Toyota Motor Credit Corporation was incorporated in California in 1982 and commenced operations in 1983.  References herein to “TMCC” denote Toyota Motor Credit Corporation, and references herein to “we”, “our”, and “us” denote Toyota Motor Credit Corporation and its consolidated subsidiaries.  We are wholly-owned by Toyota Financial Services Americas Corporation (“TFSA”), a California corporation, which is a wholly-owned subsidiary of Toyota Financial Services Corporation (“TFSC”), a Japanese corporation.  TFSC, in turn, is a wholly-owned subsidiary of Toyota Motor Corporation (“TMC”), a Japanese corporation.  TFSC manages TMC’s worldwide financial services operations.  TMCC is marketed under the brands of Toyota Financial Services and Lexus Financial Services.

We provide a variety of finance and insurance products to authorized Toyota and Lexus vehicle dealers and, to a lesser extent, other domestic and import franchise dealers (collectively referred to as “vehicle dealers”) and their customers in the United States (excluding Hawaii) (the “U.S.”) and Puerto Rico.  We also provide finance products to commercial and industrial equipment dealers (“industrial equipment dealers”) and their customers.  Our products fall primarily into the following finance and insurance product categories:

We support growth in earning assets through funding obtained in the capital markets as well as funds provided by operating activities.  Refer to the “Liquidity and Capital Resources” section of Item 7., “Management’s Discussion and Analysis of Financial Condition and Results of Operations” (“MD&A”) for a detailed discussion of our funding activities.  A more detailed description of the products and services offered by us is contained within this Business section.  Refer to Note 1718 – Segment Information of the Notes to Consolidated Financial Statements for financial information including assets, revenues, and net income generated by these segments.

We primarily acquire and service finance, lease, and insurance contracts from vehicle dealers through 30 dealer sales and services offices (“DSSOs”) located throughout the U.S. and three regional customer service centers (“CSCs”) and from industrial equipment dealers through a corporate department located at our headquarters in Torrance, California.  The DSSOs primarily support vehicle dealer financing needs by providing services such as acquiring finance and lease contracts from vehicle dealers, financing inventories, and financing other dealer activities and requirements such as business acquisitions, facilities refurbishment, real estate purchases, and working capital requirements.  The DSSOs also provide support for our insurance products sold in the U.S.  The CSCs support customer account servicing functions such as collections, lease terminations, and administration of retail and lease customer accounts.  The Central region CSC also supports insurance operations by providing customer service and handling claims processing.  Refer to Item 2., “Properties” for information on the geographical location of the DSSOs and CSCs.

Our filings with the Securities and Exchange Commission (“SEC”) may be read and copied at the SEC’s Public Reference Room at 100 F Street, N.E., Room 1580, Washington, D.C. 20549.  The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.  Our filings may also be found by accessing the SEC website (http://www.sec.gov).  The SEC website contains reports, registration statements, proxy and information statements, and other information regarding issuers that file electronically with the SEC.  A link to the SEC website is also contained on our website (http://www.toyotafinancial.com)located at: www.toyotafinancial.com under “About TFS” under “InvestorUs, Investor Relations”.  We will make available, without charge, electronic or paper copies of our filings upon written request to:

TMC files periodic reports and other information with the SEC, which can be read and copied at the SEC’s Public Reference Room at 100 F Street, N.E., Room 1580, Washington, D.C. 20549.  TMC’s filings may also be found at http://on its website located at: www.toyota.com under “About Toyota” under “Shareholder Information”“Company Info, Our Company, Our Business, Investor Relations, Presentations and SEC Filings”.

Revenues generated by receivables we own are generally not subject to seasonal variations.  Although financing volume is subject to a certain degree of seasonality, this seasonality does not have a significant impact on revenues as collections, generally in the form of fixed payments, occur over the course of several years.  The automotive finance industry is subject to seasonal variations in credit losses, which are typically higher in the first and fourth calendar quarters of the year.

As of March 31, 2007,2008, approximately 2322 percent of managed vehicle retail and lease assets were located in California, 910 percent in Texas, 7 percent in New York, and 6 percent in New Jersey.  Any material adverse changes to California’s, Texas’, New York’s, or New Jersey’s economies or applicable laws could have an adverse effect on our financial condition and results of operations.

We provide retail financing, leasing, wholesale financing, and certain other financial products and services to authorized Toyota and Lexus vehicle dealers and, to a lesser extent, other domestic and import franchised dealers and their customers in the U.S. and the Commonwealth of Puerto Rico. We also offer financing for various industrial and commercial products such as forklifts, light and medium-duty trucks, and electric vehicles.  Gross revenues related to transactions with industrial equipment dealers contributed 3 percent 4 percent, and 4 percent to total gross revenues in both fiscal 2008 and 2007, 2006, and 2005, respectively.4 percent in fiscal 2006.

The table below summarizes our financing revenues, net of depreciation by primary product.

We acquire new and used vehicle and industrial equipment finance and lease contracts primarily from Toyota and Lexus vehicle dealers and industrial equipment dealers.  Dealers transmit customer applications electronically to our online system for contract acquisition.  Applications that meet certain income, credit, and other requirements are approved by the system andwhile other applications are further analyzed by credit analysts.  We use a proprietary credit scoring system for decisioning credit applications. If approved, we acquire the retail finance contracts and a security interest in the vehicle or industrial equipment that is financed under the contract and we acquire the lease contracts and concurrently assume ownership of the leased vehicles or industrial equipment.  We view our lease arrangements, including our operating leases, as financing transactions as we do not seek to re-lease the vehicles or equipment upon default or at lease termination.

We utilize a tiered pricing program for retail and lease contracts.  The program matches customer risk with contract rates charged to allow for a range of risk levels.  Generally, each approved application is assigned a credit tier.  We review and adjust rates regularly based on competitive and economic factors. Rates vary based on credit tier, term, and collateral (if applicable), including whether a new or used vehicle is being financed.  Special rates may apply as a result of promotional efforts through subvention programs.

We regularly review and analyze our retail and lease portfolio to evaluate the effectiveness of our underwriting guidelines and purchasing criteria.

We also service our retail and lease contracts.  Each of our CSCs service the vehicle retail and lease contracts using the same servicing system and procedures, except that centralized tracking units monitor bankruptcy administration, post-charge-off, and recovery.  Our industrial equipment retail and lease contracts are serviced at a centralized facility.  The collection department manages the liquidation of each retail and lease contract.  We consider a customer to be past due if less than 90% of a regularly scheduled payment is received by the due date.

We use a behavioral-based collection strategy to minimize risk of loss and employ various collection methods.  Upon commencement of the contracts, we perfect our security interests through state Department of Motor Vehicles (or equivalent) Certificate of Title filings in the retail vehicles financed and through Uniform Commercial Code (“UCC”) filings in the industrial equipment financed andfinanced.  We have the right to repossess the assets if customers fail to meet contractual obligations and the right to enforce collection actions against the obligors under the contracts.

We generally determine whether to commence repossession efforts before an account is 60 days past due. Repossessed vehicles are held in inventory to comply with statutory requirements and then sold at private auctions, unless public auctions are required by applicable law.  Any unpaid amounts remaining after sale or after full charge off are pursued by us to the extent practical and legally permitted.   Collections of deficiencies are administered at a centralized facility.  Our policy is to charge off a retail or lease contract as soon as disposition of the vehicle has been effected and sales proceeds have been received, but may in some circumstances charge-off a retail or lease contract prior to repossession.  When repossession and disposition of the collateral has not been effected, our policy is to charge off as soon as we determine that the vehicle cannot be recovered, but not later than when the contract is 150 days contractually delinquent. Bankrupt accounts may be charged off after 150 days.  We sell the vehicles or industrial equipment through vehicle or industrial equipment dealers or physical auctions.  Repossessed vehicles are sold through a variety of distribution channels, similar to the sale of vehicles returned at lease end. Refer to the “Residual Value Risk” section of the MD&A for further discussion of our remarketing activities.

We may, in accordance with our customary servicing procedures, waive any prepayment charge, late payment charge, or any other fees that may be collected in the ordinary course of servicing the retail and lease account.   In addition, we may defer a customer’s obligation to make a payment by extending the contract term.

Substantially all of our retail and operating lease receivables are non-recourse to the vehicle and industrial equipment dealers, which relieves the vehicle and industrial equipment dealers from financial responsibility in the event of repossession.

We may experience a higher risk of loss if customers fail to maintain required insurance coverage.  The terms of our retail financing programs require customers to maintain physical damage insurance covering loss or damage to the financed vehicle or industrial equipment in an amount not less than the full value of the vehicle or equipment.  TMCC currently does not monitor ongoing insurance compliance as part of its customary servicing procedures for retail accounts.

Our vehicle lease contracts require lessees to maintain minimum liability insurance and physical damage insurance covering loss or damage to the leased vehicle in an amount not less than the full value of the vehicle.  TMCC monitors ongoing insurance compliance only in certain vicarious liability states for lease contracts.  Refer to the “Regulatory Environment” section of this Business section for further discussion of this issue.

We are also responsible for the residual value of the leased asset if the lessee, vehicle dealer, or industrial equipment dealer does not purchase the asset at lease maturity.  At the end of the lease term, lease customers have the option to purchase the leased asset at the contractual residual value or return the leased asset to the vehicle or industrial equipment dealer.  If the leased asset is returned to the vehicle or industrial equipment dealer, the vehicle or industrial equipment dealer has the option of purchasing the leased asset or returning it to us.  In an effort to minimize losses incurred at lease maturity, we have developed remarketing strategies to maximize proceeds and minimize disposition costs on used vehicles and industrial equipment sold at lease termination.  We use various channels to sell vehicles returned at lease maturity.  Refer to the “Residual Value Risk” section of the MD&A for further discussion of our remarketing activities.  Industrial equipment returned by the lessee or industrial equipment dealer is sold through authorized Toyota industrial equipment dealers or wholesalers using a bidding process.

Toyota Lease Trust, a Delaware business trust (the “Titling Trust”), acts as lessor and holds title to leased vehicles in specified states.  This arrangement was established to facilitate a previously utilized lease securitization program.  Lease contracts acquired by the Titling Trust from Toyota and Lexus vehicle dealers are serviced by TMCC in the same manner as lease contracts owned directly by us.  We hold an undivided trust interest in lease contracts owned by the Titling Trust, and these lease contracts are included in our lease assets unless and until such time as the interests in the contracts are transferred in a securitization transaction.  We do not presently have an active lease securitization program.

Dealer financing is comprised of wholesale financing and other financing options designed to meet dealer business needs.

We provide wholesale financing, also referred to as floorplan financing, to vehicle and equipment dealers for inventories of new and used Toyota, Lexus, and other vehicles and industrial equipment.  We acquire a security interest in vehicles financed at wholesale, which we perfect through UCC filings, and these financings may be backed by corporate or individual guarantees from, or on behalf of, participating vehicle and industrial equipment dealers, dealer groups, or dealer principals.  In the event of vehicle or industrial equipment dealer default under a wholesale loan arrangement, we have the right to liquidate assets in which we have a perfected security interest and seek legal remedies pursuant to the wholesale loan agreement and any applicable guarantees.

TMCC and Toyota Motor Sales, U.S.A., Inc. (“TMS”), our affiliate, have entered into an Amended and Restated Repurchase Agreement.  This agreement states that TMS will arrange for the repurchase of new Toyota and Lexus vehicles at the aggregate cost financed by TMCC in the event of vehicle dealer default under floorplan financing.  TMCC also entered into similar agreements with Toyota Material Handling, U.S.A., Inc. (“TMHU”), Hino Motor Sales, U.S.A., Inc. (“HINO”), and other domestic and import manufacturers.  TMHU is the primary distributor of Toyota lift trucks in the U.S., and HINO is the exclusive U.S. distributor of commercial trucks manufactured by Hino Motors Ltd. of Japan.

We extend term loans and revolving lines of credit to vehicle and industrial equipment dealers for business acquisitions, facilities refurbishment, real estate purchases, and working capital requirements.  These loans are typically secured with liens on real estate, vehicle inventory, and/or other dealership assets, as appropriate, and usually are guaranteed by the personal or corporate guarantees of the dealer principals or dealerships.  We also provide financing to various multi-franchise dealer organizations, referred to as dealer groups, often as part of a lending consortium, for wholesale, working capital, real estate, and business acquisitions.  These loans are typically collateralized with liens on real estate, vehicle inventory, and/or other dealership assets, as appropriate.  We obtain a personal guarantee from the vehicle or industrial equipment dealer or corporate guarantee from the dealership when deemed prudent.  Although the loans are typically collateralized or guaranteed, the value of the underlying collateral or guarantees may not be sufficient to cover our exposure under such agreements.  We price the credit facilities according to the risks assumed in entering into the credit facility and competitive factors.

TMCC markets its insurance products through Toyota Motor Insurance Services, Inc. (“TMIS”), a wholly-owned subsidiary. TMIS and its wholly-owned insurance company subsidiaries’ principal activities include marketing, underwriting, and claims administration related to covering certain risks of Toyota, Lexus, and other domestic and import franchise dealers and their customers.  TMIS’ primary business consists of issuing vehicle service and maintenance contracts and guaranteed auto protection (“GAP”) agreements sold to customers by or through Toyota and Lexus vehicle dealers, and certain other domestic or import vehicle dealers in the U.S.  TMIS also obtains a significant portion of vehicle service contract business by providing supplemental coverage to the basic factory warrantyTMS coverage on certified Toyota and Lexus pre-owned vehicles. TMIS also provides other coverage and related administrative services to certain of our affiliates.

Changes in the volume of vehicle sales, changes in vehicle dealers’ utilization of programs offered by TMIS, or changes in the level of coverage purchased by TMSaffiliates could materially impact the level of TMIS operations.  Gross revenues from insurance operations comprised 6 percent, 7 percent, 6 percent, and 76 percent of total gross revenues for fiscal 2008, 2007, 2006, and 2005,2006, respectively.

Vehicle service agreements (“VSA”) offer vehicle owners and lessees mechanical breakdown protection for new and used vehicles secondary to the manufacturer’s new vehicle warranty.  VSA coverage is available on Toyota and Lexus vehicles and other domestic and import vehicles.  Certified pre-owned contracts offer coverage on Toyota and Lexus vehicles only.  GAP insurance, or debt cancellation agreements, provides coverage for a lease or retail contract deficiency balance in the event of a total loss of the covered vehicle.

TMIS, through its wholly-owned subsidiary, provides insurance to TMCC covering Toyota, Lexus, and certain other domestic and import vehicle dealers’ inventory financed by TMCC.  TMIS has obtained reinsurance on the inventory insurance policy covering the excess of certain dollar maximums per occurrence and in the aggregate.  Through reinsurance, TMIS limits its exposure to losses by obtaining the right to reimbursement from the assuming company for the reinsured portion of losses.

TMIS administers various other products and programs includingprovides prepaid maintenance programs covering Toyota, Lexus and certain other domestic and import vehicles. TMIS, through its wholly-owned subsidiary, provides umbrella liability insurance to TMS and affiliates covering certain dollar value layers of risk above various primary or self-insured retentions.  On all layers in which TMIS has provided coverage, 99 percent of the risk has been ceded to various reinsurers.

Our business is substantially dependent upon the sale of Toyota and Lexus vehicles and our ability to offer competitive financing and insurance products in the U.S.  TMS is the primary distributor of Toyota and Lexus vehicles in the U.S.  Automobiles and light trucks sold by TMS during fiscal 2007, 2006, and 2005 totaled 2.6 million units during both fiscal 2008 and fiscal 2007, and totaled 2.3 million units and 2.1 million units, respectively.  Duringduring fiscal 2007, 2006, and 2005,2006.  Toyota and Lexus vehicles accounted for approximately 16 percent 13 percent, and 13 percent, respectively, of all retail automobile and light duty truck unit sales volume in the U.S.U.S during both fiscal 2008 and fiscal 2007, while accounting for 13 percent of all retail automobile and light duty truck unit sales volume in the U.S during fiscal 2006.

Certain lease and retail financing programs we have offered on vehicles and industrial equipment are subvened by our affiliates.  TMS sponsors subvention programs on certain new and used Toyota and Lexus vehicles that result in reduced monthlyscheduled payments to qualified retail and lease customers.  Reduced monthlyscheduled payments on certain Toyota industrial equipment to qualified lease and retail financing customers are subvened by various affiliates.

Subvention amounts received in connection with these programs typically approximate the amounts required by TMCC to maintain yields at levels consistent with standard program levels.  The level of subvention program activity varies based on our and our affiliates’ marketing strategies, economic conditions, and level of vehicle sales.  Subvention amounts received vary based on the mix of Toyota and Lexus vehicles and timing of programs and are earned over expected retail receivable and lease contract terms.

TMCC and TMS are parties to a Shared Services Agreement which cover certain technological and administrative services, such as information systems support, facilities, insurance coverage, and corporate services provided by each entity to the other.  TMCC and TMS are also parties to an Amended and Restated Repurchase Agreement, which provides that TMS will arrange for the repurchase of new Toyota and Lexus vehicles at the aggregate cost financed by TMCC in the event of vehicle dealer default under floorplan financing.  TMCC is also a party to similar agreements with TMHU, HINO, and other domestic and import manufacturers.  TMCC and Toyota Financial Savings Bank (“TFSB”), a Nevada thrift company owned by TFSA, (“TFSB”), are parties to a Master Shared Services Agreement under which TMCC and TFSB provide certain services to the other.  These agreements are further discussed inSee Note 1617 – Related Party Transactions of the Notes to Consolidated Financial Statements.Statements for further information.

Employees of TMCC, Toyota Credit de Puerto Rico Corp. (“TCPR”), and TMCC’s insurance subsidiaries are generally eligible to participate in the TMS pension plan, the Toyota Savings Plan sponsored by TMS, and various health and life and other post-retirement benefits sponsored by TMS, as discussed further in Note 1314 – Pension and Other Benefit Plans of the Notes to Consolidated Financial Statements.

Credit support agreements exist between us and TFSC and between TFSC and TMC.  These agreements are further discussed in the “Liquidity and Capital Resources” section of the MD&A and Note 1617 – Related Party Transactions of the Notes to Consolidated Financial Statements.

TMIS provides administrative services to TMS which are discussed in Note 1617 – Related Party Transactions of the Notes to Consolidated Financial Statements.  In addition, TMIS provides various levels and types of insurance coverage to TMS, including the warranty coverage for TMS’ certified pre-owned vehicle program.  TMIS, through its wholly-owned subsidiary, provides umbrella liability insurance to TMS and affiliates covering certain dollar value layers of risk above various primary or self-insured retentions.  On all layers in which TMIS has provided coverage, 99 percent of the risk has been ceded to various reinsurers.

Competition for the principal products and services provided through our insurance operations is primarily from national and regional independent service contract providers.  We compete primarily through service quality, our relationship with TMS, and pricing.  We seek to offer our vehicle dealers competitively priced products and excellent customer service.  Our relationship with TMS provides an advantage in selling our products and services.

Our finance and insurance operations are regulated under both federal and state law.  We are governed by, among other federal laws, the Equal Credit Opportunity Act, the Truth-in Lending Act, the Fair Credit Reporting Act, and the consumer data privacy and security provisions of the Gramm-Leach Bliley Act.  A majority of states (as well as the Commonwealth of Puerto Rico) have enacted legislation establishing licensing requirements to conduct retail and other finance and insurance activities.  Most states also impose limits on the maximum rate of finance charges.  In certain states, the margin between the present statutory maximum interest rates and borrowing costs is sufficiently narrow that, in periods of rapidly increasing or high interest rates, there could be an adverse effect on our operations in these states if we were unable to pass on increased interest costs to our customers.  State laws also impose requirements and restrictions on us with respect to, among other matters, required credit application and finance and lease disclosures, late and other fees and charges, the right to repossess a vehicle for failure to pay or other defaults under the finance or lease contract, other rights and remedies we may exercise in the event of a default under the finance or lease contract, privacy matters, and other consumer protection matters.  In addition, state laws differ as to whether anyone suffering injury to person or property involving a leased vehicle may bring an action against the owner of the vehicle merely by virtue of that ownership.  To the extent that applicable state law permits such an action, we may be subject to liability to such an injured party.  However, the laws of most states either do not permit such suits or limit the lessor’s liability to the amount of any liability insurance that the lessee was required under applicable law to maintain (or, in some states, the lessor was permitted to maintain), but failed to maintain.  Our lease contracts in the U.S. contain provisions requiring the lessees to maintain levels of insurance satisfying applicable state law, and we maintain certain levels of contingent liability insurance for protection from catastrophic claims.  TMCC monitors ongoing lease insurance compliance only in certain vicarious liability states.  Due to recently-enacted federal law, states are no longer permitted to impose unlimited vicarious liability on lessors of leased vehicles.  This federal law has been subjected to judicial actions challenging the law’s constitutionality and preemption of state law.  TMCC continues to monitor the impact of the repeal of unlimited vicarious liability.liability and the related judicial challenges.  At this time, TMCC has not modified its insurance compliance monitoring programs as a result of this law.  We encounter higher risk of loss if the customers fail to maintain the required insurance coverage.

Our insurance operations are subject to state insurance regulations and licensing requirements.  State laws vary with respect to which products are regulated and what types of corporate licenses are required to offer certain products and services.  Insurance company subsidiaries must be appropriately licensed in certain states in which they conduct business and must maintain minimum capital requirements as determined by their state of domicile.  Failure to comply with these state requirements could have an adverse effect on insurance operations in a particular state.  We actively monitor applicable laws and regulations in each state in order to maintain compliance.

We continually review our operations for compliance with applicable laws.  Future administrative rulings, judicial decisions, and legislation may require modification of our business practices and documentation.

As a registrant with the SEC under the Securities Exchange Act of 1934, as amended, we are subject to various federal securities laws and regulations including, but not limited to, the Sarbanes-Oxley Act of 2002.  We are also subject to similar laws and regulations in the foreign countries in which we obtain debt funding.  We maintain policies and procedures to ensure compliance with applicable laws and regulations.

At April 30, 2007,2008, we had approximately 3,0543,200 full-time employees.  We consider our employee relations to be satisfactory.  We are not subject to any collective bargaining agreements with our employees.

We are exposed to certain risks and uncertainties that could have a material adverse impact to our financial condition and operating results.

Our business is substantially dependent upon the sale of Toyota and Lexus vehicles and our ability to offer competitive financing and insurance products in the U.S.  TMS is the primary distributor of Toyota and Lexus vehicles in the U.S.  TMS also sponsors special rate retail financing and lease (“subvention”) programs offered by us in the U.S. on certain new and used Toyota and Lexus vehicles. The level of subvention varies based on TMS’ marketing strategies, economic conditions, and volume of vehicle sales.  Changes in the volume of sales of such vehicles resulting from governmental action, changes in consumer demand, changes in the level of TMS sponsored subvention programs, increased competition, or changes in pricing of imported units due to currency fluctuations or other events could impact the level of our finance and insurance operations.  To date, the level of sales of Toyota and Lexus vehicles has not restricted our operations.  Refer to Item 1., “Business – Relationships with Affiliates” and Note 1617 – Related Party Transactions of the Notes to Consolidated Financial Statements for further discussioninformation regarding our relationship with TMS.

Our credit ratings depend, in part, on the existence of the credit support arrangements discussed in the “Liquidity and Capital Resources – Credit Support Agreements” section of the MD&A and on the financial condition and operating results of TMC.  Should we for any reason not have the benefit of these arrangements (or replacement arrangements acceptable to the rating agencies), or should the credit ratings of the credit support providers identified in such arrangements be lowered, we would expect that our credit ratings would be lower than our current ratings, leading to higher borrowing costs.  However, we believe that the credit support arrangements will continue to be available.

We are exposed to risk of loss on the disposition of leased vehicles and industrial equipment to the extent that sales proceeds realized upon the sale of returned lease assets are not sufficient to cover the residual value that was estimated at lease inception.  Residual value represents an estimate of the end of term market value of a leased asset.  When the market value of a leased asset at contract maturity is less than its contractual residual value, there is a higher probability that the leased asset will be returned to us.  A higher rate of returns exposes us to greater risk of loss at lease termination.  Refer to the “Residual Value Risk” section of the MD&A for further discussion regarding our exposure to this risk.

Credit risk is the risk of loss arising from the failure of a customer or dealer to meet the terms of any contract with us or otherwise fail to perform as agreed.  Refer to the “Credit Risk” section of the MD&A for further discussion regarding our exposure to this risk.

Liquidity risk is the risk arising from our inability to meet obligations when they come due in a timely manner.  Our liquidity strategy is to maintain the capacity to fund assets and repay liabilities in a timely and cost-effective manner even in the event of adverse market conditions.  Refer to the “Liquidity and Capital Resources” section of the MD&A for further discussion regarding our exposure to this risk.

Market risk is the risk that changes in market interest rates or prices will negatively impact our income, capital, and market value.  Policies governing market risk exposure are established and periodically reviewed by our senior management as conditions warrant.  We use derivative instruments, along with other tools and strategies, to manage our market risk.  We have established procedures to ensure that our risk management, including our use of derivatives, is in accordance with our policy framework.  Refer to Item 7A., “Quantitative and Qualitative Disclosures About Market Risk” for further discussion regarding our exposure to this risk.

Operational risk is the risk of loss resulting from, among other factors, inadequate or failed processes, systems or internal controls, theft, fraud, or natural disaster.  Operational risk can occur in many forms including, but not limited to, errors, business interruptions, failure of controls, inappropriate behavior of or misconduct by our employees or those contracted to perform services for us, and vendors that do not perform in accordance with their contractual agreements.  These events can potentially result in financial losses or other damages to us, including damage to our reputation.

We rely on internal and external information and technological systems to manage our operations and are exposed to risk of loss resulting from breaches in the security or other failures of these systems.  Additionally, theAny upgrade and replacement of our major legacy transaction systems as part of the technology initiative discussed in the “Operating and Administrative Expenses” section of the MD&A could have a significant impact on our ability to conduct our core business operations and increase our risk of loss resulting from disruptions of normal operating processes and procedures that may occur during the implementation of new information and transaction systems.

In order to monitor and manage operational risk, we maintain a framework of internal controls designed to provide a sound and well-controlled operational environment. However, due to the complexity of our business and the challenges inherent in implementing control structures across global organizations, problems could be identified in the future, and management can provide no assurance that these problems will not have a material effect on our operations.

We operate in a highly competitive environment.  Increases in competitive pressures could have an adverse impact on our contract volume, market share, revenues, and margins.  Refer to “Competition” in Item 1., “Business – Competition”“Business” for further discussion of the competitive factors affecting our business.

Our business is exposed to the risk of catastrophes, including natural events, such as

We are exposed to customer concentration risk in certain states.  Factors adversely affecting the economies and applicable laws in these states could have an adverse effect on our consolidated financial position or results of operations.  Refer to “Geographic Distribution of Operations” in Item 1., “Business” for further discussion regarding our exposure to this risk.

Our insurance subsidiary is subject to the risk of loss if our reserves for unearned premium and service revenues on unexpired policies and agreements in force are not sufficient.  The risk associated with using historical loss experience as a basis for establishing earnings factors used to recognize revenue over the term of the contract or policy is that the timing of revenue recognition will materially vary from the actual loss development.  Our insurance subsidiary is also subject to the risk of loss if our reserves for reported losses, losses incurred but not reported, and loss adjustment expenses are not sufficient.  The risk associated with the projection of future loss payments is the assumption that historical loss development patterns will reasonably predict loss development patterns on existing agreements in force. Our management mitigates the risks associated with the use of such estimates by using credentialed actuaries to evaluate the adequacy of our reserves, by periodically reviewing the methods used for making such estimates, and by having experienced claims personnel actively manage the claim settlement process.  Because the reserve establishment process is an estimate, actual losses may vary from amounts established in earlier periods.  Refer to Note 23 – Summary of Accounting Policies of the Notes to Consolidated Financial Statements for further description of the reserve setting process.

Reinsurance credit risk is the risk that a reinsurer providing reinsurance coverage to our insurance subsidiary will be unable to meet its obligations under the agreement.  We mitigate this risk by holding letters of credit and funds held agreements on behalf of certain reinsurers which are available to us as collateral for reinsurance balances.  In addition, we monitor the financial condition of our reinsurers and do not believe that we are exposed to any material credit risk.

There are no unresolved SEC staff comments to report.

Our finance and insurance headquarters operations are located in Torrance, California.California, and our facilities are leased from TMS.

Field operations for both finance and insurance are located in three regional customer service centers (“CSC”), three regional management offices, and 30 dealer sales and service offices (“DSSO”) in cities throughout the U.S.  Two of the DSSOs share premises with the regional customer services centers.  All three of the regional management offices share premises with DSSO offices.  The Central region CSC is located in Cedar Rapids, Iowa, and is leased from TMS.  The Western region CSC is located in Chandler, Arizona.  The Eastern region CSC is located in Owings Mills, Maryland.  We also have offices in the Commonwealth of Puerto Rico.  All premises are occupied under lease.

We believe that our properties are suitable to meet the requirements of our business.

Various legal actions, governmental proceedings and other claims are pending or may be instituted or asserted in the future against us with respect to matters arising in the ordinary course of business.  Certain of these actions are or purport to be class action suits, seeking sizeable damages and/or changes in our business operations, policies and practices.  Certain of these actions are similar to suits that have been filed against other financial institutions and captive finance companies.  Our management and internal and external counsel perform periodic reviews of pending claims and actions to determine the probability of adverse verdicts and resulting amounts of liability.  We establish reserves for legal claims when payments associated with the claims become probable and the costs can be reasonably estimated.  The actual costs of resolving legal claims and associated costs of defense may be substantially higher or lower than the amounts reserved for these claims.  However, based on information currently available, the advice of counsel, and established reserves, our management expects that the ultimate liability resulting therefrom will not have a material adverse effect on our consolidated financial statements.  We caution that the eventual development, outcome and cost of legal proceedings are by their nature uncertain and subject to many factors, including but not limited to, the discovery of facts not presently known to us or determinations by judges, juries or other finders of fact which do not accord with our evaluation of the possible liability from existing litigation.

TMCC has omitted this section pursuant to General Instruction I(2) of Form 10-K.

TMCC is a wholly-owned subsidiary of TFSA and, accordingly, all shares of TMCC’s stock are owned by TFSA.  There is no market for TMCC's stock.

Dividends are declared and paid by TMCC as determined by its Board of Directors.  No dividends were declared or paid during fiscal 2008.  TMCC’s Board of Directors declared and paid cash dividends of $130 million and $115 million to TFSA during fiscal 2007 and fiscal 2006, respectively.  No dividends were declared or paid in fiscal 2005.

Our insurance operations reported net income of $115$122 million and $56$115 million during fiscal 20072008 and fiscal 2006,2007, respectively.  Our results in fiscal 20072008 were primarily affected by a higher level of realized gains on our investment portfolio and increasedthe increase in contract revenues and earned premiums. This waspremiums, partially offset by the increase in insurance losses and loss adjustment expenses.  Insurance losses and loss adjustment expenses increased primarily due to the increaseincreases in theaverage number of agreements in force.

Overall, we have increased our capital position decreased by $270$224 million bringing total equity to $5.1$4.8 billion at March 31, 2007.2008.  Our debt-to-equity positions were 11.5614.20 and 10.1611.65 at March 31, 20072008 and 2006,2007, respectively.

Dealer financing increased primarily due to continued growth in the number of vehicle dealers receiving wholesale financing and our emphasis on developing dealer relationships.

We are exposed to risk of loss on the disposition of leased vehicles and industrial equipment to the extent that sales proceeds realized upon the sale of returned lease assets are not sufficient to cover the residual value that was estimated at lease inception.  Substantially all of our residual value risk relates to our vehicle lease portfolio.  To date, we have not incurred material residual value losses related to our industrial equipment portfolios.

Residual value represents an estimate of the end of term market value of a leased asset.  The primary factors affecting our exposure to residual value risk are the levels at which residual values are established at lease inception, projected market values, and the resulting impact on vehicle lease return rates and loss severity.  The evaluation of these factors involves significant assumptions, complex analysis, and management judgment.  Refer to the “Critical Accounting Estimates” section of this MD&A for further discussion of the estimates involved in the determination of residual values.

Residual values are estimated at lease inception by examining external industry data and our own experience.  Factors considered in this evaluation include, but are not limited to, expected economic conditions, new vehicle pricing, new vehicle incentive programs, new vehicle sales, product attributes of popular vehicles, the mix of used vehicle supply, the level of current used vehicle values, and fuel prices.  These factors are evaluated in the context of their historical trends to anticipate potential changes in the relationship among those factors in the future.

Our management periodically reviews the estimated end of term market values of leased vehicles to assess the appropriateness of its carrying values.  To the extent the estimated end of term market value of a leased vehicle is lower than the residual value established at lease inception, the residual value of the leased vehicle is adjusted downward so that the carrying value at lease end will approximate the estimated end of term market value.  These adjustments are made over time for operating leases by recording depreciation expense in the Consolidated Statement of Income.  Refer to the “Depreciation on Operating Leases” section of this MD&A for further discussion.  For direct finance leases, the impact of the estimated decline in end of term market values is recorded at the time of assessment as a reduction of direct finance lease revenue which is included under our retail financing revenues in the Consolidated Statement of Income.  Factors considered in this assessment are similar to those considered in the evaluation of residual values at lease inception discussed above.

The vehicle lease return rate represents the number of end of term leased vehicles returned to us for sale as a percentage of lease contracts that were originally scheduled to mature in the same period.  When the market value of a leased vehicle at contract maturity is less than its contractual residual value (i.e., the price at which the lease customer may purchase the leased vehicle), there is a higher probability that the vehicle will be returned to us.  In addition, a higher market supply of certain models of used vehicles generally results in a lower relative level of demand for those vehicles, resulting in a higher probability that the vehicle will be returned to us.  A higher rate of vehicle returns exposes us to greater risk of loss at lease termination.

Loss severity is the extent to which the end of term market value of a leased vehicle is less than the estimated residual value.  Although we employ a rigorous process to estimate end of term market values, we may incur losses to the extent the end of term market value of a leased vehicle is less than the estimated residual value.

At the end of the lease contract, lease customers have the option to purchase the vehicle at the contractual residual value or return the vehicle to the vehicle dealer.  If the vehicle is returned to the vehicle dealer, the vehicle dealer has the option of purchasing the vehicle or returning it to us.  We have developed remarketing strategies to maximize proceeds and minimize disposition costs on used vehicles sold at lease termination.  We use various channels to sell vehicles returned at lease end, including the following:

The goal of the Dealer Direct program (“Dealer Direct”) is to increase vehicle dealer purchases of off-lease vehicles thereby reducing the disposition costs of such vehicles.  Through Dealer Direct, the vehicle dealer accepting the lease return (the “grounding vehicle dealer”) has the option to purchase the vehicle at the contractual residual value, purchase the vehicle at an assessed market value, or return the vehicle to us.  During fiscal 2007, 352008, 42 percent of returned vehicles were sold to the grounding vehicle dealer, compared to 3135 percent sold during fiscal 2006.2007.  The percentage of available full term off lease units purchased by grounding vehicle dealers in fiscal 2008 increased primarily due to an increased number of dealers participating in the Dealer Direct program.  In addition, the higher demand for Toyota and Lexus vehicles increased the average number of units purchased by each dealer.  Vehicles not purchased by the grounding vehicle dealer are made available to all Toyota and Lexus vehicle dealers through the Dealer Direct online auction.  During fiscal 2007, 122008, 8 percent of returned vehicles were sold through the Dealer Direct online auction to franchise vehicle dealers, compared to 1012 percent sold during fiscal 2006.2007.  This decrease is in line with the increase in the number of vehicles purchased by the grounding vehicle dealer.  As more vehicles are purchased by the grounding vehicle dealers, fewer vehicles are available through the Dealer Direct online auction.  The disposition costs of vehicles sold through the Dealer Direct online auction are lower than the costs of those sold through auction sites.  The average holding period of a vehicle sold through Dealer Direct was approximately 67 days, as compared to approximately 2530 days for all off-lease vehicles sold.

Vehicles not purchased through Dealer Direct are sold at physical vehicle auction sites throughout the country.  During fiscal 2007,2008, approximately 5350 percent of returned vehicles were sold through physical auction, compared to approximately 5953 percent of returned vehicles sold during fiscal 2006.2007.  Where necessary, we recondition used vehicles prior to sale in order to enhance the vehicle values at auction.  Additionally, we redistribute vehicles geographically to minimize oversupply in any location.

  contractual residual value.

Scheduled maturities remained fairly constantconsistent in fiscal 20072008 compared to fiscal 2006.  The2007, as did the number of vehicles sold at lease termination decreased in fiscal 2007 compared to fiscal 2006 due to lower return rates.  Lower return rates were primarily due to the favorabilitytermination.  These amounts are not indicative of usedfuture scheduled maturities and future vehicle market values relative to contractual residual values on certain vehicles in fiscal 2007.sales at lease termination.

The following table provides information related to our depreciation on operating leases:

We record depreciation expense on the portion of our lease portfolio classified as operating leases.   Depreciation expense is recorded over the lease term and is based upon the depreciable basis of the leased vehicle.  Depreciable basis is the difference between a leased vehicle’s original acquisition value and its residual value established at lease inception.  Depreciation expense is recorded on a straight-line basis over the remaining life of the lease when the end of term market value is estimated to be less than the carrying value.  Refer to the “Residual Value Risk” section of this MD&A for a discussion regarding our exposure to residual value risk on our lease portfolio.  Refer to the “Critical Accounting Estimates” section of this MD&A for a further discussion of the estimates involved in the determination of residual values.

Depreciation expense on operating leases increased during fiscal 20072008 compared to fiscal 20062007 primarily due to an increase in the average number of operating lease vehicles outstanding.  Depreciation expense is also affected by changes in the used vehicle market because used vehicle market trends are a significant factor in estimating end of term market values.  During fiscal 2007,2008, the used vehicle market was stable and did not materially contribute to the increase in depreciation expense.

We are exposed to credit risk on our earning assets.  Credit risk is the risk of loss arising from the failure of a customer or dealer to meet the terms of any contract with us or otherwise fail to perform as agreed.  Our level of credit risk on our retail and lease portfolio is influenced primarily by two factors: the total number of contracts that default (“frequency of occurrence”) and the amount of loss per occurrence (“loss severity”), which in turn are influenced by various economic factors, the used vehicle market, purchase quality mix, contract term length, and operational changes (asas discussed below).below.  Our level of credit risk on our dealer financing portfolio is influenced primarily by the financial strength of dealers within our portfolio, dealer concentration, collateral quality, and economic factors.  To date, we have not incurred material credit losses on our dealer financing portfolio.

General economic conditions such as sudden changes in housing values, unemployment rates, bankruptcy rates, consumer debt levels, fuel prices, consumer credit performance, interest rates, and inflation can influence both the frequency of occurrence and loss severity.

Changes in used vehicle prices directly affect the proceeds from sales of repossessed vehicles and, accordingly, the level of loss severity we have experienced.  The supply of and demand for used vehicles, interest rates, inflation, the level of manufacturer incentives on new vehicles, and general economic outlook are some of the factors affecting the used vehicle market.

A change in the mix of contracts acquired at various risk levels may change the amount of credit risk we assume.  An increase in the number of contracts acquired with lower credit quality (as measured by scores that establish a consumer’s creditworthiness based on present financial condition, experience, and past credit history) can increase the amount of credit risk.  Conversely, an increase in the number of contracts with higher credit quality acquired can lower credit risk.  An increase in the mix of contracts with lower credit quality can also increase operational risk unless appropriate controls and procedures are established.  We strive to price contracts in order to achieve an appropriate risk adjusted return on investment.

The average original contract term of retail and lease vehicle contracts influences credit losses.  Longer term contracts (those having original terms of 48, 60, or 72 months) generally experience a higher rate of default and thus affect the frequency of occurrence andoccurrence.  In addition, vehicles under longer term contracts depreciate at a slower rate which may lead to increased loss severity.

Operational changes and ongoing implementation of new information and transaction systems are designed to have a positive effect on our operations, including customer service improvements in the management of delinquencies and credit losses, through the implementation of processes and tools that create greater operational efficiency and effectiveness. We continue to make improvements in our service operations and credit loss management methods.

The financial strength of dealers to which we extend credit directly influences credit risk.  Lending to dealers with lower quality credit characteristics increases the risk of loss we assume.  Extending a substantial amount of financing or commitments to a specific dealer or group of dealers creates a concentration of credit risk, particularly when the financing is unsecured or not fully secured by realizable assets.  Collateral quality influences credit risk in that lower quality collateral increases the risk that, in the event of dealer default, the value of the collateral will be less than the amount owed to us.

The level of credit losses is influenced primarily by two factors: frequency of occurrence and loss severity.  Frequency of occurrence as a percentage of average outstanding contracts remained constant atincreased to 2.2% for fiscal 2008, as compared to 1.8% for fiscal 2006 and fiscal 2007. Loss2007 while loss severity increased by 7.9%10.1% from fiscal 20062007 to fiscal 2007 primarily due to the broader range of credit quality within the retail portfolio.

WeDue to the adverse change in the credit environment discussed above, we experienced an overall increase in 60-day delinquencies on the overall portfolio primarilyand an increase in credit related costs due to the higher credit risk and exposure within the retailportfolio.

Furthermore, the impact of the adverse change in the credit environment and the deterioration of the used vehicle prices contributed to higher contract defaults and higher loss severity.  As a result, management strengthened its collection practices in an effort to mitigate credit losses and increased the provision for credit losses.  Our provision for credit losses increased substantially in fiscal 2008 compared to fiscal 2007, primarily reflecting higher delinquencies in the consumer portfolio as described above.and adverse trends in the macroeconomic environment and in the estimate of future loan losses.