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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

(Mark One)

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

For the fiscal year ended March 31, 2004

OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

For the transition period from _______ to _______

Commission file number 1-9961

TOYOTA MOTOR CREDIT CORPORATION

(Exact name of registrant as specified in its charter)

Registrant's telephone number, including area code:                 (310) 468-1310

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

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

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

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934).
Yes        No    X   

As of April 30, 2004, the number of outstanding shares of capital stock, par value $10,000 per share, of the registrant was 91,500, all of which shares were held by Toyota Financial Services Americas Corporation.

PART I

ITEM 1. BUSINESS

GENERAL

Toyota Motor Credit Corporation (“TMCC”) was incorporated in California in 1982 and commenced operations in 1983. TMCC and its consolidated subsidiaries, collectively referred to herein as the “Company”, 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 finance operations. TMCC is marketed under the brands of Toyota Financial Services and Lexus Financial Services.

The Company provides 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. The Company also provides finance and insurance products to commercial and industrial equipment dealers (“industrial equipment dealers”) and their customers. The Company’s products fall primarily into the following financing and insurance product categories:

The Company supports 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 Discussion and Analysis of Financial Condition and Results of Operations” (“MD&A”) for a detailed discussion of the Company’s funding activities. A more detailed description of the products and services offered by the Company is contained within this Business section. Refer to Note 16 – Segment Information of the Notes to Consolidated Financial Statements for financial information including assets, revenues, and net income generated by these segments. Certain prior period amounts in this Form 10-K have been reclassified to conform to the current period presentation.

The Company primarily purchases and services finance and lease contracts from vehicle dealers through 30 dealer sales and services offices (“DSSOs”) and three customer service centers (“CSCs”) and from industrial equipment dealers through a corporate department located at the Company’s headquarters in Torrance, California. The DSSOs primarily support vehicle dealer financing needs by providing services such as purchasing finance and lease contracts from vehicle dealers, financing inventories, and financing other dealer activities such as business acquisitions, facilities refurbishment, real estate purchases and working capital requirements. The DSSOs also provide information and support for the Company’s finance and insurance products sold in the United States (excluding Hawaii) (“U.S.”). The CSCs support customer account servicing functions such as collections, lease terminations, and administration of retail and lease customer accounts. Prior to fiscal 2003, the functions currently performed by the DSSOs and CSCs were provided by 33 branch offices and one customer service center. Refer to the “Results of Operations — Operating and Administrative Expenses” and “Results of Operations — Credit Risk” sections of the MD&A for further discussion of related restructuring charges and the impact of the restructuring on the Company’s operating results.

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During fiscal 2004 the Company launched a multi-year initiative to replace its major legacy transaction systems, including the retail, lease, vehicle wholesale, and insurance transaction systems. The purpose of the initiative is to implement simplified, streamlined technology solutions to improve service delivery to its customers, speed information management, and support continued profitable growth. The Company expects to incur significant costs related to this initiative during the next several fiscal years. Refer to the “Results of Operations — Operating and Administrative Expenses” section of the MD&A for further discussion regarding expected costs to be incurred as a result of this initiative. In addition, the Company could incur additional losses as a result of disruptions of the Company’s processes and procedures during implementation of the new systems.

Public Filings

The Company’s filings with the Securities and Exchange Commission (“SEC”) may be read and copied at the SEC’s Public Reference Room at 450 Fifth Street, N.W., 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. The Company’s 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 the Company’s website (http://www.toyotafinancial.com) under “Investor Relations”. The Company will make available, without charge, electronic or paper copies of its filings upon written request to:

   Toyota Motor Credit Corporation
   19001 South Western Avenue
   Torrance, CA 90509
   Attention: Corporate Communications

Seasonality

Revenues generated by receivables owned by the Company are generally not subject to seasonal variations. Although contract 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, and therefore the Company, is subject to seasonal variations in credit losses, which are typically higher in the first and fourth calendar quarters of the year.

Geographic Distribution of Operations

The Company’s primary finance and insurance operations are located in the U.S. and the Commonwealth of Puerto Rico (“U.S. operations”) with earning assets principally sourced through Toyota and Lexus vehicle dealers. The Company also conducted business in Mexico and Venezuela through wholly owned subsidiaries. The combined assets, liabilities and net losses of the Company’s international subsidiaries totaled less than 1% of each of the consolidated assets, liabilities and net income of the Company as of, and for the period ended, March 31, 2004. The Company also held a minority interest in a TFSC majority-owned subsidiary in Brazil and continues to hold a minority interest in a TFSA majority-owned subsidiary in Argentina.

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During the fourth quarter of fiscal 2004, TMCC’s Board of Directors approved a plan to sell its Mexican and Venezuelan subsidiaries and its holdings in the Brazilian subsidiary to TFSA. The sale of these interests was completed in April 2004. Refer to Note 18-Subsequent Events of the Notes to Consolidated Financial Statements for further discussion of the terms and conditions of the sale. Due to the immaterial size of the Mexican and Venezuelan operations and the Brazilian holdings relative to the Company’s consolidated financial condition and results of operations, the related assets, liabilities, and results of operations are included with the results of ongoing operations in the Company’s consolidated balance sheet and consolidated statement of income.

As of March 31, 2004, approximately 24% of managed retail and lease assets were located in California, 8% in Texas, and 7% in New York. The concentration of the remaining retail and lease assets is spread throughout the other 46 serviced states. Any material adverse changes to California’s, Texas’ or New York’s economy could have an adverse effect on the Company’s financial condition and results of operations.

Risk Factors

The Company is exposed to certain risks and uncertainties that could have a material adverse impact to the Company’s financial condition and operating results:

Residual Value Risk

Residual value risk is the risk that the estimated residual value at lease origination will not be recoverable at the end of the lease term. When the market value of a leased vehicle at contract maturity is less than its contractual residual value, there is a higher probability that the vehicle will be returned to the Company. A higher rate of vehicle returns exposes the Company to greater risk of loss at lease termination. Refer to the “Results of Operations — Residual Value Risk” section of the MD&A for further discussion regarding the Company’s exposure to this risk.

Credit Risk

Credit risk is the risk of loss arising from a failure of a customer or dealer to meet the terms of any contract with the Company or otherwise fail to perform as agreed. The Company’s level of credit risk is influenced primarily by two factors: the total number of contracts that default and the loss per occurrence, which in turn are influenced by various economic factors, the used vehicle market, contract term length, purchase quality mix, and organizational and operational changes. Refer to the “Results of Operations — Credit Risk” section of the MD&A for further discussion regarding the Company’s exposure to this risk.

Liquidity Risk

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

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Market Risk

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

Operational Risk

Operational risk is the risk of loss resulting from, among other factors, inadequate or failed processes or systems, theft, fraud, or natural disaster. Operational risk can occur in many forms including, among others, errors, business interruptions, inappropriate behavior of or misconduct by the Company’s employees or those contracted to perform services for the Company, and vendors that do not perform in accordance with their contractual agreements. These events can potentially result in financial losses or other damages to the Company. The Company relies on internal and external information and technological systems to manage the Company’s operations and is exposed to risk of loss resulting from breaches in the security, or other failures of these systems. The replacement of the Company’s major legacy transaction systems could have a significant impact on its ability to conduct its core business operations and increase the Company’s 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, the Company maintains a framework of internal controls designed to provide a sound and well-controlled operational environment. The Company strives to maintain appropriate levels of operational risk relative to its businesses strategies, competitive and regulatory environment, and markets in which it operates. The Company also maintains appropriate levels of insurance coverage for those operating risks that can be mitigated through the purchase of insurance. Notwithstanding these control measures and insurance coverages, the Company remains exposed to operational risk. However, the Company’s approach to operational risk management is intended to mitigate such losses.

Regulatory Risk

Regulatory risk is the risk arising from the failure to comply with applicable regulatory requirements. Refer to the “Regulatory Environment” section of this Business section for further discussion of the Company’s exposure to this risk.

Counterparty Credit Risk

Counterparty credit risk is the risk that a counterparty may fail to perform on its contractual obligations in a derivatives contract. Refer to the “Liquidity and Capital Resources – Counterparty Credit Risk” section of the MD&A for further discussion regarding the Company’s exposure to this risk.

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Sales of Toyota and Lexus Vehicles

The Company’s business is substantially dependent upon the sale of Toyota and Lexus vehicles and its ability to offer competitive financing in the U.S. Toyota Motor Sales, U.S.A., Inc. (“TMS”), an affiliate of the Company, is the primary distributor of Toyota and Lexus vehicles in the U.S. TMS also subsidizes special rate retail financing and lease programs offered by the Company in the U.S. on certain new and used Toyota and Lexus vehicles. The level of subsidy varies based on TMS’s marketing strategies, economic conditions, and volume of vehicle sales. Changes in the volume of sales of such vehicles or level of sponsored programs resulting from governmental action, changes in consumer demand, changes in the level of TMS sponsored financing programs, increased competition, changes in pricing of imported units due to currency fluctuations or other events, could impact the level of finance and insurance operations of the Company. To date, the level of sales of Toyota and Lexus vehicles has not restricted the Company’s operations. Refer to the “Relationships with Affiliates” section in this Business section for further discussion regarding the Company’s relationship with TMS.

Factors Affecting Earnings Growth

The Company’s ability to continue to maintain its earnings growth is subject to a variety of factors, including changes in the overall market for retail financing, leasing or wholesale financing, changes in the level of sales of Toyota and Lexus vehicles in the U.S., rates of growth in the number and average balance of customer accounts, the U.S. regulatory environment, competition, rates of default by its customers, changes in the U.S. and international funding markets, the used vehicle market, levels of operating and administrative expenses including but not limited to personnel costs and technology costs, general economic conditions in the U.S. and other factors. Refer to “Competition” and “Regulatory Environment” in this Business section for discussion regarding the Company’s exposure to risk of loss resulting from the competitive and regulatory environments. Refer to the MD&A for discussion of the Company’s exposure to credit risk and expectations regarding operating and administrative expenses. Refer to Item 7a “Quantitative and Qualitative Disclosures About Market Risk” for further discussion regarding the Company’s exposure to market risk.

Concentration of Customer Risk

A large percentage of the Company’s earning assets are located in certain states. In addition, a large percentage of the Company’s earning assets are concentrated in the Company’s 25 largest vehicle and industrial equipment dealer receivables. Factors adversely affecting the economy in these states or any of the large vehicle and industrial equipment dealer receivables could have an adverse affect on the Company’s consolidated financial position or results of operations. Refer to “Geographic Distribution of Operations” and “Financing Operations-Wholesale and Other Dealer Financing-Customer Concentration” in this Business section for further discussion regarding the Company’s exposure to this risk.

