Edgar Filing: NAVISTAR INTERNATIONAL CORP

form10q-3q05

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

FORM 10-Q

(X)	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
	SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended July 31, 2005

OR

( )	TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
	SECURITIES EXCHANGE ACT OF 1934

For the transition period from				To

Commission file number 1-9618

NAVISTAR INTERNATIONAL CORPORATION

(Exact name of registrant as specified in its charter)

		Delaware			36-3359573

		(State or other jurisdiction of incorporation or organization)			(I.R.S. Employer Identification No.)

			4201 Winfield Road, P.O. Box 1488 Warrenville, Illinois 60555

			(Address of principal executive offices, Zip Code)

Registrant's telephone number, including area code (630) 753-5000

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 and (2) has been subject to such filing requirements for the past 90 days. Yes X No ___

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule12b-2 of the Act.) Yes X No __

Indicate by check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Act.) Yes No X .

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes ___No ___

APPLICABLE ONLY TO CORPORATE ISSUERS:

As of August 31, 2005, the number of shares outstanding of the registrant's common stock was 70,106,556.

PAGE 2

NAVISTAR INTERNATIONAL CORPORATION
AND CONSOLIDATED SUBSIDIARIES


INDEX

				Page Reference

Part I. Financial Information:

	Item 1. Condensed Consolidated Financial Statements

		Statement of Income
			Three and Nine Months Ended July 31, 2005 and 2004 (restated)	3

		Statement of Financial Condition
			July 31, 2005, October 31, 2004 and July 31, 2004 (restated)	4

		Statement of Cash Flow
			Nine Months Ended July 31, 2005 and 2004 (restated)	5

		Notes to the Financial Statements		6

		Additional Financial Information		25

	Item 2. Management's Discussion and Analysis of Financial
		Condition and Results of Operations		27

	Item 3. Quantitative and Qualitative Disclosures
		About Market Risk		38

	Item 4. Controls and Procedures			38

Part II. Other Information:

	Item 1. Legal Proceedings			39

	Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			40

	Item 6. Exhibits			41

Signature				41

PAGE 3

PART I - FINANCIAL INFORMATION

ITEM 1. Condensed Consolidated Financial Statements

STATEMENT OF INCOME (Unaudited) Millions of dollars, except per share data

	Navistar International Corporation and Consolidated Subsidiaries

	Three Months Ended July 31					Nine Months Ended July 31

	2005		2004			2005		2004

			* As Restated					* As Restated
Sales and revenues
Sales of manufactured products	$	2,923	$	2,294		$	8,318	$	6,456
Finance revenue		60		55			180		182
Other income		11		-			24		9

Total sales and revenues		2,994		2,349			8,522		6,647


Costs and expenses
Cost of products and services sold		2,474		1,953			7,149		5,582
Restructuring and other non-recurring charges		-		(5	)		-		(1	)
Postretirement benefits expense		59		43			178		162
Engineering and research expense		91		66			254		181
Selling, general and administrative expense		210		174			584		473
Interest expense		51		31			126		96
Other expense		12		5			26		20

Total costs and expenses		2,897		2,267			8,317		6,513


Income before income taxes		97		82			205		134
Income tax expense		33		32			70		46


Net income	$	64	$	50		$	135	$	88




Earnings per share
Basic	$	0.91	$	0.72		$	1.93	$	1.27
Diluted	$	0.83	$	0.66		$	1.78	$	1.19

Average shares outstanding (millions)
Basic		70.1		69.9			70.1		69.6
Diluted		79.9		80.0			80.1		80.2


See Notes to Financial Statements.
* See Note Q to the Financial Statements.

PAGE 4

STATEMENT OF FINANCIAL CONDITION (Unaudited) Millions of dollars

	Navistar International Corporation and Consolidated Subsidiaries

	July 31 2005			October 31 2004			July 31 2004

ASSETS							* As Restated
Current assets
Cash and cash equivalents	$	593		$	605		$	478
Marketable securities		719			182			6
Receivables, net		962			1,215			850
Inventories		1,064			790			856
Deferred tax asset, net		169			207			152
Other assets		224			168			183


Total current assets		3,731			3,167			2,525

Marketable securities		523			73			424
Finance and other receivables, net		1,108			1,222			878
Property and equipment, net		1,533			1,444			1,405
Investments and other assets		516			374			327
Prepaid and intangible pension assets		90			73			70
Deferred tax asset, net		1,266			1,239			1,290


Total assets	$	8,767		$	7,592		$	6,919


LIABILITIES AND SHAREOWNERS' EQUITY

Liabilities
Current liabilities
Notes payable and current maturities of long-term debt	$	1,170		$	823		$	271
Accounts payable, principally trade		1,383			1,462			1,161
Other liabilities		996			965			844


Total current liabilities		3,549			3,250			2,276

Debt: Manufacturing operations		1,359			1,258			1,268
Financial services operations		1,361			787			1,253
Postretirement benefits liability		1,426			1,382			1,391
Other liabilities		384			384			364


Total liabilities		8,079			7,061			6,552


Commitments and contingencies

Shareowners' equity
Series D convertible junior preference stock		4			4			4
Common stock and additional paid in capital (75.3 million shares issued)		2,078			2,096			2,087
Retained earnings (deficit)		(470	)		(604	)		(762	)
Accumulated other comprehensive loss		(756	)		(789	)		(782	)
Common stock held in treasury, at cost
(5.2 million, 5.3 million and 5.5 million shares held)		(168	)		(176	)		(180	)


Total shareowners’ equity		688			531			367


Total liabilities and shareowners’ equity	$	8,767		$	7,592		$	6,919



See Notes to Financial Statements.
* See Note Q to the Financial Statements.

PAGE 5

STATEMENT OF CASH FLOW (Unaudited) Millions of dollars

	Navistar International Corporation and Consolidated Subsidiaries

	Nine Months Ended July 31

	2005			2004

				* As Restated
Cash flow from operating activities
Net income	$	135		$	88
Adjustments to reconcile net income to cash provided by (used in) operating activities:
Depreciation and amortization		168			149
Deferred income taxes		20			18
Postretirement benefits funding less than (in excess of) expense		45			(173	)
Gains on sales of receivables		(14	)		(26	)
Other, net		(20	)		(89	)
Change in operating assets and liabilities, net of effect of acquisitions:
Receivables		79			(45	)
Inventories		(246	)		(240	)
Prepaid and other current assets		(34	)		(30	)
Accounts payable		(50	)		51
Other liabilities		3			61

Cash provided by (used in) operating activities		86			(236	)


Cash flow from investment programs
Purchases of retail notes and lease receivables		(1,240	)		(1,192	)
Collections/sales of retail notes and lease receivables		1,537			1,360
Purchases of marketable securities		(1,676	)		(235	)
Sales or maturities of marketable securities		688			401
Capital expenditures		(107	)		(103	)
Property and equipment leased to others		21			4
Acquisitions and investment in affiliates		(229	)		(1	)
Other investment programs		(83	)		(16	)

Cash provided by (used in) investment programs		(1,089	)		218


Cash flow from financing activities
Issuance of debt		1,029			165
Principal payments on debt		(111	)		(194	)
Net increase in notes and debt outstanding under bank revolving credit facility and commercial paper programs		80			56
Premium on call options, net		-			(22	)
Other financing activities		(7	)		24

Cash provided by financing activities		991			29


Cash and cash equivalents
Increase (decrease) during the period		(12	)		11
At beginning of the period		605			467

Cash and cash equivalents at end of the period	$	593		$	478


Supplemental cash flow information
Interest paid	$	122		$	113
Income taxes paid, net of refunds	$	18		$	16


See Notes to Financial Statements.
* See Note Q to the Financial Statements.

PAGE 6

Navistar International Corporation and Consolidated Subsidiaries

Notes to Financial Statements (Unaudited)

Note A. Summary of Accounting Policies

Navistar International Corporation (NIC) is a holding company whose principal operating subsidiary is International Truck and Engine Corporation (International). As used hereafter, “company” or “Navistar” refers to Navistar International Corporation and its consolidated subsidiaries. Navistar operates in three principal industry segments: truck, engine (collectively called “manufacturing operations”), and financial services. The consolidated financial statements include the results of the company’s manufacturing operations, majority owned dealers and its wholly owned financial services subsidiaries. The effects of transactions between the manufacturing, dealer and financial services operations have been eliminated to arrive at the consolidated totals.

The accompanying unaudited financial statements have been prepared in accordance with accounting policies described in the 2004 Annual Report on Form 10-K and should be read in conjunction with the disclosures therein.

In the opinion of management, these interim financial statements reflect all adjustments necessary to present fairly the financial position, results of operations and cash flow for the periods presented. In the current quarter, the company recorded charges of $14 million related to a foundry operation, including $11 million to correct the location’s inventory balances based upon physical counts conducted during the third quarter. This inventory adjustment was charged to the current period because the company was not able to determine the prior period to which the adjustment may have related. For the nine month period, the inventory charge described above combined with the correction of certain other accounting errors ($7 million) and other adjustments related to changes in estimates ($15 million) for this location totaled approximately $33 million. The errors primarily involved capitalized costs that should have been expensed in the prior periods in which they occurred.

Interim results are not necessarily indicative of results for the full year. Certain 2004 and 2005 amounts have been reclassified to conform with the presentation used in the 2005 financial statements in this report.

Statement of Financial Accounting Standards (SFAS) No. 123, “Accounting for Stock-Based Compensation” and SFAS No. 148, “Accounting for Stock-Based Compensation - Transition and Disclosure,” encourage, but do not require, companies to record compensation cost for stock-based employee compensation plans at fair value. The company has chosen to continue to account for stock-based compensation in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. Accordingly, no compensation cost has been recognized for fixed stock options because the exercise prices of the stock options equal the market value of the company’s common stock at the date of grant. The following table illustrates the effect on the company’s net income and earnings per share if the company had applied the fair value recognition provision of SFAS No. 123 in accordance with the disclosure provisions of SFAS No. 148.

	Three Months Ended July 31						Nine Months Ended July 31

Millions of dollars, except per share data	2005			2004			2005			2004


Net income, as reported	$	64		$	50		$	135		$	88
Add: Interest expense on 2.5% senior convertible and 4.75% subordinated exchangeable debt for dilutive purposes (net of tax)		2			3			7			7

Adjusted net income available to common shareholders plus assumed conversions		66			53			142			95
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards net of related tax effects		(2	)		(3	)		(8	)		(10	)

Pro forma net income	$	64		$	50		$	134		$	85


Earnings per share:
Basic - as reported	$	0.91		$	0.72		$	1.93		$	1.27
Basic - pro forma	$	0.88		$	0.68		$	1.81		$	1.13

Diluted - as reported	$	0.83		$	0.66		$	1.78		$	1.19
Diluted - pro forma	$	0.80		$	0.62		$	1.67		$	1.06

PAGE 7

Navistar International Corporation and Consolidated Subsidiaries

Notes to Financial Statements (Unaudited)

Note B. New Accounting Pronouncements

In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123 (revised 2004), “Share-Based Payment.” This Statement generally requires the recognition of the cost of employee services received in exchange for an award of equity instruments. This cost is based on the grant date fair value of the equity award and will be recognized over the period during which the employee is required to provide service in exchange for the award. The effective date for the company is the beginning of the first fiscal quarter of 2006. The company is still evaluating its share-based payment programs and the related impact this Statement may have on its results of operations, financial condition or cash flows.

In November 2004, the FASB issued SFAS No. 151, “Inventory Costs,” to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted material. The Statement clarifies that abnormal inventory costs should be recognized in the period in which they occur. This Statement is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The company will adopt this Statement in fiscal 2006 but has not yet determined the effect, if any, this Statement may have on its results of operations, financial condition or cash flows.

In December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets,” to amend Accounting Principles Board Opinion No. 29, “Accounting for Nonmonetary Transactions”(APB No. 29). The Statement eliminates the exception from fair value measurement for nonmonetary exchanges of similar products in APB No. 29 and replaces it with an exception for exchanges that do not have commercial substance. This Statement will be applied prospectively for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. The company does not expect this statement will have a material impact on its results of operations, financial condition or cash flows.

In December 2004, the FASB issued two FASB Staff Positions (FSPs) that provide accounting guidance on how companies should account for the effects of the American Jobs Creation Act of 2004 (the Act) that was signed into law on October 22, 2004. The Act could affect how companies report their deferred income tax balances. The first FSP is FSP FAS 109-1 (FSP 109-1); the second is FSP FAS 109-2 (FSP 109-2). In FSP 109-1, the FASB concludes that the tax relief (special tax deduction for domestic manufacturing) from the Act should be accounted for as a "special deduction" instead of a tax rate reduction. The company continues to evaluate the impact, if any, this FSP may have on its results of operations, financial condition or cash flows. FSP 109-2 gives a company additional time to evaluate the effects of the Act on any plan for reinvestment or repatriation of foreign earnings for purposes of applying SFAS No. 109, “Accounting for Income Taxes.” However, the company must provide certain disclosures if it chooses to utilize the additional time granted by the FASB. The company has completed its evaluation and does not intend to repatriate foreign earnings.

In March 2005, the FASB issued FASB Interpretation (FIN) No. 47, “Accounting for Conditional Asset Retirement Obligations.” This Interpretation addresses diverse accounting practices that developed with respect to the timing of liability recognition for legal obligations associated with the retirement of a tangible long-lived asset when the timing and (or) method of settlement of the obligation are conditional on a future event. FIN No. 47 concludes that an entity is required to recognize a liability for the fair value of a conditional asset retirement obligation when incurred if the liability's fair value can be reasonably estimated. This Interpretation is effective no later than the end of fiscal years ending after December 15, 2005. The company does not have any such asset retirement obligations at this time. The company expects that this Interpretation will have no impact on the company’s results of operations, financial condition or cash flows.

In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections,” to replace Accounting Principles Board Opinion No. 20, “Accounting Changes” and SFAS No. 3, “Reporting Accounting Changes in Interim Financial Statements.” This Statement provides guidance on the accounting for and reporting of accounting changes and error corrections. It also establishes the required methods by which entities should include accounting changes or error corrections in previously issued financial statements. This Statement is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. Early adoption is permitted for accounting changes and corrections of errors made in fiscal years beginning after the date this Statement was issued. The company intends to adopt this Statement for fiscal 2006.

PAGE 8

Navistar International Corporation and Consolidated Subsidiaries

Notes to Financial Statements (Unaudited)

Note C. Business Combinations

In April 2005, the company acquired MWM Motores Diesel Ltda (MWM), a Brazilian entity. MWM produces a broad line of medium and high-speed diesel engines in the 50 to 310 horsepower range for use in pick-ups, trucks, vans, light and semi-heavy trucks, as well as agricultural, marine and electric generator applications. The acquisition was effective April 1, 2005, therefore, the company’s Condensed Consolidated Financial Statements include the operating results of MWM as of that date. For the three months ended July 31, 2005, MWM contributed $7 million in profit. The Administrative Council for Economic Defense (CADE), the Brazilian antitrust regulatory authority, must review and approve the acquisition, and that review is still pending. Only minimal synergies can be achieved prior to CADE approval and CADE may require divestiture of assets or impose other conditions on the acquisition. This uncertainty inhibits the company from completing certain aspects of the purchase accounting associated with the acquisition of MWM. Once CADE finalizes its review, management will evaluate its engine operations within Brazil, decide how to best utilize its resources to meet the needs of its customers and complete the accounting associated with the acquisition.

Note D. Postretirement Benefits

Postretirement Benefits Expense

The company provides postretirement benefits to a substantial portion of its employees. Costs associated with postretirement benefits include pension and postretirement healthcare expenses for employees, retirees and surviving spouses and dependents. In addition, as part of the 1993 restructured healthcare and life insurance plans, profit sharing payments to the Retiree Supplemental Benefit Trust (Trust) are required.

The cost of postretirement benefits is segregated as a separate component on the Statement of Income and is as follows:

	Three Months Ended July 31					Nine Months Ended July 31

Millions of dollars	2005		2004			2005		2004


Pension expense	$	17	$	14		$	52	$	52
Other benefits expense		42		32			126		108
Profit sharing provision to Trust		-		(3	)		-		2

Net postretirement benefits expense	$	59	$	43		$	178	$	162

PAGE 9

Navistar International Corporation and Consolidated Subsidiaries

Notes to Financial Statements (Unaudited)

Note D. Postretirement Benefits (continued)

Net periodic postretirement benefits expense included on the Statement of Income is composed of the following:

	Pension Expense

	Three Months Ended July 31						Nine Months Ended July 31

Millions of dollars	2005			2004			2005			2004


Service costs for benefits earned during the period	$	6		$	3		$	18		$	17
Interest on obligation		55			58			166			174
Amortization of cumulative losses		15			12			44			37
Amortization of prior service cost		2			1			6			4
Other		6			7			19			20
Less expected return on assets		(67	)		(67	)		(201	)		(200	)

Net pension expense	$	17		$	14		$	52		$	52

“Other” in the above table includes the expense related to yearly lump-sum payments to retirees required by negotiated labor contracts, expense related to defined contribution plans and other postretirement benefit costs.

	Other Benefits Expense

	Three Months Ended July 31						Nine Months Ended July 31

Millions of dollars	2005			2004			2005			2004

Service costs for benefits earned during the period	$	4		$	3		$	13		$	10
Interest on obligation		36			34			108			105
Amortization of cumulative losses		15			10			45			31
Other		-			(1	)		-			3
Less expected return on assets		(13	)		(14	)		(40	)		(41	)

Net other benefits expense	$	42		$	32		$	126		$	108

Employer Contributions

The company previously disclosed in its financial statements for the year ended October 31, 2004 that it expected to contribute approximately $20 million to its pension plans in 2005. Current expectations regarding 2005 pension plan contributions have not changed since that time. As of July 31, 2005, $15 million of contributions have been made to the company’s qualified pension plans.

The company also makes contributions to partially fund retiree healthcare benefits. As of July 31, 2005, $4 million of contributions have been made to the company’s retiree healthcare plans and the company anticipates contributing an additional $2 million in 2005 for a total contribution of $6 million.

Note E. Income Taxes

The Statement of Income reflects tax expense which primarily reduces the cumulative benefit of NOL carryforwards currently recognized as a deferred tax asset, net of valuation allowances, in the Statement of Financial Condition. Cash payment of income taxes may be required for certain state income, foreign income and withholding and federal alternative minimum taxes. Until the company has utilized its significant NOL carryforwards, the cash payment of United States (U.S.) federal and state income taxes will be minimal.

PAGE 10

Navistar International Corporation and Consolidated Subsidiaries

Notes to Financial Statements (Unaudited)

Note F. Inventories

Inventories are as follows:

	July 31		October 31		July 31
Millions of dollars	2005		2004		2004


Finished products	$	675	$	505	$	539
Work in process		57		47		69
Raw materials and supplies		332		238		248

Total inventories	$	1,064	$	790	$	856

Note G. Sales of Receivables

Navistar Financial Corporation’s (NFC) primary business is to provide wholesale, retail and lease financing for new and used trucks sold by International and International’s dealers and, as a result, NFC’s finance receivables and leases have significant concentration in the trucking industry. NFC retains as collateral an ownership interest in the equipment associated with leases and a security interest in equipment associated with wholesale notes and retail notes.

The following table summarizes NFC’s sale of retail notes and leases for the three months and nine months ended July 31, 2005 and 2004, in millions of dollars.

	Three Months Ended July 31				Nine Months Ended July 31

	2005		2004		2005		2004


Sales of retail receivables	$	385	$	325	$	1,559	$	1,120
Gain on sales of retail receivables		3		3		14		26

Note H. Debt

In March 2005, the company sold $400 million in Senior Notes due 2012 (original notes). The original notes were sold in a Rule 144A and Regulation S private unregistered offering and were priced to yield 6.25%. In June 2005, the company offered to exchange these original notes for a like amount of the company’s new 6.25%, Series B, Senior Notes due 2012 (exchange notes). The exchange notes were registered under the Securities Act. The terms of the exchange notes issued in the exchange offer are substantially identical to the original notes, except that the transfer restrictions and registration rights provisions relating to the original notes will not apply to the exchange notes. The exchange notes are guaranteed on a senior unsecured basis by the company’s principal operating subsidiary, International Truck and Engine Corporation. The exchange notes are the company’s senior unsecured obligation and rank in right of payment behind all of the company’s future secured debt and equally in right of payment to all of the company’s existing and future senior unsecured debt. The company exchanged in excess of 99.9% of the original notes for the exchange notes when the exchange offer expired on July 27, 2005.

In the third quarter of fiscal 2005, NFC refinanced its $820 million revolving credit facility which was going to become due in December 2005 with a new $1,200 million revolving credit facility that becomes due in December 2010. Likewise, one of NFC’s related affiliates, Truck Retail Installment Paper Corporation (TRIP), entered into a new revolving retail facility with a capacity of $500 million that will expire in June 2010, to replace the $500 million facility that will expire in August 2005.

In July 2005, the company repurchased $18 million of its 4.75% Subordinated Exchangeable Notes due 2009 and $7 million of its 9.375% Senior Notes due 2006. The effect of these repurchases on operating income was negligible. The repurchase of the 4.75% Subordinated Exchangeable Notes due 2009 reduced the number of shares included in the calculation of diluted earnings per share, beginning in July, by approximately 323,000 shares.

PAGE 11

Navistar International Corporation and Consolidated Subsidiaries

Notes to Financial Statements (Unaudited)

Note I. Restructuring and Other Non-recurring Charges

Restructuring Charges

In 2000 and 2002, the company’s board of directors approved separate plans to restructure its manufacturing and corporate operations. The company incurred charges for severance and other benefits, curtailment losses, lease terminations, asset and inventory write-downs and other exit costs relating to these plans. The following are the major restructuring, integration and cost reduction initiatives originally included in the 2000 and 2002 Plans of Restructuring (Plans of Restructuring):

·	Replacement of steel cab trucks with a new line of High Performance Vehicles (HPV) and a concurrent realignment of the company’s truck manufacturing facilities

·	Launch of the next generation technology diesel engines (NGD)

·	Consolidation of corporate operations

·	Realignment of the bus and truck dealership network and termination of various dealerships’ contracts

·	Closure of certain facilities and operations and exit of certain activities including the Chatham, Ontario heavy truck assembly facility, the Springfield, Ohio body plant and a manufacturing production line within one of the company’s plants

·	Offer of early retirement and voluntary severance programs to certain union represented employees

The Plans of Restructuring originally called for a reduction in workforce of approximately 5,400 employees, primarily in North America, resulting in charges totaling $169 million. The decision, in 2003, to keep open the Chatham facility along with changes in staffing requirements at other manufacturing facilities lowered the total number of employee reductions to 4,200. The change in expected employee reductions along with an evaluation of the severance reserves related to the HPV and NGD product programs resulted in a net reversal to the previously recorded severance and other benefits reserves totaling $50 million.

A curtailment loss of $157 million was recorded in 2002 relating to the company’s postretirement plans. This loss was the result of an early retirement program for represented employees at the company’s Springfield and Indianapolis plants and the planned closure of the Chatham facility. Subsequently, the decision to keep open the Chatham facility, the offer of an early retirement and voluntary severance program to certain employees at the Chatham facility, and the completion of the sign-up period for the early retirement window program offered to certain eligible, long serviced UAW employees, resulted in a net reduction of $3 million to the previously recorded curtailment loss. The curtailment liability has been classified as a postretirement benefits liability on the Statement of Financial Condition.

Lease termination charges include estimated lease costs, net of probable sublease income, under long-term non-cancelable lease agreements. These charges primarily relate to the lease at the company’s previous corporate office in Chicago, Illinois, which expires in 2010.

Dealer termination costs include the termination of certain dealer contracts in connection with the realignment of the company’s bus distribution network. Other exit costs include contractually obligated exit and closure costs associated with facility closures and an accrual for the loss on sale of Harco National Insurance Company. As of July 31, 2005, $54 million of the total net charge of $66 million has been incurred.

PAGE 12

Navistar International Corporation and Consolidated Subsidiaries

Notes to Financial Statements (Unaudited)

Note I. Restructuring and Other Non-recurring Charges (continued)

Other Non-Recurring Charges

In October 2002, Ford Motor Company (Ford) advised the company that its current business case for a V-6 diesel engine in the specified vehicles was not viable and discontinued its program for the use of these engines. Accordingly, the company recorded charges of $170 million for the write-off of deferred pre-production costs, the write-down of fixed assets that were abandoned, lease obligations under non-cancelable operating leases, and accruals for amounts contractually owed to suppliers. In 2003, the company recorded an adjustment of $11 million for additional amounts contractually owed to suppliers related to the V-6 diesel engine program. In April 2003, the company reached a comprehensive agreement with Ford concerning the termination of its V-6 diesel engine program. The terms of the agreement include compensation to neutralize certain current and future V-6 diesel engine program related costs not accrued for as part of the 2002 non-recurring charge, resolution of ongoing pricing related to the company’s V-8 diesel engine program and a release by the parties of all of their obligations under the V-6 diesel engine contract. The company, under current agreements, will continue as Ford’s exclusive supplier of V-8 diesel engines through 2012. The agreement with Ford does not have a material net impact on the Statement of Financial Condition or the Statement of Income for the periods covered in this report.

Summary

Through July 31, 2005, the company has recorded cumulative charges of $818 million relating to the Plans of Restructuring and other non-recurring charges.

The remaining components of the company’s Plans of Restructuring and other non-recurring charges are shown in the following table.

Millions of dollars	Balance October 31 2004		Amount Incurred			Balance July 31 2005

Lease terminations	$	21	$	(4	)	$	17
Dealer terminations and other charges		12		-			12
Other non-recurring charges		64		(7	)		57

Total	$	97	$	(11	)	$	86

The remaining liability of $86 million is expected to be funded from existing cash balances and internally generated cash flows from operations. The total cash outlay for the remainder of 2005 is expected to be $4 million with the remaining obligation of $82 million, primarily related to non-recurring charges and long-term non-cancelable lease agreements, to be settled in 2006 and beyond.

The company is in the process of completing certain aspects of the Plans of Restructuring and will continue to evaluate the remaining restructuring reserves as the plans are executed. As a result, there may be additional adjustments to the reserves noted above. Since the company-wide restructuring plans are an aggregation of many individual components requiring judgments and estimates, actual costs have differed from estimated amounts.

PAGE 13

Navistar International Corporation and Consolidated Subsidiaries

Notes to Financial Statements (Unaudited)

Note J. Financial Instruments

The company uses derivative financial instruments as part of its overall interest rate and foreign currency risk management strategy.

The financial services operations manage exposure to fluctuations in interest rates by limiting the amount of fixed rate assets funded with variable rate debt. This is accomplished by selling fixed rate receivables on a fixed rate basis and by utilizing derivative financial instruments. These derivative financial instruments may include interest rate swaps, interest rate caps and forward contracts. The fair value of these instruments is estimated based on quoted market prices and is subject to market risk as the instruments may become less valuable due to changes in market conditions or interest rates. NFC manages exposure to counter-party credit risk by entering into derivative financial instruments with major financial institutions that can be expected to fully perform under the terms of such agreements. NFC does not require collateral or other security to support derivative financial instruments with credit risk.

NFC’s counter-party credit exposure is limited to the positive fair value of contracts at the reporting date. As of July 31, 2005, NFC’s derivative financial instruments had a positive net fair value. Notional amounts of derivative financial instruments do not represent exposure to credit loss.

At July 31, 2005, the notional amounts and fair values of the company’s derivative financial instruments are presented in the following table, in millions of dollars. The fair values of all these derivative financial instruments are recorded in other assets or other liabilities on the Statement of Financial Condition.

Inception Date

Maturity Date

Derivative Type

Notional Amount

Fair Value

October 2003 -

April 2005

April 2008 -

September 2009

Interest rate swaps*

July 2001 -

June 2004

April 2006 -

June 2011

Interest rate swaps

929

October 2000 -

September 2001

October 2009 -

November 2012

Interest rate caps

2,065

*Accounted for as non-hedging instruments.

PAGE 14

Navistar International Corporation and Consolidated Subsidiaries

Notes to Financial Statements (Unaudited)

Note K. Guarantees

The company and its subsidiaries occasionally provide guarantees that could obligate them to make future payments if the primary entity fails to perform under its contractual obligations. The company has not recorded a liability for these guarantees. The company has no recourse as guarantor in case of default.

International provides a full and unconditional guarantee on the $400 million 9.375% Senior Notes due 2006, the $250 million 7.5% Senior Notes due 2011, the $400 million 6.25% Senior Notes due 2012 and the $190 million 2.5% Senior Convertible Notes due 2007. NIC also provides a guarantee on the $19 million 9.95% Senior Notes due 2011. As of July 31, 2005, the outstanding balance on the 9.95% Senior Notes and the 9.375% Senior Notes was $13 million and $393 million, respectively.

NIC and International are obligated under certain agreements with public and private lenders of NFC to maintain the subsidiary’s income before interest expense and income taxes at not less than 125% of its total interest expense. No income maintenance payments were required for the nine months ended July 31, 2005.

NIC guarantees lines of credit made available to its Mexican finance subsidiaries by third parties and NFC. NFC guarantees the borrowings of the Mexican finance subsidiaries. The following table summarizes the borrowings as of July 31, 2005, in millions of dollars.

Entity	Amount of Guaranty			Outstanding Balance		Maturity dates extend to


NIC	$	393	(1)	$	99		2010

NFC		145			127		2010

NIC and NFC		100			10		2010

(1) Included in this amount is $260 million of un-drawn guarantees. Pursuant to an intercompany guarantee made by NIC in favor of NFC, NIC has agreed to guarantee, either directly to third party banks or indirectly through NFC, an un-drawn amount of $260 million.

The company also guarantees many of the operating leases of its operating subsidiaries. The leases have various expiration dates that extend through June 2014. The remaining maximum obligation under these leases as of July 31, 2005, totaled approximately $495 million.

The company and International also guarantee real estate operating leases of International and of the subsidiaries of the company. The leases have various maturity dates extending through 2019. As of July 31, 2005, the total remaining obligation under these leases is approximately $43 million.

The company and NFC have issued residual value guarantees in connection with various operating leases. The amount of the guarantees is undeterminable because in some instances, neither the company nor NFC is responsible for the entire amount of the guaranteed lease residual. The company’s and NFC’s guarantees are contingent upon the fair value of the leased assets at the end of the lease term. The difference between this fair value and the guaranteed lease residual represents the amount of the company’s and NFC’s exposure.

PAGE 15

Navistar International Corporation and Consolidated Subsidiaries

Notes to Financial Statements (Unaudited)

Note K. Guarantees (continued)

As of July 31, 2005, NFC had guaranteed derivative contracts for interest rate swaps and cross currency swaps related to two of the company’s Mexican finance subsidiaries. NFC is liable up to the fair market value of these derivative contracts only in cases of default by the two Mexican finance subsidiaries. As of July 31, 2005, there was an outstanding notional balance of $59 million related to interest rate swaps and cross currency swaps, and the fair market value of the outstanding balance was immaterial.

At July 31, 2005, the company’s Canadian operating subsidiary was contingently liable for $513 million of retail customers’ contracts and $26 million of retail leases that are financed by a third party. The Canadian operating subsidiary is responsible for the residual values of these financing arrangements. These contract amounts approximate the resale market value of the collateral underlying the note liabilities.

In addition, the company entered into various guarantees for purchase commitments, insurance loss reserves, credit guarantees and buyback programs with various expiration dates that total approximately $87 million. In the ordinary course of business, the company also provides routine indemnifications and other guarantees whose terms range in duration and often are not explicitly defined. The company does not believe these will have a material impact on the results of operations or financial condition of the company.

Product Warranty

Provisions for estimated expenses related to product warranty are made at the time products are sold. These estimates are established using historical information about the nature, frequency and average cost of warranty claims. Management actively studies trends of warranty claims and takes action to improve vehicle quality and minimize warranty claims. Management believes that the warranty reserve is appropriate; however, actual claims incurred could differ from the original estimates, requiring adjustments to the reserve.

Changes in the product warranty accrual for the nine months ended July 31, 2005, were as follows:

Millions of dollars

Balance, beginning of period	$	286
Change in liability for warranties issued during the period		171
Change in liability for pre-existing warranties		20
Payments made		(199	)

Balance, end of period	$	278

Note L. Legal Proceedings and Environmental Matters

The company and its subsidiaries are subject to various claims arising in the ordinary course of business, and are parties to various legal proceedings that constitute ordinary routine litigation incidental to the business of the company and its subsidiaries. The majority of these claims and proceedings relate to commercial, product liability and warranty matters. In the opinion of the company’s management, the disposition of these proceedings and claims, including those discussed below, after taking into account established reserves and the availability and limits of the company’s insurance coverage, will not have a material adverse effect on the business or the financial results of the company.

The company has been named a potentially responsible party (PRP), in conjunction with other parties, in a number of cases arising under an environmental protection law, the Comprehensive Environmental Response, Compensation and Liability Act, popularly known as the Superfund law. These cases involve sites that allegedly received wastes from current or former company locations. Based on information available to the company which, in most cases, consists of data related to quantities and characteristics of material generated at current or former

PAGE 16

Navistar International Corporation and Consolidated Subsidiaries

Notes to Financial Statements (Unaudited)

Note L. Legal Proceedings and Environmental Matters (continued)

company locations, material allegedly shipped by the company to these disposal sites, as well as cost estimates from PRPs and/or federal or state regulatory agencies for the cleanup of these sites, a reasonable estimate is calculated of the company's share, if any, of the probable costs and is provided for in the financial statements. These obligations are generally recognized no later than completion of the remedial feasibility study and are not discounted to their present value. The company reviews all accruals on a regular basis and believes that, based on these calculations, its share of the potential additional costs for the cleanup of each site will not have a material effect on the company's financial results.

Two sites formerly owned by the company, Wisconsin Steel in Chicago, Illinois and Solar Turbines in San Diego, California, were identified as having soil and groundwater contamination. While investigations and cleanup activities continue at both sites, the company anticipates that all necessary costs to complete the cleanup have been adequately reserved.

In December 2003, the United States Environmental Protection Agency (US EPA) issued a Notice of Violation to the company in conjunction with the operation of its engine casting facility in Indianapolis, Indiana. Specifically, the US EPA alleged that the company violated applicable environmental regulations by failing to obtain the necessary permit in connection with the construction of certain equipment and complying with the best available control technology for emissions from such equipment. The company is currently in discussions with the US EPA and believes that its discussions will result in capital improvements together with monetary sanctions which will not be material.

Various claims and controversies have arisen between the company and its former fuel system supplier, Caterpillar Inc. (Caterpillar), regarding the ownership and validity of certain patents covering fuel system technology used in the company's new version of diesel engines that were introduced in February 2002. In June 1999, in Federal Court in Peoria, Illinois, Caterpillar sued Sturman Industries, Inc. (Sturman), the company’s joint venture partner in developing fuel system technology, alleging that technology invented and patented by Sturman and licensed to the company, belongs to Caterpillar. After a trial, on July 18, 2002, the jury returned a verdict in favor of Caterpillar finding that this technology belongs to Caterpillar under a prior contract between Caterpillar and Sturman. Sturman appealed the adverse judgment, and the jury’s verdict was reversed by the appellate court on October 28, 2004 and remanded to the district court for retrial. The company is cooperating with Sturman in this effort. In May 2003, in Federal Court in Columbia, South Carolina, Caterpillar sued the company, its supplier of fuel injectors and joint venture, Siemens Diesel Systems Technology, L.L.C., and Sturman for patent infringement alleging that the Sturman fuel system technology patents and certain Caterpillar patents are infringed in the company’s new engines. The company believes that it has meritorious defenses to the claims of infringement of the Sturman patents as well as the Caterpillar patents and will vigorously defend such claims. In January 2002, Caterpillar sued the company in the Circuit Court in Peoria County, Illinois, alleging the company breached the purchase agreement pursuant to which Caterpillar supplied fuel systems for the company’s prior version of diesel engines. Caterpillar’s claims involve a 1990 agreement to reimburse Caterpillar for costs associated with the delayed launch of the company’s V-8 diesel engine program. Reimbursement of the delay costs was made by a surcharge of $8.08 on each injector purchased and the purchase of certain minimum quantities of spare parts. In 1999, the company concluded that, in accordance with the 1990 agreement, it had fully reimbursed Caterpillar for its delay costs and stopped paying the surcharge and purchasing the minimum quantities of spare parts. Caterpillar is asserting that the surcharge and the spare parts purchase requirements continue throughout the life of the contract and has sued the company to recover these amounts, plus interest. Caterpillar also asserts that the company failed to purchase all of its fuel injector requirements under the contract and, in collusion with Sturman, failed to pursue a future fuel systems supply relationship with Caterpillar. The company believes that it has meritorious defenses to Caterpillar’s claims.

Along with other vehicle manufacturers, the company and certain of its subsidiaries have been subject to an increase in the number of asbestos-related claims in recent years. Management believes that such claims will not have a material adverse affect on the company’s financial results. In general these claims relate to illnesses alleged to have resulted from asbestos exposure from component parts found in older vehicles, although some cases relate to the presence of asbestos in company facilities. In these claims the company is not the sole defendant, and the claims name as defendants numerous manufacturers and suppliers of a wide variety of products allegedly containing asbestos. Management has strongly disputed these claims, and it has been the

PAGE 17

Navistar International Corporation and Consolidated Subsidiaries

Notes to Financial Statements (Unaudited)

Note L. Legal Proceedings and Environmental Matters (continued)

company’s policy to defend against them vigorously. Historically, the actual damages paid out to claimants have not been material to the company’s results of operations and financial condition. However, management believes the company and other vehicle manufacturers are being more aggressively targeted, largely as a result of bankruptcies of manufacturers of asbestos and products containing asbestos. It is possible that the number of these claims will continue to grow, and that the costs for resolving asbestos related claims could become significant in the future.

On October 13, 2004, the company received a request from the staff of the Securities and Exchange Commission (SEC) to voluntarily produce certain documents and information related to the company’s accounting practices with respect to defined benefit pension plans and other postretirement benefits. The company is fully cooperating with this request. Based on the status of the inquiry, the company is not able to predict the final outcome.

On January 31, 2005, the company announced that it would restate its financial results for fiscal years 2002 and 2003 and the first three quarters of fiscal 2004. The SEC notified the company on February 9, 2005, that it was conducting an informal inquiry into the company’s restatement. On March 17, 2005, the company was advised by the SEC that the status of the inquiry had been changed to a formal investigation. The company is fully cooperating with the SEC on this investigation. Based on the status of the investigation, the company is not able to predict the final outcome.

Note M. Segment Data

Reportable operating segment data is as follows:

Millions of dollars	Truck		Engine		Financial Services		Total


	For the quarter ended July 31, 2005


External revenues	$	2,211	$	712	$	65	$	2,988
Intersegment revenues		-		181		16		197

Total revenues	$	2,211	$	893	$	81	$	3,185


Segment profit	$	113	$	13	$	26	$	152

	For the nine months ended July 31, 2005


External revenues	$	6,355	$	1,963	$	190	$	8,508
Intersegment revenues		-		515		44		559

Total revenues	$	6,355	$	2,478	$	234	$	9,067


Segment profit	$	262	$	9	$	88	$	359

	As of July 31, 2005


Segment assets	$	2,173	$	1,564	$	2,827	$	6,564

	For the quarter ended July 31, 2004


External revenues	$	1,789	$	504	$	56	$	2,349
Intersegment revenues		-		159		10		169

Total revenues	$	1,789	$	663	$	66	$	2,518


Segment profit	$	85	$	34	$	26	$	145

	For the nine months ended July 31, 2004


External revenues	$	4,936	$	1,521	$	185	$	6,642
Intersegment revenues		-		440		29		469

Total revenues	$	4,936	$	1,961	$	214	$	7,111


Segment profit	$	164	$	71	$	86	$	321

	As of July 31, 2004


Segment assets	$	1,781	$	1,091	$	2,153	$	5,025

PAGE 18

Navistar International Corporation and Consolidated Subsidiaries

Notes to Financial Statements (Unaudited)

Note M. Segment Data (continued)

Reconciliation to the consolidated financial statements as of and for the three and nine months ended July 31 is as follows:

	Three Months Ended July 31						Nine Months Ended July 31

Millions of dollars	2005			2004			2005			2004


Segment sales and revenues	$	3,185		$	2,518		$	9,067		$	7,111
Other income		6			-			14			5
Intercompany		(197	)		(169	)		(559	)		(469	)

Consolidated sales and revenues	$	2,994		$	2,349		$	8,522		$	6,647


Segment profit	$	152		$	145		$	359		$	321
Restructuring adjustment		-			5			-			1
Corporate items		(38	)		(51	)		(109	)		(146	)
Manufacturing net interest expense		(17	)		(17	)		(45	)		(42	)

Consolidated pre-tax income	$	97		$	82		$	205		$	134


Segment assets	$	6,564		$	5,025
Cash and marketable securities		634			281
Deferred taxes		1,435			1,442
Corporate intangible pension assets		1			3
Other corporate and eliminations		133			168

Consolidated assets	$	8,767		$	6,919

Note N. Comprehensive Income

The components of comprehensive income are as follows:

	Three Months Ended July 31					Nine Months Ended July 31

Millions of dollars	2005		2004			2005		2004


Net income	$	64	$	50		$	135	$	88
Other comprehensive income (loss)		13		(8	)		33		(4	)

Total comprehensive income	$	77	$	42		$	168	$	84

PAGE 19

Navistar International Corporation and Consolidated Subsidiaries

Notes to Financial Statements (Unaudited)

Note O. Earnings Per Share

Earnings per share was computed as follows:

	Three Months Ended July 31				Nine Months Ended July 31

Millions of dollars, except share and per share data	2005		2004		2005		2004


Net income	$	64	$	50	$	135	$	88
Add: Interest expense on 2.5% senior convertible and 4.75% subordinated exchangeable debt for dilutive purposes (net of tax)		2		3		7		7

Net income available to common shareholders plus assumed conversions	$	66	$	53	$	142	$	95


Average shares outstanding (millions)
Basic		70.1		69.9		70.1		69.6
Convertible debt		9.5		9.5		9.5		9.5
Stock options		0.3		0.6		0.5		1.1

Diluted		79.9		80.0		80.1		80.2

Earnings per share
Basic	$	0.91	$	0.72	$	1.93	$	1.27
Diluted	$	0.83	$	0.66	$	1.78	$	1.19

Slight changes within the diluted shares outstanding are the result of an increase or decrease in the amount of exercisable employee stock options which are affected by fluctuations in the company’s stock price.

Note P. Condensed Consolidating Guarantor and Non-Guarantor Financial Information

The following tables set forth the condensed consolidating Statements of Financial Condition as of July 31, 2005 and 2004, and the Statements of Income and Cash Flow for the nine months ended July 31, 2005 and 2004. The following information is included as a result of International’s guarantees, exclusive of its subsidiaries, of NIC’s indebtedness under its 9.375% Senior Notes due 2006, 2.5% Senior Convertible Notes due 2007, 7.5% Senior Notes due 2011 and 6.25% Senior Notes due 2012. International is a direct wholly owned subsidiary of NIC. None of NIC’s other subsidiaries guarantee any of these notes. Each of the guarantees is full and unconditional. Separate financial statements and other disclosures concerning International have not been presented because management believes that such information is not material to investors. NIC includes the consolidated financial results of the parent company only, with all of its wholly owned subsidiaries accounted for under the equity method. International, for purposes of this disclosure only, includes the consolidated financial results of its wholly owned subsidiaries accounted for under the equity method. “Non-Guarantor Companies and Eliminations” includes the consolidated financial results of all other non-guarantor subsidiaries including the elimination entries for all intercompany transactions. All applicable corporate expenses have been allocated appropriately among the guarantor and non-guarantor subsidiaries.

NIC files a consolidated U.S. federal income tax return that includes International and its U.S. subsidiaries. International has a tax allocation agreement (Tax Agreement) with NIC which requires International to compute its separate federal income tax expense based on its adjusted book income. Any resulting tax liability is paid to NIC. In addition, under the Tax Agreement, International is required to pay to NIC any tax payments received from its subsidiaries. The effect of the Tax Agreement is to allow the parent company, rather than International, to utilize U.S. operating income/losses and NIC operating loss carryforwards.

PAGE 20

Navistar International Corporation and Consolidated Subsidiaries

Notes to Financial Statements (Unaudited)

Note P. Condensed Consolidating Guarantor and Non-Guarantor Financial Information (continued)

Millions of dollars	NIC			International			Non-Guarantor Companies and Eliminations			Consolidated

CONDENSED CONSOLIDATING STATEMENT OF INCOME FOR THE NINE MONTHS ENDED JULY 31, 2005

Sales and revenues	$	8		$	6,402		$	2,112		$	8,522


Cost of products and services sold		5			5,964			1,180			7,149
All other operating expenses		(25	)		842			351			1,168

Total costs and expenses		(20	)		6,806			1,531			8,317


Equity in income (loss) of non-consolidated subsidiaries		177			464			(641	)		-


Income (loss) before income taxes		205			60			(60	)		205
Income tax expense (benefit)		70			61			(61	)		70


Net income (loss)	$	135		$	(1	)	$	1		$	135


CONDENSED CONSOLIDATING STATEMENT OF FINANCIAL CONDITION AS OF JULY 31, 2005

Assets
Cash and marketable securities	$	552		$	9		$	1,274		$	1,835
Receivables, net		1			239			1,830			2,070
Inventories		-			486			578			1,064
Property and equipment, net		-			719			814			1,533
Investment in affiliates		(2,562	)		1,752			810			-
Deferred tax asset and other assets		1,391			238			636			2,265

Total assets	$	(618	)	$	3,443		$	5,942		$	8,767


Liabilities and shareowners’ equity
Debt	$	1,459		$	13		$	2,418		$	3,890
Postretirement benefits liability		-			1,369			238			1,607
Amounts due to (from) affiliates		(2,866	)		3,692			(826	)		-
Other liabilities		101			1,453			1,028			2,582

Total liabilities		(1,306	)		6,527			2,858			8,079


Shareowners’ equity (deficit)		688			(3,084	)		3,084			688

Total liabilities and shareowners’ equity	$	(618	)	$	3,443		$	5,942		$	8,767


CONDENSED CONSOLIDATING STATEMENT OF CASH FLOW FOR THE NINE MONTHS ENDED JULY 31, 2005

Cash provided by (used in) operating activities	$	(426	)	$	162		$	350		$	86


Cash flow from investment programs
Purchases, net of collections, of finance receivables		-			-			297			297
Net decrease in marketable securities		(20	)		-			(968	)		(988	)
Capital expenditures		-			(41	)		(66	)		(107	)
Other investing activities		(7	)		(216	)		(68	)		(291	)

Cash used in investment programs		(27	)		(257	)		(805	)		(1,089	)


Cash flow from financing activities
Net borrowing (repayments) of debt		401			(2	)		599			998
Other financing activities		3			79			(89	)		(7	)

Cash provided by financing activities		404			77			510			991

Cash and cash equivalents
Increase (decrease) during the period		(49	)		(18	)		55			(12	)
At beginning of the period		406			22			177			605

Cash and cash equivalents at end of the period	$	357		$	4		$	232		$	593

PAGE 21

Navistar International Corporation and Consolidated Subsidiaries

Notes to Financial Statements (Unaudited)

Note P. Condensed Consolidating Guarantor and Non-Guarantor Financial Information (continued)

Millions of dollars	NIC			International			Non-Guarantor Companies and Eliminations			Consolidated

CONDENSED CONSOLIDATING STATEMENT OF INCOME FOR THE NINE MONTHS ENDED JULY 31, 2004

Sales and revenues	$	1		$	5,132		$	1,514		$	6,647


Cost of products and services sold		(31	)		4,709			904			5,582
Restructuring and other non-recurring charges		-			(4	)		3			(1	)
All other operating expenses		(12	)		701			243			932

Total costs and expenses		(43	)		5,406			1,150			6,513


Equity in income (loss) of non-consolidated subsidiaries		90			258			(348	)		-


Income (loss) before income taxes		134			(16	)		16			134
Income tax expense (benefit)		46			27			(27	)		46


Net income (loss)	$	88		$	(43	)	$	43		$	88


CONDENSED CONSOLIDATING STATEMENT OF FINANCIAL CONDITION AS OF JULY 31, 2004

Assets
Cash and marketable securities	$	166		$	14		$	728		$	908
Receivables, net		1			138			1,589			1,728
Inventories		-			421			435			856
Property and equipment, net		-			761			644			1,405
Investment in affiliates		(2,741	)		989			1,752			-
Deferred tax asset and other assets		1,462			211			349			2,022

Total assets	$	(1,112	)	$	2,534		$	5,497		$	6,919


Liabilities and shareowners’ equity
Debt	$	1,058		$	15		$	1,719		$	2,792
Postretirement benefits liability		-			1,348			208			1,556
Amounts due to (from) affiliates		(2,633	)		3,063			(430	)		-
Other liabilities		96			1,326			782			2,204

Total liabilities		(1,479	)		5,752			2,279			6,552


Shareowners’ equity (deficit)		367			(3,218	)		3,218			367

Total liabilities and shareowners’ equity	$	(1,112	)	$	2,534		$	5,497		$	6,919


CONDENSED CONSOLIDATING STATEMENT OF CASH FLOW FOR THE NINE MONTHS ENDED JULY 31, 2004

Cash provided by (used in) operating activities	$	(275	)	$	(19	)	$	58		$	(236	)


Cash flow from investment programs
Purchases, net of collections, of finance receivables		-			-			168			168
Net increase in marketable securities		22			-			144			166
Capital expenditures		-			(72	)		(31	)		(103	)
Other investing activities		-			55			(68	)		(13	)

Cash provided by (used in) investment programs		22			(17	)		213			218


Cash flow from financing activities
Net borrowing (repayment) of debt		218			(2	)		(211	)		5
Other financing activities		(17	)		31			10			24

Cash provided by (used in) financing activities		201			29			(201	)		29

Cash and cash equivalents
Increase (decrease) during the period		(52	)		(7	)		70			11
At beginning of the period		218			21			228			467

Cash and cash equivalents at end of the period	$	166		$	14		$	298		$	478

PAGE 22

Navistar International Corporation and Consolidated Subsidiaries

Notes to Financial Statements (Unaudited)

Note Q: Restatement of Prior Period Financial Statements

In December 2004, NFC determined that it would restate its consolidated financial statements for the first three quarters of fiscal 2004 and the fiscal years ended October 31, 2003 and 2002 due to certain misapplications of GAAP. The primary area where it was determined that GAAP was incorrectly applied was in the accounting for retail note securitizations. As a result of NFC’s restatement, the company concluded that it was necessary to restate its financial statements for the same periods. In the course of preparing the restatement of its consolidated financial statements, the company determined that it was appropriate to make other adjustments as well. These adjustments were primarily related to trade payables at the company’s Mexican truck assembly facility, accruals relating to employee plans and the consolidation of majority owned truck dealerships. In the restatement of the first three quarters of fiscal 2004 and the fiscal years ended October 31, 2003 and 2002 adjustments were recorded to properly reflect stock option exercises satisfied using treasury stock at average cost, as opposed to fair market value. This adjustment resulted in a reclassification between common stock held in treasury and retained earnings (deficit) on the Statement of Financial Condition but had no effect on total shareowners’ equity.

The significant effects of the restatements on the consolidated financial statements for the three months and nine months ended July 31, 2004, primarily due to the consolidation of majority owned truck dealerships and the accounting for retail note securitizations at NFC, are included below. The amounts shown below have minor differences to the unaudited Selected Quarterly Financial Data disclosed in Note 22 to the company’s Annual Report on Form 10-K. The changes represent timing within the quarters and do not change year-end amounts.

	Navistar International Corporation and Consolidated Subsidiaries

STATEMENT OF INCOME	Three Months Ended July 31, 2004						Nine Months Ended July 31, 2004

Millions of dollars	As Previously Reported			As Restated			As Previously Reported [1]			As Restated


Sales and revenues
Sales of manufactured products	$	2,301		$	2,294		$	6,362		$	6,456
Finance revenue		59			55			179			182
Other income		-			-			9			9

Total sales and revenues		2,360			2,349			6,550			6,647


Costs and expenses
Cost of products and services sold		1,984			1,953			5,563			5,582
Restructuring and other non-recurring charges		(5	)		(5	)		(1	)		(1	)
Postretirement benefits expense		46			43			165			162
Engineering and research expense		66			66			181			181
Selling, general and administrative expense		151			174			405			473
Interest expense		29			31			90			96
Other expense		4			5			20			20

Total costs and expenses		2,275			2,267			6,423			6,513


Income before income taxes		85			82			127			134
Income tax expense		29			32			39			46


Net income	$	56		$	50		$	88		$	88




Earnings per share
Basic	$	0.80		$	0.72		$	1.27		$	1.27
Diluted	$	0.73		$	0.66		$	1.19		$	1.19

Average shares outstanding (millions)
Basic		69.9			69.9			69.6			69.6
Diluted		80.0			80.0			80.2			80.2

[1] In addition to the adjustments noted above, pre-third quarter results were adjusted to reflect the retroactive impact of adopting FSP 106-2, Accounting and Disclosure Requirements Related to the Medicare and Prescription Drug Act of 2003, in the third quarter of fiscal 2004.

PAGE 23

Navistar International Corporation and Consolidated Subsidiaries

Notes to Financial Statements (Unaudited)

Note Q: Restatement of Prior Period Financial Statements (continued)

	Navistar International Corporation and Consolidated Subsidiaries

STATEMENT OF FINANCIAL CONDITION	As of July 31, 2004

Millions of dollars	As Previously Reported			As Restated


ASSETS
Current assets
Cash and cash equivalents	$	473		$	478
Marketable securities		6			6
Receivables, net		749			850
Inventories		787			856
Deferred tax asset, net		152			152
Other assets		186			183


Total current assets		2,353			2,525

Marketable securities		424			424
Finance and other receivables, net		878			878
Property and equipment, net		1,333			1,405
Investments and other assets		348			327
Prepaid and intangible pension assets		70			70
Deferred tax asset, net		1,466			1,290


Total assets	$	6,872		$	6,919


LIABILITIES AND SHAREOWNERS' EQUITY
Liabilities
Current liabilities
Notes payable and current maturities of long-term debt	$	259		$	271
Accounts payable, principally trade		1,134			1,161
Other liabilities		856			844


Total current liabilities		2,249			2,276

Debt: Manufacturing operations		1,071			1,268
Financial services operations		1,253			1,253
Postretirement benefits liability		1,391			1,391
Other liabilities		517			364


Total liabilities		6,481			6,552


Commitments and contingencies

Shareowners' equity
Series D convertible junior preference stock		4			4
Common stock and additional paid in capital (75.3 million shares issued)		2,087			2,087
Retained earnings (deficit)		(770	)		(762	)
Accumulated other comprehensive loss		(784	)		(782	)
Common stock held in treasury, at cost (5.5 million shares held)		(146	)		(180	)


Total shareowners' equity		391			367


Total liabilities and shareowners' equity	$	6,872		$	6,919

PAGE 24

Navistar International Corporation and Consolidated Subsidiaries

Notes to Financial Statements (Unaudited)

Note R. Subsequent Events

On August 22, 2005, the company announced that its operating company, International Truck and Engine Corporation, finalized its all-cash agreement to acquire Workhorse Custom Chassis (Workhorse) and Uptime Parts. Workhorse is a leading U.S. manufacturer of chassis for motor homes and commercial step-van vehicles. Workhorse operations, which produced more than 18,000 chassis in 2004, are carried out at a 209,000 square-foot state-of-the-art facility in Union City, IN. Uptime Parts, headquartered in West Chicago, IL, is a U.S. parts distribution network that supplies commercial fleets and RV dealers. The acquired companies had combined sales of $480 million in calendar year 2004. The acquisition supports the company's overall growth strategy by strategically investing in businesses that are in growing markets. The operating synergies between Workhorse and International's products, along with International's diesel competencies and engine portfolio, should allow the combined companies to offer a more complete line of products to existing customers.

On August 1, 2005 and August 5, 2005 the company canceled the fixed-for-floating interest rate swap agreements on the 7.50% $250 million fixed rate notes. The swaps reduced the company’s interest expense by $7 million since their inception in June 2004. The swaps had a negative fair value at the date of cancellation of less than $1 million.

PAGE 25

Navistar International Corporation and Consolidated Subsidiaries

Additional Financial Information (Unaudited)

The following additional financial information is provided based upon the continuing interest of certain shareowners and creditors to assist them in understanding our core manufacturing business. The financial information for fiscal 2004 has been restated in connection with the events mentioned in Note Q to the Financial Statements.

Navistar International Corporation (with financial services operations on an equity basis)

Condensed Statement of Income	Three Months Ended July 31					Nine Months Ended July 31

Millions of dollars	2005		2004			2005		2004

			As Restated					As Restated

Sales of manufactured products	$	2,923	$	2,292		$	8,318	$	6,456
Other income		6		-			14		5

Total sales and revenues		2,929		2,292			8,332		6,461


Cost of products sold		2,465		1,942			7,120		5,545
Restructuring and other non-recurring charges		-		(5	)		-		(1	)
Postretirement benefits expense		58		42			175		160
Engineering and research expense		91		66			254		181
Selling, general and administrative expense		191		161			532		432
Other expense		54		31			135		99

Total costs and expenses		2,859		2,237			8,216		6,416


Income before income taxes:
Manufacturing operations		70		55			116		45
Financial services operations		27		27			89		89

Income before income taxes		97		82			205		134
Income tax expense		33		32			70		46


Net income	$	64	$	50		$	135	$	88

Condensed Statement of Financial Condition	July 31		October 31		July 31
Millions of dollars	2005		2004		2004

					As Restated

Cash, cash equivalents and marketable securities	$	731	$	737	$	371
Inventories		1,053		779		824
Property and equipment, net		1,414		1,283		1,233
Equity in non-consolidated subsidiaries		604		549		512
Other assets		1,346		1,129		926
Deferred tax asset, net		1,433		1,445		1,442

Total assets	$	6,581	$	5,922	$	5,308


Accounts payable, principally trade	$	1,411	$	1,436	$	1,175
Postretirement benefits liability		1,584		1,544		1,534
Debt		1,803		1,329		1,299
Other liabilities		1,095		1,082		933
Shareowners’ equity		688		531		367

Total liabilities and shareowners’ equity	$	6,581	$	5,922	$	5,308

PAGE 26

Navistar International Corporation and Consolidated Subsidiaries

Additional Financial Information (Unaudited)

Navistar International Corporation (with financial services operations on an equity basis)

Condensed Statement of Cash Flow	Nine Months Ended July 31

Millions of dollars	2005			2004

				As Restated
Cash flow from operating activities
Net income	$	135		$	88
Adjustments to reconcile net income to cash provided by (used in) operating activities:
Depreciation and amortization		163			136
Deferred income taxes		9			22
Postretirement benefits funding less than (in excess of) expense		45			(173	)
Equity in earnings of investees, net of dividends received		(54	)		(56	)
Other, net		(36	)		(95	)
Change in operating assets and liabilities, net of effect of acquisitions		(353	)		(137	)

Cash used in operating activities		(91	)		(215	)


Cash flow from investment programs
Purchases of marketable securities		(712	)		(225	)
Sales or maturities of marketable securities		685			302
Capital expenditures		(105	)		(102	)
Receivable from financial services operations		65			(13	)
Investment in affiliates		(228	)		(1	)
Other investment programs		(84	)		(14	)

Cash used in investment programs		(379	)		(53	)


Cash provided by financing activities		436			195


Cash and cash equivalents
Decrease during the period		(34	)		(73	)
At beginning of the period		556			444

Cash and cash equivalents at end of the period	$	522		$	371

PAGE 27

Navistar International Corporation and Consolidated Subsidiaries

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

Overview

Navistar International Corporation is a holding company and its principal operating subsidiary is International Truck and Engine Corporation (International). Navistar operates in three principal industry segments: truck, engine (collectively called “manufacturing operations”) and financial services. The company’s principal operations are located in the U.S., Canada, Mexico, and Brazil. In this discussion and analysis, “company”, “Navistar”, “we” or “our” refers to Navistar International Corporation and its consolidated subsidiaries.

The company is currently focused on four key areas: great products, delivering on our commitments, cost and growth. The company will focus on offering new products based on current product platforms while delivering on commitments to our customers as well as our shareowners. The company anticipates growth in the truck and engine segments through new products and new markets while continuing to focus on ways to improve the cost structure to help the company succeed in a competitive marketplace.

In the third quarter of 2005, the company remained focused on these key objectives. The company continued to deliver on its commitments by reporting a solid quarterly profit on sales and revenues of approximately $3 billion. Gross margin improved over the prior year, however, higher material costs continue to have a negative impact on margins. The company announced during the quarter that it entered into a joint venture with Mahindra & Mahindra of India to produce and market light, medium and heavy commercial vehicles in India and other export markets. This agreement is another step in the company’s growth strategy. Furthering the company’s growth strategy was the company’s announcement that its operating company, International Truck and Engine Corporation, had entered into an agreement to acquire Workhorse Custom Chassis, a U.S. manufacturer of chassis for motor homes and commercial step-van vehicles and Uptime Parts, a U.S. parts distribution network that supplies commercial fleets and RV dealers. The acquisition would support the company's overall growth strategy by strategically investing in businesses that are in growing markets. The acquisition was not finalized as of the end of the third quarter and had no impact on the financial results presented within this discussion.

Restatement of Prior Period Financial Statements

The accompanying management’s discussion and analysis gives effect to the restatement of the consolidated financial statements for the three and nine months ended July 31, 2004, as discussed in Note Q to the consolidated financial statements.

Results of Operations

The following table illustrates the key financial indicators that management uses to assess the consolidated financial results for the three months and nine months ended July 31, 2005 and 2004.

Key Financial Indicators:	Three Months Ended July 31						Nine Months Ended July 31


(Millions of dollars, except per share data and margin)	2005			2004			2005			2004


Sales and revenues	$	2,994		$	2,349		$	8,522		$	6,647

Cost of products and services sold		2,474			1,953			7,149			5,582
Total expenses		423			314			1,168			931

Total costs and expenses		2,897			2,267			8,317			6,513

Net income	$	64		$	50		$	135		$	88


Diluted earnings per share	$	0.83		$	0.66		$	1.78		$	1.19

Manufacturing gross margin		15.7	%		15.3	%		14.4	%		14.1	%

PAGE 28

Navistar International Corporation and Consolidated Subsidiaries

Results of Operations (continued)

The company continued to improve earnings and sales and revenues over the comparable periods last year as a result of better operating results from the company’s truck segment. These improved results were primarily due to higher sales volume and improved pricing. The events that impacted the performance of the company’s three operating segments will be analyzed, in detail, later in this discussion.

Gross margin from manufacturing operations in the third quarter of 2005 was 15.7%, a slight improvement over the third quarter a year ago. Gross margin for the nine months ended also showed a slight improvement over the prior year. Improvements in pricing, performance and volumes were offset in part by higher material prices, incremental expenses associated with component supply issues and one-time charges associated with one of the company’s foundry operations within the engine segment.

Over the comparable three-month period last year, total expenses increased $109 million as a result of higher expenses across all categories. Engineering expense increased $25 million due to costs associated with 2007 emissions compliance within the company’s engine segment and costs associated with other development programs including the new LH truck program. Selling, general and administrative expense increased $36 million driven by the addition of wholly owned dealers and incremental spending within the truck and engine segments. Postretirement expense stayed consistent with prior 2005 fiscal quarters but was $16 million higher than last year. In addition to several smaller factors, the company realized less postretirement expense associated with the amortization of cumulative losses in the third quarter of 2004 when compared to the third quarter of 2005. Interest expense increased $20 million as a result of the company’s increased debt.

The following sections analyze the company’s third quarter operating results as they relate to its three principal segments: truck, engine, and financial services.

Truck

The truck segment manufactures and distributes a full line of Class 6 through 8 diesel-powered trucks and school buses in the common carrier, private carrier, government/service, leasing, construction, energy/petroleum and student transportation markets. The company recently entered the Class 5 truck market with the introduction of its Low Cab Forward (LCF) product in 2005. The truck segment also provides customers with proprietary products needed to support the Internationalâ truck and the IC™bus lines, together with a wide selection of other standard truck and trailer aftermarket parts. Sales of Class 6 through 8 trucks have historically been cyclical, with demand affected by such economic factors as industrial production, construction, demand for consumer durable goods, interest rates as well as the earnings and cash flow of dealers and customers. In addition, the Class 6 through 8 truck markets in the U.S. and Canada are highly competitive. The intensity of this competition results in price discounting and margin pressures throughout the industry. Even though sales volume has improved, the company is still experiencing competitive pricing pressure on its new truck sales, especially in the medium truck market. In addition to the influence of price, market position is driven by product quality, engineering, styling, utility and distribution.

PAGE 29

Navistar International Corporation and Consolidated Subsidiaries

Results of Operations (continued)

Truck (continued)

The following table highlights the truck segment’s financial and industry results for the three months and nine months ended July 31, 2005 and 2004.

	Three Months Ended July 31						Nine Months Ended July 31

	2005			2004			2005			2004

Results (Millions of dollars):
Sales	$	2,211		$	1,789		$	6,355		$	4,936
Segment profit		113			85			262			164

Industry data (in units) [1]:
U.S. and Canadian sales (Class 6 through 8)		107,200			90,300			308,300			248,100
Class 8 heavy truck		75,200			58,700			206,800			154,400
Class 6 and 7 medium truck [2]		25,300			25,100			82,000			73,700
School buses		6,700			6,500			19,500			20,000

Company data (in units):
U.S. and Canadian sales (Class 6 through 8)		28,100			24,900			84,300			69,200
Class 8 heavy truck		14,400			11,600			39,800			28,100
Class 6 and 7 medium truck [2]		9,500			9,400			32,300			29,300
School buses		4,200			3,900			12,200			11,800

Order backlog (in units)								26,100			27,600

Overall U.S. and Canada market share (Class 6 through 8 and school buses)		26.2	%		27.6	%		27.3	%		27.9	%

[1] Industry data derived from materials produced by Ward’s Communications.

[2] The company does not meaningfully participate in the Class 5 medium truck market.

The truck segment’s improved financial performance in 2005 is the result of increased sales volume within medium and heavy truck, improved pricing and continued cost reductions within its manufacturing processes. While truck segment operating results improved, higher material costs and engineering expenses for the new LH heavy truck program negatively impacted profit margins. The company’s overall market share in the third quarter and for the nine months ended decreased slightly over the comparable period last year. Market share was adversely impacted by the industry growth within the Class 8 heavy truck market, a market in which the company has its smallest market share. The company’s year-to-date share growth within the Class 8 heavy truck market is reflective of the company’s recommitment to the market and our dealer distribution strategy. Year-to date market share within medium truck was slightly ahead of the prior year and school bus market share was up over three percentage points. The medium truck market continues to experience pricing competition. The company’s U.S. and Canadian order backlog is consistent with prior fiscal quarters but is down slightly from the comparable period last year. A softening in medium truck orders could not be offset by increased orders for heavy trucks and school buses.

The company forecast currently projects fiscal 2005 U.S. and Canadian Class 8 heavy truck demand to be 273,000 units, up 24% from fiscal 2004. Class 6 and 7 medium truck demand, excluding school buses, is forecast to be 109,000 units, up 9% from 2004. Demand for school buses is expected to be 26,000 units, which is essentially unchanged from 2004.

PAGE 30

Navistar International Corporation and Consolidated Subsidiaries

Results of Operations (continued)

Engine

The engine segment designs and manufactures diesel engines in the 50-325 horsepower range for use primarily in the company’s Class 6 and 7 medium trucks, school buses and selected Class 8 heavy truck models. The company’s diesel engines are also produced for original equipment manufacturers (OEMs), principally Ford Motor Company (Ford). This segment also sells engines for industrial and agricultural applications. In addition, the engine segment provides customers with proprietary products needed to support the Internationalâ engine lines, together with a wide selection of other standard engine and aftermarket parts.

The following table highlights the engine segment’s financial results and sales data for the three months and nine months ended July 31, 2005 and 2004.

	Three Months Ended July 31				Nine Months Ended July 31

	2005		2004		2005		2004

Results (Millions of dollars):
Sales	$	893	$	663	$	2,478	$	1,961
Segment profit		13		34		9		71

Sales data (in units):
Total engine sales		133,400		101,700		366,900		302,300
OEM sales		111,800		83,000		306,100		248,600

The engine segment’s sales for the three months ended July 31, 2005 improved 35% over the comparable period in 2004, primarily due to higher sales volumes, however net income was lower. The increase in engine sales, period over period, resulted from higher V-8 shipments and engine sales by MWM. The engine segment’s lower profit for the three and nine months ended July 31, 2005, is primarily the result of increased engineering costs related to 2007 emissions compliance and one-time costs at one of its foundry operations, partially offset by MWM’s operating profit.

In the current quarter, the company recorded $14 million in charges related to a foundry operation, including $11 million to correct the location’s inventory balances based upon physical counts conducted during the third quarter. This inventory adjustment was charged to the current period because the company was not able to determine the prior period to which the adjustment may have related. For the nine month period, the inventory charge described above combined with the correction of certain other accounting errors ($7 million) and other adjustments related to changes in estimates ($15 million) for this location totaled approximately $33 million. The errors primarily involved capitalized costs that should have been expensed in the prior periods in which they occurred. Extensive reviews, coupled with certain personnel changes and the reinforcement of policies and procedures, have been completed to ensure that the location’s financial records have been brought into alignment with company policies and Generally Accepted Accounting Principals (GAAP).

The company’s V-8 shipments to Ford accounted for 76% of all year-to-date OEM engine sales as compared to 86% in the comparable period. The apparent decrease in the Ford V-8 shipment percentage is the result of increased sales to other OEMs. Shipments of V-8 engines to Ford are up 9% year-to-date when compared to 2004. Increased sales to other OEMs are attributable to OEM engine sales by MWM.

The company continues to forecast that OEM shipments of mid-range diesel engines in fiscal 2005 are expected to be 430,800 units, 20% higher than fiscal 2004.

Financial Services

The financial services segment provides wholesale, retail and lease financing for sales of new and used trucks sold by the company and its dealers in the U.S. and Mexico. The financial services segment also finances the company’s wholesale accounts and selected retail accounts receivable. Sales of new products (including trailers) of other manufacturers are also financed regardless of whether they are designed or customarily sold for use with the company's truck products.

PAGE 31

Navistar International Corporation and Consolidated Subsidiaries

Results of Operations (continued)

Financial Services (continued)

The following table highlights the financial services segment’s financial results for the three months and nine months ended July 31, 2005 and 2004.

	Three Months Ended July 31				Nine Months Ended July 31

	2005		2004		2005		2004

Results (Millions of dollars):
Revenue	$	81	$	66	$	234	$	214
Segment profit		26		26		88		86

Sales of retail receivables	$	385	$	325	$	1,559	$	1,120
Gain on sales of retail receivables		3		3		14		26

The increase in segment profit for the nine months ended July 31, 2005 is mainly due to higher wholesale note revenue arising from higher dealer inventory balances, the servicing income related to the higher total serviced portfolio balance and higher generation of retail account activity. Partially offsetting these favorable items are reductions in interest rate spreads on owned receivables, lower operating lease balances and lower gains on sales of finance receivables. Sales volumes on receivables reflect a timing difference between quarters.

Restructuring and Other Non-recurring Charges

Restructuring

In 2000 and 2002, the company’s board of directors approved two separate plans to restructure its manufacturing and corporate operations (Plans of Restructuring). The company incurred charges for severance and other benefits, curtailment losses, lease terminations, asset and inventory write-downs and other exit costs relating to the major restructuring, integration and cost reduction initiatives originally included in the Plans of Restructuring. A detailed discussion of the charges and initiatives can be found in Note I to the financial statements.

Other Non-Recurring Charges

The company entered into an agreement with Ford to develop and manufacture a V-6 diesel engine to be used in specific Ford vehicles. In October 2002, Ford advised the company that its current business case for a V-6 diesel engine in the specified vehicles was not viable and discontinued its program for the use of these engines. Accordingly, in 2002, the company recorded charges for the write-off of deferred pre-production costs, the write-down of fixed assets that were abandoned, lease obligations under non-cancelable operating leases, and accruals for amounts contractually owed to suppliers. In April 2003, the company reached a comprehensive agreement with Ford concerning termination of its V-6 diesel engine program. The terms of the agreement include compensation to neutralize certain current and future V-6 diesel engine program related costs not accrued for as part of the 2002 non-recurring charge, resolution of ongoing pricing related to the company’s V-8 diesel engine program and a release by the parties of all of their obligations under the V-6 diesel engine contract. The company, under current agreements, will continue as Ford’s exclusive supplier of V-8 diesel engines through 2012.

PAGE 32

Navistar International Corporation and Consolidated Subsidiaries

Restructuring and Other Non-recurring Charges (continued)

Status

Through July 31, 2005, the company has recorded cumulative charges of $818 million relating to the Plans of Restructuring and non-recurring charges. The initiatives for the Plans of Restructuring are expected to generate at least $70 million of annualized savings for the company, primarily from lower salary and benefit costs and plant operating costs. The company will continue to realize these benefits in 2005 and beyond.

The remaining components of the company’s Plans of Restructuring and other non-recurring charges are shown in the following table.

Millions of dollars	Balance October 31 2004		Amount Incurred			Balance July 31 2005

Lease terminations	$	21	$	(4	)	$	17
Dealer terminations and other charges		12		-			12
Other non-recurring charges		64		(7	)		57

Total	$	97	$	(11	)	$	86

Liquidity and Capital Resources

Cash Requirements

The company generates cash flow from the manufacture and sale of trucks, mid-range diesel engines and service parts. In addition, cash flow is generated from product financing provided to the company’s dealers and retail customers by the financial services segment. It is the opinion of management that, in the absence of significant unanticipated cash demands, current and forecasted cash flow from the company’s manufacturing operations, financial services operations and financing capacity will provide sufficient funds to meet anticipated operating requirements, capital expenditures, equity investments and strategic acquisitions. Management of the company’s financial services operations believes that collections on the outstanding receivables portfolios as well as funds available from various funding sources will permit the financial services operations to meet the financing requirements of International’s dealers and retail customers. The manufacturing operations are generally able to incur material amounts of additional debt due to their current levels of performance.

PAGE 33

Navistar International Corporation and Consolidated Subsidiaries

Liquidity and Capital Resources (continued)

Sources and Uses of Cash

	Nine Months Ended
Millions of dollars	July 31, 2005


Cash flow from operating activities	$	86
Cash flow from investment programs		(1,089	)
Cash flow from financing activities		991

Total cash flow	$	(12	)


Cash and cash equivalents, beginning balance	$	605
Cash and cash equivalents, ending balance	$	593

Outstanding capital commitments	$	154

The company had working capital of $182 million at July 31, 2005. The company had experienced negative working capital through the first two quarters of fiscal 2005 due to various funding facilities of NFC and its affiliates maturing in 2005. In the third quarter, NFC and its affiliates refinanced certain facilities which positively impacted working capital since they are now classified as non-current. Slightly offsetting this was the classification of the company’s 9.375% Senior Notes due June 2006 as current. Working capital as of July 31, 2004 was $249 million. Cash provided by operating activities during the nine months ended totaled $86 million, reflecting net income of $135 million, a decrease in accounts receivables of $79 million and $168 million of depreciation and amortization, a non-cash item. These amounts were offset by a $50 million decrease in accounts payable due to a net decrease in wholesale notes and account balances and a $246 million increase in inventory related to higher truck and engine production volumes as well as constraints within the supply base. Cash used in investment programs of $1,089 million includes a net decrease in retail notes and lease receivables of $297 million related to the timing of the sale of finance receivables, offset by $988 million used for investments in marketable securities and $312 million used to invest in MWM (a Brazilian engine manufacturer) and additional truck dealerships. Cash provided by financing activities primarily resulted from a net increase in debt of $998 million.

There have been no material changes in the company’s hedging strategies or derivative positions since October 31, 2004. Further disclosure may be found in Note J to the Financial Statements.

PAGE 34

Navistar International Corporation and Consolidated Subsidiaries

Liquidity and Capital Resources (continued)

Financial Services

The financial services segment, mainly Navistar Financial Corporation (NFC), has traditionally obtained the funds to provide financing to the company’s dealers and retail customers from sales of finance receivables, commercial paper, short and long-term bank borrowings and medium and long-term debt. As of July 31, 2005, NFC’s funding consisted of sold finance receivables of $4,294 million, bank and other borrowings of $1,698 million and secured borrowings of $128 million. NFC securitizes and sells receivables through Navistar Financial Retail Receivables Corporation (NFRRC), Navistar Financial Securities Corporation (NFSC), Truck Retail Accounts Corporation (TRAC), Truck Engine Receivables Financing Corporation (TERFCO) and Truck Retail Installment Paper Corporation (TRIP), all special purpose corporations and wholly owned subsidiaries of NFC. The sales of finance receivables in each securitization constitute sales under accounting principles generally accepted in the United States of America, with the result that the sold receivables are removed from NFC’s balance sheet and the investors’ interests in the related trust or conduit are not reflected as liabilities.

Through the asset-backed public market and private placement sales, NFC has been able to fund fixed rate retail notes and finance leases at rates which are more economical than those available to NFC in the unsecured public bond market. During the first nine months of 2005, NFC sold $1,559 million of retail notes and finance leases, net of unearned finance income, for a pre-tax gain of $14 million. The receivables were sold through NFRRC to an owner trust which, in turn, issued asset-backed securities that were sold to investors. At July 31, 2005, the remaining shelf registration available to NFRRC for the public issuance of asset-backed securities was $2,504 million.

The following are the funding facilities, in millions, that NFC and its related affiliates have in place as of July 31, 2005.

Company	Instrument type	Total Amount		Purpose of funding		Amount utilized			Matures or expires


TERFCO	Trust	$	100		Unsecured Ford trade receivables	$	50			2005

NFSC	Revolving wholesale note trust	$	1,479		Eligible wholesale notes	$	1,191			2005 through 2010

TRAC	Revolving retail account conduit	$	100		Eligible retail accounts	$	95			2005

TRIP	Revolving retail facility	$	500		Retail notes and leases	$	-			2005

TRIP	Revolving retail facility	$	500		Retail notes and leases	$	500			2010

NFC	Revolving credit facilities	$	1,200		Retail notes and leases	$	708	(1)		2010

(1) $10 million of this amount is utilized by NIC’s Mexican finance subsidiaries.

As of July 31, 2005, the aggregate amount available to fund finance receivables under the various facilities was $1,334 million.

Pension and Other Postretirement Benefits

Generally, the company’s pension plans are non-contributory. The company’s policy is to fund its pension plans in accordance with applicable U.S. and Canadian government regulations and to make additional payments as funds are available to achieve full funding of the accumulated benefit obligation. Other benefits obligations are primarily funded in accordance with the legal agreement, which governs the Voluntary Employees Beneficiary Association (VEBA).

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Navistar International Corporation and Consolidated Subsidiaries

Critical Accounting Policies

The company has identified critical accounting policies that, as a result of the judgments, uncertainties, uniqueness and complexities of the underlying accounting standards and operations involved, could result in material changes to its financial condition or results of operations under different conditions or using different assumptions. The company’s most critical accounting policies are related to sales allowances, sales of receivables, product warranty, product liability, pension and other postretirement benefits, allowance for losses and impairment of long-lived assets. Details regarding the company’s use of these policies are described in the 2004 Annual Report on Form 10-K filed with the Securities and Exchange Commission. There have been no material changes to these policies since October 31, 2004.

Off-Balance Sheet Arrangements

The company enters into various arrangements not reflected on its balance sheet that have or could have an effect on our financial condition, results of operations, liquidity, capital expenditures or capital resources. The principal off-balance sheet arrangements that the company enters into are guarantees, sales of receivables and postretirement benefits. Details regarding the company’s use of these arrangements are described in the 2004 Annual Report on Form 10-K filed with the Securities and Exchange Commission. There have been no material changes to these arrangements since October 31, 2004.

Contractual Obligations

Income Taxes

The Statement of Financial Condition at July 31, 2005, includes a deferred tax asset of $1,435 million, net of valuation allowances of $74 million. The company performs extensive analysis to determine the amount of the deferred tax asset. Such analysis is based on the premise that the company is, and will continue to be, a going concern and that it is more likely than not that deferred tax benefits will be realized through the generation of future taxable income.

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Navistar International Corporation and Consolidated Subsidiaries

New Accounting Pronouncements

In December 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based Payment.” This Statement generally requires the recognition of the cost of employee services received in exchange for an award of equity instruments. This cost is based on the grant date fair value of the equity award and will be recognized over the period during which the employee is required to provide service in exchange for the award. The effective date for the company is the beginning of the first fiscal quarter of 2006. The company is still evaluating its share-based payment programs and the related impact, if any, this Statement may have on its results of operations, financial condition or cash flows.

In December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets,” to amend Accounting Principles Board Opinion No. 29, “Accounting for Nonmonetary Transactions” (APB No. 29). The Statement eliminates the exception from fair value measurement for nonmonetary exchanges of similar products in APB No. 29 and replaces it with an exception for exchanges that do not have commercial substance. This Statement shall be applied prospectively for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. The company does not expect this statement will have a material impact on its results of operations, financial condition or cash flows.

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Navistar International Corporation and Consolidated Subsidiaries

Forward Looking Statements

This Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act, Section 21E of the Exchange Act and the Private Securities Litigation Reform Act of 1995 that are subject to risks and uncertainties. You should not place undue reliance on those statements because they are subject to numerous uncertainties and factors relating to our operations and business environment, all of which are difficult to predict and many of which are beyond our control, and such forward-looking statements only speak as of the date of this Form 10-Q. Forward-looking statements include information concerning our possible or assumed future results of operations, including descriptions of our business strategy. These statements often include words such as "believe," "expect," "anticipate," "intend," "plan," "estimate" or similar expressions. These statements are based on assumptions that we have made in light of our experience in the industry as well as our perceptions of historical trends, current conditions, expected future developments and other factors we believe are appropriate under the circumstances. As you read and consider this Form 10-Q, you should understand that these statements are not guarantees of performance or results. They involve risks, uncertainties and assumptions. Although we believe that these forward-looking statements are based on reasonable assumptions, you should be aware that many factors could affect our actual financial results or results of operations and could cause actual results to differ materially from those in the forward-looking statements. For a further description of these factors, see Exhibit 99.1 to Form 10-K for the year ended October 31, 2004, filed with the SEC on February 15, 2005.

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Navistar International Corporation and Consolidated Subsidiaries

Item 3.	Quantitative and Qualitative Disclosures About Market Risk

	The company’s primary market risks include fluctuations in interest rates and currency exchange rates as further described in Item 7A of the 2004 Annual Report on Form 10-K. Interest rate risk is the risk that the company will incur economic losses due to adverse changes in interest rates. The company measures its interest rate risk by estimating the net amount by which the fair value of all of its interest rate sensitive assets and liabilities would be impacted by selected hypothetical changes in market interest rates. Fair value is estimated using a discounted cash flow analysis. Assuming a hypothetical instantaneous 10% adverse change in interest rates as of July 31, 2005, the net fair value of these instruments would decrease by approximately $34 million. The company’s interest rate sensitivity analysis assumes a parallel shift in interest rate yield curves. The model, therefore, does not reflect the potential impact of changes in the relationship between short-term and long-term interest rates. The company is exposed to changes in the price of commodities used in its manufacturing operations. Due to the amount of steel used in its production of truck cabs, buses and engines, the company is exposed to steel price fluctuations. During the first three quarters of fiscal 2005, steel prices were higher than fiscal 2004, but steel prices have recently leveled off. The year-to-date impacet of steel price increases, net of recovery through pricing, has been approximately $85 million. The company expects the full year impact from steel to be at least $100 million. Foreign currency risk is the risk that the company will incur economic losses due to adverse changes in foreign currency exchange rates. The company’s primary exposures to foreign currency exchange fluctuations are the Canadian dollar/U.S. dollar, Mexican peso/U.S. dollar and Brazilian real/U.S. dollar. The potential reduction in future earnings from a hypothetical instantaneous 10% adverse change in quoted foreign currency spot rates applied to foreign currency sensitive instruments would be approximately $7 million at July 31, 2005.


Item 4.	Controls and Procedures

	Evaluation of disclosure controls and procedures The company’s principal executive officer and principal financial officer, along with other management of the company, evaluated the effectiveness of the company’s disclosure controls and procedures (as defined in rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)) as of July 31, 2005. Based on that evaluation, the principal executive officer and principal financial officer of the company concluded that, as of July 31, 2005, there were weaknesses in the disclosure controls and procedures within the company’s finance subsidiary, NFC, related to the lack of a sufficient quantity of specialized accounting personnel. Because of the weakness noted within the finance subsidiary, the principal executive officer and principal financial officer of the company concluded that the disclosure controls and procedures in place at the company were not effective. Management of the company’s finance subsidiary is in the process of adding additional specialized accounting personnel. Changes in internal controls over financial reporting The company has not made any significant changes to its internal control over financial reporting (as defined in rule 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter ended July 31, 2005 that have materially affected, or are reasonably likely to materially affect, the company’s internal control over financial reporting except for the changes in controls at one of the company’s foundry operations at which control issues were identified and corrected during the third quarter. Based on a thorough review of the accounting records at this facility that was completed during the third quarter, the company determined that improved controls were needed in the areas of inventory accounting and account reconciliation and review. Improvements in controls were made by replacing certain personnel, aligning the location’s accounting practices with corporate policies and GAAP and increasing the level of analysis and review over the location’s financial statements.

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Navistar International Corporation and Consolidated Subsidiaries

PART II - OTHER INFORMATION
Item 1.	Legal Proceedings

	The company and its subsidiaries are subject to various claims arising in the ordinary course of business, and are parties to various legal proceedings that constitute ordinary routine litigation incidental to the business of the company and its subsidiaries. The majority of these claims and proceedings relate to commercial, product liability and warranty matters. In the opinion of the company’s management, the disposition of these proceedings and claims, including those discussed below, after taking into account established reserves and the availability and limits of the company’s insurance coverage, will not have a material adverse affect on the business or the financial condition of the company. In December 2003, the United States Environmental Protection Agency (US EPA) issued a Notice of Violation to the company in conjunction with the operation of its engine casting facility in Indianapolis, Indiana. Specifically, the US EPA alleged that the company violated applicable environmental regulations by failing to obtain the necessary permit in connection with the construction of certain equipment and complying with the best available control technology for emissions from such equipment. The company is currently in discussions with the US EPA and believes that its discussions will result in capital improvements together with monetary sanctions which will not be material. Various claims and controversies have arisen between the company and its former fuel system supplier, Caterpillar Inc. (Caterpillar), regarding the ownership and validity of certain patents covering fuel system technology used in the company's new version of diesel engines that were introduced in February 2002. In June 1999, in Federal Court in Peoria, Illinois, Caterpillar sued Sturman Industries, Inc. (Sturman), the company’s joint venture partner in developing fuel system technology, alleging that technology invented and patented by Sturman and licensed to the company, belongs to Caterpillar. After a trial, on July 18, 2002, the jury returned a verdict in favor of Caterpillar finding that this technology belongs to Caterpillar under a prior contract between Caterpillar and Sturman. Sturman appealed the adverse judgment, and the jury’s verdict was reversed by the appellate court on October 28, 2004 and remanded to the district court for retrial. The company is cooperating with Sturman in this effort. In May 2003, in Federal Court in Columbia, South Carolina, Caterpillar sued the company, its supplier of fuel injectors and joint venture, Siemens Diesel Systems Technology, L.L.C., and Sturman for patent infringement alleging that the Sturman fuel system technology patents and certain Caterpillar patents are infringed in the company’s new engines. The company believes that it has meritorious defenses to the claims of infringement of the Sturman patents as well as the Caterpillar patents and will vigorously defend such claims. In January 2002, Caterpillar sued the company in the Circuit Court in Peoria County, Illinois, alleging the company breached the purchase agreement pursuant to which Caterpillar supplied fuel systems for the company’s prior version of diesel engines. Caterpillar’s claims involve a 1990 agreement to reimburse Caterpillar for costs associated with the delayed launch of the company’s V-8 diesel engine program. Reimbursement of the delay costs was made by a surcharge of $8.08 on each injector purchased and the purchase of certain minimum quantities of spare parts. In 1999, the company concluded that, in accordance with the 1990 agreement, it had fully reimbursed Caterpillar for its delay costs and stopped paying the surcharge and purchasing the minimum quantities of spare parts. Caterpillar is asserting that the surcharge and the spare parts purchase requirements continue throughout the life of the contract and has sued the company to recover these amounts, plus interest. Caterpillar also asserts that the company failed to purchase all of its fuel injector requirements under the contract and, in collusion with Sturman, failed to pursue a future fuel systems supply relationship with Caterpillar. The company believes that it has meritorious defenses to Caterpillar’s claims. Along with other vehicle manufacturers, the company and certain of its subsidiaries have been subject to an increase in the number of asbestos-related claims in recent years. Management believes that such claims will not have a material adverse affect on the company’s financial condition or results of operations. In general these claims relate to illnesses alleged to have resulted from asbestos exposure from component parts found in older vehicles, although some cases relate to the presence of asbestos in company facilities. In these claims the company is not the sole defendant, and the claims name as defendants numerous manufacturers and suppliers of a wide variety of products allegedly containing asbestos. Management has strongly disputed these claims, and it has been the company’s policy to defend against them vigorously. Historically, the actual damages paid out to claimants have not been material to the company’s results of operations and financial condition. However, management believes

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	Navistar International Corporation and Consolidated Subsidiaries

	PART II - OTHER INFORMATION

Item 1.	Legal Proceedings (continued)
	the company and other vehicle manufacturers are being more aggressively targeted, largely as a result of bankruptcies of manufacturers of asbestos and products containing asbestos. It is possible that the number of these claims will continue to grow, and that the costs for resolving asbestos related claims could become significant in the future. On October 13, 2004, the company received a request from the staff of the SEC to voluntarily produce certain documents and information related to the company’s accounting practices with respect to defined benefit pension plans and other postretirement benefits. The company is fully cooperating with this request. Based on the status of the inquiry, the company is not able to predict the final outcome. On January 31, 2005, the company announced that it would restate its financial results for fiscal years 2002 and 2003 and the first three quarters of fiscal 2004. The SEC notified the company on February 9, 2005, that it was conducting an informal inquiry into the company’s restatement. On March 17, 2005, the company was advised by the SEC that the status of the inquiry had been changed to a formal investigation. The company is fully cooperating with the SEC on this investigation. Based on the status of the investigation, the company is not able to predict the final outcome.

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds

	Directors of the company who are not employees receive an annual retainer and meeting fees payable at their election in shares of common stock of the company or in cash. Currently the board of directors mandates that at least one-fourth of the annual retainer be paid in the form of common stock of the company. For the period covered by this report, receipt of approximately 1,272 shares were deferred as payment for the fiscal year 2005 annual retainer and meeting fees. In each case, the shares were acquired at prices ranging from $30.195 to $34.03 per share, which represented the fair market value of such shares on the date of acquisition. Exemption from registration of the shares is claimed by the company under Section 4(2) of the Securities Act of 1933, as amended. Payments of cash dividends and the repurchase of common stock are currently limited due to restrictions contained in the company’s $400 million Senior Notes due 2006, $250 million Senior Notes due 2011, $400 million Senior Notes due 2012 and $19 million Senior Notes. The company has not paid dividends on the common stock since 1980 and does not expect to pay cash dividends on the common stock in the foreseeable future.

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Navistar International Corporation and Consolidated Subsidiaries

PART II - OTHER INFORMATION

Item 6.	Exhibits	Page


	(a) Exhibits:

	3. Articles of Incorporation and By-Laws	E-1

	4. Instruments Defining the Rights of Security Holders, Including Indentures	E-2

	10. Material Contracts	E-15

	11. Computation of Earnings per Share (incorporated by reference from Note O to the Financial Statements)	19

	31.1 CEO Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.	E-16

	31.2 CFO Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.	E-17

	32.1 CEO Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.	E-18

	32.2 CFO Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.	E-19

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

NAVISTAR INTERNATIONAL CORPORATION

(Registrant)

Date: September 9, 2005

/s/ Mark T. Schwetschenau

Mark T. Schwetschenau
Senior Vice President and Controller
(Principal Accounting Officer)