UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
FORM 10-K
(X)	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
	SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended October 31, 2004
OR
( )	TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
	SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the transition period from		To
Commission file number 1-9618
N A V I S T A R    I N T E R N A T I O N A L    C O R P O R A T I O N
(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
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class			Name of Each Exchangeon Which Registered
Common stock, par value $0.10 per share			New York Stock Exchange Chicago Stock Exchange Pacific Exchange
Cumulative convertible junior preference stock, Series D (with $1.00 par value per share)			New York Stock Exchange
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]
As of April 30, 2004, the aggregate market value of common stock held by non-affiliates of the registrant was $ 3,151,915,676.
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act.) Yes X No __
As of January 31, 2005, the number of shares outstanding of the registrant's common stock was 69,992,334.
Documents Incorporated by Reference Portions of the Proxy Statement to be delivered to shareowners in connection with the 2005 Annual Meeting of Shareowners (Part III) Navistar Financial Corporation 2004 Annual Report on Form 10-K (Part IV)

Company	Instrument type	Total Amount	Purpose of funding	Amount utilized	Matures or expires
TERFCO	Trust	$ 100	Unsecured Ford trade receivables	$ 100	2005
NFSC	Revolving wholesale note trust and marketable securities	$1,186	Eligible wholesale notes	$ 1,132	various
TRAC	Revolving retail account conduit	$ 100	Eligible retail accounts	$ 100	2005
TRIP	Revolving retail facility	$ 500	Retail notes and leases	$ 500	2005
NFC	Revolving credit facilities	$ 820	Retail notes and leases	$ 697	2005

Changes in management’s assumptions used by the actuaries will have an impact on postretirement benefits expense and the projected benefit obligation. A change in the expected return on assets of 25 basis points would increase/decrease pension expense by $8 million and other postretirement benefits expense by $2 million annually. A 25 basis point change in the discount rate would increase/decrease other benefits expense by approximately $2 million annually. A 25 basis point discount rate change would have an impact of less than $1 million on annual pension expense. The impact of a change of 25 basis points in the discount rate would increase/decrease the obligation for pension benefits by approximately $81 million and the obligation for other benefits by approximately $56 million.

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.

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. The company 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. As of October 31, 2004, the total amount of these guarantees was $611 million.

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OFF-BALANCE SHEET ARRANGEMENTS (continued)

Guarantees (continued)

The company also guarantees many of the operating leases of its subsidiaries. The leases have various expiration dates that extend through June 2014. The remaining maximum obligation under these leases as of October 31, 2004, totaled approximately $606 million. The company and International also guarantee real estate operating leases of International and the subsidiaries of the company. The leases have various maturity dates extending through 2019. As

of October 31, 2004, the total remaining obligation under these leases is approximately $45 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 excess of the guaranteed lease residual value over the fair value of the residual represents the amount of the company’s and NFC’s exposure.

In addition, the company enters into various guarantees for purchase commitments, insurance loss reserves, credit guarantees and buyback programs with various expiration dates. 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.

Sales of Receivables

The company’s affiliate, NFC, securitizes and sells receivables through Navistar Financial Retail Receivables Corporation (NFRRC), Navistar Financial Securities Corporation (NFSC), Truck Retail Accounts Corporation (TRAC) and Truck Engine Receivables Financing Co. (TERFCO), all special purpose, wholly-owned subsidiaries (SPC’s) of NFC, to fund its business operations. The securitization market provides NFC with a cost-effective source of funding. In a typical securitization transaction, NFC sells a pool of finance receivables to SPC that establishes a qualifying special purpose entity (QSPE) consistent with the requirements of SFAS No. 140 "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." The SPC then transfers the receivables to the QSPE, generally a trust, in exchange for proceeds from interest-bearing securities, commonly called asset-backed securities. These securities are issued by the QSPE and are secured by future collections on the sold receivables. The sales of 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 investor’s interests in the related trust or conduit are not reflected as liabilities.

NFC often retains interests in the securitized receivables. The retained interests may include senior and subordinated securities, undivided interests in wholesale receivables, restricted cash held for the benefit of the QSPE’s, and interest-only strips. NFC’s retained interests will be the first to absorb any credit losses on the sold receivables because NFC retains the most subordinated interests in the QSPE, including subordinated securities, the right to receive excess spread (interest-only strip) and any residual or remaining interests of the QSPE after all asset-backed securities are repaid in full. NFC’s exposure to credit losses on the sold receivables is limited to its retained interests. The SPC’s assets are available to satisfy the creditors’ claims prior to such assets becom ing available for the SPC’s own uses or to NFC or affiliated companies. NFC is under no obligation to repurchase any sold receivable that becomes delinquent in payment or otherwise is in default. The holders of the asset-backed securities have no recourse to NFC or its other assets for credit losses on sold receivables and have no ability to require NFC to repurchase their securities. NFC does not guarantee any securities issued by QSPE’s. NFC, as the seller and servicer of the finance receivables, is obligated to provide certain representations and warranties regarding the receivables. Should any receivables fail to meet these representations and warranties, NFC, as servicer, is required to repurchase the receivables.

Postretirement Benefits

The company’s postretirement benefit obligations are accounted for under SFAS No. 87, "Employers’ Accounting for Pensions" and SFAS No. 106, "Employers’ Accounting for Postretirement Benefits Other than Pensions" and as a result, the company has obligations that are not recognized in the company’s financial statements. Details regarding these obligations can be found in Note 2 to the Financial Statements.

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CONTRACTUAL OBLIGATIONS

The following table provides aggregated information, in millions of dollars, on the company’s outstanding contractual obligations and other long-term liabilities as of October 31, 2004.

		Payments due by period
Type of Contractual Obligation:		Total			Less than 1 year			1-3 years			3-5 years			More than 5 years
Long-term debt		$	2,870		$	823		$	1,276		$	505		$	266
Capital lease obligations			194			20			40			40			94
Operating lease obligations			679			121			160			369			29
Purchase obligations			-			-			-			-			-
Other long-term liabilities			384			-			310			44			30
Total		$	4,127		$	964		$	1,786		$	958		$	419

The company has no material, outstanding purchase obligations as of October 31, 2004. The company’s "Other long-term liabilities" total $384 million. This total is primarily comprised of product liability and warranty accruals, restructuring reserves and other miscellaneous liabilities. The company anticipates that a majority of these reserves will be paid within 3 years. Any payments over 3 years relate to restructuring reserves for long-term lease terminations. The company also has long-term obligations for postretirement benefits which are not included in the above table. Information regarding the company’s obligations for postretirement benefits can be found in Note 2 to the Financial Statements.

 

ENVIRONMENTAL MATTERS

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 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, have been 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.

DERIVATIVE FINANCIAL INSTRUMENTS

The company documents and accounts for derivative and hedging activities in accordance with the provisions of Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities." The company recognizes all derivatives as assets or liabilities in the Statement of Financial Condition and measures them at fair value. When certain criteria are met, it also provides for matching the timing of gain or loss recognition on the derivative hedging instrument with the recognition of (a) changes in the fair value or cash flows of the hedged asset or liability attributable to the hedged risk or (b) the earnings effect of the hedged forecasted transaction. Changes in the fair value of derivatives which are not designated as, or which do not qualify as, hedges for accounting pur poses are reported in earnings in the period in which they occur.

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DERIVATIVE FINANCIAL INSTRUMENTS (continued)

The call option derivative contracts entered into in connection with the $190 million senior convertible notes are recorded in permanent equity in accordance with EITF 00-19 "Accounting for Derivative Financial Instruments Indexed to and Potentially Settled in, a Company’s Own Stock."

As disclosed in Notes 1 and 13 to the Financial Statements, the company uses derivative financial instruments to reduce its exposure to interest rate volatility and potentially increase the return on invested funds.

The company’s manufacturing operations, as conditions warrant, hedge foreign exchange exposure on the purchase of parts and materials from foreign countries and its exposure from the sale of manufactured products in other countries. Contracted purchases of commodities or manufacturing equipment may also be hedged.

The financial services operations may use forward contracts to hedge future interest payments on the notes and certificates related to an expected sale of receivables. The financial services operations also use interest rate swaps or caps to reduce exposure to interest rate changes.

CRITICAL ACCOUNTING POLICIES

The consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires the use of estimates, judgments and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented. In preparing these financial statements, management has made its best estimates and judgments of certain amounts included in the financial statements, giving due consideration to materiality. The significant accounting principles which management believes are the most important to aid in fully understanding our financial results are included below. Management also believes that all of the acco unting policies are important to investors. Therefore, see the Notes to the Financial Statements for a more detailed description of these and other accounting policies of the company.

Sales Allowances

At the time of sale, the company records as a reduction of revenue the estimated impact of sales allowances in the form of dealer and customer incentives. There may be numerous types of incentives available at any particular time. This estimate is based upon the assumption that a certain number of vehicles in dealer inventory will have a specific incentive applied against them. If the actual number of vehicles differs from this estimate, or if a different mix of incentives occurs, the sales allowances could be affected.

Sales of Receivables

NFC securitizes finance receivables through qualified special purpose entities (QSPEs), which then issue securities to public and private investors. NFC sells receivables to the QSPEs with limited recourse. Gains or losses on sales of receivables are credited or charged to finance revenue in the periods in which the sales occur. Retained interests, which include interest-only receivables, cash reserve accounts and subordinated certificates, are recorded at fair value in the periods in which the sales occur. The accretion of the discount related to the retained interests is recognized on an effective yield basis.

Management estimates the prepayment speed for the receivables sold, the discount rate used to determine the present value of the interest-only receivable and the anticipated net losses on the receivables in order to calculate the gain or loss. The method for calculating the gain or loss aggregates the receivables in a homogenous pool. Estimates are based on historical experience, anticipated future portfolio performance, market-based discount rates and other factors, and are made separately for each securitization transaction. In addition, NFC estimates the fair value of the retained interests on a quarterly basis. The fair value of the interest-only receivable is based on present value estimates of expected cash flows using management’s key assumptions of prepayment speeds, discount rates and net losses.< /FONT>

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CRITICAL ACCOUNTING POLICIES (continued)

Presentation of NFC’s Receivables on Statement of Cash Flow

The company classifies NFC’s wholesale notes and receivables from national accounts as cash flows from operations on its Statement of Cash Flow. These programs provide financing for the purchase of inventory directly from the company. NFC’s retail notes and lease receivables, which provide financing to end customers primarily for the purchase of new and used trucks sold by the company’s dealers, are classified as cash flows from investment programs on the Statement of Cash Flow.

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.

Product Liability

The company is subject to product liability lawsuits and claims in the normal course of business. To the extent permitted under applicable law, the company maintains insurance to reduce the risk to the company. Most insurance coverage includes self-insured retention. The company records product liability reserves for the self-insured portion of any pending or threatened product liability actions. The reserve is based upon two estimates. First, management determines an appropriate case specific reserve based upon management’s best judgment and the advice of legal counsel. These estimates are continually evaluated and adjusted based upon changes in facts or circumstances surrounding the case. Second, management obtains a third party actuarial analysis to determine the amount of additional reserve required to cover certain known claims and all incurred but not reported product liability issues. Based upon this process, management believes that the product liability reserve is appropriate; however, actual claims incurred and the actual settlement values of outstanding claims may differ from the original estimates, requiring adjustments to the reserve.

Pension and Other Postretirement Benefits

The company provides postretirement benefits to a substantial portion of its employees. Costs associated with postretirement benefits include pension and postretirement health care expenses for employees, retirees and surviving spouses and dependents. The company’s employee pension and postretirement health care expenses are dependent on management’s assumptions used in calculating such amounts. These assumptions include discount rates, health care cost trend rates, inflation, long-term expected rate of return on plan assets, retirement rates, mortality rates and other factors. Health care cost trend assumptions are developed based on historical cost data, the near-term outlook and an assessment of likely long-term trends. The inflation assumption is based on an evaluation of external market indicator s. Retirement and mortality rates are based primarily on actual plan experience.

The company’s approach to establishing the discount rate assumption reflects an investment strategy that effectively settles a portion of its pension liability by investing in a bond portfolio that generates monthly cash flows equal to a portion of the projected monthly pension benefit payments. This portion of the liability is weighted using a discount rate based on the October 31, 2004, effective yield on the dedicated bond investment portfolio. The remaining non-dedicated portion of the liability used the average of the October 31, 2004, yields on the Merrill Lynch Ten Year + High Quality Corporate Bond Index and Moody’s AA Corporate Bond Index, both adjusted for an incremental yield of approximately 50 basis points that is to be achieved by active management of the bond portfolio. For the other po stretirement benefits, the discount rate is based on the Merrill Lynch Ten Year + High Quality Corporate Bond Index and Moody’s AA Corporate Bond Index with a similar provision for an incremental yield.

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CRITICAL ACCOUNTING POLICIES (continued)

Pension and Other Postretirement Benefits (continued)

Based on this approach, at October 31, 2004, the company lowered the discount rate for pension plans to 5.8% from 6.2% at October 31, 2003. The discount rate for the other benefits was lowered from 6.6% at October 31, 2003 to 6.0% at October 31, 2004.

The company determines its expected return on plan asset assumption by evaluating both historical returns as well as estimates of future returns. Specifically, the company analyzed the average historical broad market returns for various periods of time over the past 100 years for equities and over a 30 year period for fixed income securities, and adjusted the computed amount for any expected changes in the long-term outlook for both the equity and fixed income markets. The company considers its current asset mix as well as its targeted asset mix when establishing its expected return on plan assets.

The company’s estimate of the long-term rate of return on assets for both its pension and postretirement health benefits was 9.0% at October 31, 2004 and 2003. The company’s estimate of the long-term rate of return for its pension and postretirement health benefits was 10.1% and 11.0%, respectively, at October 31, 2002. The company plans on utilizing a 9.0% long-term rate of return on plan assets for both pension and postretirement health benefits in 2005.

See Note 2 to the Financial Statements for more information regarding costs and assumptions for employee retirement benefits.

Allowance for Losses

The allowance for losses is established through a charge to the provision for losses. The allowance is an estimate of the amount required to absorb losses on the existing portfolio of finance receivables and operating leases that may become uncollectible. The allowance is maintained at an amount management considers appropriate in relation to the outstanding portfolio based on factors such as overall portfolio credit risk quality, historical loss experience, and current economic conditions. Finance receivables and operating leases are charged off to the allowance for losses when amounts due from the customers are determined to be uncollectible.

Under various agreements, International and its dealers may be liable for a portion of customer losses or may be required to repurchase the repossessed collateral at the receivable principal value. Financial services’ losses recorded as part of the bad debt provision are net of the amounts received under these agreements.

Impairment of Long-Lived Assets

The company periodically reviews the carrying value of its long-lived assets held and used and assets to be disposed of, including other intangible assets, when events and circumstances warrant such a review. This review is performed using estimates of future cash flows. If the carrying value of a long-lived asset is considered impaired, an impairment charge is recorded for the amount by which the carrying value of the long-lived asset exceeds its fair value. Management believes that the estimates of future cash flows and fair value are reasonable; however, changes in estimates of such cash flows and fair value could affect the evaluations.

NEW ACCOUNTING PRONOUNCEMENTS

In January 2003, the Financial Accounting Standards Board (FASB) issued Interpretation No. 46, "Consolidation of Variable Interest Entities." This Interpretation addresses consolidation requirements of variable interest entities (VIEs). In December 2003, the FASB revised this Interpretation to clarify the application of Accounting Research Bulletin No. 51, "Consolidated Financial Statements", to certain entities in which equity investors do not have the characteristics of a controlling financial interest for the entity to finance its activities without additional financial

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NEW ACCOUNTING PRONOUNCEMENTS (continued)

support. This Interpretation, as revised, is effective for periods ending after December 15, 2003. The company analyzed its minority investments and determined that it does not have an interest in a VIE, as defined within this Interpretation. Therefore, this Interpretation has no impact on the company’s results of operations, financial condition and cash flows.

In December 2003, the FASB issued a revision to SFAS No. 132 (SFAS 132), "Employers’ Disclosure about Pensions and Other Postretirement Benefits." This Statement retains the disclosures previously required by SFAS 132 but adds additional disclosure requirements about the assets, obligations, cash flows and net periodic benefit cost of defined benefit pension plans and other defined benefit postretirement plans. It also calls for the required information to be provided separately for pension plans and for other postretirement benefit plans. The disclosures required by this Statement are included in Note 2 to the Financial Statements.

In May 2004, the FASB issued FSP 106-2, "Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003" (the Act) which provides guidance on the accounting for the effects of the Act and requires certain disclosures regarding the effect of the federal subsidy provided by the Act. The company adopted this FSP in May of 2004, retroactive to the effective date of the Act, December 8, 2003. See Note 2 to the Financial Statements for the required disclosures.

In March 2004, the Emerging Issues Task Force (EITF) reached a final consensus on EITF 03-1, "The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments". EITF 03-1 paragraph 21 requires specific disclosure for all investments in an unrealized loss position for which other than temporary impairments have not been recognized. The company does not have any investments in an unrealized loss position for which other-than-temporary impairments have not been recognized.

In June 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 fourth fiscal quarter of 2005.  The company is still evaluating the impact, if any, this Statement may have on its results of operations, financial condition or cash flows.

In December 2004, the FASB issued two FASB Staff Positions (FSP’s) 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 (FAS 109-1); the second is FSP FAS 109-2 (FAS 109-2). In FAS 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. FAS 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 FASB Statement No. 109, "Accounting for In come Taxes." However, companies must provide certain disclosures if it chooses to utilize the additional time granted by the FASB. The company is still evaluating the impact, if any, these FSP’s may have on its results of operations, financial condition or cash flows.

INCOME TAXES

The Statement of Financial Condition at October 31, 2004, includes a deferred tax asset of $1,446 million, net of valuation allowances of $76 million. The deferred tax asset at October 31, 2003, of $1,482 million is net of valuation allowances of $110 million. The deferred tax asset has been reduced by the valuation allowance, as management believes it is more likely than not that some portion of the deferred tax asset may not be realized in the future. The valuation allowance was reduced by $34 million in 2004 primarily as a result of restructuring certain foreign operations.

The deferred tax asset at October 31, 2004, includes the tax benefit from cumulative tax net operating losses (NOL) of $1,538 million, cumulative alternative minimum tax and research and development credits of $64 million and cumulative expenses of $2,203 million that have not been deducted on the company’s tax returns. The company has no open tax years that are currently under audit by the Internal Revenue Service (IRS), and management believes

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INCOME TAXES (continued)

that it is unlikely the IRS would limit utilization of the NOLs. Until the company has utilized its significant NOL carryforwards and credits, the cash payment of U.S. federal income taxes will be minimal. See Note 3 to the Financial Statements.

The company performs extensive analysis to determine the amount of the net 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. Management reviews all available evidence, both positive and negative, to assess the long-term earnings potential of the company. The financial results are evaluated using a number of alternatives in economic cycles at various industry volume conditions. One significant factor considered is the company’s role as a leading producer of heavy and medium trucks and school buses and mid-range diesel engines. Realization of the cumulative deferred tax asset, net of liabilities, is dependent on the generation of approximately $3,700 million of future taxable income. Management believes that, with the combination of available tax planning strategies and the maintenance of significant truck and engine market share, sufficient earnings are achievable in order to realize the deferred tax asset, net of liabilities, of $1,413 million.

Currently there is no annual limitation on the company’s ability to use NOLs to reduce future income taxes. However, if an ownership change as defined in Section 382 of the Internal Revenue Code of 1986, as amended, occurs with respect to the company’s capital stock, it would limit the use of NOLs to specific annual amounts. Generally, an ownership change occurs if certain persons or groups increase their aggregate ownership by more than 50 percentage points of the company’s total capital stock in any three-year period. If an ownership change occurs, the company’s ability to use domestic NOLs to reduce income taxes is limited to an annual amount based on the fair market value of the company immediately prior to the ownership change multiplied by the long-term tax-exempt interest rate publish ed monthly by the IRS. Currently the company’s change in ownership percentage is minimal.

Reconciliation of the company’s income (loss) before income taxes from continuing operations for financial statement purposes to U.S. taxable income (loss) for the years ended October 31 is as follows:

Millions of dollars		2004			2003			2002
Income (loss) from continuing operations before income taxes		$	311		$	(49	)	$	(772	)
Exclusion of income (loss) of foreign subsidiaries			(67	)		(51	)		133
State income taxes			(2	)		-			2
Temporary differences			92			(268	)		217
Permanent differences			(60	)		(40	)		21
U.S. taxable income (loss)		$	274		$	(408	)	$	(399	)

FORWARD LOOKING STATEMENTS

This Form 10-K 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-K. 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," "inte nd," "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-K, 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 this Form 10-K.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The company’s primary market risks include fluctuations in interest rates and currency exchange rates. The company is also exposed to changes in the prices of commodities used in its manufacturing operations and to changes in the prices of equity instruments owned by the company. Commodity price risk related to the company’s current commodity financial instruments and equity price risk related to the company’s current investments in equity instruments are not material. The company does not hold a material portfolio of market risk sensitive instruments for trading purposes.

The company has established policies and procedures to manage sensitivity to interest rate and foreign currency exchange rate market risk. These procedures include the monitoring of the company’s level of exposure to each market risk, the funding of variable rate receivables primarily with variable rate debt, and limiting the amount of fixed rate receivables which may be funded with floating rate debt. These procedures also include the use of derivative financial instruments to mitigate the effects of interest rate fluctuations and to reduce the company’s exposure to exchange rate risk.

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 October 31, 2004 and 2003, the net fair value of these instruments would decrease by approximately $21 million and $18 million, respectively. 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.

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 less than $1 million and $2 million at October 31, 2004 and 2003, respectively. The foreign currency sensitivity model is limited by the assumption that all of the foreign currencies to which the company is exposed would simultaneously decrease by 10% because such synchronized changes are unlikely to occur. The effect s of foreign currency forward contracts have been included in the above analysis, however, the sensitivity model does not include the inherent risks associated with the anticipated future transactions denominated in foreign currency for which these forward contracts have been entered into for hedging purposes.

The company is exposed to changes in the price of commodities used in its manufacturing operations. Due to the amount of steel used in the production of truck cabs, buses and engines, the company’s margins are impacted by steel price fluctuations. Steel prices increased significantly during fiscal 2004 and had a $60 million negative impact on the company’s cost structure.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Index to Consolidated Financial Statements	Page
Statement of Financial Reporting Responsibility	33
Report of Independent Registered Public Accounting Firm	34
Statement of Income for the years ended October 31, 2004, 2003 (restated) and 2002 (restated)	35
Statement of Comprehensive Income for the years ended October 31, 2004, 2003 (restated) and 2002(restated)	36
Statement of Financial Condition as of October 31, 2004 and 2003 (restated)	37
Statement of Cash Flow for the years ended October 31, 2004, 2003 (restated) and 2002 (restated)	38
Notes to Financial Statements
1    Summary of accounting policies	39
2    Postretirement benefits	43
3    Income taxes	48
4    Marketable securities	50
5    Receivables	51
6    Sales of receivables	51
7    Inventories	53
8    Property and equipment	53
9    Debt	54
10    Other liabilities	56
11    Restructuring and other non-recurring charges	56
12    Discontinued operations	58
13    Financial instruments	59
14    Commitments, contingencies, restricted assets, concentrations and leases	62
15    Legal proceedings and environmental matters	64
16    Segment data	66
17    Preferred and preference stocks	69
18    Common shareowners’ equity	69
19    Earnings per share	71
20    Stock compensation plans	71
21    Condensed consolidating guarantor and non-guarantor financial information	74
22    Selected quarterly financial data (unaudited)	78
23    Restatement of prior period financial statements	79
24    Subsequent Events	82
Five -Year Summary of Selected Financial and Statistical Data (unaudited)	83
Additional Financial Information (unaudited)	84

32

STATEMENT OF FINANCIAL REPORTING RESPONSIBILITY

Management of Navistar International Corporation and its subsidiaries is responsible for the preparation and for the integrity and objectivity of the accompanying financial statements and other financial information in this report. The financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and include amounts that are based on management's estimates and judgments.

The accompanying financial statements have been audited by Deloitte & Touche LLP, an independent registered public accounting firm. Management has made available to Deloitte & Touche LLP all the company's financial records and related data, as well as the minutes of the board of directors' meetings. Management believes that all representations made to Deloitte & Touche LLP during its audit were valid and appropriate.

Management is responsible for establishing and maintaining a system of internal controls throughout its operations that provides reasonable assurance as to the integrity and reliability of the financial statements, the protection of assets from unauthorized use and the execution and recording of transactions in accordance with management's authorization. The company’s system of internal controls, which provides for appropriate division of responsibility, is supported by written policies and procedures that are updated by management, as necessary. Management is responsible for the periodic evaluation of the system of internal controls. The system is tested and evaluated regularly by the company's internal auditors as well as by the independent registered public accounting firm in connection with its annual audit of the financial statements. The independent registered public accounting firm conducts its audit in accordance with the standards of the Public Company Accounting Oversight Board (United States) and perform such tests of transactions and balances as they deem necessary. The company’s system of internal controls is improved or modified, in a manner that is cost-effective in the circumstances, in response to changes in business conditions and operations and recommendations made by internal auditors and independent registered public accounting firm.

 

The Audit Committee of the board of directors, composed of six non-employee directors, meets periodically with the independent registered public accounting firm, management, general counsel and internal auditors to satisfy itself that such persons are properly discharging their responsibilities regarding financial reporting and auditing. In carrying out these responsibilities, the Committee has full access to the independent registered public accounting firm, internal auditors, general counsel and financial management in scheduled joint sessions or private meetings as in the Committee's judgment seems appropriate. Similarly, the company's independent registered public accounting firm, internal auditors, general counsel and financial management have full access to the Committee and to the board of directors and each is responsible for bringing before the Committee or its Chair, in a timely manner, any matter deemed appropriate to the discharge of the Committee's responsibility.

Daniel C. Ustian

Chairman, President and

Chief Executive Officer

Robert C. Lannert

Vice Chairman

and Chief Financial Officer

33

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Navistar International Corporation,

Its Directors and Shareowners:

We have audited the Statement of Financial Condition of Navistar International Corporation and Consolidated Subsidiaries as of October 31, 2004 and 2003, and the related Statements of Income, Comprehensive Income and Cash Flow for each of the three years in the period ended October 31, 2004. These consolidated financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We bel ieve that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Navistar International Corporation and Consolidated Subsidiaries at October 31, 2004 and 2003, and the results of their operations and their cash flow for each of the three years in the period ended October 31, 2004, in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note 23 to the consolidated financial statements, the accompanying 2003 and 2002 financial statements have been restated.

Deloitte & Touche LLP

February 14, 2005

Chicago, Illinois

34

STATEMENT OF INCOME

		Navistar International Corporation
		and Consolidated Subsidiaries
For the Years Ended October 31
Millions of dollars, except share data		2004			2003			2002
					As Restated *			As Restated *
Sales and revenues
Sales of manufactured products		$	9,468		$	7,282		$	6,725
Finance revenue			245			283			276
Other income			11			20			20
Total sales and revenues			9,724			7,585			7,021
Costs and expenses
Cost of products and services sold			8,159			6,361			5,949
Cost of products sold related to restructuring			-			9			23
Total cost of products and services sold			8,159			6,370			5,972
Restructuring and other non-recurring charges			(1	)		(41	)		521
Postretirement benefits expense			205			297			228
Engineering and research expense			245			242			260
Selling, general and administrative expense			656			597			624
Interest expense			127			142			159
Other expense			22			27			29
Total costs and expenses			9,413			7,634			7,793
Income (loss) from continuing operations before income taxes			311			(49	)		(772	)
Income tax expense (benefit)			64			(32	)		(294	)
Income (loss) from continuing operations			247			(17	)		(478	)
Discontinued operations:
Loss from discontinued operations (less applicable income taxes of $0, $0 and $2, respectively)			-			-			(14	)
Loss on disposal			-			(4	)		(46	)
Loss from discontinued operations			-			(4	)		(60	)
Net income (loss)		$	247		$	(21	)	$	(538	)
Basic earnings (loss) per share
Continuing operations		$	3.54		$	(0.25	)	$	(7.92	)
Discontinued operations			-			(0.06	)		(1.00	)
Net income (loss)		$	3.54		$	(0.31	)	$	(8.92	)
Diluted earnings (loss) per share
Continuing operations		$	3.20		$	(0.25	)	$	(7.92	)
Discontinued operations			-			(0.06	)		(1.00	)
Net income (loss)		$	3.20		$	(0.31	)	$	(8.92	)
Average shares outstanding (millions)
Basic			69.7			68.0			60.3
Diluted			80.1			68.0			60.3

See Notes to the Financial Statements.

* See Note 23 to the Financial Statements.

35

STATEMENT OF COMPREHENSIVE INCOME

		Navistar International Corporation
		and Consolidated Subsidiaries
For the Years Ended October 31
Millions of dollars		2004			2003			2002
					As Restated *			As Restated *
Net income (loss)		$	247		$	(21	)	$	(538	)
Other comprehensive income (loss), net of tax:
Minimum pension liability adjustment, net of tax of $9, $31 and $222			-			(56	)		(369	)
Foreign currency translation adjustments and other			(11	)		(25	)		11
Other comprehensive income (loss), net of tax			(11	)		(81	)		(358	)
Comprehensive income (loss)		$	236		$	(102	)	$	(896	)
See Notes to the Financial Statements.

* See Note 23 to the Financial Statements.

36

STATEMENT OF FINANCIAL CONDITION

		Navistar International Corporation
		and Consolidated Subsidiaries
As of October 31
Millions of dollars		2004			2003
					As Restated *
ASSETS
Current assets
Cash and cash equivalents		$	605		$	467
Marketable securities			182			80
Receivables, net			1,215			932
Inventories			790			592
Deferred tax asset, net			207			183
Other assets			168			165
Total current assets			3,167			2,419
Marketable securities			73			515
Finance and other receivables, net			1,222			891
Property and equipment, net			1,444			1,439
Investments and other assets			374			300
Prepaid and intangible pension assets			73			66
Deferred tax asset, net			1,239			1,299
Total assets		$	7,592		$	6,929
LIABILITIES AND SHAREOWNERS' EQUITY
Liabilities
Current liabilities
Notes payable and current maturities of long-term debt		$	823		$	254
Accounts payable, principally trade			1,462			1,113
Other liabilities			965			905
Total current liabilities			3,250			2,272
Debt: Manufacturing operations			1,258			993
Financial services operations			787			1,533
Postretirement benefits liability			1,382			1,433
Other liabilities			384			406
Total liabilities			7,061			6,637
Commitments and contingencies
Shareowners' equity
Series D convertible junior preference stock			4			4
Common stock and additional paid in capital (par value $0.10 per share, 75.3 million shares issued)			2,096			2,118
Retained earnings (deficit)			(604	)		(833	)
Accumulated other comprehensive loss			(789	)		(778	)
Common stock held in treasury, at cost (5.3 million and 6.5 million shares held)			(176	)		(219	)
Total shareowners' equity			531			292
Total liabilities and shareowners' equity		$	7,592		$	6,929
See Notes to the Financial Statements.

* See Note 23 to the Financial Statements.

37

STATEMENT OF CASH FLOW

		Navistar International Corporation
		And Consolidated Subsidiaries
For the Years Ended October 31
Millions of dollars		2004			2003			2002
					As Restated *			As Restated *
Cash flow from operations
Net income (loss)		$	247		$	(21	)	$	(538	)
Adjustments to reconcile net income (loss) to cash provided by (used in) operations:
Depreciation and amortization			256			205			231
Deferred income taxes			50			(41	)		(269	)
Postretirement benefits funding less than (in excess of) expense			(158	)		(11	)		15
Postretirement benefits curtailment			(2	)		(5	)		157
Non-cash restructuring and other non-recurring charges			-			6			157
Non-cash charge related to discontinued operations			-			-			28
Gains on sales of receivables			(26	)		(46	)		(16	)
Other, net			(144	)		(65	)		-
Change in operating assets and liabilities:
Receivables, including wholesale notes			(417	)		(121	)		33
Inventories			(194	)		125			(173	)
Prepaid and other current assets			(6	)		(51	)		3
Accounts payable			401			88			(60	)
Other liabilities			166			(115	)		221
Cash provided by (used in) operations			173			(52	)		(211	)
Cash flow from investment programs
Purchases of retail notes and lease receivables			(1,616	)		(1,288	)		(1,311	)
Collections/sales of retail notes and lease receivables			1,418			1,856			1,197
Purchases of marketable securities			(427	)		(807	)		(49	)
Sales or maturities of marketable securities			770			328			196
Proceeds from sale of business			2			-			63
Capital expenditures			(230	)		(210	)		(252	)
Proceeds from sale-leasebacks			-			-			164
Property and equipment leased to others			5			20			(21	)
Investment in affiliates			(25	)		(1	)		42
Other investment programs			(10	)		(45	)		(69	)
Cash used in investment programs			(113	)		(147	)		(40	)
Cash flow from financing activities
Issuance of debt			64			228			361
Majority owned dealer debt			125			8			101
Principal payments on debt			(206	)		(296	)		(312	)
Net increase (decrease) in notes and debt outstanding under revolving credit facility and commercial paper programs			94			(68	)		(104	)
Proceeds from sale of stock to benefit plans			-			175			-
Premiums on call options, net			(27	)		(26	)		-
Debt issuance costs and other financing activities			28			10			18
Cash provided by financing activities			78			31			64
Cash and cash equivalents
Increase (decrease) during the year			138			(168	)		(187	)
At beginning of the year			467			635			822
Cash and cash equivalents at end of the year		$	605		$	467		$	635
See Notes to Financial Statements.
* See Note 23 to the Financial Statements.

38

NOTES TO FINANCIAL STATEMENTS

FOR THE THREE YEARS ENDED OCTOBER 31, 2004

1. SUMMARY OF ACCOUNTING POLICIES

Basis of Consolidation

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 company’s truck segment is engaged in the manufacture and marketing of Class 6 through 8 trucks, including school buses, and operates primarily in the United States (U.S.), Canada, Mexico and other selected export markets. The company’s truck segment includes a number of majority owned International brand dealerships. The company’s engine segment is engaged in the design and manufacture of mid-range diesel engines and primarily operates in the U.S. and Brazil. The financial services operations of the company provide wholesale, retail and lease financing for new and used trucks sold by International and its dealers.

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. Certain 2002 and 2003 amounts have been reclassified to conform with the presentation used in the 2004 financial statements. On October 29, 2002, the company announced its decision to exit the domestic truck business in Brazil effective October 31, 2002. The financial results of this business have been classified as discontinued operations on the Statement of Income for all periods presented and are discussed in Note 12. In January 2005, the company concluded that it was necessar y to restate its consolidated financial statements for the years ended October 31, 2003 and 2002, as discussed in Note 23 to the Financial Statements.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Revenue Recognition

Truck operations recognize shipments of new trucks and service parts to dealers and retail customers as sales at the time of shipment to the customer. Price allowances, expected in the normal course of business, and the cost of special incentive programs are recorded at the time of sale. This estimate is based upon the assumption that a certain number of vehicles in dealer inventory will have a specific incentive applied against them. Engine sales are recognized at the time of shipment to original equipment manufacturers (OEMs). An allowance for losses on receivables is maintained at an amount that management considers appropriate in relation to the outstanding receivables portfolio and other business conditions, and is charged to selling, general and administrative expense when receivables are determined to be uncollectible.

Financial services operations recognize finance charges on finance receivables as income over the term of the receivables utilizing the interest method. Operating lease revenues are recognized on a straight-line basis over the life of the lease. Recognition of revenue is suspended when management determines the collection of future income is not probable. Selected receivables are securitized and sold to public and private investors with limited recourse. Financial services operations continue to service the sold receivables and receive a fee for such services. Gains or losses on sales of receivables are credited or charged to revenue in the period in which the sale occurs. Discount

39

NOTES TO FINANCIAL STATEMENTS

FOR THE THREE YEARS ENDED OCTOBER 31, 2004

1. SUMMARY OF ACCOUNTING POLICIES (continued)

Revenue Recognition (continued)

accretion is recognized on an effective yield basis. An allowance for losses is maintained at a level deemed appropriate based on such factors as overall portfolio quality, historical loss experience and current economic conditions. Receivables are charged off to the allowance for losses when the receivable is determined to be uncollectible.

Cash and Cash Equivalents

All highly liquid financial instruments with maturities of three months or less from date of purchase, consisting primarily of bankers' acceptances, commercial paper, U.S. government securities and floating rate notes, are classified as cash equivalents on the Statements of Financial Condition and Cash Flow.

Marketable Securities

Marketable securities are classified as available-for-sale securities and are reported at fair value. The difference between amortized cost and fair value is recorded as a component of accumulated other comprehensive loss in shareowners’ equity, net of applicable deferred taxes. Most securities with remaining maturities of less than twelve months and other investments needed for current cash requirements are classified as current within the Statement of Financial Condition. All equity securities are classified as current because they are highly liquid financial instruments, which can be readily converted to cash. Marketable securities used as collateral in NFC’s revolving retail warehouse facility are invested in short-term instruments, but due to liquidity restrictions, these short-term marketable se curities are classified as non-current. All other securities are classified as non-current.

Inventories

Inventories are valued at the lower of average cost or market.

Property and Other Long-Lived Assets

Significant expenditures for replacement of equipment, tooling and pattern equipment and major rebuilding of machine tools are capitalized. Manufacturing production assets placed in service after November 1, 2001, are depreciated on a units-of-production basis. Prior to November 1, 2001, manufacturing production assets were depreciated on a straight-line basis over the estimated useful lives of the assets. The impact of the change in depreciation on the net loss in fiscal 2002 was not material. The estimated depreciable lives of manufacturing production assets range from five to 12 years. Non-production related assets are depreciated on a straight-line basis over the estimated useful lives of the assets, which average 35 years for buildings and improvements and 12 years for all other assets. Gains and losses on property disposals are included in other income and expense. The carrying amount of all long-lived assets is evaluated periodically to determine if adjustment to the depreciation and amortization period or to the unamortized balance is warranted. Such evaluation is based principally on the expected utilization of the long-lived assets and the projected, undiscounted cash flows of the operations in which the long-lived assets are deployed.

Engineering and Research Expense

Engineering and research expense includes research and development expenses and routine ongoing costs associated with improving existing products and manufacturing processes. Research and development expenses, which include activities for the introduction of new truck and engine products and major improvements to existing products and processes, totaled $207 million, $216 million, and $218 million in 2004, 2003 and 2002, respectively.

40

NOTES TO FINANCIAL STATEMENTS

FOR THE THREE YEARS ENDED OCTOBER 31, 2004

1. SUMMARY OF ACCOUNTING POLICIES (continued)

Product Related Costs

The company accrues warranty expense at the time of end product sale. These estimates are established using historical information about the nature, frequency, and average cost of warranty claims. Product liability expense is accrued based on the estimate of total future payments to settle product liability claims. The reserve is based upon two estimates. There is an appropriate case specific reserve and a third party actuarial analysis to determine the amount of additional reserve required to cover certain known claims and all incurred but not reported product liability issues.

Stock Based Compensation

Statement of Financial Accounting Standards No. 123 (SFAS 123), "Accounting for Stock-Based Compensation" and Statement of Financial Accounting Standards No. 148 (SFAS 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. Further disclosure about the co mpany’s stock compensation plans can be found in Note 20. The following table illustrates the effect on the company’s net income (loss) and earnings (loss) per share if the company had applied the fair value recognition provision of SFAS 123 in accordance with the disclosure provisions of SFAS 148.

Millions of dollars		2004			2003			2002
Net income (loss), as reported		$	247		$	(21	)	$	(538	)
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects			(14	)		(11	)		(11	)
Pro forma net income (loss)		$	233		$	(32	)	$	(549	)
Earnings (loss) per share:
Basic - as reported		$	3.54		$	(0.31	)	$	(8.92	)
Basic - pro forma		$	3.34		$	(0.47	)	$	(9.11	)
Diluted - as reported		$	3.20		$	(0.31	)	$	(8.92	)
Diluted - pro forma		$	3.02		$	(0.47	)	$	(9.11	)

Foreign Currency

The financial statements of foreign subsidiaries are translated to U.S. dollars using the period-end exchange rate for assets and liabilities and a weighted-average exchange rate for each period for revenues and expenses. The functional currency for the majority of the company’s foreign subsidiaries is the U.S. dollar. Translation adjustments for those subsidiaries whose local currency is their functional currency are recorded as a component of accumulated other comprehensive loss in shareowners’ equity. Transaction gains and losses arising from fluctuations in currency exchange rates on transactions denominated in currencies other than the functional currency are recognized in earnings as incurred, except for those transactions which hedge purchase commitments and for those intercompany balances whic h are designated as long-term investments. Net income (loss) included a foreign currency transaction gain of $7 million in 2004 and $11 million in 2003 and a foreign currency transaction loss of $6 million in 2002.

41

NOTES TO FINANCIAL STATEMENTS

FOR THE THREE YEARS ENDED OCTOBER 31, 2004

1. SUMMARY OF ACCOUNTING POLICIES (continued)

Derivative Financial Instruments

Derivative financial instruments are generally held for purposes other than trading. The company uses derivative financial instruments to reduce its exposure to interest rate volatility and to potentially increase the return on invested funds. The financial services operations may use forward contracts to hedge future interest payments on the notes and certificates related to an expected sale of receivables. The principal balance of receivables expected to be sold by NFC equals or exceeds the notional amount of open forward contracts. The financial services operations also use interest rate swaps and caps to reduce exposure to interest rate changes. All derivative instruments are recorded at fair value. For those instruments that do not qualify for hedge accounting, changes in fair value are recognized in incom e.

Sales of Receivables

NFC securitizes finance receivables through qualified special purpose entities (QSPE), which then issue securities to public and private investors. NFC sells receivables to the QSPEs with limited recourse. Gains or losses on sales of receivables are credited or charged to finance in the periods in which the sales occur. Retained interests, which include interest-only receivables, cash reserve accounts and subordinated certificates, are recorded at fair value in the periods in which the sales occur. The accretion of the discount related to the retained interests is recognized on an effective yield basis.

Management estimates the prepayment speed for the receivables sold, the discount rate used to determine the present value of the interest-only receivable and the anticipated net losses on the receivables in order to calculate the gain or loss. The method for calculating the gain or loss aggregates the receivables in a homogenous pool. Estimates are based on historical experience, anticipated future portfolio performance, market-based discount rates and other factors, and are made separately for each securitization transaction. In addition, NFC estimates the fair value of the retained interests on a quarterly basis. The fair value of the interest-only receivable is based on present value estimates of expected cash flows using management’s key assumptions of prepayment speeds, discount rates and net losses.< /FONT>

Presentation of NFC’s Receivables on Statement of Cash Flow

The company classifies NFC’s wholesale notes and receivables from national accounts as cash flows from operations on its Statement of Cash Flow. These programs provide financing for the purchase of inventory directly from the company. NFC’s retail notes and lease receivables, which provide financing to end customers primarily for the purchase of new and used trucks sold by the company’s dealers, are classified as cash flows from investment programs on the Statement of Cash Flow.

New Accounting Pronouncements

In January 2003, the Financial Accounting Standards Board (FASB) issued Interpretation No. 46, "Consolidation of Variable Interest Entities." This Interpretation addresses consolidation requirements of variable interest entities (VIEs). In December 2003, the FASB revised this Interpretation to clarify the application of Accounting Research Bulletin No. 51, "Consolidated Financial Statements", to certain entities in which equity investors do not have the characteristics of a controlling financial interest for the entity to finance its activities without additional financial support. This Interpretation, as revised, is effective for periods ending after December 15, 2003. The company analyzed its minority investments and determined that it does not have an interest in a VIE, as defined within this Interpretation. Therefore, this Interpretation has no impact on the company’s results of operations, financial condition, and cash flows.

  In December 2003, the FASB issued a revision to SFAS No. 132 (SFAS 132), "Employers’ Disclosure about Pensions and Other Postretirement Benefits." This Statement retains the disclosures previously required by SFAS 132 but adds additional disclosure requirements about the assets, obligations, cash flows, and net periodic benefit

42

NOTES TO FINANCIAL STATEMENTS

FOR THE THREE YEARS ENDED OCTOBER 31, 2004

1. SUMMARY OF ACCOUNTING POLICIES (continued)

New Accounting Pronouncements (continued)

cost of defined benefit pension plans and other defined benefit postretirement plans. It also calls for the required information to be provided separately for pension plans and for other postretirement benefit plans. The disclosures required by this Statement are included in Note 2.

 

In March 2004, the Emerging Issues Task Force (EITF) reached a final consensus on EITF 03-1, "The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments". EITF 03-1 paragraph 21 requires specific disclosure for all investments in an unrealized loss position for which other than temporary impairments have not been recognized. The company does not have any investments in an unrealized loss position for which other-than-temporary impairments have not been recognized.

In May 2004, the FASB issued Staff Position (FSP) 106-2, "Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003" (the Act) which provides guidance on the accounting for the effects of the Act and requires certain disclosures regarding the effect of the federal subsidy provided by the Act. The company adopted this FSP as of May 1, 2004, retroactive to the effective date of the Act, December 8, 2003. See Note 2 for the required disclosures.

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 fourth fiscal quarter of 2005.  The company is evaluating the impact, if any, this Statement may have on its results of operations, financial condition or cash flows.

In December 2004, the FASB issued two FSP’s 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. 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, a company m ust provide certain disclosures if it chooses to utilize the additional time granted by the FASB. The company is evaluating the impact, if any, these FSP’s may have on its results of operations, financial condition or cash flows.

2. POSTRETIREMENT BENEFITS

The company provides postretirement benefits to a substantial portion of its employees. Costs associated with postretirement benefits include pension and postretirement health care expenses for employees, retirees and surviving spouses and dependents. In addition, as part of the 1993 restructured health care and life insurance plans, profit sharing payments to the Retiree Supplemental Benefit Trust (Trust) are required. The company utilizes an October 31 measurement date for all of its defined benefit plans.

Generally, the 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. At October 31, 2004, all legal funding requirements had been met. In 2005, the company expects to contribute approximately $20 million to its pension plans to meet legal requirements.

43

NOTES TO FINANCIAL STATEMENTS

FOR THE THREE YEARS ENDED OCTOBER 31, 2004

2. POSTRETIREMENT BENEFITS (continued)

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

Millions of dollars		2004			2003			2002
Pension expense		$	64		$	113		$	77
Health/life insurance			139			184			151
Profit sharing provision to Trust			2			-			-
Total postretirement benefits expense		$	205		$	297		$	228

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

		Pension Benefits									Other Benefits
Millions of dollars		2004			2003			2002			2004			2003			2002
Service cost for benefits earned during the period		$	23		$	26		$	29		$	14		$	19		$	20
Interest on obligation			231			249			241			139			153			151
Amortization of cumulative losses			49			51			35			41			58			48
Amortization of prior service cost			6			3			39			-			-			-
Other			21			16			16			-			-			-
Less expected return on assets			(266	)		(232	)		(283	)		(55	)		(46	)		(68	)
Net postretirement benefits expense		$	64		$	113		$	77		$	139		$	184		$	151

"Other" 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. Plan amendments not arising from negotiated labor contracts and cumulative gains and losses for plans where approximately 90% or more of the plan participants are inactive are amortized over the average remaining life expectancy of the participants. For all remaining plans, costs are amortized over the average remaining service life of active employees. Plan amendments arising from negotiated labor contracts are amortized over the length of the contract.

The defined contribution plans cover a substantial portion of the salaried employees and certain represented employees of the company, who were first hired on or after January 1, 1996. Under the defined contribution plans, the company makes annual contributions to each participant’s retirement account based on an age-weighted percentage of the participant’s eligible compensation for the calendar year. The plans also contain a 401(k) feature and provide for a company match; currently 50% of the first 6% of pretax salary contributions are made on behalf of the participant.

Defined contribution expense pursuant to these plans was $11 million, $10 million and $6 million in 2004, 2003, and 2002, respectively, which approximates the amount funded by the company.

44

NOTES TO FINANCIAL STATEMENTS

FOR THE THREE YEARS ENDED OCTOBER 31, 2004

2. POSTRETIREMENT BENEFITS (continued)

The funded status of the company's plans as of October 31, 2004 and 2003, and reconciliation with amounts recognized on the Statement of Financial Condition are provided below.

		Pension Benefits						Other Benefits
Millions of dollars		2004			2003			2004			2003
Change in benefit obligation
Benefit obligation at beginning of year		$	3,982		$	3,566		$	2,442		$	2,238
Amendments			6			7			-			-
Service cost			23			26			14			19
Interest on obligation			231			249			139			153
Actuarial net loss			20			428			74			157
Currency rate conversion			19			38			12			15
Plan participants’ contributions			-			-			30			27
Benefits paid			(331	)		(305	)		(207	)		(187	)
Restructuring			(2	)		(27	)		-			20
Benefit obligation at end of year		$	3,948		$	3,982		$	2,504		$	2,442
Change in plan assets
Fair value of plan assets at beginning of year		$	2,988		$	2,578		$	632		$	535
Actual return on plan assets			230			514			45			139
Currency rate conversion			17			30			-			-
Employer contributions			231			164			10			10
Benefits paid			(323	)		(298	)		(63	)		(52	)
Fair value of plan assets at end of year		$	3,143		$	2,988			624		$	632
Funded status		$	(805	)	$	(994	)	$	(1,880	)	$	(1,810	)
Unrecognized actuarial net loss			1,293			1,283			1,070			1,025
Unrecognized prior service cost			27			23			-			-
Net amount recognized		$	515		$	312		$	(810	)	$	(785	)
Amounts recognized on the Statement of Financial Condition consist of:
Prepaid benefit cost		$	49		$	45		$	-		$	-
Accrued benefit liability - current			(32	)		(170	)		(145	)		(118	)
- non-current			(717	)		(766	)		(665	)		(667	)
Intangible asset			24			21			-			-
Accumulated other comprehensive loss			1,191			1,182			-			-
Net amount recognized		$	515		$	312		$	(810	)	$	(785	)

The accumulated benefit obligation for pension benefits, a measure which excludes the effect of salary and wage increases, was $3,892 million and $3,940 million at October 1, 2004 and 2003, respectively. The projected benefit obligation, accumulated benefit obligation and fair value of plan assets for the pension plans with accumulated benefit obligations in excess of plan assets were $3,884 million, $3,830 million and $3,078 million, respectively, as of October 31, 2004, and $3,928 million, $3,872 million and $2,928 million, respectively, as of October 31, 2003.

The minimum pension liability adjustment included in accumulated other comprehensive loss is recorded on the Statement of Financial Condition net of deferred income taxes of $454 million and $445 million at October 31, 2004 and 2003, respectively.

45

NOTES TO FINANCIAL STATEMENTS

FOR THE THREE YEARS ENDED OCTOBER 31, 2004

2. POSTRETIREMENT BENEFITS (continued)

The weighted average rate assumptions used in determining benefit obligations were:

		Pension Benefits						Other Benefits
		2004			2003			2004			2003
Discount rate used to determine present value of benefit obligation at end of year			5.8	%		6.2	%		6.0	%		6.6	%
Expected rate of increase in future compensation levels			3.5	%		3.5	%		N/A			N/A

The weighted average rate assumptions used in determining net postretirement benefit expense were:

		Pension Benefits									Other Benefits
		2004			2003			2002			2004			2003			2002
Discount rate			6.2	%		7.2	%		7.4	%		6.5	%		7.1	%		7.4	%
Expected long-term rate of return on plan assets			9.0	%		9.0	%		10.1	%		9.0	%		9.0	%		11.0	%
Expected rate of increase in future compensation levels			3.5	%		3.5	%		3.5	%		N/A			N/A			N/A

The company determines its expected return on plan asset assumption by evaluating both historical returns as well as estimates of future returns. Specifically, the company analyzed the average historical broad market returns for various periods of time over the past 100 years for equities and over a 30 year period for fixed income securities, and adjusted the computed amount for any expected changes in the long-term outlook for both the equity and fixed income markets. The company considers its current asset mix as well as its targeted asset mix when establishing its expected return on plan assets.

The following table sets forth the weighted average percentage of plan assets by category at October 31:

		Pension Benefits									Other Benefits
Asset Category		Target Range			2004			2003			Target Range			2004			2003
Equity securities
Navistar common stock						7	%		8	%					9	%		10	%
Other equity securities						49	%		48	%					67	%		67	%
Hedge funds						7	%		7	%					9	%		8	%
Total equity securities			55-65	%		63	%		63	%		75-85	%		85	%		85	%
Debt securities						37	%		35	%					14	%		13	%
Other, including cash.						-			2	%					1	%		2	%
Total debt securities and other			35-45	%		37	%		37	%		15-25	%		15	%		15	%

The company’s investment strategy is consistent with its policy to maximize returns while considering overall investment risk and the funded status of the plans relative to their benefit obligations. The company’s investment strategy takes into account the long-term nature of the benefit obligations, the liquidity needs of the plans, and the expected risk/return tradeoffs of the asset classes in which the plans may choose to invest. Asset allocations are established through an investment policy, which is updated periodically and reviewed by a fiduciary committee and the board of directors. The company believes that returns on common stock over the long term will be higher than returns from fixed-income securities as the historical broad market indices have shown. Equity and fixed-income

46

NOTES TO FINANCIAL STATEMENTS

FOR THE THREE YEARS ENDED OCTOBER 31, 2004

2. POSTRETIREMENT BENEFITS (continued)

investments are made across a broad range of industries and companies to provide protection against the impact of volatility in any single industry or company. Under our policy, hedge funds are limited to no more than 15% of total assets. The long-term performance of our funds generally has outperformed our long-term return assumptions.

For 2005, the weighted average rate of increase in the per capita cost of covered health care benefits is projected to be 9.7%. The rate is projected to decrease to 5.0% by the year 2009 and remain at that level each year thereafter. The effect of changing the health care cost trend rate by one-percentage point for each future year is as follows, in millions:

		One-Percentage Point Increase			One-Percentage Point Decrease
Effect on total of service and interest cost components		$	19		$	(16	)
Effect on postretirement benefit obligation			249			(211	)

On December 8, 2003, the President signed the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the Act) into law. The Act introduces a voluntary prescription drug benefit under Medicare as well as a federal subsidy to sponsors of retiree healthcare plans that provide prescription drug benefits that are at least actuarially equivalent to Medicare Part D. This subsidy covers a defined portion of an individual beneficiary’s annual covered prescription drug costs, and is exempt from federal taxation.

In May 2004, the FASB issued FSP 106-2 which provides guidance on the accounting for the effects of the Act. The company adopted the provisions of FSP 106-2 in the third quarter of 2004, retroactive to December 8, 2003. The retroactive application of the Medicare subsidy reduced the company’s 2004 postretirement benefit expense by $32 million. The company’s accumulated postretirement benefit obligation (APBO) was reduced by $332 million at October 31, 2004, and $271 million at December 8, 2003 for the subsidy related to benefits attributed to past service. The company used a 6.5% discount rate to value the related APBO at December 8, 2003, which was 0.1 percentage point lower than the discount rate used at October 31, 2003, and caused a $23 million increase in the APBO as of that date.

The following estimated benefit payments are payable from the plans to participants:

		Estimated Benefit Payments
Millions of dollars		Pension Benefits			Postretirement Benefits
2005		$	349		$	205
2006			345			212
2007			338			197
2008			331			199
2009			323			199
2010 through 2014			1,472			954

The 2002 Plan of Restructuring, as described in Note 11, resulted in a curtailment loss of $157 million related to the company’s postretirement obligations. 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. 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 to the previously

47

NOTES TO FINANCIAL STATEMENTS

FOR THE THREE YEARS ENDED OCTOBER 31, 2004

2. POSTRETIREMENT BENEFITS (continued)

recorded curtailment loss totaling $2 million in 2004 and $5 million in 2003. These adjustments are recorded as part of "Restructuring and other non-recurring charges" on the Statement of Income and are classified on the Statement of Financial Condition as Postretirement benefits liability.

3. INCOME TAXES

The domestic and foreign components of income (loss) from continuing operations before income taxes consist of the following:

Millions of dollars		2004			2003			2002
Domestic		$	244		$	(100	)	$	(639	)
Foreign			67			51			(133	)
Total income (loss) before income taxes		$	311		$	(49	)	$	(772	)

The components of income tax expense (benefit) from continuing operations consist of the following:

Millions of dollars		2004			2003			2002
Current:
Federal		$	6		$	1		$	-
State and local			2			-			(2	)
Foreign			6			9			(2	)
Total current expense (benefit)			14			10			(4	)
Deferred:
Federal			63			(42	)		(225	)
State and local			5			(4	)		(19	)
Foreign			(18	)		4			(46	)
Total deferred expense (benefit)			50			(42	)		(290	)
Total income tax expense (benefit)		$	64		$	(32	)	$	(294	)

The deferred tax expense (benefit) represents additional net operating losses, credits and future deductions that the company expects to utilize against future operating income. Consolidated net tax payments made during 2004, 2003 and 2002 were $21 million, $2 million and $1 million, respectively.

A reconciliation of the statutory federal income tax rate to the effective income tax rate from continuing operations is as follows:

		2004			2003			2002
Statutory federal income tax rate			35	%		(35	)%		(35	)%
State income taxes, net of federal income taxes			3			(8	)		(3	)
Research and development credits			(2	)		(10	)		(1	)
Reversal of valuation reserve			(11	)		-			-
Medicare reimbursement			(4	)		-			-
International			1			(14	)		2
Other			(1	)		1			(1	)
Effective income tax rate (benefit)			21	%		(66	)%		(38	)%

48

NOTES TO FINANCIAL STATEMENTS

FOR THE THREE YEARS ENDED OCTOBER 31, 2004

3. INCOME TAXES (continued)

Research and development tax credits of $5 million, $5 million and $8 million were recorded for 2004, 2003 and 2002, respectively. The deferred tax asset valuation allowance was reduced in 2004 by $34 million principally as a result of restructuring certain foreign operations. International tax benefits in 2003 relate principally to the favorable resolution of tax audits and strategic foreign tax planning, offset by additional tax related to foreign exchange rates.

Undistributed earnings of foreign subsidiaries were $103 million, $88 million and $128 million at October 31, 2004, 2003, and 2002 respectively. Taxes have not been provided on these earnings because it is management’s present intention to reinvest unremitted earnings in our foreign operations, and negligible withholding taxes are applicable upon repatriation of these earnings. Management is currently evaluating recent tax law changes under the American Jobs Creation Act of 2004, which create a temporary incentive for U.S. corporations to repatriate accumulated income earned abroad by providing an 85 percent dividends received deduction for certain dividends from controlled foreign corporations. The deduction is subject to a number of limitations as well as uncertainty as to how to interpret numerous provi sions in the Act. As of this time, we have not concluded our analysis to determine whether, and to what extent, we might repatriate foreign earnings that have not yet been remitted to the U.S. Based on our analysis to date it is possible that we may repatriate funds of $0 to $50 million, with the respective tax liability ranging from $0 to $3 million. We expect to be able to finalize our assessment by the quarter ended July 31, 2005.

The components of the deferred tax asset (liability) at October 31 are as follows:

Millions of dollars		2004			2003
Deferred tax assets:
NOL carryforwards		$	581		$	717
Alternative minimum tax and research and development credits			64			56
Postretirement benefits			530			505
Product liability and warranty			124			86
Restructuring and other non-recurring charges			52			76
Other liabilities			171			152
Gross deferred tax assets			1,522			1,592
Less valuation allowance			(76	)		(110	)
Net deferred tax asset		$	1,446		$	1,482
Deferred tax liabilities:
Depreciation and other		$	(33	)	$	(33	)

The company performs extensive analysis to determine the amount of the net 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. Management reviews all available evidence, both positive and negative, to assess the long-term earnings potential of the company. The financial results are evaluated using a number of alternatives in economic cycles at various industry volume conditions. One significant factor considered is the company’s role as a leading producer of heavy and medium trucks and school buses and mid-range diesel engines. Realization of the cumulative deferred tax asset, net of liabilities, is dependent on the generation of approximately $3,700 million of future taxable income. Management believes that, with the combination of available tax planning strategies and the maintenance of significant truck and engine market share, sufficient earnings are achievable in order to realize the deferred tax asset, net of liabilities, of $1,413 million.

Prepaid pension previously classified in deferred tax liabilities has been included in postretirement benefits deferred tax assets. Amounts recognized on the Statement of Financial Condition consist of:

49

NOTES TO FINANCIAL STATEMENTS

FOR THE THREE YEARS ENDED OCTOBER 31, 2004

3. INCOME TAXES (continued)

Millions of dollars		2004			2003
Deferred tax assets, current		$	207		$	183
Deferred tax assets, long term			1,239			1,299
Net deferred tax assets		$	1,446		$	1,482
Other long-term deferred tax liabilities		$	(33	)	$	(33	)

At October 31, 2004, the company had $1,466 million of domestic and $72 million of foreign NOL carryforwards and $44 million of research and development credits and $20 million of domestic and foreign alternative minimum tax available to offset future taxable income. Domestic and foreign NOL carryforwards will expire as follows, in millions of dollars:

		NOLs
2008		$	337
2009			14
2011			179
2013			6
2021			129
2022			399
2023			408
Indefinite			66
Total		$	1,538

Additionally, the reversal of net temporary differences of $2,203 million as of October 31, 2004, will create net tax deductions, which, if not utilized previously, will expire subsequent to 2024.

4. MARKETABLE SECURITIES

The fair value of marketable securities is estimated based on quoted market prices, when available. If a quoted price is not available, fair value is estimated using quoted market prices for similar financial instruments.

Information related to the company's marketable securities at October 31 is as follows:

		2004						2003
Millions of dollars		Amortized Cost			Fair Value			Amortized Cost			Fair Value
Corporate securities		$	76		$	76		$	520		$	520
U.S. government securities			179			179			75			75
Total marketable securities		$	255		$	255		$	595		$	595

Contractual maturities of marketable securities at October 31 are as follows:

		2004						2003
Millions of dollars		Amortized Cost			Fair Value			Amortized Cost			Fair Value
Due in one year or less		$	245		$	245		$	584		$	584
Due after one year through five years			10			10			11			11
Total marketable securities		$	255		$	255		$	595		$	595

50

NOTES TO FINANCIAL STATEMENTS

FOR THE THREE YEARS ENDED OCTOBER 31, 2004

 

4. MARKETABLE SECURITIES (continued)

Gross gains and losses realized on sales or maturities of marketable securities were not material for each of the three years ended October 31, 2004. The marketable securities balance at October 31, 2004 and 2003, includes $63 million and $506 million, respectively, of restricted marketable securities used as collateral in NFC’s revolving retail warehouse facility. The entire portfolios are invested in short-term instruments, but due to liquidity restrictions, these short-term marketable securities are classified as long-term.

5. RECEIVABLES

Receivables at October 31 are summarized by major classification as follows:

Millions of dollars		2004			2003
Accounts receivable		$	753		$	618
Retail notes			888			587
Lease financing			181			191
Wholesale notes			263			128
Amounts due from sales of receivables			384			349
Allowance for losses			(32	)		(50	)
Total receivables, net			2,437			1,823
Less current portion			(1,215	)		(932	)
Finance and other receivables, net		$	1,222		$	891

The financial services segment purchases the majority of the wholesale notes receivable and some retail notes and accounts receivable arising from the company’s manufacturing operations.

The current portion of finance and other receivables is computed based on contractual maturities. The actual cash collections may vary from the contractual cash flows because of sales, prepayments, extensions and renewals. The contractual maturities, therefore, should not be regarded as a forecast of future collections. Contractual maturities of accounts receivable, retail notes, lease financing and wholesale notes, including unearned finance income, at October 31, 2004, were: 2005 - $1,245 million, 2006 - $412 million, 2007 - $200 million, 2008 - $157 million, 2009 - $122 million and 2010 and thereafter - $40 million. Unearned finance income totaled $91 million at October 31, 2004 and $67 million at October 31, 2003.

6. SALES OF RECEIVABLES

NFC’s 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. On a geographic basis there is not a disproportionate concentration of credit risk in any area of the United States. 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.

NFC securitizes and sells receivables through Navistar Financial Retail Receivable Corp. (NFRRC), Navistar Financial Securities Corp. (NFSC), Truck Retail Accounts Corp. (TRAC) and Truck Engine Receivables Financing Co. (TERFCO), all special purpose, wholly owned subsidiaries (SPC’s) of NFC. The sales of 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 the company’s consolidated balance sheet and the investor’s interests in the related trust or conduit are not reflected as liabilities.

In fiscal 2004, NFC sold $1,120 million of retail notes and finance leases receivables, net of unearned finance income, through NFRRC in three separate sales. NFC sold $195 million of finance receivables during thequarter ended January 2004, $600 million during the quarter ended April 2004, and $325 million

51

NOTES TO FINANCIAL STATEMENTS

FOR THE THREE YEARS ENDED OCTOBER 31, 2004

6. SALES OF RECEIVABLES (continued)

during the quarter ended July 2004 to trusts and conduits which, in turn, issued asset-backed securities that were sold to investors. Pre-tax gains of $26 million were recognized on the sales. In fiscal 2003, NFC sold $1,750 million of finance receivables to trusts which, in turn, issued asset-backed securities. Aggregate gains of $46 million were recognized on the sales. In fiscal 2002, NFC sold $1,000 million of finance receivables to trusts which, in turn, issued asset-backed securities. Aggregate gains of $16 million were recognized on the sales.

As of October 31, 2004, NFSC has in place a revolving wholesale note trust that provides for the funding of up to $1,186 million of eligible wholesale notes. The trust is comprised of a $200 million tranche of investor certificates maturing in 2008, three $212 million tranches of investor certificates maturing in 2005, 2006, and 2007, variable funding certificates with a maximum capacity of $200 million maturing in February 2005 and a seller certificate of $150 million. As of October 31, 2004, NFC had utilized $1,132 million of the revolving wholesale note trust.

During the second quarter of 2004, TRAC obtained financing for its retail accounts with a bank conduit that provides for the funding of up to $100 million of eligible retail accounts. The revolving retail account facility expires in April 2005. The sales of retail accounts under TRAC constitute sales under generally accepted accounting principles in the United States of America, with the result that the sold accounts are removed from NFC’s balance sheet and the investor’s interests are not reflected as liabilities. TRAC is a separate corporate entity, and its assets will be available first and foremost to satisfy the claims of the creditors of TRAC. As of October 31, 2004, this facility was fully utilized.

As of October 31, 2004, TERFCO has in place a revolving trust that provides for the funding of up to $100 million of eligible Ford Motor Company accounts receivables. This facility, which will expire in 2005, was fully utilized as of October 31, 2004.

The SPC’s have limited recourse on the sold receivables. The SPC’s assets are available to satisfy the creditors’ claims prior to such assets becoming available for the SPC’s own uses or to NFC or affiliated companies. The terms of receivable sales generally require NFC to provide credit enhancements in the form of overcollateralizations and/or cash reserves with the trusts and conduits. The use of such cash reserves by NFC is restricted under the terms of the securitized sales agreements. The maximum exposure under all receivable sale recourse provisions as of October 31, 2004 was $383 million.

NFC’s management estimates the prepayment speed for the receivables sold, expected net credit losses and the discount rate used to determine the present value of the interest-only receivables in order to calculate the gain or loss. Estimates of prepayment speeds, expected credit losses, and discount rates are based on historical experience and other factors and are made separately for each securitization transaction. In addition, NFC estimates the fair value of the retained interests on a quarterly basis utilizing updated estimates of these factors.

Key economic assumptions used in measuring the retained interests at the date of the sale for sales of retail notes and finance leases completed during fiscal 2004 were a prepayment speed of 1.2 to 1.4, weighted average life of 43 months, expected credit losses of 0.55%, an interest-only receivable discount rate of 15.2% to 15.3% and a reserve account discount rate of 3.2% to 4.1%. For those sales completed during fiscal 2003 the assumptions used were a prepayment speed of 1.2 to 1.4, weighted average life of 43 months, expected credit losses of 0.76%, an interest-only receivable discount rate of 15.5% to 18.1% and a reserve account discount rate of 3.1% to 4.4%. For those sales completed during fiscal 2002 the assumptions used were a prepayment speed of 1.2 to 1.4, weighted average life of 41 months, expected credit losses of 0.68%, an interest-only receivable discount rate of 16.9% to 18.2% and a reserve account discount rate of 5.1% to 5.6%.

The impact of a hypothetical 10% adverse change in these assumptions would have no material effect on the fair value of the retained interests as of October 31, 2004. These sensitivities are hypothetical and should be used with caution. The effect of a variation of a particular assumption on the fair value of the retained interests is calculated without changing any other assumption. In reality, changes in one factor may result in changes in another.

52

NOTES TO FINANCIAL STATEMENTS

FOR THE THREE YEARS ENDED OCTOBER 31, 2004

6. SALES OF RECEIVABLES (continued)

Serviced, sold and owned receivables balances are summarized below:

Millions of dollars		2004												2003
		Retail &												Retail &
		Finance			Wholesale			Accounts			Total			Finance			Wholesale			Accounts			Total
Service portfolio		$	2,758		$	1,305		$	488		$	4,551		$	2,506		$	861		$	401		$	3,768
Less sold receivables			1,943			1,132			200			3,275			1,986			815			100			2,901
Owned portfolio		$	815		$	173		$	288		$	1,276		$	520		$	46		$	301		$	867

Certain cash flows received from (paid to) securitization trusts/conduits were as follows for fiscal years:

Millions of dollars		2004			2003			2002
Proceeds from sales of finance receivables		$	1,119		$	1,701		$	999
Proceeds from sales of finance receivables into revolving facilities			6,372			4,938			4,883
Servicing fees received			30			28			27
Repurchase of receivables in breach of terms			(28	)		(69	)		(129	)
Cash used in exercise of purchase option			(87	)		(140	)		(85	)
Servicing advances, net of reimbursements			5			7			28
Cash received upon release from reserve accounts			91			83			125
All other cash received from trusts			90			104			94

7. INVENTORIES

Inventories at October 31 are as follows:

Millions of dollars		2004			2003
Finished products		$	505		$	377
Work in process			47			47
Raw materials and supplies			238			168
Total inventories		$	790		$	592

8. PROPERTY AND EQUIPMENT

At October 31, property and equipment includes the following:

Millions of dollars		2004			2003
Land		$	15		$	17
Buildings, machinery and equipment at cost:
Plants			1,944			1,789
Distribution			89			97
Construction in progress			135			143
Net investment in equipment subject to operating leases			174			206
Other			438			440
Total property			2,795			2,692
Less accumulated depreciation and amortization			(1,351	)		(1,253	)
Total property and equipment, net		$	1,444		$	1,439

53

NOTES TO FINANCIAL STATEMENTS

FOR THE THREE YEARS ENDED OCTOBER 31, 2004

8. PROPERTY AND EQUIPMENT (continued)

Total property includes property under capitalized lease obligations of $16 million at both October 31, 2004 and 2003. Future minimum rentals on net investments in operating leases are: 2005 - $47 million, 2006 - $33 million, 2007 - $20 million, 2008 - $14 million, 2009 - $8 million and 2010 and thereafter - $10 million. Capitalized interest for 2004, 2003 and 2002 was $6 million, $7 million and $14 million, respectively.

In 2003, the company made a non-cash investment in the Blue Diamond Truck joint venture of $133 million. This investment included the transfer of fixed assets totaling $148 million and net deferred tax liabilities of $15 million.

9. DEBT

Millions of dollars		2004			2003
Manufacturing operations
Notes payable and other current maturities of long-term debt		$	10		$	33
Majority owned dealership debt			61			40
Total short-term debt			71			73
7.5% Senior Notes, due 2011, net of unamortized discount of $2			248			-
8% Senior Subordinated Notes, due 2008			-			250
2.5% Senior Convertible Notes, due 2007			190			190
9 3/8% Senior Notes, due 2006			400			400
4.75% Subordinated Exchangeable Notes, due 2009			220			-
Bank term loans			-			8
9.95% Senior Notes, due 2011			13			15
Majority owned dealership debt			187			130
Total long-term debt			1,258			993
Manufacturing operations debt			1,329			1,066
Financial services operations
Current maturities of long-term debt			571			88
Bank revolvers, variable rates			181			93
Total short-term debt			752			181
Bank revolvers, variable rates, due 2005			705			689
Revolving retail warehouse facility, variable rates, due 2005			-			500
4.75% Subordinated Exchangeable Notes, due 2009			-			220
Secured borrowings, 3.7% to 6.7%, due serially through 2010			82			124
Total long-term debt			787			1,533
Financial services operations debt			1,539			1,714
Total debt		$	2,868		$	2,780

In June 2004, the company assumed the $220 million 4.75% Subordinated Exchangeable Notes due in 2009 from NFC and received approximately $170 million in cash from NFC as compensation for assumption of the debt. The company previously received $50 million from NFC as compensation for providing the shares in case the bonds convert.

54

NOTES TO FINANCIAL STATEMENTS

FOR THE THREE YEARS ENDED OCTOBER 31, 2004

9. DEBT (continued)

In June 2004, the company issued $250 million in Senior Notes due in 2011 and used the proceeds to finance its offer to purchase and redeem its outstanding 8% Senior Subordinated Notes due in 2008. The company obtained certain amendments from existing bondholders of its $400 million 9 3/8% Senior Notes due in 2006 that permitted the refinancing and the amendment of other covenant limitations. The new Senior Notes were priced at a discount with a coupon rate of 7.50% to yield 7.625%.

The company’s majority owned dealerships have debt to finance their inventory. This debt is typically settled within 6 months of issuance and has been properly classified as short-term.

The company arranged financing for $342 million of funds denominated in U.S. dollars and Mexican pesos to be used for investment in the company’s Mexican financial services operations. As of October 31, 2004, borrowings outstanding under these arrangements were $215 million, of which 26% is denominated in dollars and 74% in pesos. The interest rates on the dollar-denominated debt are at a negotiated fixed rate or at a variable rate based on LIBOR. On peso-denominated debt, the interest rate is based on the Interbank Interest Equilibrium Rate. The effective interest rate for the combined dollar and peso denominated debt was 6.6% for 2004 and 8.1% for 2003.

The company has certain debt agreements that limit its ability to incur additional indebtedness, pay dividends, buy back stock and take other actions. The company and International are also obligated under certain agreements with public and private lenders of NFC to maintain that subsidiary’s income before interest expense and income taxes at not less than 125% of its total expense. In addition, NFC has an $820 million contractually committed bank revolving credit facility, maturing in November 2005, which requires NFC to maintain certain financial ratios. The company’s three Mexican finance subsidiaries also have debt covenants, which require the maintenance of certain financial ratios.

The aggregate contractual annual maturities for debt for the years ended October 31 are as follows:

Millions of dollars		Manufacturing Operations			Financial Services Operations			Total
2005		$	71		$	752		$	823
2006			456			736			1,192
2007			50			34			84
2008			243			13			256
2009			245			4			249
2010 and thereafter			266			-			266
Total		$	1,331		$	1,539		$	2,870
The weighted average interest rate on total debt, including short-term, and the effect of discounts and related amortization is as follows for the years ended:
October 31, 2004			6.1	%		3.8	%		4.8	%
October 31, 2003			6.9	%		4.6	%		5.5	%

Consolidated interest payments were $129 million, $150 million and $166 million in fiscal 2004, 2003 and 2002, respectively.

NFC enters into secured borrowing agreements involving vehicles subject to finance and operating leases with retail customers. The outstanding balances are classified under financial services operations debt as secured borrowings.

55

NOTES TO FINANCIAL STATEMENTS

FOR THE THREE YEARS ENDED OCTOBER 31, 2004

9. DEBT (continued)

As part of outstanding long-term debt agreements with various lenders, the company is obligated to timely file, and/or deliver to the lender, a copy of its annual filings with the Securities and Exchange Commission (SEC). The delay in filing the company’s Form 10-K, did not result in the automatic acceleration of maturity of any series of the company’s debt. In addition, the trustees or the holders of the long-term debt of the company, excluding NFC, did not declare the company in default due to its non-compliance with the filing requirement. If a notice of default would have been brought against the company and the company was not able to cure the event of default within a specified time period, the principal amount and all accrued interest would have been due and payable. In addition, any accelerati on in the maturity of the company’s long-term debt could have led to the acceleration of the maturity of the indebtedness of the company’s other indentures, an automatic default and termination of used commitments under NFC’s revolving credit facility and default under certain other indebtedness of the company and NFC. NFC has similar annual filing obligations under its credit agreements with various lenders. NFC, after obtaining the necessary waivers from certain lenders, was not held in default under any of its obligations and did not incur other adverse actions with respect to its credit facilities as a result of its delay in filing. The company believes that the NFC defaults will be cured prior to the expiration of the related waivers through the delivery of NFC’s Annual Reports on Form 10-K and the related information.

10. OTHER LIABILITIES

Major classifications of other liabilities at October 31 are as follows:

Millions of dollars		2004			2003
Product liability and warranty		$	358		$	253
Employee incentive programs			63			6
Payroll, commissions and employee-related benefits			71			71
Postretirement benefits liability			183			294
Dealer reserves			25			22
Taxes			51			76
Sales and marketing			46			56
Long-term disability and workers’ compensation			48			52
Environmental			10			8
Interest			29			30
Restructuring and other non-recurring charges			97			157
Other			368			286
Total other liabilities			1,349			1,311
Less current portion			(965	)		(905	)
Other long-term liabilities		$	384		$	406

11. 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)

56

NOTES TO FINANCIAL STATEMENTS

FOR THE THREE YEARS ENDED OCTOBER 31, 2004

11. RESTRUCTURING AND OTHER NON-RECURRING CHARGES (continued)

Restructuring Charges (continued)

·	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 $46 million in 2003. In 2004, the company recorded a net favorable adjustment of $4 million to previously recorded charges. This adjustment was necessary to relieve excess reserves caused by employees returning to work due to increases in vehicle production and the timing of employee acceptance of the UAW window program and to record additional charges for those employees who accepted the early retirement and voluntary severance program at the Chatham facility since October 31, 2003.

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. In 2003, 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 to the previously recorded curtailment loss totaling $5 million. A $2 million adjustment in 2004 finalized the postretirement curtailment charge taken in 2003. 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. The company recorded a favorable adjustment of $7 million in 2004 due to a change in estimate on sublease income.

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 (Harco). An adjustment of $2 million was recorded in 2004 for additional costs associated with the realignment of our dealer network.

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

57

NOTES TO FINANCIAL STATEMENTS

FOR THE THREE YEARS ENDED OCTOBER 31, 2004

11. RESTRUCTURING AND OTHER NON-RECURRING CHARGES (continued)

Other Non-Recurring Charges (continued)

program. The terms of the agreement included 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. In 2004, the company recorded an adjustment of $6 million for additional amounts contractually owed to suppliers related to the V-6 diesel engine program.

Summary

Through October 31, 2004, the company recorded cumulative charges of $818 million relating to the Plans of Restructuring and other non-recurring charges. The remaining liability of $97 million is expected to be funded from existing cash balances and internally generated cash flows from operations. The total cash outlay for 2005 is expected to be $18 million with the remaining obligation of $79 million, primarily related to non-recurring charges and long-term non-cancelable lease agreements, to be settled in 2006 and beyond.

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 2002			Adjustments			Amount Incurred			Balance October 31 2003			Adjustments			Amount Incurred			Balance October 31 2004
Severance and other benefits		$	112		$	(46	)	$	(45	)	$	21		$	(4	)	$	(17	)	$	-
Curtailment loss			-			(5	)		5			-			2			(2	)		-
Lease terminations			30			6			(3	)		33			(7	)		(5	)		21
Inventory write-downs			-			9			(9	)		-			-			-			-
Other asset write-downs			-			1			(1	)		-			-			-			-
Dealer terminations and other charges			50			(8	)		(13	)		29			2			(19	)		12
Other non-recurring charges			104			11			(41	)		74			6			(16	)		64
Total		$	296		$	(32	)	$	(107	)	$	157		$	(1	)	$	(59	)	$	97

The adjustments made in 2003 were primarily to record the reversal of severance and other benefit reserves related to the decision to keep the Chatham, Ontario plant open. Amounts incurred are, primarily, cash payments. The change in the restructuring liability between 2002 and 2003 includes foreign exchange gains of $4 million. The fiscal 2004 adjustments are included in "Restructuring and other non-recurring charges" on the Statement of Income. 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 judgmen ts and estimates, actual costs have differed from estimated amounts.

12. DISCONTINUED OPERATIONS

In October 2002, the company announced its decision to discontinue the domestic truck business in Brazil (Brazil Truck) effective October 31, 2002. In connection with this discontinuance, the company recorded a loss on disposal of $46 million. The loss relates to the write-down of assets to fair value, contractual settlement costs for the termination of the dealer contracts, severance and other benefits costs, and the write-off of Brazil Truck’s cumulative translation adjustment due to the company’s substantial liquidation of its investment in Brazil Truck.

The disposal of Brazil Truck has been accounted for as discontinued operations in accordance with SFAS 144. Accordingly, the operating results of Brazil Truck have been classified as "Discontinued operations" and prior periods have been restated.

58

NOTES TO FINANCIAL STATEMENTS

FOR THE THREE YEARS ENDED OCTOBER 31, 2004

12. DISCONTINUED OPERATIONS (continued)

Net sales and loss from the discontinued operation for Brazil Truck for the years ended October 31, are as follows, in millions:

		2004			2003			2002
Net Sales		$	-		$	-		$	20
Loss from discontinued operations			-			-			(12	)
Loss on disposal			-			(4	)		(46	)
Income tax expense			-			-			(2	)
Net loss from discontinued operations		$	-		$	(4	)	$	(60	)

Assets and liabilities of Brazil Truck as of October 31, are as follows, in millions:

		2004			2003
Current assets		$	1		$	3
Current liabilities			-			2
Long-term liabilities			13			14

13. FINANCIAL INSTRUMENTS

Fair Value of Financial Instruments

The carrying amounts of financial instruments, as reported on the Statement of Financial Condition and described in various Notes to the Financial Statements, and their fair values at October 31 are as follows:

		2004						2003
Millions of dollars		Carrying Amount			Fair Value			Carrying Amount			Fair Value
Total receivables, net		$	2,437		$	2,407		$	1,823		$	1,842
Long-term investments and other assets			542			544			465			474
Total debt			2,868			2,939			2,780			2,897

Cash and cash equivalents approximate fair value. The cost and fair value of marketable securities are disclosed in Note 4.

The fair values of receivables are estimated by discounting expected cash flows at estimated current market rates. Customer receivables, wholesale notes and retail and wholesale accounts approximate fair value as a result of the short-term nature of the receivables.

The fair value of long-term investments and other assets is estimated based on quoted market prices or by discounting future cash flows.

The short-term debt and variable-rate borrowings under NFC's bank revolving credit agreement, which are repriced frequently, approximate fair value. The fair value of long-term debt is estimated based on quoted market prices, where available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar financial instruments or discounting future cash flows.

59

NOTES TO FINANCIAL STATEMENTS

FOR THE THREE YEARS ENDED OCTOBER 31, 2004

13. FINANCIAL INSTRUMENTS (continued)

Derivatives Held or Issued for Purposes Other Than Trading

The company uses derivative financial instruments as part of its overall interest rate and foreign currency risk management strategy to reduce its exposure to interest rate volatility, to potentially increase the return on invested funds and to reduce exposure to exchange rate risk related to purchases denominated in currencies other than the functional currency. In addition, the company has entered into derivative contracts which allow the company to minimize share dilution associated with convertible debt.

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, forward contracts and cross currency swaps. 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 counterparty 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 credit exposure is limited to the positive fair value of contracts at the reporting date. Notional amounts of derivative financial instruments do not represent exposure to credit loss.

At October 31, 2004, the notional amounts and fair values of the company’s derivatives are presented in the following table, in millions. The fair values of all derivatives are recorded in other assets or other liabilities on the Statement of Financial Condition.

Inception Date		Maturity Date		Derivative Type		Notional Amount		Fair Value
June 2004		June 2011		Interest rate swaps		$  250		$  9
August 2004 - July 2006		July 2006		Forward starting swaps		400		(1)
October 2000 - July 2004		April 2006 - September 2008		Interest rate swaps*		40		-
October 2000 - June 2004		November 2003 - November 2012		Interest rate caps		1,020		-
July 2004		August 2004		Cross currency swaps*		10		-
* Accounted for as non-hedging instruments

In June 2004, the company entered into fixed-for-floating interest rate swap agreements with several counter-parties for its 7.5% $250 million fixed-rate public notes. The fair value of these instruments is estimated based on quoted market prices and is subject to market risk as the instruments may become more or less valuable due to changes in market conditions or interest rates. The company 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. These transactions are accounted for as cash flow hedges and consequently, to the extent that the hedge is effective, gains and losses on these derivatives are recorded in other comprehensive income.

60

NOTES TO FINANCIAL STATEMENTS

FOR THE THREE YEARS ENDED OCTOBER 31, 2004

13. FINANCIAL INSTRUMENTS (continued)

Derivatives Held or Issued for Purposes Other Than Trading (continued)

In October 2000, NFC entered into a $500 million retail revolving facility as a method to fund retail notes and finance leases prior to the sale of receivables. Under the terms of this facility, NFC sells fixed rate retail notes or finance leases to the conduit and pays investors a floating rate of interest. As required by the rating agencies, NFC purchased an interest rate cap to protect investors against rising interest rates. To offset the economic cost of this cap, NFC sold an identical interest rate cap. These transactions are accounted for as hedging derivative instruments.

In July 2001, NFC entered into an interest rate swap agreement to fix a portion of its floating rate revolving debt. This transaction is accounted for as a cash flow hedge and, consequently, to the extent that the hedge is effective, gains and losses on this derivative are recorded in other comprehensive income. There has been no ineffectiveness related to this derivative since inception.

In November 2002, NFC entered into an interest rate swap agreement in connection with a sale of retail notes and finance lease receivables. The purpose of the swap was to convert the floating rate portion of the asset-backed securities issued into fixed rate interest to match the interest basis of the receivables pool sold to the owner trust, and to protect NFC from interest rate volatility. The notional amount of this swap is calculated as the difference between the actual pool balances and the projected pool balances. The outcome of the swap results in NFC paying a fixed rate of interest on the projected balance of the pool. To the extent that actual pool balances differ from the projected balances, NFC has retained interest rate exposure on this difference. This transaction is accounted for as a non-hedging derivative instrument.

In October 2003, NFC entered into an interest rate swap agreement in connection with a sale of retail notes and finance leases receivables. The purpose and structure of this swap agreement is similar to the swap agreement entered into in November 2002. This transaction is accounted for as a non-hedging derivative instrument.

In August through October 2004, NFC, in connection with anticipated sale of retail notes receivables, entered into forward starting swap agreements with a total notional value of $400 million. The purpose of these derivative instruments is to swap floating rate debt to a fixed rate to protect against sharp moves in interest rates between the date of the swap and the anticipated receivable sale date. These derivatives are accounted for as a non-hedging derivative instrument with changes in fair value recognized in income. These derivatives were closed on November 3, 2004.

  On July 30, 2004, NFC entered into an agreement for the fast pay / slow pay differential with respect to an interest rate swap agreement. Under the terms of the agreement, NFC will make or receive payments based on the variance between the actual net principal balance and the amortizing notional schedule and on changes in interest rates. The purpose of the fast pay / slow pay agreement is to ensure adequate cash flows to the conduit. This transaction is accounted for as a non-hedging derivative instrument.

In fiscal 2004, NFC’s forward starting swap losses were $4 million, compared with $9 million in 2003 and 2002.

As of October 31, 2004, the company’s Mexican finance subsidiaries had outstanding interest rate swaps with aggregate notional amounts of $25 million, interest rate caps with aggregate notional amounts of $20 million, and cross currency swaps with notional amounts of $10 million. These transactions are accounted for as cash flow hedges.

In addition to those instruments previously described, the company entered into two call option derivative contracts in connection with the issuance of the $190 million senior convertible notes in December 2002. The purchased call option and written call option will allow the company to minimize share dilution associated with the convertible debt. In accordance with EITF 00-19, "Accounting for Derivative Financial Instruments indexed to, and Potentially Settled in, a Company’s Own Stock," the company has recorded these instruments in permanent equity, and will not recognize subsequent changes in fair value as long as the instruments remain classified as equity. In

61

NOTES TO FINANCIAL STATEMENTS

FOR THE THREE YEARS ENDED OCTOBER 31, 2004

13. FINANCIAL INSTRUMENTS (continued)

Derivatives Held or Issued for Purposes Other Than Trading (continued)

2004, the company amended its written call option derivative contracts to raise the effective conversion price from $53.40/share to $75.00/share. This action minimizes the share dilution associated with convertible debt from the conversion price of each note up to $75.00 per share. The maturity and terms of the hedge match the maturity and certain terms of the notes. The net premiums paid for the call options were $52 million.

14. COMMITMENTS, CONTINGENCIES, RESTRICTED ASSETS, CONCENTRATIONS AND LEASES

Commitments, Contingencies and Restricted Assets

At October 31, 2004, commitments for capital expenditures in progress were approximately $60 million and contingent liabilities, primarily related to contract cancellation fees, were approximately $8 million. At October 31, 2004, $77 million of a Mexican subsidiary’s receivables were pledged as collateral for bank borrowings. At October 31, 2004, the maximum amount of dividends that were available for distribution to the company from its subsidiaries under the most restrictive covenants was $853 million.

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 3/8% Senior Notes due 2006, the $250 million 7.5% Senior Notes due 2011 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 October 31, 2004, the outstanding balance on the 9.95% Senior Notes was $13 million.

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 any of the three years in the period ended October 31, 2004.

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 October 31, 2004, in millions of dollars.

Entity		Amount of Guaranty		Outstanding Balance		Maturity dates extend to
NIC		$    393		$    80		2009
NFC		$    118		$    109		2007
NIC and NFC		$    100		$    25		2005

The company also guarantees many of the operating leases of its subsidiaries. The leases have various expiration dates that extend through June 2014. The remaining maximum obligations under these leases as of October 31, 2004, totaled approximately $606 million.

62

NOTES TO FINANCIAL STATEMENTS

FOR THE THREE YEARS ENDED OCTOBER 31, 2004

14.   COMMITMENTS, CONTINGENCIES, RESTRICTED ASSETS, CONCENTRATIONS

AND LEASES (continued)

Guarantees (continued)

The company and International also guarantee real estate operating leases of International and the subsidiaries of the company. The leases have various maturity dates extending out through 2019. As of October 31, 2004, the total remaining obligation under these leases is approximately $45 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 excess of the guaranteed lease residual value over the fair value of the residual represents the amount of the company’s and NFC’s exposure.

As of October 31, 2004, 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 October 31, 2004, there was an outstanding notional balance of $54 million related to interest rate swaps and cross currency swaps, and the fair market value of the outstanding balance was immaterial.

At October 31, 2004, the Canadian operating subsidiary was contingently liable for $407 million of retail customers’ contracts and $41 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 $84 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.

Concentrations

At October 31, 2004, the company employed approximately 6,800 hourly workers and 5,700 salaried workers in the U.S. and Canada. Approximately 82% of the hourly employees and 15% of the salaried employees are represented by unions. Of these represented employees, approximately 90% of the hourly workers and 100% of the salaried workers are represented by the United Automobile, Aerospace, and Agricultural Implement Workers of America (UAW) or the National Automobile, Aerospace, and Agricultural Implement Workers of Canada (CAW). The company’s current master contract with the UAW expires on September 30, 2007. On June 23, 2004, the company and the CAW reached an agreement on a new collective bargaining agreement which extended the original agreement to June 30, 2009.

Sales of mid-range diesel engines to Ford by the engine segment were 18% of consolidated sales and revenues in 2004, 21% in 2003 and 19% in 2002. In addition, Ford accounted for approximately 76%, 77% and 78% of our diesel engine unit volume in fiscal 2004, fiscal 2003 and fiscal 2002, respectively. The company has an agreement with Ford to be its exclusive supplier of V-8 diesel engines through 2012 for all of Ford’s diesel- powered super-duty trucks and vans over 8,500 lbs gross vehicle weight in North America.

Leases

The company has long-term non-cancelable leases for use of various equipment and facilities. Lease terms are generally for five to 25 years and, in many cases, provide for renewal options. The company is generally obligated for the cost of property taxes, insurance and maintenance. The company leases office buildings, distribution centers, furniture and equipment, machinery and equipment and computer equipment.

63

NOTES TO FINANCIAL STATEMENTS

FOR THE THREE YEARS ENDED OCTOBER 31, 2004

14.  COMMITMENTS, CONTINGENCIES, RESTRICTED ASSETS, CONCENTRATIONS

AND LEASES (continued)

Leases (continued)

The majority of the company’s lease payments are for operating leases. At October 31, 2004, future minimum lease payments under operating leases having lease terms in excess of one year, including the net lease payments accrued for in the restructuring and other non-recurring charges, are: 2005 - $121 million, 2006 - $80 million, 2007 - $80 million, 2008 - $127 million, 2009 - $242 million and 2010 and thereafter - $29 million. Total operating lease expense was $181 million in 2004, $137 million in 2003 and $76 million in 2002. Income received from sublease rentals was $3 million in 2004, $1 million in 2003 and $5 million in 2002.

The company’s remaining lease payments are for capital leases. These leases are generally for equipment used in the company’s manufacturing operations. At October 31, 2004, future minimum lease payments under capital leases having lease terms in excess of one year are: 2005 - $20 million, 2006 - $20 million, 2007 - $20 million, 2008 - $20 million, 2009 - $20 million and 2010 and thereafter - $94 million.

The company has obligations under its various operating leases which require the company to timely file, and/or deliver to the lessor a copy of its annual filings with the SEC. Failure to comply with this requirement, would give the lessor the right to declare a default under the lease and take other adverse actions. The company did not receive a notice of default or incur other adverse actions with respect to the operating leases as a result of the company’s delay in filing its Form 10-K.

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 year ended October 31, 2004, were as follows:

Millions of dollars
Balance, beginning of period		$	173
Change in liability for warranties issued during the period			238
Change in liability for preexisting warranties			73
Payments made			(198	)
Balance, end of period		$	286

15. 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 affect on the business or the financial condition 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

64

NOTES TO FINANCIAL STATEMENTS

FOR THE THREE YEARS ENDED OCTOBER 31, 2004

15. LEGAL PROCEEDINGS AND ENVIRONMENTAL MATTERS (continued)

 

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 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 shar e 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.

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 clai ms 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 c laims.

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 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

65

NOTES TO FINANCIAL STATEMENTS

FOR THE THREE YEARS ENDED OCTOBER 31, 2004

15. LEGAL PROCEEDINGS AND ENVIRONMENTAL MATTERS (continued)

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. Given the preliminary nature of this matter, the company is not able to predict what, if any, impact this inquiry will have on the company.

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. The company intends to fully cooperate with the SEC on the informal inquiry. Given the preliminary nature of the matter, the company is not able to predict what impact, if any, this inquiry will have on the company.

16. SEGMENT DATA

Navistar has three reportable segments: truck, engine and financial services. The company’s reportable segments are organized according to the products and the markets they each serve.

The company’s truck segment manufactures and distributes a full line of diesel-powered trucks and school buses in the common carrier, private carrier, government/service, leasing, construction, energy/petroleum and student transportation markets. The truck segment also provides customers with proprietary products needed to support the International® truck and IC™’bus lines, together with a wide selection of standard truck and trailer aftermarket parts.   

The company’s engine segment designs and manufactures diesel engines for use in the company’s Class 6 and 7 medium trucks and school buses and selected Class 8 heavy truck models, and for sale to OEMs primarily in the U.S., Mexico and Brazil. This segment also sells engines for industrial, agricultural and marine applications. In addition, the engine segment provides customers with proprietary products needed to support the International® engine lines, together with a wide selection of standard engine and aftermarket parts.

The company’s financial services segment consists of NFC and the company’s foreign finance subsidiaries. NFC’s primary business is the retail, wholesale and lease financing of products sold by the truck segment and its dealers within the U.S. as well as the company’s wholesale accounts and selected retail accounts receivable. The foreign finance subsidiaries’ primary business is to provide wholesale, retail and lease financing to the Mexican operations’ dealers and retail customers.

The company evaluates the performance of its operating segments based on operating profits, which exclude certain corporate items, including the restructuring and non-recurring charges, and retiree pension and medical expense. Additionally, the operating profits of the company’s truck and engine segments exclude most interest revenue and expense items. Intersegment sales are transferred at prices established by an agreement between the buying and selling locations.

66

NOTES TO FINANCIAL STATEMENTS

FOR THE THREE YEARS ENDED OCTOBER 31, 2004

16. SEGMENT DATA (continued)

Reportable operating segment data follows:

Millions of dollars		Truck			Engine			Financial Services			Total
		For the year ended October 31, 2004
External revenues		$	7,256		$	2,212		$	249		$	9,717
Intersegment revenues			-			617			40			657
Total revenues		$	7,256		$	2,829		$	289		$	10,374
Interest expense		$	-		$	-		$	71		$	71
Depreciation and amortization expense			123			67			46			236
Segment profit (a)			336			108			116			560
		As of October 31, 2004
Segment assets		$	1,714		$	1,191		$	2,247		$	5,152
Capital expenditures (proceeds) (b)			128			94			(3	)		219
		For the year ended October 31, 2003
External revenues		$	5,312		$	1,970		$	292		$	7,574
Intersegment revenues			-			499			33			532
Total revenues		$	5,312		$	2,469		$	325		$	8,106
Interest expense		$	-		$	-		$	77		$	77
Depreciation and amortization expense			80			54			53			187
Segment profit (loss) (a)			(48	)		85			123			160
		As of October 31, 2003
Segment assets		$	1,663		$	1,041		$	2,273		$	4,977
Capital expenditures (proceeds) (b)			54			149			(19	)		184
		For the year ended October 31, 2002
External revenues		$	4,936		$	1,789		$	285		$	7,010
Intersegment revenues			-			459			35			494
Total revenues		$	4,936		$	2,248		$	320		$	7,504
Interest expense		$	-		$	-		$	95		$	95
Depreciation and amortization expense			101			49			64			214
Segment profit (loss) (a)			(303	)		200			89			(14	)
		As of October 31, 2002
Segment assets		$	1,775		$	876		$	2,469		$	5,120
Capital expenditures (b)			86			156			26			268

(a) Before the impact of the restructuring and other non-recurring charges.

(b) Capital expenditures include the net increase (decrease) in property and equipment leased to others.

67

NOTES TO FINANCIAL STATEMENTS

FOR THE THREE YEARS ENDED OCTOBER 31, 2004

16.SEGMENT DATA (continued)

Reconciliation to the consolidated financial statements as of and for the years ended October 31 was as follows:

Millions of dollars		2004			2003			2002
Segment sales and revenues		$	10,374		$	8,106		$	7,504
Other income			7			11			11
Intercompany			(657	)		(532	)		(494	)
Consolidated sales and revenues		$	9,724		$	7,585		$	7,021
Segment profit (loss)		$	560		$	160		$	(14	)
Restructuring and other non-recurring charges			1			32			(544	)
Corporate items			(196	)		(184	)		(161	)
Manufacturing net interest expense			(54	)		(57	)		(53	)
Consolidated pre-tax income (loss) from continuing operations		$	311		$	(49	)	$	(772	)
Segment interest expense		$	71		$	77		$	95
Manufacturing expense and eliminations			56			65			64
Consolidated interest expense		$	127		$	142		$	159
Segment depreciation and amortization expense		$	236		$	187		$	214
Corporate expense			20			18			17
Consolidated depreciation and amortization expense		$	256		$	205		$	231
Segment assets		$	5,152		$	4,977		$	5,120
Cash and marketable securities			675			378			434
Deferred taxes			1,446			1,482			1,529
Corporate intangible pension assets			(4	)		9			10
Other corporate and eliminations			323			83			26
Consolidated assets		$	7,592		$	6,929		$	7,119
Segment capital expenditures (a)		$	219		$	184		$	268
Corporate capital expenditures			6			6			5
Consolidated capital expenditures		$	225		$	190		$	273

(a)    Capital expenditures include the net increase (decrease) in property and equipment leased to others.

Information concerning principal geographic areas for the years ended October 31 was as follows:

Millions of dollars		2004			2003			2002
Sales and Revenues
United States		$	8,388		$	6,326		$	5,795
Foreign countries			1,336			1,259			1,226
Property and equipment
United States		$	1,297		$	1,301		$	1,295
Foreign countries			147			138			258

68

NOTES TO FINANCIAL STATEMENTS

FOR THE THREE YEARS ENDED OCTOBER 31, 2004

 

17. PREFERRED AND PREFERENCE STOCKS

The UAW holds the Nonconvertible Junior Preference Stock Series B and is currently entitled to elect one member of the company's board of directors. At October 31, 2004, there was one share of Series B Preference stock authorized and outstanding. The value of the preference share is minimal.

At October 31, 2004, there were 153,000 shares of Series D Convertible Junior Preference Stock (Series D) issued and outstanding and 3 million authorized with an optional redemption price and liquidation preference of $25 per share plus accrued dividends. The Series D converts into common stock (subject to adjustment in certain circumstances) at .3125 per share. The Series D ranks senior to common stock as to dividends and liquidation and receives dividends at a rate of 120% of the cash dividends on common stock as declared on an as-converted basis.

Under the General Corporation Law of the State of Delaware (DGCL), dividends may only be paid out of surplus or out of net profits for the fiscal year in which the dividend is declared or the preceding fiscal year, and no dividend may be paid on common stock at any time during which the capital of outstanding preferred stock or preference stock exceeds the net assets of the company. At October 31, 2004, the company had a surplus of $524 million as defined under DGCL.

18. COMMON SHAREOWNERS’ EQUITY

Changes in certain shareowners’ equity accounts are as follows:

Millions of dollars		2004			2003			2002
Common Stock and Additional Paid in Capital
Beginning of year		$	2,118		$	2,146		$	2,139
Tax benefit related to exercise of stock options			7			2			7
Net premium for call options			(27	)		(25	)		-
Amounts due from officers and directors			2			(5	)		-
Other			(4	)		-			-
End of year		$	2,096		$	2,118		$	2,146
Retained Earnings (Deficit)
Beginning of year		$	(833	)	$	(731	)	$	(190	)
Net income (loss)			247			(21	)		(538	)
Sale of treasury stock to pension funds			-			(73	)		-
Other			(18	)		(8	)		(3	)
End of year		$	(604	)	$	(833	)	$	(731	)
Common Stock Held in Treasury
Beginning of year		$	(219	)	$	(487	)	$	(507	)
Issuance of common stock and other			63			271			34
Treasury stock adjustment			(20	)		(3	)		(14	)
End of year		$	(176	)	$	(219	)	$	(487	)

Common Stock

The company has authorized 110 million shares of common stock with a par value of $0.10 per share. There were 70.0 million and 68.8 million shares of common stock outstanding, net of common stock held in treasury, at October 31, 2004 and 2003, respectively.

69

NOTES TO FINANCIAL STATEMENTS

FOR THE THREE YEARS ENDED OCTOBER 31, 2004

18. COMMON SHAREOWNERS’ EQUITY (continued)

Common Stock (continued)

Loans to officers and directors are recorded as a reduction of shareowners’ equity. These loans accrue interest at the applicable federal rate (as determined by Section 1274(d) of the Internal Revenue Code) on the purchase date for loans of stated maturity, compounded annually, are unsecured obligations and have a nine-year term. Principal and interest is due at maturity and the loan may be prepaid at any time at the participant’s option. Loans to officers and directors, which were made primarily to finance the purchase of company shares, totaled $5 million at October 31, 2003 and $3 million at October 31, 2004. Effective July 31, 2002, the company no longer offeres such loans.

Common stock held in treasury totaled 15,210,154 shares at October 31, 2002, 6,841,059 shares at October 31, 2003 and 5,495,580 shares at October 31, 2004. In November 2002, the company completed the sale of a total of 7,755,030 shares of its common stock held in treasury, par value $0.10 per share, at a price of $22.566 per share, for an aggregate purchase price of $175 million to three employee benefit plan trusts of International. The securities were offered and sold in reliance upon the exemption from securities registration afforded by Section 4(2) of the Securities Act of 1933 and Rule 506 under Regulation D. The proceeds from the sale of the stock were used primarily to fund the company’s retirement plans in 2 003. In January 2003, the company filed a registration statement for the resale of the common stock by the employee benefit plan trusts. The remainder of the changes in treasury stock are primarily the result of the issuance of stock upon the exercise of options by employees.

Accumulated Other Comprehensive Loss

The components of accumulated other comprehensive income (loss) as of October 31 are as follows, in millions:

		Minimum Pension Liability Adjustments			Foreign Currency Translation Adjustments and Other			Accumulated Other Comprehensive Loss
2004		$	(737	)	$	(52	)	$	(789	)
2003			(737	)		(41	)		(778	)
2002			(681	)		(16	)		(697	)

The minimum pension liability adjustment is recorded on the Statement of Financial Condition net of deferred income taxes of $454 million and $445 million at October 31, 2004 and 2003, respectively.

In the Statement of Comprehensive Income, the tax effects of foreign currency translation and other adjustments were not material for each of the years in the three year period ended October 31, 2004.

70

NOTES TO FINANCIAL STATEMENTS

FOR THE THREE YEARS ENDED OCTOBER 31, 2004

19. EARNINGS PER SHARE

Earnings (loss) per share was computed as follows:

Millions of dollars, except share and per share data		2004			2003			2002
Income (loss) from continuing operations		$	247		$	(17	)	$	(478	)
Income (loss) from discontinued operations			-			(4	)		(60	)
Net income (loss)		$	247		$	(21	)	$	(538	)
Average shares outstanding (millions)
Basic			69.7			68.0			60.3
Dilutive effect of options outstanding and other dilutive securities			10.4			-			-
Diluted			80.1			68.0			60.3
Basic earnings (loss) per share
Continuing operations		$	3.54		$	(0.25	)	$	(7.92	)
Discontinued operations			-			(0.06	)		(1.00	)
Net income (loss)		$	3.54		$	(0.31	)	$	(8.92	)
Diluted earnings (loss) per share
Continuing operations		$	3.20		$	(0.25	)	$	(7.92	)
Discontinued operations			-			(0.06	)		(1.00	)
Net income (loss)		$	3.20		$	(0.31	)	$	(8.92	)

The computation of diluted shares outstanding for the years ended October 31, 2003 and 2002, excludes incremental shares of 9.1 million and 3.1 million, related to employee stock options, convertible debt and other securities. These shares are excluded due to their anti-dilutive effect as a result of the company’s losses for the years ended October 31, 2003 and 2002.

20. STOCK COMPENSATION PLANS

The company has stock-based compensation plans, approved by the Committee on Compensation and Governance of the board of directors, which provide for granting of stock options to employees for purchase of common stock at the fair market value of the stock on the date of grant. The grants generally have a 10-year contractual life.

2004 Performance Incentive Plan. The company’s 2004 Performance Incentive Plan (2004 Plan) was approved by the board of directors and subsequently by the shareowners of the company on February 17, 2004. The 2004 Plan replaces, on a prospective basis, the company’s 1994 Performance Incentive Plan and 1998 Supplemental Stock Plan, both of which expired December 16, 2003, and the company’s 1998 Non-Employee Director Stock Option Plan (the "Prior Plans"). No new grants are being made from the Prior Plans and any awards previously granted under the Prior Plans continue to vest and/or are exercisable in accordance with their original terms and conditions. In addition, after February 17, 2004 restoration st ock options are granted under the 2004 Plan. Prior to February 17, 2004, restoration stock options were granted under the company’s 1998 Supplemental Stock Plan (a non-shareowner approved plan), as supplemented by the Restoration Stock Option Program. For more information on the Restoration Stock Option Program see the description of the program contained under the 1998 Supplemental Stock Plan below. Stock options awarded under the 2004 Plan generally have a term of not more than 10 years and become exercisable one-third on the first anniversary of grant, one-third on the second anniversary and one-third on the third anniversary. Awards of restricted stock granted under the 2004 Plan, as well as other award grants, are established by the board of directors or committee thereof at the time of issuance. A total of 3,250,000 sh ares of

71

NOTES TO FINANCIAL STATEMENTS

FOR THE THREE YEARS ENDED OCTOBER 31, 2004

20. STOCK COMPENSATION PLANS (continued)

common stock were reserved for awards under the 2004 Plan. Shares subject to awards under the 2004 Plan, or any other Prior Plans after February 17, 2004, that are cancelled, expired, forfeited, settled in cash, tendered to satisfy the purchase price of an award, withheld to satisfy tax obligations or otherwise terminated without a delivery of shares to the participant again become available for awards. As of October 31, 2004, 13,037 awards remain outstanding for shares of common stock reserved for issuance under the 2004 Plan.

1994 Performance Incentive Plan. The company’s 1994 Performance Incentive Plan (1994 Plan) was approved by the board of directors and subsequently by the shareowners of the company on March 16, 1994. For each fiscal year of the company during the term of the 1994 Plan, which expired on December 16, 2003, there was reserved for issuance under the 1994 Plan one percent of the outstanding shares of common stock of the company as determined by the number of shares outstanding as of the end of the immediately preceding fiscal year. Shares not issued in a year carried over to the subsequent year. Forfeited and lapsed shares could be reissued. As of October 31, 2004, awards have been made in respect of 2,720,374 shar es of common stock reserved for issuance under the 1994 Plan.

The Non-Employee Directors Restricted Stock Plan. The plan requires that one-fourth of the annual retainer to non-employee directors be paid in the form of restricted shares of the company’s common stock. This plan expires on December 31, 2005.

The following plans were not approved by the shareowners of the company: The 1998 Interim Stock Plan (the Interim Plan); The 1998 Supplemental Stock Plan as supplemented by the Restoration Stock Option Program (the Supplemental Plan); The Executive Stock Ownership Program (the Ownership Program); The 1998 Non-Employee Director Stock Option Plan (the Director Stock Option Plan) and The Non-Employee Directors Deferred Fee Plan (the Deferred Fee Plan). Below is a brief description of the material features of each plan, but in each case the information is qualified in its entirety by the text of such plans.

The Interim Plan. The Interim Plan was approved by the board of directors on April 14, 1998. A total of 500,000 shares of common stock were reserved for awards under the Interim Plan. The Interim Plan is separate from and intended to supplement the 1994 Performance Incentive Plan (the 1994 Plan), which was approved by the shareowners of the company. As of October 31, 2004, 15,520 awards remain outstanding for shares of common stock reserved for issuance under the Interim Plan. The Interim Plan was terminated on April 15, 1999.

The Supplemental Plan. The Supplemental Plan was approved by the board of directors on December 15, 1998. As of October 31, 2004, 3,195,888 awards remain outstanding for shares of common stock reserved for issuance under the Supplemental Plan. The Supplemental Plan expired December 16, 2003. The Supplemental Plan is separate from and intended to supplement the 1994 Plan. Stock options awarded under the Supplemental Plan generally have a term of not more than 10 years and become exercisable one-third on the first anniversary of grant, one-third on the second anniversary and one-third on the third anniversary. Awards of restricted stock granted under the Supplemental Plan are established by the board of directors or committee thereof at the time of issuance. In addition, prior to February 17, 2004, the Restoration Stock Option Program supplemented the Supplemental Plan. Under the program generally, one may exercise vested options by presenting shares that have been held for at least six months and have a total market value equal to the option price times the number of options. Restoration options are then granted at the market price in an amount equal to the number of mature shares that were used to exercise the original option, plus the number of shares that are withheld for the required tax liability.

The Ownership Program. On June 16, 1997, the board of directors approved the terms of the Ownership Program as amended from time to time by the board of directors. In general, the Ownership Program requires all officers and senior managers of the company to acquire, by direct purchase or through salary or annual bonus reduction, an ownership interest in the company by acquiring a designated amount of company common stock at specified timelines. Participants are required to hold such stock for the entire period in which they are employed by the company. Premium share units may also be awarded to participants who complete their ownership requirement ahead of the specified time period.

72

NOTES TO FINANCIAL STATEMENTS

FOR THE THREE YEARS ENDED OCTOBER 31, 2004

20. STOCK COMPENSATION PLANS (continued)

The Director Stock Option Plan. The Director Stock Option Plan was approved by the board of directors on December 16, 1997, amended on December 11, 2001 and is the successor plan to the 1988 Non-Employee Director Stock Option Plan, which expired on December 17, 1997. The Director Stock Option Plan provided for an annual grant to each non-employee director of the company an option to purchase 4,000 shares of common stock. The option price in each case will be 100% of the fair market value of the common stock on the business day following the day of grant. As of October 31, 2004, 119,000 awards remain outstanding for shares of common stock reserved for issuance under the Director Stock Option Plan. Stock options awar ded under the Director Stock Option Plan generally become exercisable in whole or in part after the commencement of the second year of the term of the option, which term is 10 years. The optionee is also required to remain in the service of the company for at least one year from the date of grant. The Director Stock Option Plan was terminated on February 17, 2004. All future grants to non-employee directors will be issued under the 2004 Plan.

The Deferred Fee Plan. Under the Deferred Fee Plan, directors may elect to receive all or a portion of their retainer fees and meeting fees in cash or restricted stock, or they may defer payment of those fees in cash (with interest) or in phantom stock units. Deferrals in the deferred stock account are valued as if each deferral was vested in company common stock as of the deferral date.

The weighted-average fair values at date of grant for options granted during 2004, 2003, and 2002 were $12.60, $9.02, and $14.03, respectively, and were estimated using the Black-Scholes option-pricing model with the following assumptions:

		2004			2003			2002
Risk-free interest rate			2.5	%		2.9	%		4.1	%
Dividend yield			0	%		0	%		0	%
Expected volatility			39.1	%		39.6	%		39.1	%
Expected life in years			3.5			4.5			4.0

The following summarizes stock option activity for the years ended October 31:

		2004						2003						2002
Shares in thousands		Shares			Weighted Average Exercise Price			Shares			Weighted Average Exercise Price			Shares			Weighted Average Exercise Price
Options outstanding at beginning of year			6,122		$	32.03			5,253		$	32.89			4,832		$	27.98
Granted			1,208			42.98			2,080			27.53			1,814			38.82
Exercised			(1,165	)		28.72			(801	)		24.58			(1,325	)		22.38
Canceled			(252	)		37.39			(410	)		34.65			(68	)		47.27
Options outstanding at end of year			5,913		$	34.69			6,122		$	32.03			5,253		$	32.89
Options exercisable at end of year			3,292		$	34.26			2,945		$	34.37			2,605		$	32.29
Options available for grant at end of year			3,352						845						1,621

73

NOTES TO FINANCIAL STATEMENTS

FOR THE THREE YEARS ENDED OCTOBER 31, 2004

20. STOCK COMPENSATION PLANS (continued)

The following table summarizes information about stock options outstanding and exercisable at October 31, 2004.

Options Outstanding											Options Exercisable
Range of Exercise Prices		Number Outstanding (in thousands)			Weighted Average Remaining Contractual Life			Weighted Average Exercise Price			Number Exercisable (in thousands)			Weighted Average Exercise Price
$ 9.56  - $ 13.75			39			2.3		$	11.03			39		$	11.03
17.41  -  26.66			2,134			8.1			25.19			1,041			24.07
27.95  -  37.72			139			6.4			33.77			136			33.79
37.93  -  51.75			3,601			8.4			40.62			2,076			39.83

21.  CONDENSED CONSOLIDATING GUARANTOR AND NON-GUARANTOR

FINANCIAL INFORMATION

The following tables set forth the condensed consolidating Statements of Financial Condition as of October 31, 2004 and 2003, and the Statements of Income and Cash Flow for each of the three years in the period ended October 31, 2004. The following information is included as a result of International’s guarantees, exclusive of its subsidiaries, of NIC’s indebtedness under its 9 3/8% Senior Notes due 2006, 2.5% Senior Convertible Notes due 2007 and 7.5% Senior Notes due 2011. 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 no t 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.

74

NOTES TO FINANCIAL STATEMENTS FOR THE THREE YEARS ENDED OCTOBER 31, 2004
21. Condensed Consolidating Guarantor and Non-Guarantor Financial Information (continued)
		NIC			International			Non-Guarantor Companies and Eliminations			Consolidated
CONDENSED CONSOLIDATING STATEMENT OF INCOME FOR THE YEAR ENDED OCTOBER 31, 2004
Sales and revenues		$	2		$	7,513		$	2,209		$	9,724
Cost of products and services sold			(28	)		6,866			1,321			8,159
Restructuring and other non-recurring charges			-			(4	)		3			(1	)
All other operating expenses			(19	)		980			294			1,255
Total costs and expenses			(47	)		7,842			1,618			9,413
Equity in income (loss) of non-consolidated subsidiaries			262			430			(692	)		-
Income (loss) from continuing operations before income taxes			311			101			(101	)		311
Income tax expense (benefit)			64			145			(145	)		64
Income (loss) from continuing operations			247			(44	)		44			247
Loss from discontinued operations, net of taxes			-			-			-			-
Net income (loss)		$	247		$	(44	)	$	44		$	247
CONDENSED CONSOLIDATING STATEMENT OF FINANCIAL CONDITION AS OF OCTOBER 31, 2004
Assets
Cash and marketable securities		$	577		$	22		$	261		$	860
Receivables, net			-			211			2,226			2,437
Inventories			-			395			395			790
Property and equipment, net			-			783			661			1,444
Investment in affiliates			(2,677	)		1,084			1,593			-
Deferred tax asset and other assets			1,435			204			422			2,061
Total assets		$	(665	)	$	2,699		$	5,558		$	7,592
Liabilities and shareowners’ equity
Debt		$	1,058		$	15		$	1,795		$	2,868
Postretirement benefits liability			-			1,332			233			1,565
Amounts due to (from) affiliates			(2,378	)		2,937			(559	)		-
Other liabilities			124			1,605			899			2,628
Total liabilities			(1,196	)		5,889			2,368			7,061
Shareowners’ equity (deficit)			531			(3,190	)		3,190			531
Total liabilities and shareowners’ equity		$	(665	)	$	2,699		$	5,558		$	7,592
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOW FOR THE YEAR ENDED OCTOBER 31, 2004
Cash provided by operations		$	183		$	40		$	(50	)	$	173
Cash flow from investment programs
Purchases, net of collections, of finance receivables			-			-			(198	)		(198	)
Net increase in marketable securities			(148	)		-			491			343
Capital expenditures			-			(107	)		(123	)		(230	)
Other investing activities			(23	)		69			(74	)		(28	)
Cash provided by (used in) investment programs			(171	)		(38	)		96			(113	)
Cash flow from financing activities
Net borrowings (repayments) of debt			218			(2	)		(139	)		77
Other financing activities			(41	)		1			41			1
Cash provided by (used in) financing activities			177			(1	)		(98	)		78
Cash and cash equivalents
Increase (decrease) during the year			189			1			(52	)		138
At beginning of the year			218			21			228			467
Cash and cash equivalents at end of the year		$	407		$	22		$	176		$	605

75

NOTES TO FINANCIAL STATEMENTS FOR THE THREE YEARS ENDED OCTOBER 31, 2004
21. Condensed Consolidating Guarantor and Non-Guarantor Financial Information (continued)
		NIC			International			Non-Guarantor Companies and Eliminations			Consolidated
CONDENSED CONSOLIDATING STATEMENT OF INCOME FOR THE YEAR ENDED OCTOBER 31, 2003
Sales and revenues		$	2		$	5,671		$	1,912		$	7,585
Cost of products and services sold			56			5,175			1,130			6,361
Restructuring and other non-recurring charges			-			15			(47	)		(32	)
All other operating expenses			(21	)		1,018			308			1,305
Total costs and expenses			35			6,208			1,391			7,634
Equity in income (loss) of non-consolidated subsidiaries			(20	)		446			(426	)		-
Income (loss) from continuing operations before income taxes			(53	)		(91	)		95			(49	)
Income tax expense (benefit)			(32	)		106			(106	)		(32	)
Income (loss) from continuing operations			(21	)		(197	)		201			(17	)
Loss from discontinued operations, net of taxes			-			-			(4	)		(4	)
Net income (loss)		$	(21	)	$	(197	)	$	197		$	(21	)
CONDENSED CONSOLIDATING STATEMENT OF FINANCIAL CONDITION AS OF OCTOBER 31, 2003
Assets
Cash and marketable securities		$	240		$	21		$	801		$	1,062
Receivables, net			-			173			1,650			1,823
Inventories			-			311			281			592
Property and equipment, net			-			821			618			1,439
Investment in affiliates			(2,777	)		862			1,915			-
Deferred tax asset and other assets			1,487			156			370			2,013
Total assets		$	(1,050	)	$	2,344		$	5,635		$	6,929
Liabilities and shareowners’ equity
Debt		$	840		$	17		$	1,923		$	2,780
Postretirement benefits liability			-			1,535			192			1,727
Amounts due to (from) affiliates			(2,358	)		2,424			(66	)		-
Other liabilities			176			1,488			466			2,130
Total liabilities			(1,342	)		5,464			2,515			6,637
Shareowners’ equity (deficit)			292			(3,120	)		3,120			292
Total liabilities and shareowners’ equity		$	(1,050	)	$	2,344		$	5,635		$	6,929
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOW FOR THE YEAR ENDED OCTOBER 31, 2003
Cash provided by (used in) operations		$	(332	)	$	160		$	120		$	(52	)
Cash flow from investment programs
Purchases, net of collections, of finance receivables			-			-			568			568
Net increase in marketable securities			(22	)		-			(457	)		(479	)
Capital expenditures			-			(167	)		(43	)		(210	)
Other investing activities			(54	)		24			4			(26	)
Cash provided by (used in) investment programs			(76	)		(143	)		72			(147	)
Cash flow from financing activities
Net borrowings (repayments) of debt			53			(4	)		(177	)		(128	)
Other financing activities			158			-			1			159
Cash provided by (used in) financing activities			211			(4	)		(176	)		31
Cash and cash equivalents
Increase (decrease) during the year			(197	)		13			16			(168	)
At beginning of the year			415			8			212			635
Cash and cash equivalents at end of the year		$	218		$	21		$	228		$	467

76

NOTES TO FINANCIAL STATEMENTS FOR THE THREE YEARS ENDED OCTOBER 31, 2004
21. Condensed Consolidating Guarantor and Non-Guarantor Financial Information (continued)
		NIC			International			Non-Guarantor Companies and Eliminations			Consolidated
CONDENSED CONSOLIDATING STATEMENT OF INCOME FOR YEAR ENDED OCTOBER 31, 2002
Sales and revenues		$	6		$	5,371		$	1,644		$	7,021
Cost of products and services sold			(35	)		4,903			1,081			5,949
Restructuring and other non-recurring charges			-			324			220			544
All other operating expenses			(24	)		966			358			1,300
Total costs and expenses			(59	)		6,193			1,659			7,793
Equity in income (loss) of non-consolidated subsidiaries			(897	)		(118	)		1,015			-
Income (loss) from continuing operations before income taxes			(832	)		(940	)		1,000			(772	)
Income tax expense (benefit)			(294	)		14			(14	)		(294	)
Income (loss) from continuing operations			(538	)		(954	)		1,014			(478	)
Loss from discontinued operations			-			-			(60	)		(60	)
Net income (loss)		$	(538	)	$	(954	)	$	954		$	(538	)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOW AS OF OCTOBER 31, 2002
Cash provided by (used in) operations		$	(180	)	$	(14	)	$	(17	)	$	(211	)
Cash flow from investment programs
Purchases, net of collections, of finance receivables			-			-			(114	)		(114	)
Net (increase) decrease in marketable securities			40			-			107			147
Capital expenditures			-			(191	)		(61	)		(252	)
Other investing activities			(160	)		207			132			179
Cash provided by (used in) investment programs			(120	)		16			64			(40	)
Cash flow from financing activities
Net borrowings (repayments) of debt			(34	)		-			80			46
Purchase of common stock and other			91			-			(73	)		18
Cash provided by (used in) financing activities			57			-			7			64
Cash and cash equivalents
Increase (decrease) during the year			(243	)	$	2			54			(187	)
At the beginning of the year			658			6			158			822
Cash and cash equivalents at the end of the year		$	415		$	8		$	212		$	635

77

NOTES TO FINANCIAL STATEMENTS

FOR THE THREE YEARS ENDED OCTOBER 31, 2004

22. SELECTED QUARTERLY FINANCIAL DATA (Unaudited)

		1st Quarter												2nd Quarter
		2004 [1]						2003						2004 [1]						2003
Millions of dollars, except per share data		As Previously Reported			As Restated			As Previously Reported			As Restated			As Previously Reported			As Restated			As Previously Reported			As Restated
Sales and revenues		$	1,859		$	1,943		$	1,578		$	1,661		$	2,331		$	2,354		$	1,864		$	1,914
Manufacturing gross margin			12.0	%		12.2	%		5.3	%		5.4	%		12.9	%		13.1	%		12.9	%		13.2	%
Income (loss) from continuing     operations		$	(18	)	$	(15	)	$	(98	)	$	(58	)	$	50		$	54		$	(12	)	$	(4	)
Loss from discontinued operations			-			-			(1	)		(1	)		-			-			(2	)		(2	)
Net income (loss)		$	(18	)	$	(15	)	$	(99	)	$	(59	)	$	50		$	54		$	(14	)	$	(6	)
Basic earnings (loss) per share:
Continuing operations		$	(0.27	)	$	(0.22	)	$	(1.47	)	$	(0.86	)	$	0.72		$	0.77		$	(0.18	)	$	(0.06	)
Discontinued operations			-			-			(0.02	)		(0.02	)		-			-			(0.03	)		(0.03	)
Net income (loss)		$	(0.27	)	$	(0.22	)	$	(1.49	)	$	(0.88	)	$	0. 72		$	0.77		$	(0.21	)	$	(0.09	)
Diluted earnings (loss) per share:
Continuing operations		$	(0.27	)	$	(0.22	)	$	(1.47	)	$	(0.86	)	$	0.65		$	0.70		$	(0.18	)	$	(0.06	)
Discontinued operations			-			-			(0.02	)		(0.02	)		-			-			(0.03	)		(0.03	)
Net income (loss)		$	(0.27	)	$	(0.22	)	$	(1.49	)	$	(0.88	)	$	0.65		$	0.70		$	(0.21	)	$	(0.09	)
Market price range-common stock
High		$	52.95		$	52.95		$	31.50		$	31.50		$	49.95		$	49.95		$	29.20		$	29.20
Low		$	39.64		$	39.64		$	22.11		$	22.11		$	42.72		$	42.72		$	20.52		$	20.52

		3rd Quarter												4th Quarter
		2004						2003						2004			2003
Millions of dollars, except per share data		As Previously Reported			As Restated			As Previously Reported			As Restated			As Reported			As Previously Reported			As Restated
Sales and revenues		$	2,360		$	2,348		$	1,894		$	1,921		$	3,079		$	2,004		$	2,089
Manufacturing gross margin			14.3	%		14.7	%		13.5	%		13.8	%		14.7	%		15.3	%		16.3	%
Income (loss) from continuing     operations		$	56		$	49		$	19		$	9		$	159		$	77		$	36
Loss from discontinued operations			-			-			(1	)		(1	)		-			-			-
Net income (loss)		$	56		$	49		$	18		$	8		$	159		$	77		$	36
Basic earnings (loss) per share:
Continuing operations		$	0.80		$	0.70		$	0.27		$	0.12		$	2.27		$	1.12		$	0.53
Discontinued operations			-			-			(0.01	)		(0.01	)		-			-			-
Net income (loss)		$	0.80		$	0.70		$	0.26		$	0.11		$	2.27		$	1.12		$	0.53
Diluted earnings (loss) per share:
Continuing operations		$	0.73		$	0.64		$	0.26		$	0.12		$	2.02		$	1.00		$	0.49
Discontinued operations			-			-			(0.01	)		(0.01	)		-			-			-
Net income (loss)		$	0.73		$	0.64		$	0.25		$	0.11		$	2.02		$	1.00		$	0.49
Market price range-common stock
High		$	46.74		$	46.74		$	39.84		$	39.84		$	38.66		$	45.11		$	45.11
Low		$	33.25		$	33.25		$	25.00		$	25.00		$	32.72		$	35.89		$	35.89

[1] In addition to the adjustments in Note 23, first and second quarter results for 2004 were restated to reflect the retroactive impact of adopting FSP 106-2, regarding accounting for the impact of the Medicare Prescription Drug, Improvement and Modernization Act of 2003, in the third quarter of fiscal 2004.

78

NOTES TO FINANCIAL STATEMENTS

FOR THE THREE YEARS ENDED OCTOBER 31, 2004

23. 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. The following sections describe the restatement matters in more detail.

NFC Securitization of Assets

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 for (i) the accounting for the securitization of its retail notes and finance lease receivables and its retained interests in such securitizations, (ii) deferred taxes related to retail note and finance lease securitization transactions and secured borrowings to fund operating leases and (iii) an agreement to repurchase equipment.

The restatement recognizes income from interest-only strips on an effective yield basis and incorporates anticipated credit losses into the interest-only strip. The retained interest assets are recorded at fair value where the estimates of future cash flows take into effect current business and market conditions. Allowance for credit losses is recorded solely for owned notes. Also, as a part of its re-evaluation of securitization accounting, NFC corrected its tax treatment and deferred tax assets related to these securitizations, as well as, its secured borrowings related to operating leases.

NFC also made an additional adjustment to recognize on its statement of financial condition certain assets and liabilities relating to agreements to repurchase equipment.

As part of the restatement, the company recorded, as of the beginning of fiscal 2002, a cumulative charge of $22 million to retained deficit and a $8 million reduction to beginning other comprehensive loss reflecting the impact of the change in accounting for retail note securitizations originating in prior periods. Also, the restatement resulted in additional net loss of $2 million and net income of $4 million for fiscal 2003 and 2002 respectively.

Other

In addition to the adjustments described above, certain other adjustments, previously deemed immaterial, were also recorded for the years ended October 31, 2003 and 2002. These adjustments are necessary to conform prior periods financial statements with GAAP. For amounts recorded prior to 2002, the company identified that it had understated the amount of its trade payables at its Mexican truck assembly facility by approximately $22 million and that certain accruals relating to employee plans were overstated by approximately $27 million. These two adjustments resulted in a $5 million net increase to retained loss as of the beginning of fiscal 2002.

In addition, accounting standards relating to the consolidation of majority owned truck dealerships were not previously applied appropriately. In fiscal 2002, such dealerships were accounted for under the equity method of accounting whereas consolidating these dealerships was the appropriate treatment. The company has reviewed the timing of when it obtained a controlling interest of such dealerships and has incorporated their financial information within the company’s restated consolidated financial statements for the appropriate periods. The consolidation of such dealership information had no impact on the company’s overall results of operations or equity for any period. However, it did significantly increase sales and revenues, costs of products and services sold and selling, general and administrat ive expense on the company’s Statement of Income, while also increasing inventory and manufacturing debt on the company’s Statement of Financial Condition. These increases are included in the restated financial information for the fiscal years ended October 31, 2003 and 2002.

79

NOTES TO FINANCIAL STATEMENTS

FOR THE THREE YEARS ENDED OCTOBER 31, 2004

23. RESTATEMENT OF PRIOR PERIOD FINANCIAL STATEMENTS (continued)

In addition, the company recorded adjustments to the 2002 and 2003 financial statements to properly reflect revenue and expenses related to certain transactions. These adjustments do not have a significant impact on net income for either period.

The significant effects of the restatement on the company’s consolidated financial statements for the years ended October 31, 2003 and 2002 are included below:

		Navistar International Corporation
		and Consolidated Subsidiaries
		2003			2003			2002			2002
Condensed Statement of Income Millions of dollars		As Previously Reported			As Restated			As Previously Reported			As Restated
Sales and Revenues
Sales of manufactured products			7,033			7,282			6,493			6,725
Finance Revenue			287			283			271			276
Total sales and revenues			7,340			7,585			6,784			7,021
Costs and expenses
Total costs of products and services sold			6,238			6,370			5,840			5,972
Selling, general and administrative expense			487			597			521			624
Interest expense			136			142			154			159
Other expense			26			27			29			29
Total costs and expenses			7,385			7,634			7,553			7,793
Loss from continuing operations before taxes			(45	)		(49	)		(769	)		(772	)
Income tax benefit			(31	)		(32	)		(293	)		(294	)
Loss from continuing operations			(14	)		(17	)		(476	)		(478	)
Net loss		$	(18	)	$	(21	)	$	(536	)	$	(538	)
Basic earnings (loss) per share
Continuing operations		$	(0.21	)	$	(0.25	)	$	(7.88	)	$	(7.92	)
Net income (loss)		$	(0.27	)	$	(0.31	)	$	(8.88	)	$	(8.92	)
Diluted earnings (loss) per share
Continuing operations		$	(0.21	)	$	(0.25	)	$	(7.88	)	$	(7.92	)
Net income (loss)		$	(0.27	)	$	(0.31	)	$	(8.88	)	$	(8.92	)
Average shares outstanding (millions)
Basic			68.0			68.0			60.3			60.3
Diluted			68.0			68.0			60.3			60.3

80

NOTES TO FINANCIAL STATEMENTS

FOR THE THREE YEARS ENDED OCTOBER 31, 2004

23. RESTATEMENT OF PRIOR PERIOD FINANCIAL STATEMENTS (continued)

		Navistar International Corporation
		and Consolidated Subsidiaries
STATEMENT OF FINANCIAL CONDITION
Millions of dollars		2003			2003
		As Previously Reported			As Restated
ASSETS
Current assets
Cash and cash equivalents		$	447		$	467
Marketable securities			78			80
Receivables, net			869			932
Inventories			494			592
Deferred tax asset, net			176			183
Other assets			146			165
Total current assets			2,210			2,419
Marketable securities			517			515
Finance and other receivables, net			955			891
Property and equipment, net			1,350			1,439
Investments and other assets			339			300
Prepaid and intangible pension assets			66			66
Deferred tax asset, net			1,463			1,299
Total assets		$	6,900		$	6,929
LIABILITIES AND SHAREOWNERS' EQUITY
Liabilities
Current liabilities
Notes payable and current maturities of long-term debt		$	214		$	254
Accounts payable, principally trade			1,079			1,113
Other liabilities			911			905
Total current liabilities			2,204			2,272
Debt:   Manufacturing operations			863			993
Financial services operations			1,533			1,533
Postretirement benefits liability			1,435			1,433
Other liabilities			555			406
Total liabilities			6,590			6,637
Commitments and contingencies
Shareowners' equity
Series D convertible junior preference stock			4			4
Common stock and additional paid in capital (par value $0.10 per share, 75.3 million shares issued)			2,118			2,118
Retained earnings (deficit)			(824	)		(833	)
Accumulated other comprehensive loss			(786	)		(778	)
Common stock held in treasury, at cost (5.3 million and 6.5 million shares held)			(202	)		(219	)
Total shareowners' equity			310			292
Total liabilities and shareowners' equity		$	6,900		$	6,929

81

NOTES TO FINANCIAL STATEMENTS

FOR THE THREE YEARS ENDED OCTOBER 31, 2004

24. SUBSEQUENT EVENTS

Servicios Financieros Navistar, S. A. de C. V., Sociedad Financiera de Objeto Limitado, a wholly owned subsidiary of the company, entered into a trust agreement with Banco J.P. Morgan, S.A., Institution de Banca Multiple, J. P. Morgan Grupo Financiero, Division Fiduciaria as trustee (the Trustee), for purposes of creating irrevocable trust No. F/00098 (the Trust). On December 3, 2004, the Trust issued and placed in the Mexican Stock Exchange, Certificados Burs—tiles, Serie A (Notes), having an aggregate original principal amount of 516,000,000 Mexican Pesos, under the revolving securitization program authorized by the Mexican National Banking and Securities Commission in an aggregate amount of 1,100,000 Mexican Pesos.

On December 6, 2004, the company announced that its operating company, International Truck and Engine Corporation, signed a collaboration pact with truck and engine manufacturer, MAN Nutzfahrzeuge AG of Munich, Germany. As part of the agreement, the companies plan to collaborate on the design, development, sourcing and manufacturing of components and systems for commercial trucks, including a range of diesel engines.

The failure of the company and its affiliates to timely complete their respective Annual Reports on Form 10-K and deliver those reports to their respective lenders resulted in a default under such agreements. However, the company and its affiliates did not receive a notice of default and no adverse action was taken by those lenders or lessors against the company or its affiliates. NFC obtained the necessary waivers from its various lenders to prevent a notice of default.

 

82

FIVE-YEAR SUMMARY OF SELECTED FINANCIAL AND STATISTICAL DATA (Unaudited)

As of and for the Years Ended October 31 (Millions of dollars, except share data, units shipped and percentages)		2004			2003			2002			2001			2000
RESULTS OF OPERATIONS					As Restated *			As Restated *			As Restated *			As Restated *
Sales and revenues		$	9,724		$	7,585		$	7,021		$	6,679		$	8,436
Income (loss) from continuing operations		$	247		$	(17	)	$	(478	)	$	(10	)	$	161
Loss from discontinued operations			-			(4	)		(60	)		(14	)		(15	)
Net income (loss)		$	247		$	(21	)	$	(538	)	$	(24	)	$	146
Basic earnings (loss) per share:
Continuing operations		$	3.54		$	(0.25	)	$	(7.92	)	$	(0.17	)	$	2.65
Discontinued operations			-			(0.06	)		(1.00	)		(0.24	)		(0.25	)
Net income (loss)		$	3.54		$	(0.31	)	$	(8.92	)	$	(0.41	)	$	2.40
Diluted earnings (loss) per share:
Continuing operations		$	3.20		$	(0.25	)	$	(7.92	)	$	(0.17	)	$	2.62
Discontinued operations			-			(0.06	)		(1.00	)		(0.24	)		(0.25	)
Net income (loss)		$	3.20		$	(0.31	)	$	(8.92	)	$	(0.41	)	$	2.37
Average number of shares outstanding (millions)
Basic			69.7			68.0			60.3			59.5			60.7
Diluted			80.1			68.0			60.3			59.5			61.5
FINANCIAL DATA
Total assets		$	7,592		$	6,929		$	7,119		$	7,151		$	6,939
Long-term debt
Manufacturing operations		$	1,258		$	993		$	861		$	908		$	437
Financial services operations			787			1,533			1,651			1,560			1,711
Total long-term debt		$	2,045		$	2,526		$	2,512		$	2,468		$	2,148
Shareowners’ equity		$	531		$	292		$	235		$	1,105		$	1,290
Total manufacturing operations’ long-term debt as a percent of total manufacturing capitalization			67.6	%		73.1	%		68.1	%		43.8	%		23.5	%
Return on equity			46.3	%		(7.2	)%		(228.9	)%		(2.2	)%		11.3	%
SUPPLEMENTAL DATA
Capital expenditures		$	230		$	210		$	252		$	326		$	553
Engineering and research expense			245			242			260			253			280
OPERATING DATA
Manufacturing gross margin			14.3	%		13.5	%		12.1	%		13.5	%		16.9	%
U.S. and Canadian market share (a)			28.1	%		28.8	%		28.1	%		28.6	%		28.0	%
Unit shipments worldwide
Trucks			112,200			84,700			84,100			89,600			124,900
OEM engines (b)			357,900			332,400			315,100			324,900			304,400

a) Based on shipments of medium trucks (Classes 6 and 7), including school buses, and heavy trucks (Class 8).

b) Includes OEM engine shipments from International Engines South America.

* Restated for the effects of the matters discussed in Note 23 to financial statements.

83

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.

		Navistar International Corporation
Condensed Statement of Income		(with financial services operations on an equity basis)
For the Years Ended October 31
Millions of dollars		2004			2003			2002
					As Restated *			As Restated *
Sales of manufactured products		$	9,467		$	7,283		$	6,725
Other income			7			11			11
Total sales and revenues			9,474			7,294			6,736
Cost of products sold			8,111			6,294			5,885
Cost of products sold related to restructuring			-			9			23
Total cost of products sold			8,111			6,303			5,908
Restructuring and other non-recurring charges			(1	)		(45	)		519
Postretirement benefits expense			202			293			226
Engineering and research expense			245			242			260
Selling, general and administrative expense			601			541			553
Other expense			129			128			129
Total costs and expenses			9,287			7,462			7,595
Income (loss) from continuing operations before income taxes
Manufacturing operations			187			(168	)		(859	)
Financial services operations			124			119			87
Income (loss) from continuing operations before income taxes			311			(49	)		(772	)
Income tax expense (benefit)			64			(32	)		(294	)
Income (loss) from continuing operations			247			(17	)		(478	)
Discontinued operations:
Loss from discontinued operations (less applicable income taxes of $0, $0, and $2, respectively)			-			-			(14	)
Loss on disposal			-			(4	)		(46	)
Loss from discontinued operations			-			(4	)		(60	)
Net income (loss)		$	247		$	(21	)	$	(538	)

Condensed Statement of Financial Condition
As of October 31
Millions of dollars		2004			2003
					As Restated *
Cash, cash equivalents and marketable securities		$	737		$	522
Inventories			779			584
Property and equipment, net			1,283			1,233
Equity in non-consolidated subsidiaries			549			458
Other assets			1,129			830
Deferred tax asset, net			1,445			1,482
Total assets		$	5,922		$	5,109
Accounts payable, principally trade		$	1,436		$	1,071
Postretirement benefits liability			1,544			1,707
Debt			1,329			1,066
Other liabilities			1,082			973
Shareowners’ equity			531			292
Total liabilities and shareowners’ equity		$	5,922		$	5,109

84

ADDITIONAL FINANCIAL INFORMATION (Unaudited) (continued)
Navistar International Corporation (with financial services operations on an equity basis) in millions of dollars
For the Years Ended October 31

Condensed Statement of Cash Flow		2004			2003			2002
					As Restated *			As Restated *
Cash flow from operations
Net income (loss)		$	247		$	(21	)	$	(538	)
Adjustments to reconcile net income (loss) to cash used in operations:
Depreciation and amortization			210			152			167
Deferred income taxes			29			(54	)		(270	)
Postretirement benefits funding less than (in excess of) expense			(158	)		(11	)		15
Postretirement benefits curtailment			(2	)		(5	)		157
Equity in earnings of investees, net of dividends received			(80	)		(30	)		(48	)
Non-cash restructuring and other non-recurring charges			-			6			157
Non-cash charge related to discontinued operations			-			-			28
Other, net			(103	)		(30	)		9
Change in operating assets and liabilities			172			(54	)		100
Cash provided by (used in) operations			315			(47	)		(223	)
Cash flow from investment programs
Purchases of marketable securities			(417	)		(406	)		(29	)
Sales or maturities of marketable securities			313			328			69
Capital expenditures			(229	)		(208	)		(247	)
Proceeds from sale-leasebacks			-			-			164
Receivable from financial services operations			(51	)		67			(69	)
Investment in affiliates			(23	)		1			45
Other investment programs			(9	)		(31	)		(69	)
Cash used in investment programs			(416	)		(249	)		(136	)
Cash provided by financing activities			213			176			157
Cash and cash equivalents
Increase (decrease) during the year			112			(120	)		(202	)
At beginning of year			444			564			766
Cash and cash equivalents at end of the year		$	556		$	444		$	564

* Restated for the effects of the matters discussed in Note 23 to financial statements.

85

ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS

                ON ACCOUNTING AND FINANCIAL DISCLOSURE

Not applicable.

ITEM 9A. 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 October 31, 2004. Based on that evaluation, the principal executive officer and principal financial officer of the company concluded that, as of October 31, 2004, there were weaknesses in the disclosure controls and procedures within the company’s finance subsidiary. The weaknesses resulted in a misapplication of GAAP related to securitization accounting. The company’s finance subsidiary restated its previously issued financial statements to correct the misapplication. Becau se 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 has strengthened, as of October 31, 2004, its controls and procedures over the application of these accounting standards and believes that the circumstances resulting in the misapplication of GAAP will not reoccur.

Changes in internal controls over financial reporting

The company has not made any 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 year ended October 31, 2004 that have materially affected, or are reasonably likely to materially affect, the company’s internal control over financial reporting except for:

(1)	the actions taken by the company’s financial services subsidiary to correct the accounting associated with its retail note securitization program;

(2)	a reemphasis of reconciliation controls, relative to accounts payable, at the company’s Mexican truck assembly facility;

(3)	the commencement of the consolidation of majority owned dealerships.

ITEM 9B. OTHER INFORMATION

Not applicable.

86

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Information required by Item 10 of this Form is incorporated herein by reference from the company’s definitive Proxy Statement for the March 23, 2005, Annual Meeting of Shareowners under the captions "Election of Directors", "Board Meetings and Committees-Audit Committee", "Audit Committee Report" and "Section 16(a) Beneficial Ownership Reporting Compliance"; and in Part I, Item 1, of this Form 10-K under the caption "Executive Officers of the Registrant."

The company has adopted a Code of Ethics applicable to all employees, directors and officers, including the chief executive officer and chief financial officer. The company, in accordance with Item 406 of Regulation S-K, has posted this Code of Ethics on its website at www.internationaldelivers.com. The company intends to disclose on its website any amendments to, or waivers from, its Code of Ethics that are required to be publicly disclosed pursuant to the rules of the Securities and Exchange Commission.

 

ITEM 11. EXECUTIVE COMPENSATION

Information required by Item 11 of this Form is incorporated herein by reference from the company’s definitive Proxy Statement for the March 23, 2005, Annual Meeting of Shareowners under the captions "Executive Compensation" and "Directors’ Compensation."

 

 

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

AND RELATED STOCKHOLDER MATTERS

Information required by Item 12 of this Form is incorporated herein by reference from the company’s definitive Proxy Statement for the March 23, 2005, Annual Meeting of Shareowners under the captions "Navistar Common Stock Ownership by Directors and Officers", "Persons Owning More Than 5% of Navistar Common Stock" and "Equity Compensation Plan Information."

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Information required by Item 13 of this Form is incorporated herein by reference from the company’s definitive Proxy Statement for the March 23, 2005, Annual Meeting of Shareowners under the caption "Certain Related Transactions."

 

 

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

Information required by Item 14 of this Form and the audit committee’s pre-approval policies and procedures regarding the engagement of the principle accountant are incorporated herein by reference from the company’s definitive Proxy Statement for the March 23, 2005, Annual Meeting of Shareowners under the caption "Audit Committee Report-Independent Auditor Fees".

87

PART IV

 

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

Financial Statements

See Item 8 - Financial Statements and Supplementary Data

Schedule  Page

II     Valuation and Qualifying Accounts and Reserves                                   F-1

This consolidated financial statement schedule of the company is filed as part of this Form 10-K and should be read in conjunction with the Consolidated Financial Statements, and related notes thereto, of the company. All other schedules are omitted because of the absence of the conditions under which they are required or because information called for is shown in the consolidated financial statements and notes thereto.

Finance Subsidiaries:

The consolidated financial statements of Navistar Financial Corporation for the years ended October 31, 2004, 2003 and 2002, appearing on pages 13 through 40 in the Annual Report on Form 10-K for Navistar Financial Corporation for the fiscal year ended October 31, 2004, Commission File No. 1-4146-1, are incorporated herein by reference and filed as Exhibit 99 to this Form 10-K.

Exhibits			Page
(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-11
(11)		Computation of Earnings per Share (incorporated by reference from Note 19 to the Financial Statements)	71
(12)		Computation of Ratio of Earnings to Fixed Charges	E-94
(21)		Subsidiaries of the Registrant	E-95
(23)		Consent of Independent Registered Public Accounting Firm	92
(24)		Power of Attorney	90
(31.1)		CEO Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	E-96
(31.2)		CFO Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	E-97
(32.1)		CEO Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	E-98
(32.2)		CFO Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	E-99
(99)		Navistar Financial Corporation’s Annual Report on Form 10-K for the fiscal year ended October 31, 2004	*
(99.1)		Forward Looking Statements, Risks and Factors	E-100
(99.2)		Annual CEO Certification to the New York Stock Exchange	E-103

*Filed electronically with the Securities and Exchange Commission.

All exhibits other than those indicated above are omitted because of the absence of the conditions under which they are required or because the information called for is shown in the financial statements and notes thereto in the 2004 Annual Report on Form 10-K.

Exhibits, other than those incorporated by reference, have been included in copies of this report filed with the Securities and Exchange Commission. Shareowners of the company will be provided with copies of these exhibits upon written request to the Corporate Secretary at the address given on the cover page of this Form 10-K.

88

NAVISTAR INTERNATIONAL CORPORATION

AND CONSOLIDATED SUBSIDIARIES

________________________________

SIGNATURE

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

NAVISTAR INTERNATIONAL CORPORATION

                               (Registrant)

 

Date: February 14, 2005

 

 

/s/Mark T. Schwetschenau

Mark T. Schwetschenau 

Senior Vice President and Controller

(Principal Accounting Officer)

89

EXHIBIT 24

NAVISTAR INTERNATIONAL CORPORATION

AND CONSOLIDATED SUBSIDIARIES

________________

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below does hereby make, constitute and appoint Daniel C. Ustian, Robert C. Lannert and Mark T. Schwetschenau, and each of them acting individually, his or her true and lawful attorneys-in-fact and agents, with full power of substitution, for them and in their name, place and stead, in any and all capacities, to sign Navistar International Corporation’s Annual Report on Form 10-K for the fiscal year ended October 31, 2004, and any amendments thereto, and to file the same with all exhibits thereto, and other documents in connection therewith, with the U.S. Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents may lawfully do or cause to be done by virtue hereof.

SIGNATURES

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

Signature		Title	Date
/s/ Daniel C. Ustian
Daniel C. Ustian		Chairman, President and Chief Executive Officer and Director (Principal Executive Officer)	February 14, 2005
/s/ Robert C. Lannert
Robert C. Lannert		Vice Chairman and Chief Financial Officer and Director (Principal Financial Officer)	February 14, 2005
/s/ Mark T. Schwetschenau
Mark T. Schwetschenau		Senior Vice President and Controller (Principal Accounting Officer)	February 14, 2005

90

EXHIBIT 24 (continued)

NAVISTAR INTERNATIONAL CORPORATION

AND CONSOLIDATED SUBSIDIARIES

_______________

SIGNATURES (continued)

Signature		Title	Date
/s/ Y. Marc Belton
Y. Marc Belton		Director	February 14, 2005
/s/ Eugenio Clariond
Eugenio Clariond		Director	February 14, 2005
/s/ John D. Correnti
John D. Correnti		Director	February 14, 2005
/s/ Dr. Abbie J. Griffin
Dr. Abbie J. Griffin		Director	February 14, 2005
/s/ Michael N. Hammes
Michael N. Hammes		Director	February 14, 2005
/s/ James H. Keyes
James H. Keyes		Director	February 14, 2005
/s/ David McAllister
David McAllister		Director	February 14, 2005
/s/ Southwood J. Morcott
Southwood J. Morcott		Director	February 14, 2005
/s/ William F. Patient
William F. Patient		Director	February 14, 2005

91

NAVISTAR INTERNATIONAL CORPORATION

AND CONSOLIDATED SUBSIDIARIES

_______________

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Navistar International Corporation,

Its Directors and Shareowners:

We have audited the consolidated financial statements of Navistar International Corporation and Consolidated Subsidiaries as of October 31, 2004 and 2003, and for each of the three years in the period ended October 31, 2004, and have issued our report thereon dated February 14, 2005 (which report expresses an unqualified opinion and includes an explanatory paragraph relating to the restatement described in Note 23). Such consolidated financial statements and report are included in this Annual Report on Form 10-K of Navistar International Corporation and Consolidated Subsidiaries for the year ended October 31, 2004. Our audits also included the consolidated financial statement schedule for the company, listed in Item 15. The financial statement schedule is the responsibility of the company’s management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

Deloitte & Touche LLP

February 14, 2005

Chicago, Illinois

_______________

EXHIBIT 23

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Navistar International Corporation:

We consent to the incorporation by reference in the Registration Statements, including post-effective amendments, No. 2-70979, No. 33-26847, No. 333-25783, No. 333-29735, No. 333-29739, No. 333-29301, No. 333-77781, No. 333-73392, No. 333-86756, No. 333-86754 and No. 333-113896, all on Form S-8; No. 333-87716, No. 333-52375, No. 333-48125, No. 333-101684 and No. 333-103437 all on Form S-3; and No. 333-64626 on Form S-4, of Navistar International Corporation and Consolidated Subsidiaries of our reports dated February 14, 2005 (which report expresses an unqual ified opinion and includes an explanatory paragraph relating to the restatement described in Note 23), relating to the consolidated financial statements and financial statement schedule of Navistar International Corporation and of our report dated February 14, 2005 (which report expresses an unqualified opinion and includes an explanatory paragraph relating to the restatement described in Note 2), relating to the consolidated financial statements of Navistar Financial Corporation, appearing in and incorporated by reference in this Annual Report on Form 10-K of Navistar International Corporation and Consolidated Subsidiaries for the year ended October 31, 2004.

Deloitte & Touche LLP

February 14, 2005

Chicago, Illinois

92

SCHEDULE II
NAVISTAR INTERNATIONAL CORPORATION AND CONSOLIDATED SUBSIDIARIES ========== VALUATION AND QUALIFYING ACCOUNTS AND RESERVES FOR THE YEARS ENDED OCTOBER 31, 2004, 2003 AND 2002 (MILLIONS OF DOLLARS)
COLUMN A		COLUMN B	COLUMN C	COLUMN D		COLUMN E
DESCRIPTION				DEDUCTIONS FROM RESERVES
DESCRIPTION OF RESERVES	DEDUCTED FROM	BALANCE AT BEGINNING OF YEAR	ADDITIONS CHARGED TO INCOME	DESCRIPTION	AMOUNT	BALANCE AT END OF YEAR
Reserves deducted from assets to from assets to which they apply:
2004
Allowance for losses on receivables	Notes and accounts receivable	$50	$13	Uncollectible notes and accounts written off and reserve adjustment, less recoveries	$31	$32
2003
Allowance for losses on receivables	Notes and accounts receivable	$50	$43	Uncollectible notes and accounts written off and reserve adjustment, less recoveries	$43	$50
2002
Allowance for losses on  receivables	Notes and accounts receivable	$40	$67	Uncollectible notes and accounts written off and reserve adjustment, less recoveries	$57	$50

F-1