2008 annual report

STATEMENT OF COMPANY BUSINESS STOCKHOLDERS’ INFORMATION

PACCAR is a global technology company that manufactures Class 8 commercial vehicles sold around the world under the Kenworth, Peterbilt and DAF nameplates. Corporate Offices Stock Transfer AeroCab, AERODYNE, PACCAR Building and Dividend Air Leaf, Braden, Carco, The company competes in the North American Class 5-7 market with its medium- 777 106th Avenue N.E. Dispersing Agent ComfortClass, DAF, Bellevue, Washington Wells Fargo Bank Gearmatic, Kenmex, 98004 Minnesota, N.A. Kenworth, Kenworth Clean duty models assembled in North America and sold under the Peterbilt and Kenworth Shareowner Services Power, Leyland, PACCAR, Mailing Address P.O. Box 64854 PACCAR MX, PACCAR PX, nameplates. The company also manufactures Class 4-7 trucks in the United P.O. Box 1518 St. Paul, Minnesota PacLease, PacTrac, Peterbilt, Bellevue, Washington 55164-0854 PX-6, PX-8, TRP, UltraCab 98009 800.468.9716 and Unibilt are trademarks Kingdom for sale throughout Europe, the Middle East, Australia and Africa under www.wellsfargo.com/ owned by PACCAR Inc and Telephone shareownerservices its subsidiaries. the DAF nameplate. PACCAR distributes aftermarket truck parts to its dealers 425.468.7400 PACCAR’s transfer agent Independent Auditors Facsimile maintains the company’s Ernst & Young LLP through a worldwide network of Parts Distribution Centers. Finance and leasing 425.468.8216 shareholder records, issues Seattle, Washington stock certificates and subsidiaries facilitate the sale of PACCAR products in many countries worldwide. Web site distributes dividends and SEC Form 10-K www.paccar.com IRS Form 1099. Requests PACCAR’s annual report concerning these matters to the Securities and Significant company assets are employed in financial services activities. PACCAR should be directed to Exchange Commission Wells Fargo. will be furnished to manufactures and markets industrial winches under the Braden, Gearmatic and stockholders on request Online Delivery of to the Corporate Annual Report and Proxy Secretary, PACCAR Inc, Carco nameplates. PACCAR maintains exceptionally high standards of quality for Statement P.O. Box 1518, Bellevue, PACCAR’s 2008 Annual Washington 98009. It is all of its products: they are well engineered, are highly customized for specific Report and the 2009 Proxy also available online at Statement are available www.paccar.com/investors/ applications and sell in the premium segments of their markets, where they have a on PACCAR’s Web site at investor_resources.asp, www.paccar.com/ under SEC Filings. 2008annualmeeting/ reputation for superior performance and pride of ownership. Annual Stockholders’ Stockholders who hold Meeting PACCAR stock in street April 28, 2009, 10:30 a.m. name may inquire of their Meydenbauer Center bank or broker about the 11100 N.E. Sixth Street availability of electronic Bellevue, Washington delivery of annual 98004 meeting documents. An Equal Opportunity Employer CONTENTS

 Financial Highlights 50 Management’s Report on Internal Control  Message to Shareholders Over Financial Reporting This report was printed on recycled paper. 6 PACCAR Operations 50 Report of Independent Registered Public  Financial Charts Accounting Firm on the Company’s 3 Stockholder Return Performance Graph Consolidated Financial Statements 4 Management’s Discussion and Analysis 5 Report of Independent Registered Public 3 Consolidated Statements of Income Accounting Firm on the Company’s 3 Consolidated Balance Sheets Internal Controls 34 Consolidated Statements of Cash Flows 5 Selected Financial Data 35 Consolidated Statements 5 Common Stock Market Prices and Dividends of Stockholders’ Equity 53 Quarterly Results 36 Consolidated Statements 54 Market Risks and Derivative Instruments of Comprehensive Income 55 Officers and Directors 36 Notes to Consolidated Financial Statements 56 Divisions and Subsidiaries Financial highlights

2008 2007

(millions except per share data) 1 Truck and Other Net Sales and Revenues $13,709.6 $14,030.4 Financial Services Revenues 1,262.9 1,191.3 Total Revenues 14,972.5 15,221.7 Net Income 1,017.9 1,227.3 Total Assets: Truck and Other 6,219.4 6,599.9 Financial Services 10,030.4 10,710.3 Truck and Other Long-Term Debt 19.3 23.6 Financial Services Debt 7,465.5 7,852.2 Stockholders’ Equity 4,846.7 5,013.1 Per Common Share: Net Income: Basic $ 2.79 $$ 3.31 Diluted 2.78 3.29 Cash Dividends Declared 0.82 1.65

REVEE nU s n Et incomE stockholdERs’ EqUity REVENUES NET INCOME STOCKHOLDERS’ EQUITY billionsbillions ofof dollars dollars billionsbillions of o f dollars dol lar s billionsbillions ofof dollarsdollars 17.5 10% 1.5 40% 5

14.0 8% 1.2 32% 4

10.5 6% 0.9 24% 3

7.0 4% 0.6 16% 2

3.5 2% 0.3 8% 1

0.0 0% 0.0 0% 0 99 00 01 02 03 04 05 06 07 08 99 00 01 02 03 04 05 06 07 08 99 00 01 02 03 04 05 06 07 08

Return on Revenues (percent) Return on Equity (percent)

PACCAR Inc and Subsidiaries to oUR shaREholdERs

PaccaR had a very good year in 2008, even as the global recession had an

2 increasingly negative impact on the company’s results throughout the year. PaccaR’s

success is due to its global diversification, superior product quality, technology-led

process efficiency and strong results from aftermarket parts and financial services.

the company has delivered an impressive 70 consecutive years of net income.

customers benefited from PaccaR’s record $805 million of capital investments and

research and development, which enhanced manufacturing capability, developed

innovative aftermarket support programs and accelerated new product introductions.

PaccaR delivered 126,000 trucks to its customers and sold $2.3 billion of aftermarket

parts. PaccaR had record truck deliveries in Europe, which were offset by a depressed

truck market in the U.s. and canada. PaccaR Financial services generated $3.4

billion of new loan and lease business.

net income of $1.02 billion on revenues of $15.0 billion was the fourth highest in

the company’s 103-year history. PaccaR declared cash dividends of $.82 per share,

including a special dividend of $.10 per share. Regular quarterly cash dividends have

increased over 500 percent in the last 10 years.

Industry Class 8 truck sales in North America, including capital goods companies worldwide. After-tax return on Mexico, declined to 179,000 vehicles, compared to beginning shareholder equity (ROE) was 20.3 percent in 207,000 the prior year. Over 3,000 fleets declared 2008, compared to 27.5 percent in 2007. The company’s bankruptcy due to lower freight volume, higher fuel 2008 after-tax return on revenues was 6.8 percent. prices and the recessionary economy. The European PACCAR has distributed over $3.5 billion in dividends heavy truck market in 2008 was 334,000 vehicles, and increased shareholder equity to $4.85 billion during compared to 337,000 in 2007, a strong performance that the last ten years. PACCAR’s average annual total declined abruptly in the fourth quarter 2008. Many of shareholder return was 17.6 percent over the last decade, our competitors are discounting their vehicles below versus a negative 1.4 percent for the Standard & Poor’s cost in the challenging market. There may be some 500 Index. The fragility of global financial institutions competitors exiting the business in the next few years provided a timely reminder of the merits of PACCAR’s due to lack of profitability. conservative business approach and quality product and Even in this troubled market, PACCAR continued to customer service focus. be one of the leaders in financial performance for inVEsting FoR thE FUtURE — PACCAR’s solid in FoRmation tEchnology — PACCAR’s profits, excellent balance sheet and intense focus on Information Technology Division (ITD) and its 650 quality, technology and productivity enhancements have innovative employees are an important competitive 3 allowed the company to invest $3.8 billion since 1999 asset for the company. PACCAR’s use of information in capital projects, products and processes. Yearly technology is centered on developing and integrating productivity and efficiency improvement of 5-7 percent software and hardware that will enhance the quality and and capacity improvement of over 100 percent in the last efficiency of all products and operations throughout five years have enhanced the capability of manufacturing the company, including the seamless integration of and parts facilities. PACCAR is recognized as one of the suppliers, dealers and customers. In 2008, ITD provided leading applied-information technology companies in the innovative advancements in new manufacturing software industry, and innovation continues to be a cornerstone and infrastructure capacity upgrades. Over 17,000 dealers, of its success. customers, suppliers and employees have experienced Capital investments were a record $463 million in the company’s technology center highlighting surface 2008. One exciting multi-year initiative is the computing, tablet PCs, an electronic leasing and finance construction of PACCAR’s engine assembly plant in office and an electronic service analyst. Mississippi, which builds upon our legacy as a premier tUR cks — U.S. and Canadian Class 8 industry retail engine manufacturer. Other major capital projects sales in 2008 were 153,000 units, and the Mexican market during the year included the unveiling of an enhanced totaled 26,000. The European Union (EU) industry engine research and development center in PACCAR’s heavy truck sales were 334,000 units. Technical Center (Mt. Vernon, Washington), opening of PACCAR’s Class 8 retail sales in the U.S. and Canada a new parts distribution center (PDC) in Budapest, achieved a market share of 26.0 percent in 2008 Hungary, and a 20 percent capacity improvement at compared to 26.4 percent the prior year. DAF achieved Leyland’s manufacturing facility. 14.1 percent share in the 15+ tonne truck market in PACCAR continues to examine business opportunities Europe. Industry Class 6 and 7 truck registrations in the in Asia, with its primary focus on China and India. U.S. and Canada were 60,000 units, a 31 percent decrease PACCAR is increasing its purchases and component sales from the previous year. In the EU, the 6- to 15-tonne in China through its Shanghai office. The business market was 80,000 units, down 5 percent from 2007. opportunities in Asia have dampened, but still present PACCAR’s North American and European market shares attractive long-term returns. in the medium-duty truck segment were excellent, as the si X sigma — Six Sigma is integrated into all business company delivered 23,000 medium-duty trucks and activities at PACCAR and has been adopted at 190 of the tractors in 2008. company’s suppliers and many of the company’s dealers. A tremendous team effort by the company’s Its statistical methodology is critical in the development purchasing, materials and production personnel of new product designs, customer services and contributed to improved product quality and manufacturing processes. Since inception, Six Sigma has manufacturing efficiency during challenging market delivered over $1.2 billion in cumulative savings across conditions. High commodity prices, which began to the company. In addition, “High Impact Kaizen Events” abate during the year, were partially offset by PACCAR’s (HIKEs) leverage Six Sigma methods with production excellent long-term supplier partnerships, which enabled flow improvement concepts. Almost 13,000 employees production and efficiency improvements. have been trained in Six Sigma and 9,700 projects have PACCAR’s product quality continued to be recognized been implemented since its inception. Six Sigma, in as the industry leader in 2008. Kenworth dominated conjunction with Supplier Quality and Development, customer satisfaction awards in the Class 8 markets and the has been vital to improving logistics performance and DAF CF was the 2008 Fleet Truck of the Year in the U.K. component quality by the company’s suppliers. Over 65 percent of PACCAR’s revenue was generated outside the United States, and the company realized excellent synergies globally in product development, sales PACCAR’s superb S&P credit rating of AA- and the and finance activities, purchasing and manufacturing. strength of the dealer network, enabled PFS to earn good DAF Trucks achieved record truck production and sales results in 2008 despite turbulent worldwide financial 4 and excellent market share. markets. The PACCAR Financial Services group of Leyland Trucks is the United Kingdom’s leading truck companies has operations covering three continents manufacturer. Leyland expanded its innovative body- and 20 countries. The global breadth of PFS and its building program that has delivered over 750 custom- responsive credit application processes supported a built-bodied vehicles to customers. portfolio of 166,000 trucks and trailers, with total assets PACCAR Mexico (KENMEX) had a challenging year of $10 billion and earned a pre-tax profit of $217 million. as the Mexican economy slowed and truck fleets were PACCAR Financial Services is the preferred funding reduced. Their new manufacturing facility is delivering source in North America for Peterbilt and Kenworth improved efficiency and product quality. trucks, financing 32 percent of dealer sales. PACCAR Australia achieved good results in 2008. The The unsettled financial markets and resulting “credit introduction of new Kenworth models and expansion crunch” presented a daily challenge that increased of the DAF product range in Australia combined for a funding costs for our customers and prompted a 24.5 percent heavy-duty market share in 2008. PACCAR contraction in our finance companies’ assets. Special Parts Australian sales delivered another year of record praise is merited for PACCAR’s treasury and finance performance. teams who diligently, creatively and positively managed PACCAR International exports trucks and parts to the company through a very challenging market in 2008. over 100 countries and had an excellent year due to strong PACCAR Financial Europe (PFE) completed its sales buoyed by natural resource exploration globally. seventh year of operations, with increased assets and AFTERMARKET CUSTOMER SERVICES — PACCAR good profits as it served DAF dealers in 16 European Parts had an excellent year in 2008. With sales of countries. PFE provides wholesale and retail financing $2.3 billion, PACCAR Parts is the primary source for for DAF dealers and customers, and finances 21 percent aftermarket parts for PACCAR products, and supplies of DAF’s vehicle sales. parts for other truck brands to PACCAR’s dealer networks PACCAR Leasing (PacLease) earned its 15th around the world. Over five million heavy-duty trucks consecutive year of record operating profits and placed are operating in North America and Europe, and the 4,900 new PACCAR vehicles in service in 2008. The average age of these vehicles is estimated to be over six PacLease fleet grew to over 32,500 vehicles as 18 percent years. The large vehicle parc creates excellent demand of the North American Class 6-8 market selected full- for parts and service and moderates the cyclicality of service leasing to satisfy their equipment needs. PacLease truck sales. substantially strengthened its market presence in 2008, PACCAR Parts added new distribution centers and increasing its global network to 362 outlets, and expanded current facilities to enhance logistics represents one of the largest full-service truck rental performance to dealers and customers. PACCAR Parts and leasing operations in North America. continues to lead the industry with technology that ENVIRONMENTAL LEADERSHIP — PACCAR is a global offers competitive advantages at PACCAR dealerships. environmental leader. A significant accomplishment Managed Dealer Inventory (MDI) is now installed at during the year was earning ISO 14001 environmental 1,050 PACCAR dealers worldwide. PACCAR Parts certification at all PACCAR manufacturing facilities in enhanced its Connect program, a software solution for Europe and North America. PACCAR introduced customer fleet-maintenance management. The web-based medium-duty hybrid-electric vehicles, which can achieve application provides fleets with the tools to reduce their up to a 30 percent fuel economy improvement. Several vehicle operating costs. of the manufacturing facilities achieved “Zero Waste to FINANCIAL SERVICES — PACCAR Financial Services’ Landfill” status during the year. PACCAR employees (PFS) conservative business approach, coupled with are environmentally conscious and utilize van pools, car pools and bus passes for 30 percent of their business and was an inspirational leader on the Board, sharing his commuting. wisdom, insight and global business knowledge. We A LOOK AHEAD — The dedicated efforts of PACCAR’s thank Jim and Mike for their dedication and wish both 5 18,000 employees enabled the company to distinguish a happy and healthy retirement. itself as a global leader in the technology, capital goods, PACCAR and its employees are firmly committed to financial services and aftermarket parts businesses. strong quality growth and are proud of the remarkable Superior product quality, technological innovation and achievement of 70 consecutive years of net profit. balanced global diversification are three key operating PACCAR plans for the long-term, and our shareholders characteristics that define PACCAR’s business philosophy. have benefited from that approach. The embedded In North America and Europe, the recession will have principles of integrity, quality and consistency of a negative impact on the truck market in 2009. The purpose continue to define the course in PACCAR’s implementation of updated North American engine operations. The proven business strategy — delivering emission standards in 2010 may encourage some technologically advanced, premium products and an operators to slightly pull forward their truck purchases. extensive array of tailored aftermarket customer services Current estimates for Class 8 trucks in North America — enables PACCAR to approach growth opportunities indicate that annual industry sales could be similar to pragmatically with a long-term focus. In a challenging 2001 and range from 130,000-170,000 units. This is one recession, PACCAR continues to enhance its stellar of the lowest levels of sales in the last 10 years. Sales reputation as a leading technology company in the for Class 6-7 trucks are expected to be between 50,000- capital goods and financial service marketplace. 60,000 vehicles. The European heavy-duty truck market, which had a strong year in 2008, could decline by 40 percent, with sales between 200,000-240,000 trucks, while demand for medium trucks should range from 50,000-65,000 units. mArK c. pigOtt Though PACCAR had a very good year in 2008, with Chairman and Chief Executive Officer several operating divisions achieving record results, the February 16, 2009 outlook for 2009 appears difficult due to tumultuous economic conditions. The company has taken proactive steps to adjust production rates as well as structurally reduce costs throughout the organization. The benefits of geographic diversification, dedicated employees, quality products, modern facilities, innovative IT systems and a strong balance sheet, working in tandem with the best distribution network in the industry, are the fundamental elements that make PACCAR a vibrant, dynamic company. PACCAR is well positioned and committed to pc Ac Ar Executive committee maintaining the profitable results its shareholders expect, Seated Left to Right: Jim Cardillo, Mike Tembreull, Mark Pigott, Tom Plimpton; Standing Left to Right: Dave Anderson, Aad by delivering global leading products and services. Goudriaan, Ron Armstrong, Dan Sobic, Bob Christensen, PACCAR recognizes two significant retirements. Vice Michael Barkley Chairman Mike Tembreull retired upon completion of over 38 years of exemplary service, in which he was instrumental in the profitable growth of PACCAR Financial and the integration of DAF into PACCAR. Jim Pigott is retiring after 37 years on the Board of Directors. Jim also worked for PACCAR for thirteen years

DAF TRUCKS

DAF Trucks N.V. celebrated its 80th anniversary in 2008 by achieving new sales and production records. Truck deliveries exceeded 64,000 units as DAF strengthened its 7 reputation as one of Europe’s leading commercial vehicle manufacturers.

DAF Trucks increased its market share in both the light and heavy truck segments due to a class-leading product range and a comprehensive dealer network throughout Europe. In the light truck segment, market share grew from 8.3 percent in 2007 to 9.3 percent in the EU last year. In the over 15-tonne segment, DAF’s EU share increased from 13.9 percent in 2007 to 14.1 percent in 2008. The DAF CF85 won “Fleet Truck of the Year” for an unprecedented eighth time at the Motor Transport awards in London. Organized by the leading British magazine Motor Transport, the judging panel consisted of 25 prominent U.K. based fleet operators. The CF series also captured the “Technology and Innovation Award,” a distinction awarded by the Australian trade journal Motoring Matters to truck and trailer manufacturers who have made important contributions to the advancement of vehicle and driver safety. DAF earned, for the second year, the award for “Best Bus Engine Producer” and “Best Coach Engine Producer” at Bus World Asia in Shanghai. The engines were honored due to the reliability and durability of the PACCAR 9.2-liter and PACCAR 12.9-liter engines, combined with their excellent fuel efficiency. In 2008, DAF Trucks was the world’s first truck manufacturer to offer Enhanced Environmentally-friendly Vehicles (EEV) in its entire product range. These EEV trucks feature particulate emissions 50 percent lower than the stringent Euro 5 emission standards scheduled for October 2009. DAF unveiled significant enhancements to its popular CF and XF105 models for 2009. The vehicles offer attractive and contemporary new interior designs, an enhanced driveline and — as options — adaptive cruise control and forward collision warning systems. In recognition of its 80th anniversary, DAF unveiled a limited edition XF105. The special flagship model exhibits a striking distinctive exterior design with silver accents and extensive premium interior features. DAF introduced a sophisticated telematics package that offers a data communications system enabling operators to optimize fuel management and their business processes. The PACCAR Production System (PPS) integration enhanced DAF’s manufacturing efficiency and product quality. The 50-PPM (Parts Per Million) Initiative, introduced in all manufacturing plants, sets a new standard for supplier operational excellence. DAF Trucks expanded its extensive distribution network with 25 new facilities opening in Central and Eastern European markets.

DAF has earned a reputation, during the past 80 years, for developing, manufacturing and servicing innovative, industry-leading transport equipment of the highest quality. DAF marked its eighth decade with a special, limited edition of its flagship model XF105.

peterbilt motors company p eterbilt set a market share record in 2008, capturing more than 13 percent of class 8 truck sales in the U.s. peterbilt’s innovative fuel-conserving technology, leading-edge 9 aerodynamics and superior product quality reinforce peterbilt’s position as the “class” of the industry.

Peterbilt Models 387 and 386 were recognized as fuel efficient and environmental vehicle leaders by the Environmental Protection Agency’s (EPA) SmartWaySM program. These Peterbilt trucks utilize a proprietary range of fuel-saving, low-emission equipment specifications for Class 8 long-haul tractors and trailers which have established the industry performance standard. In 2008, Peterbilt introduced the Class 6 Model 330 and Class 7 Model 335 hybrid vehicles that reduce emissions and the vehicle’s carbon footprint, as well as delivering Peterbilt quality and performance. The fuel savings achieved by these hybrid vehicles range up to 30 percent depending on the application. Peterbilt introduced the Model 388 Low Profile truck, designed specifically for the auto carrier industry. The lower cab height allows the transport of larger vehicles and increases by 10 percent the number of vehicles that may be hauled. Peterbilt is developing hybrid Hydraulic Launch Assist technology on its low-cab-forward Model 320 for vocational and refuse applications. Testing has shown a significant improvement in fuel economy and potential brake maintenance reduction of 50 percent annually. Peterbilt launched a proprietary front Air Leaf Suspension on Models 384, 386, 388 and 389, which offers a 20 percent improvement in ride and delivers excellent handling characteristics. Peterbilt updated its conventional medium-duty product Model 335 with a new dash featuring improved side-window defrost and new panel colors. The Peterbilt Navigation System incorporates a five-inch touch- screen and an MP3 audio player. Peterbilt continues to make significant investments in its manufacturing facilities to enhance efficiency and product quality. The Denton, Texas, plant installed a chassis robotic paint system to increase capacity by 50 percent and enhance Peterbilt’s industry-leading quality. Peterbilt is the first North American truck manufacturer to achieve this innovative milestone. The Peterbilt Denton facility achieved an impressive environmental standard of “Zero Waste to Landfill” and global ISO 14001 certification. The elimination of waste was accomplished through recycling programs, employee involvement and partnering with strategic suppliers. Peterbilt Denton produced its 300,000th vehicle during the year. The Peterbilt dealer network expanded to a record 246 locations throughout the U.S. and Canada.

Peterbilt’s Model 384, offering a luxurious 63-inch Unibilt UltraCab sleeper, merges excellent aerodynamics and fuel efficiency with a “classic” conventional profile. The durable, lightweight chassis features exceptional maneuverability, visibility and ergonomic design. financial charts kenworth truck company k enworth swept the vehicle segment awards in the 2008 J.D. power and associates heavy Duty truck customer Satisfaction Study for the second consecutive year — 11 ranking highest in the over the road and Vocational categories.*

Kenworth introduced a new Driver Information Center for the T2000, which provides drivers with real-time information to increase fuel economy and efficiency. The Driver Information Center offers an enhanced multiplex instrumentation system featuring diagnostic information to optimize engine performance. Kenworth delivered record Class 6-7 market share in the U.S. as more customers recognized the benefits of Kenworth vehicle durability and ease of handling for city applications. Kenworth’s new T270 and T370 medium duty diesel-electric hybrid trucks offer fuel efficiency improvements up to 30 percent in delivery applications and up to 50 percent in utility applications. Kenworth T800 liquefied natural gas (LNG) trucks were launched with excellent results. Greenhouse gas emissions were reduced by 20 percent and this new model has been embraced as a leading alternative fuel vehicle at West Coast ports, such as the Ports of Los Angeles and Long Beach. The environmentally friendly Kenworth Clean Power no-idle system is available on all 72-inch AeroCab sleepers, including the T660, T800 and W900 models. Clean Power is a proprietary thermal storage technology that maintains constant cab temperature during non-driving hours. Savings from Clean Power can improve fuel economy by up to eight percent for fleets with high idle time. Kenworth Class 8 truck models introduced updated interior trim packages that incorporated additional storage, ergonomic display panels and new dash refinements. Kenworth introduced new proprietary suspensions to enhance the ride and handling performance in its vehicles. The Kenworth AG130 front-axle air suspension is the first front air suspension designed for Kenworth trucks and improves ride performance by over 15 percent. The new AG400L rear suspension is available in a tandem axle configuration for Class 8 trucks and a single axle configuration for medium duty models. Kenworth installed a second robotic paint line at its Chillicothe, Ohio, plant. This is the first PACCAR facility to integrate four robots painting cabs, hoods and sleepers simultaneously. Kenworth plants in Chillicothe and Renton, Washington, earned the International Organization for Standardization (ISO) 14001 certification for superior environmental management systems. The Kenworth Dealer Network increased to a record 301 dealer locations in the U.S. and Canada.

Kenworth is a leader in designing innovative, technology-driven products that meet the challenges of today’s operating environment. The T660 AeroCab AERODYNE delivers fuel optimizing aerodynamic design and long-haul luxury.

* Kenworth received the highest numerical score among Over the Road and Vocational Class 8 trucks in the proprietary J.D. Power and Associates 2008 Heavy-Duty Truck Customer Satisfaction StudySM. Study based on 2,692 U.S. responses and measures opinions of principal maintainers. Proprietary study results are based on experiences and perceptions of those surveyed in March-June 2008. PACCAR AustRAliA

Kenworth dominated the Australian heavy-duty truck market in 2008, capturing

12 62 percent of the highest horsepower segment, and remained the number one

manufacturer of heavy commercial vehicles in the market.

Kenworth expanded its product offering in 2008 with the introduction of the Model T388. The new medium duty conventional offers 430 horsepower and is directed at short haul and urban applications where excellent visibility and tight turning circles are paramount. A new, larger cab option was added to Kenworth’s flagship over-the-highway truck model, providing increased driver comfort and maximizing carrying capacity. Kenworth became the first manufacturer in Australia to offer a factory installed liquefied natural gas (LNG) engine option, providing substantial fuel savings and reducing greenhouse gas emissions by over 20 percent. PACCAR Parts Australia achieved record sales and profitability with an expanded product range and dealer network. In 2008, PACCAR Australia’s Kenworth “Innovation Truck” showcased a broad spectrum of advanced vehicle technology designed to improve environmental performance, productivity, efficiency and safety. The vehicle’s innovative concepts include collision-avoidance systems, advanced lighting and wireless communications.

In Australia, Kenworth is the most revered nameplate in heavy duty trucking. An agile and versatile performer, this T350 Agitator provides customers with a half tonne more payload than competitive trucks in a chassis design that’s as maneuverable as a cabover. paccar mexico

Kenworth is the leader in the mexican class 8 truck market, capturing over 39 percent share in 2008. Superior product quality and reliability, coupled with excellent customer 13 service, has resulted in Kenworth being the preferred truck brand throughout mexico for almost 50 years.

Kenworth Mexico (KENMEX) introduced several new product enhancements in 2008, including robust cooling and electrical installations, proprietary front air suspensions and disc brakes for all Kenworth models. Kenworth unveiled new hybrid technologies to pick-up and delivery customers and government agencies. In 2008, the Kenworth T270 medium duty diesel-electric hybrid vehicle began field tests in Mexico City, reinforcing PACCAR’s commitment to environmental leadership in the transportation industry worldwide. Kenworth’s medium duty models, the T270 Class 6 and T370 Class 7 conventionals, increased market share in Mexico. These vehicles offer excellent maneuverability, visibility and ergonomic design for urban applications. KENMEX added eight new dealer locations to its expansive parts and service network, the country’s strongest, bringing the total number of outlets to 124 nationwide.

KENMEX produces a broad range of custom-engineered vehicles, including the KW45 and KW55 medium duty cabovers for urban delivery. In Mexico, the Kenworth insignia represents superior product quality, dealer network, financial services and aftermarket support. leyland trucKS

leyland, the united Kingdom’s leading truck manufacturer, celebrated its tenth

14 anniversary as a paccar company by earning a record profit and delivering 24,700

vehicles to customers throughout the world.

Leyland operates one of the most efficient truck factories in the world. The 710,000-square-foot plant incorporates an innovative robotic chassis paint facility and a state-of-the-art advanced planning and scheduling system to produce DAF’s LF, CF and XF product lines. In 2008, Leyland extended its full-bodied truck program to include the DAF CF model range. This innovative body building program integrates Leyland’s world class engineering and manufacturing expertise to deliver premium quality bodies direct from the factory, and streamlines the delivery process by 50 percent. Leyland Trucks became the first commercial vehicle manufacturer in Europe to achieve the designation of “Zero Waste to Landfill,” demonstrating PACCAR’s commitment to environmental stewardship. Leyland earned “Best Manufacturing Logistics and Resource Efficiency” and “Best Financial Management” industry honors in 2008. The awards are sponsored by the U.K.’s Institute of Mechanical Engineers and are based on the assessment of over 600 U.K. based manufacturing companies.

Leyland is recognized as one of the most efficient truck facilities in the industry. Leyland produces the complete DAF vehicle range for the U.K. DAF achieved over 27 percent market share in the U.K. and is the leader in every major market sector. paccar international paccar international achieved outstanding sales and profits in 2008 distributing

Kenworth, peterbilt and DaF trucks and parts. 15

PACCAR International vehicle sales benefited from infrastructure projects in Latin America, Russia and Asia. Oilfield exploration, drilling and servicing sectors remained strong throughout China, Russia, India, the Middle East and North Africa, benefiting the Kenworth 963 and K500 off-highway models. The Kenworth K500 was introduced last year and has added innovative multi-axle configurations, enhancing its mobility in rugged oilfields. The introduction of the Peterbilt Model 367 generated strong sales for oil well servicing in the Middle East, Russia and China. PACCAR International launched the aerodynamic Kenworth T660 and the T800 equipped with additional sleeper combinations. DAF on-highway vehicle sales increased in Latin American and Asian markets. DAF increased sales in Taiwan and New Zealand by over 200 percent. PACCAR International increased its global dealer network by adding eight new dealer locations in 2008. Customers in over 100 countries benefit from the durability and reliability of PACCAR trucks and on-time delivery of parts and services.

PACCAR International facilitates the sale of PACCAR vehicles for use in a myriad of applications worldwide. This DAF XF hauls timber from the forests of New Zealand to mills throughout the country. PACCAR PARts

PACCAR Parts achieved excellent results in 2008 with strong sales and profit

16 performance — delivering 1.3 million parts shipments worldwide to 1,900 Kenworth,

Peterbilt and DAF dealer locations.

PACCAR Parts expanded its worldwide parts distribution centers (PDC) to 13 to support the growing network of dealers and customers. The 260,000-square-foot parts distribution center in Budapest, Hungary, began operation in 2008 and serves DAF’s customers in Central and Eastern Europe. PACCAR Parts completed a 45,000-square- foot addition of the San Luis Potosi, Mexico, PDC, enhancing service to its Kenworth Mexico dealers. Introduction of the Peterbilt Preferred, Kenworth Privileges and the DAF “MAX” Loyalty Cards generated significant retail sales in 2008. More than 75,000 customers worldwide are registered to utilize PACCAR Parts monthly parts and service programs. PACCAR Parts implemented a new Radio Frequency (RF) Shipping System in its North American distribution centers. The system processes freight bills and customer order invoices and reduces transportation costs by consolidating multiple shipments. Four PACCAR Parts distribution centers in the U.S. achieved ISO14001 Environmental Certification.

PACCAR Parts employs state-of-the-art technologies — wireless voice recognition, integrated logistic systems and tablet PCs. These innovative investments have contributed to PACCAR Parts’ sophisticated distribution centers leading the industry in aftermarket customer support. pa ccar Winch paccar Winch division, the premier full-line producer of industrial winches globally, achieved another year of record sales and profits during 2008 — driven principally by 17 strong demand in the mobile crane and energy sectors.

PACCAR Winch increased sales in the European and Asian markets due to the growth of Braden recovery winches, hoists and drives, Gearmatic planetary hoists and Carco tractor winches — nameplates recognized worldwide for their superior quality, performance and dependability. PACCAR Winch unveiled a new GH30B winch for pipelayer applications. The GH30B enhances efficiency and durability, reduces cycle time by as much as 30 percent and increases overall productivity in the installation of gas and oil pipelines. The Winch Division introduced a proprietary, aerodynamic composite bumper incorporating a recovery winch mount for the utility industry. The bumper reduces vehicle weight by 100 pounds compared to traditional metal bumpers, and integrates into utility vehicles chassis. PACCAR Winch was recognized as an Energy Champion Award winner by the U.S. Department of Energy in 2008. This honor is awarded to facilities that have saved 15 percent of total plant energy consumption.

PACCAR Winch Division’s Braden, Carco and Gearmatic nameplates are market leaders in a multitude of industries due to their reputation for engineering excellence and dependability. paccar financial services

paccar financial services companies (pfs), which support the sale of paccar trucks

18 worldwide, achieved good results, reporting pre-tax profits of $217 million. pfs

portfolios are comprised of 166,000 trucks and trailers, with total assets of $10 billion.

