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

Form 10-Q

Dana Corporation

(419) 535-4500

     Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes    X        No         

     Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

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DANA CORPORATION AND CONSOLIDATED SUBSIDIARIES
INDEX

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PART I. FINANCIAL INFORMATION

CONDENSED BALANCE SHEET (Unaudited)

(in millions)

The accompanying notes are an integral part of the condensed financial statements.

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ITEM 1. (Continued)

DANA CORPORATION

CONDENSED STATEMENT OF INCOME (Unaudited)

(in millions except per share amounts)

*

Amount is less than one-half million dollars and per share amounts are less than one-half cent per share.

The accompanying notes are an integral part of the condensed financial statements.

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ITEM 1. (Continued)

DANA CORPORATION

CONDENSED STATEMENT OF CASH FLOWS (Unaudited)

(in millions)

The accompanying notes are an integral part of the condensed financial statements.

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ITEM 1. (Continued)

NOTES TO CONDENSED FINANCIAL STATEMENTS (Unaudited)

(in millions)

1.		In our opinion, the accompanying condensed financial statements include all adjustments, including those necessary to reflect the adoption of Statement of Financial Accounting Standards (SFAS) No. 142, “Goodwill and Other Intangible Assets,” as of January 1, 2002, and other adjustments, consisting of only normal and recurring adjustments, necessary for a fair presentation of financial condition, results of operations and cash flows for the interim periods presented. Where appropriate, we have reclassified certain amounts in 2001 to conform to the 2002 presentation. These condensed financial statements should be read in conjunction with the audited financial statements and notes thereto included in our annual report on Form 10-K for the year ended December 31, 2001.
2.		In connection with the adoption of SFAS No. 142, we discontinued the amortization of goodwill as of January 1, 2002. In lieu of amortization, the new standard requires that goodwill be tested for impairment as of the date of adoption and at least annually thereafter. Our initial impairment test indicated that the carrying amounts of some of our reporting units exceeded the corresponding fair values, which were determined based on the discounted estimated future cash flows of the reporting units. The implied fair value of goodwill in these reporting units was then determined through the allocation of the fair values to the underlying assets and liabilities. The January 1, 2002 carrying amounts of the goodwill in these reporting units exceeded its implied fair value by $289. The $289 write-down of goodwill to its fair value as of January 1, 2002, net of $69 of related tax benefits, has been reported as the effect of a change in accounting in the accompanying condensed financial statements. The goodwill included in our December 31, 2001 financial statements, which included the $289 described above, was supported by the undiscounted estimated future cash flows of the related operations.
		Goodwill increased $9 during the quarter ended September 30, 2002, with $15 resulting from an acquisition within Automotive Systems Group. This increase was partially offset by a $6 decline due to currency fluctuations. The changes in goodwill during the nine months ended September 30, 2002, by segment, are presented in the following table.

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ITEM 1. (Continued)

NOTES TO CONDENSED FINANCIAL STATEMENTS (Unaudited)

(in millions except per share amounts)

SFAS No. 142 does not provide for restatement of our results of operations for periods ended prior to January 1, 2002. The following table reconciles the reported net results for the quarter and nine months ended September 30, 2001 to the pro forma results that would have been reported if the guidance contained in SFAS No. 142 had been adopted prior to 2001.

		In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 143, “Accounting for Asset Retirement Obligations.” SFAS No. 143 addresses accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated retirement costs. The Statement requires the recognition of the fair value of the legal obligation associated with the retirement of long-lived assets at the time the obligation is probable and estimable. We are required to implement SFAS No. 143 on January 1, 2003. We do not expect the implementation of SFAS No. 143 to have a material effect on our consolidated financial position or consolidated results of operations.
		In August 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” We adopted SFAS No. 144 on January 1, 2002. SFAS No. 144 retains the previously existing accounting requirements related to the recognition of impairment for assets to be held and used in operations. However, the impairment of long-lived assets held for sale is measured taking into consideration the costs to sell the assets, as well as impairment measurement criteria of previously existing accounting requirements. In addition, SFAS No. 144 broadens the definition of what constitutes a discontinued business for financial reporting purposes. Accordingly, more dispositions will qualify for presentation as discontinued businesses under SFAS No. 144. The provisions of SFAS No. 144 are generally prospective from the date of adoption and, therefore, do not apply to divestitures announced prior to January 1, 2002.

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ITEM 1. (Continued)

NOTES TO CONDENSED FINANCIAL STATEMENTS (Unaudited)

(in millions)

		The adoption of this Statement did not have a material effect on our consolidated financial position or consolidated results of operations.
		In June 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” SFAS No. 146 requires that a liability for a cost that is associated with an exit or disposal activity be recognized when the liability is incurred. The liability is measured at its fair value under the Statement. It overrides the guidance of the Emerging Issues Task Force (EITF) in EITF Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)” (EITF No. 94-3). EITF No. 94-3 required that a liability be recognized for exit costs on the date that a company committed itself to an exit plan. SFAS No. 146 will be effective for disposal or exit activities that are initiated after December 31, 2002. We are currently studying the impact of this pronouncement.
3.		In accordance with plans announced in October 2001, we are pursuing the sale of businesses of Dana Credit Corporation (DCC). See Note 9 for more information. In June 2002, we completed the sale of selected subsidiaries of DCC and recorded an after-tax gain of $27 on proceeds of $69. This gain is included in the Revenue from lease financing and other income line in the Condensed Statement of Income. In September 2002, DCC reported the sale of its Real Estate Services Group for $153; the proceeds approximated the net book value of the subsidiaries and assets included in the transaction.
4.		In August 2002, we sold our 49% interest in GKN Driveshafts Limited, a company with operations in the United Kingdom and Spain. The proceeds of $31, which approximated the carrying value of the investment, were then used to acquire Ayra Cardan, the subsidiary of GKN Driveshafts Limited with operations in Spain.
		During the same month, we entered into an agreement to sell our light-duty cylinder liner business to an equity affiliate. The business generated sales of $53 in 2001 and $46 in the first nine months of 2002. Part of our consideration for the sale of the business will be an increase in our ownership in the affiliate from 40% to 49%.
5.		Following is a reconciliation of average shares for purposes of calculating basic and diluted net income (loss) per share.

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ITEM 1. (Continued)

NOTES TO CONDENSED FINANCIAL STATEMENTS (Unaudited)

(in millions except per share amounts)

		Options to purchase approximately 14,660,000 shares of common stock at prices ranging from $17.64 to $60.09 were outstanding at September 30, 2002 but were not included in the computation of diluted earnings per share because the options’ exercise prices were greater than the average market price of the common shares. The options expire from October 2002 to July 2012.
6.		On an annual basis, disclosure of comprehensive income is incorporated into the Statement of Shareholder’s Equity. This Statement is not presented on a quarterly basis. Comprehensive income includes net income and components of other comprehensive income, such as foreign currency translation adjustments, unrealized gains or losses on certain marketable securities and derivative instruments and minimum pension liability adjustments.
		Our total comprehensive income (loss) is as follows:

		The $77 deferred translation loss in the third quarter of 2002 was mainly the result of a decrease in the value of the Brazilian real and Canadian dollar, relative to the U.S. dollar. These losses were partially offset by the effect of a stronger British pound. For the first nine months of 2002, changes in the relative value of the Brazilian real and the Argentine peso accounted for the largest components of the deferred translation loss of $115, partially offset by the effect of movements in the euro and the British pound. The $25 deferred translation gain in the third quarter of 2001 was primarily due to the strengthening of the euro against the U.S. dollar which, together with gains in Thailand and Australia, more than offset the loss resulting from further weakening of the Brazilian real. For the first nine months of 2001, weakening of the Brazilian real accounted for approximately $67 of deferred translation loss and the euro added another $23.
7.		We completed a private placement of $250 of unsecured notes in March 2002. We used a portion of the proceeds to reduce the amount outstanding under one of our revolving credit facilities. The notes carry a coupon interest rate of 10.125% and an effective interest rate of 10.375%. The notes mature in March 2010. The indenture for these notes contains limits on borrowings, payments and transactions effectively the same as those in the indenture for the notes we issued in August 2001.
8.		At June 30, 2002, we were party to several interest rate swap agreements under which we agreed to exchange the difference between fixed rate and floating rate interest amounts on notional amounts corresponding with our August 2001 and March 2002 notes. Converting the interest rate of these notes to a variable rate provides a better

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ITEM 1. (Continued)

NOTES TO CONDENSED FINANCIAL STATEMENTS (Unaudited)

(in millions)

		balance of fixed and variable rate debt. In September 2002, we received $72 in connection with amending the variable rate in two of the agreements and terminating a third agreement. Because these agreements had been designated as fair value hedges of the corresponding notes, the carrying value of the notes had been adjusted to offset the recent increases in the fair value of the swap contracts. This valuation adjustment will be amortized as a reduction of interest expense over the remaining life of the notes. The terminated agreement was replaced with a new swap agreement.
		Our current fixed-for-variable swap agreements, including the amended contracts, have all been designated as fair value hedges of the August 2001 and March 2002 notes. As of September 30, 2002, the agreements provided for us to receive an average fixed rate of 9.3% on notional amounts of $825 and €200 and pay variable rates approximating 6.7%. The agreements expire in August 2011 ($575 and €200) and March 2010 ($250). The $16 aggregate fair value of these agreements was recorded as a non-current asset and offset by an increase in the carrying value of long-term debt at September 30, 2002. This adjustment of long-term debt, which does not affect the scheduled principal payments, will fluctuate with the fair value of the agreements and will not be amortized if the agreements remain open.
9.		Our operations are organized into four market-focused Strategic Business Units (SBUs): Automotive Systems Group (ASG); Automotive Aftermarket Group (AAG); Engine and Fluid Management Group (EFMG); and Heavy Vehicle Technologies and Systems Group (HVTSG), our newest SBU which was formed by the April 2002 combination of Commercial Vehicle Systems (CVS) and Off-Highway Systems Group (OHSG). Our segment reporting is currently unaffected by the combination, as financial reporting to management of HVTSG reflects CVS and OHSG separately. Accordingly, our segments are ASG, AAG, EFMG, CVS, OHSG and DCC.
		In accordance with plans announced in October 2001, we are pursuing the sale of DCC’s businesses. We intend to sell a substantial majority of DCC’s businesses and assets, but expect to retain certain assets and liabilities, including debt, for tax and other business reasons. The assets and operations we expect to retain include services and related assets that support other Dana operations, a technology-based service business where joint marketing opportunities exist and certain portfolio investments where tax attributes and/or market conditions make disposal uneconomical at this time. We also expect to retain asset-specific financing and general obligations that are uneconomical to pay off in advance of their scheduled maturities.
		Management evaluates the operating segments and regions as if DCC were accounted for on the equity method of accounting rather than on the fully consolidated basis used for external reporting. This is done because DCC is not homogeneous with our manufacturing operations, its financing activities do not support the sales of our other operating segments and its financial and performance measures are inconsistent with those of our other operating segments.
		Operating profit after tax (PAT) is the key internal measure of performance used by management, including our chief operating decision maker, as a measure of segment profitability. With the exception of DCC, operating PAT represents earnings before

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ITEM 1. (Continued)

NOTES TO CONDENSED FINANCIAL STATEMENTS (Unaudited)

(in millions)

		interest and taxes (EBIT), tax effected at 39% (our estimated long-term effective rate), plus equity in earnings of affiliates. Net profit (loss), which is operating PAT less allocated corporate expenses and net interest expense, provides a secondary measure of profitability for our segments that is more comparable to that of a free-standing entity. The allocation is based on segment sales because it is readily calculable, easily understood and, we believe, provides a reasonable distribution of the various components of our corporate expenses among our diverse business units.
		The Other category includes businesses unrelated to the segments, discontinued businesses, trailing liabilities for closed plants and corporate administrative functions. For purposes of presenting operating PAT, Other also includes interest expense net of interest income, elimination of inter-segment income and adjustments to reflect the actual effective tax rate. In the net profit (loss) column, Other includes the net profit or loss of businesses not assigned to the segments, discontinued businesses, minority interest in earnings and the tax differential.
		As discussed in Note 2, the amortization of goodwill was discontinued at the beginning of 2002 with the adoption of SFAS No. 142. Although goodwill amortization expense was included in the results of operations of the SBUs prior to 2002, we have adjusted the segment information for 2001 to present it on a consistent basis with the 2002 presentation. The 2001 goodwill amortization expense is now presented on a separate line.

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ITEM 1. (Continued)

NOTES TO CONDENSED FINANCIAL STATEMENTS (Unaudited)

(in millions)

Information used to evaluate the segments and regions is presented in the following tables: