(48.4	)		(82.3	)

Pension and postretirement:
Unrecognized:
Actuarial loss		(465.1	)		(444.7	)		(525.9	)
Prior service cost		(13.9	)		(14.7	)		(16.0	)
Net initial obligation		(.7	)		(.6	)		(2.3	)
Tax effect		167.3			159.9			195.9

		(312.4	)		(300.1	)		(348.3	)

Currency translation adjustment		371.1			383.8			160.2

Accumulated other comprehensive income (loss)	$	41.3		$	36.2		$	(269.8	)

Other Capital Stock Changes : In April 2010, the Company retired 409,000 of its common shares held as treasury stock. PACCAR had 409,000 treasury shares at December 31, 2009 and 2008.

N OTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2010, 2009 and 2008 (currencies in millions)

O.	DERIVATIVE FINANCIAL INSTRUMENTS

As part of its risk management strategy, the Company enters into derivative contracts to hedge against interest rate and foreign currency risk.

Interest-Rate Contracts : The Company enters into various interest-rate contracts, including interest-rate swaps and cross currency interest-rate swaps. Interest-rate swaps involve the exchange of fixed for floating rate or floating for fixed rate interest payments based on the contractual notional amounts in a single currency. Cross currency interest-rate swaps involve the exchange of notional amounts and interest payments in different currencies. The Company is exposed to interest rate and exchange rate risk caused by market volatility as a result of its borrowing activities. The objective of these contracts is to mitigate the fluctuations on earnings, cash flows and fair value of borrowings. Net amounts paid or received are reflected as adjustments to interest expense.

At December 31, 2010, the notional amount of the Company’s interest-rate contracts was $2,780.7. Notional maturities for all interest-rate contracts are $1,138.4 for 2011, $722.8 for 2012, $373.8 for 2013, $339.9 for 2014, $196.4 for 2015 and $9.4 thereafter. The majority of these contracts are floating to fixed swaps that effectively convert an equivalent amount of commercial paper and other variable rate debt to fixed rates.

Foreign-Exchange Contracts: The Company enters into foreign-exchange contracts to hedge certain anticipated transactions and assets and liabilities denominated in foreign currencies, particularly the Canadian dollar, the euro, the British pound, the Australian dollar and the Mexican peso. The objective is to reduce fluctuations in earnings and cash flows associated with changes in foreign currency exchange rates. At December 31, 2010, the notional amount of the outstanding foreign-exchange contracts was $339.3. Foreign-exchange contracts mature within one year.

The following table presents the balance sheet locations and fair value of derivative financial instruments:


At December 31,	2010				2009
	ASSETS		LIABILITIES		ASSETS		LIABILITIES
Derivatives designated under hedge accounting:
Interest-rate contracts:
Financial Services:
Other assets	$	9.1			$	10.8
Deferred taxes and other liabilities			$	107.5			$	107.1
Foreign-exchange contracts:
Truck and Other:
Other current assets		.9		1.1		.1
Accounts payable, accrued expenses and other								.2

Total	$	10.0	$	108.6	$	10.9	$	107.3


Economic hedges:
Interest-rate contracts:
Financial Services:
Other assets					$	.4
Deferred taxes and other liabilities			$	3.5			$	9.0
Foreign-exchange contracts:
Truck and Other:
Other current assets	$	.1
Accounts payable, accrued expenses and other				.3				.2
Financial Services:
Other assets						.3
Deferred taxes and other liabilities				.2				.1

Total	$	.1	$	4.0	$	.7	$	9.3

N OTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2010, 2009 and 2008 (currencies in millions)

Fair Value Hedges: Changes in the fair value of derivatives designated as fair value hedges are recorded in earnings together with the changes in fair value of the hedged item attributable to the risk being hedged. The (income) or expense recognized in earnings related to fair value hedges was included in Interest and other borrowing expense in the Financial Services segment as follows:


Year Ended December 31,	2010			2009
Interest-rate swaps	$	(1.0	)	$	(3.6	)
Term notes		.9			3.9

Cash Flow Hedges: Substantially all of the Company’s interest-rate contracts and some foreign-exchange contracts have been designated as cash flow hedges. Changes in the fair value of derivatives designated as cash flow hedges are recorded in accumulated other comprehensive income to the extent such hedges are considered effective.

Amounts in accumulated other comprehensive income are reclassified into net income in the same period in which the hedged transaction affects earnings. Net realized gains and losses from interest-rate contracts are recognized as an adjustment to interest expense. Net realized gains and losses from foreign-exchange contracts are recognized as an adjustment to cost of sales or to financial services interest expense, consistent with the hedged transaction. For the periods ended December 31, 2010 and 2009 the Company recognized gains on the ineffective portion of $2.3 and $.2, respectively.