Credit Support

The Company’s credit ratings depend, in part, on the existence of the credit support arrangements between the Company and TFSC and TFSC and TMC discussed in the “Liquidity and Capital Resources-Credit Support Agreements” section of the MD&A. Should the Company for any reason not have the benefit of these arrangements (or replacement arrangements acceptable to the rating agencies), the Company would expect that its credit ratings would be substantially less that its current ratings, leading to higher borrowing costs. However, the Company believes that the credit support arrangements will continue to be available.

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FINANCING OPERATIONS

The Company provides 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., the Commonwealth of Puerto Rico, Mexico, and Venezuela as described under Item 1. “Business-General-Geographic Distribution of Operations”. The Company also offers financing for various industrial and commercial products such as forklifts, light and medium-duty trucks, and electric vehicles. Net earning assets and net income related to transactions with industrial equipment dealers totaled 2% and 1% of the net earning assets and net income of the Company, respectively, as of, and for the period ended, March 31, 2004.

The table below summarizes the Company’s financing revenues by primary product and the related retail financing and leasing average contract terms.

Lease Financing

The Company primarily purchases new vehicle and industrial equipment lease contracts originated through vehicle and industrial equipment dealers. Lease contracts to be purchased are evaluated against the Company’s credit standards and, if approved, the Company purchases the lease contracts and concurrently assumes ownership of the leased vehicles or industrial equipment. The Company views its lease arrangements as financing transactions as it does not seek to re-lease the vehicles or equipment upon either default or at lease termination. The Company is responsible for contract administration and collection during the lease period. The Company uses a behavioral-based collection strategy to minimize risk of loss and employs various collection methods. The Company is permitted to take possession of vehicles or industrial equipment upon lessee default and has the right to enforce collection actions against the lessee. Upon default, the Company sells the vehicles or equipment through vehicle and industrial equipment dealers or auctions.

The Company is 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 the Company. In an effort to minimize losses incurred at lease maturity, the Company has developed remarketing strategies to maximize proceeds and minimize disposition costs on used vehicles and industrial equipment sold at lease termination. The Company uses various channels to sell vehicles returned at lease maturity. Refer to the “Results of Operations — Residual Value Risk” section of the MD&A for further discussion of the Company’s 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.

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The Company may experience a higher risk of loss if customers fail to maintain required insurance coverage. The Company’s vehicle lease contracts require lessees to maintain 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 vicarious liability states. Refer to the “Regulatory Environment” section of this Business section for further discussion of this issue.

Toyota Lease Trust, a Delaware business trust (the “Titling Trust”), acts as lessor and holds title to leased vehicles in specified states in connection with a lease securitization program. Lease contracts purchased by the Titling Trust from Toyota and Lexus vehicle dealers are serviced by TMCC in the same manner as contracts owned directly by the Company. The Company holds an undivided trust interest in lease contracts owned by the Titling Trust, and these lease contracts are included in the Company’s lease assets unless and until such time as the interests in the contracts are transferred in a securitization transaction. The Company does not presently have an active lease securitization program.

Retail Financing

The Company primarily purchases new and used vehicle and industrial equipment financing contracts from Toyota, Lexus and, to a lesser extent, other domestic and import franchised dealers. Financing contracts to be purchased are evaluated against the Company’s credit standards and, if approved, the Company purchases the financing contracts and acquires a security interest in the vehicle or industrial equipment that is financed under the contract. Thereafter, the Company has responsibility for contract administration and collection. The Company uses a behavioral-based collection strategy to minimize risk of loss and employs various collection methods. Upon commencement of the contracts, the Company perfects its security interests through Uniform Commercial Code (“UCC”) filings in the vehicles or industrial equipment financed and has the right to repossess the assets if customers fail to meet contractual obligations and has the right to enforce collection actions against the obligors under the contracts. Upon default, the Company sells 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 “Results of Operations — Residual Value Risk” section of the MD&A for further discussion of the Company’s remarketing activities.

Substantially all of the Company’s retail financing 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.

The Company may experience a higher risk of loss if customers fail to maintain required insurance coverage. The terms of the Company’s 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.

Wholesale and Other Dealer Financing

Wholesale Financing

The Company provides wholesale financing to vehicle and equipment dealers for inventories of new and used Toyota, Lexus and other vehicles and industrial equipment. The Company acquires a security interest in vehicles financed at wholesale, which the Company perfects 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 or dealer groups. In the event of vehicle or industrial equipment dealer default under a wholesale loan arrangement, the Company has the right to liquidate assets in which it has a perfected security interest and seek legal remedies pursuant to the wholesale loan agreement and any applicable guarantees.

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TMCC and TMS 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 financed at wholesale by TMCC at the aggregate cost financed in the event of vehicle dealer default. The Company also entered into similar agreements with Toyota Material Handling, U.S.A., Inc. (“TMHU”) and other domestic and import manufacturers. TMHU is the primary distributor of Toyota lift trucks in the U.S.

Other Dealer Financing

The Company extends 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. The Company also provides 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. The Company obtains 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 the Company’s exposure under such agreements. The Company prices the credit facilities according to the risks assumed in entering into the credit facility.

Customer Concentration

At March 31, 2004, the 25 largest aggregate outstanding vehicle and industrial equipment dealer receivables totaled $2.7 billion, or 6% of total assets. Additionally, at March 31, 2004, the Company was committed to another $1.7 billion under various funding facilities to these 25 largest vehicle and industrial equipment dealers or dealer groups, which, if entirely funded, would represent an additional 4% of total assets. All of these receivables were current as of March 31, 2004. Adverse changes in the business or financial condition of a vehicle or industrial equipment dealer or dealer group to whom the Company has extended a substantial amount of financing or commitments, in particular when the financing is unsecured or not secured by realizable assets, could result in a material adverse effect on the Company’s financial condition and results of operations.

INSURANCE OPERATIONS

Toyota Motor Insurance Services, Inc. (“TMIS”), a wholly owned subsidiary of TMCC, conducts an insurance agency brokerage business in the U.S. The principal activities of TMIS and its wholly owned insurance company subsidiaries include marketing, underwriting, and claims administration related to covering certain risks of Toyota, Lexus, and other domestic and import franchise dealers and their customers. The primary business of TMIS consists of issuing vehicle service agreements (“VSA”) and guaranteed auto protection agreements sold to customers by or through Toyota and Lexus vehicle dealers, and certain other domestic or import vehicle dealers. TMIS also provides coverage and related administrative services to certain affiliates of the Company.

Substantially all of the business conducted by TMIS is tied to the sale of vehicles by related Toyota and Lexus vehicle dealers and certain other domestic or import vehicle dealers in the U.S. In addition, TMIS obtains a significant amount of VSA business through providing limited warranty coverage to TMS on certain pre-owned vehicles. 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 TMS, could materially impact the level of TMIS operations. Income before provision for income taxes from insurance operations contributed 9%, 21%, and 16% to total income before provision for income taxes for the years ended March 31, 2004, 2003, and 2002, respectively.

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RELATIONSHIPS WITH AFFILIATES

The Company’s business is substantially dependent upon the sale of Toyota and Lexus vehicles and its ability to offer competitive financing 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 2004 totaled 1.9 million units. For the years ended March 31, 2004, 2003, and 2002, Toyota and Lexus vehicles accounted for approximately 11.4%, 10.4%, and 9.8%, respectively, of all retail automobile and light truck unit sales volume in the U.S.

Certain lease and retail financing programs offered by the Company on vehicles and industrial equipment are subsidized by affiliates of the Company or other entities. TMS sponsors special rate retail financing and lease programs on certain new and used Toyota and Lexus vehicles that result in reduced monthly payments to qualified retail and lease customers. Reduced monthly payments on certain Toyota industrial equipment to qualified lease and retail financing customers are subsidized by various affiliates or other entities.

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

TMCC and TMS are parties to a shared services agreement (“Shared Services Agreement”). The Shared Services Agreement covers certain technological and administrative services, such as information systems support, facilities, insurance coverage, and corporate services provided by each entity to the other. Refer to the “Results of Operations — Operating and Administrative Expenses” section of the MD&A for a discussion of charges incurred under this agreement.

To support funding efforts, credit support agreements were established between the Company and TFSC and TFSC and TMC. These agreements are further discussed in the “Liquidity and Capital Resources” section of the MD&A, Note 14-Related Party Transactions of the Notes to Consolidated Financial Statements, and Item 13. Certain Relationships and Related Transactions.

COMPETITION

The Company operates in a highly competitive environment and competes with other financial institutions including national and regional commercial banks, savings and loan associations, credit unions, finance companies and, to a lesser extent, other automobile manufacturer’s affiliated finance companies, for retail financing and leasing. The Company competes with national and regional commercial banks and other automobile manufacturer’s affiliated finance companies for wholesale financing and other dealer financing. No single competitor is dominant in the industry. The Company competes primarily through service quality, its relationship with TMS, and financing rates. The Company seeks to provide exceptional customer service and competitive financing programs to its vehicle and industrial equipment dealers and their customers. The Company’s relationship with TMS is an advantage in providing Toyota and Lexus financing for purchases or leases of Toyota and Lexus vehicles.

Competition for the principal products and services provided through the insurance operations is primarily from national and regional independent service contract providers. The Company competes primarily through service quality, its relationship with TMS and pricing. The Company seeks to offer its vehicle dealers competitively priced products and excellent customer service. The Company’s relationship with TMS provides an advantage in selling its products and services.

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REGULATORY ENVIRONMENT

The finance and insurance operations of the Company are regulated under both federal and state law for its U.S. operations and applicable foreign country laws for its non-U.S. operations. The Company is 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. With respect to the Company’s U.S. operations, a majority of states (including 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 the Company’s operations in these states if the Company were unable to pass on increased interest costs to its customers. State laws also impose requirements and restrictions on the Company 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 the Company 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, the Company 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. The Company’s lease contracts in the U.S. contain provisions requiring the lessees to maintain levels of insurance satisfying applicable state law, and the Company maintains certain levels of contingent liability insurance for protection from catastrophic claims. TMCC monitors ongoing lease insurance compliance only in certain vicarious liability states and not all states. The Company encounters higher risk of loss if the customers fail to maintain the required insurance coverage. The Company is also subject to similar laws and regulations in the foreign countries in which it conducts its financing operations.

