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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-K

For the fiscal year ended October 31, 2003

OR

Commission file number 1-9618

	NAVISTAR INTERNATIONAL CORPORATION

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

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

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months 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, 2003, the aggregate market value of common stock held by non-affiliates of the registrant was $1,905,247,643.

     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 November 30, 2003, the number of shares outstanding of the registrant’s common stock was 68,898,553.

Documents Incorporated by Reference

Table of Contents

NAVISTAR INTERNATIONAL CORPORATION

FORM 10-K

Year Ended October 31, 2003

INDEX

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PART I

ITEM 1. BUSINESS

     Navistar International Corporation was incorporated under the laws of the state of Delaware in 1993 and is a holding company. Its principal operating subsidiary is International Truck and Engine Corporation (International). As used hereafter, “Navistar” or “company” 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 5 through 8 trucks, including school buses (however, the company is not currently participating in the Class 5 truck market). The company’s engine segment is engaged in the design and manufacture of mid-range diesel engines. The truck segment operates primarily in the United States (U.S.), Canada, Mexico and other selected export markets while the engine segment operates in the U.S. and Brazil. Based on assets and revenues, the truck and engine segments represent the majority of the company’s business activities. The financial services operations consist of Navistar Financial Corporation (NFC) and the company’s foreign finance subsidiaries. The company’s domestic insurance subsidiary, Harco National Insurance Company (Harco), was sold on November 30, 2001. Industry and geographic segment data for 2003, 2002 and 2001 is summarized in Note 16 to the Financial Statements, which is included in Item 8.

DISCONTINUED OPERATIONS

     On October 29, 2002, the company announced its decision to exit the domestic truck business in Brazil effective October 31, 2002. The financial results for this business have been classified as discontinued operations on the Statement of Income in accordance with Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” Financial and operating data reported in this Business Section has been restated to reflect the discontinuance of this operation for all periods presented. For further information, see Note 12 to the Financial Statements, which is included in Item 8.

PRODUCTS AND SERVICES

     The following table illustrates the percentage of the company’s sales of products and services by product line based on dollar amount:

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PRODUCTS AND SERVICES (continued)

     The 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 the IC™ bus lines, together with a wide selection of other standard truck and trailer aftermarket parts. The company offers diesel-powered trucks and school buses because of their improved fuel economy, ease of serviceability and greater durability over gasoline-powered vehicles.

     The truck and bus manufacturing operations in the U.S., Canada and Mexico consist principally of the assembly of components manufactured by its suppliers, although the company produces its own mid-range diesel truck engines, sheet metal components (including cabs) and miscellaneous other parts.

     The engine segment designs and manufactures diesel engines for use in the company’s Class 5, 6 and 7 medium trucks, school buses and selected Class 8 heavy truck models, and for sale to original equipment manufacturers (OEMs) in the U.S., Mexico and Brazil. This segment also sells engines for industrial and agricultural applications. In addition, the engine segment provides customers with proprietary products needed to support the International® engine lines, together with a wide selection of other standard engine and aftermarket parts. Based upon information published by R.L. Polk & Company, diesel-powered Class 5, 6 and 7 medium truck and bus shipments represented 95% of all medium truck and bus shipments for fiscal 2003 in the U.S. and Canada.

     The financial services segment provides retail, wholesale and lease financing of products sold by the truck segment and its dealers within the U.S. and Mexico as well as finance the company’s wholesale accounts and selected retail accounts receivable. Harco, which was sold on November 30, 2001, provided commercial physical damage and liability insurance to the truck segment’s dealers and retail customers and to the general public through an independent insurance agency system. The foreign finance subsidiaries’ primary business is to provide wholesale, retail and lease financing to the Mexican operations’ dealers and retail customers.

THE MEDIUM AND HEAVY TRUCK INDUSTRY

     The markets in which Navistar competes are subject to considerable volatility as they move in response to cycles in the overall business environment and are particularly sensitive to the industrial sector, which generates a significant portion of the freight tonnage hauled. Government regulation has impacted and will continue to impact trucking operations and the efficiency and specifications of equipment.

     The following table shows industry retail deliveries in the combined U.S. and Canadian markets for the five years ended October 31, in thousands of units:

Source:

Monthly data derived from materials produced by Ward’s Communications in the U.S. and the Canadian Vehicle Manufacturers Association.

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THE MEDIUM AND HEAVY TRUCK INDUSTRY (continued)

     Industry retail deliveries of Class 5 through 8 trucks and school buses in the Mexican market were 24,000 units, 24,100 units, and 28,600 units in 2003, 2002, and 2001, respectively, based on monthly data provided by the Associacion Nacional de Productores de Autobuses, Camiones y Tractocamiones.

     The Class 5 through 8 truck markets in the U.S., Canada and Mexico are highly competitive. Major U.S. domestic competitors include PACCAR, Ford and General Motors, as well as foreign-controlled domestic manufacturers, such as Freightliner, Sterling and Western Star (Daimler Chrysler) and Volvo and Mack (Volvo Global Trucks). In addition, manufacturers from Japan such as Hino (Toyota), Isuzu, Nissan and Mitsubishi are competing in the U.S. and Canadian markets. In Mexico, the major domestic competitors are Kenmex (PACCAR) and Mercedes (Daimler Chrysler). The intensity of this competition results in price discounting and margin pressures throughout the industry. In addition to the influence of price, market position is driven by product quality, engineering, styling, utility and distribution.

     From October 31, 2003, the company’s truck segment currently estimates $300 million in capital spending through 2006 for the continued development of its high performance vehicles.

TRUCK MARKET SHARE

     The company delivered 75,700 Class 5 through 8 trucks, including school buses, in the U.S. and Canada in fiscal 2003, an increase of 2% from the 74,300 units delivered in 2002. This increase is attributed to the company’s market share gain in the combined U.S. and Canadian Class 5 through 8 truck market. Market share increased to 26.2% in 2003 from 25.8% in 2002.

     The company delivered 6,500 Class 5 through 8 trucks, including school buses, in Mexico in 2003, a 12% decrease from the 7,400 units delivered in 2002. Navistar’s combined share of the Class 5 through 8 truck market in Mexico decreased to 27.3% in 2003 from 30.7% in 2002.

MARKETING AND DISTRIBUTION

     Navistar’s truck products are distributed in virtually all key markets in the U.S. and Canada. The company’s truck distribution and service network in these countries was composed of 843, 872 and 882 dealers and retail outlets at October 31, 2003, 2002 and 2001, respectively. Included in these totals were 496, 502 and 505 secondary and associate locations at October 31, 2003, 2002 and 2001, respectively. The company also has a dealer network in Mexico composed of 70 dealer locations at October 31, 2003, 2002 and 2001.

     Three regional operations in the U.S. and general offices in Canada and Mexico support retail dealer activity. The company has a national account sales group, responsible for 74 major U.S. national account customers. Navistar’s network of 15 Used Truck Centers in the U.S. provides trade-in support to the company’s dealers and national accounts group, and markets all makes and models of reconditioned used trucks to owner-operators and fleet buyers.

     In the U.S. and Canada, the company operates seven regional parts distribution centers, which allow it to offer 24-hour parts availability, order status information and technical support. The company also operates a parts distribution center in Mexico.

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ENGINE AND FOUNDRY

     Navistar is the leading supplier of mid-range diesel engines in the 160-300 horsepower range according to data supplied by Power Systems Research of Minneapolis, Minnesota. The company’s diesel engines are sold under the International® brand as well as produced for other OEMs, principally Ford Motor Company (Ford).

     Navistar has an agreement to supply its 6.0L electronically controlled diesel engine to Ford through the year 2012 for use in all of Ford’s diesel-powered super-duty trucks and vans over 8,500lbs. gross vehicle weight(GVW) in North America. Shipments to Ford account for approximately 95% of the engine segment’s 6.0L shipments. Total engine units shipped reached 396,000 in 2003, 6% higher than the 375,500 units shipped in 2002. The company’s shipments of engines to OEMs totaled 332,400 units in 2003, an increase of 6% from the 315,100 units shipped in 2002.

     From October 31, 2003, the company’s engine segment currently estimates $236 million in capital spending and $348 million in development expense through 2006 primarily to comply with future emission standards and other engine projects.

FINANCIAL SERVICES

     NFC is a commercial financing organization that provides wholesale, retail and lease financing for sales of new and used trucks sold by the company and its dealers in the U.S. NFC also finances the company’s wholesale accounts and selected retail accounts receivable. Sales of new products (including trailers) of other manufacturers are also financed regardless of whether designed or customarily sold for use with the company’s truck products. As of the year ended October 31, 2003 and 2002, NFC provided wholesale financing for 96% and 96% respectively, of the new truck inventory sold by the company to its dealers and distributors in the U.S. During 2003 and 2002, the company provided retail and lease financing for 16% and 19%, respectively, of all new truck units sold or leased by the company to retail customers.

     Harco provided commercial physical damage and liability insurance coverage to the company’s dealers and retail customers and to the general public through an independent insurance agency system. On November 30, 2000, NFC’s board of directors approved a plan to sell Harco. On November 30, 2001, NFC completed the sale of all of the stock of Harco to IAT Reinsurance Syndicate Ltd., a Bermuda reinsurance company, for approximately $63 million in cash.

     Navistar’s wholly owned subsidiaries, Arrendadora Financiera Navistar, S.A. de C.V., Servicios Financieros Navistar, S.A. de C.V. and Navistar Comercial, S.A. de C.V., provide wholesale, retail and lease financing to the truck segment’s dealers and retail customers in Mexico.

IMPORTANT SUPPORTING OPERATIONS

     International Truck and Engine Corporation Canada has an agreement with a subsidiary of General Electric Capital Canada, Inc. to provide financing for Canadian dealers and customers.

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RESEARCH AND DEVELOPMENT

     Research and development activities, which are directed toward the introduction of new products, improvements of existing products and the processes used in their manufacture, totaled $216 million, $218 million and $213 million for 2003, 2002 and 2001, respectively.

BACKLOG

     The company’s worldwide backlog of unfilled truck orders (subject to cancellation or return in certain events) at October 31, 2003, 2002 and 2001, was $1,143 million, $1,080 million and $1,107 million, respectively. All of the backlog at October 31, 2003, is expected to be filled within the next fiscal year.

     Although the backlog of unfilled orders is one of many indicators of market demand, other factors such as changes in production rates, available capacity, new product introductions and competitive pricing actions may affect point-in-time comparisons.

EMPLOYEES

     Worldwide employees totaled 14,200 individuals at October 31, 2003 and 16,500 individuals at October 31, 2002 and 2001.

LABOR RELATIONS

     As of October 31, 2003, the United Automobile, Aerospace and Agricultural Implement Workers of America (UAW) represented 4,900 of the company’s active employees in the U.S., and the National Automobile, Aerospace and Agricultural Implement Workers of Canada (CAW) represented 600 of the company’s active employees in Canada. Other unions represented 1,700 of the company’s active employees in the U.S. and Mexico. The company’s master contract with the UAW expires on September 30, 2007. On September 4, 2003, the company and the CAW agreed to a memorandum of understanding which extended the expiration date of the existing labor contract to January 31, 2007.

PATENTS AND TRADEMARKS

     Navistar continuously obtains patents on its inventions and owns a significant patent portfolio. Additionally, many of the components which Navistar purchases for its products are protected by patents that are owned or controlled by the component manufacturer. Navistar has licenses under third-party patents relating to its products and their manufacture and grants licenses under its patents. The monetary royalties paid or received under these licenses are not significant. No particular patent or group of patents is considered by the company to be essential to its business as a whole. See Item 3, Legal Proceedings, for discussion regarding various claims and controversies between the company and Caterpillar Inc. (Caterpillar).

     Navistar’s primary trademarks are an important part of its worldwide sales and marketing efforts and provide instant identification of its products and services in the marketplace. To support these efforts, Navistar maintains, or has pending, registrations of its primary trademarks in those countries in which it does business or expects to do business.

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RAW MATERIALS AND ENERGY SUPPLIES

     The company purchases raw materials, parts and components from numerous outside suppliers, but relies upon some suppliers for a substantial number of components for its truck and engine products. Single-source suppliers fill a majority of the company’s requirements for parts and components.

     The impact of an interruption in supply will vary by commodity. Some parts are generic to the industry while others are of a proprietary design requiring unique tooling, which would require time to recreate. However, the company’s exposure to a disruption in production as a result of an interruption of raw materials and supplies is no greater than the industry as a whole. In order to remedy any losses resulting from an interruption in supply, the company maintains contingent business interruption insurance for storms, fire and water damage.

     While the company believes that it has adequate assurances of continued supply, the inability of a supplier to deliver could have an adverse effect on production at certain of the company’s manufacturing locations. The company’s exposure in Mexico and Brazil to an interruption in local supply could result in an inability to meet local content requirements.

IMPACT OF GOVERNMENT REGULATION

     Truck and engine manufacturers continue to face significant governmental regulation of their products, especially in the areas of environment and safety. The company believes its products comply with all applicable environmental and safety regulations.

     As a diesel engine manufacturer, the company has incurred research, development and tooling costs to design its engine product lines to meet United States Environmental Protection Agency (U.S. EPA) and California Air Resources Board (CARB) emission requirements that will come into effect after 2004. The company is currently providing engines that satisfy CARB’s 2004 emission standards for engines used in vehicles from 8,501 to 14,000 lbs. GVW. With a Federal Court’s affirmation in 2001 of the U.S. EPA’s 2007 rule for heavy-duty diesel engines and its accompanying requirement of low sulfur diesel fuel beginning in 2006 and the recent settlement in 2003 of issues relating to other technical provisions of the U.S. EPA’s 2004 and 2007 and CARB’s 2005 rule, all of which the company actively participated in, the company intends to provide heavy duty engines that will comply with the more stringent CARB and U.S. EPA emission standards for 2004 and later model years. At the same time, Navistar expects to meet all of the obligations it agreed to in the Consent Decree entered into July 1999 with the U.S. EPA and in a Settlement Agreement with CARB concerning alleged excess emissions of nitrogen oxides.

     Canadian and Mexican heavy-duty engine emission regulations essentially mirror those of the U.S. EPA, except that compliance in Mexico is conditioned on availability of low sulfur diesel fuel. The company’s engines comply with emission regulations of Argentina, Brazil, Canada and Mexico.

     Truck manufacturers are also subject to various noise standards imposed by federal, state and local regulations. The engine is one of a truck’s primary noise sources, and the company, therefore, works closely with OEMs to develop strategies to reduce engine noise. The company is also subject to the National Traffic and Motor Vehicle Safety Act (Safety Act) and Federal Motor Vehicle Safety Standards (Safety Standards) promulgated by the National Highway Traffic Safety Administration. The company believes it is in compliance with the Safety Act and the Safety Standards.

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IMPACT OF GOVERNMENT REGULATION (continued)

     Expenditures to comply with various environmental regulations relating to the control of air, water and land pollution at production facilities and to control noise levels and emissions from the company’s products have not been material except for two sites formerly owned by the company: Wisconsin Steel in Chicago, Illinois, and Solar Turbine in San Diego, California. In 1994, Navistar recorded a $20 million after-tax charge as a loss from discontinued operations for environmental liabilities and cleanup cost at these two sites. It is not expected that the costs of compliance with foreseeable environmental requirements will have a material effect on the company’s statement of financial condition or the results of operations.

AVAILABLE INFORMATION

     The company maintains a website with the address www.internationaldelivers.com. The company is not including the information contained on the company’s website as a part of, or incorporating it by reference into, this Annual Report on Form 10-K. The company makes available free of charge through its website its Annual Report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, and amendments to these reports, as soon as reasonably practicable after the company electronically files such material with, or furnishes such material to, the Securities and Exchange Commission. The Board of Directors of the company documented its governance practices by adopting the Board Corporate Governance Guidelines. The governance guidelines, as well as the charters for the key committees of the Board (Finance Committee, Audit Committee, and the Compensation and Governance Committee) may also be viewed at the company’s website. Copies of such documents will be sent to shareholders free of charge upon written request of the corporate secretary at the address shown on the cover page of this Form 10-K.

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EXECUTIVE OFFICERS OF THE REGISTRANT

The following selected information for each of the company’s current executive officers (as defined by regulations of the Securities and Exchange Commission) was prepared as of December 12, 2003.

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ITEM 2. PROPERTIES

     In North America, the company operates eleven manufacturing and assembly operations, which contain approximately 12 million square feet of floor space. Of these eleven facilities, nine plants are owned and two are subject to long-term leases. Six plants manufacture and assemble trucks and five plants are used by the company’s engine segment. Of these five plants, three manufacture diesel engines, one manufactures grey iron castings and one manufactures ductile iron castings. In addition, the company owns or leases other significant properties in the U.S. and Canada including vehicle and parts distribution centers, sales offices, two engineering centers, which serve the company’s truck and engine segments, and its headquarters which is located in Warrenville, Illinois. In addition, the company owns and operates a manufacturing plant in both Brazil and Argentina, which contain a total of 500,000 square feet of floor space for use by the company’s South American engine subsidiary.

     The truck segment’s principal research and engineering facility is located in Fort Wayne, Indiana, while the engine segment’s principal facility is located in Melrose Park, Illinois. In addition, certain research is conducted at each of the company’s manufacturing plants.

     All of the company’s plants are being utilized and have been adequately maintained, are in good operating condition and are suitable for its current needs through productive utilization of the facilities. These facilities, together with planned capital expenditures, are expected to meet the company’s manufacturing needs in the foreseeable future.

     A majority of the activity of the financial services operations is conducted from its leased headquarters in Rolling Meadows, Illinois. The financial services operations also lease two other office locations in the U.S. and one in Mexico.

ITEM 3. LEGAL PROCEEDINGS

     The company and its subsidiaries are subject to various claims arising in the ordinary course of business, and are parties to various legal proceedings that constitute ordinary routine litigation incidental to the business of the company and its subsidiaries. The majority of these claims and proceedings relate to commercial, product liability and warranty matters. In the opinion of the company’s management, the disposition of these proceedings and claims, 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.

     Various claims and controversies have arisen between the company and its former fuel system supplier, Caterpillar Inc., 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 has appealed the adverse judgment, and 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. Based on the information developed to date, the company believes that the proceedings will not have a material adverse impact on the business, results of operations or financial condition of the company.

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ITEM 3. LEGAL PROCEEDINGS (continued)

     In January 2002, Caterpillar sued the company in the Circuit Court in Peoria County, Illinois, and the company counterclaimed against Caterpillar, each alleging the other breached the purchase agreement pursuant to which Caterpillar supplied fuel systems for the company’s prior version of diesel engines. Caterpillar’s claims involve a 1990 agreement to reimburse Caterpillar for costs associated with the delayed launch of the company’s V8 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. The company has counterclaimed that Caterpillar breached the Supply Agreement by refusing to supply the new fuel system for the company’s new diesel engines. The company is seeking damages from Caterpillar on account of this refusal and the company’s subsequent replacement of Caterpillar as its fuel system supplier. Based upon the information developed to date, and taking into account established reserves, the company believes that the ultimate resolution of the foregoing matters will not have a material adverse impact on the business, results of operations or financial condition of the company.

     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 we have some cases that relate to the presence of asbestos in our facilities. In these claims we are 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 aggressively. 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 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.

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

     No matters were submitted to a vote of security holders during the three months ended October 31, 2003.

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PART II

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

     Navistar International Corporation common stock is listed on the New York Stock Exchange, the Chicago Stock Exchange and the Pacific Exchange under the abbreviated stock symbol “NAV.” Information regarding high and low market price per share of common stock for each quarter of 2003 and 2002 is included in Note 22 to the Financial Statements on page 83. There were approximately 19,300 holders of record of common stock at October 31, 2003.

     Holders of common stock are entitled to receive dividends when and as declared by the board of directors out of funds legally available therefore, provided that, so long as any shares of the company’s preferred stock and preference stock are outstanding, no dividends (other than dividends payable in common stock) or other distributions (including purchases) may be made with respect to the common stock unless full cumulative dividends, if any, on the shares of preferred stock and preference stock have been paid. Under the General Corporation Law of the State of Delaware, 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.