PACCAR’s excellent credit rating of AA- and conservative business model enables PACCAR Financial to profitably support the sale of PACCAR trucks in 20 countries on three continents. In 2008, record high fuel prices coupled with a weaker economy and the financial liquidity crisis challenged the global transport industry. PACCAR Financial’s ability to access capital markets at competitive rates enabled PFS to provide customers with attractive financing to meet daily operating requirements. PFS achieved 28 percent market share and strengthened its position as the preferred source of financing for Kenworth, Peterbilt and DAF vehicles worldwide through superior customer service and streamlined credit processing. PFS launched a web-based customer portal that delivers online services, including electronic payments and current account information 24 hours a day. PACCAR Financial Europe (PFE) expanded its financial services to DAF dealers and customers in 16 Western and Central European countries.

PACCAR Financial facilitates the sale of Kenworth, Peterbilt and DAF vehicles worldwide, offering a full spectrum of creative, flexible financial products and value-added services — consistently supporting sales in every phase of the business cycle. paccar Leasing company paccar Leasing earned its 15th consecutive year of record profits in 2008 — delivering over 4,900 new Kenworth, peterbilt and DaF trucks to its franchise network of 362 19 locations. The pacLease fleet increased to over 32,500 vehicles.

The market for full-service leasing and fleet services represents approximately 18 percent of the North American commercial vehicle industry. PacLease offers only premium-quality PACCAR trucks with superior fuel efficiency and 15-25 percent higher residual values than competitive models. Fuel optimization and the environment are two primary areas of focus for PacLease and its customers. PacLease joined the Environmental Protection Agency’s SmartWaySM Program to emphasize its commitment to delivering energy smart vehicles. PacLease provides onsite education and training via the web describing PACCAR’s product leadership in aerodynamic design, no-idle technology, on-board telematics and use of alternative fuels such as LNG. PACCAR’s advanced hybrid vehicles are an important element of PacLease’s product offering. PacLease introduced medium duty hybrid units to private fleet customers in 2008, which allowed them to improve fuel economy by up to 30 percent and reduce greenhouse gas emissions.

One of the fastest-growing and most innovative truck leasing networks in the industry, PacLease continued to expand its customer base and increased its share of the medium-duty market with premium-quality PACCAR vehicles. paccar technical centerS

paccar’s technical centers utilize world-class testing facilities and advanced

20 simulation technologies to accelerate product development and ensure that paccar

continues to provide the highest-quality products in the industry.

PACCAR’s world-class technical centers in Europe and North America are equipped with state-of-the-art product test and validation capabilities and staffed with technical experts in powertrain and vehicle development. Sophisticated computer simulations and advanced analysis of engine and vehicle control systems are used to optimize vehicle efficiency while meeting strict emission regulations. Material laboratories, utilizing electron beam microscope technology, support the investigation and selection of new materials to reduce vehicle weight while increasing performance. Vehicle laboratories simulate truck durability testing of the equivalent of one million miles in months, rather than years. In 2008, a new 75,000-square-foot Engine Development Center opened at DAF Eindhoven. This sophisticated facility with 20 advanced test cells leads the global development of PACCAR engines designed for use in Kenworth, Peterbilt and DAF vehicles. The test cells are utilized to develop new technologies for engine cooling, electrical systems and exhaust after-treatment.

PACCAR Technical Centers, located in Eindhoven, the Netherlands, and in Washington State, employ highly sophisticated engineering analysis, simulation and rapid prototyping technologies to accelerate the development of world-class components and designs. INFORMATION TECHNOLOGY DIVISION

PACCAR’s Information Technology Division (ITD) is an industry leader in the innovative application of software and hardware technologies. ITD enhances the quality of all 21

PACCAR operations and electronically integrates dealers, suppliers and customers.

For the fifth consecutive year, PACCAR ITD was recognized by the prestigious InformationWeek magazine as a leading company introducing innovative and cost-effective information technologies. PACCAR has created multi- user applications for the emerging Microsoft interactive technology called Surface, and has tested the platform in retail dealerships to enhance customers’ knowledge of vehicle aftermarket support. ITD’s 650 employees apply technology by collaborating with PACCAR divisions to enhance manufacturing, financial services and engineering design. This year ITD partnered with DAF to introduce an in-cab telematics system, featuring touchscreen technology, which includes navigation, fleet management software, diagnostics and communications. ITD and PACCAR Financial developed and implemented a new web-based customer portal for PACCAR Financial Services. The portal allows customers to make monthly payments, review account balances and obtain financial advice.

PACCAR ITD is one of the most innovative technology organizations in the world, continually enhancing the company’s competitiveness, manufacturing efficiency, product quality, customer service and profitability. financial charts

Wt Es Ern and cEntral EUrOPE U. s. and canada class 8 trUck markEt sharE U.S. AND CANADA CLASS 8 TRUCK >WESTERN15 t mark ANDEt shar CENTRALE EUROPE 22 > 15T MARKET SHARE MARKET SHARE registrations trucks (000) retail salessales trucks (000) 15% 350 28% 325

13% 280 26% 260

11% 210 24% 195

9% 140 22% 130

7% 70 20% 65

5% 0 18% 0 99 00 01 02 03 04 05 06 07 08 99 00 01 02 03 04 05 06 07 08

■ Total Western and Central Europe ■ Total U.S. and Canada Class 8 Units >15T Units

PACCAR Market Share (percent) PACCAR Market Share (percent)

t Otal assEts GEOGa r Phic rEVEnUE TOTAL ASSETS GEOGRAPHIC REVENUE billionsb il lions of o f dollars dol lar s billionsbillions of ofdollars dollars 17.5 17.5

14.0 14.0

10.5 10.5

7.0 7.0

3.5 3.5

0.0 0.0 99 00 01 02 03 04 05 06 07 08 99 00 01 02 03 04 05 06 07 08

■ Truck and Other ■ United States

■ Financial Services ■ Rest of World STOCKHOLDER 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 two industry peer groups of companies identified in the graph (the Current Peer Group Index and the Prior Peer Group Index) for the last five fiscal years ending December 31, 2008. Effective January 1, 2008, the Company revised its peer group to reflect changes in the industry and to provide a more challenging and competitive group against which to measure performance. Standard & Poor’s has calculated a return for each company in both the Current Peer Group Index and Prior 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 Current 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 Prior Peer Group Index consists of ArvinMeritor Inc., Caterpillar Inc., Cummins Inc., Dana Corp., Deere & Company, Eaton Corporation, Ingersoll-Rand Company Ltd., Navistar International Corp. and Oshkosh Truck Corp. The comparison assumes that $100 was invested December 31, 2003 in the Company’s common stock and in the stated indices and assumes reinvestment of dividends.

300 300

PACCAR Inc S&P 500 Index 250 250 Current Peer Group Index Prior Peer Group Index

200 200

150 150

100 100

50 50 2003 2004 2005 2006 2007 2008

2003 2004 2005 2006 2007 2008 PACCAR Inc 100.00 147.13 131.80 193.77 251.52 134.92 S&P 500 Index 100.00 110.88 116.33 134.70 142.10 89.53 Current Peer Group Index 100.00 116.59 121.11 142.74 183.05 107.86 Prior Peer Group Index 100.00 120.12 124.60 142.00 204.90 100.29

PACCAR Inc and Subsidiaries ManageMent’s discussion and analysis of financial condition and results of operations

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

 results of operations: Financial Services income before taxes was $216.9 million compared to $284.1 million in 2007 as the 2008 2007 2006 benefit of asset growth was reduced by a higher Net sales and revenues: provision for credit losses. Truck and Research and development expenditures were Other $13,709.6 $14,030.4 $15,503.3 $341.8 million in 2008, an increase of 34% from Financial Services 1,262.9 1,191.3 950.8 $255.5 million in 2007 due to higher spending on new $14,972.5 $15,221.7 $16,454.1 vehicle and engine development projects. Selling, general and administrative (SG&A) expense Income before taxes: for Truck and Other declined to $470.2 million in 2008 Truck and compared to $491.4 million in 2007. This was due to Other $ 1,162.5 $ 1,384.8 $ 1,846.6 spending reductions worldwide partially offset by the Financial translation effects of stronger foreign currencies. Services 216.9 284.1 247.4 SG&A expense as a percent of revenues decreased to Investment 3.4% in 2008 from 3.5% in 2007. The Company income 84.6 95.4 81.3 continues to implement Six Sigma initiatives and Income taxes (446.1) (537.0) (679.3) process improvements in all facets of the business. Net Income $ 1,017.9 $ 1,227.3 $ 1,496.0 Investment income declined to $84.6 million in Diluted Earnings 2008 compared to $95.4 million in 2007 due to lower Per Share $ 2.78 $ 3.29 $ 3.97 invested balances and interest rates. The 2008 effective income tax rate of 30.5% was comparable to the 30.4% in 2007. Overview: The Company’s return on revenues was 6.8% in PACCAR is a global technology company whose 2008 and 8.1% in 2007. principal businesses include the design, manufacture and distribution of high-quality, light-, medium- and Truck heavy-duty commercial trucks and related aftermarket PACCAR’s truck segment, which includes the parts and the financing and leasing of its trucks and manufacture and distribution of trucks and related related equipment. The Company also manufactures aftermarket parts, accounted for 90%, 91% and 93% and markets industrial winches. of revenues in 2008, 2007 and 2006, respectively. In Consolidated net sales and revenue were $14.97 North America, trucks are sold under the Kenworth billion in 2008 and $15.22 billion in 2007. Current and Peterbilt nameplates and, in Europe, under the year results reflected strong but slowing demand for DAF nameplate. the Company’s high-quality trucks in Europe. The U.S. and Canada truck markets were down but there was continued solid aftermarket parts and financial 2008 2007 2006 services revenues. Financial Services revenues increased Truck net sales to $1.26 billion in 2008 from $1.19 billion in 2007. and revenues $13,547.4 $13,854.3 $15,367.3 PACCAR achieved net income of $1.02 billion Truck income ($2.78 per diluted share) in 2008, the fourth best before taxes $ 1,156.5 $ 1,352.8 $ 1,848.8 result in the Company’s 103 year history in very difficult business conditions. These results were achieved in the Truck and Other businesses from strong revenue and increased margins in the Company’s European operations, more than offset by lower truck sales and margins in North America and Australia. The Company’s new truck deliveries are summarized PACCAR’s worldwide aftermarket parts revenues  below: were $2.27 billion in 2008, comparable to the $2.29 billion achieved in 2007. Aftermarket parts sales in 2008 2007 2006 2008 benefited from a growing truck population and United States 38,200 44,700 82,600 expansion of the Company’s parts distribution centers Canada 6,700 8,300 12,900 offset by the effects of recessionary global economies U.S. and Canada 44,900 53,000 95,500 in the second half of the year. Europe 63,700 60,100 55,100 Truck segment gross margin as a percentage of net Mexico, Australia sales and revenues was 14.3% in 2008 and 14.9% in and other 17,300 20,800 16,200 2007. Improved operating efficiencies and strong Total units 125,900 133,900 166,800 demand for the Company’s products in Europe in the first nine months, partially mitigated the effects of weaker truck demand in other markets. In addition, 2008 Compared to 2007: higher material costs from suppliers, including the PACCAR’s worldwide truck sales and revenues were impacts of higher crude oil, copper, steel and other $13.55 billion in 2008 compared to $13.85 billion in commodities negatively impacted 2008 gross margin. 2007 due to higher demand for the Company’s trucks in Europe more than offset by lower demand in the 2007 Compared to 2006: U.S. and Canada, and other international markets. PACCAR’s worldwide truck sales and revenues were The impact of a weaker U.S. dollar relative to the $13.85 billion in 2007 compared to $15.37 billion in Company’s other currencies (primarily the euro) 2006 due to lower demand for the Company’s trucks increased revenues and pretax profit by approximately in the U.S. and Canada, somewhat offset by higher $450 million and $50 million, respectively. demand for trucks in all other markets and higher Truck income before taxes was $1.16 billion global demand for related aftermarket parts. The compared to $1.35 billion in 2007. In the U.S. and impact of a weaker U.S. dollar relative to the Canada, Peterbilt and Kenworth delivered 44,900 heavy Company’s other currencies (primarily the euro) and medium-duty trucks during 2008, a decrease of increased revenues and pretax profit by approximately 8,100 from 2007 primarily due to a lower truck market. $590 million and $90 million, respectively. The Class 8 market decreased to 152,600 units in 2008 Truck income before taxes was $1.35 billion from 175,800 units in 2007. PACCAR’s market share compared to $1.85 billion in 2006. In the U.S. and was 26.0% in 2008 compared to 26.4% in 2007. The Canada, Peterbilt and Kenworth delivered 53,000 heavy medium-duty market decreased 31% to 59,500 units. and medium-duty trucks during 2007, a decrease of In Europe, DAF trucks delivered a record 63,700 45% from 2006, due to the lower truck market. The units during 2008, a 6% increase over 2007. The 15 Class 8 market decreased to 175,800 units from a tonne and above truck market in Western and Central record 322,500 units in 2006, reflecting a 2006 pre-buy Europe was 334,000 units compared to 337,000 units and a slowdown in the housing and automotive in 2007. DAF’s 2008 market share of the 15 tonne and sectors. PACCAR’s market share increased to 26.4% in above market increased to 14.1% compared to 13.9% 2007 from 25.3% in 2006. The medium-duty market in 2007. DAF market share in the 6 to 15 tonne decreased 21% to 86,000 units. market increased to 9.3% in 2008 from 8.3% in 2007. In Europe, DAF trucks delivered 60,100 units during Truck and parts sales in Europe represented 49% of 2007, a 9% increase over 2006. The 15 tonne and PACCAR’s total truck segment net sales and revenues above truck market in Western and Central Europe in 2008 compared to 42% in 2007. improved to 337,000 units, a 9% increase from 2006 Truck unit deliveries in Mexico, Australia and other levels. DAF’s 2007 market share of the 15 tonne and countries outside the Company’s primary markets above market was 13.9% compared to 14.3% in 2006. decreased 17%. Deliveries to customers in South DAF market share in the 6 to 15 tonne market was America, Africa and Asia are sold through PACCAR 8.3% in 2007 and 9.2% in 2006. Truck and parts sales International, the Company’s international sales in Europe represented 42% of PACCAR’s total truck division. Combined truck and parts sales in these segment net sales and revenues in 2007 compared to markets accounted for 16% of truck segment sales and 28% in 2006. 20% of truck segment profit compared to 16% of sales and 19% of profits in 2007.

PACCAR Inc and Subsidiaries  Truck unit deliveries in Mexico, Australia and other decrease in volume was due to fewer new trucks sold countries outside the Company’s primary markets and a lower finance share of new truck sales. PFS increased 28%. Combined truck and parts sales in provided loan and lease financing for 28% of PACCAR these markets accounted for 16% of truck segment new trucks delivered in 2008 compared to 29% in 2007. sales and 19% of truck segment profit, an increase Income before taxes was $216.9 million compared from 10% of sales and 9% of profits in 2006. to $284.1 million in 2007 primarily due to a higher PACCAR’s worldwide aftermarket parts revenues provision for losses on receivables. Net portfolio were $2.29 billion in 2007, an increase of 18% charge-offs were $104.8 million compared to $25.8 compared to $1.94 billion in 2006. Aftermarket parts million in 2007 due to higher charge-offs related to sales increased in all major markets from a growing recessionary conditions in the U.S. and Canada and truck population, expansion of parts distribution to a lesser extent Europe. At December 31, 2008, the centers and focused sales efforts. earning asset portfolio quality overall was solid with Truck segment gross margin as a percentage of net the percentage of accounts 30+ days past-due at 3.3%, sales and revenues was 14.9% in 2007 and 15.7% in although up from 2.0% at the end of 2007, primarily 2006. Improved operating efficiencies and strong due to the difficult economy worldwide. demand for the Company’s products outside the U.S. and Canada were dampened by a weak truck market 2007 Compared to 2006: in the U.S. and Canada. Higher material costs PACCAR Financial Services (PFS) revenues increased negatively impacted truck gross margins. 25% to $1.19 billion due to higher earning assets worldwide and higher interest rates. New business Truck Outlook volume was $3.94 billion in 2007 compared to $4.24 Worldwide recessionary economic conditions are billion in 2006. currently forecast to dampen demand for heavy-duty Income before taxes increased 15% to a record trucks for 2009. In North America, industry retail sales $284.1 million from $247.4 million in 2006. The are expected to be 130,000–170,000 trucks. Western improvement was primarily due to higher finance and Central European heavy-duty registrations for gross profit, partly offset by an increase in selling, 2009 are projected to decline between 30% to 40% to general and administrative expenses to support 200,000–240,000 units. International markets are also business growth and a higher provision for losses on expected to be weaker in 2009. receivables. The increase in finance gross profit was due to higher asset levels and interest rates, offset Financial Services partly by a higher cost of debt. The Financial Services segment, which includes wholly Net portfolio charge-offs were $25.8 million owned subsidiaries in the U.S., Canada, Mexico, Europe compared to $13.9 million in 2006 due to higher and Australia, derives its earnings primarily from charge-offs in the U.S. and Canada. At December 31, financing or leasing PACCAR products. 2007, the percentage of accounts 30+ days past-due was 2.0%, up from 1.1% at the end of 2006, primarily 2008 2007 2006 due to higher past dues in the U.S. and Canada. Financial Services: Average earning Financial Services Outlook assets $10,369.0 $10,158.0 $8,746.0 Financial Services segment results are principally Revenues 1,262.9 1,191.3 950.8 dependent on the generation of loans and leases and Income before the related spread between the yields on loans and taxes 216.9 284.1 247.4 leases and borrowing costs and the level of credit losses. A reduction in average earning assets is expected 2008 Compared to 2007: as lower PACCAR truck sales will likely result in lower PACCAR Financial Services (PFS) revenues increased new business volume in 2009. 6% to $1.26 billion due to higher earning assets in all markets outside the U.S. and Canada and higher average finance yields. New business volume was $3.35 billion in 2008 compared to $3.94 billion in 2007. The The segment continues to be exposed to the risk In October 2007, PACCAR’s Board of Directors  that economic weakness around the world may approved the repurchase of $300 million of the continue to exert pressure on the profit margins of Company’s common stock. Through December 31, 2008, truck operators and result in higher past-due accounts $292 million of shares have been repurchased. In July and repossessions. 2008, PACCAR’s Board of Directors approved the repurchase of an additional $300 million of the Other Business Company’s common stock. No shares have been Included in Truck and Other is the Company’s winch repurchased pursuant to the July 2008 authorization. manufacturing business. Sales from this business represent approximately 1% of net sales for 2008, 2007 Truck and Other and 2006. The Company provides funding for working capital, capital expenditures, research and development, liquidity and capital resources: dividends, stock repurchases and other business initiatives and commitments primarily from cash December 31 provided by operations. Management expects this 2008 2007 2006 method of funding to continue in the future. Cash and cash Long-term debt totaled $19.3 million as of equivalents $1,955.2 $1,858.1 $1,852.5 December 31, 2008. Marketable debt Expenditures for property, plant and equipment securities 175.4 778.5 821.7 in 2008 totaled a record $462.8 million compared to $2,130.6 $2,636.6 $2,674.2 $425.7 million in 2007. Major capital projects included the continuation of construction of an engine The Company’s total cash and marketable debt production facility in Mississippi and completion of securities decreased $506.0 million in 2008. Cash construction of a new parts distribution center in provided by operations of $1,304.9 million was used Hungary. In addition, the Company made significant primarily to pay dividends of $629.2 million, make investments related to new product development and capital investments totaling $462.8 million and plant capacity. Over the last ten years, the Company’s repurchase PACCAR stock for $230.6 million. Cash combined investments in worldwide capital projects required to originate new loans and leases was funded and research and development totaled $3.82 billion by repayments of existing loans and leases as well as which have significantly increased capacity, efficiency Financial Services borrowings. and quality of the Company’s premier products. The Company has line of credit arrangements of The Company has reduced its planned capital $3.51 billion. The unused portion of these credit expenditures to reflect current economic conditions. arrangements was $3.26 billion at December 31, 2008. As a result, capital spending in 2009 is expected to be Included in these arrangements are $3.0 billion of bank approximately $150 to $200 million. Spending on facilities, of which $2.0 billion matures in June 2009 research and development in 2009 is expected to be and $1.0 billion matures in 2012. PACCAR intends to approximately $200 to $250 million. PACCAR will replace these credit facilities as they expire with continue to focus on engine development, new facilities of similar amounts. The bank facilities are product programs and manufacturing efficiency primarily maintained to provide backup liquidity on improvements. commercial paper borrowings of the financial services companies. There were no borrowings outstanding under these facilities at December 31, 2008. In November 2008, PACCAR Inc filed a shelf registration under the Securities Act of 1933. In February 2009, the Company issued $750 million of fixed rate medium-term notes under this registration. The registration expires in 2011 and does not limit the principal amount of debt securities that may be issued during the period. The Company believes its strong liquidity position and AA- investment grade credit rating will continue to provide financial stability and access to capital markets at competitive interest rates. PACCAR Inc and Subsidiaries  Financial Services PACCAR believes its Financial Services companies The Company funds its financial services activities will be able to continue funding receivables, servicing primarily from collections on existing finance debt and paying dividends through internally receivables and borrowings in the capital markets. generated funds, access to public and private debt An additional source of funds is loans from other markets and lines of credit. PACCAR companies. PACCAR’s strong cash position and credit ratings Commitments enabled PFS to meet its funding requirements despite The following summarizes the Company’s contractual a decline in liquidity in the debt and capital markets cash commitments at December 31, 2008: since the second half of 2007. The primary sources of borrowings in the capital Maturity markets are commercial paper and medium-term notes Within More than issued in the public markets and, to a lesser extent, One Year One Year Total bank loans. The majority of the medium-term notes Borrowings $5,558.2 $1,909.1 $7,467.3 are issued by PACCAR’s largest financial services Operating leases 25.2 41.2 66.4 subsidiary, PACCAR Financial Corp. (PFC). PFC Purchase obligations 164.8 155.6 320.4 filed a shelf registration under the Securities Act of Other obligations 5.8 29.4 35.2 1933 in November 2006. The registration expires in Total $5,754.0 $2,135.3 $7,889.3 November 2009 and does not limit the principal amount of debt securities that may be issued during The Company had $7.89 billion of cash the period. commitments, substantially all of which mature within PFC participates in the Commercial Paper Funding three years. Of the total cash commitments for Facility offered by the Federal Reserve Bank of New borrowings, $7.47 billion were related to the Financial York. Under this funding facility, PFC may issue Services segment. As described in Note J of the 90-day commercial paper through October 30, 2009. consolidated financial statements, borrowings consist The total amount of commercial paper that PFC may primarily of term notes and commercial paper issued have outstanding under this program is $1.46 billion, by the Financial Services segment. The Company of which, $.74 billion was outstanding at December expects to fund its maturing Financial Services debt 31, 2008. obligations principally from funds provided by In June 2008, PACCAR’s European finance collections from customers on loans and lease contracts, subsidiary, PACCAR Financial Europe, renewed and as well as from the proceeds of commercial paper and increased the registration of a €1.5 billion medium- medium-term note borrowings. Purchase obligations term note program with the London Stock Exchange. are the Company’s contractual commitment to acquire On December 31, 2008, €402 million remained future production inventory and capital equipment. available for issuance. This program is renewable Other obligations include deferred cash compensation. annually through the filing of a new prospectus. In The Company’s other commitments include the June 2008, PACCAR Mexico registered a 7.0 billion following at December 31, 2008: peso medium-term note program with the Comision Nacional Bancaria y de Valores. The registration Commitment Expiration expires in 2012 and at December 31, 2008, 6.1 billion Within More than pesos remained available for issuance. One Year One Year Total To reduce exposure to fluctuations in interest rates, the Financial Services companies pursue a policy Letters of credit $ 34.2 $ 1.5 $ 35.7 of structuring borrowings with interest-rate Loan and lease characteristics similar to the assets being funded. As commitments 105.1 105.1 part of this policy, the companies use interest-rate Equipment contracts. The permitted types of interest-rate acquisition contracts and transaction limits have been established commitments 53.4 53.4 by the Company’s senior management, who receive Residual value periodic reports on the contract amounts outstanding guarantees 67.3 198.7 266.0 and counterparty’s involved. Total $206.6 $253.6 $460.2 Loan and lease commitments are for funding new Operating Leases 9 retail loan and lease contracts. Equipment acquisition The accounting for trucks sold pursuant to agreements commitments require the Company, under specified accounted for as operating leases is discussed in Notes circumstances, to purchase equipment. Residual value A and G of the consolidated financial statements. In guarantees represent the Company’s commitment to deter mining its estimate of the residual value of such acquire trucks at a guaranteed value if the customer vehicles, the Company considers the length of the lease decides to return the truck at a specified date in the term, the truck model, the expected usage of the truck future. and anticipated market demand. If the sales price of the trucks at the end of the term of the agreement impact of environmental matters: differs from the Company’s estimate, a gain or loss The Company, its competitors and industry in will result. The Company believes its residual-setting general are subject to various domestic and foreign policies are appropriate; however, future market requirements relating to the environment. The conditions, changes in government regulations and Company believes its policies, practices and other factors outside the Company’s control could procedures are designed to prevent unreasonable risk impact the ultimate sales price of trucks returned of environmental damage and that its handling, use under these contracts. Residual values are reviewed and disposal of hazardous or toxic substances have regularly and adjusted if market conditions warrant. been in accordance with environmental laws and regulations enacted at the time such use and disposal Allowance for Credit Losses occurred. Expenditures related to environmental The Company determines the allowance for credit activities in 2008, 2007 and 2006 were immaterial. losses on financial services receivables based on a The Company is involved in various stages of combination of historical information and current investi gations and cleanup actions in different countries market conditions. This determination is dependent related to environmental matters. In certain of these on estimates, including assumptions regarding the matters, the Company has been designated as a likelihood of collecting current and past-due accounts, “potentially responsible party” by domestic and repossession rates and the recovery rate on the foreign environmental agencies. The Company has underlying collateral based on used truck values and provided an accrual for the estimated costs to other pledged collateral or recourse. The Company investigate and complete cleanup actions where it is believes its reserve-setting policies adequately take into probable that the Company will incur such costs in account the known risks inherent in the financial the future. Management expects that these matters services portfolio. If there are significant variations in will not have a significant effect on the Company’s the actual results from those estimates, the provision consolidated cash flow, liquidity or financial condition. for credit losses and operating earnings may be materially impacted. critical accounting policies: In the preparation of the Company’s financial Product Warranty statements, in accordance with U.S. generally accepted The expenses related to product warranty are estimated accounting principles, management uses estimates and and recorded at the time products are sold based on makes judgments and assumptions that affect asset historical and current data and reasonable expectations and liability values and the amounts reported as for the future regarding the frequency and cost of income and expense during the periods presented. warranty claims. Management believes that the The following are accounting policies which, in the warranty reserve is appropriate and takes actions to opinion of management, are particularly sensitive and minimize warranty costs through quality-improvement which, if actual results are different from estimates programs; however, actual claims incurred could used by management, may have a material impact on materially differ from the estimated amounts and the financial statements. require adjustments to the reserve.

PACCAR Inc and Subsidiaries 30 Pension and Other Postretirement Benefits The determination of the fair value of derivatives The Company’s accounting for employee pension and whether hedge relationships qualify for hedge and other postretirement benefit costs and obligations accounting is complex and requires management is based on management assumptions about the future estimates and involves judgment. If the Company used by actuaries to estimate net costs and liabilities. determines that the derivative financial instruments These assumptions include discount rates, long-term no longer qualify for hedge accounting, the fair value rates of return on plan assets, health care cost trends, changes of derivative financial instruments are inflation rates, retirement rates, mortality rates and reported in earnings. other factors. Management bases these assumptions on historical results, the current environment and Income Taxes reasonable estimates of future events. The Company calculates income tax expense on pretax The discount rate for each plan is based on market income based on current tax law. Deferred tax assets interest rates of high-quality corporate bonds with a and liabilities are recorded for future tax consequences maturity profile that matches the timing of the on temporary differences between recorded amounts projected benefit payments of the plans. Changes in in the financial statements and their respective tax basis. the discount rate affect the valuation of the plan The determination of income tax expense requires benefits obligation and funded status of the plans. management estimates and involves judgment regarding The long-term rate of return on plan assets is based jurisdictional mix of earnings, indefinitely reinvested on projected returns for each asset class and relative foreign earnings and future outcomes regarding tax weighting of those asset classes in the plans. law issues included in tax returns. If the Company’s Actual results that differ from these assumptions are assessment of these matters changes, the effect is accumulated and amortized into expense over future accounted for in earnings in the period the change periods. While management believes the assumptions is made. used are appropriate, significant differences in actual experience or significant changes in assumptions forward-looking statements: would affect pension and other postretirement benefit Certain information presented in this report contains costs and obligations and the balance sheet funded forward-looking statements made pursuant to the status of the plans. Private Securities Litigation Reform Act of 1995, which are subject to risks and uncertainties that may affect Derivative Financial Instruments and actual results. Risks and uncertainties include, but are Hedging Activities not limited to: a significant decline in industry sales; The Company uses derivative financial instruments competitive pressures; reduced market share; reduced to minimize risk exposures from the fluctuation in availability of or higher prices for fuel; increased interest rates and foreign currency exchange rates. All safety, emissions, or other regulations resulting in derivative financial instruments are recorded at fair higher costs and/or sales restrictions; currency or value as either assets or liabilities. The Company commodity price fluctuations; lower used truck prices; designates certain of its derivative financial instruments insufficient or under-utilization of manufacturing as qualifying hedges under accounting standards. capacity; supplier interruptions; insufficient liquidity The changes in the fair value of derivative financial in the capital markets; fluctuations in interest rates; instruments of qualifying fair value hedges are offset insufficient supplier capacity or access to raw materials; by the effective portion of the changes in the fair value labor disruptions; shortages of commercial truck of the hedged item attributable to the risk being drivers; increased warranty costs or litigation; or hedged. The changes in the fair value of derivative legislative and governmental regulations. financial instruments, to the extent they are considered to be effective cash flow hedges, are initially reported in other comprehensive income and reclassified into earnings in the period the hedged item affects earnings. Changes in fair value of derivative financial instruments that are not designated in hedge accounting relationships are reported in earnings in the period in which the change occurs. consolidated statements of income

Year Ended December 31 2008 2007 2006 31 (millions except per share data) truck and other: Net sales and revenues $13,709.6 $14,030.4 $15,503.3

Cost of sales and revenues 11,736.9 11,917.3 13,036.6 Research and development 341.8 255.5 163.1 Selling, general and administrative 470.2 491.4 457.3 Interest and other income, net (1.8) (18.6) (.3) 12,547.1 12,645.6 13,656.7 Truck and Other Income Before Income Taxes 1,162.5 1,384.8 1,846.6 financial services: Revenues 1,262.9 1,191.3 950.8

Interest and other 831.9 755.3 573.7 Selling, general and administrative 111.2 110.9 95.9 Provision for losses on receivables 102.9 41.0 33.8 1,046.0 907.2 703.4 Financial Services Income Before Income Taxes 216.9 284.1 247.4

Investment income 84.6 95.4 81.3 Total Income Before Income Taxes 1,464.0 1,764.3 2,175.3 Income taxes 446.1 537.0 679.3 Net Income $ 1,017.9 $ 1,227.3 $ 1,496.0

Net Income Per Share Basic $ 2.79 $ 3.31 $ 3.99 Diluted $ 2.78 $ 3.29 $ 3.97

Weighted average number of common shares outstanding Basic 364.2 371.1 375.1 Diluted 365.9 373.3 377.2 See notes to consolidated financial statements.

PACCAR Inc and Subsidiaries consolidated balance sheets

2 assets December 31 2008 2007 (millions of dollars) truck and other: Current Assets Cash and cash equivalents $ 1,899.2 $ 1,736.5 Trade and other receivables, net 698.7 652.0 Marketable debt securities 175.4 778.5 Inventories 658.1 628.3 Deferred taxes and other current assets 211.7 205.6 Total Truck and Other Current Assets 3,643.1 4,000.9

Equipment on operating leases, net 425.3 489.2 Property, plant and equipment, net 1,782.8 1,642.6 Other noncurrent assets 368.2 467.2 Total Truck and Other Assets 6,219.4 6,599.9

financial services: Cash and cash equivalents 56.0 121.6 Finance and other receivables, net 8,036.4 9,025.4 Equipment on operating leases, net 1,534.8 1,318.7 Other assets 403.2 244.6 Total Financial Services Assets 10,030.4 10,710.3 $16,249.8 $17,310.2 liabilities and stockholders’ equity  December 31 2008 2007 (millions of dollars) truck and other: Current Liabilities Accounts payable and accrued expenses $ 1,792.3 $ 2,218.3 Dividend payable 36.3 367.1 Total Truck and Other Current Liabilities 1,828.6 2,585.4 Long‑term debt 19.3 23.6 Residual value guarantees and deferred revenues 470.8 539.4 Deferred taxes and other liabilities 636.6 458.4 Total Truck and Other Liabilities 2,955.3 3,606.8

financial services: Accounts payable, accrued expenses and other 249.2 258.5 Commercial paper and bank loans 3,576.2 4,130.1 Term notes 3,889.3 3,722.1 Deferred taxes and other liabilities 733.1 579.6 Total Financial Services Liabilities 8,447.8 8,690.3 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 363.1 million and 368.4 million shares 363.1 368.4 Additional paid‑in capital 46.1 37.7 Treasury stock – at cost (17.4) (61.7) Retained earnings 4,724.7 4,260.6 Accumulated other comprehensive (loss) income (269.8) 408.1 Total Stockholders’ Equity 4,846.7 5,013.1 $16,249.8 $17,310.2 See notes to consolidated financial statements.

PACCAR Inc and Subsidiaries consolidated statements of cash flows

4 Year Ended December 31 2008 2007 2006 (millions of dollars) operating activities: Net income $ 1,017.9 $ 1,227.3 $ 1,496.0 Items included in net income not affecting cash: Depreciation and amortization: Property, plant and equipment 226.5 196.4 163.4 Equipment on operating leases and other 422.9 330.0 271.2 Provision for losses on financial services receivables 102.9 41.0 33.8 Gain on sale of property (21.7) Deferred taxes 131.0 38.3 66.9 Other, net (1.1) 5.3 (6.0) Change in operating assets and liabilities: (Increase) decrease in assets other than cash and equivalents: Receivables: Trade and other (55.5) 143.6 (80.5) Wholesale receivables on new trucks (246.3) 81.3 (64.6) Sales-type finance leases and dealer direct loans on new trucks 52.8 40.3 (232.4) Inventories (85.2) 114.4 (168.5) Other, net 8.8 16.8 (2.2) (Decrease) increase in liabilities: Accounts payable and accrued expenses (239.3) (277.6) 423.3 Residual value guarantees and deferred revenues 118.1 85.1 72.9 Other, net (148.6) 34.9 (120.6) Net Cash Provided by Operating Activities 1,304.9 2,055.4 1,852.7

investing activities: Retail loans and direct financing leases originated (2,307.5) (3,116.6) (3,318.5) Collections on retail loans and direct financing leases 2,771.0 2,837.3 2,543.8 Net decrease (increase) in wholesale receivables on used equipment 10.4 13.7 (27.5) Marketable securities purchases (667.3) (1,282.9) (1,458.2) Marketable securities sales and maturities 1,239.4 1,345.5 1,225.4 Acquisition of property, plant and equipment (462.8) (425.7) (312.0) Acquisition of equipment for operating leases (1,087.2) (841.7) (642.3) Proceeds from asset disposals 239.3 240.1 162.2 Other, net 12.8 (66.5) 1.0 Net Cash Used in Investing Activities (251.9) (1,296.8) (1,826.1)

financing activities: Cash dividends paid (629.2) (736.7) (530.4) Purchase of treasury stock (230.6) (360.5) (312.0) Stock compensation transactions 11.5 30.8 37.7 Net (decrease) increase in commercial paper and short-term bank loans (482.0) (366.1) 576.0 Proceeds from long-term debt 1,190.9 879.5 2,222.6 Payments on long-term debt (728.7) (285.5) (1,951.4) Net Cash (Used in) Provided by Financing Activities (868.1) (838.5) 42.5 Effect of exchange rate changes on cash (87.8) 85.5 84.5 Net Increase in Cash and Cash Equivalents 97.1 5.6 153.6 Cash and Cash Equivalents at beginning of year 1,858.1 1,852.5 1,698.9 Cash and Cash Equivalents at end of year $ 1,955.2 $ 1,858.1 $ 1,852.5 See notes to consolidated financial statements. consolidated statements of stockholders’ equity

December 31 2008 2007 2006 5 (millions except per share data) common stock, $1 par value: Balance at beginning of year $ 368.4 $ 248.5 $ 169.4 Treasury stock retirement (5.9) (3.8) (5.0) 50% stock dividend 122.8 83.1 Stock compensation .6 .9 1.0 Balance at end of year 363.1 368.4 248.5 additional paid-in capital: Balance at beginning of year 37.7 27.5 140.6 Treasury stock retirement (14.0) (33.8) (160.8) Stock compensation and tax benefit 22.4 44.0 47.7 Balance at end of year 46.1 37.7 27.5 treasury stock, at cost: Balance at beginning of year (61.7) (2.1) (35.1) Purchases: (shares) 2008-5.1; 2007-5.1; 2006-4.5 (230.6) (359.6) (301.5) Retirements 274.9 300.0 334.5 Balance at end of year (17.4) (61.7) (2.1) retained earnings: Balance at beginning of year 4,260.6 4,026.1 3,471.5 Net income 1,017.9 1,227.3 1,496.0 Cash dividends declared on common stock, per share: 2008-$.82; 2007-$1.65; 2006-$1.84 (298.8) (607.6) (689.6) Treasury stock retirement (255.0) (262.4) (168.7) 50% stock dividend (122.8) (83.1) Balance at end of year 4,724.7 4,260.6 4,026.1 accumulated other comprehensive (loss) income: Balance at beginning of year 408.1 156.2 154.7 Accounting change, net of $87.5 tax effect (160.2) Other comprehensive (loss) income (677.9) 251.9 161.7 Balance at end of year (269.8) 408.1 156.2 Total Stockholders’ Equity $ 4,846.7 $ 5,013.1 $ 4,456.2 See notes to consolidated financial statements.

PACCAR Inc and Subsidiaries consolidated statements of comprehensive income

6 Year Ended December 31 2008 2007 2006 (millions of dollars) Net income $1,017.9 $1,227.3 $1,496.0 Other comprehensive (loss) income: Unrealized (losses) gains on derivative contracts (Losses) gains arising during the period (85.5) (32.5) 13.1 Tax effect 24.7 15.9 (4.7) Reclassification adjustment (17.4) (14.8) (17.4) Tax effect 4.1 5.6 5.9 (74.1) (25.8) (3.1) Unrealized gains (losses) on investments Net holding gain (loss) 2.9 5.2 (.6) Tax effect (.9) (2.1) .3 Reclassification adjustment (5.1) .2 Tax effect 1.8 (.1) (1.3) 3.2 (.3) Pension and postretirement Minimum pension liability adjustment 26.0 Tax effect (9.8) Amounts arising during the period (395.1) 87.0 Tax effect 144.7 (32.2) Reclassification adjustment 6.0 12.7 Tax effect (2.1) (4.6) (246.5) 62.9 16.2 Foreign currency translation (losses) gains (356.0) 211.6 148.9 Net other comprehensive (loss) income (677.9) 251.9 161.7 Comprehensive Income $ 340.0 $1,479.2 $1,657.7 See notes to consolidated financial statements.

notes to consolidated financial statements

December 31, 2008, 2007 and 2006 (currencies in millions)

a. significant accounting policies Company and its wholly owned domestic and foreign Description of Operations: PACCAR Inc (the Company subsidiaries. All significant intercompany accounts and or PACCAR) is a multinational company operating in transactions are eliminated in consolidation. two segments: (1) the manufacture and distribution of Use of Estimates: The preparation of financial light-, medium- and heavy-duty commercial trucks statements in conformity with accounting principles and related aftermarket parts and (2) finance and generally accepted in the United States requires leasing products and services provided to customers management to make estimates and assumptions that and dealers. PACCAR’s sales and revenues are derived affect the amounts reported in the financial statements primarily from North America and Europe. The and accompanying notes. Actual results could differ Company also operates in Australia and sells trucks from those estimates. and parts outside its primary markets to customers in Cash and Cash Equivalents: Cash equivalents consist Asia, Africa and South America. of liquid investments with a maturity at date of Principles of Consolidation: The consolidated purchase of three months or less. financial statements include the accounts of the notes to consoliDateD financial statements

December 31, 2008, 2007 and 2006 (currencies in millions)

Trade and Other Receivables: The Company’s trade Earnings per Share: Diluted earnings per share are 7 and other receivables are recorded at cost on the based on the weighted average number of basic shares balance sheet net of allowances. outstanding during the year, adjusted for the dilutive Long-lived Assets, Goodwill and Other Intangible effects of stock-based compensation awards under the Assets: The Company evaluates the carrying value of treasury stock method. long-lived assets (including property and equipment, New Accounting Pronouncements: The Company goodwill and other intangible assets) when events and adopted FASB Statement No. 159, The Fair Value circumstances warrant such a review. Goodwill is Option for Financial Assets and Financial Liabilities tested for impairment on an annual basis. Impairment (FAS 159) effective January 1, 2008. FAS 159 permits charges were insignificant during the three years ended entities to measure most financial instruments at fair December 31, 2008. value if desired and requires that unrealized gains and Revenue Recognition: Substantially all sales and losses on instruments for which the option has been revenues of trucks and related aftermarket parts are elected to be reported in earnings. During 2008, the recorded by the Company when products are shipped Company did not elect the fair value option for any to dealers or customers, except for certain truck financial instruments. See Note Q. shipments that are subject to a residual value guarantee The Company adopted FASB Statement No.157, to the customer. Revenues related to these shipments are Fair Value Measurements (FAS 157) effective January 1, recognized on a straight-line basis over the guarantee 2008 with no significant effect on the financial period (see Note G). At the time certain truck and statements. parts sales to a dealer are recognized, the Company In March 2008, the FASB issued Statement No. 161, records an estimate of the future sales incentive costs Disclosures about Derivative Instruments and Hedging related to such sales. The estimate is based on Activities (FAS 161). FAS 161, which is effective historical data and announced incentive programs. January 1, 2009, amends and expands the disclosure Interest income from finance and other receivables requirements for derivative instruments and hedging is recognized using the interest method. Certain loan activities. origination costs are deferred and amortized to In December 2008, the FASB issued FASB Staff interest income. For operating leases, rental revenue is Position FAS132R-1, Employers’ Disclosures about recog nized on a straight-line basis over the lease term. Postretirement Benefit Plan Assets (FSP FAS 132R-1) Recognition of interest income and rental revenue which is effective for the year ending December 31, is suspended when management determines that 2009. This standard provides guidance on an collection is not probable (generally after 90 days past employer’s disclosures about plan assets of a defined the contractual due date). Recognition is resumed if benefit pension or other postretirement plan. the receivable becomes contractually current and the Reclassifications: Certain prior-year amounts have collection of amounts is again considered probable. been reclassified to conform to the 2008 presentation. 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 record ed 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. Resulting gains and losses are included in net income.

PACCAR Inc and Subsidiaries notes to consoliDateD Financial statements

December 31, 2008, 2007 and 2006 (currencies in millions)

8 b. investments in marketable securities c. inventories The Company’s investments in marketable securities Inventories include the following: are classified as available-for-sale. These investments At December 31, 2008 2007 are stated at fair value with any unrealized gains Finished products $ 394.3 $ 435.2 or losses, net of tax, included as a component of Work in process and raw materials 421.7 342.5 accumulated other comprehensive income. Gross realized gains were $5.1 for the year ended December 816.0 777.7 31, 2008, and were not significant for the two years Less LIFO reserve (157.9) (149.4) ended December 31, 2007 and 2006. $ 658.1 $ 628.3 The cost of marketable debt securities is adjusted for amortization of premiums and accretion of Inventories are stated at the lower of cost or market. discounts to maturity. Amortization, accretion, interest Cost of inventories in the United States is determined and dividend income and realized gains and losses are principally by the last-in, first-out (LIFO) method. included in investment income. The cost of securities Cost of all other inventories is determined principally sold is based on the specific identification method. by the first-in, first-out (FIFO) method. Inventories Marketable debt securities consisted of the valued using the LIFO method comprised 52% and following at December 31: 40% of consolidated inventories before deducting the LIFO reserve at December 31, 2008 and 2007. amortized fair 2008 cost value U.S. tax-exempt securities $ 167.2 $ 168.5 D. Finance anD other receivables Non U.S. corporate Finance and other receivables consist primarily of securities 4.3 4.0 receivables from loans and financing leases resulting Other debt securities 2.9 2.9 from truck sales and loan and leasing activity. Finance $ 174.4 $ 175.4 and other receivables include the following: At December 31, 2008 2007 amortized fair 2007 cost value Loans $ 3,506.7 $ 4,325.9 U.S. tax-exempt securities $ 554.0 $ 558.4 Retail direct financing leases 2,558.4 2,816.7 Non U.S. corporate Sales-type finance leases 817.9 908.1 securities 113.7 113.0 Dealer wholesale financing 1,635.0 1,554.6 Non U.S. government Interest and other receivables 127.3 108.9 securities 92.7 92.5 Unearned interest: Other debt securities 15.0 14.6 Finance leases (430.6) (495.4) $ 775.4 $ 778.5 8,214.7 9,218.8 Less allowance for losses (178.3) (193.4) Contractual maturities at December 31, 2008, were $ 8,036.4 $ 9,025.4 as follows: Terms for substantially all loans and leases range amortized fair Maturities: cost value up to 60 months. Annual payments due on loans beginning January 1, 2009, are $1,301.3, $955.5, Within one year $ 25.2 $ 25.3 $688.5, $378.6, $164.9 and $17.9 thereafter. Annual One to five years 83.3 84.2 minimum lease payments due on finance leases Ten or more years 65.9 65.9 beginning January 1, 2009, are $1,023.0, $855.5, $643.8, $ 174.4 $ 175.4 $386.6, $191.3 and $85.5 thereafter. Repayment experience indicates that some receivables will be paid Marketable debt securities included $65.9 and $75.8 prior to contract maturity, while others may be of variable rate demand obligations (VRDOs) at extended or revised. December 31, 2008 and 2007, respectively. VRDOs are The effects of sales-type leases, dealer direct loans debt instruments with long-term scheduled maturities and wholesale financing of new trucks are shown in which have interest rates that reset periodically. the consolidated statements of cash flows as operating activities since they finance the sale of company inventory. Included in Loans are dealer direct loans on the sale of new trucks of $171.6 and $198.2 as of December 31, 2008 and 2007. Estimated residual notEs to consolidAtEd finAnciAl stAtEmEnts

December 31, 2008, 2007 and 2006 (currencies in millions)

values included with finance leases amounted to g. EquiPmEnt on oPErAting lEAsEs 9 $190.6 in 2008 and $216.6 in 2007. The Company leases equipment under operating leases to customers in the financial services segment. In E. AllowAncE for lossEs addition, in the truck segment, equipment sold to Receivables are charged to the allowance for losses customers in Europe subject to a residual value when, in the judgment of management, they are guarantee (RVG) is accounted for as operating leases. considered uncollectible (generally upon repossession Equipment is recorded at cost and is depreciated on of the collateral). The provision for losses on finance, the straight-line basis to the lower of the estimated trade and other receivables is charged to income based residual value or guarantee value. Lease and guarantee on management’s estimate of incurred credit losses, periods generally range from three to seven years. net of recoveries, inherent in the portfolio. Estimated useful lives of the equipment range from The allowance for losses is summarized as follows: five to ten years. The Company reviews residual values of equipment on operating leases periodically to truck financial and other services determine that recorded amounts are appropriate. Balance, December 31, 2005 $ 10.9 $ 145.2 Provision for losses .3 33.8 Truck and Other: Net losses (6.0) (13.9) Equipment on operating leases is as follows: Currency translation .5 3.9 At December 31, 2008 2007 Balance, December 31, 2006 5.7 169.0 Equipment on lease $ 610.6 $ 678.8 Provision for losses .2 41.0 Less allowance for depreciation (185.3) (189.6) Net losses (.5) (25.8) $ 425.3 $ 489.2 Acquisitions .2 1.8 Currency translation 1.9 7.4 When the equipment is sold subject to an RVG, the Balance, December 31, 2007 7.5 193.4 full sales price is received from the customer. A Provision for losses (.3) 102.9 liability is established for the residual value obligation Net losses (2.0) ( 104.8) with the remainder of the proceeds recorded as deferred Currency translation (.3) (13.2) lease revenue. These amounts are summarized below: Balance, December 31, 2008 $ 4.9 $178.3 At December 31, 2008 2007 Deferred lease revenues $ 204.8 $ 211.0 The Company’s customers are principally concentrated Residual value guarantee 266.0 328.4 in the transportation industry in North America and $ 470.8 $ 539.4 Europe. There are no significant concentrations of credit risk in terms of a single customer. Generally, The deferred lease revenue is amortized on a receivables are collateralized by the related equipment straight-line basis over the RVG contract period. At and parts. December 31, 2008, the annual amortization of deferred revenue beginning January 1, 2009, is $51.8, f . ProPErty, PlAnt And EquiPmEnt $62.8, $42.9, $26.7, $15.3 and $5.3 thereafter. Annual Property, plant and equipment include the following: maturities of the residual value guarantees beginning At December 31, 2008 2007 January 1, 2009, are $67.3, $81.6, $55.7, $34.6, $19.9 and $6.9 thereafter. Land $ 186.8 $ 179.3 Buildings and improvements 951.1 847.6 Financial Services: Machinery and equipment 2,355.2 2,206.9 Equipment on operating leases is as follows: 3,493.1 3,233.8 Less allowance for depreciation (1,710.3) (1,591.2) At December 31, 2008 2007 $ 1,782.8 $ 1,642.6 Transportation equipment $ 2,053.4 $ 1,777.1 Less allowance for depreciation (518.6) (458.4) Property, plant and equipment are stated at cost. $ 1,534.8 $ 1,318.7 Depreciation is computed principally by the straight- line method based upon the estimated useful lives of Annual minimum lease payments due on operating the various classes of assets, which range as follows: leases beginning January 1, 2009, are $389.3, $262.9, $174.4, $90.7, $33.0 and $4.0 thereafter. Buildings and improvements 10-40 years Machinery and equipment 5-12 years PACCAR Inc and Subsidiaries notes to consolIdated fInancIal statements

December 31, 2008, 2007 and 2006 (currencies in millions)

40 h. accounts payable and accrued expenses J. borrowIngs and credIt arrangements Accounts payable and accrued expenses include the Truck and other long‑term debt consists of non‑ following: interest bearing notes, which amounted to $19.3 in 2008 and $23.6 in 2007. These notes mature in 2011. At December 31, 2008 2007 Financial Services borrowings include the following Truck and Other: at December 31: Accounts payable $ 617.9 $ 959.7 effective Salaries and wages 168.7 162.9 rate 2008 2007 Product support reserves 298.6 315.5 Commercial paper 3.7% $ 3,332.6 $ 4,096.4 Other 707.1 780.2 Bank loans: $ 1,792.3 $ 2,218.3 Short‑term 8.2% 50.4 10.4 Medium‑term 8.2% 193.2 23.3 I. product support lIabIlItIes 3,576.2 4,130.1 Product support liabilities include reserves related to Term notes 4.4% 3,889.3 3,722.1 product warranties and optional extended warranties $ 7,465.5 $ 7,852.2 and repair and maintenance (R&M) contracts. The Company generally offers one‑year warranties covering The term notes of $3,889.3 at December 31, 2008, most of its vehicles and related aftermarket parts. include an increase in fair value of $17.5 for notes Specific terms and conditions vary depending on the designated to fair value hedges. The effective rate is product and the country of sale. Optional extended the weighted average rate as of December 31, 2008, warranty and R&M contracts can be purchased for and includes the effects of interest‑rate contracts. The periods which generally range up to five years. annual maturities of the borrowings beginning Warranty expenses and reserves are estimated and January 1, 2009, are as follows: recorded at the time products or contracts are sold based on historical data regarding the source, Commercial Bank Term frequency and cost of claims. PACCAR periodically Paper Loans Notes Total assesses the adequacy of its recorded liabilities and 2009 $3,332.6 $ 52.8 $2,172.8 $5,558.2 adjusts them as appropriate to reflect actual experience. 2010 75.4 783.0 858.4 Changes in warranty and R&M reserves are 2011 105.4 916.0 1,021.4 summarized as follows: 2012 10.0 10.0 Total $3,332.6 $243.6 $3,871.8 $7,448.0 At December 31, 2008 2007 2006 Beginning balance $ 483.3 $ 458.3 $ 391.5 Cost accruals and Interest paid on borrowings was $327.1, $339.0 and revenue deferrals 312.3 339.2 302.4 $281.6 in 2008, 2007 and 2006. The weighted average Payments and interest rate on consolidated commercial paper and revenue recognized (304.6) (345.1) (271.0) short‑term bank loans was 3.8% and 5.2% at Currency translation (40.6) 30.9 35.4 December 31, 2008 and 2007. The primary sources of borrowings are commercial $ 450.4 $ 483.3 $ 458.3 paper and medium‑term notes issued in the public markets. The medium‑term notes are issued by Warranty and R&M reserves are included in the PACCAR Financial Corp. (PFC), PACCAR Financial accompanying consolidated balance sheets as follows: Europe and PACCAR Mexico. PFC filed a shelf At December 31, 2008 2007 registration under the Securities Act of 1933 in 2006. Truck and Other: The registration expires in November 2009 and does Accounts payable and not limit the principal amount of debt securities that accrued expenses $ 298.6 $ 315.5 may be issued during the period. Deferred taxes and other PFC participates in the Commercial Paper Funding liabilities 83.9 82.7 Facility offered by the Federal Reserve Bank of New Financial Services: York. Under this funding facility, PFC may issue Deferred taxes and other 90‑day commercial paper through October 30, 2009. liabilities 67.9 85.1 The total amount of commercial paper that PFC may $ 450.4 $ 483.3 have outstanding under this program is $1,456.8. At December 31, 2008, commercial paper of $735.0 was outstanding. notes to consoLidated financiaL statements

December 31, 2008, 2007 and 2006 (currencies in millions)

In June 2008, PACCAR Financial Europe renewed L . commitments and contingencies 41 and increased the registration of a €1,500 medium- The Company is involved in various stages of term note program with the London Stock Exchange. investigations and cleanup actions in different On December 31, 2008, €402 remained available for countries related to environmental matters. In certain issuance. This program is renewable annually through of these matters, the Company has been designated as the filing of a new prospectus. a “potentially responsible party” by domestic and In June 2008, PACCAR Mexico registered a 7,000 foreign environmen tal agencies. The Company has an peso medium-term note program with the Comision accrual to provide for the estimated costs to investigate Nacional Bancaria y de Valores. The registration and complete cleanup actions where it is probable that expires in 2012 and at December 31, 2008, 6,100 pesos the Company will incur such costs in the future. remained available for issuance. Expenditures related to environmental activities in In November 2008, PACCAR Inc filed a shelf 2008, 2007 and 2006 were not significant. registration under the Securities Act of 1933. In While the timing and amount of the ultimate costs February 2009, the Company issued $750 of fixed rate associated with future environmental cleanup cannot medium-term notes under this registration. The be determined, management expects that these matters registration expires on 2011 and does not limit the will not have a significant effect on the Company’s principle amount of debt securities that may be issued consolidated financial position. during the period. At December 31, 2008, PACCAR had standby letters The Company has line of credit arrangements of of credit of $35.7, which guarantee various insurance $3,507. The unused portion of these credit arrangements and financing activities. The Company is committed, was $3,264 at December 31, 2008. Included in these under specific circumstances, to purchase equipment arrangements are $3,000 of bank facilities, of which at a cost of $53.4 in 2011. At December 31, 2008, $2,000 matures in June 2009 and $1,000 in 2012. PACCAR’s financial services companies, in the normal PACCAR intends to replace these credit facilities as course of business, had outstanding commitments to they expire with facilities of similar amounts. The fund new loan and lease transactions amounting to bank facilities are primarily maintained to provide $105.1. The commitments generally expire in 90 days. backup liquidity for commercial paper borrowings of At December 31, 2008, the Company had commitments the financial services companies. There were no related to the construction of its engine facility in borrowings outstanding under these facilities at Columbus, Mississippi of $16.3 in 2009 and $107.6 December 31, 2008. Compensating balances are not thereafter. The Company had other commitments, required on the lines, and service fees are immaterial. primarily to purchase production inventory, amounting to $154.3 in 2009 and $77.4 thereafter. K. Leases PACCAR is a defendant in various legal proceedings The Company leases certain facilities, computer and, in addition, there are various other contingent equipment and aircraft under operating leases. Leases liabilities arising in the normal course of business. expire at various dates through the year 2017. After consultation with legal counsel, management Annual minimum rent payments under non- does not anticipate that disposition of these proceedings cancelable operating leases having initial or remaining and contingent liabilities will have a material effect on terms in excess of one year at January 1, 2009, are the consolidated financial statements. $25.2, $18.0, $11.0, $6.8, $4.3 and $1.1 thereafter. Total rental expenses under all leases amounted to $43.3, $41.1 and $41.4 for 2008, 2007 and 2006.

PACCAR Inc and Subsidiaries notes to consoliDateD financial stateMents

December 31, 2008, 2007 and 2006 (currencies in millions)

2 M. eMployee benefit plans 2008 2007 PACCAR has several defined benefit pension plans, Change in Projected Benefit Obligation: which cover a majority of its employees. Benefit obligation at January 1 $ 1,201.0 $ 1,193.4 The Company evaluates its actuarial assumptions Service cost 46.6 49.7 on an annual basis and considers changes based upon Interest cost 73.9 68.7 market conditions and other factors. Benefits paid (48.8) (41.4) The Company funds its pensions in accordance with Actuarial loss (gain) 3.0 (86.6) applicable employee benefit and tax laws. The Company Curtailment (3.3) (5.5) contributed $63.9 to its pension plans in 2008 and Currency translation (80.9) 18.1 $13.8 in 2007. The Company expects to contribute in Participant contributions 4.9 4.6 the range of $50.0 to $150.0 to its pension plans in Projected benefit obligation at 2009 of which $11.0 is estimated to satisfy minimum December 31 $ 1,196.4 $ 1,201.0 funding requirements. Annual benefits expected to be paid beginning January 1, 2009, are $47.8, $50.9, $56.4, Change in Plan Assets: $62.0, $65.8, and for the five years thereafter, a total Fair value of plan assets at of $398.5. January 1 $ 1,312.5 $ 1,242.1 Plan assets are invested in a diversified mix of equity Employer contributions 63.9 13.8 and debt securities through professional investment Actual return on plan assets (336.4) 74.3 managers with the objective to achieve targeted risk Benefits paid (48.8) (41.4) adjusted returns and maintain liquidity sufficient to Currency translation (82.3) 19.1 fund current benefit payments. Allocation of plan assets Participant contributions 4.9 4.6 may change over time based upon investment manager Fair value of plan assets at determination of the relative attractiveness of equity December 31 913.8 1,312.5 and debt securities. The Company periodically assesses Funded Status at December 31 $ (282.6) $ 111.5 allocation of plan assets by investment type and evaluates external sources of information regarding Amounts Recorded in Balance Sheet: the long-term historical returns and expected future Other noncurrent assets $ 5.5 $ 158.1 returns for each investment type. Other noncurrent liabilities (288.1) (46.6) The following information details the allocation of Accumulated other plan assets by investment type: comprehensive loss: Actual Actuarial loss 334.5 78.0 Target 2008 2007 Prior service cost 10.1 12.6 Plan Assets Allocation as of December 31: Net initial transition amount 1.0 1.4 Equity securities 50-70% 59.3% 65.6% Debt securities 30-50% 40.7% 34.4% Of the December 31, 2008 amounts in accumulated 100.0% 100.0% other comprehensive income, $12.8 of unrecognized actuarial loss, $2.0 of unrecognized prior service cost The following additional data relates to all pension and $.1 of unrecognized net initial transition amount plans of the Company, except for certain multi- are expected to be amortized into net pension expense employer and foreign-insured plans: in 2009. The accumulated benefit obligation for all pension At December 31, 2008 2007 plans of the Company, except for certain multi-employer Weighted Average Assumptions: and foreign-insured plans was $1,037.6 at December 31, Discount rate 6.2% 6.2% 2008, and $1,055.5 at December 31, 2007. Rate of increase in future Information for all plans with accumulated benefit compensation levels 4.3% 4.3% obligation in excess of plan assets is as follows: Assumed long-term rate of return on plan assets 7.4% 7.4% At December 31, 2008 2007 Projected benefit obligation $ 933.7 $ 43.9 Accumulated benefit obligation 791.9 33.8 Fair value of plan assets 650.9 1.0 notes to consoliDateD financial statements

December 31, 2008, 2007 and 2006 (currencies in millions)

Year Ended December 31, 2008 2007 2006 Assumed health care cost trends have an effect on 3 Components of Pension Expense: the amounts reported for the postretirement health Service cost $ 46.6 $ 49.7 $ 50.5 care plans. A one-percentage-point change in assumed Interest on projected health care cost trend rates would have the following benefit obligation 73.9 68.7 60.8 effects: Expected return on assets (92.8) (89.7) (76.7) 1% 1% Amortization of prior increase decrease service costs 2.4 2.9 3.6 Effect on annual total of Recognized actuarial loss 3.0 8.4 12.7 service and interest Curtailment .9 2.7 .1 cost components $ 1.0 $ (.8) Net pension expense $ 34.0 $ 42.7 $ 51.0 Effect on accumulated postretirement benefit Pension expense for multi-employer and foreign- obligation $ 8.0 $ (6.4) insured plans was $45.8, $37.9 and $32.0 in 2008, 2007 and 2006. 2008 2007 The Company has certain defined contribution Change in Projected Benefit Obligation: benefit plans whereby it generally matches employee Benefit obligation at January 1 $ 88.0 $ 92.4 contributions up to 5% of base wages. The majority of Service cost 3.2 4.8 participants in these plans are non-union employees Interest cost 4.7 5.2 located in the United States. Expenses for these plans Benefits paid (4.1) (3.0) were $22.1, $22.6 and $22.1 in 2008, 2007 and 2006. Curtailment (5.3) The Company also provides optional coverage of Actuarial gain (10.9) (6.1) approxi mately 50% of medical costs for the majority Projected benefit obligation of its U.S. employees from retirement until age 65 as at December 31 $ 80.9 $ 88.0 well as a death benefit. Unfunded Status at December 31 $ (80.9) $ (88.0) The following data relates to unfunded postretirement medical and life insurance plans: Amounts Recorded in Balance Sheet: Year Ended December 31, 2008 2007 2006 Other noncurrent liabilities $ (80.9) $ (88.0) Components of Retiree Expense: Accumulated other Service cost $ 3.2 $ 4.8 $ 5.4 comprehensive loss: Interest cost 4.7 5.2 4.8 Actuarial loss 1.8 8.6 Recognized actuarial loss .9 1.4 Prior service cost .1 .2 Recognized prior service Net initial transition amount .8 1.0 cost .1 .1 .1 Recognized net initial obligation .4 .4 .5 Net retiree expense $ 8.4 $ 11.4 $ 12.2

The discount rate used for calculating the accumu- lated plan benefits was 6.1% for 2008 and 6.5% for 2007. In 2008 the assumed long-term medical inflation rate was 9% declining to 6% over three years. In 2007 the rate assumption was 10% declining to 6% over four years. Annual benefits expected to be paid beginning January 1, 2009, are $4.3, $5.0, $6.0, $6.6, and $7.3; and for the five years thereafter, a total of $41.5.

PACCAR Inc and Subsidiaries Notes to coNsoliDateD fiNaNcial statemeNts

December 31, 2008, 2007 and 2006 (currencies in millions)

 N. iNcome taxes At December 31, 2008, the Company’s net tax Year Ended December 31, 2008 2007 2006 operating loss carryforwards were $203.0. Substantially Income Before Income Taxes: all of the loss carryforwards are in foreign subsidiaries Domestic $ 96.0 $ 419.1 $ 1,149.3 and carry forward indefinitely, subject to certain Foreign 1,368.0 1,345.2 1,026.0 limita tions under applicable laws. The future tax $ 1,464.0 $ 1,764.3 $ 2,175.3 benefits of net operating loss carryforwards are evaluated on a regular basis, including a review of Provision for Income Taxes: historical and projected future operating results. Current provision (benefit): At December 31: 2008 2007 Federal $ (24.7) $ 120.5 $ 280.4 Components of Deferred Tax Assets (Liabilities): State (7.9) 11.1 39.6 Assets: Foreign 347.7 367.1 292.4 Postretirement benefit plans $ 196.6 $ 50.8 315.1 498.7 612.4 Accrued expenses 156.4 208.2 Deferred provision (benefit): Allowance for losses on Federal 123.7 41.9 49.6 receivables 58.0 62.1 State 12.5 3.6 4.7 Net operating loss Foreign (5.2) (7.2) 12.6 carryforwards 54.0 54.9 131.0 38.3 66.9 Other 152.1 77.8 $ 446.1 $ 537.0 $ 679.3 617.1 453.8 Valuation allowance (5.4) (18.8) Reconciliation of Statutory U.S. Federal Tax to Actual 611.7 435.0 Provision: Liabilities: Statutory rate 35% 35% 35% Financial Services Statutory tax $ 512.4 $ 617.5 $ 761.4 leasing depreciation (524.1) (410.3) Effect of: Depreciation and amortization (116.4) (125.0) Tax on foreign Postretirement benefit plans (72.3) (61.8) earnings (67.3) (72.4) (48.8) Other (55.1) (23.9) Other, net 1.0 (8.1) (33.3) (767.9) (621.0) $ 446.1 $ 537.0 $ 679.3 Net deferred tax liability $ (156.2) $ (186.0)

U.S. income taxes are not provided on the At December 31: 2008 2007 undistributed earnings of the Company’s foreign Classification of Deferred Tax Assets (Liabilities): subsidiaries that are considered to be indefinitely Truck and Other: reinvested. At December 31, 2008, the amount of Deferred taxes and undistributed earnings which are considered to be other current assets $ 83.5 $ 107.2 indefinitely reinvested is $2,835.0. Other noncurrent assets 195.3 108.4 Accounts payable and accrued expense (13.3) Deferred taxes and other liabilities (13.1) (47.3) Financial Services: Other assets 56.4 34.3 Deferred taxes and other liabilities (465.0) (388.6) Net deferred tax liability $ (156.2) $ (186.0)

Cash paid for income taxes was $452.0, $412.9 and $611.5 in 2008, 2007 and 2006. nOteS tO cOnSOlidated financial StatementS

December 31, 2008, 2007 and 2006 (currencies in millions)

A reconciliation of the beginning and ending Board of Directors may ex change exercisable rights, in 5 amount of unrecognized tax benefits is as follows: whole or in part, for one share of PACCAR common stock per right. The rights, which will expire on 2008 2007 February 19, 2009, may be redeemed at one cent per Balance at January 1 $ 57.9 $ 54.3 right, subject to certain conditions. For this plan, Additions based on tax positions 50,000 preferred shares are reserved for issuance. No and settlements related to shares have been issued. the current year 9.7 11.4 Accumulated Other Comprehensive (Loss) Income: Reductions for tax positions of Following are the components of accumulated other prior years (20.7) (2.9) comprehensive income: Lapse of statute of limitations (9.8) (4.9)

Balance at December 31 $ 37.1 $ 57.9 At December 31: 2008 2007 2006 Unrealized gain (loss) on The Company had $15.3 of related assets at investments $ 1.0 $ 3.2 $ (2.2) December 31, 2008 and $30.6 of related assets at Tax effect (.4) (1.3) .9 December 31, 2007. All of the unrecognized tax .6 1.9 (1.3) benefits and related assets would impact the effective tax rate if recognized. The Company does not currently Unrealized (loss) gain on anticipate any significant changes to its unrecognized derivative contracts (121.7) (18.8) 28.5 tax benefits during the next twelve months. Tax effect 39.4 10.6 (10.9) Interest and penalties are classified as income taxes (82.3) (8.2) 17.6 in the accompanying statements of income and were Pension and postretirement: not significant during any of the three years ended Unrecognized: December 31, 2008. Amounts accrued for the payment Actuarial loss (525.9) (131.6) (225.2) of penalties and interest at December 31, 2008 and Prior service cost (16.0) (20.0) (25.3) 2007 were also not significant. Net initial obligation (2.3) (3.5) (4.4) The United States Internal Revenue Service has Tax effect 195.9 53.3 90.1 completed examinations of the Company’s tax returns (348.3) (101.8) (164.8) for all years through 2004. Examinations of the Currency translation Company’s tax returns for other major jurisdictions adjustment 160.2 516.2 304.7 have not been completed for years ranging from 2001 through 2008. Accumulated other comprehensive

O.t S OckhOlderS’ equity income $(269.8) $ 408.1 $ 156.2 Stockholder Rights Plan: The plan provides one right Other Capital Stock Changes: PACCAR had 409,000, for each share of PACCAR common stock outstanding. 1,278,900 and 32,873 treasury shares at December 31, Rights become exercisable if a person publicly 2008, 2007 and 2006, respectively. announces the intention to acquire 15% or more Stock Dividend: A 50% common stock dividend of PACCAR’s common stock or if a person (Acquiror) was paid in October 2007. This resulted in the issuance acquires such amount of common stock. In all cases, of 122,775,211 additional shares and 613 fractional rights held by the Acquiror are not exercisable. When shares paid in cash. In 2006, a 50% common stock exercisable, each right entitles the holder to purchase dividend was paid, which resulted in the issuance of for two hundred dollars a fractional share of Series A 83,104,090 additional shares and 543 fractional shares Junior Participating Preferred Stock. Each fractional paid in cash. preferred share has dividend, liquidation and voting rights which are no less than those for a share of common stock. Under certain circumstances, the rights may become exercisable for shares of PACCAR common stock or common stock of the Acquiror having a market value equal to twice the exercise price of the right. Also under certain circumstances, the

PACCAR Inc and Subsidiaries notes to consoliDateD financial statements

December 31, 2008, 2007 and 2006 (currencies in millions)

6 P. Derivative financial instruments All derivative financial instruments are recorded at Derivative financial instruments are used as hedges to fair value in the consolidated balance sheets. Derivative manage exposures to fluctuations in interest rates and assets are included in the consolidated balance sheets foreign currency exchange rates. Instruments designated in Truck and Other “Deferred taxes and other current as either cash flow hedges or fair value hedges may assets” and in Financial Services “Other assets.” qualify for hedge accounting. Derivative instruments Derivative liabilities are included in Truck and Other that do not qualify for hedge accounting are held as “Accounts payable and accrued expenses” and in economic hedges. The Company’s policies prohibit Financial Services “Accounts payable, accrued expenses the use of derivatives for speculation or trading. At and other.” During 2008, the Company did not elect to inception of each hedge relationship, the Company offset the fair value of derivative instruments. There documents its risk management objectives, procedures was no collateral pledged to derivative positions at and accounting treatment. Exposure limits and December 31, 2008. minimum credit ratings are used to minimize the risks Changes in the fair value of derivatives designated of counterparty default. The Company had no as cash flow hedges are recorded in accumulated other material exposures to default at December 31, 2008. comprehensive income to the extent such hedges are Interest-Rate Contracts: The Company enters into considered effective. Changes in the fair value of various interest-rate contracts, including interest-rate derivatives designated as fair value hedges are recorded swaps and cap agreements. Interest-rate swaps involve in earnings together with the changes in fair value of the exchange of fixed and floating rate interest the hedged item attributable to the risk being hedged. payments based on the contractual notional amounts. Changes in the fair value of economic hedges that do These contracts are used to manage exposures to not qualify for hedge accounting are recorded in fluctuations in interest rates. Net amounts paid or earnings in the period in which the change occurs. received are reflected as adjustments to interest Amounts in accumulated other comprehensive expense. The following table presents the notional income are reclassified into net income in the same amounts and fair value of interest-rate contracts: period in which the hedged transaction affects earnings. Of the accumulated net loss included in At December 31, 2008 2007 other compre hensive income as of December 31, 2008, Notional amounts $ 5,055.7 $ 5,355.6 $34.7, net of taxes, is expected to be reclassified to Fair value: interest expense or cost of sales in 2009. Net realized Assets 25.1 18.9 gains and losses from foreign exchange contracts are Liabilities 151.5 53.6 recognized as an adjustment to cost of sales or to financial services interest expense, consistent with the Notional maturities for all interest-rate contracts for hedged transaction. Net realized gains and losses from the five years beginning January 1, 2009, are $1,599.5, interest-rate contracts are recognized as an adjustment $1,528.8, $1,494.0, $401.9, and $31.5. The majority of to interest expense. The fixed interest earned on finance these contracts are floating to fixed swaps that effectively receivables will offset the amount recognized in interest convert an equivalent amount of commercial paper expense, resulting in a stable interest margin consistent and other variable rate debt to fixed rates. with the Company’s risk management strategy. Foreign Currency Exchange Contracts: The Company Substantially all of the Company’s interest-rate enters into foreign currency exchange contracts to contracts and foreign currency exchange contracts hedge certain anticipated transactions and borrowings have been designated as cash flow hedges. The denominated in foreign currencies, particularly the Company uses regression analysis to assess and Canadian dollar, the euro, the British pound and the measure effectiveness of interest-rate contracts. For Mexican peso. The following table presents the foreign currency exchange contracts, the Company notional amounts and fair value of foreign currency performs quarterly assessments to ensure that critical exchange contracts: terms continue to match. Gains or losses on the ineffective portion of cash flow hedges are recognized At December 31, 2008 2007 currently in earnings and were immaterial for each of Notional amounts $ 925.1 $ 494.9 the three years ended December 31, 2008. Fair value: Hedge accounting is discontinued prospectively when Assets 35.3 19.2 the Company determines that a derivative financial Liabilities 21.5 .3 instrument has ceased to be a highly effective hedge. Foreign currency exchange contracts mature within As a result of a reduction of certain forecasted sales one year. transactions in the fourth quarter of 2008, the foreign notes to consoliDateD financial statements

December 31, 2008, 2007 and 2006 (currencies in millions)

currency forward contracts that hedged these Derivative Financial Instruments: The Company’s 7 transactions were determined to no longer be effective derivative contracts consist of interest-rate contracts hedges. Accordingly, the $16.1 fair value of the related and foreign currency exchange contracts. foreign currency forward contracts was reclassified These derivative contracts are over the counter and from other comprehensive income to income. Also in their fair value is determined using modeling the fourth quarter, due to disruptions of certain foreign techniques that include market inputs such as interest credit markets, the Company did not replace maturing rates, yield curves and currency exchange rates. These commercial paper specified as hedged items for certain contracts are categorized as Level 2. interest-rate contracts. As a result, hedge accounting A portion of the Company’s fixed-rate term notes was discontinued and $15.3 of expense related to the has been converted to variable-rate term notes using change in fair value of those contracts was recorded. fair value hedges for interest-rate risk. Fair value is Both of these amounts are included in Truck and determined using modeling techniques that include Other “Interest and other (income) expense, net.” market inputs for interest rates. PACCAR’s assets and liabilities subject to recurring q. fair value of financial instruments fair value measurements at December 31, 2008, are Fair value represents the price that would be received either Level 1 or Level 2 as follows: to sell an asset or paid to transfer a liability in an Level 1 Level 2 Total orderly transaction between market participants at the Assets: measurement date. The hierarchy of fair value Marketable debt measurements is described below. securities $ 6.9 $ 168.5 $ 175.4 Level 1 – Valuations are based on quoted prices that Derivative contracts 60.4 60.4 the Company has the ability to obtain in actively Liabilities: traded markets for identical assets or liabilities. Since Term notes 541.4 541.4 valuations are based on quoted prices that are readily Derivative contracts 173.0 173.0 and regularly available in an active market or exchange traded market, valuation of these instruments does The Company used the following methods and not require a significant degree of judgment. assumptions to determine the fair value of financial Level 2 – Valuations are based on quoted prices for instruments that are not recognized at fair value as similar instruments in active markets, quoted prices for described below. identical or similar instruments in markets that are not Cash and Cash Equivalents: Carrying amounts active, and model-based valuation techniques for which approximate fair value. all significant assumptions are observable in the market. Financial Services Net Receivables: For floating- Level 3 – Valuations are based on model-based rate loans, wholesale financings, and interest and other techniques for which some or all of the assumptions receivables, fair values approximate carrying values. are obtained from indirect market information that is For fixed-rate loans, fair values are estimated using significant to the overall fair value measurement and discounted cash flow analysis based on current rates which require a significant degree of management for comparable loans. Finance lease receivables and judgment. The Company has no financial instruments related loss provisions have been excluded from the requiring Level 3 valuation. accompanying table. The Company uses the following methods and Debt: The carrying amounts of long-term debt, assumptions to measure fair value for assets and financial services commercial paper, banks loans, and liabilities subject to recurring fair value measurements. variable-rate term notes approximate fair value. Marketable Securities: The Company’s marketable Trade Receivables and Payables: Carrying amounts debt securities consist of municipal bonds, government approximate fair value. obligations and investment-grade corporate bonds. Financial services fixed-rate loans that are not The fair value of government obligations and carried at approximate fair value are as follows at corporate bonds is based on quoted prices in active December 31: markets. These are categorized as Level 1. The fair value of municipal bonds is estimated carrying fair using recent transactions, market price quotations, and amount value pricing models that consider, where applicable, interest 2008 $ 3,011.1 $ 3,030.8 rates and other observable market information. These 2007 3,602.6 3,562.7 bonds are categorized as Level 2.

PACCAR Inc and Subsidiaries notes to consoliDateD financial statements

December 31, 2008, 2007 and 2006 (currencies in millions except per share amounts)

8 R. stock compensation plans The fair value of restricted stock awards was PACCAR has certain plans under which officers and determined based on the stock price at the award date. key employees may be granted options to purchase Certain restricted stock awards granted in 2008 and shares of the Company’s authorized but unissued 2007 contain conditions tied to the Company’s common stock. Non-employee directors and certain performance over a five year period. Compensation officers may be granted restricted shares of the expense for awards with performance conditions is Company’s common stock. The maximum number of recorded only when it is probable that the requirements shares of the Company’s common stock authorized for will be achieved. Compensation expense related to issuance under these plans is 46.7 million, and as of restricted stock awards with only service conditions is December 31, 2008, the maximum number of shares recognized over the requisite service period. available for future grants was 18.8 million. Options Realized tax benefits for 2008 of $3.7 and 2007 of outstanding under these plans were granted with $13.6 related to the excess of deductible amounts over exercise prices equal to the fair market value of the compensation costs recognized have been classified as Company’s common stock at the date of grant. a financing cash flow. Stock based compensation Options expire no later than ten years from the grant expense was $10.2, $12.3 and $10.0 in 2008, 2007 and date and generally vest within three years. Stock 2006 respectively. As of December 31, 2008, there was option activity is summarized below: $5.9 of unrecognized compensation cost related to number exercise unvested stock options, which is expected to be of shares price* recognized over a remaining weighted-average vesting Outstanding at 12/31/05 7,131,400 $ 15.64 period of 1.5 years. Unrecognized compensation cost Granted 964,700 32.23 at December 31, 2008, related to unvested restricted Exercised (1,883,400) 11.15 stock awards of $1.2 is expected to be recognized over Cancelled (50,700) 29.13 a remaining weighted-average vesting period of .4 years. Outstanding at 12/31/06 6,162,000 19.50 The estimated fair value of stock options granted Granted 824,200 44.56 during 2008, 2007 and 2006 was $8.58, $10.10 and Exercised (1,168,200) 14.79 $7.96 per share. These amounts were determined using Cancelled (109,000) 34.80 the Black-Scholes-Merton option-pricing model, Outstanding at 12/31/07 5,709,000 23.79 which values options based on the stock price at the Granted 734,300 45.74 grant date and the following assumptions: Exercised (403,000) 16.95 Cancelled (241,000) 39.50 2008 2007 2006 Outstanding at 12/31/08 5,799,300 $ 26.39 Risk-free interest rate 2.86% 4.80% 4.44% Expected volatility 29% 30% 34% For options exercised, the aggregate difference between Expected dividend yield 4.0% 4.0% 4.0% the market price and strike price on the date of exercise Expected term 5 years 5 years 5 years was $10.8 in 2008, $40.4 in 2007, and $43.2 in 2006. Diluted Earnings Per Share: The following table The following tables summarize information about shows additional shares added to weighted average options outstanding at December 31, 2008: basic shares outstanding to calculate diluted earnings remaining average per share. These additional shares primarily represent range of number contractual exercise exercise prices of shares life in years price* the effect of stock options.

Exercisable: At December 31: 2008 2007 2006 $ 8.25-10.62 1,242,000 1.2 $ 9.63 Additional shares 1,721,300 2,206,800 2,064,300 12.54-13.96 1,070,800 3.6 13.30 25.31 503,300 4.9 25.31 32.11 775,900 5.8 32.11 There were 1,397,800 antidilutive options in 2008, none in 2007 and 948,000 in 2006. 3,592,000 3.4 17.78 Not Exercisable: 32.23 809,500 7.1 32.23 44.56 713,200 8.1 44.56 45.74 684,600 9.1 45.74 2,207,300 8.0 40.40 5,799,300 5.2 $26.39 *Weighted Average notes to consolidated financial statements

December 31, 2008, 2007 and 2006 (currencies in millions)

s. segment and related information Geographic Area Data 2008 2007 2006 9 PACCAR operates in two principal segments, Truck Equipment on operating leases, net: and Financial Services. United States $ 634.9 $ 464.4 $ 438.7 The Truck segment includes the manufacture of Germany 358.4 243.3 172.8 trucks and the distribution of related aftermarket United Kingdom 290.9 342.8 295.5 parts, both of which are sold through a network of Mexico 212.4 186.6 120.3 independent dealers. This segment derives a large Other 463.5 570.8 424.0 proportion of its revenues and operating profits $ 1,960.1 $ 1,807.9 $ 1,451.3 from operations in North America and Europe. The Financial Services segment is composed of Business Segment Data finance and leasing products and services provided to Net sales and revenues: truck customers and dealers. Revenues are primarily Truck generated from operations in North America and Total $ 14,142.7 $ 14,295.7 $ 15,754.7 Europe. Less intersegment (595.3) (441.4) (387.4) Included in All Other is PACCAR’s industrial winch Net Truck 13,547.4 13,854.3 15,367.3 manufacturing business. Also within this category are All Other 162.2 176.1 136.0 other sales, income and expenses not attributable to a 13,709.6 14,030.4 15,503.3 reportable segment, including a portion of corporate Financial Services 1,262.9 1,191.3 950.8 expense. Intercompany interest income on cash $ 14,972.5 $ 15,221.7 $ 16,454.1 advances to the financial services companies is included in All Other and was $17.2, $24.9 and $13.1 Income before income taxes: for 2008, 2007 and 2006. Geographic revenues from Truck $ 1,156.5 $ 1,352.8 $ 1,848.8 external customers are presented based on the country All Other 6.0 32.0 (2.2) of the customer. 1,162.5 1,384.8 1,846.6 PACCAR evaluates the performance of its Truck Financial Services 216.9 284.1 247.4 segment based on operating profits, which excludes Investment income 84.6 95.4 81.3 investment income, other income and expense and income taxes. The Financial Services segment’s $ 1,464.0 $ 1,764.3 $ 2,175.3 performance is evaluated based on income before income taxes. Depreciation and amortization: Truck $ 309.0 $ 261.4 $ 218.8 Geographic Area Data 2008 2007 2006 Financial Services 329.4 252.7 203.3 Revenues: All Other 11.0 12.3 12.5 United States $ 4,765.6 $ 5,517.5 $ 8,496.5 $ 649.4 $ 526.4 $ 434.6 Europe 7,023.4 6,159.6 4,589.8 Other 3,183.5 3,544.6 3,367.8 Expenditures for long-lived assets: $ 14,972.5 $ 15,221.7 $ 16,454.1 Truck $ 671.6 $ 562.3 $ 447.5 Financial Services 859.4 671.7 494.2 Property, plant and equipment, net: All Other 19.0 33.4 12.6 United States $ 820.7 $ 621.1 $ 527.4 $ 1,550.0 $ 1,267.4 $ 954.3 The Netherlands 467.3 480.7 378.8 Other 494.8 540.8 441.0 Segment assets: $ 1,782.8 $ 1,642.6 $ 1,347.2 Truck $ 3,939.3 $ 3,846.7 $ 3,480.1 Other 205.5 238.2 188.1 Cash and marketable securities 2,074.6 2,515.0 2,628.0 6,219.4 6,599.9 6,296.2 Financial Services 10,030.4 10,710.3 9,811.2 $ 16,249.8 $ 17,310.2 $ 16,107.4

PACCAR Inc and Subsidiaries ManageMent’s report on internal control over financial reporting

The management of PACCAR Inc (the Company) is responsible for establishing and maintaining satisfactory internal 50 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, 2008, 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, 2008. 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 51.

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, 2008 and 2007, 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, 2008. 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, 2008 and 2007, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2008, 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, 2008, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 13, 2009 expressed an unqualified opinion thereon.

Seattle, Washington February 13, 2009 report of independent registered public accounting firm on the company’s internal controls

The Board of Directors and Stockholders of PACCAR Inc 51 We have audited PACCAR Inc’s internal control over financial reporting as of December 31, 2008, 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, 2008, 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, 2008 and 2007 and the related consolidated statements of income, stockholders’ equity, comprehensive income and cash flows for each of the three years in the period ended December 31, 2008 and our report dated February 13, 2009 expressed an unqualified opinion thereon.

Seattle, Washington February 13, 2009

PACCAR Inc and Subsidiaries selected financial data

52 2008 2007 2006 2005 2004 (millions except per share data) Truck and Other Net Sales and Revenues $ 13,709.6 $ 14,030.4 $ 15,503.3 $ 13,298.4 $ 10,833.7 Financial Services Revenues 1,262.9 1,191.3 950.8 759.0 562.6 Total Revenues $ 14,972.5 $ 15,221.7 $16,454.1 $ 14,057.4 $ 11,396.3 Net Income $ 1,017.9 $ 1,227.3 $ 1,496.0 $ 1,133.2 $ 906.8 Net Income Per Share: Basic 2.79 3.31 3.99 2.93 2.31 Diluted 2.78 3.29 3.97 2.92 2.29 Cash Dividends Declared Per Share .82 1.65 1.84 1.28 1.22 Total Assets: Truck and Other 6,219.4 6,599.9 6,296.2 5,359.5 5,247.9 Financial Services 10,030.4 10,710.3 9,811.2 8,355.9 6,980.1 Truck and Other Long‑Term Debt 19.3 23.6 20.2 20.2 27.8 Financial Services Debt 7,465.5 7,852.2 7,259.8 6,226.1 4,788.6 Stockholders’ Equity 4,846.7 5,013.1 4,456.2 3,901.1 3,762.4

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 be low reflects the range of trading prices as reported by The NASDAQ Stock Market LLC, and cash dividends declared. There were 2,208 record holders of the common stock at December 31, 2008.

2008 2007 cash dividends stock price cash dividends stock price quarter declared high low declared high low First $ .18 $55.54 $41.14 $ .13 $52.15 $42.15 Second .18 53.81 41.36 .17 61.53 48.49 Third .18 45.95 36.22 .17 65.75 48.02 Fourth .18 37.99 21.96 .18 58.95 46.15 Year-End Extra .10 1.00

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 53 (millions except per share data) 2008 Truck and Other: Net Sales and Revenues $3,621.0 $3,782.0 $3,682.1 $2,624.5 Cost of Sales and Revenues 3,079.3 3,202.2 3,113.5 2,341.9 Research and Development 82.9 90.7 88.1 80.1 Financial Services: Revenues 317.4 330.5 322.8 292.2 Interest and Other Expenses 203.6 217.4 215.2 195.7 Net Income 292.3 313.5 299.0 113.1 Net Income Per Share (1): Basic $ .80 $ .86 $ .82 $ .31 Diluted .79 .86 .82 .31

2007 Truck and Other: Net Sales and Revenues $3,720.5 $3,429.4 $3,448.5 $3,432.0 Cost of Sales and Revenues 3,135.3 2,912.5 2,930.6 2,938.9 Research and Development 37.4 58.2 67.8 92.1 Financial Services: Revenues 264.0 286.8 313.2 327.3 Interest and Other Expenses 166.2 180.5 201.4 207.2 Net Income 365.6 298.3 302.3 261.1 Net Income Per Share (1): Basic $ .98 $ .80 $ .82 $ .71 Diluted .97 .79 .81 .71 (1) The sum of quarterly per share amounts may not equal per share amounts reported for year-to-date periods. This is due to changes in the number of weighted shares outstanding and the effects of rounding for each period.

PACCAR Inc and Subsidiaries market risks and deriVatiVe instruments

(currencies in millions)

54 Interest-Rate Risks – See Note P 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) 2008 2007 consolidated: Assets Cash equivalents and marketable securities $ (1.4) $ (9.2) truck and other: Liabilities Fixed-rate long-term debt .5 .6 F inancial serVices: Assets Fixed-rate loans (50.0) (59.7) Liabilities Fixed-rate term debt 14.8 .4 Interest-rate swaps related to financial services debt 51.8 82.0 Total $ 15.7 $ 14.1

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 P 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 $103 related to contracts outstanding at December 31, 2008, compared to a loss of $53.3 at December 31, 2007. These amounts would be largely offset by changes in the values of the underlying hedged exposures. officers and directors

officers 55 Mark C. Pigott David C. Anderson William R. Kozek Chairman and Vice President and Vice President Chief Executive Officer General Counsel Jack K. LeVier Thomas E. Plimpton Richard E. Bangert, II Vice President Vice Chairman Vice President Thomas A. Lundahl James G. Cardillo Michael T. Barkley Vice President President Vice President and Controller Helene N. Mawyer Daniel D. Sobic Richard T. Gorman Vice President Executive Vice President Vice President George E. West, Jr. Ronald E. Armstrong Aad L. Goudriaan Vice President Senior Vice President Vice President Robin E. Easton Robert J. Christensen Timothy M. Henebry Treasurer Senior Vice President Vice President Janice M. D’Amato William D. Jackson Secretary Vice President

directors

Mark C. Pigott Stephen F. Page William G. Reed, Jr. Chairman and Retired Vice Chairman and Retired Chairman Chief Executive Officer Chief Financial Officer Simpson Investment Company (1, 3) PACCAR Inc (3) United Technologies Corporation (1, 4) Gregory M. E. Spierkel Alison J. Carnwath Robert T. Parry Chief Executive Officer Chairman Retired President and Ingram Micro Inc. (2) MF Global Ltd. (2, 4) Chief Executive Officer Federal Reserve Bank Warren R. Staley John M. Fluke, Jr. of San Francisco (2) Retired Chairman and Chairman Chief Executive Officer Fluke Capital Management, L.P. (1, 4) James C. Pigott Cargill Inc. (4) President Kirk S. Hachigian Pigott Enterprises, Inc. (3, 4) Charles R. Williamson Chairman and Retired Chairman and Thomas E. Plimpton Chief Executive Officer Chief Executive Officer Vice Chairman Cooper Industries (2) Unocal Corporation (1, 2) PACCAR Inc

committees of the board

(1) a u d i t c o m m i t t e e (2) compensation c o m m i t t e e (3) e x e c u t i v e c o m m i t t e e (4) n o m i n a t i n g a n d g o v e r n a n c e c o m m i t t e e

PACCAR Inc and Subsidiaries divisions and subsidiaries

56 trucks Leyland Trucks Ltd. winches PacLease Méxicana Croston Road S.A. de C.V. Kenworth Truck Company Leyland, Preston PACCAR Winch Division Calzada Gustavo Vildósola Division Headquarters: Lancs PR26 6LZ Division Headquarters: Castro 2000 10630 N.E. 38th Place United Kingdom 800 E. Dallas Street Mexicali, Baja California Kirkland, Washington 98033 Broken Arrow, Oklahoma Mexico Factory: 74012 Factories: Leyland, Lancashire PACCAR Financial Chillicothe, Ohio Factories: Services Ltd. Renton, Washington Kenworth Méxicana, Broken Arrow, Oklahoma Markborough Place I S.A. de C.V. Okmulgee, Oklahoma 6711 Mississauga Road N. Peterbilt Calzada Gustavo Vildósola Mississauga, Ontario Motors Company Castro 2000 L5N 4J8 Canada Division Headquarters: Mexicali, Baja California 1700 Woodbrook Street Mexico p r o d u c t t e s t i n g , PACCAR Financial Denton, Texas 76205 r e s e a r c h a n d development Pty. Ltd. Factory: 64 Canterbury Road Factories: Mexicali, Baja California PACCAR Technical Center Bayswater, Victoria 3153 Denton, Texas Division Headquarters: Australia Madison, Tennessee PACCAR 12479 Farm to Market Road Australia Pty. Ltd. Mount Vernon, Washington PACCAR Leasing Company PACCAR of Canada Ltd. Kenworth Trucks 98273 Division of PACCAR Markborough Place I Division Headquarters: Financial Corp. 6711 Mississauga Road N. 64 Canterbury Road DAF Trucks Test Center PACCAR Building Mississauga, Ontario Bayswater, Victoria 3153 Weverspad 2 777 106th Avenue N.E. L5N 4J8 Canada Australia 5491 RL St. Oedenrode Bellevue, Washington 98004 The Netherlands Factory: Factory: Ste-Thérèse, Quebec Bayswater, Victoria export sales Canadian Kenworth p a c c a r F i n a n c i a l Company services group PACCAR International Division Headquarters: t r u c k p a r t s Division Headquarters: Markborough Place I and supplies PACCAR Financial Corp. PACCAR Building 6711 Mississauga Road N. PACCAR Building 777 106th Avenue N.E. Mississauga, Ontario PACCAR Engine Company 777 106th Avenue N.E. Bellevue, Washington 98004 L5N 4J8 Canada 1000 PACCAR Drive Bellevue, Washington 98004 Columbus, Mississippi 39701 Offices: Peterbilt of Canada PACCAR Financial Beijing, Shanghai, People’s Division Headquarters: PACCAR Parts Europe B.V. Republic of China Markborough Place I Division Headquarters: Hugo van der Goeslaan 1 Jakarta, Indonesia 6711 Mississauga Road N. 750 Houser Way N. P.O. Box 90065 Manama, Bahrain Mississauga, Ontario Renton, Washington 98055 5600 PT Eindhoven Miami, Florida L5N 4J8 Canada The Netherlands Dynacraft DAF Trucks N.V. Division Headquarters: PACCAR Capital Hugo van der Goeslaan 1 650 Milwaukee Avenue N. México S.A. de C.V. P.O. Box 90065 Algona, Washington 98001 Calzada Gustavo Vildósola 5600 PT Eindhoven Castro 2000 The Netherlands Mexicali, Baja California Mexico Factories: Eindhoven, The Netherlands Westerlo, Belgium

STATEMENT OF COMPANY BUSINESS STOCKHOLDERS’ INFORMATION

PACCAR is a global technology company that manufactures Class 8 commercial vehicles sold around the world under the Kenworth, Peterbilt and DAF nameplates. Corporate Offices Stock Transfer AeroCab, AERODYNE, PACCAR Building and Dividend Air Leaf, Braden, Carco, The company competes in the North American Class 5-7 market with its medium- 777 106th Avenue N.E. Dispersing Agent ComfortClass, DAF, Bellevue, Washington Wells Fargo Bank Gearmatic, Kenmex, 98004 Minnesota, N.A. Kenworth, Kenworth Clean duty models assembled in North America and sold under the Peterbilt and Kenworth Shareowner Services Power, Leyland, PACCAR, Mailing Address P.O. Box 64854 PACCAR MX, PACCAR PX, nameplates. The company also manufactures Class 4-7 trucks in the United P.O. Box 1518 St. Paul, Minnesota PacLease, PacTrac, Peterbilt, Bellevue, Washington 55164-0854 PX-6, PX-8, TRP, UltraCab 98009 800.468.9716 and Unibilt are trademarks Kingdom for sale throughout Europe, the Middle East, Australia and Africa under www.wellsfargo.com/ owned by PACCAR Inc and Telephone shareownerservices its subsidiaries. the DAF nameplate. PACCAR distributes aftermarket truck parts to its dealers 425.468.7400 PACCAR’s transfer agent Independent Auditors Facsimile maintains the company’s Ernst & Young LLP through a worldwide network of Parts Distribution Centers. Finance and leasing 425.468.8216 shareholder records, issues Seattle, Washington stock certificates and subsidiaries facilitate the sale of PACCAR products in many countries worldwide. Web site distributes dividends and SEC Form 10-K www.paccar.com IRS Form 1099. Requests PACCAR’s annual report concerning these matters to the Securities and Significant company assets are employed in financial services activities. PACCAR should be directed to Exchange Commission Wells Fargo. will be furnished to manufactures and markets industrial winches under the Braden, Gearmatic and stockholders on request Online Delivery of to the Corporate Annual Report and Proxy Secretary, PACCAR Inc, Carco nameplates. PACCAR maintains exceptionally high standards of quality for Statement P.O. Box 1518, Bellevue, PACCAR’s 2008 Annual Washington 98009. It is all of its products: they are well engineered, are highly customized for specific Report and the 2009 Proxy also available online at Statement are available www.paccar.com/investors/ applications and sell in the premium segments of their markets, where they have a on PACCAR’s Web site at investor_resources.asp, www.paccar.com/ under SEC Filings. 2008annualmeeting/ reputation for superior performance and pride of ownership. Annual Stockholders’ Stockholders who hold Meeting PACCAR stock in street April 28, 2009, 10:30 a.m. name may inquire of their Meydenbauer Center bank or broker about the 11100 N.E. Sixth Street availability of electronic Bellevue, Washington delivery of annual 98004 meeting documents. An Equal Opportunity Employer CONTENTS

 Financial Highlights 50 Management’s Report on Internal Control  Message to Shareholders Over Financial Reporting This report was printed on recycled paper. 6 PACCAR Operations 50 Report of Independent Registered Public  Financial Charts Accounting Firm on the Company’s 3 Stockholder Return Performance Graph Consolidated Financial Statements 4 Management’s Discussion and Analysis 5 Report of Independent Registered Public 3 Consolidated Statements of Income Accounting Firm on the Company’s 3 Consolidated Balance Sheets Internal Controls 34 Consolidated Statements of Cash Flows 5 Selected Financial Data 35 Consolidated Statements 5 Common Stock Market Prices and Dividends of Stockholders’ Equity 53 Quarterly Results 36 Consolidated Statements 54 Market Risks and Derivative Instruments of Comprehensive Income 55 Officers and Directors 36 Notes to Consolidated Financial Statements 56 Divisions and Subsidiaries 2008 annual report