The Company’s 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. The Company actively monitors applicable laws and regulations in each state in order to maintain compliance.

The Company continually reviews its operations for compliance with applicable laws. Future administrative rulings, judicial decisions, and legislation may require modification of the Company’s business practices and documentation.

As a registrant with the SEC under the Securities Act of 1933, as amended, the Company is subject to federal securities laws and regulations including, but not limited to, the Sarbanes-Oxley Act of 2002. The Company is also subject to similar laws and regulations in the foreign countries in which it obtains debt funding. The Company maintains policies and procedures to ensure compliance with applicable laws and regulations.

EMPLOYEE RELATIONS

At April 30, 2004, the Company had approximately 2,800 full-time employees, an increase of 100 employees over the prior year. The Company considers its employee relations to be satisfactory. The Company is not subject to any collective bargaining agreements with its employees.

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ITEM 2. PROPERTIES

The Company relocated its finance and insurance headquarters operations to a new location within the TMS headquarters complex in Torrance, California, in fiscal year 2004.

During fiscal 2003, the Company completed the physical restructuring of its field operations in the U.S. The field operations for both finance and insurance are now 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. The Company also has offices in the Commonwealth of Puerto Rico, Venezuela and Mexico. All premises are occupied under lease. As discussed in Item 1. “Business – General — Geographic Distribution of Operations”, in April 2004, the Mexico and Venezuela operations were transferred to TFSA.

The Company believes that its properties are suitable to meet the requirements of its business.

ITEM 3. LEGAL PROCEEDINGS

Various legal actions, governmental proceedings and other claims are pending or may be instituted or asserted in the future against the Company 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 the Company’s business operations, policies and practices. Certain of these actions are similar to suits which have been filed against other financial institutions and captive finance companies. 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. The Company establishes reserves for legal claims when costs arising from such claims become probable and reasonably estimable. The actual costs of resolving legal claims may be substantially higher or lower than the amounts reserved for those claims. However, based on information currently available, the advice of counsel and established reserves, management believes that any ultimate liability resulting therefrom should not have a material adverse effect on the Company’s consolidated financial position or results of operations. The foregoing is a forward looking statement within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Act of 1934, as amended, which represents the Company’s expectations and beliefs concerning future events. The Company cautions that its discussion of legal proceedings is further qualified by important factors that could cause actual results to differ materially from those in the forward looking statement, including but not limited to the discovery of facts not presently known to the Company or determinations by judges, juries or other finders of fact which do not accord with the Company’s evaluation of the possible liability from existing litigation.

Fair Lending Class Actions

An alleged class action in federal court in California, Baltimore v. Toyota Motor Credit Corporation, claims that the Company’s pricing practices discriminate against African-Americans. Two additional cases pending in the state courts in California, (Herra v. Toyota Motor Credit Corporation and Gonzales v. Toyota Motor Credit Corporation), contain similar allegations claiming discrimination against minorities. Litigation is subject to many uncertainties and the outcome is not predictable. It is possible that the matters described above could be decided unfavorably to the Company. Although the amount of liability as of the date of this filing with respect to these matters cannot be ascertained, management believes that any resulting liability should not materially affect the Company’s consolidated financial position or results of operations.

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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Not applicable.

PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

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

Dividends are declared and paid by the Company as determined by its Board of Directors. During fiscal 2004 and 2003, no dividends were declared or paid. During fiscal 2002, the Company’s Board of Directors declared and paid a cash dividend of $4 million to TFSA. No dividends had previously been declared or paid. The Company expects to pay periodic dividends to its shareholder in the future.

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ITEM 6. SELECTED FINANCIAL DATA

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

Toyota Motor Credit Corporation (“TMCC”) and its consolidated subsidiaries, collectively referred to herein as the “Company”, is 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.

The Company generates revenue, income, and cash flows by providing retail financing, leasing, wholesale financing, and certain other financial products and services to vehicle and industrial equipment dealers and their customers. The Company also generates revenue through marketing, underwriting, and administering claims related to covering certain risks of vehicle dealers and their customers. The Company supports growth in earning assets through funding obtained in the capital markets as well as funds provided by investing and operating activities.

The Company’s financial results are affected by a variety of economic and industry factors primarily in the U.S, including but not limited to, new and used vehicle markets, consumer behavior, new vehicle incentives, employment growth, and interest rates. Changes in these factors can influence the demand for new and used vehicles, the frequency and severity of credit losses, the realizability of residual values on the Company’s leased assets, and the Company’s gross margins on new contract volume. Additionally, the Company’s funding programs and related costs are influenced by changes in the capital markets and prevailing interest rates, which may affect the Company’s ability to obtain cost effective funding to support asset growth.

The Company measures the performance of its financing operations on the basis of new volume and market share of financing Toyota and Lexus vehicle sales, return on assets, financial leverage and operating efficiency. The Company measures the performance of its insurance operations on the basis of agreement volume, the number of agreements in force, and loss ratio.

The Company’s primary competitors are other financial institutions including national and regional commercial banks, savings and loan associations, credit unions, finance companies and, to a lesser extent, other automobile manufacturers’ affiliated finance companies that actively seek to purchase retail consumer contracts through Toyota and Lexus independent dealerships (“dealerships”). During fiscal 2004, the Company experienced increased competition in the U.S. automotive sector. To compete effectively in this sector, the Company seeks to provide exceptional customer service to its vehicle and industrial equipment dealers and their customers. To facilitate this goal, the Company focuses its DSSO network and resources on encouraging the dealerships to improve the quality of service provided by their finance and insurance representatives, and to increase customer loyalty to their dealerships and the Toyota and Lexus brands. Further, during fiscal 2004 the Company launched an initiative to develop the TFS brand, improve service delivered to its dealers, and strengthen customer loyalty.

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Fiscal 2004 Operating Summary

The Company reported net income of $601 million during fiscal 2004, compared with net income of $110 million in fiscal 2003. Fiscal 2004 financial results were influenced by a number of factors including volume growth, improvements in customer delinquencies and related credit losses, and reduced funding costs, including a positive adjustment to the fair value of the Company’s derivative instruments, resulting from the low interest rate environment. During fiscal 2004 the Company significantly increased its volume of new contracts purchased primarily from Toyota and Lexus vehicle dealers, from 857,000 contracts in fiscal 2003 to 949,000 contracts in fiscal 2004. Much of this growth in volume resulted from increased sales levels of Toyota and Lexus vehicles in the U.S. TMS sold 1.9 million units during fiscal 2004 compared to 1.8 million units in fiscal 2003. The Company also increased its consumer retail and lease finance market share of Toyota and Lexus vehicles, excluding fleet sales and sales of an independent distributor, by 50 basis points to 45.5%. The increase in market share was attributable to increased contract volume coupled with the continued use of TMS sponsored special financing programs offered to qualified retail customers. The combination of these factors coupled with lower securitization volume contributed to a $5.7 billion, or a 16% increase, in the Company’s earning assets to $40.1 billion. This growth in earning assets provides a key source of ongoing revenue and profitability.

Current year net financing revenues increased $592 million, or 57%, over the prior year to $1.6 billion due to the increase in earning assets partially offset by a general decline in the earnings rate, or portfolio yield, of the Company’s earning assets portfolio resulting from lower market interest rates over the last several fiscal years and the competitive environment.

The Company continued to benefit from low short-term interest rates as a portion of its funding is based upon LIBOR. Further, the recent rise in two and three-year swap rates in the past few quarters resulted in favorable mark-to-market adjustments on the Company’s derivative portfolio. The combination of these two factors contributed to a $588 million, or 50%, reduction in overall interest expense over fiscal 2003.

The Company continued to improve the operational efficiency of its customer service centers leading to a significant improvement in delinquencies and net charge-offs over fiscal 2003. Key initiatives implemented during fiscal 2004 included hiring new and experienced leadership, investing in technology and associate training, and deploying new tools to improve customer service and collections effectiveness. These efforts have resulted in continuous improvements in customer and vehicle and industrial equipment dealer satisfaction and reductions in customer delinquency and net charge-offs.

Current year financial results also reflect a $60 million, or 20%, decrease in amounts incurred to bring lease residual values in line with expected end of term market values over fiscal 2003. This decrease is primarily attributable to benefits realized from the Company’s continued efforts to incorporate the impact of lower used vehicle prices in its residual setting policies and lower losses incurred at lease termination.

Overall, the Company increased its capital position by $0.6 billion bringing total equity to $3.5 billion at March 31, 2004. The Company’s debt-to-equity position improved from 11.21 to 10.55 at March 31, 2003 and 2004, respectively. Additionally, reserves as a percentage of gross earning assets declined from 1.32% to 1.28%, reflecting the improvement in overall portfolio credit quality.

During fiscal 2004 the Company launched a multi-year initiative to replace its major legacy transaction systems. The purpose of the initiative is to implement simplified, streamlined technology solutions to improve service delivery to its customers, speed information management, and support continued profitable growth. Refer to the “Results of Operations – Operating and Administrative Expenses” section of this MD&A for further discussion regarding expected costs to be incurred under this initiative.

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Business Outlook

The Company anticipates fiscal 2005 results will be influenced by the level of new vehicle retail and lease contract volume and the continued use of TMS sponsored special rate financing programs and the level of competitive pricing pressure. The Company also anticipates continued growth in wholesale market share, which may positively influence the level of vehicle financing volume. The sustainability of the Company’s financial results depends on the Company’s ability to maintain gross margin in an increasingly competitive marketplace, which may be further affected by the prospect for a rising interest rate environment. The Company is at risk for margin compression to the extent that the Company’s product pricing strategies lag behind changes in the level of market interest rates or if short-term interest rates rise above current market expectations. The Company expects operating and administrative costs to increase as a result of costs incurred under its technology initiative discussed above and general business growth, although, as a percentage of earning assets, expenses are expected to be consistent with fiscal 2004.

Management expects that the level of delinquencies and credit losses will continue to be influenced by changes in the economic factors discussed above, the used vehicle market, and benefits realized from operating initiatives implemented during the current fiscal year. Although the Company’s credit loss rates have declined from historical highs reached during fiscal 2003, they remain at elevated levels. Management remains cautiously optimistic that the recent favorable trends in credit quality will continue into fiscal 2005.

During the latter half of fiscal 2004, used vehicle prices stabilized, the risk of deflation lessened and the U.S. economy has shown overall improvement. Management’s view of the impact of these favorable trends on the used vehicle market is tempered by several observations. Employment reports have indicated a strengthening jobs market, but this is a recent turnaround following several years of rising unemployment. Although the employment picture has improved, short-term interest rates are projected to rise in the near term, and automotive energy costs have risen substantially in recent months. As a result of these trends, management remains cautious regarding the level of residual risk it underwrites.

The foregoing information may contain “forward looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward looking statements may include estimates, projections and statements of the Company’s beliefs concerning future events, business plans, objectives, expected operating results, and the assumptions upon which those statements are based. Refer to the “Cautionary Statement for Purposes of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995” section of this MD&A for a detailed discussion regarding words used to identify such statements and factors that could cause actual results to differ materially from those expressed or implied by such statements.

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FINANCIAL CONDITION

Net Earning Assets

The composition of the Company's net earning assets is summarized below:

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      March 31, 2004 Compared to March 31, 2003

The increase in net earning assets was driven by the increased volume of retail finance receivables and wholesale and other dealer loans, partially offset by a decrease in both finance leases and investments in operating leases (collectively referred to as “lease earning assets”). The significant increase in retail finance receivables primarily resulted from the continued growth in the number of new vehicles financed under the Company’s retail financing programs. This growth was generated in large part by an increased use of TMS sponsored special rate financing programs and higher Toyota and Lexus vehicle sales levels, which increased 9%, and the historic lows in market interest rates. Also contributing to the growth in retail finance receivables during the current year period was a reduction in securitization activity when compared to the prior year, which resulted in a decrease in the amount of retail receivables sold by the Company. The Company entered into one securitization transaction totaling approximately $1.9 billion that qualified for sale accounting during fiscal 2004 as compared with three such transactions totaling approximately $4.6 billion during fiscal 2003 and two such transactions totaling approximately $3.1 billion during fiscal 2002. Lease earning assets continued to decrease due to the continued emphasis on retail financing programs. Wholesale and other dealer loans also increased primarily due to increases in the number of vehicle dealers receiving vehicle wholesale financing and the corresponding increase in the amount of dealer inventory financed by the Company. The number of vehicle dealers receiving vehicle wholesale financing increased as a result of the Company’s continued emphasis on developing dealer relationships.

Operating leases as a percentage of lease earning assets have increased during the last three fiscal years due to a Company decision to discontinue purchasing residual value insurance. Through June 2001 the Company insured residual values for all leases purchased by the Titling Trust, enabling leases acquired by the Titling Trust to be classified as finance lease receivables rather than investments in operating leases and, thus, qualify for off-balance sheet securitization. The Company’s residual value insurance purchases were discontinued effective July 2001. Additionally, the Company recently revised the estimates underlying its classification of leases. As a result, the Company expects a significant decrease in the number of vehicles that will qualify as finance leases in the future.

      March 31, 2003 Compared to March 31, 2002

The increase in net earning assets was primarily due to higher levels of both retail finance receivables and wholesale and other dealer loans, partially offset by a decrease in lease earning assets. The increase in retail finance receivables primarily resulted from the growth in the number of new vehicles financed under the Company’s retail financing programs. This growth was generated in large part by an increased use of TMS sponsored special rate financing programs and higher Toyota and Lexus vehicle sales levels. The increase in wholesale and other dealer loans was primarily due to increases in the number of vehicle dealers receiving vehicle wholesale financing and the corresponding increase in the amount of dealer inventory financed by the Company. The number of vehicle dealers receiving vehicle wholesale financing increased as a result of the Company’s continued emphasis on developing dealer relationships.

Total lease earning assets decreased primarily due to a general shift in programs sponsored by TMS from lease to retail as well as an industry-wide shift away from leasing. In addition to the overall decrease in vehicle lease earning assets, the composition of the vehicle lease portfolio has shifted toward an increased mix of operating leases relative to finance leases due to the discontinuation of purchasing residual value insurance effective July 2001 discussed above.

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Contract Volume

The composition of the Company’s contract volume and market share is summarized below:

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      Fiscal 2004 Compared to Fiscal 2003

Total contract volume increased due to the combined effects of higher Toyota and Lexus vehicle sales, incremental volume from the increased number of wholesale dealers serviced by TMCC, and continued use of TMS sponsored special rate financing programs. Used vehicle retail contract volume increased when compared with the prior year primarily due to increased TMS retail sponsored special rate financing programs for certain used Toyota and Lexus vehicle contracts. In contrast, total vehicle lease contract volume decreased for the year ended March 31, 2004 when compared with the prior year due to the continued emphasis on retail financing programs.

      Fiscal 2003 Compared to Fiscal 2002

Total contract volume increased modestly when compared with the prior year. However, the mix of retail contract volume and lease contract volume changed significantly. New vehicle retail contract volume increased, reflecting the continued use of incentives on new vehicle contracts and increases in TMS sponsored special rate financing programs. Used vehicle retail contract volume decreased as the increased use of incentives on new vehicle contracts reduced the demand for financing related to used vehicles contracts. Total vehicle lease contract volume decreased for the year ended March 31, 2003 when compared to the prior year due to the continued emphasis on retail financing programs.

RESULTS OF OPERATIONS

Total Financing Revenues

      Fiscal 2004 Compared to Fiscal 2003

Total financing revenues increased due to retail financing and wholesale and other dealer financing revenue increases, offset by a decline in leasing revenues. Leasing revenues declined due to reductions in vehicle lease earning assets and in lease portfolio yield. Retail financing revenues increased as a result of the continued growth in vehicle retail finance receivables, partially offset by reductions in retail financing portfolio yield. The declines in lease and retail portfolio yields are due to the declines in market interest rates and the level of competitive pricing pressure. Wholesale and other dealer financing revenues increased due to increases in the related receivables, partially offset by a reduction in wholesale and other dealer financing portfolio yield. The decrease in wholesale and other dealer portfolio yield reflects general decreases in short term interest rates. The changes in leasing and retail financing revenues are consistent with the continued emphasis by the Company and TMS on special retail financing programs. Refer to the “Financial Condition – Net Earning Assets and Contract Volume” sections of this MD&A for further discussion regarding earning asset changes.

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      Fiscal 2003 Compared to Fiscal 2002

Total financing revenues increased due to the combined effect of higher leasing and retail financing revenues, partially offset by lower wholesale and other dealer financing revenues. Leasing revenues increased due to growth in vehicle lease earning assets, partially offset by a reduction in overall portfolio yield. Retail financing revenues increased as a result of the continued growth in vehicle retail finance receivables, partially offset by a reduction in overall portfolio yield. Wholesale and other dealer financing revenues decreased as the incremental revenue from growth in the related receivables was more than offset by lower portfolio yield.

Residual Value Risk

The Company is exposed to risk of loss on the disposition of end of term leased vehicles and industrial equipment to the extent that sales proceeds are not sufficient to cover the carrying value of the leased asset at lease termination. Substantially all of the Company’s residual value risk relates to its vehicle lease portfolio. To date, the Company has not incurred material losses related to declines in contractual residual values on its industrial equipment portfolios.

Management periodically reviews the estimated realizable value of leased assets to assess the appropriateness of the carrying value of the lease residuals. For operating leases, the impact of estimated declines in contractual residual values is included in depreciation expense in the Consolidated Statement of Income and is discussed in the “Results of Operations – Depreciation on Operating Leases” section of this MD&A. For direct financing leases, the impact of estimated declines in contractual residual values reduces lease financing revenues in the Consolidated Statement of Income and is discussed in the “Results of Operations – Total Financing Revenues” section of this MD&A.

Factors Affecting Exposure to Residual Value Risk

The primary factors affecting the Company’s exposure to residual value risk are the levels at which contractual residual values are established at lease inception, end of term market values, and their effects 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.

      Contractual Residual Values at Lease Inception

The contractual residual value established at lease inception represents an estimate of the end of term market value of a leased vehicle. Contractual residual values are determined at lease inception by examining external industry data and the Company’s own historical residual experience. Factors considered in this evaluation include expected economic conditions, historical trends, and market information on new and used vehicle sales.

      End of Term Market Values

To the extent the estimated end of term market value of a leased vehicle is less than the contractual residual value established at lease inception, the residual value of the leased vehicle is adjusted downward over time so that the carrying value at lease end will approximate the estimated end of term market value. Factors considered in this assessment include, but are not limited to, new vehicle incentive programs, new vehicle pricing, used vehicle values, the mix of used vehicle supply, and economic conditions.

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      Vehicle Lease Return Rate

The vehicle lease return rate represents end of term leased vehicles returned to the Company 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, there is a higher probability that the vehicle will be returned to the Company. A higher rate of vehicle returns exposes the Company to greater risk of loss at lease termination.

      Loss Severity

Loss severity is the extent to which the end of term market value of a lease is less than its carrying value at lease end. Although the Company makes every effort to establish accurate contractual residual values at lease inception and adjusts the residual value downward throughout the life of the lease as conditions warrant, the Company may still incur losses to the extent the end of term market value of a lease is less than its carrying value at lease end.

Vehicle Remarketing

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 the Company. The Company has developed remarketing strategies to maximize proceeds and minimize disposition costs on used vehicles sold at lease termination. The Company uses various channels to sell vehicles returned at lease end, including the following:

      Dealer Direct

The Company introduced the Dealer Direct program (“Dealer Direct”) in July 2003. The goal of 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 the Company. During fiscal 2004, 13% of returned vehicles were sold to the grounding vehicle 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 2004, 7% of returned vehicles were sold through the Dealer Direct online auction to franchise vehicle dealers. The Dealer Direct online auction reduces disposition costs associated with sales through auction sites. The average holding period of a vehicle sold through Dealer Direct was approximately seven days, as compared to approximately thirty days for vehicles sold through other means. Management expects the total percentage of returned vehicles sold through the Dealer Direct program to continue to increase during the next fiscal year.

      Auction

Vehicles not purchased through the Dealer Direct program are sold through fourteen vehicle auction sites throughout the country. During fiscal 2004, approximately 80% of returned vehicles were sold through auction. During fiscal 2003, substantially all returned vehicles were sold through auction. Where necessary, the Company reconditions used vehicles prior to sale in order to enhance the values of the vehicles at auction. Additionally, the Company redistributes vehicles geographically should certain model concentrations potentially affect sales prices at auction.

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The following table summarizes the Company’s scheduled maturities and related vehicle lease return rates by period:

      Fiscal 2004 Compared to Fiscal 2003

The decrease in scheduled maturities resulted from lower levels of lease originations in prior years due to the Company’s emphasis on retail financing programs. The decrease in vehicle lease return rates resulted from a shift from shorter-term lease contracts to longer-term lease contracts and a narrowing spread between contractual residual values and end of lease market values, as well as a decrease in lease maturities. Longer term lease contracts have a higher customer purchase rate resulting in a lower return rate. A decrease in lease maturities affects return rate in that a lower market supply of certain makes of used vehicles generally results in a higher relative level of demand for used cars, which provides an incentive for lessees and vehicle dealers to purchase lease vehicles at the end of lease term.

      Fiscal 2003 Compared to Fiscal 2002

The decrease in scheduled maturities resulted from lower levels of lease originations in prior years due to the Company’s emphasis on retail financing programs. The decrease in vehicle lease return rates resulted primarily from a narrowing spread between contractual residual values and end of lease market values, as well as a decrease in lease maturities.

Refer to the “Results of Operations – Depreciation on Operating Leases” section of this MD&A for further discussion of the impact of return rates on depreciation expense.

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Depreciation on Operating Leases

The following table sets forth the items included in the Company’s depreciation on operating leases:

The Company records depreciation expense on the portion of its lease portfolio classified as operating leases. Contractual depreciation expense is recorded over the original contract life and is based upon the depreciable basis of the leased vehicle (“depreciable basis”). Depreciable basis is the difference between a leased vehicle’s original book value (“capitalized cost”) and its contractual residual value established at lease inception. Incremental 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 contractual residual value. Refer to the “Results of Operations – Residual Value Risk” section of this MD&A for a discussion regarding the Company’s exposure to residual value risk on its 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.

      Fiscal 2004 Compared to Fiscal 2003

Higher total depreciation expense on operating leases resulted from an increase in contractual depreciation, partially offset by a decrease in incremental depreciation expense. Higher contractual depreciation expense resulted from an increase in the average depreciable basis. The decline in incremental depreciation expense resulted primarily from the Company’s continued efforts to reflect the impact of lower used vehicle prices into its process of establishing contractual residual values and from lower losses incurred at lease termination. The lower losses incurred at lease termination were attributable to a reduction in the number of leased vehicles returned at maturity and sold at auction. In prior periods, the Company recorded incremental depreciation expense in response to declines in used vehicle prices. Incremental depreciation is taken to bring contractual residual values in line with expected end of term market values. Concurrently, the Company continued to adjust contractual residual values on new lease volume. These adjustments have contributed to the increase in contractual depreciation and the corresponding decrease in incremental depreciation expense.

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      Fiscal 2003 Compared to Fiscal 2002

Higher total depreciation expense on operating leases resulted from an increase in contractual depreciation, partially offset by a decrease in incremental depreciation expense. Higher contractual depreciation expense resulted from an overall increase in the average depreciable basis. The decrease in incremental depreciation expense primarily resulted from a decline in the number of outstanding lease vehicles in the Company’s portfolio as well as adjustments to contractual residual values at lease inception in response to expected lower end-of-term market values. This decrease was partially offset by an increase in average losses per vehicle sold during the year on units returned at maturity.

Outlook

During the latter half of fiscal 2004, used vehicle prices stabilized, the risk of deflation lessened and the U.S. economy has shown overall improvement. Management’s view of the impact of these favorable trends on the used vehicle market is tempered by several observations. Employment reports have indicated a strengthening jobs market, but this is a recent turnaround following several years of rising unemployment. Although the employment picture has improved, short-term interest rates are projected to rise in the near term, and automotive energy costs have risen substantially in recent months. As a result of these trends, management remains cautious regarding the level of residual risk it underwrites.

Credit Risk

The Company is exposed to credit risk on its vehicle and industrial equipment portfolios. Credit risk is the risk of loss arising from a failure by the customer to meet the terms of any contract with the Company or otherwise fail to perform as agreed. The Company’s level of credit risk is influenced primarily by two factors: the total number of contracts that default (“frequency of occurrence”) and loss per occurrence (“loss severity”), which in turn are influenced by various economic factors, the used vehicle market, contract term length, purchase quality mix, and organizational and operational changes (as discussed below). Most of the Company’s credit losses are related to its retail finance receivables and lease earning assets. The Company is exposed to credit losses on its wholesale and other dealer loans portfolio, but default rates for those receivables have been substantially lower than those for retail finance receivables and lease earning assets. To date, the Company has not incurred material credit losses on its wholesale and other dealer loans portfolio. The following factors relate to the Company’s retail finance receivables and lease earning assets.

Factors Affecting Credit Risk

      Economic Factors

General economic conditions such as unemployment rates, bankruptcy rates, consumer debt levels, consumer credit performance, interest rates, and inflation can influence both the frequency of occurrence and loss severity.

      Used Vehicle Market

Changes in used vehicle prices directly affect the proceeds from sales of repossessed vehicles and, accordingly, the level of loss severity experienced by the Company. 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.

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      Contract Term Length

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 and loss severity.

      Purchase Quality Mix

A change in the mix of contracts purchased at various risk levels may potentially increase the amount of credit risk the Company assumes. An increase in the number of contracts purchased with lower Fair Isaac Credit Organization (“FICO”) scores (numeric 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 FICO scores purchased can lower credit risk. An increase in the mix of contracts with lower FICO scores can also increase operating risk unless appropriate controls and procedures are established. The Company strives to maintain a consistent mix of contracts purchased with various levels of FICO scores and to price such contracts according to their risk in order to achieve a reasonable return on investment.

      Organizational and Operational Changes

Organizational changes such as the field restructuring completed in fiscal 2003 and operational changes such as the planned implementation of new information and transaction systems are designed to have a positive effect on the Company’s operations, including the level of credit risk, through the implementation of processes and tools that create greater operational efficiency and effectiveness. However, such changes have the potential to adversely affect delinquencies and credit losses by disrupting the Company’s normal operations during the organizational or operational change process.

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Allowance for Credit Losses and Credit Loss Experience

The Company maintains an allowance for credit losses to cover probable losses resulting from the non-performance of its customers. The determination of the allowance 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 determining the allowance. The following tables provide information related to the Company’s allowance for credit losses and credit loss experience:

      Fiscal 2004 Compared to Fiscal 2003

Reductions in the provision for credit losses and total charge-offs, net of recoveries, as well as in the allowance for credit losses as a percentage of gross earning assets, reflect decreases in both frequency of occurrence and loss severity. This improvement in both the frequency and severity of credit losses during fiscal 2004 resulted, in large part, from several operational initiatives implemented during the fiscal year. These initiatives included the implementation of new tools and technology to measure and monitor performance, the strategic outsourcing of certain functions, the development of enhanced training for CSC field associates, and technology initiatives and strategies that enhanced collections productivity.

Overall loss severity was also positively influenced by a stabilization of used vehicle prices, as evidenced by the increase in the Manheim Used Vehicle Value Index, a statistical index based on historical auction sales data, which moved from approximately 103 (as a percentage of January 1995 used car prices) at March 2003 to approximately 107 at March 2004. Continued improvement in loss severity is uncertain as the trend toward improvement in used vehicle prices is fairly recent and follows a multi-year decline. Improvements in both the unemployment levels and consumer confidence also positively influenced the Company’s delinquency experience in the current year.

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While the factors discussed above contributed to overall improvements in delinquency and credit loss experience during fiscal 2004, the Company’s results continue to be influenced by the trend toward longer-term contracts. The average original retail and lease contract terms on contracts purchased increased from 54.8 months in fiscal 2003 to 56.2 months in fiscal 2004. Additionally, while the employment outlook and consumer confidence have improved, consumer debt and personal bankruptcies were at record levels during fiscal 2004. As such, there remains concern for the future rate of economic recovery and its influence on the Company’s results.

      Fiscal 2003 Compared to Fiscal 2002

The increases in the provision for credit losses and total charge-offs, net of recoveries, as well as the increase in the allowance for credit losses as a percentage of gross earning assets reflect increases in both frequency of occurrence and loss severity.

The Company experienced historically high delinquency and charge-off rates during fiscal 2003 as the restructuring of the field organization completed during this period disrupted normal collection activities. Additionally, the combination of continued economic weakness, the effects of changes in purchase quality mix, continued declines in used vehicle prices during fiscal 2003 and increases in the average original contract term of purchased retail and lease contracts negatively impacted the frequency and severity of losses incurred by the Company. During fiscal 2003, the Manheim Used Vehicle Value Index declined from approximately 115 at March 2002 to approximately 103 at March 2003. The average original retail and lease contract terms on purchased contracts increased from 54.4 months in fiscal 2002 to 54.8 months in fiscal 2003.

Outlook

Management expects that the level of delinquencies and credit losses will continue to be influenced by changes in the economic factors discussed above, the used vehicle market, and benefits realized from operating initiatives implemented during the current fiscal year. Although the Company’s credit loss rates have declined from historical highs reached during fiscal 2003, they remain at elevated levels. Management remains cautiously optimistic that the recent favorable trends in credit quality will continue into fiscal 2005.

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Use of Derivative Instruments

The Company manages its exposure to market risks such as interest rate and foreign exchange risks with derivative instruments. These instruments include interest rate swaps, cross currency interest rate swaps, and purchased interest rate caps. Market risks are discussed further in Item 7A, “Quantitative and Qualitative Disclosures About Market Risk”. The Company’s use of derivatives is limited to the reduction of the economic exposure inherent in otherwise unhedged positions. The Company is not a derivatives dealer and does not enter into derivatives transactions for trading purposes.

The Company enters into interest rate swap and cross currency interest rate swap agreements to convert certain fixed-rate assets and debt to variable-rate U.S. dollar assets and debt. The currency exposure for all foreign currency debt is hedged at issuance, using cross currency interest rate swaps that convert non-U.S. dollar debt to U.S. dollar denominated payments.

All derivative instruments are recorded as assets or liabilities, at fair value in the Consolidated Balance Sheet. Certain derivatives are linked to specific liabilities at inception and are designated as fair value hedges for accounting purposes (“designated hedges”). In certain instances, the Company may elect not to apply hedge accounting for specific interest rate swaps (“non-designated hedges”). All designated hedge relationships are formally documented. This documentation includes the risk management objectives and strategies for undertaking the hedge, along with the method for assessing hedge effectiveness.

Hedge ineffectiveness is the difference between the change in fair value of the hedged item and the change in fair value of the hedging instrument. The ineffective portion of designated fair value hedges is recognized and reported as a component of interest expense in the Consolidated Statement of Income. When the Company elects not to designate a derivative instrument and hedged item as a hedge for accounting purposes, or the relationship does not qualify for hedge accounting treatment, the full change in the fair value of the derivative instrument is recognized as a component of interest expense in the Consolidated Statement of Income with no offsetting fair value adjustment for the hedged item.