The following table presents the pre-tax effects of derivative instruments recognized in earnings and Other Comprehensive Income (OCI):


Year Ended December 31,	2010					2009
	INTEREST-RATE CONTRACTS		FOREIGN- EXCHANGE CONTRACTS			INTEREST-RATE CONTRACTS		FOREIGN- EXCHANGE CONTRACTS
(Gain) loss recognized in OCI:
Truck and Other			$	(.2	)			$	(.6	)
Financial Services	$	77.0				$	72.0		.2

Total	$	77.0	$	(.2	)	$	72.0	$	(.4	)


(Income) expense reclassified from Accumulated OCI into income:

Truck and Other:
Cost of sales and revenues			$	(.4	)			$	(10.0	)
Interest and other expense (income), net									(1.7	)
Financial Services:
Interest and other borrowing expenses	$	123.5				$	131.4		.2

Total	$	123.5	$	(.4	)	$	131.4	$	(11.5	)

Of the $17.9 accumulated net loss on derivative contracts included in accumulated other comprehensive income as of December 31, 2010, $35.7, before tax effects, is expected to be reclassified to interest expense or cost of sales in the following 12 months. The fixed interest earned on finance receivables will offset the amount recognized in interest expense, resulting in a stable interest margin consistent with the Company’s risk management strategy.

N OTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2010, 2009 and 2008 (currencies in millions)

Economic Hedges: For other risk management purposes, the Company enters into derivative instruments not designated as hedges that do not qualify for hedge accounting. These derivative instruments are used to mitigate the risk of market volatility arising from borrowings and foreign currency denominated transactions. Changes in the fair value of economic hedges are recorded in earnings in the period in which the change occurs.

The (income) or expense recognized in earnings related to economic hedges is as follows:


Year Ended December 31,	2010					2009
	INTEREST-RATE CONTRACTS			FOREIGN- EXCHANGE CONTRACTS		INTEREST-RATE CONTRACTS		FOREIGN- EXCHANGE CONTRACTS
Truck and Other:
Cost of sales and revenues				$	.2			$	(14.4	)
Interest and other expense (income), net	$	.6			8.0	$	6.1		18.3
Financial Services:
Interest and other borrowing expenses		(7.8	)				4.0		2.3

Total	$	(7.2	)	$	8.2	$	10.1	$	6.2

P.	FAIR VALUE MEASUREMENTS

Fair value represents the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The hierarchy of fair value measurements is described below.

Level 1 – Valuations are based on quoted prices that the Company has the ability to obtain in actively traded markets for identical assets or liabilities. Since valuations are based on quoted prices that are readily and regularly available in an active market or exchange traded market, valuation of these instruments does not require a significant degree of judgment.

Level 2 – Valuations are based on quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.

Level 3 – Valuations are based on model-based techniques for which some or all of the assumptions are obtained from indirect market information that is significant to the overall fair value measurement and which require a significant degree of management judgment. The Company has no financial instruments valued under Level 3 criteria.

The Company uses the following methods and assumptions to measure fair value for assets and liabilities subject to recurring fair value measurements.

Marketable Securities : The Company’s marketable debt securities consist of municipal bonds, government obligations, investment-grade corporate obligations, commercial paper, asset-backed securities and term deposits. The fair value of U.S. government obligations is based on quoted prices in active markets. These are categorized as Level 1. The fair value of non U.S. government bonds, municipal bonds, corporate bonds, asset-backed securities, commercial paper and term deposits is estimated using an industry standard valuation model, which is based on the income approach. The significant inputs into the valuation model include quoted interest rates, yield curves, credit rating of the security and other observable market information. These are categorized as Level 2.

Derivative Financial Instruments : The Company’s derivative contracts consist of interest-rate swaps, cross currency swaps and foreign currency exchange contracts. These derivative contracts are over the counter and their fair value is determined using industry standard valuation models, which are based on the income approach. The significant inputs into the valuation models include market inputs such as interest rates, yield curves, currency exchange rates, credit default swap spreads and forward spot rates. These contracts are categorized as Level 2.

N OTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2010, 2009 and 2008 (currencies in millions)

PACCAR’s assets and liabilities subject to recurring fair value measurements are either Level 1 or Level 2 as follows:


*At December 31, 2010*	LEVEL 1		LEVEL 2		TOTAL
Assets:
Marketable debt securities
U.S. government securities	$	2.7			$	2.7
U.S. tax-exempt securities			$	365.4		365.4
U.S. corporate securities				27.6		27.6
Non U.S. corporate securities				37.0		37.0
Other debt securities				17.8		17.8

Total marketable debt securities	$	2.7	$	447.8	$	450.5

Derivatives
Interest-rate swaps			$	5.8	$	5.8
Cross currency swaps				3.3		3.3
Foreign-exchange contracts				1.0		1.0

Total derivative assets			$	10.1	$	10.1

Liabilities:
Derivatives
Interest-rate swaps			$	37.2	$	37.2
Cross currency swaps				73.8		73.8
Foreign-exchange contracts				1.6		1.6

Total derivative liabilities			$	112.6	$	112.6

At December 31, 2009	LEVEL 1		LEVEL 2		TOTAL
Assets:
Marketable debt securities
U.S. government securities	$	6.5			$	6.5
U.S. tax-exempt securities			$	142.5		142.5
U.S. corporate securities				22.1		22.1
Non U.S. corporate securities				22.0		22.0
Non U.S. government securities				12.2		12.2
Other debt securities				14.2		14.2

Total marketable debt securities	$	6.5	$	213.0	$	219.5
Derivatives
Interest-rate swaps			$	5.3	$	5.3
Cross currency swaps				5.9		5.9
Foreign-exchange contracts				.4		.4

Total derivative assets			$	11.6	$	11.6

Liabilities:
Derivatives
Interest-rate swaps			$	82.2	$	82.2
Cross currency swaps				33.9		33.9
Foreign-exchange contracts				.5		.5

Total derivative liabilities			$	116.6	$	116.6

N OTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2010, 2009 and 2008 (currencies in millions)

Other nonfinancial assets that are measured at fair value on a nonrecurring basis are as follows:


At December 31,	2010		2009
	LEVEL 2		LEVEL 2
Impaired loans:
Financial Services	$	33.2	$	55.2

Used trucks held for sale:
Truck and Other	$	20.0	$	28.1
Financial Services		38.2		124.7

	$	58.2	$	152.8

The carrying amount of used trucks held for sale and collateral dependent impaired loans are adjusted when appropriate to reflect their fair value. The fair value of used trucks and collateral dependent impaired loans are determined from a matrix pricing model, which is based on the market approach. The significant observable inputs into the valuation model are recent sales prices of comparable units, the condition of the vehicles and the number of similar units to be sold.

For the year ended December 31, 2010 used truck write-downs were $5.3, recorded as Depreciation and other in the Financial Services segment. The amount of used truck write-downs was $34.7 for the year ended December 31, 2009, of which $18.0 was recorded in cost of sales in the Truck segment and $16.7 was recorded in the Financial Services segment (Provision for losses on receivables of $4.7 and Depreciation and other expense of $12.0).

The Company used the following methods and assumptions to determine the fair value of financial instruments that are not recognized at fair value as described below.

Cash and Cash Equivalents: Carrying amounts approximate fair value.

Financial Services Net Receivables: For floating-rate loans, wholesale financings, and interest and other receivables, fair values approximate carrying values. For fixed-rate loans, fair values are estimated using discounted cash flow analysis based on current rates for comparable loans. Finance lease receivables and related loss provisions have been excluded from the accompanying table.

Debt: The carrying amounts of financial services commercial paper, variable-rate bank loans and variable-rate term notes approximate fair value. For fixed-rate debt, fair values are estimated using discounted cash flow analysis based on current rates for comparable debt.

Trade Receivables and Payables: Carrying amounts approximate fair value.

Fixed-rate loans and debt that are not carried at approximate fair value are as follows:

At December 31,

2010

2009

CARRYING
AMOUNT

FAIR
VALUE

CARRYING
AMOUNT

FAIR
VALUE

Assets:

Financial Services fixed-rate loans

2,444.1

2,483.3

2,491.1

2,539.0

Liabilities:

Truck and Other fixed-rate debt

173.5

196.9

172.3

192.4

Financial Services fixed-rate debt

1,870.7

1,967.9

1,645.4

1,746.7

N OTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2010, 2009 and 2008 (currencies in millions except per share amounts)

Q.	STOCK COMPENSATION PLANS

PACCAR has certain plans under which officers and key employees may be granted options to purchase shares of the Company’s authorized but unissued common stock under plans approved by stockholders. Non-employee directors and certain officers may be granted restricted shares of the Company’s common stock under plans approved by stockholders. Options outstanding under these plans were granted with exercise prices equal to the fair market value of the Company’s common stock at the date of grant. Options expire no later than ten years from the grant date and generally vest after three years. Restricted stock awards generally vest after three years.

The Company recognizes compensation cost on these options and restricted stock awards on a straight line basis over the requisite period the employee is required to render service. The maximum number of shares of the Company’s common stock authorized for issuance under these plans is 46.7 million shares and as of December 31, 2010, the maximum number of shares available for future grants was 18.5 million.

The estimated fair value of each option award is determined on the date of grant using the Black-Scholes-Merton option pricing model that uses assumptions noted in the following table. The risk free interest rate is based on the US Treasury yield curve in effect at the time of grant. Expected volatility is based on historical volatility. The dividend yield is based on an estimated future dividend yield using projected net income for the next five years, implied dividends and Company stock price. The expected term is based on the period of time that options granted are expected to be outstanding based on historical experience.


	2010			2009			2008
Risk-free interest rate		2.48	%		2.00	%		2.86	%
Expected volatility		44	%		39	%		29	%
Expected dividend yield		2.5	%		3.0	%		4.0	%
Expected term		5 years			5 years			5 years
Weighted average grant date fair value of options per share	$	11.95		$	8.47		$	8.58

The fair value of options granted was $11.7, $10.0 and $6.3 for the years ended December 31, 2010, 2009 and 2008, respectively.

A summary of activity under the Company’s stock plans is presented below.


	2010		2009		2008
Intrinsic value of options exercised	$	33.7	$	22.7	$	10.8
Cash received from stock option exercises		22.0		17.6		11.5
Tax benefit related to stock option exercises		10.8		7.1		3.7
Stock based compensation		8.5		9.5		10.2
Tax benefit related to stock based compensation		3.2		3.5		3.8

N OTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2010, 2009 and 2008 (currencies in millions except per share amounts)

The summary of options as of December 31, 2010, and changes during the year then ended is presented below.


	NUMBER OF SHARES			EXERCISE PRICE*		REMAINING CONTRACTUAL LIFE IN YEARS*		AGGREGATE INTRINSIC VALUE

Options outstanding at January 1		5,567,700		$	29.12
Granted		975,500			36.12
Exercised		(1,118,000	)		19.72
Cancelled		(142,900	)		37.50

Options outstanding at December 31		5,282,300		$	32.18		6.01	$	132.9

Vested and expected to vest at December 31		5,091,300		$	32.11		5.91	$	128.4

Exercisable at December 31		2,686,100		$	28.47		3.84	$	77.5

*	Weighted Average

The fair value of restricted shares is determined based upon the stock price on the date of grant. The summary of nonvested restricted shares as of December 31, 2010 and changes during the year then ended is presented below:


NONVESTED SHARES	NUMBER OF SHARES			GRANT DATE FAIR VALUE*

Nonvested awards outstanding at January 1		182,900		$	39.25
Granted		24,600			36.61
Vested		(62,000	)		40.69
Forfeited		(2,900	)		35.22

Nonvested awards outstanding at December 31		142,600		$	38.25

*	Weighted Average

As of December 31, 2010, there was $9.7 million of total unrecognized compensation cost related to nonvested stock options, which is recognized over a remaining weighted average vesting period of 1.45 years. Unrecognized compensation cost related to nonvested restricted stock awards of $.8 million is expected to be recognized over a remaining weighted average vesting period of 1.1 years.

A total of 187,500 performance based restricted stock awards were granted in 2008 and 2007 at a weighted-average fair value of $43.61. These awards vest after five years if the Company’s earnings per share growth over the same five year period meet or exceed certain performance goals. No matching shares were granted under this program in 2010 or 2009.

The fair value of the performance based restricted stock awards were determined based on the stock price on the grant date. Compensation expense for awards with performance conditions is recorded only when it is probable that the requirements will be achieved. As of December 31, 2010, 2009 and 2008, the attainment of the conditions of the awards was not considered probable.

N OTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2010, 2009 and 2008 (currencies in millions)

R.	SEGMENT AND RELATED INFORMATION

PACCAR operates in two principal segments, Truck and Financial Services.

The Truck segment includes the manufacture of trucks and the distribution of related aftermarket parts, both of which are sold through a network of independent dealers. This segment derives a large proportion of its revenues and operating profits from operations in North America and Europe.

The Financial Services segment is composed of finance and leasing products and services provided to truck customers and dealers. Revenues are primarily generated from operations in North America and Europe.

Included in All Other is PACCAR’s industrial winch manufacturing business. Also within this category are other sales, income and expenses not attributable to a reportable segment, including a portion of corporate expense. Intercompany interest income on cash advances to the financial services companies is included in All Other and was nil for 2010 and 2009 and $17.2 in 2008. Included in All Other income before income taxes of $42.2 in 2009 was $66.0 of curtailment gains and $22.2 of expense related to economic hedges. Geographic revenues from external customers are presented based on the country of the customer.

PACCAR evaluates the performance of its Truck segment based on operating profits, which excludes investment income, other income and expense and income taxes. The Financial Services segment’s performance is evaluated based on income before income taxes.


Geographic Area Data	2010		2009		2008
Revenues:
United States	$	4,195.8	$	3,594.4	$	4,765.6
Europe		3,472.3		2,828.3		7,023.4
Other		2,624.8		1,663.8		3,183.5

	$	10,292.9	$	8,086.5	$	14,972.5


Property, plant and equipment, net:
United States	$	846.4	$	814.6	$	820.7
The Netherlands		381.6		452.8		467.3
Other		445.7		490.3		494.8

	$	1,673.7	$	1,757.7	$	1,782.8


Equipment on operating leases, net:
United States	$	666.9	$	686.6	$	634.9
Germany		334.0		362.7		358.4
United Kingdom		384.9		349.7		290.9
Mexico		200.4		186.7		212.4
Other		433.1		431.3		463.5

	$	2,019.3	$	2,017.0	$	1,960.1

N OTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2010, 2009 and 2008 (currencies in millions)


Business Segment Data:	2010			2009			2008
Net sales and revenues:
Truck	$	9,591.3		$	7,388.6		$	14,142.7
Less intersegment		(354.0	)		(394.6	)		(595.3	)

Net Truck		9,237.3			6,994.0		$	13,547.4
All Other		87.8			82.7			162.2

Truck and Other		9,325.1			7,076.7		$	13,709.6
Financial Services		967.8			1,009.8			1,262.9

	$	10,292.9		$	8,086.5		$	14,972.5


Income before income taxes:
Truck	$	501.0		$	25.9		$	1,156.5
All Other		(15.3	)		42.2			6.0

		485.7			68.1			1,162.5
Financial Services		153.5			84.6			216.9
Investment income		21.1			22.3			84.6

	$	660.3		$	175.0		$	1,464.0


Depreciation and amortization:
Truck	$	276.7		$	277.2		$	309.0
Financial Services		337.5			364.4			333.1
All Other		9.0			10.1			11.0

	$	623.2		$	651.7		$	653.1

Expenditures for long-lived assets:
Truck	$	373.9		$	324.2		$	671.6
Financial Services		505.6			646.0			859.4
All Other		4.3			.8			19.0

	$	883.8		$	971.0		$	1,550.0


Segment assets:
Truck	$	3,742.2		$	3,849.1		$	3,939.3
Other		181.2			232.6			205.5
Cash and marketable securities		2,432.5			2,056.0			2,074.6

		6,355.9			6,137.7			6,219.4
Financial Services		7,878.2			8,431.3			10,030.4

	$	14,234.1		$	14,569.0		$	16,249.8

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER

FINANCIAL REPORTING

The management of PACCAR Inc (the Company) is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

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

Management assessed the Company’s internal control over financial reporting as of December 31, 2010, based on criteria for effective internal control over financial reporting described in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, we concluded that the Company maintained effective internal control over financial reporting as of December 31, 2010.

Ernst & Young LLP, the Independent Registered Public Accounting Firm that audited the financial statements included in this Annual Report, has issued an attestation report on the Company’s internal control over financial reporting. The attestation report is included on page 77.

/s/ Mark C. Pigott

Mark C. Pigott

Chairman and Chief Executive Officer

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON

THE COMPANY’S CONSOLIDATED FINANCIAL STATEMENTS

The Board of Directors and Stockholders of PACCAR Inc

We have audited the accompanying consolidated balance sheets of PACCAR Inc as of December 31, 2010 and 2009, and the related consolidated statements of income, comprehensive income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2010. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of PACCAR Inc at December 31, 2010 and 2009, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2010, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), PACCAR Inc's internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 1, 2011 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

Ernst &Young LLP

Seattle, Washington

March 1, 2011

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON

THE COMPANY’S INTERNAL CONTROL OVER FINANCIAL REPORTING

The Board of Directors and Stockholders of PACCAR Inc

We have audited PACCAR Inc’s internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). PACCAR Inc’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, PACCAR Inc maintained, in all material respects, effective internal control over financial reporting as of December 31, 2010, based on the COSO criteria .

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of PACCAR Inc as of December 31, 2010 and 2009, and the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2010 and our report dated March 1, 2011 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

Ernst &Young LLP

Seattle, Washington

March 1, 2011

S ELECTED F INANCIAL DATA


	2010		2009		2008		2007		2006
	(millions except per share data)

Truck and Other Net Sales and Revenues	$	9,325.1	$	7,076.7	$	13,709.6	$	14,030.4	$	15,503.3
Financial Services Revenue		967.8		1,009.8		1,262.9		1,191.3		950.8

Total Revenues	$	10,292.9	$	8,086.5	$	14,972.5	$	15,221.7	$	16,454.1

Net Income	$	457.6	$	111.9	$	1,017.9	$	1,227.3	$	1,496.0
Net Income Per Share:
Basic		1.25		.31		2.79		3.31		3.99
Diluted		1.25		.31		2.78		3.29		3.97
Cash Dividends Declared Per Share		.69		.54		.82		1.65		1.84
Total Assets:
Truck and Other		6,355.9		6,137.7		6,219.4		6,599.9		6,296.2
Financial Services		7,878.2		8,431.3		10,030.4		10,710.3		9,811.2
Truck and Other Long-Term Debt		173.5		172.3		19.3		23.6		20.2
Financial Services Debt		5,102.5		5,900.5		7,465.5		7,852.2		7,259.8
Stockholders' Equity		5,357.8		5,103.7		4,846.7		5,013.1		4,456.2
Ratio of Earnings to Fixed Charges		4.07x		1.57x		4.58x		5.36x		7.78x

COMMON STOCK MARKET PRICES AND DIVIDENDS

Common stock of the Company is traded on the NASDAQ Global Select Market under the symbol PCAR. The table below reflects the range of trading prices as reported by The NASDAQ Stock Market LLC, and cash dividends declared. There were 2,159 record holders of the common stock at December 31, 2010.

2010

2009

Quarter

CASH
DIVIDENDS
DECLARED

STOCK PRICE

CASH
DIVIDENDS
DECLARED

STOCK PRICE

HIGH

LOW

HIGH

LOW

First

.09

43.64

33.79

.18

32.04

20.89

Second

.09

47.81

38.66

.18

35.83

26.14

Third

.09

47.90

38.95

.09

39.74

29.13

Fourth

.12

57.49

47.32

.09

39.68

35.31

Year-End Extra

.30

The Company expects to continue paying regular cash dividends, although there is no assurance as to future dividends because they are dependent upon future earnings, capital requirements and financial conditions.

QUARTERLY RESULTS (UNAUDITED)


	QUARTER
	FIRST		SECOND		THIRD		FOURTH
	(millions except per share data)
2010
Truck and Other:
Net sales and revenues	$	1,984.3	$	2,224.8	$	2,304.2	$	2,811.8
Cost of sales and revenues		1,767.8		1,954.9		2,019.2		2,456.9
Research and development		54.8		58.4		59.9		65.4
Financial Services:
Revenues		246.4		239.3		238.3		243.8
Interest and other borrowing expenses		57.1		54.5		51.8		49.6
Depreciation and other (a)		121.3		110.9		110.3		109.1
Net Income		68.3		99.6		119.9		169.8
Net Income Per Share:
Basic	$	.19	$	.27	$	.33	$	.46
Diluted		.19		.27		.33		.46

2009
Truck and Other:
Net sales and revenues	$	1,730.4	$	1,602.3	$	1,758.5	$	1,985.5
Cost of sales and revenues		1,561.1		1,492.8		1,646.5		1,783.0
Research and development		52.3		52.8		43.4		50.7
Financial Services:
Revenues		255.8		246.6		252.5		254.9
Interest and other borrowing expenses		91.3		73.0		66.7		60.8
Depreciation and other (a)		105.3		112.8		123.6		114.4
Net Income		26.3		26.5		13.0		46.1
Net Income Per Share:
Basic	$	.07	$	.07	$	.04	$	.13
Diluted		.07		.07		.04		.13

(a)	Amounts reflect certain reclassifications to conform with current year presentation. See Note A in the notes to the consolidated financial statements.

MARKET RISKS AND DERIVATIVE INSTRUMENTS

(currencies in millions)

Interest-Rate Risks - S ee Note O for a description of the Company’s hedging programs and exposure to interest-rate fluctuations. The Company measures its interest-rate risk by estimating the amount by which the fair value of interest rate sensitive assets and liabilities, including derivative financial instruments, would change assuming an immediate 100 basis point increase across the yield curve as shown in the following table:


Fair Value Gains (Losses)	2010			2009
CONSOLIDATED:
Assets
Cash equivalents and marketable securities	$	(5.7	)	$	(2.4	)
TRUCK AND OTHER:
Liabilities
Fixed-rate long-term debt		5.2			6.8
FINANCIAL SERVICES:
Assets
Fixed-rate loans		(40.2	)		(40.1	)
Liabilities
Fixed-rate term debt		30.9			39.7
Interest rate swaps related to financial services debt		37.0			30.8

Total	$	27.2		$	34.8

Currency Risks - The Company enters into foreign currency exchange contracts to hedge its exposure to exchange rate fluctuations of foreign currencies, particularly the Canadian dollar, the euro, the British pound and the Mexican peso ( See Note O for additional information concerning these hedges ). Based on the Company’s sensitivity analysis, the potential loss in fair value for such financial instruments from a 10% unfavorable change in quoted foreign currency exchange rates would be a loss of $15.0 related to contracts outstanding at December 31, 2010, compared to a loss of $24.0 at December 31, 2009. These amounts would be largely offset by changes in the values of the underlying hedged exposures.

Exhibit 21

SUBSIDIARIES OF THE REGISTRANT


Name(a)	State or Country of Incorporation	Names Under Which Company Or Subsidiaries Do Business

PACCAR of Canada Ltd.	Canada	PACCAR of Canada Ltd.

		Canadian Kenworth Co.

		Peterbilt of Canada

		PACCAR Parts of Canada

		PACCAR Leasing of Canada a
		division of PACCAR of Canada Ltd.

PACCAR Australia Pty. Ltd.	Australia	PACCAR Australia Pty. Ltd.

		Kenworth Trucks

		DAF Trucks Australia

PACCAR Financial Pty. Ltd.	Australia	PACCAR Financial Pty. Ltd.

PACCAR Mexico, S.A. de C.V.	Mexico	PACCAR Mexico, S.A. de C.V.
		KENFABRICA, S.A. de C.V.
		Kenworth Mexicana S.A. de C.V.
		PACCAR Parts Mexico S.A. de C.V.
		PACCAR Capital Mexico S.A. de C.V.
		PacLease Mexicana S.A. de C.V.

PACCAR Financial Mexico	Mexico	PACCAR Financial Mexico

DAF Trucks, N.V. (a)(b)	Netherlands	DAF Trucks, N.V.

DAF Trucks Vlaanderen N.V. (c)	Belgium	DAF Trucks Vlaanderen N.V.

DAF Trucks Ltd. (c)	United Kingdom	DAF Trucks Ltd.

DAF Trucks Deutschland GmbH (c)	Germany	DAF Trucks Deutschland GmbH

DAF Trucks France, S.A.R.L. (c)	France	DAF Trucks France, S.A.R.L.

DAF Vehiculos Industriales S.A. (c)	Spain	DAF Vehiculos Industriales S.A.

DAF Veicoli Industriali S.p.A. (c)	Italy	DAF Veicoli Industriali S.p.A.

PACCAR Parts U.K. Limited (d)	England and Wales	PACCAR Parts U.K. Limited

Leyland Trucks Limited (e)	England and Wales	Leyland Trucks Limited

PACCAR Engine Company	Mississippi	PACCAR Engine Company

PACCAR Financial Services Corp.	Washington	PACCAR Financial Services Corp.

PACCAR Financial Corp. (f)	Washington	PACCAR Financial Corp.
		PACCAR Leasing Company
		PacLease

PACCAR Financial Services Ltd.	Canada	PACCAR Financial Services Ltd.

PACCAR Financial Ltd. (g)	Canada	PACCAR Financial Ltd.

PACCAR Sales North America, Inc.	Delaware	PACCAR Sales North America, Inc.

SUBSIDIARIES OF THE REGISTRANT


Name(a)	State or Country of Incorporation	Names Under Which Company Or Subsidiaries Do Business

PACCAR Holding B.V. (h)	Netherlands	PACCAR Holding B.V.

PACCAR Financial Europe B.V. (b)	Netherlands	PACCAR Financial Europe B.V.

PACCAR Financial Holdings	Netherlands	PACCAR Financial Holdings
Europe B.V. (i)		Europe B.V.

PACCAR Financial Belux BVBA (j)	Belgium	PACCAR Financial Belux BVBA

PACCAR Financial	Germany	PACCAR Financial
Deutschland GmbH (j)		Deutschland GmbH

PACCAR Leasing GmbH (j)	Germany	PACCAR Leasing Europe

PACCAR Financial Espana S.r.l. (j)	Spain	PACCAR Financial Espana S.r.l.

PACCAR Financial France S.A.S. (j)	France	PACCAR Financial France S.A.S.

PACCAR Financial Italia Srl (j)	Italy	PACCAR Financial Italia Srl

PACCAR Financial PLC (j)	United Kingdom	PACCAR Financial PLC

PACCAR Financial Nederland B.V. (j)	Netherlands	PACCAR Financial Nederland B.V.

PACCAR Financial Services
Europe B.V. (j)	Netherlands	PACCAR Financial Services
		Europe B.V.

(a)	The names of some subsidiaries have been omitted. Considered in the aggregate, omitted subsidiaries would not constitute a significant subsidiary.

(b)	A wholly owned subsidiary of PACCAR Holding B.V.

(c)	A wholly owned subsidiary of DAF Trucks, N.V.

(d)	A wholly owned subsidiary of PACCAR Trucks U.K. Ltd., which is a wholly owned subsidiary of PACCAR Holding B.V.

(e)	A wholly owned subsidiary of PACCAR Parts U.K. Limited

(f)	A wholly owned subsidiary of PACCAR Financial Services Corp.

(g)	A wholly owned subsidiary of PACCAR Financial Services Ltd.

(h)	A wholly owned subsidiary of PACCAR Sales North America, Inc.

(i)	A wholly owned subsidiary of PACCAR Financial Europe B.V.

(j)	A wholly owned subsidiary of PACCAR Financial Holdings Europe B.V.

Exhibit 23

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in this Annual Report (Form 10-K) of PACCAR Inc of our reports dated March 1, 2011, with respect to the consolidated financial statements of PACCAR Inc, and the effectiveness of internal control over financial reporting of PACCAR Inc, included in the 2010 Annual Report to Stockholders of PACCAR Inc.

We also consent to the incorporation by reference in the following Registration Statements:

the Registration Statement (Form S-8 No. 33-47763) pertaining to the 1991 Long-Term Incentive Plan of PACCAR Inc

the Registration Statement (Form S-8 No. 333-39161) pertaining to the 1991 Long-Term Incentive Plan of PACCAR Inc

the Registration Statement (Form S-8 No. 333-103706) pertaining to the 1991 Long-Term Incentive Plan of PACCAR Inc

the Registration Statement (Form S-8 No. 333-36712) pertaining to the PACCAR Inc Restricted Stock and Deferred Compensation Plan for Non-Employee Directors

the Registration Statement (Form S-8 No. 333-120238) pertaining to the PACCAR Inc Restricted Stock and Deferred Compensation Plan for Non-Employee Directors

the Registration Statement (Form S-8 No. 333-52230) pertaining to the PACCAR Inc Savings Investment Plan

the Registration Statement (Form S-8 No. 333-139544) pertaining to the PACCAR Inc Savings Investment Plan

the Registration Statement (Form S-3 No. 333-155429) pertaining to the issuance of Senior Debt Securities.

of our reports dated March 1, 2011, with respect to the consolidated financial statements of PACCAR Inc, and the effectiveness of internal control over financial reporting of PACCAR Inc incorporated by reference in this Annual Report (Form 10-K) of PACCAR Inc.

/s/ Ernst and Young LLP

Ernst and Young LLP

Seattle, Washington

March 1, 2011

Exhibit 24

POWER OF ATTORNEY

We, the undersigned directors of PACCAR Inc, a Delaware corporation, hereby severally constitute and appoint M. C. Pigott our true and lawful attorney-in-fact, to sign for us, and in our names in our capacity as director, a Form 10-K on behalf of the Company for the year ending December 31, 2010, to be filed with the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended.

IN WITNESS WHEREOF, each of the undersigned has executed this power of attorney as of this 7 ^th day of December 2010.


/s/ A. J. Carnwath				/s/ J. M. Pigott
A. J. Carnwath				J. M. Pigott
Director, PACCAR Inc				Director, PACCAR Inc

/s/ J. M. Fluke, Jr.				/s/ W. G. Reed, Jr.
J. M. Fluke, Jr.				W. G. Reed, Jr.
Director, PACCAR Inc				Director, PACCAR Inc

/s/ K. S. Hachigian				/s/ G. M. E. Spierkel
K. S. Hachigian				G.M. E. Spierkel
Director, PACCAR Inc				Director, PACCAR Inc

/s/ S. F. Page				/s/ W. R. Staley
S. F. Page				W. R. Staley
Director, PACCAR Inc				Director, PACCAR Inc

/s/ R. T. Parry				/s/ C. R. Willamson
R. T. Parry				C. R. Williamson
Director, PACCAR Inc				Director, PACCAR Inc

Exhibit 31(a)

CERTIFICATION

I, Mark C. Pigott, certify that:

1.	I have reviewed this annual report on Form 10-K of PACCAR Inc;

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

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

The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.	The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting.



Date		March 1, 2011

/s/ Mark C. Pigott

Mark C. Pigott

Chairman and Chief Executive Officer

(Principal Executive Officer)

Exhibit 31(b)

CERTIFICATION

I, Thomas E. Plimpton, certify that:

1.	I have reviewed this annual report on Form 10-K of PACCAR Inc;

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

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

5.	The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting.



Date		March 1, 2011

/s/ Thomas E. Plimpton

Thomas E. Plimpton

Vice Chairman

(Principal Financial Officer)

Exhibit 32

CERTIFICATION PURSUANT TO SECTION 906

OF THE SARBANES-OXLEY ACT OF 2002 (18 U.S.C. SECTION 1350)

In connection with the Annual Report of PACCAR Inc (the “Company”) on Form 10-K for the year ended December 31, 2010 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned certify, pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. section 1350), that to the best of our knowledge and belief:

(1)	The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.


Date	March 1, 2011	By	/s/ Mark C. Pigott
			Mark C. Pigott
			Chairman and
			Chief Executive Officer
			PACCAR Inc

		By	/s/ Thomas E. Plimpton
			Thomas E. Plimpton
			Vice Chairman
			PACCAR Inc
			(Principal Financial Officer)

A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.