     Directors of the company who are not employees receive an annual retainer and meeting fees payable at their election in shares of common stock of the company or in cash. Currently the board of directors mandates that at least one-fourth of the annual retainer be paid in the form of common stock of the company. For the period covered by this report, receipt of approximately 1,510 shares was deferred as payment for the 2003 annual retainer and meeting fees. In each case, the shares were acquired at prices ranging from $37.05 to $43.315 per share, which represented the fair market value of such shares on the date of acquisition. Exemption from registration of the shares is claimed by the company under Section 4(2) of the Securities Act of 1933, as amended

     The company has not paid cash dividends on the common stock since 1980. The company does not expect to pay cash dividends on the common stock in the foreseeable future, and is subject to restrictions under the indentures for the 8% Senior Subordinated Notes, the 9 3/8% Senior Notes and the 9.95% Senior Notes on the amount of cash dividends the company may pay. Navistar Financial Corporation is subject to certain restrictions under its revolving credit facility which may limit its ability to pay dividends to International.

ITEM 6. SELECTED FINANCIAL DATA

     This information is included in the table “Five-Year Summary of Selected Financial and Statistical Data” on page 84 of this Form 10-K.

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

     Navistar International Corporation is a holding company and its principal operating subsidiary is International Truck and Engine Corporation (International). In this discussion and analysis, “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 5 through 8 trucks, including school buses (however, the company is not currently participating in the Class 5 truck market). 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 other standard truck and trailer aftermarket parts. The truck segment operates primarily in the United States (U.S.), Canada, Mexico and other selected export markets. The company’s engine segment is engaged in the design and manufacture of mid-range diesel engines. The engine segment also provides customers with proprietary products needed to support the International® engine lines, together with a wide selection of other standard engine and aftermarket parts. The engine segment operates in the U.S., and Brazil. The financial services segment, which includes Navistar Financial Corporation (NFC) and the company’s foreign finance subsidiaries, provides wholesale, retail and lease financing for sales of trucks sold by the company and its dealers in the U.S. and Mexico. The financial services segment operates in the U.S., Mexico and Bermuda.

RESULTS OF OPERATIONS

     The company reported a net loss of $18 million for 2003, or a loss of $0.27 per diluted share, compared to a net loss of $536 million, or a loss of $8.88 per diluted common share and a net loss of $23 million, or a loss of $0.39 per diluted share, in 2002 and 2001, respectively. Net loss from discontinued operations was $4 million, $60 million, and $14 million for 2003, 2002, and 2001, respectively.

     The company reported a loss from continuing operations before income taxes of $45 million in 2003 compared to losses of $769 million and $33 million in 2002 and 2001, respectively. The pre-tax loss from continuing operations in 2002 was impacted by the effects of corporate restructuring and other non-recurring charges of $544 million. In 2003, the pre-tax loss was reduced by $32 million due to the reversal of a portion of the previously recorded charges. Further discussion on restructuring and other non-recurring charges can be found later in this section

     The truck segment’s loss, as defined, decreased to $47 million in 2003 from the loss of $298 million reported in 2002, and the loss of $223 million in 2001. The truck segment’s revenues of $5,064 million in 2003 were 8% and 9% higher than the $4,709 million and the $4,628 million reported in 2002 and 2001, respectively. The truck segment’s decreased loss and increased revenue in 2003 are the result of higher shipments and lower production costs. The truck segment’s loss for 2002 was impacted by a number of unusual items including product recall expenses, the inability of a major supplier to supply pre-emission engines and costs associated with the six-week strike at the company’s Chatham, Ontario heavy truck assembly plant, which totaled approximately $115 million. During 2001, the company’s truck segment was adversely affected by declining overall industry volume as well as reduced truck pricing.

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RESULTS OF OPERATIONS (continued)

     The engine segment’s profit, as defined, of $85 million in 2003 was 58% lower than the $204 million reported in 2002, and 67% lower than the $257 million reported in 2001. The engine segment’s revenues were $2,469 million in 2003, a 10% increase from the $2,244 million in 2002 and a 7% increase from the $2,301 million reported in 2001. The decrease in the engine segment’s 2003 profits is primarily due to start-up cost associated with the new 6.0L V-8 engine. However, the new 6.0L V-8 and increased overall engine demand are the main drivers behind the increase in 2003 revenue. The decreases in the engine segment’s profits and revenues for 2002, as compared to 2001, are primarily the result of lower shipments driven by the continued weakness in the medium truck market and costs related to new development programs.

     The financial services segment’s profit in 2003 was $126 million, which represents a 50% increase over the profit reported in 2002 and a 43% increase over the profit in 2001. This substantial increase is primarily due to greater gains on sale of receivables. The profit in 2002 was slightly lower than 2001 due to lower average retail note, operating lease and serviced wholesale note balances, partially offset by higher gains on the sales of retail note receivables. The changes in the financial services segment’s revenues are primarily due to changes in finance revenue discussed below.

Sales and Revenues

     Sales and revenues of $7,340 million in 2003 were 8% higher than the $6,784 million in 2002 and 9% higher than the $6,739 million reported in 2001. Sales of manufactured products totaled $7,033 million in 2003, compared to $6,493 million and $6,400 million reported in 2002 and 2001.

     U.S. and Canadian industry sales of Class 5 through 8 trucks totaled 289,400 units in 2003, which is comparable to the 288,300 units in 2002, but 7% lower than the 312,700 units in 2001. Class 8 heavy truck sales totaled 159,300 units in 2003 which is slightly lower than the 163,300 and 163,700 units sold in 2002 and 2001, respectively. Industry sales of Class 5, 6, and 7 medium trucks, including school buses, totaled 130,100 units in 2003, a 4% increase from the 125,000 units in 2002, and a 13% decrease from the 149,000 units sold in 2001. Industry sales of school buses, which accounted for 22% of the medium truck market in 2003, were 29,200 units in 2003, which was slightly higher than the 27,400 units in 2002 and the 27,900 units in 2001.

     The company’s market share in the combined U.S. and Canadian Class 5 through 8 truck market for 2003 was 26.2% which is an increase from the 25.8% market share in 2002 and comparable to the 26.3% market share in 2001.

     The company’s total engine shipments in 2003 reached 396,000 units, which is 6% higher than the the 375,500 units shipped in 2002 and slightly higher than the 394,300 units shipped in 2001. The increase over prior year was attributable to increased shipments of engines to original equipment manufacturers (OEMs). Shipments of mid-range diesel engines by the company to OEMs during 2003 were 332,400 units, an increase of 6% from the 315,100 units shipped in 2002 and a slight increase from the 324,900 units shipped in 2001.

     Finance and insurance revenue was $287 million for 2003, a 6% increase from the $271 million for 2002 and a 3% decrease from 2001 revenue of $296 million. The increase in 2003 was primarily due to greater gains on sales of receivables. The decrease in 2002 was primarily due to lower average retail note, operating lease and serviced wholesale note balances.

     The company recorded other income of $20 million, $20 million and $43 million in 2003, 2002 and 2001, respectively.

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RESULTS OF OPERATIONS (continued)

Costs and Expenses

     Manufacturing gross margin was 12.1% in 2003, an increase from the 11.0% in 2002, but a decrease from the 13.2% in 2001. The 2003 increase in gross margin compared to 2002 is primarily due to improved pricing and cost reduction initiatives included in the Plans of Restructuring, which are described, in detail, later in this discussion. The decrease in 2002 from 2001 was attributable to start-up costs related to the introduction of new products.

     Postretirement benefits expense of $297 million in 2003 increased $69 million and $126 million over the $228 million and $171 million in 2002 and 2001, respectively. The increase is a result of higher pension and health care obligations combined with lower return on invested assets, as well as, higher amortization expense due to significant unrecognized actuarial losses in 2002 and 2001. These increases were partially offset by the effects of a required change in how certain cumulative gains and losses are amortized into income. In fiscal 2003, due to the Plan of Restructuring initiatives substantially all of the participants in the company’s pension plans became inactive. Accordingly, cumulative unrecognized gains and losses related to pension benefits will be amortized over the remaining life expectancy of the participants in the plans, 18 years in 2003. In 2002, amortization of unrecognized gains and losses was amortized over the future years of expected service of active employees of 12 years. The change in amortization period reduced pension expenses by $26 million in 2003. In 2003, amortization expense related to pensions was $70 million while the amortization for other benefit plans was $58 million. The unrecognized actuarial net losses related to pension benefits were $1,281 million, $1,179 million and $752 million, respectively, as of October 31, 2003, 2002 and 2001. Unrecognized net losses related to other benefits were $1,025 million, $1,019 million and $879 million, respectively, as of October 31, 2003, 2002 and 2001.

     Engineering and research expense in 2003 was $242 million. This is a 7% decrease from the $260 million in 2002 and a 4% decrease from the $253 million reported in 2001. The decrease in 2003 primarily relates to completion of new products and controlled spending. The increase in 2002 over 2001 reflects an increase in spending on development programs and new plant initiatives, partially offset by a reduction in the amount of spending on the company’s High Performance Vehicle (HPV) and Next Generation Diesel (NGD) programs.

     Selling, general and administrative (SG&A) expense of $487 million in 2003 is 7% lower than the $521 million in 2002 and 10% lower than the $543 million reported in 2001. The decrease in 2003 is due to continued focus on reducing expenses. The decrease in 2002 compared to 2001 is due to a reduction in the provision for losses on receivables of $24 million and the result of increased focus on reducing SG&A expenses.

     Interest expense decreased to $136 million in 2003 from $154 million in 2002 and $161 million in 2001. The decrease in 2003 and 2002 is primarily due to lower average receivable funding requirements and lower average interest rates.

     Other expense totaled $26 million, $29 million and $36 million in 2003, 2002, and 2001, respectively. The decrease for 2003 and 2002 over 2001 is due to lower finance charges on sold receivables.

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RESTRUCTURING AND OTHER NON-RECURRING CHARGES

Restructuring Charges

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

	•		Replacement of steel cab trucks with a new line of High Performance Vehicles (HPV) and a concurrent realignment of the company’s truck manufacturing facilities
	•		Launch of the next generation technology diesel engines (NGD)
	•		Consolidation of corporate operations
	•		Realignment of the bus and truck dealership network and termination of various dealerships’ contracts
	•		Closure of certain facilities and operations and exit of certain activities including the Chatham, Ontario heavy truck assembly facility, the Springfield, Ohio body plant and a manufacturing production line within one of the company’s plants
	•		Offer of early retirement and voluntary severance programs to certain union represented employees

     As a result of agreements with the National Automobile, Aerospace and Agricultural Implement Workers of Canada, the Government of Canada and the Province of Ontario, that provide the company with investment and financial support sufficient to meet the company’s cost reduction requirements and conditions, the company’s board of directors approved the decision to keep open the Chatham, Ontario facility. The company’s decision to keep open the Chatham, Ontario assembly plant along with an evaluation of all remaining restructuring reserves resulted in a net reversal to the previously recorded restructuring charges totaling $32 million.

     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 to keep open the Chatham facility along with changes in staffing requirements at other manufacturing facilities will lower 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. Benefit costs will extend beyond the completion of the workforce reductions due to the company’s contractual severance obligations.

     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. 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. The curtailment liability has been classified as a postretirement benefits liability on the Statement of Financial Condition.

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RESTRUCTURING AND OTHER NON-RECURRING CHARGES (continued)

     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. The company’s lease termination liability increased $6 million due to the loss of a significant sub-lessee at this location.

     Additional charges of $9 million were required relating to the write-down of inventory attributable to prior engine and vehicle models that were replaced.

     Additional charges of $1 million were required relating to assets that were disposed of or abandoned as a direct result of the completion of the introduction of the new HPV and NGD product programs.

     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. Adjustments to these charges totaled $8 million and primarily relate to the reversal of exit and closure costs for the Chatham facility.

Other Non-Recurring Charges

     In October 2002, Ford advised the company that its current business case for a V-6 diesel engine in the specified vehicles was not viable and discontinued its program for the use of these engines. Accordingly, 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 termination of its V-6 diesel engine program. The terms of the agreement include compensation to neutralize certain current and future V-6 diesel engine program related costs not accrued for as part of the 2002 non-recurring charge, resolution of ongoing pricing related to the company’s V-8 diesel engine program and a release by the parties of all of their obligations under the V-6 diesel engine contract. The company will continue as Ford’s exclusive supplier of V-8 diesel engines through 2012. The agreement with Ford did not have a material net impact on the Statement of Financial Condition or the Statement of Income for the year ended October 31, 2003.

Summary

     Through October 31, 2003, the company has incurred approximately $819 million in charges, net of adjustments, relating to the Plans of Restructuring and non-recurring charges. The remaining liability of $157 million is expected to be funded from existing cash balances and internally generated cash flows from operations. The total cash outlay for 2004 is expected to be $54 million with the remaining obligation of $103 million to be settled in 2005 and beyond.

     The initiatives for the Plans of Restructuring are expected to generate at least $70 million of annualized savings for the company, primarily from lower salary and benefit costs and plant operating costs. The company will continue to realize these benefits in 2004 and beyond, once the initiatives are fully implemented.

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RESTRUCTURING AND OTHER NON-RECURRING CHARGES (continued)

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

     Inventory write-downs of $9 million are included in “Cost of products sold related to restructuring” on the Statement of Income. The remaining 2003 adjustments of $(41) million 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 judgments and estimates, actual costs have differed from estimated amounts.

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 Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” Accordingly, the operating results of Brazil Truck have been classified as “Discontinued operations” and prior periods have been restated.

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

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LIQUIDITY AND CAPITAL RESOURCES

     Cash flow is generated from the manufacture and sale of trucks and mid-range diesel engines and their associated service parts as well as from product financing provided to the company’s dealers and retail customers by the financial services segment. The company’s current debt ratings have made sales of finance receivables the most economical source of funding for NFC.

     The company had working capital of $6 million at October 31, 2003, compared to $200 million at October 31, 2002. The decrease from 2002 to 2003 is primarily due to a sale of finance receivables which also resulted in NFC issuing a non-current asset-backed security.

     Consolidated cash, cash equivalents and marketable securities of the company were $1,042 million at October 31, 2003, $736 million at October 31, 2002, and $1,085 million at October 31, 2001. Cash, cash equivalents and marketable securities available to manufacturing operations totaled $502 million, $549 million and $806 million at October 31, 2003, 2002 and 2001, respectively. Manufacturing operations had intercompany receivables from the financial services operations of $4 million, $71 million and $6 million at October 31, 2003, 2002 and 2001, respectively, which the financial services operations is obligated to repay upon request. Cash, cash equivalents and marketable securities available to financial services was $540 million, $187 million, and $279 million at October 31, 2003, 2002 and 2001, respectively.

     Cash used in operations during 2003 totaled $50 million primarily from a net loss of $18 million and a net change in operating assets and liabilities of $74 million. This was partially offset by $42 million of non-cash items.

     The net use of cash resulting from the change in operating assets and liabilities included a $118 million decrease in other liabilities primarily due to a reduction in the restructuring liability as a result of cash payments during the year and a reversal of previously recorded restructuring charges as well as a decrease in the warranty liability.

     During 2003, investment programs used $136 million of cash which includes a net increase in marketable securities of $479 million as well as $206 million of capital expenditures. These were partially offset by a $560 million net decrease in retail notes and lease receivables.

     Cash provided by financing activities resulted primarily from the sale of 7,755,030 shares of the company’s common stock for an aggregate purchase price of $175 million. This was mostly offset by a net decrease in long-term debt of $78 million, a net decrease in notes and debt outstanding under the bank revolving credit facility of $68 million and net premiums paid on call options on the company’s stock of $25 million.

     Cash flow from the company’s manufacturing operations, financial services operations and financing capacity is currently sufficient to cover planned investments in the business. Capital investments for 2004 are expected to be $200 million including approximately $28 million for the HPV program and $26 million for the NGD program as well as other new engine projects. The company had outstanding capital commitments of $64 million at October 31, 2003, including $5 million for the HPV program and $16 million for the NGD program.

     The company currently estimates $300 million in capital spending through 2006 for the continued development of the HPV program, and $236 million in capital spending and $348 million in development expense through 2006 primarily to comply with future emission standards as well as other engine projects. Approximately $112 million of the development expenses for the engine programs are planned for 2004.

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LIQUIDITY AND CAPITAL RESOURCES (continued)

     The company’s required debt principal payment obligations including obligations under lease commitments at October 31, 2003, are as follows:

     At October 31, 2003, $90 million of a Mexican subsidiary’s receivables were pledged as collateral for bank borrowings. In addition, as of October 31, 2003, the company is contingently liable for approximately $91 million for various purchasing commitments, credit guarantees and buyback programs. Based on historical loss trends, the company’s exposure is not considered material.

     NFC has traditionally obtained the funds to provide financing to the company’s dealers and retail customers from sales of finance receivables, commercial paper, short and long-term bank borrowings and medium and long-term debt. At October 31, 2003, NFC’s funding consisted of sold finance receivables of $2,901 million, bank and other borrowings of $1,071 million, convertible debt of $178 million, secured borrowings of $213 million and equity of $364 million.

     NFC securitizes and sells finance receivables through Navistar Financial Retail Receivables Corporation (NFRRC), Navistar Financial Securities Corporation (NFSC), Truck Retail Accounts Corporation (TRAC) and Truck Engine Receivables Financing Corporation (TERFCO), all special purpose entities and wholly owned subsidiaries 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 NFC’s balance sheet and the investor’s interests in the related trust or conduit are not reflected as liabilities.

     NFRRC, NFSC, TRAC and TERFCO have limited recourse on the sold receivables and their assets are available to satisfy the claims of their creditors prior to such assets becoming available for their 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 or conduits. The use of cash reserves held by the trusts and conduits is restricted under the terms of the securitized sales agreements.

     Through the asset-backed public market and private placement sales, NFC has been able to fund fixed rate retail notes and finance receivables at rates which are more economical than those available to NFC in the public unsecured bond market. During 2003, NFC sold $1,705 million of retail notes and finance leases receivables, net of unearned finance income, through NFRRC in three separate sales. NFC sold $850 million of finance receivables during the six-month period ended April 2003 and $500 million during the three-month period ended July 2003 to owner trusts which, in turn, issued asset-backed securities that were sold to investors. In October 2003, NFC sold $355 million of finance receivables to owner trusts which, in turn, issued $550 million of asset-backed securities. Aggregate gains of $77 million were recognized on the sales. The remaining $195 million was funded with receivables in the first quarter of fiscal 2004, with gains of approximately $7 million recognized on the sale. As of October 31, 2003, the remaining shelf registration available to NFRRC for the public issuance of asset-backed securities was $600 million.

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LIQUIDITY AND CAPITAL RESOURCES (continued)

     At October 31, 2003, NFSC had in place a revolving wholesale note trust that funded $1,024 million of eligible wholesale notes. The trust comprises two $200 million tranches of investor certificates maturing in 2004 and 2008, two $212 million tranches of investor certificates maturing in 2005 and 2006 and a variable funding certificate with a maximum capacity of $200 million maturing in January 2004. As of October 2003, NFC had utilized $815 million of the revolving wholesale note trust.

     TRAC had in place a revolving retail account conduit that provided for the funding of retail accounts. The facility expired in August 2003. NFC is in the process of obtaining a new facility for retail accounts.

     As of October 31, 2002, TERFCO provided for the funding of up to $100 million of eligible Ford accounts receivable. The revolving facility expires in 2005 and contractually matures in 2006. As of October 31, 2003, NFC had utilized $100 million of this facility.

     NFC has an $820 million contractually committed bank revolving credit facility that will mature in December 2005. Under this agreement, the company’s Mexican finance subsidiaries are permitted to borrow up to $100 million in the aggregate. Such borrowings by the Mexican finance subsidiaries are guaranteed by the company and NFC. As of October 31, 2003, $212 million was available under the facility.

     In October 2000, Truck Retail Instalment Paper Corporation, a special purpose entity and wholly owned subsidiary of NFC, issued $500 million of senior and subordinated floating rate asset-backed notes. The proceeds were used to establish a revolving retail warehouse facility to fund NFC’s retail notes and retail leases, other than fair market value leases.

     At October 31, 2003, the Canadian operating subsidiary was contingently liable for $340 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. At October 31, 2003, the maximum amount of dividends that were available for distribution to the company from its subsidiaries under the most restrictive covenants was $363 million.

     NFC’s maximum contractual exposure under all receivable sale recourse provisions at October 31, 2003, was $369 million. Management believes that the recorded reserves for losses on sold receivables are adequate. See Notes 5 and 6 to the Financial Statements.

     As part of the sale of Harco, NFC has agreed to guarantee the adequacy of Harco’s loss reserves as of November 30, 2001, the closing date of the sale. There is no limit to the potential amount of future payments required under this agreement, which is scheduled to expire in November 2008. As security for its obligation under this agreement, NFC has escrowed $5 million, which will become available for use in February 2004. Management believes the carrying amount of the liability is adequate to cover any future potential payments.

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LIQUIDITY AND CAPITAL RESOURCES (continued)

     The company and International are obligated under certain agreements with public and private lenders of NFC to maintain the subsidiary’s income before interest expense and income taxes at not less than 125% of its total interest expense. No income maintenance payments were required for the three years ended October 31, 2003.

     There have been no material changes in the company’s hedging strategies or derivative positions since October 31, 2002. Further disclosure may be found in Note 13 to the Financial Statements.

     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 2003.

     In December 2002, Fitch IBCA lowered the company’s and NFC’s senior unsecured debt ratings to BB from BB+. They also lowered the company’s and NFC’s senior subordinated debt ratings to B+ from BB-. Also in December 2002, Standard and Poor’s lowered the company’s and NFC’s senior unsecured debt ratings to BB- from BB and the company’s senior subordinated debt rating to B from B+. In December 2002, Moody’s also lowered the company’s senior unsecured debt rating to Ba3 from Ba1 and the company’s and NFC’s senior subordinated debt ratings to B2 from Ba2.

     In December 2002, the company completed the private placement of $190 million of senior convertible bonds due 2007. The bonds were priced to yield 2.5% with a conversion premium of 30% on a closing price of $26.70. Simultaneous with the issuance of the convertible bonds, the company entered into two call option derivative contracts, the consequences of which will allow the company to eliminate share dilution upon conversion of the convertible debt from the conversion price of the bond up to a 100% premium over the share price at issuance. In February 2003, $100 million of the net proceeds from the $190 million offering was used to repay the aggregate principal amount of the 7% senior notes due February 2003. The remaining funds were used to repay other existing debt, replenish cash balances that were used to repay other debt that matured in fiscal 2002 and to pay fees and expenses related to the offering.

     It is the opinion of management that, in the absence of significant unanticipated cash demands, current and forecasted cash flow as well as available financing actions will provide sufficient funds to meet operating requirements and capital expenditures. Currently, under the limitations in various debt agreements, the manufacturing operations are generally unable to incur material amounts of additional debt. The manufacturing operations are generally allowed under these limitations to refinance their debt as it matures. Management believes that collections on the outstanding receivables portfolios as well as funds available from various funding sources will permit the financial services operations to meet the financing requirements of International’s dealers and retail customers.

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LIQUIDITY AND CAPITAL RESOURCES (continued)

Pension and Other Postretirement Benefits

     Generally, the company’s pension plans are non-contributory. The company’s policy is to fund its pension plans in accordance with applicable U.S. and Canadian government regulations and to make additional payments as funds are available to achieve full funding of the accumulated benefit obligation. At October 31, 2003, all legal funding requirements had been met. The company contributed $164 million to its pension plans in 2003 and $91 million in 2002. In 2004, the company expects to contribute approximately $162 million to its pension plans to meet legal requirements.

     Other benefits obligations are primarily funded in accordance with the legal agreement, which governs the VEBA which currently requires the company to fund a portion of the plan’s annual service cost.

     Funded status is derived by subtracting the value of the projected benefit obligations at October 31, 2003 from the end of year fair value of plan assets.

     The funded status of the pension benefits deteriorated from $(988) million at the end of 2002 to $(994) million at the end of 2003. This decline was primarily due to actuarial losses of $428 million, payments to plan beneficiaries of $298 million, offset by positive returns on plan assets of $514 million and company contributions of $164 million, and a decrease in projected plan obligations of $27 million due to the reversal of a portion of a curtailment loss related to the Plans of Restructuring. The funded status of the other benefits deteriorated from $(1,703) million at the end of 2002 to $(1,810) million at the end of 2003. This decline was primarily due to actuarial losses of $157 million, payments to plan beneficiaries of $52 million, offset by positive returns on plan assets of $139 million.

     Changes in management’s assumptions used by the actuaries will have an impact on postretirement benefits expense and the projected benefit obligation. A 25 basis point change in the discount rate would increase/decrease pension expense by approximately $11 million and other benefits expense by approximately $4 million annually. The impact of a change of 25 basis points in the discount rate would increase/decrease the obligation for pension benefits by approximately $125 million and the obligation for other benefits by $62 million. A change in the expected return on assets of 25 basis points would increase/decrease pension expense by $7 million and other benefits expense by $1 million annually.

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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 have 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, or shipped to, each site 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 its 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.

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 purposes are reported in earnings in the period in which they occur.

     The call option derivative contracts entered into in connection with the issuance of $190 million senior convertible notes in December 2002 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

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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 accounting 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 stock 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.

     Management estimates the prepayment speed for the receivables sold and the discount rate used to present value the interest-only receivable in order to calculate the gain or loss. Estimates of prepayment speeds 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 interest-only receivable on a quarterly basis. The fair value of the interest-only receivable is based on updated estimates of prepayment speeds and discount rates.

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

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CRITICAL ACCOUNTING POLICIES (continued)

Product Liability (continued)

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 heath care expenses are dependent on management’s assumptions used by actuaries in calculating such amounts. These assumptions include discount rates, health care cost trend rates, inflation, long-term 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 indicators. 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 the projected monthly benefits. This portion of the liability is weighted using a discount rate based on the October 31, 2003 effective yield on the dedicated bond investment portfolio. The remaining non-dedicated portion of the liability used the average of the October 31, 2003 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 achieved by selecting bonds whose credit characteristics satisfy the quality requirements (e.g. Aa3/AA- or better) but whose yields are slightly higher than the “normal” bonds that comprise the index. For the other 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 provision for an incremental yield.

     Based on this approach, at October 31, 2003, the company lowered the discount rate for pension plans to 6.2% from 7.2% at October 31, 2002. The discount rate for the other benefits was lowered from 7.1% at October 31, 2002 to 6.6% at October 31, 2003.

     The company determines its expected return on plan asset assumptions 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, adjusted these returns for a premium due to the active management of its investment funds, and adjusted the computed amount for any expected changes in the long-term outlook for the equity and fixed income markets. The company’s expected return on assets was based on expected equity and fixed income returns weighted by the percentage of assets allocated to each plan.

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CRITICAL ACCOUNTING POLICIES (continued)

Pension and Other Postretirement Benefits (continued)

     As a result, the company revised its estimate of the long-term rate of return on assets for both its pension and postretirement health benefits to 9.0% from 10.1% and 11.0%, and 9.9% and 10.8%, for 2003, 2002 and 2001 respectively. The company did not change the long-term rate of return on plan assets for both pension and postretirement health benefits in 2004.

     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 reflects management’s estimate of the losses inherent in financial services’ portfolio of finance receivables and operating leases. 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. These factors require management judgment, and different assumptions or changes in economic circumstances could result in changes to the allowance for losses.

     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 are net of these benefits.

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 June 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 143 (SFAS 143), “Accounting for Asset Retirement Obligations.” The company adopted the Statement effective November 1, 2002 and has properly recorded obligations associated with the retirement of long-lived assets. These obligations do not have a material impact on the company’s results of operations, financial condition or cash flows.

     In November 2002, the FASB issued Interpretation No. 45 (FIN 45), “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” FIN 45 elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also requires a guarantor to recognize, at inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The company adopted this statement effective November 1, 2002 and has provided disclosures about guarantees in Note 14.

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NEW ACCOUNTING PRONOUNCEMENTS (continued)

     In December 2002, the FASB issued Statement of Financial Accounting Standards No. 148, “Accounting for Stock-Based Compensation.” This Statement provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. It also requires prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The company adopted this Statement effective April 30, 2003 and elected to continue to account for stock-based compensation in accordance with Accounting Principles Board Opinion No. 25, “Accounting of Stock Issued to Employees.” The company has provided the required disclosures in Note 1.

     In January 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities.” This interpretation addresses consolidation requirements of variable interest entities. The effective date for this Interpretation has been extended until the first fiscal period ending after December 15, 2003. The company is still evaluating the impact, if any, this Interpretation may have on its results of operations, financial condition or cash flows.

     In April 2003, the FASB issued Statement of Financial Accounting Standards No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities,” which amends and clarifies accounting and reporting for certain derivative instruments. The company adopted this Statement effective July 1, 2003 and currently reports cash received from, or paid to, derivative contracts consistent with the underlying assets on its Statement of Cash Flow.

     In May 2003, the FASB issued Statement of Financial Accounting Standards No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity,” which establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. The company adopted this Statement effective August 1, 2003. This Statement had no impact on the company’s results of operations, financial condition, and cash flows.

INCOME TAXES

     The Statement of Financial Condition at October 31, 2003, includes a deferred tax asset of $1,639 million, net of valuation allowances of $110 million. The deferred tax asset at October 31, 2002, of $1,528 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 deferred tax asset at October 31, 2003, includes the tax benefit from cumulative tax net operating losses (NOL) of $1,664 million, cumulative alternative minimum tax and research and development credits of $55 million and cumulative expenses of $2,687 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 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

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INCOME TAXES (continued)

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 $3,800 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 $1,456 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 published 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:

BUSINESS ENVIRONMENT

     Sales of Class 5 through 8 trucks have historically been cyclical, with demand affected by such economic factors as industrial production, construction, demand for consumer durable goods, interest rates and the earnings and cash flow of dealers and customers. Truck sales in 2003 were hindered by a number of factors including the overall state of the economy, rising insurance costs, tightened credit availability and increased fuel prices. The company’s U.S. and Canadian order backlog at October 31, 2003, is 21,500 units, consistent with October 31, 2002. Historically, retail deliveries have been impacted by the rate at which new truck orders are received. Therefore, in order to manage through the current downturn, the company continually evaluates order receipts and backlog throughout the year by balancing production with demand as appropriate.

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BUSINESS ENVIRONMENT (continued)

     The company currently projects 2004 U.S. and Canadian Class 8 heavy truck demand to be 191,000 units, up 20% from 2003. Class 6 and 7 medium truck demand, excluding school buses, is forecast at 86,000 units, 15% higher than in 2003. Demand for school buses is expected to be 27,500 units, consistent with 2003. Mid-range diesel engine shipments by the company to OEMs in 2004 are expected to be 349,000 units, 5% higher than 2003.

     In May 2003, the company announced that as a result of discussions with the National Automobile, Aerospace and Agricultural Implement Workers of Canada, or CAW, it has reached a conditional understanding on a plan that would keep the company’s Chatham, Ontario heavy truck assembly plant open if certain financial and operating conditions were met including obtaining financial support from the Government of Canada and the Province of Ontario. In September 2003, the company finalized negotiations with the Government of Canada and the Province of Ontario that provided the company with investment and financial support sufficient to meet the company’s financial requirements and conditions. Accordingly, the company’s board of directors has approved the decision to keep the Chatham, Ontario heavy truck assembly plant open and maintain a production schedule of heavy trucks.

     In September 2003, the company accelerated the sign-up period for an early retirement window program offered to certain eligible, long serviced United Auto Worker employees. The purpose of the window program is to enable the company to address the changing staffing needs of the business. The expected dates for retirement under the program have not been changed. This program along with an early retirement window program and voluntary severance program offered at the Chatham facility resulted in an adjustment to the previously recorded curtailment loss which is described in further detail in Note 11 to the financial statements.

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,” “intend,” “plan,” “estimate” or similar expressions. These statements are based on assumptions that we have made in light of our experience in the industry as well as our perceptions of historical trends, current conditions, expected future developments and other factors we believe are appropriate under the circumstances. As you read and consider this Form 10-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, 2003 and 2002, the net fair value of these instruments would decrease by approximately $19 million and $10 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. At October 31, 2003 and 2002, the potential reduction in future earnings from a hypothetical instantaneous 10% adverse change in quoted foreign currency spot rates applied to foreign currency sensitive instruments would be approximately $2 million. 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 effects 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.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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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, independent auditors. 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. Management believes that the company’s system of internal controls is adequate to accomplish these objectives. The 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. The system is tested and evaluated regularly by the company’s internal auditors as well as by the independent auditors in connection with their annual audit of the financial statements. The independent auditors conduct their audit in accordance with auditing standards generally accepted in the United States of America and perform such tests of transactions and balances as they deem necessary. Management considers the recommendations of its internal auditors and independent auditors concerning the company’s system of internal controls and takes the necessary actions that are cost-effective in the circumstances to respond appropriately to the recommendations presented.

     The Audit Committee of the board of directors, composed of six non-employee directors, meets periodically with the independent auditors, 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 auditors, 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 auditors, 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
President and
Chief Executive Officer

Robert C. Lannert
Vice Chairman
and Chief Financial Officer

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INDEPENDENT AUDITORS’ REPORT

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, 2003 and 2002, and the related Statements of Income, Comprehensive Income and Cash Flow for each of the three years in the period ended October 31, 2003. 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 auditing standards generally accepted in the United States of America. 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 examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

     In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Navistar International Corporation and Consolidated Subsidiaries at October 31, 2003 and 2002, and the results of their operations and their cash flow for each of the three years in the period ended October 31, 2003, in conformity with accounting principles generally accepted in the United States of America.

Deloitte & Touche LLP
December 18, 2003
Chicago, Illinois

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STATEMENT OF INCOME

See Notes to Financial Statements

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STATEMENT OF COMPREHENSIVE INCOME

See Notes to Financial Statements

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STATEMENT OF FINANCIAL CONDITION