The Company reviews the effectiveness of its hedging relationships quarterly to determine whether the relationships have been, and will continue to be, effective. The Company currently uses regression analysis to assess the effectiveness of its hedges. When the Company has determined that a hedging relationship has not been effective, hedge accounting is no longer applied. When hedge accounting is discontinued, the Company continues to carry the derivative instrument as a component of other assets or other liabilities in the Consolidated Balance Sheet at its fair value. In addition, the Company ceases to adjust the hedged item for changes in fair value and amortizes the cumulative fair value adjustments recognized in prior periods over the remaining term of the hedged item.

In addition to discontinuing the use of hedge accounting when a hedging relationship is no longer effective, the Company also discontinues the use of hedge accounting if the derivative is sold, terminated or exercised or the Company’s management determines that designating the derivative as a hedge for accounting purposes is no longer appropriate (“de-designated hedges”).

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Interest Expense

Interest expense is comprised of interest paid on notes and loans payable (including net settlements on interest rate swaps) and the Company’s derivative fair value adjustment, which was reclassified into interest expense during the current year in response to SEC public announcements regarding the income statement presentation of certain derivative activities. The reclassification had no impact on net financing revenues and other revenues or net income.

The following table summarizes the components of interest expense:

The decline in interest on notes and loans payable (including net settlements on interest rate swaps) during both fiscal 2004 and 2003 was the result of decreased short-term interest rates, particularly 3-month LIBOR. The impact of lower interest rates, however, was partially offset by higher average outstanding debt used to fund the Company’s asset growth.

The Company’s positive derivative fair value adjustment during fiscal 2004, which decreased interest expense, was primarily due to the impact of increased market interest rates, particularly the two and three-year swap rates, on the Company’s non-designated hedges. Another main component of the Company’s positive derivative fair value adjustment during fiscal 2004 was the amortization of the cumulative fair value adjustment for de-designated hedges. The Company’s negative derivative fair value adjustment during fiscal 2003, which increased interest expense, was mainly due to the impact of decreased market interest rates on the value of the Company’s non-designated hedges and caps.

In recent years the Company has experienced significant volatility in interest expense due to changes in the market value of its non-designated hedges. The Company believes that this volatility results, in part, from differences in accounting treatment between the Company’s net earning assets and these derivatives. To moderate the volatility and better match the accounting results to the economic fundamentals of its derivatives, in January 2004, the Company began a program of targeted de-designation of previously designated hedges. The Company de-designated a portion of its derivative hedges on the debt side that should, in part, offset the volatility on its non-designated derivatives hedging the asset side. While this is not expected to eliminate the volatility of the derivatives portfolio on the Company’s reported interest expense, the Company expects that the volatility will be significantly moderated over time, and that the results thereof will more accurately reflect the economics of its business.

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The following table summarizes the components of the Company’s derivative fair value adjustment, which is included in interest expense.

Investment and Other Income

The following table summarizes the Company’s investment and other income:

Investment and other income remained relatively unchanged from fiscal 2003 to fiscal 2004 primarily due to lower gains from securitizations of finance receivables offsetting the positive impact of realized gains on marketable securities and the absence of losses on impairment of retained interests and on the investment in Toyota Credit Argentina S.A. (“TCA”). Investment and other income increased from fiscal 2002 to fiscal 2003 primarily due to higher gains from securitizations of finance receivables and lower losses on impairment of retained interests and on the investment in TCA, partially offset by higher realized losses on marketable securities.

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Income from Retained Interests and Servicing Fee Income

Income from retained interests represents investment income earned on interests retained in securitizations that qualified as sales for accounting purposes, as discussed in the “Off-Balance Sheet Arrangements” section within this MD&A. Servicing fee income relates to the contractual servicing fees that the Company receives for servicing its securitized receivables.

Gains from Securitization of Finance Receivables

The securitization of receivables generally accelerates the recognition of income on retail contracts, net of servicing fees and other related deferrals, into the period the assets are sold. Numerous factors can affect the timing and amounts of gain recognition, such as the amount of assets sold, market interest rates at the time of the sale, the structure of the sale, and key economic assumptions used as discussed in the “Critical Accounting Estimates” section within this MD&A. Gains from securitization decreased from fiscal 2003 to fiscal 2004 due to a reduction in the number of securitization transactions executed by the Company. The Company entered into one securitization transaction totaling approximately $1.9 billion that qualified for sale accounting during fiscal 2004 as compared with three such transactions totaling approximately $4.6 billion during fiscal 2003 and two such transactions totaling approximately $3.1 billion during fiscal 2002. Gains from securitization increased from fiscal 2002 to fiscal 2003 due to decreases in market interest rates that increased the value of the interest-only strips retained by the Company, as well as an increased use of securitization transactions that qualified for sale accounting during fiscal 2003.

Loss on Impairment of Retained Interests

The Company recognized no impairment losses related to its retained interests in securitized receivables during fiscal 2004 as compared to $21 million in impairment losses recognized during fiscal 2003 and $70 million in impairment losses recognized in fiscal 2002. The impairment losses recognized in fiscal 2003 resulted from increased credit losses on securitized receivables. The impairment losses recognized in fiscal 2002 resulted from increased credit losses on both securitized retail and lease receivables and declines in residual values on securitized lease receivables. Increased credit losses were attributable to the same factors affecting the Company’s owned portfolio, as discussed in the “Credit Risk” section within this MD&A.

Investment Income from and Realized Gains/(Losses) on Marketable Securities

The Company realized gains on marketable securities of $14 million in fiscal 2004, compared to losses of $19 million in fiscal 2003, primarily due to higher net realized gains on debt and equity investments. The increase in realized losses on marketable securities for fiscal 2003, as compared to fiscal 2002, was primarily due to a $25 million impairment loss related to certain of the Company’s equity holdings in its investment portfolio, resulting from an other-than-temporary decline in the fair value of investments below cost. This impairment loss was partially offset by $6 million in net realized gains on marketable securities. The Company did not recognize similar losses during fiscal 2004 or 2002.

Losses Related to Argentine Investment

The Company holds a minority interest in TCA, a majority-owned subsidiary of TFSA. The Company wrote off its investment in TCA during fiscal 2002 due to the Argentine government’s currency redenomination policies which adversely affected TCA’s financial condition. During fiscal 2003, TMCC performed under its guarantees of TCA’s offshore U.S. dollar bank loans and repaid $35 million of the then $37 million outstanding balance and accrued interest. TCA repaid the remaining outstanding balance and accrued interest. As of March 31, 2003, all of TMCC’s guarantees of TCA’s debt have been satisfied and the guarantees were terminated. Accordingly, no additional charges were recorded for the year ended March 31, 2004.

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TMCC has also entered into a separate indemnity agreement with TCA. The indemnity agreement and a subsequent letter agreement executed between TMCC and TCA included reimbursement provisions whereby TMCC would be entitled to reimbursement from TCA for the principal amount paid by TMCC to TCA’s banks under the guarantees, while the interest portion would be forgiven. Although TMCC is entitled to reimbursement of amounts paid under the guarantees, receipt of such reimbursement is not certain as to amount or timing.

Operating and Administrative Expenses

The 7% increase in operating and administrative expenses from $540 million in fiscal 2003 to $580 million in fiscal 2004 reflects increases in personnel expenses related to increased headcount and training activities, expenses related to technology services provided by TMS, expenses related to new technology development, losses on disposal of assets in connection with the Company’s move to the new headquarters location in the TMS headquarters complex in Torrance, California, and additional costs incurred to support growth in the Company’s business. These increases were partially offset by a decrease in restructuring costs. Included in operating and administrative expenses are charges allocated by TMS for certain technological and administrative services provided to TMCC. Refer to Note 14 – Related Party Transactions of the Notes to Consolidated Financial Statements for further details.

The 2% increase in operating and administrative expenses from $529 million in fiscal 2002 to $540 million in fiscal 2003 reflects increases in expenses related to technology services provided by TMS and additional costs incurred to support growth in the Company’s business, partially offset by a decrease in restructuring costs.

Technology Initiative

During fiscal 2004 the Company launched a multi-year initiative to replace its major legacy transaction systems. The purpose of the initiative is to implement simplified, streamlined technology solutions to improve service delivery to its customers, speed information management, and support continued profitable growth. The Company expects to incur significant costs related to this initiative over the next several fiscal years. As of March 31, 2004, the Company had entered into payment obligations with various information technology service providers related to the replacement of its legacy systems totaling $70 million in fixed or estimated payments over the next three fiscal years. These costs, if incurred, would increase the Company’s operating and administrative costs over the next three fiscal years, as the majority of these estimated costs relate to recurring service fees. These contracts contain voluntary provisions under which the Company may terminate the contract for a specified fee, ranging up to $1.2 million, depending upon the contract. In addition to these contractual costs the Company expects to incur ongoing operating and administrative costs related to implementation of the major legacy transaction systems.

As discussed in “Business – Risk Factors – Operational Risk”, the replacement of major legacy transaction systems could increase the Company’s exposure to risk of loss through disruption of normal operating processes and procedures. Refer to Item 1. “Business” for further discussion.

Restructuring and Related Activities

The Company completed the physical migration of resources related to the restructuring of its field operations during fiscal 2003. Restructuring charges and costs recognized during fiscal 2003 and 2002 were $10 million and $19 million, respectively. Fiscal 2003 charges included $4 million for asset and facility costs and $6 million for other exit costs. Fiscal 2002 charges included $9 million related to employee separations, $3 million related to asset and facility costs, and $7 million for other exit costs. The Company did not incur any additional restructuring costs during the year ended March 31, 2004.

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Selected Insurance Operations Results

The general financial condition and operating expenses of the insurance segment are included in the foregoing discussion of the overall financial condition and results of operations of the Company. Certain revenues and expenses specific to the Company’s insurance operations are discussed below.

Insurance Premiums Earned and Contract Revenues

Revenue from insurance operations is affected by sales volume as well as the level, age, and mix of agreements in force. Agreements in force represent insurance policies written and contracts issued. Revenues from premiums written are earned over the terms of the policies in relation to the timing and level of anticipated claims. Contract revenue is recognized over the term of the coverage in relation to the timing and level of anticipated claims and administrative expenses. The effect of subsequent cancellations is recorded as an offset to earned premiums and contract revenue, respectively.

Insurance premiums earned and contract revenues from insurance operations increased for fiscal 2004 and fiscal 2003 when compared to the respective prior year periods primarily due to increased contract volume and increases in total agreements in force.

Insurance Losses and Loss Adjustment Expenses

Insurance losses and loss adjustment expenses represent losses incurred by the Company’s insurance operations. Losses incurred are a function of the number of covered risks, the frequency and severity of claims associated with the agreements in force, and the level of risk retained by the insurance operations. Insurance losses include amounts paid and accrued for reported losses, estimates of losses incurred but not reported, and any related claim adjustment expenses. Accruals for reported losses represent payments to be made on loss events that are known and have been recorded as a claim by insurance operations. Losses incurred but not reported are estimated liabilities for future loss events based on historical loss patterns. An inherent assumption in the projection of future loss payments is that historical loss patterns can be relied upon to reasonably predict loss patterns on existing agreements in force. Ultimate loss payments may vary from such estimates and the variances can be significant. Estimated liabilities are reviewed regularly, and adjustments to such estimates are reflected in the results of current operations. Management believes that given the inherent variability of such estimates, the aggregate reserves are within an acceptable range of reasonableness. Accruals for unpaid losses and losses incurred but not reported are included in other liabilities in the Consolidated Balance Sheet.

Insurance losses and loss adjustment expenses increased for fiscal 2004 when compared to fiscal 2003 primarily due to an increased number of agreements in force. Insurance losses and loss adjustment expenses increased for fiscal 2003 when compared to fiscal 2002 primarily due to an increased number of agreements in force. In addition, losses incurred related to insuring vehicle dealer wholesale inventories also increased, due to a decline in salvage recoveries in fiscal 2003 and an increase in the level of risk retained by TMIS.

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LIQUIDITY AND CAPITAL RESOURCES

Liquidity risk is the risk arising from the inability to meet obligations when they come due in a timely manner. The Company’s liquidity strategy is to maintain the capacity to fund assets and repay liabilities in a timely and cost-effective manner under adverse market conditions. This capacity primarily arises from the Company’s issuance ability in the global capital markets as well as its ability to generate liquidity from its balance sheet. This strategy has led the Company to develop a borrowing base that is diversified by market and geographic distribution and type of security, among other factors, as well as programs to prepare assets for sale and securitization. Credit support provided by the Company’s parent provides an additional source of liquidity to the Company, although it is not relied upon by the Company in its liquidity planning and capital and risk management.

The Company does not rely on any one source of funding and may choose to reallocate its funding activities depending upon market conditions, relative costs, and other factors. The Company believes that debt and securitization funding, combined with operating and investing activities, will provide sufficient liquidity to meet future funding requirements.

Commercial Paper

Short-term funding needs are met through the issuance of commercial paper in the United States. Commercial paper outstanding under the Company’s commercial paper programs ranged from approximately $4.7 billion to $8.7 billion during fiscal 2004, with an average outstanding balance of $7.0 billion. The Company’s commercial paper programs are supported by the liquidity facilities discussed later in this section. As an issuer rated A-1+/P-1 by Standard & Poor’s Ratings Group, a division of The McGraw-Hill Companies, Inc. (“S&P”) and Moody’s Investors Service, Inc. (“Moody’s”), respectively, in a $1.3 trillion market, the Company believes there is ample capacity to meet its short-term requirements.

In addition, the Company maintained excess cash and cash equivalents ranging from $5 million to $1.5 billion during fiscal 2004, with an average balance of $ 0.5 billion.

Unsecured Term Debt

Term funding requirements are met through the issuance of a variety of debt securities issued in both the U.S. and international capital markets. To diversify its funding sources, the Company has issued in a variety of markets, currencies, and maturities, which allows it to broaden its distribution of securities and further enhance liquidity.

In the past, medium term notes (“MTNs”) and bonds have provided the Company with significant sources of funding. During fiscal 2004, the Company issued approximately $7.7 billion of MTNs and bonds with original maturities ranging from greater than one year to approximately fifteen years. At March 31, 2004, the Company had total MTNs and bonds outstanding of $26.7 billion, of which $10.5 billion were denominated in foreign currencies. The remaining maturities of all MTNs and bonds outstanding at March 31, 2004 ranged from less than one year to approximately fifteen years. The Company anticipates continued use of MTNs and bonds in both the U.S. and international capital markets.

To provide for the issuance of debt securities in the U.S. capital market, the Company maintains a shelf registration with the SEC under which approximately $15 billion was available for issuance at April 30, 2004. Under the Company’s Euro MTN program, which provides for the issuance of debt securities in the international capital markets, the maximum aggregate principal amount authorized to be outstanding at any time is $20 billion, of which approximately $7 billion was available for issuance at April 30, 2004. The U.S. dollar and Euro MTN programs may be expanded from time to time to allow for the continued use of these sources of funding. In addition, the Company may issue bonds in the U.S. and international capital markets that are not issued under its MTN or Euro MTN programs.

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Securitization

In addition to the unsecured debt markets, the Company maintains access to the securitization market. The Company’s securitization program is a significant source of liquidity as the Company holds over $22.6 billion in potentially securitizable retail finance receivables. The Company had $4.6 billion and $6.7 billion outstanding in asset-backed securities as of March 31, 2004 and 2003, respectively. The Company currently maintains a shelf registration with the SEC relating to the issuance of securities secured by retail finance receivables. During fiscal 2004, the Company sold retail finance receivables totaling $1.9 billion in connection with securities issued under the shelf registration statement. Of the $1.9 billion sold, the Company invested $0.6 billion in purchased and retained securities, resulting in $1.3 billion of net funding proceeds to the Company. As of April 30, 2004, approximately $6.2 billion remained available for issuance under the registration statement. Asset-backed securities are discussed in the “Off-Balance Sheet Arrangements” section of this MD&A.

Liquidity Facilities and Letters of Credit

For additional liquidity purposes, the Company maintains syndicated bank credit facilities with certain banks whose commitments aggregated $5.4 billion and $4.2 billion at March 31, 2004 and 2003, respectively. No amounts were outstanding under the syndicated bank credit facilities as of March 31, 2004. During fiscal 2004, Toyota Credit de Puerto Rico Corp. (“TCPR Corp.”), a wholly owned subsidiary of TMCC, established a $400 million, 364-day syndicated bank credit facility, which is restricted to its own use. During fiscal 2004, TMCC renewed its 364-day syndicated credit facility for an additional 364-day period and increased the amount to $3.6 billion, which is restricted to its own use.

The syndicated bank credit facilities do not contain any material adverse change clauses or restrictive financial covenants that would limit the ability of the Company or TCPR Corp. to borrow under their respective facilities. These facilities contain provisions that would prevent the Company or TCPR Corp., as applicable, from borrowing (and could require repayment of any outstanding loans) if the Company’s long-term debt ratings from S&P or Moody’s are less than A and A2, respectively, (for TMCC) or TCPR Corp.’s short-term debt ratings from S&P and Moody’s are less than A-2 and P-3, respectively (for TCPR Corp.), or if credit support arrangements acceptable to the rating agencies rating the Company’s and TCPR Corp’s debt are not maintained.

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Credit Support Agreements

To support funding efforts, credit support agreements were established between the Company and its parents. Under the terms of a credit support agreement between TMC and TFSC (“TMC Credit Support Agreement”), TMC agreed to: 1) maintain 100% ownership of TFSC; 2) cause TFSC and its subsidiaries to have a net worth of at least ¥10 million, equivalent to $95,951 at March 31, 2004; and 3) make sufficient funds available to TFSC so that TFSC will be able to (i) service the obligations arising out of its own bonds, debentures, notes and other investment securities and commercial paper and (ii) honor its obligations incurred as a result of guarantees or credit support agreements that it has extended. The agreement is not a guarantee by TMC of any securities or obligations of TFSC.

Under the terms of a similar credit support agreement between TFSC and TMCC (“TFSC Credit Support Agreement”), TFSC agreed to: 1) maintain 100% ownership of TMCC; 2) cause TMCC and its subsidiaries to have a net worth of at least $100,000; and 3) make sufficient funds available to TMCC so that TMCC will be able to service the obligations arising out of its own bonds, debentures, notes and other investment securities and commercial paper (collectively, “TMCC Securities”). The agreement is not a guarantee by TFSC of any TMCC Securities or other obligations of TMCC. The TMC Credit Support Agreement and the TFSC Credit Support Agreement are governed by, and construed in accordance with, the laws of Japan. TMCC Securities do not include the securities issued by securitization trusts in connection with TMCC’s securitization programs.

Holders of TMCC Securities have the right to claim directly against TFSC and TMC to perform their respective obligations under the credit support agreements by making a written claim together with a declaration to the effect that the holder will have recourse to the rights given under the credit support agreement. If TFSC and/or TMC receives such a claim from any holder of TMCC Securities, TFSC and/or TMC shall indemnify, without any further action or formality, the holder against any loss or damage resulting from the failure of TFSC and/or TMC to perform any of their respective obligations under the credit support agreements. The holder of TMCC Securities who made the claim may then enforce the indemnity directly against TFSC and/or TMC.

TMCC and TFSC are parties to a credit support fee agreement (“Credit Support Fee Agreement”). The Credit Support Fee Agreement requires TMCC to pay to TFSC a semi-annual fee equal to 0.05% per annum of the weighted average outstanding amount of TMCC Securities entitled to credit support.

TCPR is the beneficiary of a credit support agreement with TFSC containing the same provisions as the TFSC Credit Support Agreement described above but pertaining to TCPR and TCPR bonds, debentures, notes and other investment securities and commercial paper (collectively, “TCPR Securities”). Holders of TCPR Securities have the right to claim directly against TFSC and TMC to perform their respective obligations as described above. This agreement is not a guarantee by TFSC of any securities or other obligations of TCPR. TCPR has agreed to pay TFSC a semi-annual fee equal to 0.05% per annum of the weighted average outstanding amount of TCPR’s Securities entitled to credit support.

TMC files periodic reports and other information with the SEC, which can be read and copied at the SEC’s Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. Copies of such material may also be obtained by mail from the Public Reference Section of the SEC, at 450 Fifth Street, N.W., Room 1200, Washington, D.C. 20549 at prescribed rates. The public may obtain information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330.

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Credit Ratings

The cost and availability of unsecured financing is influenced by credit ratings, which are intended to be an indicator of the creditworthiness of a particular company, security, or obligation. Lower ratings generally result in higher borrowing costs as well as reduced access to capital markets. Credit ratings are not recommendations to buy, sell, or hold securities and are subject to revision or withdrawal at any time by the assigning nationally recognized statistical rating organization (“NRSRO”). Each NRSRO may have different criteria for evaluating risk, and therefore ratings should be evaluated independently for each NRSRO. In August 2003, Moody’s upgraded the ratings of TMC and its supported subsidiaries, including TMCC and TCPR from Aa1 to Aaa. In January 2004, S&P revised the outlook of TMC and its supported subsidiaries, including TMCC and TCPR, from negative to stable. As of April 30, 2004, the ratings and outlook established by Moody’s and S&P for TMCC were as follows:

OFF-BALANCE SHEET ARRANGEMENTS

Securitization Funding

Securitization of receivables allows the Company to access a highly liquid and efficient capital market while providing the Company with an alternative source of funding and investor diversification. The Company has been a participant in the asset-backed securitization market since 1993, securitizing both retail and lease finance receivables. The Company’s current securitization program involves only retail finance receivables. For further discussion of the Company’s funding strategy, refer to the “Liquidity and Capital Resources” section within this MD&A.

The Company’s securitization program involves a two-step transaction. The Company sells discrete pools of retail finance receivables to a wholly owned consolidated bankruptcy remote special purpose entity (“SPE”), which in turn transfers the receivables to a qualified special purpose entity (“QSPE” or “securitization trust”) in exchange for the proceeds from securities issued by the securitization trust. The asset-backed securities are rated by at least two NRSROs and sold in registered public offerings. These securities, usually in the form of notes or certificates of various maturities and interest rates, are secured by collections on the sold receivables. The securities are structured into senior and subordinated classes. Generally, the senior classes have priority over the subordinated classes in receiving collections from the sold receivables. The Company typically uses an amortizing structure in its securitizations. In most amortizing structures, holders of the asset-backed securities receive monthly payments of principal and interest and therefore the outstanding principal balance of the securities is repaid as the securitization trust receives principal collections on the sold receivables.

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The following flow chart diagrams a typical securitization transaction:

The Company’s use of SPEs in securitizations is consistent with conventional practices in the securitization markets. The sale to the SPE isolates the sold receivables from other creditors of the Company for the benefit of securitization investors and, assuming accounting requirements are satisfied, the securitization is accounted for as a sale. Investors in securitizations have no recourse to the Company beyond the retained subordinated interests, any cash reserve funds, and any amounts available or funded under the revolving liquidity notes discussed below. Investors do not have recourse to other assets of the Company for obligor defaults. The Company does not guarantee any securities issued by any securitization trust. None of the Company’s officers, directors, or employees holds any equity interests or receives any direct or indirect compensation from the Company’s SPEs. The SPEs do not own the Company’s stock or stock of any of the Company’s affiliates and there are no contracts to do so. Each SPE has limited purposes and may only be used to purchase and sell the receivables. The individual securitization trusts have a limited duration and generally terminate when investors holding the asset-backed securities have been paid all amounts owed to them.

The SPE retains an interest in each securitization trust. Each retained interest includes subordinated securities issued by the securitization trust and interest-only strips representing the right to receive any excess interest. The retained interests are subordinated and serve as credit enhancements for the more senior securities issued by the securitization trust to help ensure that adequate funds will be available to pay investors. The retained interests are held by the SPE as restricted assets and are not available to satisfy any obligations of the Company. The SPE’s ability to realize value on its retained interests depends on actual credit losses and prepayment speeds on the sold receivables. To the extent prepayment speeds are faster or losses are greater than expected, the SPE may be required to recognize an impairment loss on the retained interests. For accounting purposes, the interests of the SPE are consolidated with the Company’s accounts. These retained interests as well as senior securities purchased by the Company are reflected in the Consolidated Balance Sheet as available for sale investments in marketable securities and other assets. For further discussion of the estimates involved in the valuation of the Company’s retained interests, refer to the “Critical Accounting Estimates” section within this MD&A.

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Various forms of credit enhancements are provided to reduce the risk of loss for senior classes of securities. These credit enhancements may include the following:

The Company may enter into a swap agreement with the securitization trust under which the securitization trust is obligated to pay the Company a fixed rate of interest on payment dates in exchange for receiving amounts equal to the floating rate of interest payable on the asset backed securities. This arrangement enables the securitization trust to issue securities bearing interest on a basis different from that of the receivables held.

Income earned from the sale of receivables includes gains or losses on assets sold, servicing fee income, and interest income earned on retained securities. The sale of receivables has the effect of reducing financing revenues in the year the receivables are sold, as well as in future years. The net impact of securitizations on annual earnings will include financing revenue effects in addition to the reported gain or loss on assets sold and will vary depending on the amount and timing of securitizations in the current year, as well as the interest rate environment at the time the finance receivables were originated and securitized. Gains on assets sold are recognized in the period in which the sale occurs and are included in investment and other income in the Consolidated Statement of Income. The recorded gains on assets sold are dependent on the carrying amount and fair value of the assets at the time of the sale. The carrying amount is allocated between the assets sold and the retained interests based on their relative fair values at the date of the sale.

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The Company recognizes income from the retained interests over the life of the underlying retained interests using the effective yield method. The effective yield represents the excess of all forecasted cash flows over the initial amount recorded as the retained interests at the sale date. As adjustments to forecasted cash flows are made based upon market conditions, the Company adjusts the rate at which income is earned prospectively. If forecasted future cash flows result in an other-than-temporary decline in the fair value of the retained interests, then an impairment loss is recognized to the extent that the fair value is less than the carrying amount. Such losses, when incurred, are included in investment and other income in the Consolidated Statement of Income. Otherwise, any difference in the carrying amount and the fair value of the retained interests is recognized as an unrealized gain or loss, net of income taxes, and is included in accumulated other comprehensive income in the Consolidated Balance Sheet.

TMCC continues to service the sold receivables for a servicing fee. TMCC’s servicing duties include collecting payments on receivables and submitting them to the trustee for distribution to the certificate holders. TMCC also prepares monthly investor reports on the performance of the sold receivables, including collections, investor distributions, delinquencies and credit losses that are used by the trustee on behalf of the Trust to distribute monthly interest and principal payments to investors. TMCC also performs administrative services for the securitization trusts, including filing periodic reports, preparing notices, and tax reporting. While servicing the sold receivables for the securitization trusts, TMCC applies the same servicing policies and procedures that are applied to the owned receivables and maintains a normal relationship with the financing customers.

The sale of receivables through securitizations is further discussed in Note 7 of the Notes to Consolidated Financial Statements.

Guarantees

TMCC has guaranteed the payments of principal and interest with respect to the bonds of manufacturing facilities of certain affiliates. TMCC receives a fee of $100,000 for guaranteeing such payments. TMCC has also guaranteed the payments of principal and interest of an offshore bank loan of Banco Toyota do Brasil, an affiliate in which TMCC has a minority interest. The nature and business purpose of these guarantees are described in Note 15 – Commitments and Contingent Liabilities of the Consolidated Financial Statements. Other than the fee discussed above, there are no corresponding expenses or cash flows arising from the Company’s guarantees, nor are any amounts recorded as liabilities on the Company’s consolidated balance sheet.

Lending Commitments

The Company provides credit facilities to vehicle and industrial equipment dealers. These credit facilities may be used for business acquisitions, facilities refurbishment, real estate purchases, and working capital requirements. These loans are typically collateralized with liens on real estate, vehicle inventory, and/or other dealership assets, as appropriate. The Company obtains 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 the Company’s exposure under such agreements. The Company prices the credit facilities according to the risks assumed in entering into the credit facility. The Company also provides 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. The Company has also extended credit facilities to affiliates as described in Note 15 – Commitments and Contingent Liabilities. While the majority of these credit facilities and financing arrangements are secured, approximately 22% at March 31, 2004 are unsecured. The credit facilities and financing arrangements with vehicle and industrial equipment dealers and affiliates totaled $3.8 billion of which $2.3 billion was outstanding as of March 31, 2004.

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Indemnification

In the ordinary course of business, the Company enters into agreements containing indemnification provisions standard in the industry related to several types of transactions, including, but not limited to, debt funding, derivatives, securitization transactions, and its vendor and supplier agreements. Performance under these indemnities would occur upon a breach of the representations, warranties or covenants made or given, or a third party claim. In addition, the Company has agreed in certain debt and derivative issuances, and subject to certain exceptions, to gross-up payments due to third parties in the event that withholding tax is imposed on such payments. In addition, certain of the Company’s funding arrangements would require the Company to pay lenders for increased costs due to certain changes in laws or regulations. Management periodically evaluates the probability of having to incur such costs. Due to the difficulty in predicting events which could cause a breach of the indemnification provisions or trigger a gross-up or other payment obligation, the Company is not able to estimate its maximum exposure to future payments that could result from claims made under such provisions. The Company has not made any material payments in the past as a result of these provisions, and as of March 31, 2004, the Company does not believe it is probable that it will have to make any material payments in the future. As such, no amounts have been recorded under these indemnifications as of March 31, 2004.

Receivable Repurchase Obligations

TMCC makes certain representations and warranties to the SPE, and the SPE makes corresponding representations and warranties to the securitization trust, relating to receivables sold in a securitization. TMCC and the SPE may be required to repurchase any receivables in the event of a breach of a representation and warranty relating to the receivable that materially and adversely affects the interest of the SPE, or securitization trust, as applicable. In addition, TMCC, as servicer of the receivables, may be required to repurchase any receivable in the event of a breach of a covenant by the servicer with respect to the receivable that materially and adversely affects the interest of the securitization trust or of certain extensions or modifications of a receivable as to which TMCC, as servicer, does not commit to make advances to fund reductions in interest payments. The repurchase price is generally the outstanding principal balance of the receivable and accrued interest. These provisions are customary for securitization transactions.

Advancing Requirements

As servicer, TMCC is required to advance certain shortfalls in obligor payments to the related securitization trust to the extent it believes the advance will be recovered from future collections of the related receivable. Each securitization trust is required to reimburse the Company for these advances from collections on all receivables before making other required payments. These provisions are customary for securitization transactions.

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CONTRACTUAL OBLIGATIONS AND CREDIT-RELATED COMMITMENTS

The Company has certain obligations to make future payments under contracts and credit-related financial instruments and commitments. Aggregate contractual obligations and credit-related commitments in existence at March 31, 2004 are summarized as follows: