10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

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

For the quarterly period ended April 30, 2008

OR

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

For the transition period from                     To                     

Commission file number 1-9618

NAVISTAR INTERNATIONAL CORPORATION

(Exact name of registrant as specified in its charter)

Delaware	36-3359573
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
4201 Winfield Road, P.O. Box 1488, Warrenville, Illinois	60555
(Address of principal executive offices)	(Zip Code)

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “larger accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer  x    Accelerated filer  ¨    Non-accelerated filer  ¨    Smaller reporting company  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act.)    Yes  ¨    No  x.

As of April 30, 2008, the number of shares outstanding of the registrant’s common stock was 70,239,785, net of treasury shares.

Documents incorporated by reference: None.

NAVISTAR INTERNATIONAL CORPORATION FORM 10-Q

INDEX

		Page
PART I
Item 1.	Condensed Consolidated Financial Statements (Unaudited)	3
	Consolidated Statements of Operations for the three and six months ended April 30, 2008 and 2007	3
	Consolidated Balance Sheets as of April 30, 2008 and October 31, 2007	4
	Condensed Consolidated Statements of Cash Flows for the six months ended April 30, 2008 and 2007	5
	Notes to Condensed Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	28
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	52
Item 4.	Controls and Procedures	52
PART II
Item 6.	Exhibits	54
	Signature	55

2

PART I

Item  1. Condensed Consolidated Financial Statements

Navistar International Corporation and Subsidiaries

Consolidated Statements of Operations

(Unaudited)

	Three Months Ended April 30,						Six Months Ended April 30,
	2008			2007			2008			2007
(in millions, except per share data)
Sales and revenues
Sales of manufactured products, net	$	3,853		$	2,900		$	6,713		$	5,950
Finance revenues		96			90			190			188
Sales and revenues, net		3,949			2,990			6,903			6,138
Costs and expenses
Costs of products sold		3,196			2,472			5,647			5,077
Selling, general and administrative expenses		364			345			685			642
Engineering and product development costs		99			95			181			198
Interest expense		102			131			269			242
Other (income) expenses, net		(4	)		(16	)		(5	)		13
Total costs and expenses		3,757			3,027			6,777			6,172
Equity in income of non-consolidated affiliates		21			18			45			40
Income (loss) before income tax		213			(19	)		171			6
Income tax benefit (expense)		2			(6	)		(9	)		(19	)
Net income (loss)	$	215		$	(25	)	$	162		$	(13	)
Basic earnings (loss) per share	$	3.06		$	(0.36	)	$	2.30		$	(0.19	)
Diluted earnings (loss) per share	$	2.94		$	(0.36	)	$	2.22		$	(0.19	)
Weighted average shares outstanding
Basic		70.3			70.3			70.3			70.3
Diluted		73.2			70.3			72.9			70.3

See Notes to Condensed Consolidated Financial Statements

3

Navistar International Corporation and Subsidiaries

Consolidated Balance Sheets

(Unaudited)

	As of
	April 30, 2008			October 31, 2007
(in millions, except per share data)
ASSETS
Current assets
Cash and cash equivalents	$	675		$	777
Marketable securities		38			6
Finance and other receivables (net of allowance for losses of $53 and $60 as of April 30, 2008 and October 31, 2007, respectively)		3,142			2,941
Inventories		1,364			1,412
Deferred taxes, net		115			115
Other current assets		167			194
Total current assets		5,501			5,445
Restricted cash and cash equivalents		735			419
Finance and other receivables (net of allowance for losses of $40 and $41 as of April 30, 2008 and October 31, 2007, respectively)		2,330			2,478
Investments in and advances to non-consolidated affiliates		175			154
Property and equipment (net of accumulated depreciation and amortization of $2,266 and $2,199 as of April 30, 2008 and October 31, 2007, respectively)		1,980			2,086
Goodwill		359			353
Intangible assets (net of accumulated amortization of $65 and $53 as of April 30, 2008 and October 31, 2007, respectively)		273			286
Pension assets		121			103
Deferred taxes, net		20			35
Other noncurrent assets		120			89
Total assets	$	11,614		$	11,448
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Liabilities
Current liabilities
Notes payable and current maturities of long-term debt	$	856		$	798
Accounts payable		2,027			1,770
Other current liabilities		1,203			1,423
Total current liabilities		4,086			3,991
Long-term debt		6,028			6,083
Postretirement benefits liabilities		1,235			1,327
Other noncurrent liabilities		827			781
Total liabilities		12,176			12,182
Stockholders’ deficit
Series D convertible junior preference stock		4			4
Common stock and additional paid in capital (par value $0.10 per share, 75.4 million shares issued as of April 30, 2008 and October 31, 2007)		2,107			2,101
Accumulated deficit		(2,362	)		(2,519	)
Accumulated other comprehensive loss		(146	)		(155	)
Common stock held in treasury, at cost (5.1 million shares as of April 30, 2008 and October 31, 2007)		(165	)		(165	)
Total stockholders’ deficit		(562	)		(734	)
Total liabilities and stockholders’ deficit	$	11,614		$	11,448

See Notes to Condensed Consolidated Financial Statements

4

Navistar International Corporation and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited)

	Six Months Ended April 30,
	2008			2007
(in millions)
Cash flows from operating activities
Net income (loss)	$	162		$	(13	)
Adjustments to reconcile net income (loss) to cash provided by (used in) operating activities
Depreciation and amortization		156			151
Depreciation of equipment held for or under lease		30			27
Deferred taxes		—			(4	)
Amortization of debt issuance costs		10			5
Stock-based compensation		2			4
Provision for doubtful accounts		18			16
Equity in income of non-consolidated affiliates		(45	)		(40	)
Dividends from non-consolidated affiliates		29			52
Gain on sale of affiliate		(4	)		—
(Gain) loss on sale of property and equipment		(2	)		6
Loss on repurchases of debt		—			31
Changes in other assets and liabilities		(45	)		(468	)
Total adjustments		149			(220	)
Net cash provided by (used in) operating activities		311			(233	)
Cash flows from investing activities
Purchases of marketable securities		(42	)		(148	)
Sales or maturities of marketable securities		11			264
Net change in restricted cash and cash equivalents		(316	)		163
Capital expenditures		(103	)		(139	)
Purchase of equipment held for or under lease		(27	)		(29	)
Proceeds from sale of property and equipment		20			10
Investments and advances to non-consolidated affiliates		(4	)		(7	)
Proceeds from sale of affiliate		19			—
Business acquisitions, net of cash acquired		—			(7	)
Other investing activities		1			(1	)
Net cash provided by (used in) investing activities		(441	)		106
Cash flows from financing activities
Proceeds from issuance of securitized debt		813			473
Principal payments on securitized debt		(980	)		(671	)
Proceeds from issuance of non-securitized debt		101			1,548
Principal payments on non-securitized debt		(8	)		(1,525	)
Net increase (decrease) in notes and debt outstanding under revolving credit facilities		143			(186	)
Principal payments under financing arrangements and capital lease obligations		(51	)		(30	)
Debt issuance costs		(7	)		(19	)
Net cash provided by (used in) financing activities		11			(410	)
Effect of exchange rate changes on cash and cash equivalents		17			28
Decrease in cash and cash equivalents		(102	)		(509	)
Cash and cash equivalents at beginning of period		777			1,157
Cash and cash equivalents at end of the period	$	675		$	648

See Notes to Condensed Consolidated Financial Statements

5

Navistar International Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)

1. Summary of significant accounting policies

Organization and Description of the Business

Navistar International Corporation (“NIC”), incorporated under the laws of the state of Delaware in 1993, is a holding company whose principal operating subsidiaries are Navistar, Inc. and Navistar Financial Corporation (“NFC”). References herein to the “company,” “we,” “our,” or “us” refer collectively to NIC, its subsidiaries, and certain variable interest entities (“VIEs”) of which we are the primary beneficiary. We operate in four principal industry segments: Truck, Engine, Parts (collectively called “manufacturing operations”), and Financial Services. The Financial Services segment consists of NFC and our foreign finance operations (collectively called “financial services operations”).

Basis of Presentation and Consolidation

The accompanying unaudited condensed consolidated financial statements include the assets, liabilities, revenues, and expenses of our manufacturing operations, majority owned dealers, wholly-owned financial services subsidiaries, and VIEs of which we are the primary beneficiary. The effects of transactions among consolidated entities have been eliminated to arrive at the consolidated amounts. Certain reclassifications were made to prior year’s amounts to conform to the 2008 presentation.

We prepared the accompanying unaudited condensed consolidated financial statements in accordance with United States (“U.S.”) generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X issued by the Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information and notes required by U.S. GAAP for comprehensive annual financial statements.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting policies described in the Annual Report on Form 10-K for the year ended October 31, 2007 and should be read in conjunction with the disclosures therein. In our opinion, these interim financial statements reflect all adjustments, consisting of normal recurring adjustments, necessary to present fairly the financial position, results of operations, and cash flows for the periods presented. Operating results for interim periods are not necessarily indicative of annual operating results.

Accounting Changes

As of November 1, 2007, we adopted Financial Accounting Standards Board (“FASB”) Interpretation No. 48, Accounting for Uncertainty in Income Taxes—an Interpretation of FASB Statement No. 109. See Note 9, Income taxes, for more information.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses. Significant estimates and assumptions are used for, but are not limited to, pension and other postretirement benefits, allowance for losses, sales of receivables, income tax contingency accruals and valuation allowances, product warranty accruals, asbestos accruals, asset impairment, and litigation related accruals. Actual results could differ from our estimates.

6

Navistar International Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements—(Continued)

(Unaudited)

Concentration Risks

Our financial position, results of operations, and cash flows are subject to concentration risks related to concentrations of union employees and two customers. As of April 30, 2008, approximately 6,100, or 64%, of our hourly workers and approximately 700, or 10%, of our salaried workers are represented by labor unions and are covered by collective bargaining agreements. See Note 13, Segment reporting, for discussions on customer concentration.

Product Warranty Liability

Accrued product warranty and deferred warranty revenue activity is as follows:

	Six Months Ended April 30,
	2008			2007
(in millions)
Balance, at beginning of period	$	677		$	777
Costs accrued and revenues deferred		100			120
Adjustments to pre-existing warranties(A)		5			25
Payments and revenues recognized		(174	)		(170	)
Balance, at end of period	$	608		$	752

(A) Adjustments to pre-existing warranties reflect changes in our estimate of warranty costs for products sold in prior periods.

The amount of deferred revenue related to extended warranty programs as of April 30, 2008 and October 31, 2007 was $125 million and $127 million, respectively. Revenue recognized under our extended warranty programs was $12 million and $6 million, and $23 million and $11 million for three months and six months ended April 30, 2008 and 2007, respectively.

New Accounting Pronouncements

Accounting pronouncements issued by various standard setting and governmental authorities that have not yet become effective with respect to our condensed consolidated financial statements are described below, together with our assessment of the potential impact they may have on our financial position, results of operations, or cash flows:

Pronouncement	Effective Date	Impact on Our Financial Condition and Results of Operations
Emerging Issues Task Force Issue No. 08-3, Accounting by Lessees for Nonrefundable Maintenance Deposits	Effective for financial statements issued for fiscal years beginning after December 15, 2008 and interim periods within those fiscal years. Early adoption is not permitted. Our effective date is November 1, 2009.	We are evaluating the potential impact, if any.

7

Navistar International Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements—(Continued)

(Unaudited)

Pronouncement	Effective Date	Impact on Our Financial Condition and Results of Operations
FASB Staff Position No. FAS 142-3, Determination of the Useful Life of Intangible Assets	Effective for fiscal years beginning after December 15, 2008 and interim periods within those fiscal years. Our effective date is November 1, 2009.	We are evaluating the potential impact, if any.
FASB Statement No. 161, Disclosures about Derivative Instruments and Hedging Activities—An Amendment of FASB Statement No. 133	Effective for fiscal years and interim reporting periods beginning after November 15, 2008. Our effective date is February 1, 2009.	When effective, we will comply with the disclosure provisions of this Statement.
FASB Statement No. 160, Noncontrolling Interests in Consolidated Financial Statements—An Amendment of ARB No. 51	Effective for fiscal years and interim periods within those fiscal years, beginning on or after December 15, 2008. Our effective date is February 1, 2009.	We are evaluating the potential impact, if any.
FASB Statement No. 141(R), Business Combinations	Applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. An entity may not apply it before that date. Our effective date is November 1, 2009.	We will adopt this Statement on a prospective basis.
Emerging Issues Task Force Issue No. 07-03, Accounting for Nonrefundable Advance Payments for Goods or Services Received for Use in Future Research and Development Activities	Effective for financial statements issued for fiscal years beginning after December 15, 2007. Our effective date is November 1, 2008.	We are evaluating the potential impact, if any.
FASB Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities	Effective as of the beginning of the first fiscal year beginning after November 15, 2007. If we adopt the Fair Value Option, our effective date is November 1, 2008.	We are evaluating the potential impact, if any. We have not determined whether to adopt the fair value option.
FASB Statement No. 157, Fair Value Measurements	Effective for financial statements issued for fiscal years beginning after November 15, 2007, and for interim periods within those fiscal years. Our effective date is November 1, 2008.	We are evaluating the potential impact, if any.

8

Navistar International Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements—(Continued)

(Unaudited)

2. Disposal of business

In December 2007, we sold all of our interests in a heavy duty truck parts remanufacturing business. In connection with the sale, we received gross proceeds of $22 million, including liabilities assumed, resulting in a gain of $4 million.

3. Finance and other receivables, net

Information regarding impaired finance receivables is as follows:

	As of
	April 30, 2008		October 31, 2007
(in millions)
Outstanding balances with specific loss reserves	$	55	$	52
Specific loss reserves		8		11
Outstanding balances on non-accrual status loans		42		39
Average balance of impaired finance receivables		55		42
Outstanding balances with payments over 90 days past due		129		120

Impaired receivables include accounts identified as “critical accounts” as a result of financial difficulties and accounts that are on non-accrual status. In certain cases, we continue to collect payments on our impaired receivables.

The activity related to our allowance for losses for finance and other receivables is summarized as follows:

	Three Months Ended April 30,						Six Months Ended April 30,
	2008			2007			2008			2007
(in millions)
Balance, at beginning of period		107			78			101			75
Provision for doubtful accounts		6			10			18			15
Charge-off of accounts, net of recoveries		(20	)		(8	)		(26	)		(10	)
Balance, at end of period	$	93		$	80		$	93		$	80

Repossessions

We repossess leased and sold trucks on defaulted finance receivables and leases, and place them into Inventories. We liquidate these repossessions to partially recover the credit losses in our portfolio. Losses recognized at the time of repossession and charged against the allowance for losses for the three months ended April 30, 2008 and 2007 were $12 million and $6 million, and for the six months ended April 30, 2008 and 2007 were $16 million and $7 million, respectively. Losses recognized upon the sale of repossessed vehicles for the three months ended April 30, 2008 and 2007 were $4 million and less than $1 million, and for the six months ended April 30, 2008 and 2007 were $4 million and $1 million, respectively.

9

Navistar International Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements—(Continued)

(Unaudited)

A summary of the activity related to repossessed vehicles is as follows:

	Three Months Ended April 30,						Six Months Ended April 30,
	2008			2007			2008			2007
(in millions)
Repossessed vehicles, at beginning of period		31			10			25			6
Repossessions		42			15			62			23
Liquidations		(25	)		(8	)		(39	)		(12	)
Repossessed vehicles, at end of period	$	48		$	17		$	48		$	17

4. Sales of receivables

The primary business of our financial services operations is to provide wholesale, retail, and lease financing for new and used trucks sold by us and our dealers and, as a result, our finance receivables and leases have a significant concentration in the trucking industry. On a geographic basis, there is not a disproportionate concentration of credit risk in any area of the U.S. or other countries where we have financial service operations. We retain as collateral an ownership interest in the equipment associated with leases and, on behalf of the various trusts we maintain, a security interest in equipment associated with wholesale notes and retail notes.

NFC finances receivables through Navistar Financial Retail Receivables Corporation (“NFRRC”), Navistar Financial Securities Corporation (“NFSC”), Truck Retail Accounts Corporation (“TRAC”), Truck Retail Instalment Paper Corporation (“TRIP”), and International Truck Leasing Corporation (“ITLC”), which are all special purpose, wholly-owned subsidiaries (“SPEs”) of NFC. In accordance with FASB Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, these transactions are accounted for either as a sale with gain or loss recorded at the date of sale and a retained interest recorded, or as secured borrowings. We provide limited recourse for all subordinated receivables. The recourse is limited to our retained interest and relates to credit risk only.

Off-Balance Sheet Securitizations

The NFSC trust owned $956 million of wholesale notes and $35 million of marketable securities as of April 30, 2008 and $1.1 billion of wholesale notes and $85 million of marketable securities as of October 31, 2007.

Components of available wholesale note trust funding certificates related to NFSC were as follows:

		As of
	Maturity	April 30, 2008			October 31, 2007
(in millions)
Investor certificate	July 2008	$	200		$	200
Investor certificate	February 2010		212			212
Variable funding certificate	November 2008		800			800
Total funding available			1,212			1,212
Funding utilized			(832	)		(982	)
Unutilized funding		$	380		$	230

10

Navistar International Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements—(Continued)

(Unaudited)

All of the unutilized funding is related to the variable funding certificate (“VFC”). Our retained interest was $164 million and $200 million as of April 30, 2008 and October 31, 2007, respectively.

The TRAC trust owned $111 million of retail accounts and $9 million of marketable securities as of April 30, 2008, and $155 million of retail accounts and $26 million of marketable securities as of October 31, 2007.

The amount of available retail accounts funding related to TRAC was as follows:

		As of
	Maturity	April 30, 2008			October 31, 2007
(in millions)
Funding conduit	August 2008	$	100		$	100
Funding utilized			(43	)		(60	)
Unutilized funding		$	57		$	40

Our retained interest was $76 million and $119 million as of April 30, 2008 and October 31, 2007, respectively.

For the three months ended April 30, 2008 and 2007, proceeds from the sale of finance receivables with off balance sheet treatment were $1.0 billion and $1.2 billion, respectively. For the six months ended April 30, 2008 and 2007, proceeds from the sale of finance receivables with off balance sheet treatment were $1.8 billion and $2.8 billion, respectively.

Retained Interests

The SPEs’ assets are available to satisfy their creditors’ claims prior to such assets becoming available for the SPEs’ own uses or to NFC or affiliated companies. NFC is under no obligation to repurchase any sold receivable that becomes delinquent in payment or otherwise is in default. The terms of receivable sales generally require NFC to provide credit enhancements in the form of excess seller’s interest and/or cash reserves with the trusts and conduits. The use of such cash reserves by NFC is restricted under the terms of the securitized sales agreements. The maximum exposure under all receivable sale recourse provisions was $240 million and $319 million as of April 30, 2008 and October 31, 2007, respectively.

The following is a summary of amounts due from sales of receivables (retained interest):

	As of
	April 30, 2008		October 31, 2007
(in millions)
Excess seller’s interest	$	222	$	296
Interest only strip		8		11
Restricted cash reserves		10		12
Total amounts due from sales of receivables	$	240	$	319

11

Navistar International Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements—(Continued)

(Unaudited)

The key economic assumptions used in valuing our retained interests are as follows:

	As of
	April 30, 2008		October 31, 2007
Discount rate (annual)	10.5 to 16.5	%	10.3 to 18.8	%
Estimated credit losses	0 to 0.18	%	0 to 0.18	%
Payment speed (percent of portfolio per month)	10.0 to 75.0	%	9.9 to 69.2	%

The lower end of the discount rate assumption range and the upper end of the payment speed assumption range were used to value the retained interests in the TRAC retail account securitization. No percentage for estimated credit losses were assumed for TRAC as no losses have been incurred to date. The upper end of the discount rate assumption range and the lower end of the payment speed assumption range were used to value the retained interests in the wholesale note securitization facility.

The following tables reconcile the total serviced portfolio to NFC’s on-balance sheet portfolio, net of unearned income:

	Retail Notes		Finance Leases		Wholesale Notes			Accounts Receivable			Total
(in millions)
As of April 30, 2008
Total portfolio		$2,735		$132		$1,113			$354			$4,334
Less: Sold receivables		—		—		(820)			(111)			(931)
Total on balance sheet		$2,735		$132		$293			$243			$3,403
As of October 31, 2007
Total portfolio	$	3,012	$	157	$	1,025		$	424		$	4,618
Less: Sold receivables		—		—		(919	)		(155	)		(1,074	)
Total on balance sheet	$	3,012	$	157	$	106		$	269		$	3,544

Securitization Income

The following table sets forth the activity related to off-balance sheet securitizations, which are reported in Finance revenues:

	Three Months Ended April 30,						Six Months Ended April 30,
	2008			2007			2008			2007
(in millions)
Fair value adjustments	$	2		$	(1	)	$	5		$	6
Excess spread income		6			12			11			31
Servicing fees revenue		3			4			6			8
Losses on sales of receivables		(4	)		(2	)		(7	)		(5	)
Investment revenue		1			1			3			3
Securitization income	$	8		$	14		$	18		$	43

12

Navistar International Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements—(Continued)

(Unaudited)

5. Inventories

The components of inventories are as follows:

	As of
	April 30, 2008		October 31, 2007
(in millions)
Finished products	$	835	$	851
Work in process		118		210
Raw materials		353		293
Supplies		58		58
Total inventories	$	1,364	$	1,412

6. Investments in and advances to non-consolidated affiliates

Investments in and advances to non-consolidated affiliates is comprised of a 49 percent ownership interest in Blue Diamond Parts (“BDP”), a 51 percent ownership interest in Blue Diamond Truck (“BDT”), and thirteen other partially-owned affiliates. We do not control these affiliates, but have the ability to exercise significant influence over their operating and financial policies. Our ownership percentages in the thirteen other affiliates range from 9.9 percent to 51 percent. Our investment in these affiliates is an integral part of our operations, and we account for them using the equity method of accounting.

Presented below is summarized financial information for BDP, which is considered a significant unconsolidated affiliate. BDP manages sourcing, merchandising, and distribution of various replacement parts. The following table summarizes results of operations information of BDP:

	Three Months Ended April 30,				Six Months Ended April 30,
	2008		2007		2008		2007
(in millions)
Net service revenue	$	57	$	49	$	108	$	109
Net expenses		7		7		16		18
Income before tax expense		50		42		92		91
Net income		50		42		91		90

7. Debt

NFC’s Revolving Credit Agreement (“Credit Agreement”), as amended in March 2007, has two primary components, a term loan of $620 million and a revolving bank loan of $800 million. The latter has a Mexican sub-revolver ($100 million), which may be used by NIC’s Mexican financial services operations.

The Credit Agreement requires both NIC and NFC to file with the SEC and provide to NFC’s lenders copies of their respective Annual Reports on Form 10-K for each year, their Quarterly Reports on Form 10-Q for each of the first three quarters of each year, and the related financial statements on or before the dates specified in the Credit Agreement. Failure to do so results in a default under the Credit Agreement, during which NFC may not incur any additional indebtedness under the Credit Agreement until the default is cured or waived, and which would give rise to a cross-default to NIC’s $1.5 billion five-year term loan facility and synthetic revolving facility.

13

Navistar International Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements—(Continued)

(Unaudited)

NFC received a series of waivers extending through December 31, 2007, which waived any default or event of default that would result solely from NFC’s and NIC’s failure to meet the filing requirements of Sections 13 and 15 of the Securities Exchange Act of 1934, as amended, with respect to their Annual Reports on Form 10-K for 2005 and 2006 and certain of their Quarterly Reports on Form 10-Q.

In December 2007, NFC received a fifth waiver to the Credit Agreement extending the waiver period through November 30, 2008. This waiver expands the scope of certain reporting default conditions to include the Annual Report on Form 10-K for 2007 and the Quarterly Reports on Form 10-Q for 2008. The fifth waiver continues the 0.25% rate increase through the waiver’s expiration.

In November and December 2007, NFC obtained waivers for the private retail securitizations and the VFC portion of the wholesale note securitizations. These waivers are similar in scope to the Credit Agreement waivers and expire upon the earlier of November 30, 2008, or the date on which NIC and NFC each shall have timely filed a report on Form 10-K or Form 10-Q with the SEC, which will not occur prior to filing of the Form 10-Q for the third quarter of 2008.

In February 2008 and April 2008, NFC completed separate securitization transactions for the sale of retail notes in the amount of $536 million and $247 million, respectively. These transactions do not qualify for sale treatment under FASB Statement No. 140 and, therefore, were recorded as secured borrowings. NFC also utilized an additional $252 million of the bank revolving credit facility.

In March 2008, NFC received an Acknowledgement and Consent from the lenders under the Credit Agreement, whereby the filing of the audited financial statements for 2006 on a Current Report on Form 8-K filed March 6, 2008 was deemed satisfactory by the lenders.

In April 2008, NFC received a second Acknowledgement and Consent from the lenders under the Credit Agreement acknowledging that the method used in calculating various financial covenants was in accordance with the Credit Agreement.

8. Postretirement benefits

Defined Benefit Plans

Generally, our pension plans are non-contributory. Our policy is to fund the pension plans in accordance with applicable U.S. and Canadian government regulations and to make additional contributions from time to time. For the three months and six months ended April 30, 2008, we contributed $14 million and $21 million, respectively, to our pension plans to meet regulatory minimum funding requirements. For the three and six months ended April 30, 2007, we contributed $7 million and $15 million respectively to meet minimum funding requirements. We currently anticipate additional contributions of approximately $79 million during the remainder of 2008.

On December 16, 2007, the majority of company employees represented by the United Automobile, Aerospace and Agriculture Implement Workers of America voted to ratify a new contract that will run through September 30, 2010. Among the changes from the prior contract was the cessation of annual lump sum payments that had been made to certain retirees. We accounted for these payments as a defined benefit plan based on the historical substance of the underlying arrangement. The elimination of these payments and other changes resulted in a net settlement and curtailment of the plan resulting in income of $42 million, which is presented as a reduction of Selling, general and administrative expenses, for the six months ended April 30, 2008.

14

Navistar International Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements—(Continued)

(Unaudited)

We primarily fund other post-employment benefit (“OPEB”) obligations, such as retiree medical, in accordance with a 1993 legal agreement, which requires us to fund a portion of the plans’ annual service cost. For the three months and six months ended April 30, 2008, we contributed $1 million and $2 million, respectively, to our OPEB plans to meet legal funding requirements. For the three and six months ended April 30, 2007, we contributed $1 million and $3 million respectively, to our OPEB plans to meet legal funding requirements. We currently anticipate additional contributions of approximately $3 million during the remainder of 2008.

Components of Net Postretirement Benefits (Income) Expense

Net postretirement benefits (income) expense included in our consolidated statements of operations is composed of the following:

	Three Months Ended April 30,												Six Months Ended April 30,
	Pension Benefits						Health and Life Insurance Benefits						Pension Benefits						Health and Life Insurance Benefits
	2008			2007			2008			2007			2008			2007			2008			2007
(in millions)
Service cost for benefits earned during the period	$	6		$	6		$	3		$	4		$	12		$	13		$	6		$	8
Interest on obligation		56			55			28			28			112			110			57			56
Amortization of net cumulative losses		3			15			—			5			7			30			—			11
Amortization of prior service cost (benefit)		1			1			(1	)		(2	)		1			2			(2	)		(4	)
Settlements and curtailments		—			—			—			—			(42	)		—			(1	)		—
Premiums on pension insurance		1			—			—			—			1			—			—			—
Expected return on assets		(81	)		(69	)		(17	)		(14	)		(162	)		(139	)		(34	)		(28	)
Net postretirement benefits (income) expense	$	(14	)	$	8		$	13		$	21		$	(71	)	$	16		$	26		$	43

Defined Contribution Plans

Our defined contribution plans cover a substantial portion of domestic salaried employees and certain domestic represented employees. The defined contribution plans contain a 401(k) feature and provide most participants with a matching contribution from the company. Many participants covered by the plan receive annual company contributions to their retirement account based on an age-weighted percentage of the participant’s eligible compensation for the calendar year.

Defined contribution expense pursuant to these plans was $6 million and $12 million for each of the three months and six months ended April 30, 2008 and 2007, respectively.

9. Income taxes

Under Accounting Principles Board Opinion No. 28, Interim Financial Reporting, we compute on a quarterly basis an estimated annual effective tax rate considering ordinary income and related income tax expense. Ordinary income refers to income (loss) before income tax benefit (expense) excluding significant unusual or infrequently occurring items. The tax effect of an unusual or infrequently occurring item is recorded in the interim period in which it occurs. To the extent a company cannot reliably estimate annual projected taxes

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Navistar International Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements—(Continued)

(Unaudited)

for a taxing jurisdiction, taxes on ordinary income for such a jurisdiction are reported in the period in which they are incurred, which is the case for our domestic tax jurisdictions. Other items included in income tax expense in the periods in which they occur include the cumulative effect of changes in tax laws or rates, foreign exchange gains and losses, and adjustments to our valuation allowance due to judgment in the realizability of deferred tax assets in future years.

We have assessed the need to maintain a valuation allowance for deferred tax assets based on an assessment of whether it is more likely than not that deferred tax benefits will be realized through the generation of future taxable income. Appropriate consideration is given to all available evidence, both positive and negative, in assessing the need for a valuation allowance. Due to our recent history of U.S. operating and taxable losses, the inconsistency of U.S. profits, and the uncertainty of our U.S. financial outlook, we continue to maintain a full valuation allowance against our domestic deferred tax assets.

On November 1, 2007, we adopted FASB Interpretation No. 48, which addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under FASB Interpretation No. 48, we may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. FASB Interpretation No. 48 also provides guidance on de-recognition, classification, interest and penalties on income taxes, and accounting in interim periods. Upon adoption, we increased our liability for unrecognized tax benefits by $5 million, resulting in a comparable increase to Accumulated deficit. As of November 1, 2007, after adoption of FASB Interpretation No. 48, the amount of the liability for unrecognized tax benefits was $107 million, $105 million of which, if recognized, would favorably affect the income tax rate.

We continued our policy of recognizing interest and penalties related to uncertain tax positions as part of Income tax benefit (expense). Total interest and penalties recognized in the consolidated balance sheet at November 1, 2007 were $15 million.

While it is probable that the liability for unrecognized tax benefits may increase or decrease during the 12 months after adoption of FASB Interpretation No. 48, we do not expect any such change would have a material effect on our financial condition and results of operations.

We have open tax years from 1993 to 2007 with significant tax jurisdictions in the U.S., Canada, Mexico, and Brazil.

10. Fair value of financial instruments

In January 2007, we signed a definitive loan agreement for a five-year senior unsecured term loan facility and synthetic revolving facility in the aggregate principal amount of $1.5 billion (“Facilities”). The Facilities were arranged by JP Morgan Chase Bank and a group of lenders that included Credit Suisse, Banc of America Securities, and Citigroup Global Markets. The Facilities are guaranteed by Navistar, Inc. The outstanding balance of the Facilities as of April 30, 2008 and October 31, 2007 was $1.3 billion. The fair value of the Facilities as of April 30, 2008 and October 31, 2007 was $1.2 billion and $1.3 billion, respectively, resulting in a decline in the fair value of $78 million over the six month period. This decline in the fair value is due to the increase in the discount rate as a result of current credit market conditions.

16

Navistar International Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements—(Continued)

(Unaudited)

11. Financial instruments

We use derivative financial instruments as part of our overall interest rate and foreign currency risk management strategy to reduce our interest rate exposure, to potentially increase the return on invested funds, and to reduce exchange rate risk for transactional exposures denominated in currencies other than the functional currency. From time to time, we also use commodity forward contracts to manage variability related to exposure to certain commodity price risk.

Our financial services operations manage exposure to fluctuations in interest rates by limiting the amount of fixed rate assets funded with variable rate debt. This is accomplished by funding fixed rate receivables utilizing a combination of fixed rate debt and variable rate debt and derivative financial instruments. These derivative financial instruments may include interest rate swaps, interest rate caps, and forward contracts. The fair value of these instruments is estimated based on quoted market prices and is subject to market risk, as the instruments may become less valuable due to changes in market conditions or interest rates. Notional amounts of derivative financial instruments do not represent exposure to credit loss.

In connection with a sale of retail notes, our financial services operations entered into additional interest rate swap agreements during the six month period ending April 30, 2008. The purpose and structure of these swaps is to convert the floating rate portion of the asset-backed securities into fixed rate swap interest to match the interest basis of the receivables pool sold to the owner trust and to protect our financial services operations from interest rate volatility.

As of April 30, 2008, the net fair value of our derivative financial instruments was $46 million consisting of $49 million recorded in Other noncurrent assets and $95 million in Other noncurrent liabilities. The net fair value of our derivatives as of October 31, 2007 was $18 million consisting of $20 million recorded in Other noncurrent assets, $37 million in Other noncurrent liabilities and $1 million in Other current liabilities. The maturities of these derivatives range from 2010 through 2016.

Interest expense includes mark to market (gains) losses under our interest rate swap agreements of ($1) million and $6 million, and $39 million and less than $1 million for the three month and six month periods ended April 30, 2008 and April 30, 2007, respectively.

12. Commitments and contingencies

Guarantees

We occasionally provide guarantees that could obligate us to make future payments if the primary entity fails to perform under its contractual obligations. As described below, we have recognized liabilities for some of these guarantees in our consolidated balance sheets as they meet the recognition and measurement provisions of FASB Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees Including Indirect Guarantees of the Indebtedness of Others. In addition to the liabilities that have been recognized as described below, we are contingently liable for other potential losses under various guarantees. We do not believe that claims that may be made under such guarantees would have a material effect on our financial position, results of operations, or cash flows.

We have issued residual value guarantees in connection with various leases that extend through 2010. The amounts of the guarantees are estimated and recorded as liabilities, and were $27 million as of April 30, 2008. Our guarantees are contingent upon the fair value of the leased assets at the end of the lease term.

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Navistar International Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements—(Continued)

(Unaudited)

We obtain certain stand-by letters of credit and surety bonds from third party financial institutions in the ordinary course of business when required under contracts or to satisfy insurance-related requirements. Outstanding stand-by letters of credit and surety bonds were $49 million at April 30, 2008.

As of April 30, 2008, our Canadian operating subsidiary was contingently liable for the residual value, calculated at inception, of $24 million of retail customers’ contracts and $47 million of retail leases that are financed by a third party. These amounts approximate the estimated future resale market value of the collateral underlying these contracts and leases at their inception. As of April 30, 2008, we have recorded accruals totaling $5 million and $6 million for potential losses on the retail customers’ contracts and retail leases, respectively.

We extend credit commitments to certain truck fleet customers, which allow them to purchase parts and services from participating dealers. The participating dealers receive accelerated payments from us with the result that we carry the receivables and absorb the credit risk related to these customers. As of April 30, 2008, we have $39 million of unused credit commitments outstanding under this program.

In addition, we have entered into various guarantees for purchase commitments, credit guarantees, and contract cancellation fees with various expiration dates through 2012 totaling $52 million at April 30, 2008. In the ordinary course of business, we also provide routine indemnifications and other guarantees, the terms of which range in duration and often are not explicitly defined. We do not believe these will result in claims that would have a material impact on our financial position, results of operations, or cash flows.

Environmental Liabilities

We have been named a potentially responsible party (“PRP”), in conjunction with other parties, in a number of cases arising under an environmental protection law, the Comprehensive Environmental Response, Compensation, and Liability Act, popularly known as the Superfund law. These cases involve sites that allegedly received wastes from current or former company locations. Based on information available to us which, in most cases, consists of data related to quantities and characteristics of material generated at current or former company locations, material allegedly shipped by us to these disposal sites, as well as cost estimates from PRPs and/or federal or state regulatory agencies for the cleanup of these sites, a reasonable estimate is calculated of our share, if any, of the probable costs and accruals are recorded in our condensed consolidated financial statements. These accruals are generally recognized no later than completion of the remedial feasibility study and are not discounted to their present value. We review all accruals on a regular basis and believe that, based on these calculations, our share of the potential additional costs for the cleanup of each site will not have a material effect on our financial position, results of operations, or cash flows.

Four sites formerly owned by us, Wisconsin Steel in Chicago, Illinois, Solar Turbines in San Diego, California, West Pullman Plant in Chicago, Illinois, and the Canton Plant in Canton, Illinois, were identified as having soil and groundwater contamination. While investigations and cleanup activities continue at all sites, we believe that we have adequate accruals to cover costs to complete the cleanup of these sites.

In 2007, a former facility location in the City of Springfield, Ohio, which we voluntarily demolished in 2004 and conducted environmental sampling on, was sold to the City of Springfield. The city has obtained funds from the U.S. Environmental Protection Agency and the State of Ohio to address relatively minor soil contamination prior to commercial/industrial redevelopment of the site. Also in 2007, we engaged the City of Canton, Illinois in a remediation plan for the environmental clean-up of a former company facility. We anticipate that execution of this plan will not have a material effect on our financial position, results of operations, or cash flows.

We have accrued $20 million and $22 million for these environmental matters, which are included within Other current liabilities and Other noncurrent liabilities, as of April 30, 2008 and October 31, 2007,

18

Navistar International Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements—(Continued)

(Unaudited)

respectively. As of April 30, 2008, the majority of these accrued liabilities are expected to be paid out during the period from 2008 through 2011.

Along with other vehicle manufacturers, we have been subject to an increase in the number of asbestos-related claims in recent years. In general, these claims relate to illnesses alleged to have resulted from asbestos exposure from component parts found in older vehicles, although some cases relate to the alleged 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. We have strongly disputed these claims, and it has been our policy to defend against them vigorously. Historically, the actual damages paid out to claimants have not been material in any year to our financial position, results of operations, or cash flows. 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.

Legal Proceedings

Overview

We 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 our business. The majority of these claims and proceedings relate to commercial, product liability, and warranty matters. In our opinion, apart from the actions set forth below, the disposition of these proceedings and claims, after taking into account recorded accruals and the availability and limits of our insurance coverage, will not have a material adverse effect on our business or our financial position, results of operations, or cash flows.

Ford Litigation

In January 2007, a complaint was filed against us in Oakland County Circuit Court in Michigan by Ford Motor Company (“Ford”) claiming damages relating to warranty and pricing disputes with respect to certain engines purchased by Ford from us. While Ford’s complaint did not quantify its alleged damages, we estimate that Ford may be seeking in excess of $500 million, and that this amount may increase (i) as we continue to sell engines to Ford at a price that Ford alleges is too high and (ii) as Ford pays its customers’ warranty claims, which Ford alleges are attributable to us. We disagree with Ford’s position and are defending ourselves vigorously in this litigation. We have filed an answer to the complaint denying Ford’s allegations in all material respects. We have also asserted affirmative defenses to Ford’s claims, as well as counterclaims alleging that, among other things, Ford has materially breached contracts between it and us in several different respects. Based on our investigation to date, we believe we have meritorious defenses to this matter. There can be no assurance, however, that we will be successful in our defense, and an adverse resolution of the lawsuit could have a material adverse effect on our results of operations, cash flows, or financial condition. In June 2007, we filed a separate lawsuit against Ford in the Circuit Court of Cook County, Illinois, for breach of contract relating to the manufacture of new diesel engines for Ford for use in vehicles including the F-150 pickup truck. In that case, we are seeking unspecified damages. In September 2007, the judge dismissed our lawsuit against Ford, directing us to proceed with mediation. In February 2008, we re-filed the lawsuit against Ford because the parties were unable to resolve the dispute through mediation.

Securities and Exchange Commission Investigations

In October 2004, we received a request from the staff of the SEC to voluntarily produce certain documents and information related to our accounting practices with respect to defined benefit pension plans and other

19

Navistar International Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements—(Continued)

(Unaudited)

postretirement benefits. We are fully cooperating with this request. Based on the status of the inquiry, we are not able to predict the final outcome of this matter.

In January 2005, we announced that we would restate our financial results for 2002 and 2003 and the first three quarters of 2004. Our restated Annual Report on Form 10-K was filed in February 2005. The SEC notified us on February 9, 2005, that it was conducting an informal inquiry into our restatement. On March 17, 2005, we were advised by the SEC that the status of the inquiry had been changed to a formal investigation. On April 7, 2006, we announced that we would restate our financial results for 2002 through 2004 and for the first three quarters of 2005. We were subsequently informed by the SEC that it was expanding the investigation to include that restatement. Our 2005 Annual Report on Form 10-K, which included the restated financial statements, was filed in December 2007. We have been providing information to and fully cooperating with the SEC on this investigation. Based on the status of the investigation, we are not able to predict its final outcome.

Litigation Relating to Accounting Controls and Financial Restatement

In December 2007, a complaint was filed against us by Norfolk County Retirement System and Brockton Contributory Retirement System (collectively “Norfolk”). In March 2008, an additional complaint was filed by Richard Garza. Each of these matters is pending in the United States District Court, Northern District of Illinois.

The plaintiffs in the Norfolk case allege they are shareholders suing on behalf of themselves and a class of other shareholders who purchased shares of the company’s common stock between February 14, 2003 and July 17, 2006. The complaint alleges that the defendants, which include the company, one of its executive officers, two of its former executive officers, and the company’s former independent accountants, Deloitte & Touche LLP, violated federal securities laws by making false and misleading statements about the company’s financial condition during that period. In March 2008, the court appointed Norfolk County Retirement System and the Plumbers Local Union 519 Pension Trust as joint lead plaintiffs. The plaintiffs’ in this matter seek compensatory damages and attorneys’ fees among other relief.

The plaintiff in the Garza case brought a derivative claim on behalf of the company against one of the company’s executive officers, two of its former executive officers and certain of its directors, alleging that (i) all of the defendants violated their fiduciary obligations under Delaware law by willfully ignoring certain accounting and financial reporting problems at the company; thereby knowingly disseminating false and misleading financial information about the company, (ii) that certain of the defendants were unjustly enriched in connection with their sale of company stock during the December 2002 to January 2006 period and (iii) that defendants violated Delaware law by failing to hold an annual meeting of shareholders. In connection with this last allegation, the plaintiff seeks an order requiring defendants to schedule an annual meeting of shareholders. Otherwise, the plaintiffs in this matter seek compensatory damages, disgorgement of the proceeds of defendants’ profits from the sale of company stock, attorneys’ fees, and other equitable relief.

We strongly dispute the allegations in these complaints and will vigorously defend ourselves.

13. Segment reporting

The following is a description of our four reporting segments:

• Our Truck segment manufactures and distributes a full line of class 4 through 8 trucks and buses under the International and IC Bus, LLC (“IC”) brands. We also produce chassis for motor homes and commercial step-van vehicles under the Workhorse Custom Chassis, LLC (“WCC”) brand. In an effort to strengthen and maintain our dealer network, this segment occasionally acquires and operates dealer locations (“Dealcors”) for the purpose of transitioning ownership or providing temporary operational assistance.

20

Navistar International Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements—(Continued)

(Unaudited)

• Our Engine segment designs and manufactures diesel engines for use primarily in our class 6 and 7 medium trucks and buses and selected class 8 heavy truck models, and for sale to original equipment manufacturers (“OEMs”) primarily in North America. In addition, we produce diesel engines in Brazil primarily for distribution in South America. Ford accounted for 54% of our diesel unit volume (including intercompany transactions) for the three months and six months ended April 30, 2008 and 59% and 58% for the same periods in 2007, respectively.

• Our Parts segment provides customers with products needed to support the International truck, IC bus, WCC, and the MaxxForce^TM engine lines, together with a wide selection of other standard truck, trailer, and engine aftermarket parts.

• Our 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 financing for wholesale accounts and selected retail accounts receivable.

Corporate contains those items that do not fit into our four segments.

Segment Profit (Loss)

We define segment profit (loss) as adjusted earnings (loss) before income tax. Our results for interim periods are not necessarily indicative of results for a full year. Beginning in 2008, the sales from the Parts segment to the Truck segment, specifically our Dealcors, are recorded as intersegment sales, which are eliminated within “Corporate and Eliminations.” Previously, such sales were eliminated within the Truck segment’s external sales and revenues. As such, the Parts and Truck segment sales and revenues, in the amounts of $65 million and $125 million for the three months and six months ended April 30, 2007, have been restated to conform to the 2008 presentation. Selected financial information is as follows:

	Truck			Engine		Parts		Financial Services(A)		Corporate and Eliminations			Total
(in millions)
Three Months Ended April 30, 2008
External sales and revenues, net	$	2,717		$	751	$	385	$	96	$	—		$	3,949
Intersegment sales and revenues		—			188		53		21		(262	)		—
Total sales and revenues, net	$	2,717		$	939	$	438	$	117	$	(262	)	$	3,949
Depreciation and amortization	$	45		$	39	$	2	$	5	$	6		$	97
Interest expense		—			—		—		67		35			102
Equity in income (loss) of non-consolidated affiliates		(3	)		23		1		—		—			21
Segment profit (loss)		213			51		56		19		(126	)		213
Capital expenditures		42			28		1		9		2			82
Three Months Ended April 30, 2007
External sales and revenues, net	$	1,896		$	682	$	322	$	90	$	—		$	2,990
Intersegment sales and revenues		2			90		65		35		(192	)		—
Total sales and revenues, net	$	1,898		$	772	$	387	$	125	$	(192	)	$	2,990
Depreciation and amortization	$	39		$	38	$	2	$	5	$	4		$	88
Interest expense		—			—		—		78		53			131
Equity in income of non-consolidated affiliates		1			16		1		—		—			18
Segment profit (loss)		36			18		40		28		(141	)		(19	)
Capital expenditures		25			17		2		9		3			56

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Notes to Condensed Consolidated Financial Statements—(Continued)

(Unaudited)

	Truck			Engine		Parts		Financial Services(A)			Corporate and Eliminations			Total
(in millions)
Six Months Ended April 30, 2008
External sales and revenues, net	$	4,600		$	1,385	$	728	$	190		$	—		$	6,903
Intersegment sales and revenues		—			340		111		43			(494	)		—
Total sales and revenues, net	$	4,600		$	1,725	$	839	$	233		$	(494	)	$	6,903
Depreciation and amortization	$	86		$	76	$	4	$	10		$	10		$	186
Interest expense		—			—		—		186			83			269
Equity in income (loss) of non-consolidated affiliates		(3	)		46		2		—			—			45
Segment profit (loss)		234			85		105		(6	)		(247	)		171
Capital expenditures		68			39		2		17			4			130
Six Months Ended April 30, 2007
External sales and revenues, net	$	4,041		$	1,286	$	623	$	188		$	—		$	6,138
Intersegment sales and revenues		4			315		125		75			(519	)		—
Total sales and revenues, net	$	4,045		$	1,601	$	748	$	263		$	(519	)	$	6,138
Depreciation and amortization	$	76		$	80	$	4	$	10		$	8		$	178
Interest expense		—			—		—		146			96			242
Equity in income of non-consolidated affiliates		1			37		2		—			—			40
Segment profit (loss)		125			6		77		84			(286	)		6
Capital expenditures		111			22		4		23			8			168
As of April 30, 2008
Segment assets		2,724			2,243		542		5,446			659			11,614
As of October 31, 2007
Segment assets		2,696			2,151		550		5,292			759			11,448

(A) Total sales and revenues in the Financial Services segment include interest revenues of $102 million and $200 million for the three months and six months ended April 30, 2008, respectively, and $101 million and $204 million for the same periods in 2007, respectively.

The following are descriptions of our two customers that are greater than 10% of our consolidated Sales and revenues, net:

• Sales of vehicles and service parts to the U.S. military were 26% and 23% of consolidated sales and revenues for the three months and six months ended April 30, 2008 and 2% for the same periods in 2007, respectively. U.S. military receivable balances totaled $452 million and $71 million as of April 30, 2008 and October 31, 2007, respectively.

• Sales of diesel engines to Ford were 10% and 11% of consolidated sales and revenues for the three months and six months ended April 30, 2008 and 14% and 13% for the same periods in 2007, respectively. Ford receivable balances totaled $250 million and $245 million as of April 30, 2008 and October 31, 2007, respectively.

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Notes to Condensed Consolidated Financial Statements—(Continued)

(Unaudited)

14. Comprehensive income (loss)

Total comprehensive income (loss) is summarized as follows:

	Three Months Ended   April 30,					Six Months Ended   April 30,
	2008		2007			2008			2007
(in millions)
Net income (loss)	$	215	$	(25	)	$	162		$	(13	)
Other comprehensive income (loss)
Foreign currency translation adjustments		22		17			15			18
Unrealized gains on marketable securities		—		1			—			—
Pension amortization and settlements, net of tax		2		2			(6	)		4
Total other comprehensive income		24		20			9			22
Total comprehensive income (loss)	$	239	$	(5	)	$	171		$	9

15. Earnings (loss) per share

The following table shows the information used in the calculation of our basic and diluted earnings (loss) per share:

	Three Months Ended April 30,					Six Months Ended April 30,
(in millions, except per share data)	2008		2007			2008		2007
Numerator:
Net income (loss) available to common stockholders	$	215	$	(25	)	$	162	$	(13	)
Denominator:
Weighted average shares outstanding Basic		70.3		70.3			70.3		70.3
Effect of dilutive securities — Stock options		2.9		—			2.6		—
Diluted		73.2		70.3			72.9		70.3
Basic earnings (loss) per share	$	3.06	$	(0.36	)	$	2.30	$	(0.19	)
Diluted earnings (loss) per share	$	2.94	$	(0.36	)	$	2.22	$	(0.19	)

Shares not included in the computation of diluted earnings (loss) per share, as they would be anti-dilutive, were 1.8 million and 1.2 million for the three months and six months ended April 30, 2007, respectively.

16. Condensed consolidating guarantor and non-guarantor financial information

The following tables set forth condensed consolidating balance sheets as of April 30, 2008 and October 31, 2007, condensed consolidating statements of operations for the three months and six months ended April 30, 2008 and 2007, and condensed consolidating statements of cash flows for the six months ended April 30, 2008 and 2007. The information is presented as a result of Navistar, Inc.’s guarantee, exclusive of its subsidiaries, of NIC’s indebtedness under its 7.5% Senior Notes due 2011. Navistar, Inc. is a direct wholly-owned subsidiary of NIC. None of NIC’s other subsidiaries guarantee any of these notes. The guarantee is full and unconditional. Separate financial statements and other disclosures concerning Navistar, Inc. have not been presented because

23

Navistar International Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements—(Continued)

(Unaudited)

management believes that such information is not material to investors. Within this disclosure only, “NIC” includes the consolidated financial results of the parent company only, with all of its wholly-owned subsidiaries accounted for under the equity method. Likewise, “Navistar, Inc.,” for purposes of this disclosure only, includes the consolidated financial results of its wholly-owned subsidiaries accounted for under the equity method. “Non-Guarantor Subsidiaries” includes the combined financial results of all other non-guarantor subsidiaries. “Eliminations and Other” includes all eliminations and reclassifications to reconcile to the condensed consolidated financial statements. NIC files a consolidated U.S. federal income tax return that includes Navistar, Inc. and its U.S. subsidiaries, and NIC’s U.S. subsidiaries. Navistar, Inc. is party to a tax allocation agreement (“Tax Agreement”) with NIC which requires Navistar, Inc. to compute its separate federal income tax liability and remit any resulting tax liability to NIC. Tax benefits that may arise from net operating losses of Navistar, Inc. are not refunded to Navistar, Inc. but may be used to offset future required tax payments under the Tax Agreement. The effect of the Tax Agreement is to allow NIC, the parent company, rather than Navistar, Inc., to realize the benefit of current U.S. taxable losses of Navistar, Inc. and all other direct or indirect subsidiaries of NIC.

	NIC			Navistar, Inc.			Non-Guarantor Subsidiaries		Eliminations and Other			Consolidated
(in millions)
Condensed Consolidating Statement of Operations for the Three Months Ended April 30, 2008
Sales and revenues, net	$	—		$	2,048		$	3,412	$	(1,511	)	$	3,949
Costs of products sold		—			1,840			2,859		(1,503	)		3,196
All other operating expenses (income)		(64	)		366			195		64			561
Total costs and expenses		(64	)		2,206			3,054		(1,439	)		3,757
Equity in income (loss) of non-consolidated affiliates		151			280			20		(430	)		21
Income (loss) before income tax		215			122			378		(502	)		213
Income tax benefit (expense)		—			(2	)		4		—			2
Net income (loss)	$	215		$	120		$	382	$	(502	)	$	215

	NIC			Navistar, Inc.			Non-Guarantor Subsidiaries			Eliminations and Other			Consolidated
(in millions)
Condensed Consolidating Statement of Operations for the Six Months Ended April 30, 2008
Sales and revenues, net	$	—		$	3,519		$	6,097		$	(2,713	)	$	6,903
Costs of products sold		—			3,219			5,111			(2,683	)		5,647
All other operating expenses (income)		(111	)		715			453			73			1,130
Total costs and expenses		(111	)		3,934			5,564			(2,610	)		6,777
Equity in income (loss) of non-consolidated affiliates		51			434			44			(484	)		45
Income (loss) before income tax		162			19			577			(587	)		171
Income tax benefit (expense)		—			(5	)		(4	)		—			(9	)
Net income (loss)	$	162		$	14		$	573		$	(587	)	$	162

24

Navistar International Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements—(Continued)

(Unaudited)

	NIC			Navistar, Inc.			Non-Guarantor Subsidiaries			Eliminations and Other			Consolidated
(in millions)
Condensed Consolidating Balance Sheet as of April 30, 2008
Assets
Cash, cash equivalents, and marketable securities	$	442		$	35		$	971		$	—		$	1,448
Finance and other receivables, net		—			234			5,236			2			5,472
Inventories		—			586			823			(45	)		1,364
Goodwill		—			—			359			—			359
Property and equipment, net		—			824			1,158			(2	)		1,980
Investments in and advances to non-consolidated affiliates		(2,517	)		3,344			209			(861	)		175
Deferred taxes, net		49			115			(27	)		(2	)		135
Other		23			206			452			—			681
Total assets	$	(2,003	)	$	5,344		$	9,181		$	(908	)	$	11,614
Liabilities and stockholders’ equity (deficit)
Debt	$	1,345		$	345		$	5,420		$	(226	)	$	6,884
Postretirement benefits liabilities		—			1,078			157			—			1,235
Amounts due to (from) affiliates		(3,362	)		5,359			(2,055	)		58			—
Other liabilities		576			1,300			2,270			(89	)		4,057
Total liabilities		(1,441	)		8,082			5,792			(257	)		12,176
Stockholders’ equity (deficit)		(562	)		(2,738	)		3,389			(651	)		(562	)
Total liabilities and stockholders’ equity (deficit)	$	(2,003	)	$	5,344		$	9,181		$	(908	)	$	11,614

	NIC			Navistar, Inc.			Non-Guarantor Subsidiaries			Eliminations and Other			Consolidated
(in millions)
Condensed Consolidating Statement of Cash Flows for the Six Months Ended April 30, 2008
Net cash provided by (used in) operations	$	24		$	414		$	380		$	(507	)	$	311
Cash flow from investment activities
Net change in restricted cash and cash equivalents		1			4			(321	)		—			(316	)
Net decrease in marketable securities		(31	)		—			—			—			(31	)
Capital expenditures		—			(10	)		(120	)		—			(130	)
Other investing activities		20			(428	)		118			326			36
Net cash provided by (used in) investment activities		(10	)		(434	)		(323	)		326			(441	)
Cash flow from financing activities
Net borrowings (repayments) of debt		—			—			69			(58	)		11
Other financing activities		—			—			(227	)		227			—
Net cash provided by (used in) financing activities		—			—			(158	)		169			11
Effect of exchange rate changes on cash and cash equivalents		—			—			5			12			17
Cash and cash equivalents Increase (decrease) during the period		14			(20	)		(96	)		—			(102	)
At beginning of the period		391			47			339			—			777
Cash and cash equivalents at end of the period	$	405		$	27		$	243		$	—		$	675

25

Navistar International Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements—(Continued)

(Unaudited)

	NIC			Navistar, Inc.			Non-Guarantor Subsidiaries			Eliminations and Other			Consolidated
(in millions)
Condensed Consolidating Statement of Operations for the Three Months Ended April 30, 2007
Sales and revenues, net	$	—		$	1,786		$	2,141		$	(937	)	$	2,990
Costs of products sold		—			1,605			1,780			(913	)		2,472
All other operating expenses (income)		(17	)		206			205			161			555
Total costs and expenses		(17	)		1,811			1,985			(752	)		3,027
Equity in income (loss) of non-consolidated affiliates		(42	)		(45	)		15			90			18
Income (loss) before income tax		(25	)		(70	)		171			(95	)		(19	)
Income tax benefit (expense)		—			(1	)		(5	)		—			(6	)
Net income (loss)	$	(25	)	$	(71	)	$	166		$	(95	)	$	(25	)

	NIC			Navistar, Inc.			Non-Guarantor Subsidiaries			Eliminations and Other			Consolidated
(in millions)
Condensed Consolidating Statement of Operations for the Six months ended April 30, 2007
Sales and revenues, net	$	—		$	3,731		$	4,660		$	(2,253	)	$	6,138
Costs of products sold		—			3,398			3,886			(2,207	)		5,077
All other operating expenses (income)		(14	)		576			414			119			1,095
Total costs and expenses		(14	)		3,974			4,300			(2,088	)		6,172
Equity in income (loss) of non-consolidated affiliates		(29	)		152			36			(119	)		40
Income (loss) before income tax		(15	)		(91	)		396			(284	)		6
Income tax benefit (expense)		2			(4	)		(17	)		—			(19	)
Net income (loss)	$	(13	)	$	(95	)	$	379		$	(284	)	$	(13	)

	NIC			Navistar, Inc.		Non-Guarantor Subsidiaries			Eliminations and Other			Consolidated
(in millions)
Condensed Consolidating Balance Sheet as of October 31, 2007
Assets
Cash, cash equivalents and marketable securities	$	396		$	60	$	746		$	—		$	1,202
Finance and other receivables, net		—			179		5,253			(13	)		5,419
Inventories		—			560		910			(58	)		1,412
Goodwill		—			—		353			—			353
Property and equipment, net		—			889		1,199			(2	)		2,086
Investments in and advances to non-consolidated affiliates		(2,503	)		2,239		149			269			154
Deferred taxes, net		(1	)		171		(19	)		(1	)		150
Other		26			204		442			—			672
Total assets	$	(2,082	)	$	4,302	$	9,033		$	195		$	11,448

26

Navistar International Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements—(Continued)

(Unaudited)

	NIC			Navistar, Inc.			Non-Guarantor Subsidiaries			Eliminations and Other			Consolidated
(in millions)
Liabilities and stockholders’ equity (deficit)
Debt	$	1,345		$	390		$	5,375		$	(229	)	$	6,881
Postretirement benefits liabilities		—			1,170			157			—			1,327
Amounts due to (from) affiliates		(3,272	)		4,900			(1,657	)		29			—
Other liabilities		579			1,291			2,193			(89	)		3,974
Total liabilities		(1,348	)		7,751			6,068			(289	)		12,182
Stockholders’ equity (deficit)		(734	)		(3,449	)		2,965			484			(734	)
Total liabilities and stockholders’ equity (deficit)	$	(2,082	)	$	4,302		$	9,033		$	195		$	11,448

	NIC			Navistar, Inc.			Non-Guarantor Subsidiaries			Eliminations and Other			Consolidated
(in millions)
Condensed Consolidating Statement of Cash Flows for the Six Months Ended April 30, 2007
Net cash provided by (used in) operations	$	(692	)	$	(479	)	$	551		$	387		$	(233	)
Cash flow from investment activities
Net change in restricted cash and cash equivalents		—			8			155			—			163
Net increase in marketable securities		76			—			40			—			116
Capital expenditures		—			(49	)		(119	)		—			(168	)
Other investing activities		197			(138	)		(132	)		68			(5	)
Net cash provided by (used in) investment activities		273			(179	)		(56	)		68			106
Cash flow from financing activities Net borrowings (repayments) of debt		(48	)		667			(375	)		(654	)		(410	)
Other financing activities		—			—			(199	)		199			—
Net cash provided by (used in) financing activities		(48	)		667			(574	)		(455	)		(410	)
Effect of exchange rate changes on cash and cash equivalents		—			—			28			—			28
Cash and cash equivalents
Increase (decrease) during the period		(467	)		9			(51	)		—			(509	)
At beginning of the period		814			20			323			—			1,157
Cash and cash equivalents at end of the period	$	347		$	29		$	272		$	—		$	648

17. Subsequent events

In May 2008, NFC received a third Acknowledgement and Consent from the lenders under the Credit Agreement that clarified certain definitions used to measure the fixed charge coverage ratio.

In May 2008, Ford announced that it planned to reduce its pickup production levels due to current economic conditions. As a significant supplier to Ford, we in turn have lowered engine production and have initiated a temporary layoff in our Indianapolis, Indiana facility. For further discussion related to Ford see Note 12, Commitments and contingencies.

In June 2008, we announced that we entered into a memorandum of understanding with Caterpillar Inc. to pursue a strategic alliance in the mutual development of on-highway truck business opportunities and global truck collaboration. The strategic alliance would include the cooperative development of mid-range diesel engines and access to global distribution centers. This transaction is subject to completion of due diligence, execution of definitive agreements, and regulatory approvals.

27

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

Forward-Looking Statements; Risk Factors

Information provided and statements contained in this report that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (“Securities Act”), Section 21E of the Securities Exchange Act of 1934 (“Exchange Act”), and the Private Securities Litigation Reform Act of 1995. Such forward-looking statements only speak as of the date of this report and the company assumes no obligation to update the information included in this report. Such 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 not guarantees of performance or results and they involve risks, uncertainties and assumptions. For a further description of these factors, see Item 1A. Risk Factors included within our Form 10-K for the year ended October 31, 2007, which was filed on May 29, 2008. Although we believe that these forward-looking statements are based on reasonable assumptions, there are many factors that 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.

Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is designed to provide information that is supplemental to, and should be read together with, our consolidated financial statements and the accompanying notes contained in the “Financial Statements and Supplementary Data” section of our 2007 Annual Report on Form 10-K. Information in this Item is intended to assist the reader in obtaining an understanding of our condensed consolidated financial statements, information about our business segments and how the results of those segments impact our results of operations and financial condition as a whole, and how certain accounting principles affect the company’s condensed consolidated financial statements. Our MD&A includes the following sections:

• Executive Summary

• Results of Operations and Segment Results of Operations

• Liquidity and Capital Resources

• Other Information

• Critical Accounting Policies

• New Accounting Pronouncements

Executive Summary

We are an international manufacturer of International brand commercial trucks, IC brand buses, MaxxForce brand diesel engines, WCC brand chassis for motor homes and step vans, and a provider of service parts for all makes of trucks and trailers. Additionally, we are a private-label designer and manufacturer of diesel engines for the pickup truck, van, and SUV markets. We also provide retail, wholesale, and lease financing of our trucks, and financing for our wholesale accounts and selected retail accounts receivable. We operate in four industry segments: Truck, Engine, Parts (referred to as our “manufacturing segments”), and Financial Services. Corporate contains those items that do not fit into our four segments. Selected financial data for each segment can be found in Note 13, Segment reporting, to the accompanying condensed consolidated financial statements.

Our business is heavily influenced by the overall performance of the “traditional” medium and heavy truck markets within U.S. and Canada, which includes vehicles in weight classes 6 through 8, including school buses. These markets are typically cyclical in nature but in certain years they have also been impacted by accelerated purchases of trucks (“pre-buy”) in anticipation of higher prices due to stricter emissions standards imposed by the U.S. Environmental Protection Agency, as was particularly evident throughout 2006. In turn, the industry has experienced corresponding periods of delayed purchases of trucks during the last three quarters of

28

2007 and into 2008. To minimize the impact of the “traditional” markets cyclicality, our continuing strategy incorporates further growth in our Parts segment and an increased presence in “expansion” markets such as the non-U.S. military, recreational vehicle, commercial step-van and export markets. In addition within the “traditional” markets, we continue to focus on U.S. military growth and market share expansion to further mitigate the impact of “traditional” markets volatility. Furthermore, we continue to focus on improving the cost structure in our Truck and Engine segments while delivering products of distinction and evaluating opportunities to contain our legacy costs, utilize our deferred tax assets, and return to a more conventional capital structure.

We experienced a decline in unit volumes in both the Truck and Engine segments during the six month period ended April 30, 2008 compared to the same period in 2007 despite an increase in unit volumes within the Engine segment for the second quarter of 2008. Worldwide Truck segment units invoiced to customers were 27,200 (a decrease of 3.9%) and 46,500 (a decrease of 25.0%) for the quarter and the six month period ended April 30, 2008, respectively, compared to the same three month and six month periods in 2007. Total Engine segment units, which include units delivered both to OEMs and our Truck segment, were 102,500 (an increase of 8.2%) and 188,300 (a decrease of 5.3%) during the second quarter and first half of 2008, respectively, which compares to 94,700 and 198,800 in the same periods of 2007.

During the quarter ended April 30, 2008, the “traditional” truck retail industry, as well as the heavy duty pickup market, remained depressed, which is reflected in the 61,200 retail units sold during this period compared to 82,400 units sold in the second quarter of 2007. Total “traditional” truck units sold during the six month period ended April 30, 2008 amounted to 118,300 that compares to 192,000 units for the same six month period in 2007. The depressed sales in the retail truck industry did not significantly impact our total engine volumes in the second quarter of 2008 primarily due to volume growth with OEMs other than Ford. Our engine volumes increased by 7,800 units in the second quarter of 2008 when compared to the same period in 2007. Despite the continuation of the downturn experienced throughout the “traditional” truck markets during the second quarter of 2008, we attained consolidated net sales and revenues for the quarter and the six month period ended April 30, 2008 of $3.9 billion and $6.9 billion, respectively, which compares with $3.0 billion and $6.1 billion for the same respective periods in 2007. Growth in our U.S. military sales, the introduction of new products, competitive pricing strategies, and a slight increase in sales in our “expansion” markets contributed to overall sales and revenue growth during the second quarter and first half of 2008 compared to the same period in 2007. U.S. military sales included in our consolidated net sales and revenues were $1.0 billion and $1.6 billion in the second quarter and first half of 2008, respectively, compared to $63 million and $107 million for the comparable periods in 2007.

For the quarter and six month period ended April 30, 2008, we realized net income of $215 million and $162 million, respectively, compared to net losses of $25 million and $13 million for the respective periods in 2007. Our diluted earnings were $2.94 per share for the quarter ended April 30, 2008 compared to a diluted loss of $0.36 per share for the same period in 2007. Our diluted earnings were $2.22 per share for the six month period ended April 30, 2008 that compares to a diluted loss of $0.19 per share for the same period in 2007. During the second quarter and first half year of 2008, we recognized a benefit of $2 million and incurred an expense of $9 million, respectively, of state, local, and foreign income taxes. Included in the change in our results were the following items in the second quarter of 2008: non-cash mark to market benefit in our interest rate swap agreements of $1 million during the second quarter of 2008 as compared to a charge of $6 million in the same period in 2007, and professional, consulting, and auditing expenses of $40 million in the second quarter of 2008 as compared to expense of $41 million in the same period in 2007. Included in the change in our results were the following items in the first half of 2008: non-cash mark to market charge on our interest rate swap agreements of $39 million during the first half of 2008 as compared to a nominal amount in the same period in 2007, professional, consulting, and auditing expenses of $105 million in the first half of 2008 as compared to expenses of $86 million in the same period in 2007, debt refinancing and restructuring costs of $31 million in the first half of 2007 that did not occur in the same period in 2008, and a $42 million reduction in postretirement expense in the first half of 2008 due to changes in our UAW agreement that did not impact the same period in 2007.

29

A summary of our condensed results of operations, including diluted earnings (loss) per share, is as follows:

	Three Months Ended April 30,					Six Months Ended April 30,
	2008		2007			2008		2007
(in millions, except per share data)
Sales and revenues, net	$	3,949	$	2,990		$	6,903	$	6,138
Total costs and expenses		3,757		3,027			6,777		6,172
Equity in income of non-consolidated affiliates		21		18			45		40
Income (loss) before income tax		213		(19	)		171		6
Net income (loss)		215		(25	)		162		(13	)
Diluted earnings (loss) per share		2.94		(0.36	)		2.22		(0.19	)

Subsequent Event

During May 2008, Ford announced that it planned to reduce its pickup production levels due to current economic conditions. As a significant supplier to Ford, we in turn have lowered engine production and have initiated a temporary layoff in our Indianapolis, Indiana facility. A prolonged reduction in Ford’s demand for our engines could have a material impact on our financial position, results of operations, or cash flows.

Results of Operations and Segment Results of Operations

The following tables summarize our consolidated statements of operations and illustrate the key financial indicators used to assess the consolidated financial results. Financial information is presented for the quarters and six month periods ended April 30, 2008 and 2007, as prepared in accordance with U.S. GAAP for interim financial information.

Results of Operations

	Three Months Ended April 30,						Change			Percentage Change
	2008			2007
(in millions, except per share data and percentage change)
Sales and revenues, net	$	3,949		$	2,990		$	959		32.1	%
Costs of products sold		3,196			2,472			724		29.3
Selling, general and administrative expenses		364			345			19		5.5
Engineering and product development costs		99			95			4		4.2
Interest expense		102			131			(29	)	(22.1	)
Other income, net		(4	)		(16	)		12		N.M.
Total costs and expenses		3,757			3,027			730		24.1
Equity in income of non-consolidated affiliates		21			18			3		16.7
Income (loss) before income tax		213			(19	)		232		N.M.
Income tax benefit (expense)		2			(6	)		8		N.M.
Net income (loss)	$	215		$	(25	)	$	240		N.M.
Diluted earnings (loss) per share	$	2.94		$	(0.36	)	$	3.30		N.M.

N.M. Not meaningful.

30

	Six Months Ended April 30,						Change			Percentage Change
	2008			2007
(in millions, except per share data and percentage change)
Sales and revenues, net	$	6,903		$	6,138		$	765		12.5	%
Costs of products sold		5,647			5,077			570		11.2
Selling, general and administrative expenses		685			642			43		6.7
Engineering and product development costs		181			198			(17	)	(8.6	)
Interest expense		269			242			27		11.2
Other (income) expenses, net		(5	)		13			(18	)	N.M.
Total costs and expenses		6,777			6,172			605		9.8
Equity in income of non-consolidated affiliates		45			40			5		12.5
Income before income tax		171			6			165		N.M.
Income tax expense		(9	)		(19	)		10		N.M.
Net income (loss)	$	162		$	(13	)	$	175		N.M.
Diluted earnings (loss) per share	$	2.22		$	(0.19	)	$	2.41		N.M.

Net Sales and Revenues

Our net sales and revenues are comprised of the following:

	Three Months Ended April 30,				Change		Percentage Change
	2008		2007
(in millions, except percentage change)
Sales of manufactured products, net – U.S. and Canada	$	3,230	$	2,399	$	831	34.6	%
Sales of manufactured products, net – Rest of world (“ROW”)		623		501		122	24.4
Total sales of manufactured products, net		3,853		2,900		953	32.9
Finance revenues		96		90		6	6.7
Sales and revenues, net	$	3,949	$	2,990	$	959	32.1

	Six Months Ended April 30,				Change		Percentage Change
	2008		2007
(in millions, except percentage change)
Sales of manufactured products, net – U.S. and Canada	$	5,567	$	5,003	$	564	11.3	%
Sales of manufactured products, net – ROW		1,146		947		199	21.0
Total sales of manufactured products, net		6,713		5,950		763	12.8
Finance revenues		190		188		2	1.1
Sales and revenues, net	$	6,903	$	6,138	$	765	12.5

Our Truck segment was our largest segment as measured in net sales and revenues, representing 68.8% and 63.5% of total consolidated net sales and revenues for the second quarter of 2008 and 2007, respectively, and 66.6% and 65.9% of total consolidated net sales and revenues for the six month period ended April 30, 2008 and 2007, respectively. Net sales and revenues increased within this segment by $819 million or 43.2% during the second quarter of 2008 as compared to the same period in 2007. Net sales and revenues increased by $555 million or 13.7% for the six month period ended April 30, 2008 as compared to the same period in 2007. Contributing to the increase in net sales and revenues was the growth in our U.S. military sales, the introduction

31

of new products, and competitive pricing strategies. While our share of retail deliveries by “traditional” truck class fluctuated in 2008 and 2007, the Truck segment’s bus, medium and severe service classes continue to lead their markets with the greatest relative retail market share in each of their classes by brand.

Our Engine segment was our second largest segment in net sales and revenues with $939 million and $1.7 billion in the second quarter and first half of 2008 that compares with $772 million and $1.6 billion for the same respective periods in 2007. Due to the decrease in demand for heavy duty pickup trucks, engine units shipped to Ford in North America during the quarter ended April 30, 2008 decreased by 3,000 units or 5.9% compared to the prior year quarter and decreased by 15,400 units or 14.7% compared to the six month period ended April 30, 2007. The Engine segment was able to mitigate the second quarter 2008 reduction in shipments to Ford North America through growth of 22.9% or 6,600 units in the South American markets, as compared to the same period in 2007. Intersegment sales began to recover in the second quarter of 2008 as inventory levels of the pre-2007 emission compliant engines were consumed.

Our Parts segment grew net sales 13.2% and 12.2% in the quarter and six month period ended April 30, 2008 as compared to the same respective periods in 2007. This increase was primarily due to growth in our U.S. military sales and improved pricing.

Our Financial Services segment net revenues declined by 6.4% and 11.4% in the second quarter and for the first half of 2008 as compared to the same respective periods in 2007. Revenue for the first half of 2007 included additional revenue related to the financing of dealer inventory of pre-2007 emissions compliant vehicles. In the first half of 2008 we incurred a reduction of financing opportunities resulting from fewer purchases of vehicles and components due to reduced customer demand, related to higher interest rates, current tightening of the credit environment, and increased diesel fuel prices.

Costs and Expenses

The following tables summarize the key components of Costs of products sold:

	Three Months Ended April 30,				Change			Percentage Change
	2008		2007
(in millions, except percentage change)
Costs of products sold, excluding items presented separately below	$	3,147	$	2,417	$	730		30.2	%
Postretirement benefits expense allocated to costs of products sold		5		12		(7	)	(58.3	)
Product warranty costs		44		43		1		2.3
Total costs of products sold	$	3,196	$	2,472	$	724		29.3

	Six Months Ended April 30,				Change			Percentage Change
	2008		2007
(in millions, except percentage change)
Costs of products sold, excluding items presented separately below	$	5,550	$	4,943	$	607		12.3	%
Postretirement benefits expense allocated to costs of products sold		10		24		(14	)	(58.3	)
Product warranty costs		87		110		(23	)	(20.9	)
Total costs of products sold	$	5,647	$	5,077	$	570		11.2

Costs of products sold increased 29.3% and 11.2% for the quarter and six month period ended April 30, 2008, respectively, as compared to the same respective periods in 2007. As a percentage of net sales of manufactured products, Costs of products sold decreased to 82.9% and 84.1% for the quarter and six month period ended April 30, 2008 from 85.2% and 85.3% for the same respective periods in 2007. Product warranty

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costs, including extended warranty program costs and net of vendor recoveries (“product warranty costs”), were $44 million and $87 million for the second quarter and first half of 2008, respectively, and $43 million and $110 million for the comparable periods of 2007. Postretirement benefits expense included in Costs of products sold, inclusive of company 401(k) contributions, was $5 million and $10 million for the quarter and six month period ended April 30, 2008 that compares with $12 million and $24 million for the same respective periods in 2007. Apart from product warranty costs and postretirement benefits expense, Costs of products sold as a percentage of net sales of manufactured products decreased to 81.7% and 82.7% during the second quarter and first half of 2008 from 83.3% and 83.1% for the same respective periods in 2007. The decrease in costs of products sold as a percentage of net sales of manufactured products between the quarters and the six month periods ended April 30, 2008 and 2007 is primarily due to improved pricing and improvement in manufacturing performance offset by a decrease in production volumes and the corresponding loss of operational efficiencies and margin benefits normally associated with greater production volumes.

The product warranty costs increased by $1 million for the three months ended April 30, 2008 and decreased by $23 million for the six month period ended April 30, 2008 as compared to the same respective periods in 2007. The increase in the three months ended April 30, 2008 as compared to the same respective period in 2007 was primarily a result of higher volumes offset by lower costs per unit. The decrease in product warranty costs for the six months ended April 30, 2008 as compared to the same respective period in 2007 was primarily the result of lower volumes, lower per unit costs, and the impact of changes to pre-existing warranties. During the second quarter and first half of 2008, we incurred $1 million of product warranty cost reductions and $5 million of warranty expense associated with adjustments to pre-existing warranties compared to $1 million and $25 million in expense for the same respective periods in 2007. These adjustments reflect changes in our estimate of warranty costs for sales recognized in prior years associated with products at the Truck and Engine segments attributed to eliminating or rectifying warranty related issues earlier in the product life cycle. For more information regarding product warranty costs, see Note 1, Summary of significant accounting policies, to the accompanying condensed consolidated financial statements.

Direct material costs have been impacted by industry-wide increases in commodity and fuel prices, which affected all of our manufacturing operations. Costs related to steel, precious metals, resins, and petroleum products increased by $13 million during the quarter ended April 30, 2008 as compared to the immediately preceding quarter and increased by $20 million on a year to date basis. However, we generally have been able to mitigate the effects by our efforts to reduce costs through a combination of design changes, material substitution, alternative supplier resourcing, global sourcing, and price performance. We expect our direct material costs will continue to increase in the future as global demand for these commodities continue to escalate.

Selling, general and administrative expenses, including certain key items, are highlighted in the following tables:

	Three Months Ended April 30,					Change			Percentage Change
	2008			2007
(in millions, except percentage change)
Selling, general and administrative expenses, excluding items presented separately below	$	257		$	204	$	53		26.0	%
Professional consulting and auditing fees		40			41		(1	)	(2.4	)
Postretirement benefits (income) expense allocated to selling, general and administrative expenses		(1	)		20		(21	)	N.M.
Dealcor expenses		62			70		(8	)	(11.4	)
Provision for losses on receivables		6			10		(4	)	(40.0	)
Total selling, general and administrative expenses	$	364		$	345	$	19		5.5

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	Six Months Ended April 30,					Change			Percentage Change
	2008			2007
(in millions, except percentage change)
Selling, general and administrative expenses, excluding items presented separately below	$	486		$	364	$	122		33.5	%
Professional consulting and auditing fees		105			86		19		22.1
Postretirement benefits (income) expense allocated to selling, general and administrative expenses		(44	)		41		(85	)	N.M.
Dealcor expenses		120			137		(17	)	(12.4	)
Provision for losses on receivables		18			14		4		28.6
Total selling, general and administrative expenses	$	685		$	642	$	43		6.7

Selling, general and administrative expenses amounted to $364 million and $685 million for the quarter and six month period ended April 30, 2008, respectively, that compares to $345 million and $642 million for the same respective periods in 2007. Our Truck segment occasionally acquires and operates dealer locations for the purpose of transitioning ownership or providing temporary operational assistance, which may increase or decrease Selling, general and administrative expenses in the period of acquisitions and disposals. Our ratio of Selling, general and administrative expenses to net sales and revenues decreased by 2.3 percentage points to 9.2% for the quarter ended April 30, 2008 as compared to 11.5% for the same period in 2007. This ratio of Selling, general and administrative expenses as a percentage of net sales and revenues decreased by 0.6 percentage points to 9.9% for the six month period ended April 30, 2008 compared to 10.5% for the same period in 2007. After separating the effects of professional, consulting, and auditing fees, postretirement benefits (income) expense, Dealcor expenses and provision for losses on receivables, Selling, general and administrative expenses as a percentage of net sales and revenues decreased from 6.8% during the quarter ended April 30, 2007 to 6.5% for the same period in 2008 but increased from 5.9% for the six month period ended April 30, 2007 to 7.0% for the same period in 2008. In addition to the above mentioned items, we have established an accrual for incentive compensation and profit-sharing in the amount of $22 million and $45 million for the quarter and six month period ended April 30, 2008 that compares to a nominal amount in the same periods in 2007. The remaining differences that impacted Selling, general and administrative expenses were increased overhead and infrastructure enhancements in support of the company’s growth initiatives. It is not uncommon for Selling, general and administrative expenses as a percentage of net sales to increase in lower production periods and to decline in higher production periods.

Engineering and product development costs increased 4.2% during the second quarter of 2008 and decreased 8.6% during the first half of 2008 as compared to the same respective periods in 2007. Engineering and product development costs were primarily incurred by our Truck and Engine segments for product innovation and cost reductions, and to provide our customers with product and fuel-usage efficiencies. Engineering and product development costs incurred at our Engine segment increased $8 million or 16.3% and decreased $2 million or 2.0% during the second quarter and first half of 2008, respectively, as compared to the same respective periods in 2007. This fluctuation in costs is a result of our previously incurred efforts to develop reliable, high-quality emissions-compliant engines that we introduced in 2007 and begin developing the next generation of emission-compliant engines. Throughout the first half of 2008, we incurred lower costs associated with the development of the MaxxForce Big-Bore engine line and our emissions-compliant products. Engineering and product development costs incurred at the Truck segment were $42 million and $83 million for the second quarter and first half of 2008, which compares to the $43 million and $91 million incurred in the same respective periods of 2007, and relate primarily to the further development of our ProStar class 8 long-haul truck. In addition, the Truck segment also incurred costs, to a lesser extent, in 2007 related to the development and roll-out of our 2007 emissions-compliant products and the development of the LoneStar class 8 tractor.

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The following tables present the amounts of postretirement benefits (income) expenses allocated between Costs of products sold, Selling, general and administrative expenses, and Engineering and product development costs:

	Three Months Ended April 30,					Change			Percentage Change
	2008			2007
(in millions, except percentage change)
Postretirement benefits expense included in:
Costs of products sold	$	5		$	12	$	(7	)	(58.3	%)
Selling, general and administrative expenses		(1	)		20		(21	)	N.M.
Engineering and product development costs		1			3		(2	)	(66.7	)
Total postretirement benefits expenses	$	5		$	35	$	(30	)	(85.7	)

	Six Months Ended April 30,					Change			Percentage Change
	2008			2007
(in millions, except percentage change)
Postretirement benefits (income) expense included in:
Costs of products sold	$	10		$	24	$	(14	)	(58.3	%)
Selling, general and administrative expenses		(44	)		41		(85	)	N.M.
Engineering and product development costs		1			6		(5	)	(83.3	)
Total postretirement benefits (income) expense	$	(33	)	$	71	$	(104	)	(146.5	)

Total postretirement benefits (income) expense includes defined benefit plans (pensions and post employment benefits primarily health and life insurance) and defined contribution plans (401K contributions for active employees) as described in Note 8, Postretirement benefits, to the accompanying condensed consolidated financial statements.

We recognized income related to our postretirement benefits from defined benefit plans of $1 million in the second quarter of 2008 compared to an expense of $29 million for the same period in 2007. The $30 million reduction in defined benefit plan expense resulted from better than expected returns and a significant reduction in the projected benefit obligation resulting from fully insuring our Medicare eligible population in our largest postretirement medical plan. Each of these actions occurred in 2007 and represent variances from prior actuarial estimates. These variances significantly reduced the cumulative loss pool during 2007. Such costs amortize into income in the subsequent years as a component of postretirement benefits (income) expense. Amortization of the loss pool for pension and health and welfare plans was $3 million in the second quarter of 2008 compared to $21 million for the same period in 2007. Additionally, the growth in the asset base from the better than expected returns during 2007 had the effect of increasing the expected return on plan assets in 2008 (another component of postretirement benefits (income) expense). The expected return on plan assets for pension and health and welfare plans in the first quarter of 2008 was $98 million compared to $83 million for the same period in 2007. See Note 8, Postretirement benefits, of the condensed consolidated financial statements for further information on postretirement benefits.

We recognized income related to our postretirement benefits from defined benefit plans of $45 million in the six months ended April 30, 2008 compared to an expense of $59 million for the same period in 2007. On December 16, 2007 the majority of company employees represented by the United Automobile, Aerospace and Agriculture Implement Workers of America voted to ratify a new contract that will run through September 30, 2010. Among the changes from the prior contract was the cessation of annual lump sum payments that had been made to certain retirees. We previously accounted for these payments as a defined benefit plan based on the historical substance of the underlying arrangement. The elimination of these payments and other changes resulted in a net settlement and curtailment of the plan resulting in income of $42 million for the three months ended January 31, 2008.

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Excluding the effects of the plan settlement and curtailment described above, postretirement benefits income from defined benefit plans was $3 million in the six months ended April 30, 2008. The $62 million reduction in defined benefit plan expense resulted from better than expected returns and a significant reduction in the projected benefit obligation resulting from fully insuring our Medicare eligible population in our largest postretirement medical plan. Each of these actions took place in 2007 and represent variances from prior actuarial estimates. These variances significantly reduced the cumulative loss pool during 2007. Such costs amortize into income in the subsequent years as a component of postretirement benefits (income) expense. Amortization of the loss pool for pension and health and welfare plans was $7 million for the six months ended April 30, 2008 compared to $41 million for the same period in 2007. Additionally, the growth in the asset base from the better than expected returns during 2007 had the effect of increasing the expected return on plan assets in 2008 (another component of postretirement benefits (income) expense). The expected return on plan assets for pension and health and welfare plans for the six months ended April 30, 2008 was $196 million compared to $167 million for the same period in 2007. See Note 8, Postretirement benefits, of the condensed consolidated financial statements for further information on postretirement benefits.

Postretirement benefits expense resulting from the defined contribution plans was $6 million and $12 million for each of the three months and six months ended April 30, 2008 and 2007, respectively.

The following tables represent the components of Interest expense:

	Three Months Ended April 30,					Change			Percentage Change
	2008			2007
(in millions, except percentage change)
Manufacturing operations debt	$	35		$	53	$	(18	)	(34.0	%)
Financial Services operations debt		68			72		(4	)	(5.6	)
Non-cash mark to market charge (income) in our interest rate swap agreements		(1	)		6		(7	)	N.M.
Total Interest expense	$	102		$	131	$	(29	)	(22.1	)

	Six Months Ended April 30,					Change			Percentage Change
	2008		2007
(in millions, except percentage change)
Manufacturing operations debt	$	83	$	96		$	(13	)	(13.5	%)
Financial Services operations debt		147		147			—		—
Non-cash mark to market charge (income) in our interest rate swap agreements		39		(1	)		40		N.M.
Total Interest expense	$	269	$	242		$	27		11.2

The overall decrease in the three month period ended April 30, 2008 was primarily due to a decrease in interest rates and lower debt balances. The overall increase for the six month period ended April 30, 2008 was primarily due to non-cash mark to market adjustments in our interest rate swap agreements in the Financial Services segment and offset by a decrease in interest rates and lower debt balances. For more information, see Note 10, Debt, included in the Annual report on Form 10-K for 2007 and see Note 11, Financial instruments to the accompanying condensed consolidated financial statements.

Other (income) expenses, net amounted to $4 million and $5 million of other income for the quarter and six month period ended April 30, 2008, respectively, and compares with $16 million of other income and $13 million of other expense for the quarter and six month period ended April 30, 2007, respectively. Other (income) expenses, net includes $31 million of expenses related to the early extinguishment of debt in the first six months

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of 2007, which did not recur in 2008. Excluding the expenses related to the early retirement of debt in 2007, interest income earned of $10 million and $23 million for the three month and six month periods ended April 30, 2008, respectively, compares to $11 million and $28 million for the comparable three month and six month periods ended April 30, 2007, respectively, and was primarily offset by other miscellaneous expenses.

Equity in income of non-consolidated affiliates

Income and losses reported in Equity in income of non-consolidated affiliates are derived from our ownership interest in BDP, BDT, and thirteen other partially-owned affiliates. We reported $21 million and $45 million of income for the quarter and six month period ended April 30, 2008 as compared to $18 million and $40 million for the quarter and six month period ended April 30, 2007 with a majority of the income throughout these periods being derived from BDP. For more information, see Note 6, Investments in and advances to non-consolidated affiliates, to the accompanying condensed consolidated financial statements.

Income tax benefit (expense)

Income tax benefit (expense) was a benefit of $2 million and an expense of $9 million for the second quarter and first half of 2008 as compared to $6 million and $19 million of expense for the comparable periods in 2007. Our income tax expense each quarter is affected by various items, including deferred tax asset valuation allowances, research and development credits, Medicare reimbursements, and other items. We record income tax expense on domestic operations for current state income taxes and other items which amounted to a benefit of $8 million in the second quarter of 2008. We currently have $1.0 billion of U.S. net operating losses as of October 31, 2007. For so long as we are able to offset our current taxable income by these net operating losses, we believe that our cash payment of U.S. taxes will be minimal. For additional information, see Note 9, Income taxes, to the accompanying condensed consolidated financial statements.

Net income (loss) and Diluted earnings (loss) per share

For the quarter and six month period ended April 30, 2008, we recorded net income of $215 million and $162 million, respectively, which compares to net losses of $25 million and $13 million for the quarter and six month period ended April 30, 2007, respectively. Diluted earnings for the quarter and six month period ended April 30, 2008 was $2.94 and $2.22 per share, respectively, calculated on approximately 73.2 and 72.9 million shares, respectively. For the quarter and six month period ended April 30, 2007, our diluted loss was $0.36 and $0.19 per share, respectively, calculated on approximately 70.3 million shares, respectively. Diluted shares reflect the impact of common stock options in accordance with the treasury stock method.

Segment Results of Operations

We define segment profit (loss) as adjusted income (loss) before income tax. Our results for interim periods are not necessarily indicative of results for a full year. Beginning in 2008, the sales from the Parts segment to the Truck segment, specifically our Dealcors, are recorded as intersegment sales, which are eliminated within Corporate and Eliminations. Previously, such sales were eliminated within the Truck segment’s external sales and revenues. As such, the Parts and Truck segments sales and revenues in the amounts of $65 million and $125 million for the three months and six months ended April 30, 2007, respectively, have been restated to conform to the 2008 presentation. The following sections analyze operating results as they relate to our four industry segments.

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Truck Segment

The following tables summarize our Truck segment’s financial and key operating results:

	Three Months Ended April 30,				Change		Percentage Change
	2008		2007
(in millions, except percentage change)
Segment sales	$	2,717	$	1,898	$	819	43.2	%
Segment profit		213		36		177	491.7

	Six Months Ended April 30,				Change		Percentage Change
	2008		2007
(in millions, except percentage change)
Segment sales	$	4,600	$	4,045	$	555	13.7	%
Segment profit		234		125		109	87.2

Chargeouts are defined by management as trucks that have been invoiced to customers with units held in dealer inventory primarily representing the difference between retail deliveries and chargeouts. The following tables reflect our chargeouts in units.

	Three Months Ended April 30,		Change		Percentage Change
	2008	2007
“Traditional” Markets (U.S. and Canada)
School buses	3,300	4,100	(800	)	(19.5	%)
Class 6 and 7 medium trucks	6,300	6,800	(500	)	(7.4	)
Class 8 heavy trucks	3,900	4,500	(600	)	(13.3	)
Class 8 severe service trucks(A)	5,400	3,700	1,700		45.9
Sub-total combined class 8 trucks	9,300	8,200	1,100		13.4
Total “Traditional” Markets	18,900	19,100	(200	)	(1.0	)
Total “Expansion” Markets	8,300	9,200	(900	)	(9.8	)
Total Worldwide Units	27,200	28,300	(1,100	)	(3.9	)

(A) Includes 2,000 and 400 units in the three months ended April 30, 2008 and 2007, respectively, related to U.S. military contracts.

	Six Months Ended April 30,		Change		Percentage Change
	2008	2007
“Traditional” Markets (U.S. and Canada)
School buses	6,400	7,500	(1,100	)	(14.7	%)
Class 6 and 7 medium trucks	10,000	16,500	(6,500	)	(39.4	)
Class 8 heavy trucks	6,500	11,500	(5,000	)	(43.5	)
Class 8 severe service trucks(B)	9,100	7,900	1,200		15.2
Sub-total combined class 8 trucks	15,600	19,400	(3,800	)	(19.6	)
Total “Traditional” Markets	32,000	43,400	(11,400	)	(26.3	)
Total “Expansion” Markets	14,500	18,600	(4,100	)	(22.0	)
Total Worldwide Units	46,500	62,000	(15,500	)	(25.0	)

(B) Includes 3,300 and 700 units in the six months ended April 30, 2008 and 2007, respectively, related to U.S. military contracts.

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Truck Segment Sales

	Three Months Ended April 30,				Change		Percentage Change
	2008		2007
(in millions, except percentage change)
Truck segment sales of manufactured products, net – U.S. and Canada	$	2,418	$	1,612	$	806	50.0	%
Truck segment sales of manufactured products, net – ROW		299		286		13	4.5
Total truck segment sales of manufactured products, net	$	2,717	$	1,898	$	819	43.2
	Six Months Ended April 30,				Change		Percentage Change
	2008		2007
(in millions, except percentage change)
Truck segment sales of manufactured products, net – U.S. and Canada	$	4,031	$	3,478	$	553	15.9	%
Truck segment sales of manufactured products, net – ROW		569		567		2	0.4
Total truck segment sales of manufactured products, net	$	4,600	$	4,045	$	555	13.7

During the three months and six months ended April 30, 2008, the Truck segment’s net sales increased from the same respective periods in 2007 primarily due to growth in U.S. military sales, new truck pricing performance, and a slight increase in our “expansion” markets.

We observed that the “traditional” markets began to experience a downturn at the end of our first quarter of 2007 and continued into the first half of 2008. Strongly influencing this downturn was the industry-wide increase in demand for vehicles containing the pre-2007 emissions-compliant engines ahead of the implementation of stricter engine emissions requirements which accounts for the majority of the change between our second quarter and first half of 2008 and 2007, respectively. “Traditional” industry retail units delivered in the three months and six months ended April 30, 2008 amounted to 61,200 and 118,300 retail units, respectively, and were 25.7% and 38.4% less than the same respective periods in 2007 of 82,400 and 192,000 industry retail units. “Traditional” market retail deliveries for the three and six months ended April 30, 2008 and 2007 are categorized by relevant class in the tables below. The Truck segment “traditional” retail units sold declined by 2,800 and 13,500 units during the second quarter and first half of 2007, respectively, or a 13.5% and 28.2% reduction, respectively.

The following tables summarize industry retail deliveries, in the “traditional” truck markets in the U.S. and Canada, in units, according to Wards Communications and R.L. Polk & Co.:

	Three Months Ended April 30,		Change		Percentage Change
	2008	2007
“Traditional” Markets (U.S. and Canada)
School buses	5,800	6,800	(1,000	)	(14.7	%)
Class 6 and 7 medium trucks	16,300	22,800	(6,500	)	(28.5	)
Class 8 heavy trucks	24,600	37,700	(13,100	)	(34.7	)
Class 8 severe service trucks	14,500	15,100	(600	)	(4.0	)
Sub-total combined class 8 trucks	39,100	52,800	(13,700	)	(25.9	)
Total “Traditional” Truck Markets	61,200	82,400	(21,200	)	(25.7	)

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	Six Months Ended April 30,		Change		Percentage Change
	2008	2007
“Traditional” Markets (U.S. and Canada)
School buses	11,200	12,500	(1,300	)	(10.4	%)
Class 6 and 7 medium trucks	30,900	49,800	(18,900	)	(38.0	)
Class 8 heavy trucks	48,700	94,600	(45,900	)	(48.5	)
Class 8 severe service trucks	27,500	35,100	(7,600	)	(21.7	)
Sub-total combined class 8 trucks	76,200	129,700	(53,500	)	(41.2	)
Total “Traditional” Truck Markets	118,300	192,000	(73,700	)	(38.4	)

The following tables summarize our retail delivery market share percentages based on market-wide information from Wards Communications and R.L. Polk & Co.:

	Three Months Ended April 30,
	2008		2007
“Traditional” Markets (U.S. and Canada)
School buses	56.9	%	60.3	%
Class 6 and 7 medium trucks	35.0		34.2
Class 8 heavy trucks	15.0		12.2
Class 8 severe service trucks	35.9		27.8
Sub-total combined class 8 trucks	22.8		16.7
Total “Traditional” Truck Markets	29.2		25.1
Impact of excluding U.S. military deliveries
Class 8 severe service trucks, exclusive of U.S. military deliveries	25.6		25.9
Sub-total combined class 8 trucks, exclusive of U.S. military deliveries	18.6		16.0
Total “Traditional” Truck Markets, exclusive of U.S. military deliveries	26.9		24.8

	Six Months Ended April 30,
	2008		2007
“Traditional” Markets (U.S. and Canada)
School buses	57.1	%	60.0	%
Class 6 and 7 medium trucks	34.3		35.5
Class 8 heavy trucks	15.4		14.4
Class 8 severe service trucks	35.6		25.6
Sub-total combined class 8 trucks	22.7		17.4
Total “Traditional” Truck Markets	29.0		24.9
Impact of excluding U.S. military deliveries
Class 8 severe service trucks, exclusive of U.S. military deliveries	26.9		24.1
Sub-total combined class 8 trucks, exclusive of U.S. military deliveries	19.2		17.0
Total “Traditional” Truck Markets, exclusive of U.S. military deliveries	27.0		24.6

For the three months and six months ended April 30, 2008, our school bus, class 6 and 7 medium, and class 8 severe service classes all led their markets with the greatest retail market share in each of their classes by brand. Our continuing strategy is to maintain and grow these market share positions at our required margins while aggressively pursuing market share gains in the heavy truck class, the class in which we have the lowest market share. We demonstrated our long-term commitment to the heavy truck market through our 2007 introduction of the ProStar class 8 long-haul truck. Additionally, we recently unveiled our new LoneStar class 8 tractor to the public at the Chicago International Auto Show in February 2008.

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Our class 8 heavy truck market share rose by 2.8 and 1.0 percentage points for the three months and six months ended April 30, 2008, respectively, compared to the same periods in 2007, due to our reengagement in this class with new models, re-established scale, and increased supplier relationships. Market share in the school bus class was 56.9% and 57.1% for the three months and six months ended April 30, 2008, respectively, and 60.3% and 60.0% for the same respective periods in 2007 and was primarily attributable to our distribution strategy and our on-going efforts to further engage and support our dealer and customer networks. Market share in the school bus class declined over the reporting period as a result of competitive pricing strategies and our desire to collect for the intrinsic value of our product. Market share in class 6 and 7 medium increased to 35.0% from 34.2% during the second quarter of 2008 and was down slightly during the first half of 2008. We have been able to mitigate the impact of new entrants into this class and discount programs instituted by our competitors. Our severe service class market share increased 8.1 and 10.0 percentage points during the second quarter and first half of 2008, respectively, as compared to market share of 27.8% and 25.6% for the three months and six months ended April 30, 2007, due to our growth in U.S. military deliveries offsetting the industry downturn in residential and non-residential construction and federal transportation spending.

Net sales grew during the second quarter and first half of 2008 in our “expansion” markets, which include Mexico, international export, non-U.S. military, recreational vehicle, commercial step-van, and other truck and bus classes. Products such as the Low-Cab Forward vehicle, class 4 and 5 small bus, and our recreational vehicle products, as well as our entrance into the non-U.S. military market contributed to incremental sales within these quarters in addition to our traditional markets. It is our goal to continue to diversify into these “expansion” markets in future periods. The Mexican truck market increased 5.4% and decreased 13.0% in the three months and six months ended April 30, 2008, respectively, compared to the same respective periods in 2007. The enactment of a new tax on inventory of Mexican dealers’ inventory as of December 31, 2007 deterred dealers from holding inventory as of calendar year end resulting in higher competitive discounts which impacted the industry and our market share. Our Mexican truck market share was 33.0% and 31.5% for the quarters ended April 30, 2008 and 2007, respectively, and 31.7% and 36.2% for the six months ended April 30, 2008 and 2007, respectively.

Truck segment costs and expenses

	Three Months Ended April 30,				Change			Percentage Change
	2008		2007
(in millions, except percentage change)
Costs of products sold, excluding items presented separately below	$	2,260	$	1,630	$	630		38.7	%
Postretirement benefits expense allocated to costs of products sold		4		9		(5	)	(55.6	)
Product warranty costs		32		26		6		23.1
Total costs of products sold	$	2,296	$	1,665	$	631		37.9

	Six Months Ended April 30,				Change			Percentage Change
	2008		2007
(in millions, except percentage change)
Costs of products sold, excluding items presented separately below	$	3,890	$	3,417	$	473		13.8	%
Postretirement benefits expense allocated to costs of products sold		9		18		(9	)	(50.0	)
Product warranty costs		59		71		(12	)	(16.9	)
Total costs of products sold	$	3,958	$	3,506	$	452		12.9

Our Costs of products sold decreased to 84.5% and 86.0% during the second quarter and first half of 2008, respectively, from 87.7% and 86.7% during the same respective periods in 2007 as a percentage of net sales of

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manufactured products. Product warranty costs are included in Costs of products sold. Generally, we offer one- to five-year warranty coverage for our trucks, although the terms and conditions can vary. In addition, in an effort to strengthen and grow relationships with our customer base, we may incur warranty costs for claims that are outside of the contractual obligation period. Product warranty costs at the Truck segment were 1.4% and 1.5% of Truck segment’s costs of products sold for the three months and six months ended April 30, 2008, respectively, compared to 1.6% and 2.0% of Truck segment’s costs of products sold for the same respective periods in 2007. We accrue warranty related costs under standard warranty terms and for claims that we may choose to pay as an accommodation to our customers even though we are not contractually obligated to do so (“out-of-policy”). Our warranty cost declined as a result of a reduction in truck shipments for the three month and six month periods ended April 30, 2008, respectively, as compared to the same respective periods of 2007. In addition, quality improvements, a decrease in pre-existing warranty costs of $3 million and $12 million during the second quarter and first half of 2008, and reduced levels of out-of-policy claims have allowed us to mitigate our warranty cost for the second quarter and first half of 2008. Our Costs of products sold as a percentage of net sales of manufactured products, exclusive of product warranty costs and postretirement benefits expenses, decreased by 2.7 percentage points for the second quarter of 2008 compared to the same period in 2007 primarily due to improved pricing and operating efficiency. Our Costs of products sold as a percentage of net sales of manufactured products, exclusive of product warranty costs and postretirement benefits expense, increased by 0.1 percentage points for the first half of 2008 compared to the same period in 2007 primarily due to improved pricing mitigating the impact of lower volumes and the associated decline in operating efficiency.

	Three Months Ended April 30,					Change			Percentage Change
	2008			2007
(in millions, except percentage change)
Selling, general and administrative expenses, excluding items presented separately below	$	92		$	79	$	13		16.5	%
Postretirement benefits expense allocated to selling, general and administrative expenses		—			2		(2	)	(100.0	)
Dealcor expenses		62			70		(8	)	(11.4	)
Provision for losses on receivables		(2	)		3		(5	)	(166.7	)
Total selling, general and administrative expenses	$	152		$	154	$	(2	)	(1.3	)

	Six Months Ended April 30,				Change			Percentage Change
	2008		2007
(in millions, except percentage change)
Selling, general and administrative expenses, excluding items presented separately below	$	178	$	155	$	23		14.8	%
Postretirement benefits expense allocated to selling, general and administrative expenses		—		4		(4	)	(100.0	)
Dealcor expenses		120		137		(17	)	(12.4	)
Provision for losses on receivables		3		5		(2	)	(40.0	)
Total selling, general and administrative expenses	$	301	$	301	$	—		—

The Truck segment’s Selling, general and administrative expenses were $152 million and $154 million for the quarters ended April 30, 2008 and 2007, respectively and amounted to $301 million for both the six months ended April 30, 2008 and 2007. Our relative ratio of Selling, general and administrative expenses to net sales and revenues, exclusive of postretirement benefits expense, Dealcor expenses and provision for losses on receivables decreased to 3.4% from 4.2% for the three month periods ended April 30, 2008 and 2007, respectively, but slightly increased to 3.9% compared to 3.8% for the six month periods ended April 30, 2008 and 2007, respectively. Selling, general and administrative expenses for the Truck segment include expenses attributable to segment overhead and infrastructure enhancements in support of sales activity.

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For the three month and six month periods ended April 30, 2008, the Truck segment’s Engineering and product development costs approximated $42 million and $83 million, respectively, which compares to $43 million and $91 million for the same respective periods in 2007. Approximately half of our total consolidated Engineering and product development costs were incurred at the Truck segment during the three months and six months ended April 30, 2008 and 2007, respectively. During this time, our top developmental priority was establishing our ProStar and LoneStar class 8 long-haul trucks and redeveloping our emissions-compliant vehicles, both of which required significant labor, material, outside engineering, and prototype tooling. Besides innovation, we also focus resources on continuously improving our existing products as a means of streamlining our manufacturing process, minimizing warranty costs, and providing our customers with product and fuel-usage efficiencies.

Truck segment profit

The Truck segment increased profitability for the quarter and six month period ended April 30, 2008 by $177 million and $109 million, respectively, to $213 million and $234 million, respectively, compared to $36 million and $125 million for the comparable periods in 2007. This increase in profitability for the three months and six months ended April 30, 2008 was primarily attributable to growth in our U.S. military sales, new truck pricing performance, and improved operational efficiencies.

Engine Segment

The following tables summarize our Engine segment’s financial results and sales data:

	Three Months Ended April 30,				Change			Percentage Change
	2008		2007
(in millions)
Segment sales	$	939	$	772	$	167		21.6	%
Segment profit		51		18		33		183.3
Sales data (in units):
Ford sales		55,300		56,200		(900	)	(1.6	)
Other OEM sales		31,400		26,400		5,000		18.9
Intercompany sales		15,800		12,100		3,700		30.6
Total sales		102,500		94,700		7,800		8.2

	Six Months Ended April 30,				Change			Percentage Change
	2008		2007
(in millions)
Segment sales	$	1,725	$	1,601	$	124		7.7	%
Segment profit		85		6		79		N.M.
Sales data (in units):
Ford sales		102,300		116,200		(13,900	)	(12.0	)
Other OEM sales		57,300		47,400		9,900		20.8
Intercompany sales		28,700		35,200		(6,500	)	(18.5	)
Total sales		188,300		198,800		(10,500	)	(5.3	)

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Engine segment sales

	Three Months Ended April 30,				Change		Percentage Change
	2008		2007
(in millions, except percentage change)
Engine segment sales of manufactured products, net – U.S. and Canada	$	641	$	579	$	62	10.7	%
Engine segment sales of manufactured products, net – ROW		298		193		105	54.4
Total engine segment sales of manufactured products, net	$	939	$	772	$	167	21.6

	Six Months Ended April 30,				Change			Percentage Change
	2008		2007
(in millions, except percentage change)
Engine segment sales of manufactured products, net – U.S. and Canada	$	1,195	$	1,262	$	(67	)	(5.3	%)
Engine segment sales of manufactured products, net – ROW		530		339		191		56.3
Total engine segment sales of manufactured products, net	$	1,725	$	1,601	$	124		7.7

The Engine segment continues to be our second largest segment as measured in net sales and revenues, representing 23.8% and 25.0% of total consolidated net sales and revenues for the three months and six months ended April 30, 2008, respectively, compared to 25.8% and 26.1% of total consolidated net sales and revenues for the same respective periods in 2007. The Engine segment experienced an increase in net sales for the three months and six months ended April 30, 2008 compared to the same respective periods in 2007. The primary drivers in the second quarter of 2008 were increased ROW volumes and improved pricing. In the first half of 2008, the decreased product volume in U.S. and Canada, primarily Ford, was greatly offset by increased ROW volumes and improved pricing. Volume reductions in our second quarter are primarily attributable to our largest diesel engine customer, Ford. This was the result of Ford reducing its purchasing requirements as a result of higher diesel fuel prices which impacted customer demand for the heavy duty pick up trucks. Sales of engines to Ford represented 54.0% and 54.3% of our unit volume for the second quarter and first half of 2008, respectively, compared to 59.3% and 58.5% of our unit volume for the same respective periods in 2007.

Sales to non-Ford customers, including intercompany sales, increased approximately 8,700 and 3,400 units during the second quarter and first half of 2008 compared to the same respective periods in 2007 largely attributed to the increase in South American volumes and recovery of truck sales.

Engine segment costs and expenses

	Three Months Ended April 30,				Change			Percentage Change
	2008		2007
(in millions, except percentage change)
Costs of products sold, excluding items presented separately below	$	828	$	684	$	144		21.1	%
Postretirement benefits expense allocated to costs of products sold		1		5		(4	)	(80.0	)
Product warranty costs		11		12		(1	)	(8.3	)
Total costs of products sold	$	840	$	701	$	139		19.8

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	Six Months Ended April 30,				Change			Percentage Change
	2008		2007
(in millions, except percentage change)
Costs of products sold, excluding items presented separately below	$	1,534	$	1,452	$	82		5.6	%
Postretirement benefits expenses allocated to costs of products sold		1		10		(9	)	(90.0	)
Product warranty costs		26		41		(15	)	(36.6	)
Total costs of products sold	$	1,561	$	1,503	$	58		3.9

For the three months ended April 30, 2008, Costs of products sold as a percentage of net sales of manufactured products decreased to 89.5% compared to 90.8% for the same period in 2007. The decrease of 1.3 percentage points for the three months ended April 30, 2008 compared to the corresponding period in 2007 is primarily attributable to the increased production volumes and the corresponding gain of operational efficiencies and increased selling prices. For the six months ended April 30, 2008, Costs of products sold as a percentage of net sales of manufactured products decreased to 90.5% compared to 93.9% for the same period in 2007. The decrease of 3.4 percentage points for the six months ended April 30, 2008 compared to the corresponding period in 2007 is primarily attributable to improved manufacturing performance as a result of the change over in production to the 2007 emissions-compliant engines and increased selling prices.

Product warranty costs for the three months and six months ended April 30, 2008 approximated 1.3% and 1.7% of the Engine segment’s cost of product sold compared to 1.7% and 2.7% of the Engine segment’s cost of product sold for the same respective periods of 2007. The decrease in product warranty costs at the Engine segment was attributable to a combination of lower per unit costs and a charge to pre-existing warranty in 2007 that did not recur in 2008. The reduction in pre-existing warranty was nominal for the second quarter and $10 million for the first half of 2008 compared to the same periods in 2007. Progressive improvements in product warranty costs were also achieved by focusing on controlling the reliability and quality of our emissions-compliant engines as evidenced by the level of spending incurred during previous quarters and periods within Engineering and product development costs. Costs are accrued per unit based on expected warranty claims that incorporate historical information and forward assumptions about the nature, frequency, and average cost of warranty claims.

Selling, general and administrative expenses incurred during the second quarter and six month period ended April 30, 2008 were $31 million and $61 million, respectively, and compared to $32 million and $56 million for the comparable periods in 2007.

Engineering and product development costs incurred during the second quarter and six month period ended April 30, 2008 were $57 million and $98 million, respectively, and compare to $49 million and $100 million for the comparable periods in 2007. The Engine segment’s Engineering and product development costs represented approximately half of our total consolidated Engineering and product development costs for the second quarter and first half of the year in both 2008 and 2007. Our top developmental priorities focus on further design changes to our diesel engines and the development of our MaxxForce Big-Bore engines. We have also begun development on new products to meet the requirements of the 2010 emissions regulations.

Engine segment profit

The Engine segment has made substantial investments in various affiliated entities and joint ventures. The most significant Engine segment joint venture in terms of income is BDP. We account for these entities using the equity method of accounting, and our percentage share of the income associated with these affiliates amounted to $23 million and $46 million for the second quarter and first half of 2008 and compares to $16 million and $37 million for the same respective periods in 2007.

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As a result of the above items, the Engine segment recognized a profit of $51 million and $85 million for the three months and six months ended April 30, 2008 that compares to a profit of $18 million and $6 million for the same respective periods in 2007.

Parts Segment

The following tables summarize our Parts segment’s financial results:

	Three Months Ended April 30,				Change		Percentage Change
	2008		2007
(in millions)
Segment sales	$	438	$	387	$	51	13.2	%
Segment profit		56		40		16	40.0

	Six Months Ended April 30,				Change		Percentage Change
	2008		2007
(in millions)
Segment sales	$	839	$	748	$	91	12.2	%
Segment profit		105		77		28	36.4

Parts segment sales

For the three month and six month periods ended April 30, 2008, the Parts segment sales growth was due primarily to an increase in U.S. military sales and improved pricing.

Parts segment profit

Selling, general and administrative expenses amounted to $41 million and $79 million for both the three months and six months ended April 30, 2008 and 2007, respectively. Our relative ratio of Selling, general and administrative expenses to net sales and revenues was approximately 9.4% for the quarter and six months ended April 30, 2008 compared to 10.6% for the comparable periods in 2007.

During the three month and six month periods ended April 30, 2008, a large portion of our profitability was due to volume growth primarily with the U.S. military while containing our Selling, general and administrative expenses.

Financial Services Segment

The following tables summarize this segment’s financial results:

	Three Months Ended April 30,					Change			Percentage Change
	2008			2007
(in millions)
Segment revenues	$	117		$	125	$	(8	)	(6.4	%)
Segment profit		19			28		(9	)	(32.1	)
	Six Months Ended April 30,					Change			Percentage Change
	2008			2007
(in millions)
Segment revenues	$	233		$	263	$	(30	)	(11.4	%)
Segment profit (loss)		(6	)		84		(90	)	(107.1	)

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Financial Services segment revenues

The Financial Services segment revenues include revenues from retail notes and finance leases, operating lease revenues, wholesale notes, retail and wholesale accounts, and securitization income. The Financial Services segment net revenues declined during the second quarter and first half of 2008 compared to the same periods in 2007 due to the decline in the credit markets, fewer originations, and a decrease in rental income. The decline in revenues was primarily due to a decrease in dealer inventory of pre-2007 emissions-compliant vehicles. In addition, we experienced a reduction in customer financing opportunities of purchases for vehicles and components due to the difficult credit environment and increased diesel fuel prices.

The Financial Services segment also receives interest income from the Truck and Parts segments relating to financing of wholesale notes, wholesale accounts, and retail accounts. This income is eliminated upon consolidation of financial results. Substantially all revenues earned on wholesale and retail accounts are received from other segments. Aggregate interest revenue provided by the Truck and Parts segments was $21 million and $43 million for the three months and six months ended April 30, 2008, respectively, and compares with $35 million and $75 million for the comparable periods in 2007.

Financial Services segment profit (loss)

The following tables present the components of Interest expense:

	Three Months Ended April 30,						Change			Percentage Change
	2008			2007
(in millions, except percentage change)
Interest expense related to debt	$	68		$	72		$	(4	)	(5.6	%)
Non-cash mark to market charge (income) on our interest rate swap agreements		(1	)		6			(7	)	N.M.
Total interest expense	$	67		$	78		$	(11	)	(14.1	)
	Six Months Ended April 30,						Change			Percentage Change
	2008			2007
(in millions, except percentage change)
Interest expense related to debt	$	147		$	147		$	—		—
Non-cash mark to market charge in our interest rate swap agreements		39			(1	)		40		N.M.
Total interest expense	$	186		$	146		$	40		27.4

In connection with our retail securitization transactions we enter into various derivative financial instruments, primarily interest rate swaps and caps to convert our interest rate exposure on both the finance receivables we originate and then sell as well as the notes issued as secured borrowings. Our intent is to convert our interest rate exposure related to our secured borrowings from a floating rate to a fixed rate in order to better match the cash flow of our fixed rate finance receivables so that the net margin spread over the life of the securitization is more predictable. Given the dramatic decrease in interest rates from October 31, 2007 to April 30, 2008, the required periodic mark to market of the derivative financial instruments resulted in a non-cash charge (gain) of ($1) million and $39 million in our consolidated statements of operations for the second quarter and the first half of 2008, respectively, and a nominal amount in the same periods in 2007. While these derivative instruments provide us with an economic hedge of the expected future interest cash flows associated with the secured borrowings, they do not qualify for hedge accounting under FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, thus the non-cash charge (gain). Further movement in interest rates could change the mark to market adjustments of the fair values of the derivatives in future periods.

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Repossessions and delinquencies increased during the second quarter and first half of 2008 compared to the same respective periods in 2007 driven primarily by weakness in the underlying trucking economy, which is currently impacting our overall customer portfolio. Decreases in tonnage hauled, suppressed freight rates driven by excess capacity, increased fuel costs, and the sub-prime mortgage market crisis have all contributed to the distress of our customers. We provide for certain losses related to the repossession and liquidation of collateral underlying finance receivables with dealers and retail customers. During the second quarter and first half of 2008, our provision for losses on receivables was reduced by $7 million and increased by $14 million, respectively, which compares with increases of $6 million and $8 million for the same respective periods in 2007.

In addition to the above items, we experienced a reduction in the net interest rate spread between our financing rates and the cost of our borrowings due to the timing of customer financing compared to our funding of the related debt. The Financial Services segment recognized a profit of $19 million and a loss of $6 million for the three months and six months ended April 30, 2008 that compares to a profit of $28 million and $84 million for the same respective periods in 2007.

Liquidity and Capital Resources

Cash Requirements

We generate cash flow primarily from the sale of trucks, diesel engines, and parts. In addition, we generate cash flow from product financing provided to our dealers and retail customers by the Financial Services segment. It is our opinion that, in the absence of significant unanticipated cash demands, current and forecasted cash flow from our manufacturing operations, financial services operations, and financing capacity will provide sufficient funds to meet anticipated operating requirements, capital expenditures, equity investments, and strategic acquisitions. We also believe 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 our dealers and retail customers. The manufacturing operations are generally able to access sufficient sources of financing to support our business plan. At April 30, 2008 our manufacturing operations had a total of $339 million available under committed credit facilities that mature in 2012.

Sources and Uses of Cash

	Six Months Ended April 30,
	2008			2007
(in millions)
Net cash provided by (used in) operating activities	$	311		$	(233	)
Net cash provided by (used in) investing activities		(441	)		106
Net cash provided by (used in) financing activities		11			(410	)
Effect of exchange rate changes on cash and cash equivalents		17			28
Decrease in cash and cash equivalents		(102	)		(509	)
Cash and cash equivalents at beginning of period		777			1,157
Cash and cash equivalents at end of the period	$	675		$	648

Cash Flow from Operating Activities

Cash provided by operating activities was $311 million for the six months ended April 30, 2008 compared with cash used in operating activities of $233 million for the six months ended April 30, 2007. The increase in cash provided by operating activities for the six months ended April 30, 2008 compared with the same period in 2007 was due primarily to higher net income and an increase in operating liabilities, partially offset by an

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increase in operating assets. The changes in net income and operating cash flows were primarily attributed to growth in our military and export business, primarily related to Mine-Resistant Ambush Protected vehicles, as well as better pricing as a result of the introduction of our 2007 emissions-compliant products. Net income for the six months ended April 30, 2008 was $162 million compared with net loss of $13 million for the six months ended April 30, 2007.

Cash paid for interest, net of amounts capitalized, was $271 million for the six months ended April 30, 2008 versus $256 million for the six months ended April 30, 2007. The increase was due primarily to higher average interest rates for the six months of 2008 compared with the six months of 2007. During the six months of 2008, $128 million was paid for certain fees associated with the ongoing consulting and other professional services related to the preparation of our public filing documents and documentation and assessment of internal control over financial reporting. Cash paid during the six months of 2008 for income taxes, net of refunds, was $28 million lower than the six months of 2007 due to decreased income in foreign jurisdictions.

Cash Flow from Investing Activities

Cash used in investing activities was $441 million for the six months ended April 30, 2008 compared with net cash provided by investing activities of $106 million for the six months ended April 30, 2007. The increase in cash used in investing activities for the six months of 2008 compared with the six months of 2007 was due primarily to lower net sales or maturities of marketable securities and a net increase in restricted cash and cash equivalents for the six months of 2008 compared with a net decrease in restricted cash and cash equivalents for the six months of 2007. The net increase in restricted cash and cash equivalents for the six months of 2008 compared with the same period in 2007 resulted from timing of transactions at one of our financial services subsidiaries. At the end of April 2008, this subsidiary’s assets were all restricted cash equivalents rather than a combination of restricted cash, note receivables, and lease receivables.

Cash Flow from Financing Activities

Cash flow provided by financing activities was $11 million for the six months ended April 30, 2008 compared with net cash used in financing activities of $410 million for the six months ended April 30, 2007. The increase in cash provided by financing activities for the six months of 2008 compared with the six months of 2007 was due primarily to a net increase in notes and debt outstanding under revolving credit facilities.

Credit Markets

In the late summer and early fall of 2007, the financial markets began a correction and period of credit tightening precipitated by large losses in the sub-prime mortgage market that bled over into other sectors of the market. The effects of this credit tightening manifested themselves primarily in our financial services operations. Pricing and liquidity were impacted in the asset-backed securitization market, a source of funding within our financial services operations. Substantial increases in the spreads on borrowing rates were seen at all credit rating levels. As a result, although we continue to believe that we will have sufficient liquidity to fund our financial services operations, future borrowings could be more costly than in the past.

Other Information

Critical Accounting Policies

Our condensed consolidated financial statements are prepared in accordance with U.S. GAAP. In connection with the preparation of our condensed consolidated financial statements, we use estimates and make judgments and assumptions about future events that affect the reported amounts of assets, liabilities, revenue, expenses, and the related disclosures. Our assumptions, estimates, and judgments are based on historical

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experience, current trends, and other factors we believe are relevant at the time we prepare our condensed consolidated financial statements. Our significant accounting policies and critical accounting estimates are consistent with those described in Note 1, Summary of significant accounting policies, accompanying the condensed consolidated financial statements and the MD&A section of our 2007 Annual Report on Form 10-K. There are no significant changes in our application of our critical accounting policies in the six months ended April 30, 2008 with exception to the adoption of FASB Interpretation No. 48, as further described in Note 9, Income taxes, to the accompanying condensed consolidated financial statements.

To aid in fully understanding and evaluating our reported results, we have identified the following accounting policies as our most critical because they require us to make difficult, subjective, and complex judgments.

• Pension and Other Postretirement Benefits

• Allowance for Losses

• Sales of Receivables

• Income Taxes

• Impairment of Long-Lived Assets

• Contingent Liabilities

• Product Warranty

• Goodwill and Intangible Assets

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New Accounting Pronouncements

Accounting pronouncements issued by various standard setting and governmental authorities that have not yet become effective with respect to our condensed consolidated financial statements are described below, together with our assessment of the potential impact they may have on our financial position, results of operations and cash flows:

Pronouncement	Effective Date	Impact on Our Financial Condition and Results of Operations
Emerging Issues Task Force Issue No. 08-3, Accounting by Lessees for Nonrefundable Maintenance Deposits	Effective for financial statements issued for fiscal years beginning after December 15, 2008 and interim periods within those fiscal years. Early adoption is not permitted. Our effective date is November 1, 2009.	We are evaluating the potential impact, if any.
FASB Staff Position No. FAS 142-3, Determination of the Useful Life of Intangible Assets	Effective for fiscal years beginning after December 15, 2008 and interim periods within those fiscal years. Our effective date is November 1, 2009.	We are evaluating the potential impact, if any.
FASB Statement No. 161, Disclosures about Derivative Instruments and Hedging Activities—An Amendment of FASB Statement No. 133	Effective for fiscal years and interim reporting periods beginning after November 15, 2008. Our effective date is February 1, 2009.	When effective, we will comply with the disclosure provisions of this Statement.
FASB Statement No. 160, Noncontrolling Interests in Consolidated Financial Statements—An Amendment of ARB No. 51	Effective for fiscal years and interim periods within those fiscal years, beginning on or after December 15, 2008. Our effective date is February 1, 2009.	We are evaluating the potential impact, if any.
FASB Statement No. 141(R), Business Combinations	Applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. An entity may not apply it before that date. Our effective date is November 1, 2009.	We will adopt this Statement on a prospective basis.
Emerging Issues Task Force Issue No. 07-03, Accounting for Nonrefundable Advance Payments for Goods or Services Received for Use in Future Research and Development Activities	Effective for financial statements issued for fiscal years beginning after December 15, 2007. Our effective date is November 1, 2008.	We are evaluating the potential impact, if any.

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Pronouncement	Effective Date	Impact on Our Financial Condition and Results of Operations
FASB Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities	Effective as of the beginning of the first fiscal year beginning after November 15, 2007. If we adopt the Fair Value Option, our effective date is November 1, 2008.	We are evaluating the potential impact, if any. We have not determined whether to adopt the fair value option.
FASB Statement No. 157, Fair Value Measurements	Effective for financial statements issued for fiscal years beginning after November 15, 2007, and for interim periods within those fiscal years. Our effective date is November 1, 2008.	We are evaluating the potential impact, if any.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

There have been no significant changes in our exposure to market risk since October 31, 2007. For further information please see Note 10, Fair value of financial instrument and Note 11, Financial instruments, to the accompanying condensed consolidated financial statements, and Item 7A of our Annual Report on Form 10-K for the year ended October 31, 2007.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our evaluation of the effectiveness of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act was performed under the supervision and with the participation of our senior management, including our Chief Executive Officer and Chief Financial Officer. The purpose of disclosure controls and procedures is to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosures.

As previously disclosed under “Item 9A—Controls and Procedures” in our Annual Report on Form 10-K for the fiscal year ended October 31, 2007, we concluded that our internal control over financial reporting was not effective based on the material weaknesses identified. Based on those material weaknesses, which we view as an integral part of our disclosure controls and procedures, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the quarter ended April 30, 2008, our disclosure controls and procedures were not effective. Nevertheless, based on a number of factors, including the performance of additional procedures by management designed to ensure the reliability of our financial reporting, we believe that the condensed consolidated financial statements in this Quarterly Report on Form 10-Q fairly present, in all material respects, our financial position, results of operations and cash flows for the periods presented in conformity with GAAP.

Management’s Remediation Initiatives

We continue to make progress toward achieving the effectiveness of our disclosure controls and procedures. Remediation generally requires making changes to how controls are designed and then adhering to those changes for a sufficient period of time such that the effectiveness of those changes is demonstrated with an appropriate amount of consistency. We believe that we have made significant improvements in our internal control over financial reporting and are committed to remediating our material weaknesses. Our Sarbanes Oxley compliance function is responsible for helping develop and monitor our short-term and long-term remediation plans. In

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addition, we have assigned executive owners to each material weakness to oversee the necessary remedial changes to the overall design of our internal control environment and to address the root causes of our material weaknesses.

Our remediation initiatives summarized below are intended to further address our specific material weaknesses and to continue to enhance our internal control over financial reporting.

• Our leadership team remains committed to achieving and maintaining a strong control environment, high ethical standards and financial reporting integrity. This commitment will continue to be communicated to and reinforced with our employees.

• We continue to foster awareness and understanding of standards and principles for accounting and financial reporting. This includes the implementation and clarification of specific accounting policies and procedures and effective execution of our newly designed accounting training program.

• We continue to enhance the development, communication, and monitoring of processes and controls to ensure that appropriate account reconciliations and journal entry controls are performed, documented, and reviewed as part of our standardized procedures.

• We continue to invest in modifications of our information systems to improve the reliability of our financial reporting and increase the completeness and consistency of the controls around logical access, program change and computer operations.

• We plan to redesign our period-end closing and financial statement preparation process in order to improve both its effectiveness and efficiency.

• We continue to support our Disclosure Committee and our internal Management Representation Letter process, both of which have been re-designed to ensure the timely assessment of accounting and disclosure matters requiring our attention.

Collectively, these and other actions are improving the foundation of our internal control over financial reporting.

Changes in Internal Control over Financial Reporting

There were no material changes in our internal control over financial reporting identified in connection with the evaluation required by Rules 13a-15 and 15d-15 that occurred during the quarter ended April 30, 2008 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II—OTHER INFORMATION

Item 6. Exhibits

Exhibit:		Page
(3)	Articles of Incorporations and By-Laws	E-1
(10)	Material Contracts	E-16
(31.1)	CEO Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	E-18
(31.2)	CFO Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	E-19
(32.1)	CEO Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	E-20
(32.2)	CFO Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	E-21
(99.1)	Additional Financial Information (Unaudited)	E-22

All exhibits other than those indicated above are omitted because of the absence of the conditions under which they are required or because the information called for is shown in the financial statements and notes thereto in the Quarterly Report on Form 10-Q for the period ended April 30, 2008.

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NAVISTAR INTERNATIONAL CORPORATION

AND CONSOLIDATED SUBSIDIARIES

SIGNATURE

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

NAVISTAR INTERNATIONAL CORPORATION

(Registrant)

/s/    JOHN P. WALDRON        

John P. Waldron

Vice President and Controller

(Principal Accounting Officer)

June 27, 2008

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EX-3

EXHIBIT 3

NAVISTAR INTERNATIONAL CORPORATION

AND CONSOLIDATED SUBSIDIARIES

ARTICLES OF INCORPORATION AND BY-LAWS

The following documents of Navistar International Corporation are incorporated herein by reference:

3.1	Restated Certificate of Incorporation of Navistar International Corporation effective July 1, 1993. Filed as Exhibit 3.2 to Annual Report on Form 10-K for the period ended October 31, 1993, which was dated and filed on January 27, 1994. Commission File No. 1-9618, and amended as of May 4, 1998.
3.2	Certificate of Retirement of Stock filed with the Secretary of State for the State of Delaware effective July 30, 2003 retiring the Class B common stock of Navistar International Corporation in accordance with the Restated Certificate of Incorporation of Navistar International Corporation. Filed as Exhibit 3.2 to Quarterly Report on Form 10-Q for the period ended July 31, 2003, which was dated and filed on September 12, 2003. Commission File No. 001-09618.
3.3	Certificate of Designation, Preferences and Rights of Junior Participating Preferred Stock, Series A filed with the Secretary of State for the State of Delaware effective July 23, 2007 establishing the Series A Preferred Stock of Navistar International Corporation in accordance with the Restated Certificate of Incorporation of Navistar International Corporation. Filed as Exhibit 3.1 to Current Report on Form 8-K which was dated and filed on July 23, 2007. Commission File No. 001-09618.
	The following documents of Navistar International Corporation are filed herewith:
3.4	The Amended and Restated By-Laws of Navistar International Corporation effective June 17, 2008 (marked to indicate all changes from the May 27, 2008 version).

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EX-3.4

EXHIBIT 3.4

AMENDED AND RESTATED

BY-LAWS

OF

NAVISTAR INTERNATIONAL CORPORATION

Incorporated Under the Laws

of the State of Delaware

(Effective May 27 June 17, 2008)

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AMENDED AND RESTATED

BY-LAWS

OF

NAVISTAR INTERNATIONAL CORPORATION

ARTICLE I.

Meetings of Stockholders

Section 1. Annual Meetings. The annual meeting of the stockholders for the election of directors and for the transaction of such other business as may properly come before the meeting shall be held on such date as shall be fixed by the Board of Directors and at such time and place, within or without the State of Delaware, as may be designated in the notice of meeting. If the day fixed for the annual meeting shall fall on a legal holiday, the meeting shall be held on the next succeeding day not a legal holiday. If the annual meeting is omitted on the day herein provided, a special meeting may be held in place thereof, and any business transacted at such special meeting in lieu of annual meeting shall have the same effect as if transacted or held at the annual meeting. At the discretion of the Board of Directors, the meeting may be conducted by remote communication to the extent permitted by law.

Section 2. Special Meetings. A special meeting of the stockholders for any purpose or purposes, unless otherwise prescribed by statute, may be called at any time by the Chair of the Board or by the Board of Directors.

Section 3. Time and Place of Meetings. All meetings of the stockholders shall be held at such times and places, within or without the State of Delaware, as may from time to time be fixed by the Board of Directors, or as shall be specified or fixed in the respective notices or waivers of notice thereof.

Section 4. Notice of Meetings. Except as otherwise expressly required by law or by the Certificate of Incorporation of Navistar international Corporation (“Corporation”), written notice of each meeting of the stockholders, stating the date, hour and place and, in the case of a special meeting of the stockholders, the purpose or purposes for which the meeting is called, shall be given to each stockholder of record entitled to vote at such meeting by mail, or if authorized by the Board of Directors, by a form of electronic transmission permitted by law. In the case of an annual meeting, such notice shall be given not less than fifteen (15) days before the date on which the meeting is to be held and, in the case of a special meeting, such notice shall be given not less than ten (10) days before the date on which the meeting is to be held. Any such notice shall be deemed given if by mail, when deposited in the United States mail, postage prepaid, directed to the stockholder at such stockholder’s last post office address appearing on the stock records of the Corporation or, if by electronic transmission, as follows: (a) if by facsimile telecommunications, when directed to a number at which the stockholder has consented to receive notice; (b) if by electronic mail, when directed to an electronic mail address at which the stockholder has consented to receive notice; (c) if by a posting on an electronic network together with separate notice to the stockholder of such specific posting, upon the later of (1) such posting and (2) the giving of such separate notice; and (d) if by any other form of electronic transmission, when directed to the stockholder. Except as otherwise expressly required by law, no publication of any notice of a meeting of the stockholders shall be required. At special meetings of stockholders no business other than that specified in the notice of the meeting or germane thereto shall be transacted at such meeting. Except as otherwise expressly required by law, notice of any adjourned meeting of the stockholders need not be given.

Section 5. Quorum. At each meeting of the stockholders, except as otherwise expressly required by law, stockholders holding one-third (1/3) of the shares of stock of the Corporation, issued and outstanding, and entitled to be voted thereat, shall be present in person or by proxy to constitute a quorum for the transaction of business. In the absence of a quorum at any such meeting or any adjournment or adjournments thereof, a majority in voting interest of those present in person or by proxy and entitled to vote thereat, or in the absence therefrom of all the stockholders, any officer entitled to preside at, or to act as secretary of, such meeting may adjourn such meeting from time to time until stockholders holding the amount of stock requisite for a quorum shall be present

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or represented. At any such adjourned meeting at which a quorum may be present any business may be transacted which might have been transacted at the meeting as originally called.

Section 6. Organization. At each meeting of the stockholders, one of the following shall chair the meeting and preside thereat, in the following order of precedence:

(a) the Chair of the Board;

(b) the Chief Executive Officer;

(c) an Executive Officer in order of rank of office and by seniority within the same rank; or

(d) a stockholder of record of the Corporation who shall be chosen to chair such meeting by a majority in voting interest of the stockholders present in person or by proxy and entitled to vote thereat.

The Secretary, or, if he or she shall be absent from such meeting, the person (who shall be an Assistant Secretary, if an Assistant Secretary shall be present thereat) whom the chair of such meeting shall appoint, shall act as secretary of such meeting and keep the minutes thereof.

Section 7. Order of Business. The order of business at each meeting of the stockholders shall be determined by the chair of such meeting, but such order of business at any meeting at which a quorum is present may be changed by the vote of a majority in voting interest of those present in person or by proxy at such meeting and entitled to vote thereat.

Section 8. Notice of Stockholder Nomination and Stockholder Business. At a meeting of the stockholders, only such business shall be conducted as shall have been properly brought before the meeting. Nominations for the election of directors may be made by the Board of Directors or by any stockholder entitled to vote for the election of directors. Other matters to be properly brought before the meeting must be: (a) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors, including matters covered by Rule 14a-8 of the Exchange Act of 1934, as amended, of the United States Securities and Exchange Commission; (b) otherwise properly brought before the meeting by or at the direction of the Board of Directors; or (c) otherwise properly brought before the meeting by a stockholder.

A notice of the intent of a stockholder to make a nomination or to bring any other matter before the meeting shall be made in writing and received by the Secretary of the Corporation not more than 180 days and not less than 120 days in advance of the annual meeting, or in the event of a special meeting of stockholders, such notice shall be received by the Secretary of the Corporation not later than the earlier of (i) the close of the fifteenth day following the day on which notice of the meeting is first mailed to stockholders, or (ii) the close of the day next preceding the meeting; provided, however, that if the date of the annual meeting is advanced more than 30 days prior to, or delayed by more than 30 days after, the anniversary of the preceding year’s annual meeting, notice by the stockholder to be timely must be so delivered not later than the close of business on the later of (i) the ninetieth 120^th day prior to such annual meeting or (ii) the tenth 10^th day following the day on which public announcement of the date of such meeting is first made.

Every such notice by a stockholder shall set forth:

(a) the name and residence address of the stockholder of the Corporation who intends to make a nomination or bring up any other matter;

(b) a representation that the stockholder is a holder of the Corporation’s voting stock and intends to appear in person or by proxy at the meeting to make the nomination or bring up the matter specified in the notice;

(c) with respect to notice of an intent to make a nomination, a description of all arrangements or understandings among the stockholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nomination or nominations are to be made by the stockholder;

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(d) with respect to notice of an intent to make a nomination, such other information regarding each nominee proposed by such stockholder as would have been required to be included in a proxy statement filed pursuant to the proxy rules of the United States Securities and Exchange Commission had each nominee been nominated by the Board of Directors of the Corporation; and

(e) with respect to notice of an intent to bring up any other matter, a description of the matter, and any material interest of the stockholder in the matter.

Notice of intent to make a nomination shall be accompanied by the written consent of each nominee to serve as director of the Corporation if so elected.

At the meeting of stockholders, the chair shall declare out of order and disregard any nomination or other matter not presented in accordance with this section.

Section 9. Voting. Each stockholder shall, at each meeting of the stockholders, be entitled to one vote in person or by proxy for each share of stock of the Corporation held by the stockholder and registered in the stockholder’s name on the books of the Corporation on the date fixed or determined pursuant to the provisions of Section 5 of Article VI of these By-laws as the record date for the determination of stockholders who shall be entitled to receive notice of and to vote at such meeting.

Shares of its own stock belonging to the Corporation shall not be voted directly or indirectly. Any vote on stock of the Corporation may be given at any meeting of the stockholders by the stockholder entitled thereto in person or by the stockholder’s proxy appointed by an instrument in writing delivered to the Secretary or an Assistant Secretary of the Corporation or to the secretary of the meeting. The attendance at any meeting of a stockholder who may theretofore have given a proxy shall not have the effect of revoking the same unless the stockholder shall in writing so notify the secretary of the meeting prior to the voting of the proxy. At all meetings of the stockholders all matters, except as otherwise provided in these By-laws or by law, shall be decided by the vote of a majority in voting interest of the stockholders present in person or by proxy and entitled to vote thereat, a quorum being present. Except in the case of votes for the election of directors, the vote at any meeting of the stockholders on any question need not be by ballot, unless so directed by the chair of the meeting. On a vote by ballot each ballot shall be signed by the stockholder voting, or by the stockholder’s proxy, if there be such proxy. If authorized by the Board of Directors, such a requirement of a written ballot shall be satisfied by a ballot submitted by electronic transmission, provided that any such electronic transmission must either set forth or be submitted with information from which it can be determined that the electronic transmission was authorized by the stockholder or proxy holder.

Section 10. List of Stockholders. It shall be the duty of the Secretary or other officer of the Corporation who shall have charge of its stock ledger to prepare and make, at least ten (10) days before every meeting of the stockholders, a complete list of the stockholders entitled to vote thereat, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten (10) days prior to said meeting either at a place within the city where said meeting is to be held and which place shall be specified in the notice of said meeting, or, if not so specified, at the place where said meeting is to be held, and such list shall be produced and kept at the time and place of said meeting during the whole time thereof, and may be inspected by any stockholder who is present. The stock ledger shall be the only evidence as to who are the stockholders entitled to examine the stock ledger or such list or the books of the Corporation, or to vote in person or by proxy at any meeting of stockholders.

Section 11. Inspectors or Judges. The Board of Directors, in advance of any meeting of stockholders, may appoint one or more inspectors or judges to act at such meeting or any adjournment thereof. If the inspectors or judges shall not be so appointed, or if any of them shall fail to appear or act, the chair of such meeting shall appoint the inspectors or judges, or such replacement or replacements therefor, as the case may be. Such inspectors or judges, before entering on the discharge of their duties, shall take and sign an oath or affirmation faithfully to execute the duties of inspectors or judges at meetings for which they are appointed. At such meeting,

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the inspectors or judges shall receive and take in charge the proxies and ballots and decide all questions touching the qualification of voters and the validity of proxies and the acceptance or rejection of votes. An inspector or judge need not be a stockholder of the Corporation, and any officer of the Corporation may be an inspector or judge on any question other than a vote for or against his or her election to any position with the Corporation.

ARTICLE II.

Board of Directors

Section 1. General Powers. The business and affairs of the Corporation shall be managed by the Board of Directors.

Section 2. Number and Time of Holding office. Subject to the requirements of the laws of the State of Delaware, the Board may from time to time by the vote of the majority of the whole Board determine the number of directors. Until the Board shall otherwise so determine, the number of directors shall not exceed eighteen (18). Each of the directors of the Corporation shall hold office until the expiration of his or her term and until his or her successor shall be elected. Directors need not be stockholders.

Section 3. Election of Directors. Except as otherwise provided in the Certificate of Incorporation of the Corporation, at each meeting of the stockholders for the election of directors, at which a quorum is present, the persons receiving the greatest number of votes, up to the number of directors to be elected, shall be the directors. Such election shall be by ballot; provided, however, a nomination shall be accepted and votes cast for a nominee shall be counted by the inspectors or judges of the election, only if the Secretary of the Corporation has received at least 24 hours prior to the meeting a statement over the signature of the nominee that he or she consents to being a nominee and, if elected, intends to serve as a director.

Section 4. Organization and Order of Business. At its last meeting before, or first meeting after, the Annual Meeting of Stockholders the Board of Directors shall elect one of its members to be Chair of the Board. The Chair of the Board may be but does not have to be an officer, executive or employee of the Corporation. The Chair of the Board shall preside at meetings of the Board, lead the Board in carrying out its responsibilities to manage the business and affairs of the Corporation and perform other duties as requested by the Board of Directors.

At each meeting of the Board, one of the following shall chair the meeting and preside thereat, in the following order of precedence:

(a) the Chair of the Board;

(b) the Chief Executive Officer; or

(c) any director chosen by a majority of the directors present thereat.

The Secretary, or in case of his or her absence, the person whom the chair of such meeting shall appoint, shall act as secretary of such meeting and keep the minutes thereof. The order of business at each meeting of the Board of Directors shall be determined by the chair of such meeting.

Section 5. Resignations. Any director may resign at any time by giving written notice of his or her resignation to the Chair of the Board or the Secretary of the Corporation. Any such resignation shall take effect at the time specified therein, or, if the time when it shall become effective shall not be specified therein, then it shall take effect when accepted by action of the Board of Directors. Except as aforesaid, the acceptance of such resignation shall not be necessary to make it effective.

Section 6. Vacancies, etc. Except as otherwise provided in the Certificate of Incorporation of the Corporation, in case of any vacancy on the Board, or in case of any newly created directorship, a director to fill the vacancy or the newly created directorship for the unexpired portion of the term being filled may be elected by

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the holders of shares of stock of the Corporation entitled to vote in respect thereof at an annual or special meeting of said holders or by a majority of the directors of the Corporation then in office though less than a quorum.

Section 7. Place of Meeting. The Board may hold its meetings at such place or places within or without the State of Delaware as the Board may from time to time by resolution determine or as shall be specified or fixed in the respective notices or waivers of notice thereof; provided, that all meetings, regular or special, shall be held at the chief executive office of the Corporation in Warrenville, Illinois, unless otherwise ordered or approved by a majority of the whole Board.

Section 8. First Meeting. As soon as practicable after each annual election of directors, the Board shall meet for the purpose of organization, the election of officers and the transaction of other business. Such meeting shall be held at the time and place theretofore fixed by the Board for the next regular meeting of the Board and no notice thereof need be given; provided, however, that the Board may determine that such meeting shall be held at a different place and time but notice thereof shall be given in the manner hereinafter provided for special meetings of the Board.

Section 9. Regular Meetings. Regular meetings of the Board shall be held at such times as the Board shall from time to time determine. Notices of regular meetings need not be given. If any day fixed for a regular meeting shall be a legal holiday at the place where the meeting is to be held, then the meeting which would otherwise be held on that day shall be postponed until the same hour on the same day of the next succeeding week in which such day shall not be a legal holiday at such place, or at such other time and place as the Board shall determine in which event notice thereof shall be given.

Section 10. Special Meetings; Notice. Special meetings of the Board shall be held whenever called by the Chair of the Board, the Chief Executive Officer or one-third (1/3) of the directors at the time in office. The Secretary shall give notice to each director as hereinafter in this Section provided of each such special meeting, in which shall be stated the time and place of such meeting. Notice of each such meeting shall be mailed to each director, addressed to the director at his or her residence or usual place of business, at least two (2) days before the day on which such meeting is to be held; or shall be sent addressed to him or her at such place by telegraph, cable, wireless or other form of recorded communication, or be delivered personally or by telephone not later than the day before the day on which such meeting is to be held. Notice of any meeting of the Board need not, however, be given to any director, if waived by him or her in writing or by telegraph, cable, wireless or other form of recorded communication, before, during or after such meeting, or if he or she shall be present at such meeting; and any meeting of the Board shall be a legal meeting without any notice thereof having been given if all the directors of the Corporation then in office shall be present thereat.

Dividends may be declared upon the stock of the Corporation at any special meeting of the Board of Directors; provided, that the notice of said special meeting states specifically the fact that dividend action is to be considered. Any and all other business may be transacted at a special meeting unless notice of the meeting specifically states that action will be taken only upon the matters listed in the notice.

Section 11. Quorum and Manner of Acting. Except as otherwise provided in these By-laws or by law, a majority of directors at the time in office shall be present in person at any meeting of the Board of Directors in order to constitute a quorum for the transaction of business at such meeting, and the affirmative vote of at least a majority of the directors present at any such meeting, at which a quorum is present, shall be necessary for the passage of any resolution or act of the Board. In the absence of a quorum from any such meeting, a majority of the directors present thereat may adjourn such meeting from time to time until a quorum shall be present thereat. Notice of any adjourned meeting need not be given. The directors shall act only as a board and the individual directors shall have no power as such.

Section 12. Action by Consent. Unless otherwise restricted by the Certificate of Incorporation, any action required or permitted to be taken at any meeting of the Board of Directors, or of any committee thereof, may be taken without a meeting, if prior to such action a written consent thereto is signed by all members of the Board or of such committee as the case may be, and such written consent is filed with the minutes of proceedings of the Board or committee.

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Section 13. Committees. The Board of Directors may appoint standing committees of its members. Such committees shall be composed of such number of Directors and shall have such powers as are conferred by the By-laws or determined by the Board of Directors. The members of all standing committees shall be appointed annually at the first meeting of the Board of Directors after the annual meeting of the stockholders and shall continue as members until their successors are appointed, subject to the power of the Board to remove any member of a committee at any time and to appoint a successor.

A majority of the members of each standing committee shall constitute a quorum. The chair of each standing committee shall preside at the committee’s meetings. If the chair is absent, then the meeting shall be chaired by the Committee member present at the meeting who has been a director for the longest period of time.

Each committee chair shall report regularly to the Board as to the committee’s reviews, actions and recommendations.

Section 14. Meeting by Remote Communication. Members of the Board of Directors or any committee appointed by the Board of Directors, may participate in a meeting of the Board of Directors or of such committee by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and such participation in a meeting shall constitute presence in person at such meeting.

ARTICLE III.

Executive Committee

Section 1. Number, Appointment, Term of Office. There shall be an Executive Committee consisting of not less than three (3) and not more than eight (8) regular members appointed from and by the Board of Directors. A majority of the members of the Executive Committee shall be Independent Directors, as defined by the Board. In addition to the regular members, the Chair of the Board and the Chief Executive Officer shall be members ex officio. The regular members of the Committee shall be appointed by the affirmative vote of a majority of the whole Board and shall hold office until the first meeting of the Board after the next annual meeting of the stockholders until their successors are appointed. A vacancy in a regular membership may be filled by the Board at any time.

Any appointed regular member of the Executive Committee shall be subject to removal at any time by the affirmative vote of a majority of the whole Board.

Section 2. Functions and Powers. The Executive Committee shall represent the Board of Directors between meetings for the purpose of consulting with the officers and giving special consideration to matters of importance affecting the policies, financing, management and operations of the business, and taking action thereon or making recommendations to the Board. The Board of Directors reserves to itself alone the power to elect and remove officers, to determine the number of directors, to fill any vacancies on the Board of Directors, to declare dividends, issue stock, recommend to shareholders any action requiring their approval, change the membership of any committee at any time, and discharge any committee either with or without cause at any time. Subject to the foregoing limitations, the Executive Committee shall possess and may exercise all other powers of the Board of Directors during the intervals between meetings of the Board of Directors.

Section 3. Meetings. The Executive Committee shall meet as often as may be deemed necessary and expedient. Meetings may be called by standing resolution of the Committee, or at the request of the Chair of the Board, the Chief Executive Officer or of any two (2) members of the Committee. The Secretary shall notify each member of the Committee of each meeting, giving at least two (2) days’ notice by mail or one (1) day’s notice by telegraph or telephone, but such notice may be waived by any member. The purposes of a meeting need not be specified in the notice or waiver of notice of any meeting.

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At each meeting of the Board of Directors the Committee shall make a report to the Board of all action taken since its last report. Such reports may be made orally or in writing and only such matters need be recorded in the minutes of the Executive Committee as the Committee deems proper or the Board of Directors may require.

Section 4. Organization. A majority of the Executive Committee shall constitute a quorum. The Chair of the Board shall serve as Chair of the Executive Committee. The Chair of the Board, or in his or her absence, the Chief Executive Officer shall preside at meetings of the Executive Committee. If the Chair of the Board and the Chief Executive Officer are absent, the Committee shall appoint a temporary Chair from among the members present. In other respects the Committee shall fix its own rules of procedures.

ARTICLE IV.

Officers

Section 1. Election, Appointment, Term of Office. The Executive Officers of the Corporation shall consist of a Chief Executive Officer, a President and such number of other Executive Officers as the Board of Directors may determine from time to time. There shall also be a General Counsel, a Treasurer, a Controller and a Secretary, any of whom may also be an Executive Officer.

The Board of Directors may also appoint such other officers and agents as it may deem necessary, who shall have such authority and perform such duties as may be prescribed by the Board.

All Executive Officers and other officers of the Corporation shall be regularly elected or appointed by the majority vote of the whole Board of Directors at its first meeting after the annual meeting of the stockholders and shall hold office until the first meeting of the Board after the next annual meeting of the stockholders, and until their successors are elected or appointed.

If additional officers are elected or appointed during the year, they shall hold office until the next annual meeting of the Board of Directors at which officers are regularly elected or appointed and until their successors are elected or appointed.

A vacancy in any office may be filled for the unexpired portion of the term in the same manner as provided for election or appointment to such office.

All officers and agents elected or appointed by the Board of Directors shall be subject to removal at any time by the Board of Directors.

Section 2. Chief Executive Officer. The Chief Executive Officer shall have the powers and perform the duties incident to that position. Subject to the Board of Directors, he or she shall be in general and active charge of the entire business and all the affairs of the Corporation, and shall be its chief policy-making officer. He or she shall have such other powers and perform such other duties as may be prescribed by the Board of Directors or provided in these Bylaws.

Section 3. President. The President shall have such powers and perform such duties as may be prescribed by the Board of Directors at the time of his or her election and such other powers and duties as may be assigned to him or her from time to time by the Chief Executive Officer or the Board of Directors.

Section 4. Executive Officers. Each Executive Officer shall have such powers, duties and titles as shall be prescribed by the Board of Directors at the time of his or her election and such other powers and duties as may be assigned to him or her from time to time by the Chief Executive Officer or the Board of Directors.

Section 5. General Counsel. The General Counsel shall have charge of all matters of legal import concerning the Corporation and of the department relating to such matters. He or she shall have such other powers and duties as may be assigned to him or her by the Chief Executive Officer or the Board of Directors.

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Section 6. Treasurer. The Treasurer shall be responsible for safeguarding the cash and securities of the Corporation and the formulation of the investment and financial policies of the Corporation. He or she shall have such other powers and duties as may be assigned to him or her by the Chief Executive Officer or the Board of Directors.

Section 7. Controller. The Controller shall be in charge of the accounts of the Corporation and the maintenance of adequate accounting procedure and records of the Corporation. He or she shall have such other powers and duties as may be assigned to him or her by the Chief Executive Officer or the Board of Directors.

Section 8. Secretary. The Secretary shall keep the records of all meetings of the stockholders and of the Board of Directors and of its committees. He or she shall affix the seal of the Corporation to all deeds, contracts, bonds or other instruments requiring the corporate seal when the same have been signed on behalf of the Corporation by a duly authorized officer. He or she shall perform such other duties as may be assigned to him or her from time to time by the Chief Executive Officer or the Board of Directors.

ARTICLE V.

Contracts, Checks, Drafts, Bank Accounts, Etc.

Section 1. Execution of Documents by Officers. All of the Executive Officers of the Corporation elected as provided in Section 1 of Article IV of the By-laws, shall have power to execute and deliver any deeds, contracts, mortgages, bonds, debentures and other documents for and in the name of the Corporation.

All appointed officers shall have such powers with respect to execution and delivery of deeds, contracts, mortgages, bonds, debentures and other documents as may be assigned to them by the Board of Directors.

Section 2. Deposits. All funds of the Corporation not otherwise employed shall be deposited from time to time to the credit of the Corporation or otherwise as the Board of Directors, the Chief Executive Officer or the Treasurer shall direct in such banks, trust companies or other depositories as the Board of Directors may select or as may be selected by any officer or officers or agent or agents of the Corporation to whom power in that respect shall have been delegated by the Board of Directors. For the purpose of deposit and for the purpose of collection for the account of the Corporation, checks, drafts and other orders for the payment of money which are payable to the order of the Corporation may be endorsed, assigned and delivered by any officer or agent of the Corporation.

Section 3. Proxies in Respect of Stock or Other Securities of Other Corporations. Unless otherwise provided by resolution adopted by the Board, each of the Executive Officers of the Corporation elected as provided in Section 1 of Article IV of these By-laws may from time to time appoint an attorney or attorneys or agent or agents of the Corporation to exercise in the name and on behalf of the Corporation the powers and rights which the Corporation may have as the holder of stock or other securities in any other corporation to vote or consent in respect of such stock or other securities, may instruct the person or persons so appointed as to the manner of exercising such powers and rights, and may execute or cause to be executed in the name and on behalf of the Corporation and under its corporate seal, or otherwise, all such written proxies, powers of attorney or other instruments as such Executive Officer may deem necessary or proper in order that the Corporation may exercise its said powers and rights.

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ARTICLE VI.

Shares and Their Transfers

Examination of Books

Section 1. Certificates for Stock. Shares of stock of the Corporation may be certificated or uncertificated, as provided under the General Corporation Law of the State of Delaware. Every holder of stock of the Corporation shall be entitled to have a certificate or certificates, in such form as the Board shall prescribe, certifying the number of shares of stock of the Corporation owned by the stockholder. The certificates representing shares of such stock shall be numbered in the order in which they shall be issued and shall be signed in the name of the Corporation by the person who was at the time of signing the Chief Executive Officer or an Executive Officer and by the person who was at the time of signing the Treasurer or an Assistant Treasurer and its seal may be affixed thereto; provided, however, that the signature of such Executive Officer of the Corporation and of such Treasurer or Assistant Treasurer and the seal of the Corporation may be facsimile. In case any officer or officers of the Corporation who shall have signed, or whose facsimile signature or signatures shall have been used on, any such certificate or certificates shall cease to be such officer or officers, whether because of death, resignation or otherwise, before such certificate or certificates shall have been delivered by the Corporation, such certificate or certificates may nevertheless be adopted by the Corporation and be issued and delivered as though the person or persons who signed such certificate or certificates, or whose facsimile signature or signatures shall have been used thereon, had not ceased to be such officer or officers. A record shall be kept of the respective names of the persons, firms or corporations owning the stock of the Corporation, the number of shares held by such persons, firms or corporations, and the respective dates of issuance, and in case of cancellation, the respective dates of cancellation. Every share of stock surrendered to the Corporation for exchange or transfer shall be canceled and neither a new certificate or certificates nor uncertificated shares of stock shall be issued in exchange thereof until such stock shall have been so canceled except in cases provided for in Section 4 of this Article VI.

Section 2. Transfers of Stock. Transfers of shares of the stock of the Corporation shall be made only on the books of the Corporation by the registered holder thereof, or by his or her attorney thereunto authorized by power of attorney duly executed and filed with the Secretary of the Corporation, or with a transfer clerk or a transfer agent appointed as in Section 3 of this Article VI provided, and upon payment of all taxes thereon and, in the case of certificated shares, surrender of the certificate or certificates for such shares properly endorsed or, in the case of uncertificated shares of stock, compliance with appropriate procedures for transferring shares in uncertificated form. The person in whose name shares of stock stand on the books of the Corporation shall be deemed the owner thereof for all purposes as regards the Corporation.

Section 3. Regulations. The Board may make such rules and regulations as it may deem expedient, not inconsistent with these By-laws, concerning the issue, transfer and registration of shares of stock of the Corporation. The Board may appoint or authorize any officer or officers to appoint one or more transfer clerks, any of whom may be employees of the Corporation, or one or more transfer agents and one or more registrars, and may require all certificates for stock to bear the signature or signatures of any of them; provided, however, that the signature of any transfer clerk, transfer agent, or registrar may be facsimile. In case any transfer clerk, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such transfer clerk, transfer agent, or registrar before such certificate is issued, it may be issued by the Corporation with the same effect as if he were such transfer clerk, transfer agent, or registrar at the date of issue.

Section 4. Lost, Destroyed and Mutilated Certificates. The owner of any certificated shares of stock of the Corporation shall immediately notify the Corporation of any loss, destruction or mutilation of the certificate therefor, and the Corporation may issue a new certificate of stock or uncertificated shares of stock in the place of any certificate theretofore issued by it, alleged to have been lost or destroyed, and the Board may, in its discretion, require the owner of the lost or destroyed certificate, or his or her legal representatives, to give the Corporation a bond in such sum, limited or unlimited, and in such form and with such surety or sureties, as the Board shall in its uncontrolled discretion determine, to indemnify the Corporation against any claim that may be made against it on account of the alleged loss or destruction of any such certificate, or the issuance of such new certificate or uncertificated shares of stock.

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Section 5. Record Date. To determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board of Directors may fix, in advance, a record date, which shall not be more than sixty (60) nor less than ten (10) days before the date of such meeting, nor more than sixty (60) days prior to any other action. If no record date is fixed by the Board of Directors:

(a) The record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given.

(b) The record date for determining stockholders for any other purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto.

A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting unless the Board of Directors shall fix a new record date for the adjourned meeting.

Section 6. Examination of Books by Stockholders. The Board may determine, from time to time, whether and to what extent, at what times and places, and under what conditions and regulations, the accounts and books of the Corporation, or any of them, shall be open to the inspection of the stockholders, and no stockholder shall have any right to inspect any account or book or document of the Corporation, except as conferred by the laws of the State of Delaware or as authorized by resolution adopted by the Board or by the stockholders of the Corporation entitled to vote in respect thereof.

ARTICLE VII.

Offices, Etc.

Section 1. Registered Office. The registered office of the Corporation in the State of Delaware shall be in the City of Wilmington, County of New Castle, and the name of the resident agent in charge thereof shall be The Corporation Trust Company.

Section 2. Other Offices. The Corporation also may have an office or offices other than said principal office at such place or places, either within or without the State of Delaware, as provided in these By-laws or as the Board may from time to time appoint or as the business of the Corporation may require.

Section 3. Books and Records. Except as otherwise required by law, the Certificate of Incorporation or these By-laws, the Corporation may keep the books and records of the Corporation in such place or places within or without the State of Delaware as the Board may from time to time by resolution determine or the business of the Corporation may require; provided, however, the principal accounting books and records of the Corporation, including the records of meetings of the Board of Directors, shall be kept at the chief executive office of the Corporation in Warrenville, Illinois, unless otherwise determined by resolution of the Board of Directors.

ARTICLE VIII.

Dividends

Subject to the provisions of law, of the Certificate of Incorporation of the Corporation and of these By-laws, the Board may declare and pay dividends upon the shares of the stock of the Corporation either (a) out of its net assets in excess of its capital as computed in accordance with the provisions of the laws of the State of Delaware or (b) in case there shall be no such excess, out of its net profits for the fiscal year then current and/or the preceding fiscal year, whenever and in such amounts as, in the opinion of the Board, the condition of the affairs of the Corporation shall render it advisable. Dividends upon the shares of stock of the Corporation may be declared at any regular meeting of the Board of Directors and also at a special meeting, if notice of such proposed action is given as provided Section 10 of Article II of these By-laws.

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ARTICLE IX.

Seal

The Board shall provide a corporate seal, which shall be in the form of a circle and shall bear the full name of the Corporation and the words and figures “Incorporated 1993 Delaware”, or words and figures of similar import. The seal or a facsimile thereof may be impressed or affixed or reproduced or other use made thereof by the Secretary or any Assistant Secretary or any other officer authorized by the Board.

ARTICLE X.

Fiscal Years

The fiscal year of the Corporation shall end on the thirty-first day of October in each year.

ARTICLE XI.

Waiver of Notices

Whenever any notice whatever is required to be given by these By-laws or by the Certificate of Incorporation of the Corporation or by the General Corporation Law of the State of Delaware, a waiver thereof in writing, signed by the person or persons entitled to said notice, whether before or after the time stated therein, shall be deemed equivalent thereto.

ARTICLE XII.

Indemnification

Section 1. Coverage. Each person who was or is made a party or is threatened to be made a party to or is otherwise involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative ( each a “proceeding”), by reason of the fact that he or she is or was a director or officer of the Corporation (which term shall include any predecessor corporation of the Corporation) or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation or of a partnership, joint venture, trust or other enterprise, including service with respect to employee benefit plans (each an “indemnitee”), whether the basis of such proceeding is alleged action in an official capacity as a director, officer, employee or agent or in any other capacity while serving as a director, officer, employee or agent, shall be indemnified and held harmless by the Corporation to the fullest extent authorized by the Delaware General Corporation Law, as the same exists or may hereafter be amended (but, in the case of any such amendment, only to the extent that such amendment permits the Corporation to provide broader indemnification rights than said law permitted the Corporation to provide prior to such amendment), against all expenses, liability and loss (including attorneys’ fees, judgments, fines, ERISA excise taxes or penalties and amounts paid in settlement) reasonably incurred or suffered by such indemnitee in connection therewith and such indemnification shall continue as to an indemnitee who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the indemnitee’s heirs, executors and administrators; provided however, that, except as provided in Section 2 of this Article XII with respect to proceedings to enforce rights to indemnification, the Corporation shall indemnify any such indemnitee in connection with a proceeding (or part thereof) initiated by such indemnitee only if such proceeding (or part thereof) was authorized by the Board of Directors. The right to indemnification conferred in this Article XII shall be a contract right and shall include the right to be paid by the Corporation the expenses incurred in defending any such proceeding in advance of its final disposition; provided however, that, if the Delaware General Corporation Law requires, the payment of such expenses incurred by a director or officer in his or her capacity as a director or officer (and not in any other capacity in which service was or is rendered by such indemnitee, including, without limitation, service to an employee benefit plan) in advance of the final disposition of a proceeding, shall be made only upon delivery to the Corporation of an undertaking, by or on behalf of such

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indemnitee, to repay all amounts so advanced if it ultimately be determined by final judicial decision from which there is no further right to appeal that such indemnitee is not entitled to be indemnified for such expenses under this Article XII or otherwise.

Section 2. Claims. If a claim under Section 1 of this Article XII is not paid in full by the Corporation within sixty (60) days after a written claim has been received by the Corporation, except in the case of a claim for expenses incurred in defending a proceeding in advance of its final disposition, in which case the applicable period shall be twenty (20) days, the indemnitee may at any time thereafter bring suit against the Corporation to recover the unpaid amount of the claim. If successful in whole or in part in any such suit or in a suit brought by the Corporation to recover payments by the Corporation of expenses incurred by an indemnitee in defending in his or her capacity as a director or officer, a proceeding in advance of its final disposition, the indemnitee shall be entitled to be paid also the expense of prosecuting or defending such claim. In any action brought by the indemnitee to enforce a right to indemnification hereunder (other than an action brought to enforce a claim for expenses incurred in defending any proceeding in advance of its final disposition where the required undertaking, if any, has been tendered to the Corporation) or by the Corporation to recover payments by the Corporation of expenses incurred by an indemnitee in defending, in his or her capacity as a director or officer, a proceeding in advance of its final disposition, the burden of proving that the indemnitee is not entitled to be indemnified under this Article XII or otherwise shall be on the Corporation. Neither the failure of the Corporation (including the Board of Directors, independent legal counsel, or its stockholders) to have made a determination prior to the commencement of such action that indemnification of the indemnitee is proper in the circumstances because the indemnitee has met the applicable standard of conduct set forth in the Delaware General Corporation Law, nor an actual determination by the Corporation (including the Board of Directors, independent legal counsel or its stockholders) that the indemnitee has not met such applicable standard of conduct, shall be a presumption that the indemnitee has not met the applicable standard of conduct, or in the case of such an action brought by the indemnitee, be a defense to the action.

Section 3. Rights Not Exclusive. The rights conferred on any person by Sections 1 and 2 of this Article XII shall not be exclusive of any other right which such person may have or hereafter acquire under any statute, certificate of incorporation, by-law, agreement, vote of stockholders or disinterested directors or otherwise.

Section 4. Insurance. The Corporation may maintain insurance, at its expense, to protect itself and any director, officer, employee or agent of the Corporation or another corporation, partnership, joint venture, trust or other enterprise against any expense, liability or loss, whether or not the Corporation would have the power to indemnify such person against such expense, liability or loss under the Delaware General Corporation Law.

Section 5. Employees. Persons who are not included as indemnities under Section 1 of this Article XII but are employees of the Corporation or any subsidiary may be indemnified to the extent authorized at any time or from time to time by the Board of Directors.

ARTICLE XIII.

Amendments

These By-laws as they shall be at any time may be amended, altered or repealed by the Board of Directors at any regular meeting of the Board of Directors or at any special meeting if the proposed amendment, alteration or repeal is stated in the notice of the special meeting; but any by-laws made by the Board may be altered, amended or repealed by the stockholders in the manner provided in the Certificate of Incorporation of the Corporation.

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ARTICLE XIV.

National Emergency

Section 1. Definition and Application. For the purposes of this Article XIV the term “national emergency” is defined as an emergency situation resulting from an attack upon the United States, a nuclear disaster within the United States, a catastrophe, or other emergency condition, as a result of which attack, disaster, catastrophe or emergency condition a quorum of the Board of Directors cannot readily be convened for action. Persons not directors of the Corporation may conclusively rely upon the determination by the Board of Directors of the Corporation, at a meeting held or purporting to be held pursuant to this Article XIV that a national emergency as hereinabove defined exists regardless of the correctness of such determination made or purporting to be made as hereinafter provided. During the existence of a national emergency the provisions of this Article XIV shall become operative, but, to the extent not inconsistent with such provisions, the other provisions of these By-laws shall remain in effect during any national emergency and upon its termination the provisions of this Article XIV shall cease to be operative.

Section 2. Meetings, etc. When it is determined in good faith by any director that a national emergency exists, special meetings of the Board of Directors may be called by such director. The director calling any such special meeting shall make a reasonable effort to notify all other directors of the time and place of such special meeting, and such effort shall be deemed to constitute the giving of notice of such special meeting, and every director shall be deemed to have waived any requirement, of law or otherwise, that any other notice of such special meeting be given. At any such special meeting two directors shall constitute a quorum for the transaction of business including without limiting the generality hereof the filling of vacancies among directors and officers of the Corporation and the election of additional Executive Officers, Assistant Controllers, Assistant Secretaries and Assistant Treasurers. The act of a majority of the directors present thereat shall be the act of the Board of Directors. If at any such special meeting of the Board of Directors there shall be only one director present, such director present may adjourn the meeting from time to time until a quorum is obtained, and no further notice thereof need be given of any such adjournment.

The directors present at any such special meeting shall make reasonable effort to notify all absent directors of any action taken thereat, but failure to give such notice shall not affect the validity of the action taken at any such meeting. All directors, officers, employees and agents of, and all persons dealing with, the Corporation, if acting in good faith, may conclusively rely upon any action taken at any such special meeting.

Section 3. Amendment. The Board of Directors shall have the power to alter, amend, or repeal any of these By-laws by the affirmative vote of at least two-thirds (2/3) of the directors present at any special meeting attended by two (2) or more directors and held in the manner prescribed in Section 2 of this Article XIV, if it is determined in good faith by said two-thirds (2/3) that such alteration, amendment or repeal would be conducive to the proper direction of the Corporation’s affairs.

Section 4. Chair of the Board and Executive Officers. If during the existence of a national emergency, the Chair of the Board becomes incapacitated, cannot by reasonable effort be located or otherwise is unable or unavailable to perform the duties of his or her office, the Board shall elect one of its members to be Chair of the Board. The Chair of the Board may, but need not be an officer of or employed in an executive or any other capacity by the Corporation. If, during the existence of a national emergency, the Chief Executive Officer becomes incapacitated or unavailable to perform the duties of his or her office, the Chair of the Board is hereby designated also as Chief Executive Officer and will act as both Chair of the Board and Chief Executive Officer.

Section 5. Substitute Directors. To the extent required to constitute a quorum at any meeting of the Board of Directors during a national emergency, the officers of the Corporation who are present shall be deemed, in order of rank of office and within the same rank in order of election or appointment of such offices, directors for such meeting.

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EX-10

EXHIBIT 10

NAVISTAR INTERNATIONAL CORPORATION

AND CONSOLIDATED SUBSIDIARIES

MATERIAL CONTRACTS

The following documents of Navistar International Corporation, its principal subsidiary Navistar, Inc. and its affiliate Navistar Financial Corporation are incorporated herein by reference:

*10.94 Board of Directors resolution approving an additional retainer for the lead director of the Board of Directors. Filed as Exhibit 10.94 to Form 10-K for the period ended October 31, 2007, which was dated and filed May 29, 2008. Commission File No. 001-09618.

The following document of Navistar International Corporation is filed herewith:

*10.95 Compensation Committee and Board of Directors approval of 2008 long term emergence incentive grants to non-employee directors and named executive officers.

* Indicates a management contract or compensatory plan or arrangement required to be filed as an exhibit to this report pursuant to Item 14(c).

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EX-10.95

EXHIBIT 10.95

2008 Emergence Long-Term Incentive Grant

On April 14, 2008 the Compensation Committee approved, and on April 15, 2008, the Board of Directors approved, the emergence long-term incentive grant to those individuals set forth below in the amount and upon the terms and conditions set forth below; provided, that (i) management of the Corporation shall have the discretion in determining whether such grants are made in the form of restricted stock units or restricted stock and (ii) such grants are to be made after the expiration of the current SEC Regulation BTR trading black-out period.

General Terms of Grant:

• Form of grant: Management has the discretion to determine whether such grants are made in the form of restricted stock units or restricted stock.

• Vesting: 25% on the first anniversary of the grant date, another 25% on the 2nd anniversary of the grant date, and 50% on the 3rd anniversary of the grant date. If the grant is made in the form of units, each individual will receive the units upon vesting unless elected otherwise.

• Grant date: 5 business days following the expiration of the current SEC Regulation BTR trading black-out period.

• Number of restricted stock units or restricted stock:

Daniel C. Ustian, Chairman, President and CEO	—	45,600
William A. Caton , Chief Risk Officer and former CFO	—	20,867
Terry M. Endsley, Executive Vice President and current CFO	—	15,900
Deepak T. Kapur, President—Truck Group	—	15,900
John J. Allen, President—Engine & Foundry Group	—	15,900
Pamela J. Turbeville, SVP & CEO, Navistar Financial Corporation	—	10,300

Each Non-Employee Director—1,333 in lieu of the 2008 Stock option grant of 4,000 shares.

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EX-31.1

EXHIBIT 31.1

CERTIFICATION

I, Daniel C. Ustian, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Navistar International Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s Board of Directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: June 27, 2008

/s/    DANIEL C. USTIAN        

Daniel C. Ustian

Chairman, President and Chief Executive Officer

(Principal Executive Officer)

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EX-31.2

EXHIBIT 31.2

CERTIFICATION

I, Terry M. Endsley, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Navistar International Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s Board of Directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: June 27, 2008

/s/    TERRY M. ENDSLEY        

Terry M. Endsley

Executive Vice President and Chief Financial Officer

(Principal Financial Officer)

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EX-32.1

EXHIBIT 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Navistar International Corporation (the “Company”) on Form 10-Q for the period ended April 30, 2008 as filed with the Securities and Exchange Commission (the “SEC”) on the date hereof (the “Report”), I, Daniel C. Ustian, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 has been provided to the Company and will be retained by the Company and furnished to the SEC or its staff upon request.

Date: June 27, 2008

/s/    DANIEL C. USTIAN        

Daniel C. Ustian

Chairman, President and Chief Executive Officer

(Principal Executive Officer)

This certification accompanies the Report pursuant to § 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section. This certification shall also not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, except to the extent that the Company specifically incorporates it by reference.

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EX-32.2

EXHIBIT 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Navistar International Corporation (the “Company”) on Form 10-Q for the period ended April 30, 2008 as filed with the Securities and Exchange Commission (the “SEC”) on the date hereof (the “Report”), I, Terry M. Endsley, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 has been provided to the Company and will be retained by the Company and furnished to the SEC or its staff upon request.

Date: June 27, 2008

/s/    TERRY M. ENDSLEY        

Terry M. Endsley

Executive Vice President and Chief Financial Officer

(Principal Financial Officer)

This certification accompanies the Report pursuant to § 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section. This certification shall also not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, except to the extent that the Company specifically incorporates it by reference.

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EX-99.1

EXHIBIT 99.1

Additional Financial Information (Unaudited)

The following additional financial information is provided based upon the continuing interest of certain stockholders and creditors to assist them in understanding our core manufacturing business and as such, includes certain non-GAAP financial measures.

Condensed Statements of Revenues and Expenses

Navistar International Corporation (with financial services operations on a pre-tax equity basis)

		Three Months Ended April 30,					Six Months Ended April 30,
		2008		2007			2008			2007
(in millions)
Sales of manufactured products, net		$	3,853	$	2,900		$	6,713		$	5,950
Costs of products sold			3,196		2,472			5,647			5,077
Selling, general and administrative expenses			326		319			619			593
Engineering and product development costs			99		95			181			198
Other (income) expenses, net			38		61			89			160
Total costs and expenses			3,659		2,947			6,536			6,028
Income (loss) before income taxes	— Manufacturing operations		194		(47	)		177			(78	)
	— Financial services operations		19		28			(6	)		84
Income (loss) before income taxes			213		(19	)		171			6
Income tax benefit (expense)			2		(6	)		(9	)		(19	)
Net income (loss)		$	215	$	(25	)	$	162		$	(13	)

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Condensed Statements of Assets, Liabilities and Stockholders’ Deficit

Navistar International Corporation (with financial service operations on a pre-tax equity basis)

	As of
	April 30, 2008			October 31, 2007
(in millions)
Cash and cash equivalents	$	591		$	716
Marketable securities		38			6
Accounts receivables		1,132			788
Inventories		1,316			1,380
Investments in and advances to financial services affiliates		368			397
Investments in and advances to non-consolidated affiliates		175			154
Property and equipment, net		1,884			1,980
Goodwill and intangible assets, net		632			639
Other assets		307			325
Deferred taxes, net		110			123
Total assets	$	6,553		$	6,508
Accounts payable	$	2,137		$	1,888
Postretirement benefits liabilities		1,218			1,310
Debt—manufacturing operations		1,913			2,028
Other liabilities		1,847			2,016
Stockholders’ deficit		(562	)		(734	)
Total liabilities and stockholders’ deficit	$	6,553		$	6,508

Condensed Statements of Cash Activities

Navistar International Corporation (with financial services operations on a pre-tax equity basis)

	Six Months Ended April 30,
	2008			2007
(in millions)
Cash flow from operating activities:
Net income (loss)	$	162		$	(13	)
Adjustments to reconcile net income (loss) to cash provided by (used in) operating activities:
Depreciation and amortization		162			155
Depreciation of equipment held for or under lease		20			17
Deferred taxes		(2	)		24
Equity in loss (income) of financial services operations		6			(84	)
Equity in income of non-consolidated affiliates		(45	)		(40	)
Dividends from financial services operations		25			175
Dividends from non-consolidated affiliates		29			52
Other, net		(274	)		(549	)
Net cash provided by (used in) operating activities		83			(263	)
Cash flow from investing activities: Purchases of marketable securities		(42	)		(148	)
Sales or maturities of marketable securities		11			264
Net change in restricted cash and cash equivalents		5			(18	)
Capital expenditures		(101	)		(137	)
Purchase of equipment held for or under lease		(13	)		(8	)
Acquisitions, net of cash acquired		—			(7	)
Other investment activities		19			(7	)
Net cash used in investing activities		(121	)		(61	)
Net cash used in financing activities		(104	)		(218	)
Effect of exchange rate changes on cash and cash equivalents		17			28
Decrease in cash and cash equivalents		(125	)		(514	)
Cash and cash equivalents at beginning of the period		716			1,078
Cash and cash equivalents at end of the period	$	591		$	564

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