**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


Washington,
      D.C. 20549





**FORM
      10-K**





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


For
      the
      fiscal year ended **October 31, 2005**





OR





o
      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 1-4146-1





**NAVISTAR
      FINANCIAL CORPORATION**


(Exact
      name of registrant as specified in its charter)





**Delaware**
            
            **36-2472404**(State
                or other jurisdiction of incorporation or organization)
            
            (I.R.S.
                Employer Identification No.)




**425
      N. Martingale Road, Schaumburg, IL 60173**


(Address
      of principal executive offices, Zip Code)





**(630)
      753-4000**


(Registrant’s
      telephone number, including area code)





Securities
      registered pursuant to Section 12(b) of the Act:  None





Indicate
      by check mark if the registrant is a well-known seasoned issuer, as defined
      in
      Rule 405 of the Securities Act.


Yes
o                               No
      x





Indicate
      by check mark if the registrant is not required to file reports pursuant to
      Section 13 or Section 15(d) of the Act.


Yes
o                               No
      x





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




Indicate
      by check mark if disclosure of delinquent filers pursuant to Item 405 of
      Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not
      be contained , to the best of registrant’s knowledge, in definitive proxy or
      information statements incorporated by reference in Part III of this Form 10-K
      or any amendment to this Form 10-K. o





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


Large
                accelerated filer o
              Accelerated
                filer o
              Non-accelerated
                filer x




Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Act).


Yes
o                    No
      x


As
      of
      November 30, 2007 the number of shares outstanding of the registrant's common
      stock was 1,600,000.





Documents
      Incorporated by Reference: None





THE
      REGISTRANT IS A WHOLLY-OWNED SUBSIDIARY OF INTERNATIONAL TRUCK AND ENGINE
      CORPORATION, WHICH IS A WHOLLY-OWNED SUBSIDIARY OF NAVISTAR INTERNATIONAL
      CORPORATION, AND MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION I (1)
      (a)
      AND (b) OF FORM 10-K AND IS THEREFORE FILING THIS FORM WITH THE REDUCED
      DISCLOSURE FORMAT.













**NAVISTAR
      FINANCIAL CORPORATION**


**AND
      SUBSIDIARIES**





**INDEX**


Page
              Reference**PART
                I.**Item
                1.
            
            Business
                (A)
            2Item1A.
            
            Risk
                Factors
            2Item
                1B.
            
            Unresolved
                Staff Comments
            5Item
                2.
            
            Properties(A)
            6Item
                3.
            
            Legal
                Proceedings
            6Item
                4.
            
            Submission
                of Matters to a Vote of Security Holder
                (A)
            6**PART
                II.**Item
                5.
            
            Market
                for the Registrant’s Common Equity and Related
                Stockholder Matters
            7Item
                6.
            
            Selected
                Financial Data (A)
            7Item
                7.
            
            Management's
                Discussion and Analysis of Results of Operations
                and Financial Condition
            7Item
                7A.
            
            Quantitative
                and Qualitative Disclosures About Market
                Risk
            24Item
                8.
            
            Financial
                Statements and Supplementary Data
            25Item
                9.
            
            Changes
                in and Disagreements with Accountants on Accounting
                and Financial Disclosure
            69Item
                9A.
            
            Controls
                and Procedures
            70Item
                9B.
            
            Other
                Information
            76**PART
                III.**Item
                10.
            
            Directors
                and Executive Officers of the Registrant
                (A)
            77Item
                11.
            
            Executive
                Compensation (A)
            77Item
                12.
            
            Security
                Ownership of Certain Beneficial Owners and
                Management and Related Transactions (A)
            77Item
                13.
            
            Certain
                Relationships and Related Transactions
                (A)
            77Item
                14.
            
            Principal
                Accountant Fees and Services
            77**PART
                IV.**Item
                15.
            
            Exhibits,
                Financial Statement Schedules and Reports on Form
                8-K
            78**Signatures**
            
            
            79





(A)
                -Omitted or amended or reduced as the registrant is a wholly-owned
                subsidiary of International Truck and Engine Corporation, which is
                a
                wholly-owned subsidiary of Navistar International Corporation, and
                meets
                the conditions set forth in General Instructions I (1) (a) and (b)
                of
                Annual Report on Form 10-K and is, therefore, filing this report
                with the
                reduced disclosure format.





1
 ***Index***





**PART
      I**





**EXPLANATORY
      NOTE**





This
      Annual Report on Form 10-K for the year ended October 31, 2005 is our first
      filing with the United States Securities and Exchange Commission (“SEC”) that
      includes comprehensive financial statements since our Quarterly Report on Form
      10-Q for the quarter ended July 31, 2005.  Unless otherwise stated,
      all financial information presented in this Annual Report on Form 10-K reflects
      restated consolidated financial statements for the years ended October 31,
      2003
      and 2004 and the first three quarters of the year ended October 31, 2005. The
      effect of the restatement on periods prior to 2003 has been presented as a
      reduction of *Shareowner’s equity* as of November 1, 2002, the beginning
      of our 2003 fiscal year.





**Item
      1.  Business**





The
      registrant, Navistar Financial Corporation, was incorporated in Delaware in
      1949
      and is a wholly-owned subsidiary of International Truck and Engine Corporation
      (“International”), which is a wholly-owned subsidiary of Navistar International
      Corporation (“Navistar”).  As used herein, “us,” “we,” “our” or “NFC”
refers to Navistar Financial Corporation and its wholly-owned subsidiaries,
      unless the context otherwise requires.





We
      are a
      commercial financing organization that provides wholesale, retail and lease
      financing in the United States for sales of new and used trucks sold by
      International and International’s dealers.  We also finance wholesale
      accounts and selected retail accounts receivable of International
      (“accounts”).  Sales of new products (including trailers) of other
      manufacturers are also financed regardless of whether they are designed or
      customarily sold for use with International’s truck products.





We
      also
      service the finance receivables we originate and purchase following their sale
      to unrelated third parties.  Our revenue components from these
      securitized receivables are primarily servicing fees and excess spread income
      (See Item 7, *Management’s Discussion and Analysis**of Results of
      Operation and Financial Condition,* for an explanation of securitized
      receivables).





On
      November 30, 2001, we completed the sale of all of the stock of Harco National
      Insurance Company ("Harco"), a wholly-owned insurance subsidiary, to IAT
      Reinsurance Syndicate Ltd., a Bermuda reinsurance company.  The Harco
      insurance segment was accounted for as a discontinued operation, and
      accordingly, balances in our accompanying consolidated financial statements
      and
      notes thereto, for all periods affected, have been presented to recognize those
      discontinued operations.  For further information, see Note 4,
*Discontinued Operations*, to the accompanying consolidated financial
      statements in Item 8, *Financial Statements and Supplementary
      Data*.





**Item
      1A.   Risk Factors**





***Forward-Looking
      Statements***





This
      document contains forward-looking statements within the meaning of Section
      27A
      of the Securities Act, Section 21E of the Exchange Act of 1934 (“Exchange Act”),
      and the Private Securities Litigation Reform Act of 1995 that are subject to
      risks and uncertainties. You should not place undue reliance on those statements
      because they are subject to numerous uncertainties and factors relating to
      our
      operations and business environment, all of which are difficult to predict
      and
      many of which are beyond our control, and such forward-looking statements only
      speak as of the date hereof. Forward-looking statements include information
      concerning our possible or assumed future results of operations, including
      descriptions of our business strategy.  These statements often include
      words such as “believe,” “expect,” “anticipate,” “intend,” “plan,” “estimate,”
or similar expressions.  These statements are based on assumptions
      that we have made in light of our experience in the industry as well as our
      perceptions of historical trends, current conditions, expected future
      developments, and other factors we believe are appropriate under the
      circumstances.  As you read and consider the information contained
      herein, you should understand that these statements are not guarantees of
      performance or results.  They involve risks, uncertainties, and
      assumptions.  Although we believe that these forward-looking
      statements are based on reasonable assumptions, you should be aware that many
      factors could affect our actual financial results and could cause these actual
      results to differ materially from those in the forward-looking
      statements.





2
 ***Index***




This
      section identifies specific risks that could adversely affect our business,
      results of operations or financial condition. The following information should
      be read in conjunction with Item 7, and the accompanying consolidated financial
      statements and related notes included in this report.





***Risks
      that Relate to Our Delay in Filing Timely Reports with the SEC, the Restatement
      of Our Consolidated Financial Statements, and Accounting and Internal
      Controls:***





***Inability
      to Access Debt or Securitization Markets at Competitive
      Rates***





The
      delay
      in filing required financial reports with the SEC and the downgrading of NFC
      and
      Navistar credit ratings has increased our borrowing costs. In response, we
      rely
      more extensively on securitization for the cost effective funding of our
      operations. Continued delay in filing required financial reports for subsequent
      periods could adversely limit our ability to access the debt or securitization
      markets. Our ability to sell our receivables may be dependent on the following
      factors: the volume and credit quality of receivables, the performance of
      previously securitized receivables, general demand for the type of receivables
      we offer, market capacity for our sponsored investments, accounting and tax
      changes, our debt ratings and our ability to maintain back-up liquidity
      facilities for certain securitization programs.  If as a result of any
      of these or other factors, the cost of securitized funding significantly
      increased or securitized funding was no longer available, there could be a
      material adverse effect on our results of operations, financial condition and
      liquidity.





Un-cured
      or un-waived violations or defaults under our servicing agreements could result
      in the replacement of NFC as servicer. We do not believe replacement as servicer
      on public transactions would have a material adverse impact on our results
      of
      operations, financial condition and liquidity.





***Potential
      or Possible Lawsuits or Governmental Investigations in Relation to the
      Restatement of our Financial Statements***





The
      restatement of our financial results may lead to lawsuits and/or governmental
      investigations. We are engaged in an ongoing dialogue with the SEC with respect
      to the current restatement process and the pending formal investigation of
      our
      earlier restatement.  For additional information regarding this matter
      see Item 3, *Legal Proceedings.*





***Changes
      in Laws or Regulations***





Aspects
      of our business as a lender and lessor are subject to state and federal laws
      and
      regulations including, but not limited to, (a) establishment of maximum interest
      rates, (b) collection, foreclosure and repossession procedures, (c) financial
      transaction structures and (d) the use and reporting of information relating
      to
      a borrower’s or lessee’s credit experience. Changes to such laws or regulations
      could have a material adverse effect on our results of operations, financial
      condition and liquidity.





***Reduction
      in our Credit Rating***





We
      may
      have difficulty maintaining existing business and may experience a reduction
      in
      our credit rating which could have a material adverse effect on us by, among
      other things, (a) reducing our revenues if existing and potential customers
      hesitate to, or decide not to, retain us, (b) increasing our costs or decreasing
      our liquidity if suppliers desire a change in existing payment terms and (c)
      increasing our borrowing costs or negatively affecting our ability to obtain
      new
      financings on acceptable terms or at all if rating agencies downgrade our credit
      ratings.





***Risks
      that Relate to Business Operations and Liquidity:***





***Strategic
      Decisions of Navistar***





As
      an
      indirect wholly-owned subsidiary of Navistar, we are subject to the effects
      of
      strategic decisions made from time to time by Navistar. The major share of
      our
      business consists of financing International vehicles and supporting their
      dealers.  Any extended reduction or suspension of International’s
      production or sale of vehicles for reasons discussed below would have an adverse
      effect on our business. Special-rate financing programs available though NFC,
      which may be independent or supported/reimbursed by International, increases
      our
      financing volume and share of financing sales of International vehicles.
      Since the majority of our business transactions originate with Navistar,
      significant changes in Navistar’s overall business strategy, product pricing and
      incentives or support of our financial products could have a material adverse
      effect on our results of operations, financial condition and
      liquidity.





3
 ***Index***




***Economic
      Condition of the Trucking Industry***





The
      secured value of our lease and loan portfolio and our ability to generate new
      business at competitive rates depends substantially on the economic condition
      of
      the trucking industry. To the extent future events such as increasing fuel
      price
      levels, fuel shortages or general economic downturn adversely affect the
      trucking industry, there could be an increase in customer defaults, impaired
      asset values and less competitive interest and lease rates. These events could
      have a material adverse impact on our results of operations, financial condition
      and liquidity.





The
      markets in which Navistar competes are subject to considerable
      cyclicality.  Their ability to generate business for us depends in
      part on the varying conditions in the truck, school bus, mid-range diesel
      engine, and service parts markets which are subject to cycles in the overall
      business environment and are particularly sensitive to the industrial sector,
      which generates a significant portion of the freight tonnage
      hauled.  Truck and engine demand is also dependent on general economic
      conditions, interest rate levels, and fuel costs, among other
      factors.





The
      North
      American truck market in which Navistar operates is highly
      competitive.  This competition results in price discounting and margin
      pressures throughout the industry and could adversely affect our
      business.  Banks or other financing institutions may attempt to
      capture an increased share of retail and wholesale financing of Navistar
      products.





***Access
      to Capital***





We
      traditionally obtain the funds to provide financing from sales of receivables,
      medium- and long-term debt, and equity capital and from short- and long-term
      bank borrowings.  If cash provided by operations, bank borrowings,
      continued sales and securitizations of receivables, and the placement of term
      debt does not provide the necessary liquidity, we may restrict financing of
      International products and to International dealers.





***Credit
      Markets***





In
      the
      late summer and early fall of 2007, the financial markets experienced a major
      correction linked primarily to the “sub-prime” mortgage lending
      market.  The asset backed securitization market used by us and our
      lending banks was affected by this correction.  Substantial increases
      in the spreads on borrowing rates were seen at all credit rating
      levels.  High quality and highly rated issuers saw their previous
      rates go from 0 to 15 basis points over LIBOR or treasuries to 30 to 50 basis
      points above.  The magnitude of the change at lower quality levels was
      in excess of 100 basis points.  As a result, future borrowings could
      be more costly than in the past.





***Collection
      and Servicing Problems***





Disruption
      of our servicing, such as a failure to maintain accurate account records or
      maintain access to such records, could have a significant negative impact on
      our
      ability to collect on our receivables and satisfy our customers.





All
      future written and oral forward-looking statements by us or persons acting
      on
      our behalf are expressly qualified in their entirety by the cautionary
      statements contained or referred to above.  Except for our ongoing
      obligations to disclose material information as required by the federal
      securities laws, we do not have any obligations or intention to release publicly
      any revisions to any forward-looking statements to reflect events or
      circumstances in the future or to reflect the occurrence of unanticipated
      events.





4
 ***Index***




**Item
      1B.  Unresolved Staff
      Comments.**





We
      received a letter dated September 27, 2005 containing SEC Division of
      Corporation Finance staff comments pertaining to our 2004 Form 10-K, which
      has
      been restated as part of this 10-K filing.  These comments and those
      contained in a follow-up letter from the SEC staff dated December 20, 2005,
      are
      un-resolved as of December 5, 2007.





The
      following is a brief summary of the comments and management’s
      response:





·
            We
                were asked to clarify many of the terms used to identify the types
                of
                receivables, such as “finance receivables,” “components of ‘income related
                to sales of receivables’,” “finance leases,” “distinguish between the
                types of revenue”.  Clarification was specific to terms in Note
                1, *Summary of Accounting Policies,* and several other footnotes
                such as the Allowance for Losses
                (“ALLL”).


We
      have
      modified our disclosures in the 2005 Form 10-K to respond to these comments
      and
      provided examples to the SEC staff.





·
            In
                addition to clarification of terms the staff had several questions
                concerning the ALLL. We were asked “to revise disclosures to fully explain
                the reasons for changes in each element of our allowance for losses
                so
                that a reader can understand how changes in risks in the portfolio
                during
                each period relate to the allowance established at period-end; quantify
                and explain how changes in our estimation methods and assumptions
                affected
                the allowance; quantify and explain how changes in finance receivables
                and
                lease concentrations, quality, and terms that occurred during the
                period
                are reflected in our allowance; quantify our gross charge-offs and
                recoveries for each period
                presented.”


We
      have
      provided this information in both our footnotes and in Item 7.





·
            Seven
                comments related to various components of accounting and disclosure
                under
                SFAS No. 140, *Accounting for Transfers and Servicing of Financial
                Assets and Extinguishment of Liabilities* (“SFAS No. 140”), such as
                key assumptions used in subsequently measuring the fair value of
                retained
                interests (including, at a minimum, quantitative information about
                discount rates, expected prepayments including the expected
                weighted-average life of pre-payable financial assets, and anticipated
                credit losses, including expected static pool losses).  The
                Staff also asked about the recognition of servicer assets or liabilities
                in connection with generally accepted accounting principles
                (“GAAP”).


These
      comments were directed to our various retail securitizations and are no longer
      relevant as the majority of retail securitizations were restated to secured
      borrowings as part of the 2005 Restatement (See Note 2, *Restatement of
      Previously Issued Consolidated Financial Statements*).  We did
      provide the requested information for the wholesale and the retail
      securitizations that continue to be accounted for as a sale in accordance with
      SFAS No. 140.  We also provided the requested information that we have
      no servicing assets or liabilities and that the fees received are just adequate
      to cover our costs in the 2005 Form 10-K.





·
            One
                comment was a request to include an exhibit on fixed charge coverage
                in
                future filings.


We
      have
      included the exhibit beginning with the 2005 Form 10-K.





·
            Comments
                related to the nature of a guaranty from (i) a sale of the insurance
                operation in 2001, (ii) certain derivatives and (iii) the debt of
                an
                affiliate.


We
      have
      informed the SEC about each guaranty and cited the accounting literature
      supporting the extent and basis of our disclosure.  To the extent that
      the guaranty was in existence at October 31, 2005, we have expanded our
      disclosure in the 2005 Form 10-K. For more information see Notes 3,
*Transactions with Affiliated Companies*, Note 4, *Discontinued
      Operations*, and Note 12, *Commitments and
      Contingencies.*





·
            A
                comment related to the booking of a lease residual.  While
                reviewing the accounting for this item so we could respond to the
                Staff we
                discovered several similar leases.


This
      is
      the restatement  issue discussed in Note 2 under *Lease
      Transactions*.





5
 ***Index***




·
            One
                comment concerned the increase in *Paid-in capital* when Navistar
                assumed $220 million of our debt and the basis for accounting for
                the
                increase at the date Navistar assumed the
                debt.


The
      assumption of debt by Navistar resulted in an increase to *Paid-in
      capital* as it was an intercompany transaction with our Parent. Also, during
      the 2005 Restatement we concluded that there was an embedded derivative that
      was
      not properly valued from the time the debt was issued in 2002 through the
      assumption in 2004.  This was one of the restatement issues and is
      discussed in Notes 2 and 3.





·
            Finally
                the Staff asked about various swaps and caps and our use of hedge
                accounting.


In
      the
      2005 Restatement and the 2005 Form 10-K, we expanded our disclosures on swaps
      and caps and our revised conclusion that hedge accounting was not
      appropriate.  Now all changes in fair value for these derivatives are
      reflected in operating income.





In
      conclusion, we believe that the issues raised by the SEC staff in their letters
      to us have been adequately addressed in this Form 10-K.  Further we
      believe that ultimate resolution of these comments will not have a material
      affect on the 2005 Form 10-K including the consolidated financial statements
      or
      related footnotes.





**Periodic
      Reports Access**





Navistar
      maintains a website with the address
      www.internationaldelivers.com.  NFC is not including the information
      contained on Navistar’s website as a part of, or incorporating it by reference
      into, this Annual Report on Form 10-K.  We make available, free of
      charge, through Navistar’s website our Annual Report on Form 10-K, quarterly
      reports on Form 10-Q and current reports on Form 8-K, and amendments to these
      reports, if any, as soon as reasonably practicable after we electronically
      file
      such material with, or furnish such material to, the SEC.





NFC
      has
      adopted the Code of Ethics posted on Navistar’s website.  This Code of
      Ethics applies to all employees, directors and officers, including the chief
      executive officer and principal financial officer.  NFC intends to
      disclose any amendments to, or waivers from, the Code of Ethics that are
      required to be publicly disclosed pursuant to the rules of the Securities and
      Exchange Commission.





**Item
      2.  Properties**





NFC’s
      properties principally consist of office equipment and leased office space
      in
      Schaumburg, Illinois, Duluth, Georgia and Frisco, Texas. The office equipment
      owned and in use by us is not significant in relation to the total assets of
      NFC.





**Item
      3.  Legal Proceedings**





In
      December 2004, we announced that we would restate our financial results for
      the
      fiscal years 2002 and 2003 and the first three quarters of fiscal 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
      November 8, 2006, we announced that we would restate our financial results
      for
      fiscal years 2002 through 2004 and for the first three quarters of fiscal
      2005. We were subsequently informed by the SEC that it was expanding the
      investigation to include this current restatement. Since April of 2006, NFC
      and
      Navistar have been providing information to the SEC regarding the current
      restatement.  We are fully cooperating with the SEC on this
      investigation. Based on the status of the investigation, we are not able to
      predict its final outcome.





We
      are
      subject to various claims arising in the ordinary course of business, and are
      parties to various legal proceedings, which constitute ordinary, routine
      litigation incidental to our business.





**Item
      4.  Submission of Matters to a Vote of Security
      Holders**





Intentionally
      omitted.  See the index page of this report for an
      explanation.





6
 ***Index***





**PART
      II**





**Item
      5.  Market for the Registrant’s Common Equity and Related
      Stockholder Matters**





As
      of
      October 31, 2005, International owned all shares of our issued and outstanding
      capital stock.  No shares are reserved for officers and employees, or
      for options, warrants, conversions and other rights.  NFC did not pay
      any dividends in fiscal 2005 or 2004. We paid $50.0 million in dividends to
      International during fiscal 2003, $175.0 million in February 2007, $100.0
      million in July 2007 and $125.0 million in October 2007.





**Item
      6.  Selected Financial Data**





Intentionally
      omitted.  See the index page of this report for
      explanation.





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





**Restatement
      of previously issued consolidated financial statements**





This
      Annual Report on Form 10-K for the year ended October 31, 2005 is our first
      filing with the SEC that includes comprehensive financial statements since
      our
      Quarterly Report on Form 10-Q for the quarter ended July 31, 2005. All
      information presented in this Annual Report on Form 10-K reflects restated
      consolidated financial statements for the years ended October 31, 2002 through
      2004 and the first three quarters of the year ended October 31,
      2005.





In
      January 2006, we announced the delay in filing our Annual Report on Form 10-K
      for the year ended October 31, 2005 until NFC and Navistar resolved a number
      of
      complex and technical accounting issues. In November 2006, we announced that
      our
      previously issued consolidated financial statements and the independent
      auditors’ reports thereon for the years ended October 31, 2002 through 2004, and
      all quarterly financial statements for periods after November 1, 2002, should
      no
      longer be relied upon because of errors in the financial reporting process.
      See
      Item 9A, *Controls and Procedures*.





We
      concluded in February 2007 that an element of effective control existed over
      certain transferred assets and as such did not meet the requirements for sale
      accounting treatment under paragraph 9 (c) of  SFAS No.
      140,.  As a result, we have recorded the assets (note and lease
      receivables, net of allowance for loss) and liabilities (secured borrowings)
      related to certain transfers of assets, reversed the associated gains and losses
      previously recognized and recorded interest income and interest expense. The
      cumulative effect of the reversal of sale accounting treatment for retail
      securitizations was the major contributor to our restatement changes. The
      restatement adjustments in total resulted in a cumulative net increase to
*Shareowner’s equity* of $8.3 million as of October 31, 2004, and an
      increase (reduction) in previously reported net income of $13.4 million and
      $(15.4) million for the years ended October 31, 2004 and 2003, respectively.
      We
      also increased our November 1, 2002 opening *Retained earnings* by $56.4
      million, reduced *Paid-in capital* by $50.5 million and increased
*Accumulated other comprehensive loss* by $12.4 million to recognize
      corrected items that relate to prior periods. More detail can be found in Note
      2, *Restatement of Previously Issued Consolidated Financial
      Statements*.





Since
      the
      time of announcement, both Navistar and NFC have devoted substantial resources
      toward the completion of the restatement. We have also obtained assistance
      from
      a variety of resources, including technology and accounting consulting firms
      and
      outside counsel.





**Guarantees**





NFC
      periodically guarantees the outstanding debt of affiliates.  The
      guarantees allow for diversification of funding sources for the
      affiliates.  As of October 31, 2005, we had numerous guarantees
      related to Navistar's three Mexican finance subsidiaries, Navistar Financial,
      S.A. de C.V. SOFOM E.N.R (“NF”), Arrendadora Financiera Navistar, S.A. de C.V.
      SOFOM E.N.R (“Arrendadora”) and Navistar Comercial S.A. de C.V. As of October
      31, 2005, our maximum exposure under these guarantees is the total amount of
      debt outstanding of $158.9 million. We have not recorded any liability related
      to these guarantees.





7
 ***Index***




On
      April
      29, 2005 and July 30, 2004, NFC, through its wholly-owned subsidiary Navistar
      Financial Retail Receivables Corporation (“NFRRC”), legally sold $417.7 million
      and $325.0 million, respectively, of retail note receivables to a bank
      conduit.  In order to match fund the fixed rate receivables with the
      variable rate debt of the conduit, the conduit entered into an interest rate
      swap agreement on the anticipated cash flows from the
      receivables.  NFC, as servicer, has indemnified the conduit for the
      impact any variance in those cash flows has on the swap settlement. As of
      October 31, 2005, the fair market value of the swap settlement was a loss of
      $0.8 million.





**Contractual
      Obligations**





The
      following table provides aggregate information about our outstanding contractual
      obligations and other long-term liabilities as of October 31 and includes
      asset-backed debt payable out of collections on the securitized receivables
      transferred to those entities. Such debt is the legal obligation of the
      consolidated subsidiary whereby there is no recourse to NFC (in
      millions):





Due
                in Fiscal
            
            2006
            
            
            
            2007-2008
            
            
            
            2009-2010
            
            
            After
                2010
            
            
            TotalSenior
                and subordinated debt (1)
            
            $
            120.7
            
            
            $
            762.3
            
            
            $
            1,966.4
            
            
            $
            1,112.7
            
            
            $
            3,962.1Operating
                leases
            
            
            1.7
            
            
            
            2.6
            
            
            
            2.0
            
            
            
            4.0
            
            
            
            10.3Interest
                (2)
            
            
            157.7
            
            
            
            292.6
            
            
            
            195.2
            
            
            
            20.0
            
            
            
            665.5Total
            
            $
            280.1
            
            
            $
            1,057.5
            
            
            $
            2,163.6
            
            
            $
            1,136.7
            
            
            $
            4,637.9


(1)Principal
      only


(2)Amounts
      represent estimated contractual
      interest payments on long-term debt and the effect of our interest rate swaps.
      Rates in effect as of October 31, 2005, are used for variable rate
      debt.





**Results
      from Continuing Operations**





Results
      from continuing operations for the last three fiscal years were as follows
      (in
      millions):





**2005**
            
            
            2004
              (Restated)
            
            
            2003
              (Restated)Financing
                revenue
            
            **$**
            **218.4**
            
            
            $
            193.6
            
            
            $
            203.1Operating
                lease
                revenue
            
            ****
            **39.6**
            
            
            
            57.8
            
            
            
            68.3Securitization
                income
            
            ****
            **74.5**
            
            
            
            54.4
            
            
            
            47.1Cost
                of
                borrowing
            
            ****
            **144.3**
            
            
            
            111.0
            
            
            
            135.2Credit,
                collection and administrative expenses
            
            ****
            **45.3**
            
            
            
            40.7
            
            
            
            41.3Provision
                for credit
                losses
            
            ****
            **5.7**
            
            
            
            7.8
            
            
            
            12.9Depreciation
                on operating
                leases
            
            ****
            **29.7**
            
            
            
            42.4
            
            
            
            49.8Income
                before
                taxes
            
            ****
            **123.4**
            
            
            
            113.7
            
            
            
            71.7Income
                from continuing
                operations
            
            ****
            **79.2**
            
            
            
            74.5
            
            
            
            42.5Income
                tax expense from continuing operations
            
            ****
            **44.2**
            
            
            
            39.2
            
            
            
            29.2**Other
                Financial Data:**Return
                on average equity
            
            ****
            **16.8**
            **%**
            
            
            19.4
            %
            
            
            11.7
            %





Financing
      revenue includes interest revenue from retail notes, finance leases, wholesale
      notes and retail and wholesale accounts. Financing revenue in 2005 was 12.8%
      higher than 2004 resulting from higher interest rates and increased note and
      lease originations. Financing revenue in 2004 was 4.7% lower than 2003
      reflecting steady interest rates being charged to customers and a marginal
      decrease in note and lease originations.





Operating
      lease revenue decreased by 31.5% in 2005 and 15.4% in 2004. This trend reflects
      the shift to a more attractive purchase financing environment for equipment
      users driven by better finance rates, incentives and stronger used vehicle
      values.





8
 ***Index***




We
      also
      receive interest income from the Truck and Parts segments of International
      and
      corporate International relating to financing of wholesale notes, wholesale
      accounts, and retail accounts based upon contractual agreements. We receive
      interest income at agreed upon interest rates applied to the average outstanding
      balances less interest amounts paid by dealers on wholesale notes and wholesale
      accounts. Aggregate interest revenue provided by the Truck and Parts segments
      of
      International and corporate International was $89.6 million in 2005, $57.7
      million in 2004, and $47.3 million in 2003.





Securitization
      income represents all revenue components resulting from off balance sheet sales
      of receivables including: excess spread income; servicing fees; initial gain
      or
      loss at time of sale; investment income and fair value adjustments to retained
      interests. Securitization income increased by 36.9% in 2005 and 15.5% in 2004.
      The increase in 2005 and 2004 directly corresponds to the increase in the
      aggregate off balance sheet portfolio as securitization has become a more cost
      effective funding source. As used herein, “balance sheet” refers to the
      accompanying consolidated statements of financial condition.





Cost
      of
      borrowing primarily includes interest expense on debt financing. Cost of
      borrowing in 2005 was 30.0% higher than 2004, as LIBOR interest rates rose
      throughout 2005 and we experienced increased funding requirements. Borrowing
      costs in 2004 were 17.9% lower than 2003, following the steady decline in
      interest rates experienced throughout 2004 that affected the rates charged
      on
      the debt we issued and slightly lower average funding needs. Our average
      interest rate on senior and subordinated debt was 3.7% in 2005, 2.8% in 2004
      and
      3.6% in 2003. The ratio of debt to equity was 7.7:1 as of October 31, 2005
      and
      2004.





Credit,
      collection and administrative expenses include costs relating to the management
      and servicing of receivables as well as general business expenses and wages.
      Such costs increased 11.3% from 2004 to 2005 as administrative employee
      headcount increased and building relocation expenses were incurred. Cost
      decreased 1.5% from 2003 to 2004 as there was no substantial change in
      administrative infrastructure or headcount.





Provision
      for credit losses on receivables totaled $5.7 million in 2005, a decrease of
      $2.1 million from the $7.8 million recognized in 2004.  Provision for
      credit losses on receivables in 2004 was $5.1 million lower than 2003. The
      decrease in both periods reflects overall improvement in portfolio performance
      and improved values in the used truck markets. The finance receivables in these
      pools are considered to be relatively homogenous.





The
      allocation of the *Allowance for losses* by receivable type is as follows
      at October 31 (in millions):





**2005**
            
            
            2004
                (Restated)Retail
                Notes and Finance
                Leases
            
            **$**
            **13.2**
            
            
            $
            13.2Accounts
            
            ****
            **0.4**
            
            
            
            0.4Total
            
            **$**
            **13.6**
            
            
            $
            13.6





NFC
      evaluates its *Allowance for losses* based on a pool method by asset
      type: retail notes and finance leases, and retail accounts.  The
      finance receivables in these pools are considered to be relatively
      homogenous.





NFC’s
      estimate of the required allowance is based on applying an estimated loss
      percentage to the finance receivables.  The estimated loss percentage
      is based on historical average annual losses as a percent of average finance
      receivable balances and an estimate of annual losses for the following year
      as
      percent of the average receivable balances.





The
      current year estimate of losses is developed by reviewing past due balances,
      current repossession frequency, recovery percentages on recently repossessed
      vehicles and current economic conditions.  The qualitative conditions
      include, but are not limited to, diesel fuel price changes, freight tonnage
      and
      freight carrier profitability.





In
      addition, when NFC identifies significant customers at probable risk of default,
      it segregates that customer’s receivables from the pools and separately
      evaluates the estimated losses based on the market value of the collateral
      and
      specific terms of the receivable contract.  NFC uses its experience in
      remarketing transportation equipment to estimate market values.





9
 ***Index***





Depreciation
      on operating leases decreased by 30.0% in 2005 and 14.9% in
      2004.  This trend reflects the shift from operating leases to a more
      attractive purchase financing environment for equipment users driven by better
      finance rates, incentives and stronger used vehicle values. Retirements
      increased in 2005 to $119.8 million from $98.6 million in 2004.





Income
      tax expense from continuing operations includes federal and state income tax.
      Our effective tax rate was  35.8% in 2005, as compared to 34.5% for
      2004 and 40.7% for 2003. The reduction in effective tax rate from 2003 resulted
      primarily from the elimination of a permanent tax difference upon Navistar’s
      assumption of our convertible debt in 2004.





Return
      on
      average equity decreased in 2005 to 16.8% despite an increase in net income
      resulting from higher financing revenue and securitization income partially
      offset by a higher cost of borrowing. The impact of the growth in retained
      earnings was disproportionately higher than the growth in net income. Return
      on
      average equity increased in 2004 to 19.4% as a result of an increase in net
      income on account of a lower cost of borrowing. The impact of the growth in
      retained earnings was partially offset by $50.0 million in dividends paid during
      2003.





**Financing
      Environment**





***Financing
      Volume and Finance Market Share***





NFC’s
      net
      retail note and finance lease originations/purchases were $1.6 billion in fiscal
      2005, $1.4 billion in fiscal 2004 and $1.3 billion in fiscal 2003. NFC provided
      15.1% of retail and lease financing for the new International trucks sold in
      the
      U.S. at October 31, 2005, compared to 15.7% at October 31, 2004 and 15.8% at
      October 31, 2003. Although market share was down slightly as International
      increased its direct sales, originations increased primarily as a result of
      higher sales volume by International’s dealers.





NFC
      provided 96.2% of the wholesale financing of new trucks sold to International’s
      dealers in fiscal 2005, 95.4% in 2004 and 93.7% in 2003. Wholesale note
      originations/purchases were $5.3 billion in fiscal 2005, $4.3 billion in fiscal
      2004 and $3.2 billion in fiscal 2003.





Serviced
      wholesale notes balances were $1.5 billion, $1.3 billion and $860.8 million
      as
      of October 31, 2005, 2004 and 2003, respectively.  These increases
      reflect International’s higher sales to its dealers in the United
      States.





**Funds
      Management**





We
      have
      traditionally obtained the funds to provide financing to International's dealers
      and retail customers from the financing of receivables in securitization
      transactions, short and long-term bank borrowings, and medium and long-term
      debt.  Given our debt ratings and the overall quality of our
      receivables, the financing of receivables in securitizations has been the most
      economical source of funding.





***Credit
      Ratings***





NFC’s
      debt ratings during the three years ended October 31, 2005, were as
      follows:


Fitch
            Moody’s
            Standard
              and
                Poor’sSenior
                unsecured debt
            BB
            Ba3
            BB-Outlook
                as of October 31, 2005
            Stable
            Stable
            Stable




In
        July
        2006, Moody’s withdrew its credit rating for both Navistar and
        NFC.  In January 2006, Standard and Poor’s changed its outlook to
        Negative from Stable.  These actions have caused current borrowing
        rates to be higher.


10
 ***Index***





***Funding
      Facilities***





We
      finance receivables through securitizations through the asset-backed public
      market and private placement sales. NFC, through these securitizations, despite
      a rising rate market, has been able to fund its operating needs at rates which
      are more economical than those available to NFC in the public unsecured bond
      market. We finance receivables using a process commonly known as securitization,
      whereby asset-backed securities are sold via public offering or private
      placement.   In a typical securitization transaction, NFC
      transfers a pool of finance receivables to a special purpose entity
      (“SPE”).  The SPE then transfers the receivables to a bankruptcy
      remote, legally isolated entity, generally a trust, in exchange for proceeds
      from interest bearing securities.  These securities are issued by the
      trust and are secured by future collections on the receivables sold to the
      trust. These transactions are considered sales from a legal standpoint but
      are
      subject to the provisions of SFAS No. 140 as to accounting
      treatment.  When we finance receivables we use various wholly-owned
      special purpose subsidiaries depending on the assets being sold. NFRRC finances
      retail notes and finance leases; ITLC finances operating leases and some
      terminal residual clause leases.





We
      securitized $1.9 billion and $968.0 million of retail notes and finance leases
      during fiscal 2005 and 2004, respectively, through on-balance sheet
      securitization arrangements through NFRRC.  As of October 31, 2005,
      the remaining shelf registration available to NFRRC for the public issuance
      of
      asset-backed securities was $2.5 billion.  The shelf registration
      expired March 31, 2006, without any further issuances pursuant to it since
      October 31, 2005.  We are in the process of preparing a new
      registration statement. Compliance with new SEC requirements for securitized
      debt offerings known as Regulation AB goes beyond preparing a registration
      statement. Processing and reporting are key aspects.  We expect a
      preliminary filing of the new registration statement in 2008.





We
      finance wholesale notes through our wholly-owned subsidiary Navistar Financial
      Securities Corporation (“NFSC”), which has in place a revolving wholesale note
      trust that provides for the funding of eligible wholesale notes.  As
      of October 31, 2005 and 2004, the trust owned $1.4 billion and $1.2 billion,
      respectively, of wholesale notes and marketable securities. Components of the
      wholesale note trust funding certificates as of October 31, 2005 were a $200.0
      million tranche of investor certificates maturing in July 2008, three $212.0
      million tranches of investor certificates and notes expected to mature equally
      on June 26, 2006, May 25, 2007 and February 25, 2010, variable funding
      certificates (“VFC”) with a maximum capacity of $400.0 million expected to
      mature December 26, 2005 and a seller’s subordinated interest of $202.1 million
      as of October 31, 2005 and $170.4 million as of October 31, 2004. On June 26,
      2006, the wholesale note trust paid off $212.0 million of the investor
      certificates and on May 25, 2007 paid off $212.0 million of the investor notes.
      In May 2006 the VFC was increased to $600.0 million, then to $800.0 million
      in
      October 2006. In January 2007 the expiration date was extended from May 2007
      to
      January 2008. In December 2007 funding under the VFC was extended from January
      2008 to November 2008.





During
      the second quarter of 2004, our wholly-owned subsidiary, Truck Retail Accounts
      Corporation (“TRAC”) obtained financing for its retail accounts with a bank
      conduit that provides for the funding of up to $100.0 million of eligible retail
      accounts.  The sales of retail accounts receivable through TRAC
      constitute sales under SFAS No. 140, and therefore sold accounts are removed
      from NFC’s balance sheets and the investor’s interests are not reflected as
      liabilities.  The revolving retail account facility expired in August
      2006, and was renewed and amended with an expiration date of August 8,
      2008.  As of October 31, 2005, this facility was fully
      utilized.





Truck
      Engine Receivables Financing Co. (“TERFCO”), our wholly-owned subsidiary, had in
      place a trust to provide funding of $100.0 million of unsecured trade
      receivables generated by the sale of diesel engines and engine service parts
      from International to Ford Motor Company.  This facility was fully
      utilized as of October 31, 2005.  On December 15, 2005, the trust was
      fully repaid and is no longer used.





In
      June
      2005, Truck Retail Instalment Paper Corp. (“TRIP”), a special purpose,
      wholly-owned subsidiary of NFC, entered into a new $500.0 million revolving
      facility to replace the 2000 facility that otherwise would have expired in
      October 2005.  The new notes mature in June 2010 and are subject to
      optional early redemption in full without penalty or premium upon satisfaction
      of certain terms and conditions on any date on or after April 15,
      2010.  NFC uses TRIP to temporarily fund retail notes and retail
      leases, other than operating leases.  This facility is used primarily
      during the periods prior to a securitization of retail notes and finance leases.
      NFC retains a repurchase option against the retail notes and leases sold into
      TRIP; therefore, TRIP’s assets and liabilities are included in our consolidated
      statements of financial condition. As of October 31, 2005, NFC had $232.6
      million in retail notes and finance leases in TRIP.  *Restricted
      cash**and
      cash equivalents* as of October 31, 2005 included $267.4 million of the
      unused TRIP facility available as of that date.





11
 ***Index***




International
      Truck Leasing Corporation (“ITLC”), our wholly-owned subsidiary, was established
      to provide for the funding of certain leases.  During fiscal 2005,
      ITLC received proceeds of $42.1 million in the form of collateralized
      borrowings. As of October 31, 2005, the balance of ITLC’s collateralized
      borrowing secured by operating leases was $54.9 million.





On
      July
      1, 2005, NFC entered into a Revolving Credit Agreement (“the
      Agreement”).  The new contractually committed credit facility has two
      primary components, a term loan ($400.0 million originally), and a revolving
      bank loan ($800.0 million). The latter has a Mexican sub-revolver ($100.0
      million), which may be used by Navistar’s three Mexican
      subsidiaries.  The entire credit facility matures July 1, 2010,
      however, the term loan is to be repaid in 19 consecutive quarterly amounts
      of
      $1.0 million and a final payment of $381.0 million on July 1,
      2010.  The first quarterly payment was paid on October 31,
      2005.  As of October 31, 2005, NFC utilized $560.0 million of the
      revolver facility; $33.0 million was utilized by Navistar's Mexican finance
      subsidiaries. On March 28, 2007, NFC entered into a First Amendment to the
      Agreement increasing the term loan component by $220.0 million and increasing
      the maximum permitted consolidated leverage ratio from 6:1 to 7:1 through
      November 1, 2007, and from 6:1 to 6.5:1 for the period November 1, 2007, through
      April 30, 2008. After April 30, 2008, the ratio returns to 6:1 for all periods
      thereafter.





Certain
      affirmative covenants under the Agreement require that NFC file its Annual
      Report on Form 10-K for the period ended October 31, 2005 by January 31,
      2006.  On January 17, 2006, NFC received a waiver of the existing
      defaults under the Agreement through May 31, 2006, including potential future
      defaults for failure to provide financial statements to the
      lenders.  This waiver permitted NFC to incur additional borrowings
      under the Agreement through May 31, 2006, provided no other un-waived defaults
      occurred.  On March 2, 2006, NFC received a Second Waiver and Consent
      through January 31, 2007, which extended the previous waiver covering a default
      or event of default created by NFC’s and Navistar’s failure to meet the filing
      requirements of Sections 13 and 15 of the Exchange Act of 1934, as amended,
      when
      NFC and Navistar failed to file its 2005 Annual Report on Form 10-K with the
      Securities and Exchange Commission, and further waived a default, if any,
      created by the right of the holders of our long-term debt to accelerate payment
      of such debt because of the late filing of required SEC reports.  In
      November 2006, NFC received a Third Waiver and Consent, which extended through
      October 31, 2007, and expanded the previous waivers which waive any default
      or
      event of default that would result solely from NFC and Navistar’s failure to
      meet the filing requirements of Sections 13 and 15 of the Exchange Act of 1934,
      as amended, with respect to their Annual Reports on Form 10-K for 2005 and
      2006
      and their quarterly reports on Form 10-Q for the periods from November 1, 2005,
      through July 31, 2007. On October 23, 2007, NFC received a Second Amendment
      and
      a Fourth Waiver.  The waiver extends through December 31, 2007, and expands
      the previous waivers which waive any default or event of default that would
      result solely from NFC’s and Navistar’s failure to meet the filing requirements
      mentioned in third waiver and including Sections 13 and 15 of the Exchange
      Act
      of 1934, as amended, with respect to their Annual Reports on Form 10-K for
      2007.  During the period from November 1, 2007, until the waiver
      terminates, interest rate on certain loans under the Agreement shall be
      increased by 0.25%. In December 2007, NFC entered into a Fifth Waiver to the
      Agreement expanding the scope of certain default conditions covered by the
      waiver therein until November 30, 2008.





Several
      publicly funded retail and wholesale securitizations transactions, including
      TRIP, have similar covenants to the private transaction which requires us to
      provide financial statements.   If the investors substantiate
      that our failure is material, we could be replaced as servicer resulting in
      the
      loss of a portion of servicing revenueof approximately $10.0
      million annually.  We are in regular contact with the trustees on the
      public deals and do not believe the investors will attempt to substantiate
      that
      the lack of the servicer report reported on by our independent accountants
      or
      our delayed filing of the Form 10-K constitutes a material adverse affect on
      them.  We are not aware of any investor attempting to make such a
      claim since our first announcement of the delay in January 2006. We do not
      believe loss of servicing or accelerated amortization would have a material
      adverse effect on us. Similar to the waivers obtained on the Agreement, we
      have
      obtained waivers for the private retail transactions and the private portion
      of
      the wholesale note transaction.  These waivers are similar in scope to
      those of the Agreement and expire on or about November 30, 2008.





12
 ***Index***




Prior
      to
      amending and restating the Agreement in July 2005, NFC had received waivers
      to
      cure default conditions on the original credit facility dated December 8, 2000,
      as amended. Specifically, on January 31, 2005, NFC received a waiver for failure
      to timely complete and deliver its Annual Report on Form 10-K for the year
      ended
      October 31, 2004. On March
      15,
      2005, NFC received a waiver for failure to timely complete and deliver its
      Quarterly Report on Form 10-Q for the three months ended January 31,
      2005.





**Critical
      Accounting Estimates**





Our
      consolidated financial statements are prepared in accordance with GAAP in the
      United States. In connection with the preparation of our 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 experience, current trends and other factors we believe
      are relevant at the time we prepared our consolidated financial
      statements.





Our
      significant accounting policies are discussed in Note 1, *Summary of
      Accounting Policies*, to our accompanying consolidated financial statements.
      We believe that the following policies are the most critical in fully
      understanding and evaluating our reported results as they require us to make
      difficult, subjective and complex judgments.  In determining whether
      an estimate is critical we consider if:





·
            the
                nature of the estimates or assumptions contain levels of subjectivity
                and
                judgment necessary to account  for highly uncertain matters or
                the susceptibility of such matters to change;
                and


·
            the
                impact of the estimates and assumptions on financial condition or
                operating performance is material.





We
      have
      reviewed these critical accounting policies and related disclosures with the
      Audit Committee of our Board of Directors.





13
 ***Index***




**Description**
            
            **Judgments
                and Uncertainties**
            
            **Effect
                if Actual Results Differ**
              **from
                Assumptions****Allowance
                for Losses**The
                allowance for losses is our estimate of losses incurred in our finance
                receivable portfolio. The portfolio consists of retail notes, finance
                leases, wholesale notes and accounts. The allowance is established
                through
                a charge to provision for losses. It is evaluated based on a pool
                method
                by type of receivable, primarily using historical and current net
                loss
                experience in conjunction with current portfolio trends in delinquencies
                and repossession frequency for each receivable type. Specific allowances
                are made for significant impaired receivables.
            
            We
                exercise significant judgment about the timing, frequency and severity
                of
                losses and the impact of general economic conditions and current
                delinquency and repossession frequency. We evaluate the adequacy
                of the
                allowance for losses considering several risk factors for each type
                of
                receivable.  For retail notes, finance leases and retail
                accounts, the primary risk factors are the general economy, fuel
                prices,
                type of freight being hauled, length of freight movements, number
                of
                competitors our customers have in their lane of service, how extensively
                our customers use independent operators and the number and profitability
                of owner operators. To the extent our judgments about these risk
                factors
                and conditions are not accurate an adjustment to our allowance for
                losses
                may materially impact our results of operations, financial condition
                or
                cash flows.
            
            If
                we were to adjust the estimated weighted average loss rate of 0.42%
                using
                the upper and lower limit of estimated weighted average loss percentages
                used by the company from 2002 through 2006, the required allowance
                would
                increase from $13.6 million to $21.3 million, and decrease to $12.4
                million, respectively.**Amounts
                Due from Sales of**
              **Receivables
                (Including Fair**
              **Value
                Calculations)**Some
                of our securitization transactions qualify as sales under SFAS No.
                140.
                Gains or losses on sales of receivables are credited or charged to
                securitization income in the periods in which the sales occur. Amounts
                due
                from sales of receivables, also known as retained interests, which
                include
                interest-only receivables, cash reserve accounts and subordinated
                certificates, are recorded at fair value in the periods in which
                the sales
                occur. The accretion of the discount related to the retained interests
                is
                recognized on an effective yield basis.
            
            We
                estimate the payment speed for the receivables sold, the discount
                rate
                used to determine the present value of the retained interests, and
                the
                anticipated net losses on the receivables to calculate the gain or
                loss.
                The method for calculating the gain or loss aggregates the receivables
                into a homogeneous pool. Estimates are based upon historical and
                current
                experience, anticipated future portfolio performance, market-based
                discount rates and other factors and are made for each securitization
                transaction. In addition, we estimate the fair value of the retained
                interests on a quarterly basis and record the changes in
                operations.
            
            The
                primary assumption used to estimate retained interests in sold receivables
                is the discount rate. An immediate adverse change in the discount
                rate
                used to estimate retained interests of 10% as of October 31, 2005,
                would
                result in a decrease in pre-tax income of $2.4 million.




14
 ***Index***





**Description**
            
            **Judgments
                and Uncertainties**
            
            **Effect
                if Actual Results Differ**
              **from
                Assumptions****Net
                Investment in Operating**
              **Leases**We
                have investments in trucks, tractors and trailers that are leased
                to
                customers under operating lease agreements.   These
                vehicles are depreciated on a straight-line basis over the term of
                the
                lease in an amount necessary to reduce the leased asset to its estimated
                residual value at the end of the lease term.
            
            The
                residual values of the equipment represent estimates of the values
                of the
                assets at the end of the lease contracts and are initially recorded
                based
                on estimates of future market values.  Realization of the
                residual values is dependent on our future ability to market the
                vehicles
                under then prevailing conditions. We review residual values periodically
                to determine that recorded amounts are appropriate and the equipment
                on
                operating lease assets has not been impaired.
            
            Our
                estimated residual values impact the timing and amount of depreciation
                expense. An adverse change in the aggregate estimated residual value
                of
                equipment under operating leases of 5% as of October 31, 2005 would
                result
                in a cumulative decrease in pre-tax income of $3.1 million over the
                useful
                life of the equipment.**Pension
                and Other**
              **Postretirement
                Benefits**We
                provide postretirement benefits to a substantial portion of our employees.
                Accounting for these benefits require the use of our estimates and
                assumptions as well as third party actuarial data.
            
            The
                primary assumptions include factors such as discount rates, health
                care
                cost trend rates, inflation, expected return on plan assets, retirement
                rates, mortality rates and other factors.
            
            As
                of October 31, 2005, an increase in the discount rate of 0.5%, assuming
                inflation remains unchanged, would result in a decrease of $3.3 million
                in
                the pension obligations and a decrease of $0.2 million in the net
                periodic
                benefit cost. A 1% increase in the discount rate of the other
                postretirement plans will result in a decrease of $2.4 million for
                the
                obligation and a decrease of $0.2 million in the net periodic benefit
                cost. A decrease of 0.5% in the discount rate as of October 31, 2005,
                assuming inflation remains unchanged, would result in an increase
                of $3.7
                million in the pension obligations and an increase of $0.2 million
                in the
                net periodic benefit cost. A decrease of 1% in the discount rate
                of the
                other postretirement benefit plans would result in an increase in
                other
                postretirement obligations of $2.9 million and an increase of $0.2
                million
                in the net periodic benefit cost. The calculation of the expected
                return
                on plan assets is described in Note 11, *Postretirement benefits,*
                to the accompanying consolidated financial statements. The expected
                return
                on assets was 9.0% for 2005, 2004 and 2003. The expected return on
                assets
                is a long-term assumption whose accuracy can only be measured over
                a long
                time period based upon past experience.  A variation in the
                expected return on assets by 0.5% as of October 31, 2005 would result
                in a
                variation of approximately $0.3 million in the net periodic benefit
                cost.




15
 ***Index***




**Description**
            
            **Judgments
                and Uncertainties**
            
            **Effect
                  if Actual Results Differ**
                **from
                  Assumptions****Income
                Taxes**We
                account for income taxes using the asset and liability method. Tax
                laws
                require certain items to be reported in tax filings at different
                times
                than the items are recognized in the consolidated financial statements.
                A
                current liability is recognized for the estimated taxes payable for
                the
                current year. Deferred income taxes represent the future consequences
                expected to occur when the reported amounts of assets and liabilities
                are
                recovered or paid. Deferred income taxes are adjusted for enacted
                changes
                in tax laws in the period such changes are enacted. Valuation allowances
                are recorded to reduce deferred tax assets when it is more likely
                than not
                that a tax benefit will not be realized. Realization is dependent
                on
                generating sufficient future taxable income; changes in estimates
                of
                future taxable income could affect future evaluations.  Income
                tax is computed under a tax sharing agreement between us and our
                parent as
                if we were a separate taxpayer, as are tax payments and realization
                of tax
                assets.
            
            The
                ultimate recovery of certain of our deferred tax assets is dependent
                upon
                the amount and timing of future taxable income and other factors
                such as
                the taxing jurisdiction in which the asset is to be
                recovered.  A high degree of judgment is required to determine
                if and the extent that valuation allowances should be recorded against
                deferred tax assets. We have provided valuation allowances at October
                31,
                2005, and October 31, 2004 aggregating ($0.7) and ($0.6) million,
                respectively for state deferred tax assets based upon our current
                assessment of factors described above.
              
              Contingent
                tax liabilities are based upon our assessment of the likelihood that
                we
                have incurred a liability. Such liabilities are reviewed based upon
                recent
                updates in tax laws and regulations including recent judicial rulings.
                As
                of October31,
                2005, we recorded a contingent tax liability of $5.8
                million.
            
            Although
                we believe that our approach to estimates and judgments as discussed
                herein are reasonable, actual results could differ and we may be
                exposed
                to increases or decreases in income tax expense that could be
                material.




16
 ***Index***




**Description**
            
            **Judgments
                and Uncertainties**
            
            **Effect
                if Actual Results Differ**
              **from
                Assumptions**Contingent
                tax liabilities must be accounted for separately from deferred tax
                assets
                and liabilities; an accrual is recorded when we believe it is probable
                that a liability has been incurred for taxes and related interest
                and
                penalties, if any. It must be probable that a contingent tax benefit
                will
                be sustained before the contingent benefit is recognized for financial
                reporting.




**New
      Accounting Pronouncements**





In
      November 2007, the Staff of the SEC issued
      SAB No. 109,***Written Loan Commitments Recorded at
      Fair Value through Earnings.*SAB No. 109 provides guidance on the
      consideration of expected net future cash flows related to the servicing of
      written loan commitments that are accounted for at fair value.
      SAB No. 109 is effective for first fiscal quarter beginning after
      December 15, 2007. We will adopt SAB No. 109 as of February 1, 2008.
      We are currently evaluating if adoption of SAB No. 109 will have an impact
      on
      our consolidated financial condition, results of operations and cash
      flows.





In
      February 2007, the FASB issued Statement of Financial Accounting
      Standards (SFAS) No. 159,*The Fair Value Option for Financial
      Assets and Financial Liabilities,* which provides companies with an option
      to report selected financial assets and liabilities at fair value. The new
      standard also establishes presentation and disclosure requirements designed
      to
      facilitate comparisons between companies that choose different measurement
      attributes for similar types of assets and liabilities. It also requires
      companies to provide additional information that will help investors and other
      users of financial statements to more easily understand the effect of a
      company’s choice to use fair value on its earnings. The new Statement also
      requires entities to display the fair value of those assets and liabilities
      for
      which the company has chosen to use fair value on the face of the balance sheet.
      SFAS No. 159 does not eliminate disclosure requirements included in other
      accounting standards, including requirements for disclosures about fair value
      measurements included in SFAS No. 107, *Disclosure about**F**air**V**alue of**F**inancial**I**nstruments**,* and SFAS No. 157,*Fair Value
      Measurements.*SFAS No. 159 is effective as of the beginning
      of an entity’s first fiscal year beginning after November 15, 2007, which
      would be fiscal 2009 for us. Early adoption is permitted as of the beginning
      of
      the previous fiscal year provided that the entity makes that choice in the
      first
      120 days of that fiscal year and also elects to apply the provisions of
      SFAS No. 157.  We have not yet commenced evaluating the potential
      impact, if any, of the adoption of SFAS No. 159 on our consolidated
      financial condition, results of operations, and cash flows.




In
      September 2006, the Staff of the SEC issued SAB No. 108,*Considering the Effects of Prior-Year Misstatements when Quantifying
      Misstatements in Current Year Financial
      Statements.*  SAB No. 108 provides guidance on the
      consideration of the effects of prior year misstatements in quantifying current
      year misstatements. SAB No. 108 is effective for fiscal years ending
      after November 15, 2006. We will adopt SAB No. 108 as of
      October 31, 2007. However, because of the restatement of previously issued
      financial statements we believe the adoption of SAB No. 108 should not
      have a material impact on our consolidated financial condition, results of
      operations and cash flows.




In
      September 2006, the FASB issued SFAS No. 158, *Employers’ Accounting for
      Defined Benefit Pension and Other Postretirement Plans*,  which
      requires a company that sponsors one or more single-employer defined benefit
      pension and other postretirement benefit plans (benefit plans) to recognize
      in
      its balance sheet the funded status of a benefit plan, which is the difference
      between the fair value of plan assets and the benefit obligation, as a net
      asset
      or liability, with an offsetting
      adjustment to accumulated other comprehensive income in shareholders’ equity.
      SFAS No. 158 requires additional financial statement disclosure regarding
      certain effects on net periodic benefit cost. SFAS No. 158 requires
      prospective application and the recognition and disclosure requirements are
      effective for fiscal years ending after December 15, 2006, our fiscal 2007.
      We will adopt the provisions of SFAS No. 158 in fiscal 2007.  Based on
      the funded status of our pension and postretirement plans as of October 31,
      2005, we believe the adoption of SFAS No. 158 would increase our postretirement
      benefits liability by $4.4 million, decrease *Total assets* by $6.1
      million and decrease *Shareowner’s equity* by $10.5
      million.





17
 ***Index***




In
      addition, SFAS No. 158 requires that a company measure defined benefit plan
      assets and obligations at its year-end balance sheet date. We currently use
      our
      year-end balance sheet date as our measurement date, and as a result, that
      new
      requirement does not affect us.





In
      September 2006, the FASB issued SFAS No. 157,*Fair Value
      Measurements*, which defines fair value, establishes a framework for
      measuring fair value under GAAP, and expands disclosures about fair value
      measurements. SFAS No. 157 applies to other accounting pronouncements that
      require or permit fair value measurements. The new guidance is effective for
      financial statements issued for fiscal years beginning after November 15,
      2007, our fiscal 2009 and for interim periods within those fiscal years. We
      are
      currently evaluating if adoption of SFAS No. 157 will have an impact on our
      consolidated financial condition, results of operations and cash
      flows.




In
      June
      2006, the FASB issued FASB Interpretation No. 48,*Accounting for
      Uncertainty in Income Taxes,* which is effective for fiscal years beginning
      after December 15, 2006. FASB Interpretation No. 48 clarifies the
      accounting for uncertainty in income taxes recognized in the financial
      statements by prescribing a recognition threshold and measurement attribute
      for
      the financial statement recognition and measurement of a tax position taken
      or
      expected to be taken in a tax return. FASB Interpretation No. 48 also
      provides guidance on de-recognition, classification, interest and penalties,
      accounting in interim periods, disclosure, and transition. We will adopt the
      provisions of FASB Interpretation No. 48 effective November 1, 2007,
      however, we are still evaluating the potential impact, if any, of the adoption
      on our consolidated financial condition, results of operations, and cash
      flows.





In
      March
      2006, the FASB issued SFAS No. 156, *Accounting for Servicing of
      Financial Assets,* which changes the accounting for all loan servicing
      rights which are recorded as the result of selling a loan where the seller
      undertakes an obligation to service the loan, usually in exchange for
      compensation. The Statement amends current accounting guidance by permitting
      the
      servicing right to be recorded initially at fair value and also permits the
      subsequent reporting of these assets at fair value. SFAS No. 156 is effective
      as
      of the beginning of a company’s first fiscal year that begins after September
      15, 2006. We adopted SFAS No. 156 on November 1, 2006, and it did
      not have a material effect on our financial condition, results of operations,
      or
      cash flows.





In
      February 2006, the FASB issued SFAS No. 155, *Accounting for Certain
      Hybrid Instruments.*  The Statement provides companies with relief from
      having to separately determine the fair value of an embedded derivative that
      would otherwise be required to be bifurcated from its host contract in
      accordance with SFAS No.133, *Accounting for Derivatives and Hedging
      Activities.* SFAS No. 155 allows a company to make an irrevocable
      election to measure such a hybrid financial instrument at fair value in its
      entirety, with changes in fair value recognized in earnings.  The Statement
      also (1) clarifies which interest-only strips and principal-only strips are
      not
      subject to SFAS No. 133; (2) establishes a requirement for holders of
      securitized financial assets to evaluate whether the interest is a freestanding
      derivative or a hybrid financial instrument that contains an embedded derivative
      requiring bifurcation; (3) clarifies that concentrations of credit risk in
      the
      form of subordination are not embedded derivatives; and (4) eliminates the
      prohibition on a qualifying special-purpose entity from holding a derivative
      financial instrument that pertains to a beneficial interest other than another
      derivative financial instrument.  The Statement is effective for all
      financial instruments acquired, issued or subject to a re-measurement event
      occurring after the beginning of a company's first fiscal year that begins
      after
      September 15, 2006.  We adopted SFAS No. 155 on
      November 1, 2006, and it did not have a material effect on our financial
      condition, results of operations, or cash flows.





In
      May
      2005, the FASB issued SFAS No.154,*Accounting Changes and Error
      Corrections.* This Statement replaces APB Opinion No. 20,*Accounting
      Changes,* and SFAS No. 3,***Reporting Accounting Changes in
      Interim Financial Statements,* and changes the requirements for the
      accounting for and reporting of a change in accounting principle. SFAS No.154
      applies to all voluntary changes in accounting principle, and it applies to
      changes required by a new accounting
      pronouncement in the unusual instance that the pronouncement does not include
      specific transition provisions. The new standard requires retrospective
      application to prior periods’ financial statements of a voluntary change in
      accounting principle, unless it is impracticable. APB Opinion No. 20 previously
      required that most voluntary changes in accounting principle be recognized
      by
      including in net income of the period of the change the cumulative effect of
      changing to the new accounting principle. In addition, SFAS No. 154 requires
      that we account for a change in method of depreciation, amortization, or
      depletion for long-lived, non-financial assets as a change in accounting
      estimate that is affected by a change in accounting principle. APB Opinion
      No. 20 previously required that we report such a change as a change in
      accounting principle. SFAS No. 154 is effective for accounting changes and
      corrections of errors made in fiscal years beginning after December 15, 2005.
      Earlier application is permitted for accounting changes and corrections of
      errors made occurring in fiscal years beginning after June 1, 2005. The
      Statement does not change the transition provisions of any existing accounting
      pronouncements, including those that are in a transition phase as of the
      effective date of this Statement.We will adopt this
      Statement in fiscal 2007 and apply its guidance for any changes in accounting
      principle, changes in accounting estimate and a correction of an error in
      previously issued financial statements.  However, because of the
      restatement of our previously issued financial statements we believe the
      adoption of this Statement should not have a material
      impact.





18
 ***Index***




In
      March
      2005, the FASB issued FASB Interpretation No. 47,*Accounting for Conditional
      Asset Retirement Obligations*. FASB Interpretation No. 47 clarifies that the
      term “conditional asset retirement obligation,” as used in SFAS Statement No.
      143, *Accounting for Asset Retirement Obligations*, refers to a legal
      obligation to perform an asset retirement activity in which the timing and/or
      method of settlement are conditional on a future event that may or may not
      be
      within the control of the entity. The obligation to perform the asset retirement
      activity is unconditional even though uncertainties exist about the timing
      and/or method of settlement. Uncertainty about the timing and/or method of
      settlement of a conditional asset retirement obligation should be factored
      into
      the measurement of the liability when sufficient information exists. FASB
      Interpretation No. 47 also clarifies when a company would have sufficient
      information to reasonably estimate the fair value of an asset retirement
      obligation.  FASB Interpretation No. 47 is effective no later than the
      end of fiscal years ending after December 15, 2005.  NFC does not have
      any such asset retirement obligations at this time and, as a result, we do
      not
      expect that this Interpretation will have an impact on our consolidated
      financial condition, results of operations and cash flows.





In
      December 2004, the FASB issued SFAS No. 153,*Exchange of Nonmonetary
      Assets,* which amends APB Opinion No. 29,*Accounting for Nonmonetary
      Transactions.*  This Statement eliminates the exception to fair
      value in APB Opinion No. 29 for exchanges of similar productive assets and
      replaces it with a general exception for exchanges that do not have commercial
      substance. This Statement is effective for nonmonetary asset exchanges occurring
      in fiscal periods beginning after June 15, 2005. The application of this
      Statement will not have an impact on our consolidated financial condition or
      results of operations.





We
      have
      determined that all other recently issued accounting pronouncements do not
      apply
      to our operations or will not have a material impact on our consolidated
      financial condition, results of operations or cash flows.





**2005
      Quarterly Results (Unaudited)**





Certain
      selected quarterly financial information for the fiscal year ended October
      31,
      2005, are presented below.





The
      consolidated statements of income for the three month periods ended January
      31,
      2005, April 30, 2005, and July 31, 2005 have been restated from previously
      reported results.  Consolidated statements of financial condition as
      of January 31, 2005, April 30, 2005, and July 31, 2005 have also been restated
      from previously reported results. For additional information and a detailed
      discussion of the accounts restated, see Note 2 to the accompanying consolidated
      financial statements.





19
 ***Index***




**Consolidated
      Statements of Income**





**For
                the Three Months Ended**Millions
                of dollars
            
            January
                31, 2005
            
            
            April
                30, 2005
            
            
            July
                31, 2005Previously
            
            
            
            
            
            Previously
            
            
            
            
            
            Previously
            
            
            
            
            
            October
                31,Reported
            
            
            Restated
            
            
            Reported
            
            
            Restated
            
            
            Reported
            
            
            Restated
            
            
            2005**Revenues**Retail
                notes and finance lease
            
            $
            6.7
            
            
            $
            47.3
            
            
            $
            12.4
            
            
            $
            49.3
            
            
            $
            10.1
            
            
            $
            50.6
            
            
            $
            53.8Operating
                leases revenue
            
            
            11.6
            
            
            
            11.2
            
            
            
            11.1
            
            
            
            10.9
            
            
            
            10.1
            
            
            
            9.7
            
            
            
            7.8Wholesale
                notes interest
            
            
            11.2
            
            
            
            2.5
            
            
            
            11.0
            
            
            
            2.5
            
            
            
            12.7
            
            
            
            3.5
            
            
            
            3.4Retail
                and wholesale accounts
            
            
            5.7
            
            
            
            1.3
            
            
            
            8.5
            
            
            
            1.4
            
            
            
            7.5
            
            
            
            1.4
            
            
            
            1.4Securitization
                income
            
            
            26.8
            
            
            
            15.0
            
            
            
            18.6
            
            
            
            17.6
            
            
            
            20.4
            
            
            
            20.8
            
            
            
            21.1Other
                revenues
            
            
            2.7
            
            
            
            4.0
            
            
            
            2.6
            
            
            
            3.0
            
            
            
            3.9
            
            
            
            5.8
            
            
            
            8.7**Total
                revenues**
            
            
            64.7
            
            
            
            81.3
            
            
            
            64.2
            
            
            
            84.7
            
            
            
            64.7
            
            
            
            91.8
            
            
            
            96.2**Expenses**Cost
                of borrowing:Interest
                expense
            
            
            10.2
            
            
            
            28.2
            
            
            
            11.1
            
            
            
            28.3
            
            
            
            15.3
            
            
            
            36.1
            
            
            
            40.7Other
            
            
            1.5
            
            
            
            2.7
            
            
            
            1.7
            
            
            
            2.5
            
            
            
            1.7
            
            
            
            2.5
            
            
            
            3.3Credit,
                collections and administrative
            
            
            10.4
            
            
            
            9.4
            
            
            
            13.6
            
            
            
            14.1
            
            
            
            12.6
            
            
            
            11.3
            
            
            
            10.5Provision
                for credit losses
            
            
            2.5
            
            
            
            1.3
            
            
            
            4.1
            
            
            
            1.8
            
            
            
            2.4
            
            
            
            2.2
            
            
            
            0.4Depreciation
                on operating leases
            
            
            8.2
            
            
            
            8.2
            
            
            
            8.1
            
            
            
            7.5
            
            
            
            7.8
            
            
            
            7.4
            
            
            
            6.6Derivative
                expense (income)
            
            
            0.1
            
            
            
            (0.5
            )
            
            
            1.0
            
            
            
            0.5
            
            
            
            (0.1
            )
            
            
            (0.2
            )
            
            
            (0.1
            )Other
                expenses
            
            
            0.6
            
            
            
            1.2
            
            
            
            0.4
            
            
            
            1.3
            
            
            
            1.2
            
            
            
            2.0
            
            
            
            1.4**Total
                expenses**
            
            
            33.5
            
            
            
            50.5
            
            
            
            40.0
            
            
            
            56.0
            
            
            
            40.9
            
            
            
            61.3
            
            
            
            62.8**Income
                before taxes**
            
            
            31.2
            
            
            
            30.8
            
            
            
            24.2
            
            
            
            28.7
            
            
            
            23.8
            
            
            
            30.5
            
            
            
            33.4Income
                tax expense
            
            
            12.1
            
            
            
            11.0
            
            
            
            9.3
            
            
            
            10.2
            
            
            
            9.3
            
            
            
            10.9
            
            
            
            12.1**Net
                income**
            
            $
            19.1
            
            
            $
            19.8
            
            
            $
            14.9
            
            
            $
            18.5
            
            
            $
            14.5
            
            
            $
            19.6
            
            
            $
            21.3





Revenue
      amounts previously reported under *Income related to sales of finance
      receivables* and *Servicing income* have been combined with
*Securitization income* to conform to the current presentation. Amounts
      currently presented under *Derivative expense (income)* were previously
      reported as a component of *Retail notes and finance lease
      revenue*.





20
 ***Index***




**Consolidated
      Statements of Financial Condition**





**As
                of**Millions
                of dollars
            
            January
                31, 2005
            
            
            April
                30, 2005
            
            
            July
                31, 2005Previously
            
            
            
            
            
            Previously
            
            
            
            
            
            PreviouslyReported
            
            
            Restated
            
            
            Reported
            
            
            Restated
            
            
            Reported
            
            
            Restated**ASSETS**Cash
                and cash equivalents
            
            $
            40.4
            
            
            $
            49.8
            
            
            $
            26.3
            
            
            $
            34.9
            
            
            $
            34.3
            
            
            $
            47.6Finance
                receivables:Finance
                receivables
            
            
            938.0
            
            
            
            2,931.3
            
            
            
            848.9
            
            
            
            3,021.3
            
            
            
            686.8
            
            
            
            3,097.8Finance
                receivables from affiliates
            
            
            31.2
            
            
            
            160.5
            
            
            
            40.3
            
            
            
            185.1
            
            
            
            50.2
            
            
            
            184.9Allowance
                for losses
            
            
            (3.9
            )
            
            
            (13.9
            )
            
            
            (3.1
            )
            
            
            (14.3
            )
            
            
            (3.2
            )
            
            
            (15.0
            )**Finance
                receivables, net**
            
            
            965.3
            
            
            
            3,077.9
            
            
            
            886.1
            
            
            
            3,192.1
            
            
            
            733.8
            
            
            
            3,267.7Amounts
                due from sales of receivables
            
            
            384.7
            
            
            
            501.0
            
            
            
            442.1
            
            
            
            533.2
            
            
            
            481.8
            
            
            
            434.4Net
                accounts due from affiliates
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            10.9
            
            
            
            4.3Net
                investment in operating leases
            
            
            136.1
            
            
            
            136.7
            
            
            
            119.3
            
            
            
            121.1
            
            
            
            107.5
            
            
            
            108.3Vehicle
                inventory
            
            
            6.0
            
            
            
            24.5
            
            
            
            3.1
            
            
            
            18.7
            
            
            
            3.6
            
            
            
            14.5Restricted
                cash and cash equivalents
            
            
            315.7
            
            
            
            529.6
            
            
            
            507.8
            
            
            
            740.8
            
            
            
            1,013.9
            
            
            
            1,636.7Other
                assets
            
            
            25.0
            
            
            
            36.3
            
            
            
            29.7
            
            
            
            34.7
            
            
            
            45.5
            
            
            
            49.4**Total
                assets**
            
            $
            1,873.2
            
            
            $
            4,355.8
            
            
            $
            2,014.4
            
            
            $
            4,675.5
            
            
            $
            2,431.3
            
            
            $
            5,562.9**LIABILITIES
                AND SHAREOWNER’S EQUITY**Net
                accounts due to affiliates
            
            $
            5.0
            
            
            $
            53.6
            
            
            $
            95.6
            
            
            $
            127.5
            
            
            $
            -
            
            
            $
            -Senior
                and subordinated debt
            
            
            1,297.4
            
            
            
            3,737.9
            
            
            
            1,317.1
            
            
            
            3,933.1
            
            
            
            1,825.9
            
            
            
            4,931.7Other
                liabilities
            
            
            123.9
            
            
            
            111.9
            
            
            
            141.3
            
            
            
            143.4
            
            
            
            127.2
            
            
            
            139.5**Total
                liabilities**
            
            
            1,426.3
            
            
            
            3,903.4
            
            
            
            1,554.0
            
            
            
            4,204.0
            
            
            
            1,953.1
            
            
            
            5,071.2**Shareowner’s
                equity**Capital
                stock
            
            
            1.6
            
            
            
            1.6
            
            
            
            1.6
            
            
            
            1.6
            
            
            
            1.6
            
            
            
            1.6Paid-in
                capital
            
            
            181.3
            
            
            
            139.6
            
            
            
            181.3
            
            
            
            139.6
            
            
            
            181.3
            
            
            
            139.6Retained
                earnings
            
            
            265.1
            
            
            
            320.2
            
            
            
            280.0
            
            
            
            338.7
            
            
            
            294.5
            
            
            
            358.3Accumulated
                other comprehensive loss
            
            
            (1.1
            )
            
            
            (9.0
            )
            
            
            (2.5
            )
            
            
            (8.4
            )
            
            
            0.8
            
            
            
            (7.8
            )**Total
                shareowner’s equity**
            
            
            446.9
            
            
            
            452.4
            
            
            
            460.4
            
            
            
            471.5
            
            
            
            478.2
            
            
            
            491.7**Total
                liabilities and shareowner’s equity**
            
            $
            1,873.2
            
            
            $
            4,355.8
            
            
            $
            2,014.4
            
            
            $
            4,675.5
            
            
            $
            2,431.3
            
            
            $
            5,562.9




21
 ***Index***




**Quarter
      Ended January 31, 2005, Restated**





For
      the
      quarter ended January 31, 2005, NFC recorded net revenues of $81.3 million.
      Restated *Wholesale note interest*declined from previously reported
      amounts as certain income components were presented in *Securitization
      income.*  Ending wholesale note balances were $97.8
      million.





Retail
      securitizations were $750.0 million during the first quarter, primarily
      reflecting acquisitions from the prior year.  These receivables
      remained on the books as the transactions did not qualify for sale accounting
      under FAS 140.  Restated retail notes and finance lease income
      increased from previously reported amounts as a result of the error in
      accounting for securitization transactions.  These transactions now
      remain on NFC’s books; therefore, NFC continues to report the earnings from
      these receivables in its operating results.  Ending retail and lease
      balances were $2.7 billion





Restated
      securitization income declined from previously reported amounts.  As a
      result of the error in accounting for the securitization transactions NFC no
      longer earns servicing fees on its portfolio of securitized non-fleet retail
      note and finance lease receivables.  This decline was partially offset
      by amounts remapped from wholesale note interest.





Restated
      cost of borrowings and provision for credit losses increased from previously
      reported amounts as a result of the error in accounting for securitization
      transactions.  These transactions now remain on NFC’s books;
      therefore, NFC includes a provision for losses on these receivables as well
      as
      the interest costs incurred to fund these receivables in its operating
      results.  In addition, changes in the timing and amounts of credit
      losses recognized during the quarter impacted the provision for losses
      charge.





NFC
      recorded income before taxes of $30.8 million and net income of $19.8 million
      for the first quarter.  The effective tax rate for the quarter was
      36%.





**Quarter
      Ended April 30, 2005, Restated**





For
      the
      quarter ended April 30, 2005, NFC recorded net revenues of $84.7 million.
      Restated wholesale note interest declined from previously reported amounts
      as
      certain income components were presented in securitization
      income.  Ending wholesale note balances were $123.3
      million.





Retail
      securitizations were $418.0 million during the second quarter.  These
      receivables remained on the books as the transactions did not qualify for sale
      accounting under FAS 140.  Restated retail notes and finance lease
      income increased from previously reported amounts as a result of the error
      in
      accounting for securitization transactions.  These transactions now
      remain on NFC’s books, so NFC continues to report the earnings from these
      receivables in its operating results.  Ending retail and lease
      balances were $2.8 billion





Restated
      securitization income declined from previously reported amounts since NFC no
      longer earns servicing fees on its portfolio of securitized non-fleet retail
      note and finance lease receivables.  This is a result of the error in
      accounting for the securitization transactions.  The decline in
      securitization income was partially offset by amounts remapped from wholesale
      note interest.





Restated
      cost of borrowings and provision for credit losses increased from previously
      reported amounts as a result of the error in accounting for securitization
      transactions.  These transactions now remain on NFC’s books and
      therefore NFC includes a provision for losses on these receivables as well
      as
      the interest costs incurred to fund these receivables in its operating
      results.  Changes in the timing and amounts of credit losses
      recognized during the quarter also impacted the provision for losses
      charge.





NFC
      recorded income before taxes of $28.7 million and net income of $18.5 million
      for the second quarter.  The effective tax rate for the quarter was
      36%.





22
 ***Index***





**Quarter
      Ended July 31, 2005, Restated**





For
      the
      quarter ended July 31, 2005, NFC recorded net revenues of $91.8 million.
      Restated wholesale note interest declined from previously reported amounts
      as
      certain income components were presented in securitization
      income.  Ending wholesale note balances were $82.0
      million.





Retail
      securitizations were $385.0 million during the third quarter.  These
      receivables remained on the books as the transactions did not qualify for sale
      accounting under FAS 140.  Restated retail notes and finance lease
      income increased from previously reported amounts as a result of the error
      in
      accounting for securitization transactions.  These transactions now
      remain on NFC’s books; therefore, NFC continues to report the earnings from
      these receivables in its operating results.  Ending retail and lease
      balances were $2.9 billion





Restated
      securitization income increased from previously reported amounts as a result
      of
      certain income components being remapped from wholesale note interest to
      securitization income. This increase was partially offset by the error in
      accounting for the securitization transactions.  NFC no longer earns
      servicing fees on its portfolio of securitized non-fleet retail note and finance
      lease receivables.





Restated
      cost of borrowings and provision for credit losses increased from previously
      reported amounts as a result of the error in accounting for securitization
      transactions.  These transactions now remain on NFC’s books, so NFC
      includes a provision for losses on these receivables as well as the interest
      costs incurred to fund these receivables in its operating
      results.  Changes in the timing and amounts of credit losses
      recognized during the quarter also impacted the provision for losses
      charge.





NFC
      recorded income before taxes of $30.5 million and net income of $19.6 million
      for the third quarter.  The effective tax rate for the quarter was
      36%.







**Quarter
      Ended October 31, 2005**





For
      the
      quarter ended October 31, 2005, NFC recorded net revenues of $96.2 million.
      Wholesale note interest reflected the remapping of certain income components
      to
      securitization income.  Ending wholesale note balances were $98.1
      million.





Retail
      securitizations were $365.0 million during the fourth quarter.  As
      these transactions did not qualify for sale accounting under FAS 140, they
      remained on the books.  Retail notes and finance lease income included
      income on securitized receivables as a result of the error in accounting for
      securitization transactions.  These transactions now remain on NFC’s
      books and NFC continues to report the earnings from these receivables in its
      operating results.  Ending retail and lease balances were $3.1
      billion





Securitization
      income included the impact of certain income components being remapped from
      wholesale note interest to securitization income. Securitization income was
      also
      impacted by the error in accounting for the securitization transactions, which
      no longer allows NFC to earn servicing fees on its portfolio of securitized
      non-fleet retail note and finance lease receivables.





Cost
      of
      borrowings and provision for credit losses have been impacted by the error
      in
      accounting for securitization transactions. Since these transactions now remain
      on NFC’s books, NFC includes a provision for losses on these receivables as well
      as the interest costs incurred to fund these receivables in its operating
      results.  In addition, changes in the timing and amounts of credit
      losses recognized during the quarter impacted the provision for losses
      charge.





NFC
      recorded income before taxes of $33.4 million and net income of $21.3 million
      for the fourth quarter.  The effective tax rate for the quarter was
      36%.





23
 ***Index***





**Quarterly
      Summary of Restatement Adjustments**





The
      following table sets forth the effects of the restatement adjustments on our
      consolidated statements of income for the first three quarters of 2005 (in
      millions):





For
                the Three Months EndedJanuary
                31,
              2005
            
            
            April
                30,
              2005
            
            
            July
                31,
              2005Income
                before tax, previously reported
            
            $
            31.2
            
            
            $
            24.2
            
            
            $
            23.8Retail
                securitizations
            
            
            (0.4
            )
            
            
            5.7
            
            
            
            4.0Retained
                interest valuation
            
            
            (1.2
            )
            
            
            (1.7
            )
            
            
            1.6Postretirement
                benefits
            
            
            0.2
            
            
            
            0.1
            
            
            
            0.1Other
                miscellaneous adjustments
            
            
            1.0
            
            
            
            0.4
            
            
            
            1.0Total
                restatement adjustments
            
            
            (0.4
            )
            
            
            4.5
            
            
            
            6.7Income
                before tax, restated
            
            
            30.8
            
            
            
            28.7
            
            
            
            30.5Income
                tax expense, restated
            
            
            (11.0
            )
            
            
            (10.2
            )
            
            
            (10.9
            )Net
                income, restated
            
            $
            19.8
            
            
            $
            18.5
            
            
            $
            19.6








**Item
      7A.  Quantitative and Qualitative Disclosures About
      Market Risk**





Fluctuating
      interest rates are our primary market risk.  Interest rate risk arises
      when we fund a portion of the fixed rate receivables with floating rate
      debt.  NFC has managed this exposure to interest rate changes by
      funding floating rate receivables with floating rate debt and fixed rate
      receivables with fixed rate debt, floating rate debt and equity
      capital.  We have reduced the net exposure, which results from the
      funding of fixed rate receivables with floating rate debt by generally
      securitizing fixed rate receivables and by utilizing derivative financial
      instruments, primarily swaps, when appropriate.  NFC does not use
      derivative financial instruments for trading purposes.





NFC
      measures its interest rate risk by estimating the net amount by which the fair
      value of all interest rate sensitive assets and liabilities, including
      derivative financial instruments, would be impacted by selected hypothetical
      changes in market interest rates.  Fair value is estimated using a
      discounted cash flow analysis.  Assuming a hypothetical instantaneous
      10% adverse change in interest rates as of October 31, 2005 and 2004, the
      estimated fair value of the net assets would decrease by approximately $36.8
      million and $30.0 million, respectively.  NFC’s interest rate
      sensitivity analysis assumes a parallel shift in interest rate yield
      curves.  The model, therefore, does not reflect the potential impact
      of changes in the relationship between short-term and long-term interest
      rates.





24
 ***Index***





**Item
      8.  Financial Statements and Supplementary
      Data**





**Index**





Consolidated
                Financial Statements:
            **Page**Consolidated
                Statements of Income
              Fiscal
                years ended October 31, 2005, 2004 and 2003
            26Consolidated
                Statements of Shareowner’s Equity and Comprehensive Income
              Fiscal
                years ended October 31, 2005, 2004 and 2003
            27Consolidated
                Statements of Financial Condition
              October
                31, 2005 and 2004
            28Consolidated
                Statements of Cash Flows
              Fiscal
                years ended October 31, 2005, 2004 and 2003
            29Notes
                to  Consolidated Financial Statements
            30Report
                of Independent Registered Public Accounting Firm
            69




25
 ***Index***




**Navistar
      Financial Corporation and Subsidiaries**


**Consolidated
      Statements of Income**


**For
                the years ended**
              **October
                31**Millions
                of dollars
            
            **2005**
            
            
            2004
              (Restated)
            
            
            2003
              (Restated)**Revenues**Retail
                notes and finance lease revenue
            
            **$**
            **201.0**
            
            
            $
            180.9
            
            
            $
            191.6Operating
                leases revenue
            
            ****
            **39.6**
            
            
            
            57.8
            
            
            
            68.3Wholesale
                notes interest
            
            ****
            **11.9**
            
            
            
            8.5
            
            
            
            6.7Retail
                and wholesale accounts interest
            
            ****
            **5.5**
            
            
            
            4.2
            
            
            
            4.8Securitization
                income
            
            ****
            **74.5**
            
            
            
            54.4
            
            
            
            47.1Other
                revenues
            
            ****
            **21.5**
            
            
            
            6.8
            
            
            
            9.6**Total
                revenues**
            
            ****
            **354.0**
            
            
            
            312.6
            
            
            
            328.1**Expenses**Cost
                of borrowing:Interest
                expense
            
            ****
            **133.3**
            
            
            
            98.9
            
            
            
            123.9Other
            
            ****
            **11.0**
            
            
            
            12.1
            
            
            
            11.3Credit,
                collections and administrative
            
            ****
            **45.3**
            
            
            
            40.7
            
            
            
            41.3Provision
                for credit losses
            
            ****
            **5.7**
            
            
            
            7.8
            
            
            
            12.9Depreciation
                on operating leases
            
            ****
            **29.7**
            
            
            
            42.4
            
            
            
            49.8Derivative
                expense (income)
            
            ****
            **(0.3**
            **)**
            
            
            (6.3
            )
            
            
            13.8Other
                expenses
            
            ****
            **5.9**
            
            
            
            3.3
            
            
            
            3.4**Total
                expenses**
            
            ****
            **230.6**
            
            
            
            198.9
            
            
            
            256.4**Income
                before taxes**
            
            ****
            **123.4**
            
            
            
            113.7
            
            
            
            71.7Income
                tax expense from continuing operations
            
            ****
            **44.2**
            
            
            
            39.2
            
            
            
            29.2**Income
                from continuing operations**
            
            ****
            **79.2**
            
            
            
            74.5
            
            
            
            42.5Loss
                on disposal of discontinued operations,(net
                of tax $0, $0, and $1.5)
            
            ****
            **-**
            
            
            
            -
            
            
            
            (2.4
            )**Net
                income**
            
            **$**
            **79.2**
            
            
            $
            74.5
            
            
            $
            40.1








See
      Notes
      to Consolidated Financial Statements





26
 ***Index***





**Navistar
      Financial Corporation and Subsidiaries**


**Consolidated
      Statements of Shareowner’s Equity and Comprehensive Income**


Millions
                of dollars
            
            Capital
                Stock
            
            
            Paid-In
                Capital
            
            
            Retained
                Earnings
            
            
            Accumulated
                Other Comprehensive Loss
            
            
            Total
            
            
            Comprehensive
                Income**Balance
                at October 31, 2002 (restated)**
            
            $
            1.6
            
            
            $
            118.9
            
            
            $
            235.8
            
            
            $
            (7.8
            )
            
            $
            348.52003
                Activity:Net
                Income (restated)
            
            
            -
            
            
            
            -
            
            
            
            40.1
            
            
            
            -
            
            
            
            40.1
            
            
            $
            40.1Change
                in minimum pension liability (net of tax $0.4)
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (0.7
            )
            
            
            (0.7
            )
            
            
            (0.7
            )Cash
                dividend paid to parent company
            
            
            -
            
            
            
            -
            
            
            
            (50.0
            )
            
            
            -
            
            
            
            (50.0
            )
            
            
            -**Balance
                at October 31, 2003 (restated)**
            
            $
            1.6
            
            
            $
            118.9
            
            
            $
            225.9
            
            
            $
            (8.5
            )
            
            $
            337.9
            
            
            $
            39.42004
                Activity:Net
                income (restated)
            
            
            -
            
            
            
            -
            
            
            
            74.5
            
            
            
            -
            
            
            
            74.5
            
            
            
            74.5Assumption
                of debt by Navistar
            
            
            -
            
            
            
            20.7
            
            
            
            -
            
            
            
            -
            
            
            
            20.7
            
            
            
            -Change
                in minimum pension liability (net of   tax
                $0.7)
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (1.2
            )
            
            
            (1.2
            )
            
            
            (1.2
            )**Balance
                at October 31, 2004 (restated)**
            
            $
            1.6
            
            
            $
            139.6
            
            
            $
            300.4
            
            
            $
            (9.7
            )
            
            $
            431.9
            
            
            $
            73.32005
                Activity:Net
                income
            
            
            -
            
            
            
            -
            
            
            
            79.2
            
            
            
            -
            
            
            
            79.2
            
            
            
            79.2Change
                in minimum pension liability (net of tax $1.0)
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            1.8
            
            
            
            1.8
            
            
            
            1.8**Balance
                at October 31, 2005**
            
            $
            1.6
            
            
            $
            139.6
            
            
            $
            379.6
            
            
            $
            (7.9
            )
            
            $
            512.9
            
            
            $
            81.0








See
      Notes
      to Consolidated Financial Statements





27
 ***Index***




**Navistar
      Financial Corporation and Subsidiaries**


**Consolidated
      Statements of Financial Condition**


**As
                of**
              **October
                31**Millions
                of dollars
            
            **2005**
            
            
            2004
              (Restated)**ASSETS**Cash
                and cash equivalents
            
            **$**
            **23.0**
            
            
            $
            22.8Finance
                receivables:Finance
                receivables
            
            ****
            **3,239.1**
            
            
            
            2,877.8Finance
                receivables from affiliates
            
            ****
            **184.7**
            
            
            
            156.5Allowance
                for losses
            
            ****
            **(13.6**
            **)**
            
            
            (13.6
            )**Finance
                receivables, net**
            
            ****
            **3,410.2**
            
            
            
            3,020.7Amounts
                due from sales of receivables
            
            ****
            **441.2**
            
            
            
            410.7Net
                accounts due from affiliates
            
            ****
            **29.7**
            
            
            
            -Net
                investment in operating leases
            
            ****
            **105.7**
            
            
            
            151.9Vehicle
                inventory
            
            ****
            **8.4**
            
            
            
            26.6Restricted
                cash and cash equivalents
            
            ****
            **543.8**
            
            
            
            274.6Other
                assets
            
            ****
            **56.0**
            
            
            
            38.1**Total
                assets**
            
            **$**
            **4,618.0**
            
            
            $
            3,945.4**LIABILITIES
                AND SHAREOWNER’S EQUITY**Net
                accounts due to affiliates
            
            **$**
            **-**
            
            
            $
            68.3Senior
                and subordinated debt
            
            ****
            **3,962.1**
            
            
            
            3,319.4Other
                liabilities
            
            ****
            **143.0**
            
            
            
            125.8**Total
                liabilities**
            
            ****
            **4,105.1**
            
            
            
            3,513.5**Shareowner’s
                equity**Capital
                stock (par value $1.00, 2,000,000 shares authorized, 1,600,000 shares
                issued and outstanding)
            
            ****
            **1.6**
            
            
            
            1.6Paid-in
                capital
            
            ****
            **139.6**
            
            
            
            139.6Retained
                earnings
            
            ****
            **379.6**
            
            
            
            300.4Accumulated
                other comprehensive loss
            
            ****
            **(7.9**
            **)**
            
            
            (9.7
            )**Total
                shareowner’s equity**
            
            ****
            **512.9**
            
            
            
            431.9**Total
                liabilities and shareowner’s equity**
            
            **$**
            **4,618.0**
            
            
            $
            3,945.4








See
      Notes
      to Consolidated Financial Statements





28
 ***Index***




**Navistar
                Financial Corporation and Subsidiaries**
              **Consolidated
                Statements of Cash Flows****For
                the years ended October 31**Millions
                of dollars
            
            **2005**
            
            
            2004
              (Restated)
            
            
            2003
              (Restated)**Cash
                flow from operating activities:**Net
                income
            
            **$**
            **79.2**
            
            
            $
            74.5
            
            
            $
            40.1Adjustments
                to reconcile net income to cash flow from operations:Loss
                on disposal of discontinued operations, net of tax
            
            ****
            **-**
            
            
            
            -
            
            
            
            2.4Net
                loss on sales of finance receivables
            
            ****
            **2.1**
            
            
            
            6.8
            
            
            
            6.4Net
                loss (gain) on sale of equipment
            
            ****
            **0.8**
            
            
            
            -
            
            
            
            -Depreciation
                and amortization
            
            ****
            **39.1**
            
            
            
            56.1
            
            
            
            65.1Provision
                for credit losses
            
            ****
            **5.7**
            
            
            
            7.8
            
            
            
            12.9Net
                change in amounts due from sales of receivables
            
            ****
            **(30.5**
            **)**
            
            
            (201.5
            )
            
            
            148.7Net
                change in finance receivables - wholesale notes
            
            ****
            **29.7**
            
            
            
            (84.3
            )
            
            
            (7.5
            )Net
                change in finance receivables from affiliates - wholesale
            
            ****
            **26.5**
            
            
            
            (42.3
            )
            
            
            (0.5
            )Net
                change in accounts payable to (due from) affiliates
            
            ****
            **(98.0**
            **)**
            
            
            65.6
            
            
            
            (59.9
            )Net
                change in other assets and liabilities
            
            ****
            **7.0**
            
            
            
            (31.6
            )
            
            
            30.1**Net
                cash provided by (used in) operating activities**
            
            ****
            **61.6**
            
            
            
            (148.9
            )
            
            
            237.8**Cash
                flow from investing activities:**Originations
                of retail notes and finance leases, includes affiliates
            
            ****
            **(1,592.6**
            **)**
            
            
            (1,376.4
            )
            
            
            (1,262.1
            )Net
                change in restricted cash and cash equivalents
            
            ****
            **(269.2**
            **)**
            
            
            688.8
            
            
            
            (642.0
            )Collections
                on retail notes and finance lease receivables,
              net
                of change in unearned finance income, includes affiliates
            
            ****
            **1,068.3**
            
            
            
            1,067.2
            
            
            
            1,198.0Net
                change in finance receivables from affiliates  -
                accounts
            
            ****
            **(2.1**
            **)**
            
            
            (0.3
            )
            
            
            (2.9
            )Net
                change in finance receivables - accounts
            
            ****
            **20.3**
            
            
            
            142.9
            
            
            
            (170.4
            )Proceeds
                from sale of repossessed assets
            
            ****
            **70.8**
            
            
            
            48.1
            
            
            
            72.9Purchase
                of equipment leased to others
            
            ****
            **(31.0**
            **)**
            
            
            (29.5
            )
            
            
            (34.8
            )Proceeds
                from sale of equipment
            
            ****
            **47.6**
            
            
            
            43.1
            
            
            
            48.5**Net
                cash (used in) provided by investing activities**
            
            ****
            **(687.9**
            **)**
            
            
            583.9
            
            
            
            (792.8
            )**Cash
                flow from financing activities:**Net
                change in bank-revolving credit facility, net of issuance
                costs
            
            ****
            **(118.8**
            **)**
            
            
            101.0
            
            
            
            (11.0
            )Proceeds
                from issuance of long-term debt, net of issuance costs
            
            ****
            **497.1**
            
            
            
            -
            
            
            
            -Principal
                payments on long-term debt
            
            ****
            **(500.0**
            **)**
            
            
            -
            
            
            
            -Proceeds
                from issuance of securitized debt, net of issuance costs
            
            ****
            **1,949.6**
            
            
            
            967.3
            
            
            
            1,921.1Payments
                on securitized debt
            
            ****
            **(1,201.4**
            **)**
            
            
            (1,324.5
            )
            
            
            (1,326.5
            )Dividends
                paid to parent company
            
            ****
            **-**
            
            
            
            -
            
            
            
            (50.0
            )Payoff
                of convertible debt
            
            ****
            **-**
            
            
            
            (170.0
            )
            
            
            -**Net
                cash provided by (used in) financing activities**
            
            ****
            **626.5**
            
            
            
            (426.2
            )
            
            
            533.6**Change
                in cash and cash equivalents**
            
            ****
            **0.2**
            
            
            
            8.8
            
            
            
            (21.4
            )**Cash
                and cash equivalents, beginning of year**
            
            ****
            **22.8**
            
            
            
            14.0
            
            
            
            35.4**Cash
                and cash equivalents, end of year**
            
            **$**
            **23.0**
            
            
            $
            22.8
            
            
            $
            14.0**Supplemental
                cash flow information:**Interest
                paid
            
            **$**
            **130.8**
            
            
            $
            100.9
            
            
            $
            126.9Paid-in
                capital from
                assumption of debt by Navistar
            
            ****
            **-**
            
            
            
            20.7
            
            
            
            -Income
                taxes paid, net of
                refunds
            
            ****
            **34.3**
            
            
            
            39.7
            
            
            
            20.8Transfers
                of loans and leases
                to vehicle inventory
            
            ****
            **52.6**
            
            
            
            39.9
            
            
            
            68.3





See
      Notes
      to Consolidated Financial Statements





29
 ***Index***




NAVISTAR
        FINANCIAL CORPORATION AND SUBSIDIARIES
  NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS




**1.
      SUMMARY OF ACCOUNTING POLICIES**





Commencing
      in January 2006, Navistar undertook a comprehensive review of their previously
      issued consolidated financial statements. In November 2006, we undertook a
      similar comprehensive review. Navistar and NFC both determined that those
      consolidated financial statements were not prepared in accordance with
      accounting principles generally accepted in the United States of America
      (“GAAP”). As a result of this review, we have restated our previously issued
      consolidated financial statements for the quarters ended July 31, 2005, April
      30, 2005 and January 31, 2005. See Note 19, *Selected quarterly financial
      data (unaudited)*, as well as the fiscal years ended October 31, 2004 and
      2003 and retained earnings at November 1, 2002. The consolidated financial
      statements contained herein for the fiscal years ended October 31, 2004 and
      2003
      include the effects of these restatements. See Note 2 below.





This
      Annual Report on Form 10-K for the year ended October 31, 2005 is our first
      filing with the Securities and Exchange Commission (“SEC”) that includes
      comprehensive financial statements since our Quarterly Report on Form 10-Q
      for
      the quarter ended July 31, 2005.  Unless otherwise stated, all
      financial information presented in this Annual Report on Form 10-K reflects
      restated consolidated financial statements for the years ended October 31,
      2003
      and 2004 and the first three quarters of the year ended October 31, 2005. The
      effect of the restatement on periods prior to 2003 has been presented as an
      adjustment to *Shareowner’s equity* as of November 1, 2002, the beginning
      of our 2003 year.





**Nature
      of Operations**





Navistar
      Financial Corporation was incorporated in Delaware in 1949 and is a wholly-owned
      subsidiary of International Truck and Engine Corporation (“International”),
      which is a wholly-owned subsidiary of Navistar International Corporation
      (“Navistar”).  As used herein, “us,” “we,” “our” or “NFC” refers to
      Navistar Financial Corporation and its wholly-owned subsidiaries unless the
      context otherwise requires.  NFC is a commercial financing
      organization that provides retail, wholesale and lease financing of products
      sold by International and its dealers within the United States.  NFC
      also finances wholesale accounts and selected retail accounts receivable of
      International.  Sales of new products (including trailers) of other
      manufacturers are also financed regardless of whether they are designed or
      customarily sold for use with International’s truck products.





Revenue
      includes interest revenue from retail notes, finance leases, wholesale notes,
      retail accounts, wholesale accounts, securitization income and rental income
      from operating leases. Cost of borrowing includes interest expense on debt
      financing and amortization of debt issuance costs.





We
      have
      traditionally obtained the funds to provide financing to International's dealers
      and retail customers from the securitization of finance receivables, short
      and
      long-term bank borrowings, and medium and long-term debt.  We sell
      wholesales notes through our wholly-owned subsidiary NFSC, which has in place
      a
      revolving wholesale note trust that provides for the funding of eligible
      wholesale notes.  We finance non-fleet retail notes and finance leases
      through NFRRC and TRIP, our wholly-owned subsidiaries.  Fleet accounts
      receivables are financed via TRAC, our wholly-owned
      subsidiary.  TERFCO, our wholly-owned subsidiary, had in place a trust
      that terminated in December 2005 to provide funding of unsecured trade
      receivables generated by the sale of diesel engines and engine service parts
      from International to Ford Motor Company. ITLC, our wholly-owned subsidiary,
      was
      established to provide for the funding of certain leases.  See
      Securitization Transactions below.





**Basis
      of Presentation and Consolidation**





The
      consolidated financial statements include the accounts of Navistar Financial
      Corporation and its wholly-owned subsidiaries. All intercompany balances and
      transactions have been eliminated. We evaluate our performance and allocate
      resources based on a single segment concept. Accordingly, there are no
      separately identified material operating segments for which discrete financial
      information is available. We do not derive revenue from, or have assets located
      in foreign countries, nor do we derive revenues from any single customer that
      represents 10% or more of our total revenues.





30
 ***Index***




NAVISTAR
          FINANCIAL CORPORATION AND SUBSIDIARIES
  NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
  Estimates





The
      preparation of financial statements in conformity with GAAP requires us to
      make
      estimates and assumptions that affect the reported amounts of assets and
      liabilities and disclosure of contingent assets and liabilities at the date
      of
      the financial statements and the reported amounts of revenues and expenses
      during the reporting period.  Significant estimates and assumptions
      are used for, but are not limited to: (1) allowance for losses;
      (2) amounts due from sales of receivables (including fair value
      calculations); (3) net investment in operating leases; (4) income
      taxes; and (5) pension and other postretirement benefits. Future events and
      their effects cannot be predicted with certainty, and accordingly, our
      accounting estimates require the exercise of judgment. The accounting estimates
      used in the preparation of our consolidated financial statements will change
      as
      new events occur, as more experience is acquired, as additional information
      is
      obtained and as our operating environment changes. We evaluate and update our
      assumptions and estimates on an ongoing basis and may employ outside experts
      to
      assist in our evaluations for statistical models and pension and benefits.
      Actual results could differ from the estimates we have used.





**Revenue
      Recognition**





*Finance
      Receivables*





We
      recognize revenue from retail notes, finance leases, wholesale notes, retail
      accounts and wholesale accounts, including amounts received from International
      for reimbursement of interest income for various dealer and buyer incentives,
      as
      interest income using the effective interest method. Certain origination costs
      and fees are deferred and recognized as an adjustment to yield and are reported
      as part of interest income over the life of the receivable as specified by
      FASB
      Statement No. 91, *Accounting for Nonrefundable Fees and Costs Associated
      with Originating or Acquiring Loans and Initial Direct Costs of Leases*.
      Loans are considered to be impaired when we conclude there is a high likelihood
      the customer will not be able to make full payment after reviewing the
      customers’ financial performance, payment ability, capital raising potential,
      management style, economic situation, etc. The accrual of interest on such
      loans
      is discontinued when, in our opinion, the collection of the account becomes
      doubtful.  When interest accrual is discontinued, all unpaid accrued
      interest is reversed against interest revenue.  Interest income on
      these accounts is recognized only to the extent cash payments are received.
      We
      resume accruing interest on these accounts when payments are current according
      to the terms of the loans and future payments are reasonably
      assured.





*Operating
      Leases*





We
      recognize revenue on operating leases as rental income on a straight-line basis
      over the life of the lease.  Recognition of revenue is suspended when
      we determine the collection of future rental revenue is not
      probable.  Income recognition is resumed if collection doubts are
      removed.





*Securitization
      Transactions*





We
      finance receivables using a process commonly known as securitization, whereby
      asset-backed securities are sold via public offering or private
      placement.   In a typical securitization transaction, NFC sells a
      pool of finance receivables to a special purpose entity (“SPE”).  The
      SPE then transfers the receivables to a bankruptcy remote, legally isolated
      entity, generally a trust, in exchange for proceeds from interest bearing
      securities.  These securities are issued by the trust and are secured
      by future collections on the receivables sold to the trust. These transactions
      are subject to the provisions of FASB Statement No. 140, *Accounting for
      Transfers and Servicing of Financial Assets and Extinguishment of
      Liabilities* (“SFAS No. 140”) as to accounting treatment.  When we
      finance receivables we use various wholly-owned special purpose subsidiaries
      depending on the type of assets being financed. NFRRC finances retail notes
      and
      finance leases; ITLC finances operating leases and some terminal residual clause
      leases.   Both NFRRC and ITLC securitizations are accounted for
      as secured borrowings.  Wholesale notes are financed through NFSC and
      retail accounts and parts or special items or large fleet customers of
      International are financed through TRAC and TERFCO. Financing of receivables
      by
      NFSC, TRAC and TERFCO comply with the requirements of SFAS No. 140 and are
      accounted for as sales.





31
 ***Index***




NAVISTAR
        FINANCIAL CORPORATION AND SUBSIDIARIES
  NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
   When
        we
        securitize receivables we may have retained interests in the receivables
        sold
        (transferred). The retained interests may include senior and subordinated
        securities, undivided interests in receivables used as over-collateralization,
        restricted cash held for the benefit of the trust and interest-only strips.
        Our
        retained interests are the first to absorb any credit losses on the transferred
        receivables because we have the most subordinated interests in the trust,
        including subordinated securities, the right to receive excess spread
        (interest-only strip), and any residual or remaining interests of the trust
        after all asset-backed securities are repaid in full.  Our exposure to
        credit losses on the transferred receivables is limited to our retained
        interests. The SPE’s assets are available to satisfy the creditors’ claims
        against the assets prior to such assets becoming available for the SPE’s own
        uses or to NFC or affiliated companies.  Since the transfer
        constitutes a legal sale, we are under no obligation to repurchase any
        transferred receivable that becomes delinquent in payment or otherwise is
        in
        default.  We are not responsible for credit losses on transferred
        receivables other than through our ownership of the lowest tranches in the
        securitization structures. We do not guarantee any securities issued by trusts.
        We, as seller and the servicer of the finance receivables are obligated to
        provide certain representations and warranties regarding the
        receivables.  Should any receivables fail to meet these
        representations and warranties, we, as servicer, are required to repurchase
        the
        receivables.





Off
      balance sheet securitizations:





For
      transactions that qualify as sales under SFAS No. 140, receivables and
      associated liabilities are removed from the consolidated statements of financial
      condition. Gains or losses from these sales are recognized at the time of sale
      based on the relative carrying value of the portion sold and the portion
      allocated to the retained interests are included in *Securitization
      income*. The gain or loss is determined by the difference between the
      proceeds received and the allocated carrying value of the sold receivables.
      We
      estimate the payment speeds for the receivables sold, the discount rate used
      to
      determine the present value of the retained interests and the anticipated net
      losses on the receivables in order to calculate the gain or
      loss.  Estimates are based on historical experience, anticipated
      future portfolio performance, market-based discount rates and other factors
      and
      are made separately for each securitization transaction.  In addition,
      we re-evaluate the fair value of the retained interests on a quarterly basis
      and
      recognize in current income changes as required.  The fair value of
      retained interests is based on present value estimates of expected cash flows
      using our key assumptions of payment speeds, discount rates and net
      losses.  The retained interests are classified as
      trading.





The
      trusts used for off balance sheet sales engage us as servicer for a servicing
      fee. The servicing duties include collecting payments on receivables and
      preparing monthly investor reports on the performance of the receivables that
      are used by the trustee to distribute monthly interest and principal payments
      to
      investors.  We apply the same servicing policies and procedures that
      are applied to our owned receivables.  The servicing income received
      by us is just adequate to compensate us for our servicing responsibilities.
      Therefore, no servicing asset or liability is recorded.





The
      following elements of income related to the off balance sheet securitizations
      are included in *Securitization income* in the consolidated statements of
      income and in operating activities in the consolidated statements of cash
      flows.





*Fair
      value adjustments
–*


Gains
      or
      losses on changes in the estimated fair value of the retained
      interests.





*Excess
      spread income –*


Income
      generated by the receivables in off balance sheet securitization trusts, net
      of
      interest expense, credit losses and administrative expenses.





*Servicing
      fee
      revenue****–*


Fees
      charged for collection and reporting on behalf of the investors.





*Gains
      and losses on sale of receivables –*


Proceeds
      less initial relative carrying
      value calculated in the period of sale.





32
 ***Index***


NAVISTAR
        FINANCIAL CORPORATION AND SUBSIDIARIES
  NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS


*Investment
      income****–*


Interest
      income on cash reserve accounts.





On
      balance sheet securitizations:





For
      transactions that do not qualify as sales under SFAS No. 140, the financed
      receivables remain on our balance sheet net of allowance for losses and
      associated debt issued is recorded as secured borrowings in the consolidated
      statements of financial condition under *Finance receivables* and
*Senior and subordinated debt,*respectively. Interest revenue and
      expense are recorded as earned or incurred on the consolidated statements of
      income and debt issuance costs are capitalized and included in *Other
      assets* and amortized on a level yield basis over the term of the debt. For
      these on balance sheet receivables, a provision for credit losses is recognized
      for probable losses.  There are no gains or losses recorded upon
      transfer and income is earned over the life of the assets
      transferred.





**Income
      Taxes**





Navistar
      and its domestic subsidiaries file a consolidated federal income tax return
      and
      both combined and separate state income tax returns.  We determine our
      provision for income taxes using the asset and liability approach for accounting
      for income taxes. Tax laws require certain items to be reported in tax filings
      at different times than the items are recognized in the consolidated financial
      statements. A current liability is recognized for the estimated taxes payable
      for the current year. Deferred income taxes represent the future consequences
      expected to occur when the reported amounts of assets and liabilities are
      recovered or paid. Deferred income taxes are adjusted for enacted changes in
      tax
      laws in the period such changes are enacted. Valuation allowances are recorded
      to reduce deferred tax assets when it is more likely than not that a tax benefit
      will not be realized. Realization is dependent on generating sufficient future
      taxable income; changes in estimates of future taxable income could affect
      future evaluations. We recognize an accrual for tax exposures for uncertain
      tax
      positions. Income taxes are computed under a tax sharing agreement between
      us
      and our parent as if we were a separate taxpayer, as are tax payments and
      realization of tax assets.





**Cash
      and Cash Equivalents**





Cash
      and
      cash equivalents are defined as short-term, highly liquid investments with
      original maturities of 90 days or less.





**Finance
      Receivables**





In
      December 2001, the Accounting Standards Executive Committee issued SOP 01-6,
      *Accounting by Certain Entities (Including Entities with Trade
      Receivables)**that Lend to or Finance the Activities of Others*. This
      SOP requires companies to report loans and trade receivables not held for sale
      on the balance sheet at outstanding principal adjusted for any charge offs,
      the
      allowance for losses, fees or costs on origination and any unamortized premiums
      or discounts on purchased loans. Loans held for sale are to be reported at
      the
      lower of cost or fair value. NFC’s retail notes, finance leases, retail accounts
      and wholesale accounts are not classified as held for sale, and are accounted
      for net of an allowance for losses.  Upon origination, wholesale notes
      are classified as held-for-sale and are valued at the lower of amortized cost
      or
      fair value on an aggregate basis. *Finance receivables from affiliates*
      include retail and wholesale notes. Our finance receivables consist of the
      following:





*Retail
      Notes**--*


Retail
      notes primarily consist of fixed rate loans to commercial customers to
      facilitate their purchase of new and used trucks, trailers and related
      equipment.  At acquisition, we record the retail notes at their gross
      value (principal and interest) and record, as a reduction to the gross value,
      the amount of unearned interest.   Revenue is recorded over the
      term of the note using the effective interest method.





33
 ***Index***




NAVISTAR
        FINANCIAL CORPORATION AND SUBSIDIARIES
  NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS


*Finance
      Leases --*


Finance
      leases consist of direct financing leases to commercial customers to facilitate
      their acquisition of new and used trucks, trailers and related
      equipment.  Finance leases are recorded at origination as gross
      finance receivable, unearned income and the guaranteed residual value of the
      leased equipment.  Unearned income represents the excess of the gross
      receivable, plus the guaranteed residual value over the cost of the equipment.
      Revenue is recorded over the term of the lease using the effective interest
      method.





*Wholesale
      Notes --*


Wholesale
      notes primarily consist of variable rate loans to International's dealers for
      the purchase of new and used trucks, trailers and related
      equipment.





*Retail
      Accounts --*


Retail
      accounts purchased from International consist of short term accounts receivables
      related to the sale of products to retail customers.





*Wholesale
      Accounts --*


Wholesale
      accounts purchased from International consist of short term accounts receivables
      primarily related to the sales of items other than trucks, trailers and related
      equipment (e.g. service parts) to International’s dealers.





**Allowance
      for Losses**





The
      loss
      allowance for finance receivables is established through a charge to the
      provision for credit losses.  The allowance is an estimate of the
      amount required to absorb probable losses on the existing portfolio of finance
      receivables that may become uncollectible.  Finance receivables are
      charged off to the *Allowance for losses* when amounts due from the
      customers are determined to be uncollectible.





Troubled
      loan accounts are specifically identified and segregated from the remaining
      owned loan portfolio. The expected loss on troubled accounts is fully reserved
      in a separate calculation as a specific reserve. A specific reserve is set
      up if
      the past due balance exceeds $1.0 million and it is believed that there is
      a
      greater than 50% likelihood that the account could be impaired, and if the
      value
      of the underlying collateral is less than the principal balance of the loan.
      We
      calculate a general reserve on the remaining loan portfolio using loss ratios
      based on a pool method by asset type:  retail notes and finance
      leases, retail accounts and wholesale accounts. Loss ratios are determined
      using
      historical loss experience in conjunction with current portfolio trends in
      delinquencies and repossession frequency for each receivable or asset
      type.





Under
      various agreements, International and its dealers may be liable for a portion
      of
      customer losses or may be required to repurchase the repossessed collateral
      at
      the receivable principal value.  The amount of losses we record in our
      provision for credit losses does not include any amount for receivables covered
      under these agreements. Allocation of the losses on the portfolio between us,
      International and dealers is generally dependent on the type of collateral
      being
      financed and loss sharing percentages established at date of
      financing.  International’s proportion of total losses is typically
      higher in poor economic conditions as NFC’s allocation for new trucks financed
      is limited and in poor economic conditions, recovery values, as a percent of
      note balances, are lower.





When
      we
      evaluate the adequacy of the *Allowance for losses,* several risk factors
      are considered for each type of receivable.  For retail notes, finance
      leases and retail accounts the primary risk factors are the general economy,
      fuel prices, type of freight being hauled, length of freight movements, number
      of competitors our customers have in their service territory, how extensively
      our customers use independent operators, profitability of owner operators and
      expected value of the underlying collateral.





34
 ***Index***




NAVISTAR
        FINANCIAL CORPORATION AND SUBSIDIARIES
  NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS




In
      order
      to establish a specific reserve in the loss allowance for finance receivables,
      we look at many of the same factors listed above but also consider the financial
      strength of the customer or dealer and key management, the timeliness of
      payments, the number and location of satellite locations especially for the
      dealer, the number of dealers of competitor manufacturers in the market area,
      type of equipment normally financed (over the road or local use/delivery
      vehicles) and the seasonality
      of the business (e.g.. primarily a bus dealer). We may continue to collect
      payments on accounts with specific reserves as the amount of the reserve is
      reviewed at least quarterly.





**Net
      Investment in Operating Leases**





We
      have
      investments in trucks, tractors and trailers that are leased to customers under
      operating lease agreements.   These vehicles are depreciated on a
      straight-line basis over the term of the lease in an amount necessary to reduce
      the leased asset to its estimated residual value at the end of the lease
      term.  The residual values of the equipment represent estimates of the
      values of the assets at the end of the lease contracts and are initially
      recorded based on estimates of future market values.  Realization of
      the residual values is dependent on our future ability to market the vehicles
      under then prevailing conditions. We review residual values periodically to
      determine that recorded amounts are appropriate and the equipment on operating
      lease assets has not been impaired.  If the value of the equipment has
      declined the carrying value is reduced and charged to *Other
      expenses*.





**Vehicle
      Inventory**





Losses
      arising from the repossession of collateral supporting finance receivables
      and
      operating leases are recognized upon repossession and charged to the
*Allowance for losses* account.  We recognize repossessed
      assets at the lower of historical cost or fair value, less estimated costs
      to
      sell, and reclassify them from *Finance receivables* or *Net
      investment in operating leases* to *Vehicle inventory*. Once the
      repossessed assets are sold, the additional losses or gains, if any, are charged
      to *Other expenses.*





**Restricted
      Cash and Cash Equivalents**





*Restricted
      cash and cash equivalents* are primarily those held in designated bank
      accounts for our securitization facilities which are accounted for as secured
      borrowings. These amounts are used to pay interest expense, principal, or other
      amounts in accordance with the related securitization agreements.





The
      proceeds from the $500.0 million senior and subordinated floating rate
      asset-backed notes, issued by TRIP, finance a revolving retail warehouse
      facility to fund our retail notes and finance leases. NFC is required to
      maintain the revolving retail warehouse facility with collateral in the amount
      of $500.0 million.  In the event that retail note and lease balances
      pledged to the revolving retail warehouse facility fall below $500.0 million,
      the excess proceeds are invested in money market funds with maturities of three
      months or less.  The carrying value of these short-term marketable
      securities approximates their fair value. The excess proceeds for TRIP reported
      in *Restricted cash and cash equivalents* for October 31, 2005, was
      $267.4 million. There were no excess proceeds for TRIP as of October 31,
      2004.  Interest income on short-term marketable securities which are
      restricted for on balance sheet securitizations are included in *Other
      revenues*.





**Pension
      and Postretirement Benefits**





We
      use
      various actuarial methods and assumptions to account for our defined benefit
      pension plans and our postretirement benefit plans.  Pension and
      postretirement benefit expense includes the actuarially computed cost of
      benefits earned during the current service period, the interest cost on accrued
      obligations, the expected return on plan assets are based on fair market value
      and the straight-line amortization of net actuarial gains and losses due to
      plan
      amendments.  Net actuarial gains and losses are generally amortized
      over the expected average remaining service lives of the employees.










35
 ***Index***




NAVISTAR
        FINANCIAL CORPORATION AND SUBSIDIARIES
  NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS


Derivative Financial Instruments




We
      recognize all derivatives as assets or liabilities in the consolidated
      statements of financial condition and measure them at fair value in accordance
      with SFAS No. 133, *Accounting for Derivative Instruments and Hedging
      Activities*, as amended.  When certain criteria are met, the
      timing of gain or loss recognition on the derivative instrument is matched
      with
      the recognition of (a) the changes in the fair value or cash flows of the hedged
      asset or liability attributable to the hedged risk or (b) the earnings effect
      of
      the hedged forecasted transaction.Our policy prohibits
      the
      use of derivative financial instruments for speculative purposes.  We
      use derivative financial instruments to reduce our exposure to interest rate
      volatility. We may use forward starting swap or cap contracts to limit interest
      rate risk exposure on the notes and certificates related to an expected sale
      of
      receivables.  We may use interest rate swaps or caps to reduce
      exposure to interest rate changes when we sell
      fixed rate receivables on a variable rate basis. 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 if market conditions or
      interest rates change. We do not use hedge accounting for any swaps or caps
      under SFAS No. 133, thus changes in fair value of these instruments are
      recognized in*Derivative expense (income)*.





We
      recorded and bifurcated an embedded derivative that was a key component to
      the
      issuance of Exchangeable Notes in 2002.  The fair value of this
      derivative was determined at inception and subsequent changes in fair value
      each
      period from inception until the debt was assumed by Navistar in 2004 were
      charged to *Derivative expense (income)*.





**New
      Accounting Pronouncements**





The
      following is a summary of the accounting pronouncements effective after October
      31, 2005, and their potential impact on us.





**SAB
      109** - In November 2007 the Staff of the SEC issued
      SAB No. 109,***Written Loan Commitments Recorded at
      Fair Value through Earnings.*SAB No. 109 provides guidance on the
      consideration of expected net future cash flows related to the servicing of
      written loan commitments that are accounted for at fair value.
      SAB No. 109 is effective for first fiscal quarter beginning after
      December 15, 2007. We will adopt SAB No. 109 as of February 1, 2008.
      We are currently evaluating if adoption of SAB No. 109 will have an impact
      on
      our consolidated financial condition, results of operations and cash
      flows.





**SFAS 159**
      - In February 2007, the FASB issued Statement of Financial Accounting Standards
      No. 159 (SFAS 159),*The Fair Value Option for Financial Assets and Financial
      Liabilities,* which provides companies with an option to report selected
      financial assets and liabilities at fair value. The new standard requires
      entities to display the fair value of those assets and liabilities for which
      the
      company has chosen to use fair value on the face of the balance
      sheet.**SFAS No. 159 is effective as of the beginning of an
      entity’s first fiscal year beginning after November 15, 2007; this would be
      fiscal 2009 for us.  We have not yet commenced evaluating the
      potential impact, if any, of the adoption of SFAS No. 159 on our
      consolidated financial condition, results of operations, and cash flows.





**SAB 108**
      - In September 2006, the Staff of the SEC issued SAB No. 108,*Considering the Effects of Prior-Year Misstatements when Quantifying
      Misstatements in Current Year Financial
      Statements.*  SAB No. 108 provides guidance on the
      consideration of the effects of prior year misstatements in quantifying current
      year misstatements. SAB No. 108 is effective for fiscal years ending
      after November 15, 2006. We will adopt SAB No. 108 as of
      October 31, 2007. However, because of the restatement of previously issued
      financial statements we believe the adoption of SAB No. 108 should not
      have a material impact on our consolidated financial condition, results of
      operations and cash flows.




**SFAS
      158** - In September 2006, the FASB issued SFAS No. 158, *Employers’
Accounting for Defined Benefit Pension and Other Postretirement
      Plans*,  which requires a company that sponsors one or more
      single-employer defined benefit pension and other postretirement benefit plans
      (benefit plans) to recognize in its balance sheet the funded status of a benefit
      plan. SFAS No. 158 requires prospective application and the
      recognition and disclosure requirements are effective for fiscal years ending
      after December 15, 2006, our fiscal 2007. We will adopt the provisions of
      SFAS No. 158 in fiscal 2007.  Based on the funded status of our
      pension and postretirement plans as of October 31, 2005, we believe the adoption
      of SFAS No. 158 would increase our postretirement benefits liability by $4.4
      million, decrease *Total assets* by $6.1 million and decrease
*Shareowner’s equity* by $10.5 million on the consolidated balance
      sheet.





36
 ***Index***




NAVISTAR
        FINANCIAL CORPORATION AND SUBSIDIARIES
  NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS




In
      addition, SFAS No. 158 requires that a company measure defined benefit plan
      assets and obligations at its year-end balance sheet date. We currently use
      our
      year-end balance sheet date as our measurement date, and as a result, this
      new
      requirement does not affect us.





**SFAS****157**
      - In September 2006, the FASB issued SFAS No. 157,*Fair Value
      Measurements*, which defines fair value, establishes a framework for
      measuring fair value under GAAP, and expands disclosures about fair value
      measurements. The new guidance is effective for financial statements issued
      for
      fiscal years beginning after November 15, 2007, our fiscal 2009 and
      for
      interim periods within those fiscal years. We are currently evaluating the
      potential impact, if any, of the adoption of SFAS No. 157 on our
      consolidated financial condition, results of operations and cash
      flows.




**FASB****Interpretation
      No.****48** - In June 2006, the FASB issued FASB
      Interpretation No. 48,*Accounting for Uncertainty in Income Taxes,*
      which is effective for fiscal years beginning after December 15, 2006. FASB
      Interpretation No. 48 clarifies the accounting for uncertainty in income
      taxes recognized in the financial statements by prescribing a recognition
      threshold and measurement attribute for the financial statement recognition
      and
      measurement of a tax position taken or expected to be taken in a tax return.
      FASB Interpretation No. 48 also provides guidance on de-recognition,
      classification, interest and penalties, accounting in interim periods,
      disclosure, and transition. We will adopt the provisions of FASB Interpretation
      No. 48 effective November 1, 2007, however, we are still evaluating
      the potential impact, if any, of the adoption on our consolidated financial
      condition, results of operations, and cash flows.





**S****FAS****156**
      - In March 2006, the FASB issued SFAS No. 156, *Accounting for Servicing
      of Financial Assets,* which changes the accounting for all loan servicing
      rights which are recorded as the result of selling a loan where the seller
      undertakes an obligation to service the loan, usually in exchange for
      compensation. The Statement amends current accounting guidance by permitting
      the
      servicing right to be recorded initially at fair value and also permits the
      subsequent reporting of these assets at fair value. SFAS No. 156 is effective
      as
      of the beginning of a company’s first fiscal year that begins after September
      15, 2006. We adopted SFAS No. 156 on November 1, 2006, and it did
      not have a material effect on our financial condition, results of operations,
      or
      cash flows.





**SFAS
      155** - In February 2006, the FASB issued SFAS No. 155,
*Accounting for Certain Hybrid Instruments.*  The Statement provides
      companies with relief from having to separately determine the fair value of
      an
      embedded derivative that would otherwise be required to be bifurcated from
      its
      host contract in accordance with SFAS No.133, *Accounting for Derivatives and
      Hedging Activities.* SFAS No. 155 allows a company to make an
      irrevocable election to measure such a hybrid financial instrument at fair
      value
      in its entirety, with changes in fair value recognized in earnings.  The
      Statement is effective for all financial instruments acquired, issued or subject
      to a re-measurement event occurring after the beginning of a company's first
      fiscal year that begins after September 15, 2006.  We
      adopted SFAS No. 155 on November 1, 2006, and it did not have a
      material effect on our financial condition, results of operations, or cash
      flows.





**S****FAS****154** - In May 2005, the FASB issued SFAS No.154,*Accounting Changes and Error Corrections.* This Statement replaces APB
      Opinion No. 20,*Accounting Changes,* and SFAS No.
      3,***Reporting Accounting Changes in Interim Financial
      Statements,* and changes the requirements for the accounting for and
      reporting of a change in accounting principle. The new standard requires
      retrospective application to prior periods’ financial statements of a voluntary
      change in accounting principle, unless it is impracticable. SFAS No. 154 is
      effective for accounting changes and corrections of errors made in fiscal years
      beginning after December 15, 2005. Earlier application is permitted for
      accounting changes and corrections of errors made occurring in fiscal years
      beginning after June 1, 2005. The Statement does not change the transition
      provisions of any existing accounting pronouncements, including those that
      are
      in a transition phase as of the effective date of this Statement.





37
 ***Index***




NAVISTAR
        FINANCIAL CORPORATION AND SUBSIDIARIES
  NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS




**FASB****Interpretation No.****47** - In March
      2005, the FASB issued FASB Interpretation No. 47,*Accounting for Conditional
      Asset Retirement Obligations*. FASB Interpretation No. 47 clarifies that the
      term “conditional asset retirement obligation,” as used in SFAS Statement No.
      143, *Accounting for Asset Retirement Obligations*, refers to a legal
      obligation to perform an asset retirement activity in which the timing and/or
      method of settlement are conditional on a future event that may or may not
      be
      within the control of the entity. FASB Interpretation No. 47 is effective no
      later than the end of fiscal years ending after December 15,
      2005.  NFC does not have any such asset retirement obligations at this
      time and, as a result, we do not expect that this Interpretation will have
      an
      impact on our consolidated financial condition, results of operations and cash
      flows.





**S****FAS****153** - In December 2004, the FASB issued SFAS No. 153,*Exchange of
      Nonmonetary Assets,* which amends APB Opinion No. 29,*Accounting for
      Nonmonetary Transactions.*  This Statement eliminates the
      exception to fair value in APB Opinion No. 29 for exchanges of similar
      productive assets and replaces it with a general exception for exchanges that
      do
      not have commercial substance. This Statement is effective for nonmonetary
      asset
      exchanges occurring in fiscal periods beginning after June 15, 2005. The
      application of this Statement did not have an impact on our consolidated
      financial condition or results of operations considering our intermittent
      participation in exchanges of nonmonetary assets.





We
      have
      determined that all other recently issued accounting pronouncements will not
      have a material impact on our consolidated financial condition, results of
      operations or cash flows.








**2.
      RESTATEMENT OF PREVIOUSLY ISSUED CONSOLIDATED FINANCIAL
      STATEMENTS**





In
      January 2006, we announced the delay in filing our Annual Report on Form 10-K
      for the year ended October 31, 2005 until NFC and Navistar resolved a number
      of
      complex and technical accounting issues. On November 8, 2006, NFC announced
      that
      its previously issued consolidated financial statements for the years ended
      October 31, 2002 through 2004 and all issued quarterly financial statements
      for
      all periods after November 1, 2002 should no longer be relied upon because
      of
      errors in such financial statements.





Since
      January 2006, as a result of the identification of such errors, NFC and Navistar
      have undertaken a comprehensive review of our previously filed consolidated
      financial statements. We identified numerous matters requiring restatement
      or
      reclassification, including:





Retail
      securitizations


Lease
      transactions


Retained
      interest
      valuation


Exchangeable
      debt
      derivative


Postretirement
      benefits


Income
      taxes


Other miscellaneous adjustments





As
      a
      result of the comprehensive review, we have restated our previously reported
      consolidated financial statements for the years ended October 31, 2004 and
      2003.
      The restatement adjustments resulted in a cumulative net increase to
*Shareowner’s equity* of $8.3 million as of October 31, 2004, and an
      increase (reduction) in previously reported net income by $13.4 million and
      $(15.4) million for the years ended October 31, 2004 and 2003, respectively.
      We
      also increased our November 1, 2002 opening *Retained earnings* by $56.4
      million, reduced *Paid**-**in capital* by $50.5 million and
      increased *Accumulated other comprehensive loss* (net of tax) by
      $12.4 million to recognize corrected items that relate to prior periods. Except
      as otherwise specified, all information presented in the accompanying
      consolidated financial statements and the related notes are presented after
      inclusion of all such restatement adjustments.





38
 ***Index***




NAVISTAR
        FINANCIAL CORPORATION AND SUBSIDIARIES
  NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS




The
      following table summarizes the effects of the restatement adjustments on revenue
      and *Income before taxes* in our consolidated statements of income for
      the years ended October 31 (in millions):


2004
            
            
            2003Revenue
            
            
            Income
                before taxes
            
            
            Revenue
            
            
            Income
                before taxesPreviously
                Reported
            
            $
            239.1
            
            
            $
            102.3
            
            
            $
            262.5
            
            
            $
            98.8Retail
                securitizations
            
            
            67.3
            
            
            
            4.5
            
            
            
            56.4
            
            
            
            (28.2
            )Lease
                transactions
            
            
            5.4
            
            
            
            0.5
            
            
            
            6.2
            
            
            
            0.3Retained
                interest valuation
            
            
            (0.9
            )
            
            
            (0.9
            )
            
            
            2.9
            
            
            
            2.9Exchangeable
                debt derivative
            
            
            -
            
            
            
            10.3
            
            
            
            -
            
            
            
            (3.3
            )Postretirement
                benefits
            
            
            -
            
            
            
            (1.4
            )
            
            
            -
            
            
            
            0.4Other
                miscellaneous adjustments
            
            
            1.7
            
            
            
            (1.6
            )
            
            
            0.1
            
            
            
            0.8Total
                adjustments
            
            
            73.5
            
            
            
            11.4
            
            
            
            65.6
            
            
            
            (27.1
            )Restated
            
            $
            312.6
            
            
            $
            113.7
            
            
            $
            328.1
            
            
            $
            71.7








The
      following table summarizes the cumulative effects of the restatement adjustments
      on components of *Shareowner’s Equity* as of October 31, 2002 (in
      millions):





Retained
                earnings
            
            
            Accumulated
                other comprehensive loss (net of tax)
            
            
            Paid-in
                capitalPreviously
                Reported
            
            $
            179.4
            
            
            $
            4.6
            
            
            $
            169.4Retail
                securitizations
            
            
            11.5
            
            
            
            (6.5
            )
            
            
            -Lease
                transactions
            
            
            (0.8
            )
            
            
            -
            
            
            
            -Retained
                interest valuation
            
            
            (3.5
            )
            
            
            -
            
            
            
            -Exchangeable
                debt derivative
            
            
            34.6
            
            
            
            -
            
            
            
            (50.5
            )Postretirement
                benefits
            
            
            (1.0
            )
            
            
            (5.9
            )
            
            
            -Income
                Taxes
            
            
            12.6
            
            
            
            -
            
            
            
            -Other
                miscellaneous adjustments
            
            
            3.0
            
            
            
            -
            
            
            
            -Total
                adjustments
            
            
            56.4
            
            
            
            (12.4
            )
            
            
            (50.5
            )Restated
            
            $
            235.8
            
            
            $
            (7.8
            )
            
            $
            118.9





A
      description of the significant components of our restatement adjustments and
      their impact on line items in our consolidated statements of financial condition
      and consolidated statements of income follows. The errors described within
      each
      restatement category represent the most significant items impacting the
      restatement of our consolidated statements of financial condition, consolidated
      statements of income and consolidated statements of cash flow.





39
 ***Index***




NAVISTAR
        FINANCIAL CORPORATION AND SUBSIDIARIES
  NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS




*Retail
      Securitizations*





During
      the restatement process, we determined that there existed an element of
      effective control over certain transferred assets underlying retail
      securitizations and as such these receivables did not meet the requirements
      for
      sale accounting treatment under paragraph 9 (c) of SFAS No. 140.  As a
      result, we have recorded the assets (note and lease receivables net of allowance
      for loss) and liabilities (secured borrowings) related to certain transfers
      of
      assets, reversed the associated gains or losses previously recognized and
      recorded interest income and interest expense, and provision for credit
      losses.  The impact was an increase in both assets and debt on the
      consolidated statement of financial condition as of October 31, 2004, in the
      amount of $2.0 billion, an increase in *Income before taxes* of $4.5
      million for the year ended October 31, 2004, and a decrease in *Income before
      taxes* of $28.2 million for the year ended October 31, 2003.





*Lease
      classification*





We
      corrected the classification of a lease financing transaction entered into
      in
      fiscal 2000. The result of this correction was an increase in *Net investment
      in operating leases*, net of accumulated depreciation, and an increase in
      the capital lease obligation during fiscal 2000. We then recognized operating
      lease revenue and depreciation and interest expenses during the remaining life
      of the transaction through fiscal 2003 and 2004. The transaction terminated
      in
      2004.





*Retained
      Interest Valuation*





We
      determined that retained interests in certain retail accounts securitization
      facilities and wholesale note securitizations should be reported at fair value
      in accordance with SFAS No. 140 as opposed to allocated cost. Gains and losses
      are included in *Securitization income*.





*Exchangeable
      Debt Derivative*





When
      the
      Exchangeable Notes (“E Notes”) were originally issued in 2002, NFC recorded
      Unamortized Debt Discount of $50.5 million and debt issuance costs of $5.5
      million.  We did not record the embedded conversion feature which
      permitted the holders of the E Notes to convert the E Notes into Navistar shares
      upon exchange. We determined that the conversion option held by the holders
      was
      an embedded derivative that required bifurcation.  A third party was
      engaged to calculate the fair value of the derivative and we recorded the
      derivative, upon issuance of the debt, at its fair value of $61.5
      million.  NFC also adjusted the previously recorded debt discount
      accretion from issuance in March 2002 through the date of assumption by Navistar
      in June 2004 to reflect this new value. The assumption by Navistar was effective
      as of May 28, 2004, with settlement in June.  The changes in fair
      value from March 2002 through May 2004 were calculated by the third party and
      we
      recorded the changes in fair value in *Derivative expense
      (income).*





Initially
      a $50.5 million payment to Navistar on the date of issuance was considered
      to be
      the purchase of a call option and amortized. Upon subsequent review of the
      legal
      documents and discussions with counsel, management determined that the $50.5
      million should not be classified as the purchase of a call option as no legal
      contract existed between NFC and Navistar. Since there was no legal contract,
      the payment to Navistar has been reflected as a capital transaction separately
      from the issuance of the E Notes and reflected as a reduction in *Paid-in
      capital* in 2002.





When
      the
      E Notes were assumed by Navistar, the difference between the cash paid to
      Navistar of $170.0 million and the carrying value of the debt of $173.1 million
      and the fair value of the embedded derivative was credited to *Paid-in
      capital* in the amount of $20.7 million compared to $11.9 million which was
      previously recorded.





40
 ***Index***




NAVISTAR
        FINANCIAL CORPORATION AND SUBSIDIARIES
  NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS




*Postretirement
      benefits*





We
      recorded restatement adjustments for pension and other post-employment benefits
      to correct pension expense, *Other liabilities* and *Accumulated other
      comprehensive loss* representing the impact on our consolidated financial
      statements for adjustments to Navistar administered plans. The adjustments
      related primarily to the selection of discount rates and the amortization
      periods for unrecognized gains and losses.





*Income
      Taxes*





We
      recorded adjustments to reflect the tax impact of the restatement of our
      consolidated financial statements which included a decrease in *Retained
      earnings* at October 31, 2002 of $2.0 million.  Additionally, as
      of October 31, 2002, such tax adjustments of $14.6 million were made to correct
      previously established contingent tax reserves which increased retained
      earnings.





*Other
      Miscellaneous Adjustments*





We
      also
      recorded other miscellaneous restatement adjustments generally representing
      the
      impact on our consolidated financial statements for errors in incentive
      accruals, intercompany transactions, and account reconciliations.





*Reclassifications*





The
      amount of outstanding checks drawn on controlled disbursement accounts were
      reclassified from C*ash and cash equivalents* to O*ther
      liabilities* since the corresponding funds are not made available until the
      checks are presented for payment.  As of October 31, 2004, the
      reclassified amount was $12.4 million.





The
      following amounts previously reported in *Wholesale notes interest* and
*Accounts revenue* relating to securitizations**are now
      reported in *Securitization income*(in millions):





2004
            
            
            2003Wholesale
                notes interest
            
            $
            32.5
            
            
            $
            30.9Accounts
                revenue
            
            
            18.1
            
            
            
            12.9





41
 ***Index***




NAVISTAR
        FINANCIAL CORPORATION AND SUBSIDIARIES
  NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS





The
      following tables summarize the effects of the restatement adjustments,
      previously discussed, on the consolidated statements of income items for the
      years ended October 31 (in millions):





2004
            
            Previously
              Reported
            
            
            Adjustment
            
            
            RestatedRetail
                notes and finance lease revenue
            
            $
            51.0
            
            
            $
            129.9
            
            
            $
            180.9Operating
                leases revenue
            
            
            51.2
            
            
            
            6.6
            
            
            
            57.8Wholesale
                notes interest
            
            
            33.5
            
            
            
            (25.0
            )
            
            
            8.5Retail
                and wholesale accounts interest
            
            
            22.4
            
            
            
            (18.2
            )
            
            
            4.2Securitization
                income
            
            
            80.9
            
            
            
            (26.5
            )
            
            
            54.4Other
                revenues
            
            
            3.5
            
            
            
            3.3
            
            
            
            6.8Cost
                of borrowing
            
            
            48.7
            
            
            
            62.3
            
            
            
            111.0Credit,
                collections and administrative
            
            
            39.8
            
            
            
            0.9
            
            
            
            40.7Provision
                for credit losses
            
            
            8.2
            
            
            
            (0.4
            )
            
            
            7.8Depreciation
                on operating leases
            
            
            38.1
            
            
            
            4.3
            
            
            
            42.4Derivative
                expense (income)
            
            
            3.4
            
            
            
            (9.7
            )
            
            
            (6.3
            )Other
                expenses
            
            
            2.0
            
            
            
            1.3
            
            
            
            3.3Income
                before taxes
            
            
            102.3
            
            
            
            11.4
            
            
            
            113.7Income
                tax expense from continuing operations
            
            
            41.2
            
            
            
            (2.0
            )
            
            
            39.2Loss
                on disposal of discontinued operations, net of tax
            
            
            -
            
            
            
            -
            
            
            
            -Net
                income
            
            
            61.1
            
            
            
            13.4
            
            
            
            74.5Comprehensive
                income
            
            
            59.3
            
            
            
            14.0
            
            
            
            73.3






2003
            
            Previously
              Reported
            
            
            Adjustment
            
            
            RestatedRetail
                notes and finance lease revenue
            
            $
            60.3
            
            
            $
            131.3
            
            
            $
            191.6Operating
                leases revenue
            
            
            64.5
            
            
            
            3.8
            
            
            
            68.3Wholesale
                notes interest
            
            
            31.0
            
            
            
            (24.3
            )
            
            
            6.7Retail
                and wholesale accounts interest
            
            
            17.7
            
            
            
            (12.9
            )
            
            
            4.8Securitization
                income
            
            
            92.3
            
            
            
            (45.2
            )
            
            
            47.1Other
                revenue
            
            
            5.4
            
            
            
            4.2
            
            
            
            9.6Cost
                of borrowing
            
            
            57.5
            
            
            
            77.7
            
            
            
            135.2Credit,
                collections and administrative
            
            
            41.2
            
            
            
            0.1
            
            
            
            41.3Provision
                for credit losses
            
            
            15.8
            
            
            
            (2.9
            )
            
            
            12.9Depreciation
                on operating leases
            
            
            45.0
            
            
            
            4.8
            
            
            
            49.8Derivative
                expense (income)
            
            
            8.7
            
            
            
            5.1
            
            
            
            13.8Other
                expenses
            
            
            4.2
            
            
            
            (0.8
            )
            
            
            3.4Income
                before taxes
            
            
            98.8
            
            
            
            (27.1
            )
            
            
            71.7Income
                tax expense from continuing operations
            
            
            40.9
            
            
            
            (11.7
            )
            
            
            29.2Loss
                on disposal of discontinued operations, net of tax
            
            
            (2.4
            )
            
            
            -
            
            
            
            (2.4
            )Net
                income
            
            
            55.5
            
            
            
            (15.4
            )
            
            
            40.1Comprehensive
                income
            
            
            47.4
            
            
            
            (8.0
            )
            
            
            39.4





Revenue
      amounts previously reported under *Income related to sales of finance
      receivables* and *Servicing income* have been combined with
*Securitization income* to conform to the current presentation. Amounts
      currently presented under *Derivative expense (income)* were previously
      reported as a component of *Retail notes and finance lease revenue*. The
      tax effect of the restatement adjustments for the year ended October 31, 2004
      was offset by a reduction of state tax liabilities. For the year ended October
      31, 2003, the tax effect relates solely to the restatement
      adjustments.





42
 ***Index***




NAVISTAR
        FINANCIAL CORPORATION AND SUBSIDIARIES
  NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS





The
      following table summarizes the effects of the restatement adjustments,
      previously discussed, on the consolidated statement of financial condition
      items
      as of October 31, 2004 (in millions):





Previously
              Reported
            
            
            Adjustment
            
            
            RestatedCash
                and cash equivalents
            
            $
            10.4
            
            
            $
            12.4
            
            
            $
            22.8Finance
                receivables, net
            
            
            1,269.1
            
            
            
            1,751.6
            
            
            
            3,020.7Amounts
                due from sale of receivables
            
            
            383.4
            
            
            
            27.3
            
            
            
            410.7Net
                investment in operating leases
            
            
            148.9
            
            
            
            3.0
            
            
            
            151.9Vehicle
                inventory
            
            
            20.5
            
            
            
            6.1
            
            
            
            26.6Restricted
                cash and cash equivalents
            
            
            63.0
            
            
            
            211.6
            
            
            
            274.6Other
                assets
            
            
            13.0
            
            
            
            25.1
            
            
            
            38.1Total
                assets
            
            
            1,908.3
            
            
            
            2,037.1
            
            
            
            3,945.4Net
                accountsdue to affiliates
            
            
            43.5
            
            
            
            24.8
            
            
            
            68.3Senior
                and subordinated debt
            
            
            1,325.2
            
            
            
            1,994.2
            
            
            
            3,319.4Other
                liabilities
            
            
            116.0
            
            
            
            9.8
            
            
            
            125.8Total
                liabilities
            
            
            1,484.7
            
            
            
            2,028.8
            
            
            
            3,513.5Capital
                stock
            
            
            1.6
            
            
            
            -
            
            
            
            1.6Paid-in
                capital
            
            
            181.3
            
            
            
            (41.7
            )
            
            
            139.6Retained
                earnings
            
            
            246.0
            
            
            
            54.4
            
            
            
            300.4Accumulated
                other comprehensive loss
            
            
            (5.3
            )
            
            
            (4.4
            )
            
            
            (9.7
            )Total
                shareowner’s equity
            
            
            423.6
            
            
            
            8.3
            
            
            
            431.9




Amounts
      currently presented under *Vehicle inventory* were previously reported as
      a component of *Other assets*.








The
      following table summarizes the impact of the restatement on the *Shareowner’s
      equity* as of October 31 (in millions):





2004
            
            
            2003Ending
                shareowner’s equity, as previously reported
            
            $
            423.6
            
            
            $
            352.4Effect
                of restatement adjustments on net income for the current
                period
            
            
            13.4
            
            
            
            (15.4
            )Cumulative
                adjustments to paid- in capital
            
            
            (41.7
            )
            
            
            (50.5
            )Cumulative
                prior period adjustments to retained earnings
            
            
            41.0
            
            
            
            56.4Cumulative
                adjustments to accumulated other comprehensive loss
            
            
            (4.4
            )
            
            
            (5.0
            )Shareowner’s
                equity as restated
            
            $
            431.9
            
            
            $
            337.9




43
 ***Index***


NAVISTAR
          FINANCIAL CORPORATION AND SUBSIDIARIES
 
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
  The
          following table summarizes the effects of the restatement adjustments on
          selected consolidated statements of cash flows items for the years ended
          October
          31 (in millions):
 
 2004
                
                
                2003Previously
                    Reported
                
                
                Restated
                
                
                Previously
                    Reported
                
                
                RestatedNet
                    cash provided by ( used in) operating activities
                
                $
                94.9
                
                
                $
                (148.9
                )
                
                $
                38.2
                
                
                $
                237.8Net
                    cash provided by (used in) investing activities
                
                
                43.9
                
                
                
                583.9
                
                
                
                86.0
                
                
                
                (792.8
                )Net
                    cash (used in) provided by financing activities
                
                
                (128.4
                )
                
                
                (426.2
                )
                
                
                (156.2
                )
                
                
                533.6
 
 The
          change in net cash related to operating activities is related primarily
          to the
          change in*Amounts due from sales of
          receivables.*  Historically this change had been shown in the
*Cash flow from investing activities* section but has now been reflected
          in the *Cash flow from operating activities* section.  This
          change and, the balance of this line item have changed significantly as
          a result
          of the correction of accounting for retail securitizations.
 
 The
          changes in net cash related to investing activities and net cash related
          to
          financing activities are related primarily to the correction of accounting
          for
          retail note and finance lease securitizations.  Since these
          transactions are now accounted for as secured borrowings, the proceeds from the
          initial securitizations are shown in the financing section instead of the
          investing section and the securitized debt payments are included in the
          financing section.  Previously, the debt payments were considered in
          the calculation of the A*mounts due from sales of
          receivables*.
 
 **3.
          TRANSACTIONS WITH AFFILIATED COMPANIES**
 
 ***Wholesale
          Notes, Wholesale Accounts and Retail Accounts***
 
 In
          accordance with the agreements between NFC and International relating to
          financing of wholesale notes, wholesale accounts and retail accounts, NFC
          receives interest income from International at prevailing market rates
          applied
          to the average outstanding balances less interest amounts paid by dealers
          on
          wholesale notes. Substantially all revenues earned on wholesale accounts
          and
          retail accounts are received from International.  Receivables
          purchased by NFC from International for the years ended October 31, 2005,
          2004,
          2003, were $6.6 billion, $5.4 billion and $4.0 billion, respectively. Aggregate
          interest revenue from International was $89.6 million in 2005, $57.7 million
          in
          2004 and $47.3 million, in 2003.  The interest revenues are reported
          as components of *Retail notes and finance lease revenue, Securitization
          income,**Wholesale notes interest*and*Retail and wholesale
          accounts interest* on the consolidated statements of income.
 
 ***Finance
          Receivables and Operating Leases***
 
 In
          accordance with agreements between NFC and International, International
          may be
          liable for certain losses on finance receivables and investments in equipment
          on
          operating leases and may be required to repurchase the repossessed collateral
          at
          the receivable principal value.  Losses recorded by International on
          vehicles financed by NFC were $3.4 million in 2005, $4.6 million in 2004
          and
          $14.1 million in 2003 .
 
 ***Support
          Agreements***
 
 Under
          provisions of certain public and private financing arrangements and agreements,
          International and Navistar must make income maintenance payments if NFC’s
          consolidated income before interest expense and income taxes is less than
125.0%
          of
          its consolidated interest expense.  No income maintenance payments
          were required during the years ended October 31, 2005, 2004,
          2003.
  44
 ***Index***
  NAVISTAR
          FINANCIAL CORPORATION AND SUBSIDIARIES
 
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
  ***Administrative
          Expenses***
 
 NFC
          pays
          a fee to International for data processing and other administrative services
          based on the cost of actual services performed.  The amount of the fee
          was $2.1 million, $1.9 million, and $1.9 million for the years ended October
          31,
          2005, 2004 and 2003, respectively.  The fee is reported in *Credit,
          collection and administrative* expenses on the consolidated statements of
          income.
 
 ***Assumption
          of Debt***
 
 We
          issued
          $220.0 million of 4.75% Exchangeable Notes due 2009 in March 2002. At the
          same
          time we recorded a liability related to the embedded derivative created
          by the
          conversion option which allowed the note holders to convert the notes into
          shares of Navistar upon exchange.  This liability was valued at $61.5
          million as of the note issuance date.  A key feature of these notes
          was the ability of Navistar to assume them at Navistar’s discretion. Navistar
          exercised this right effective May 28, 2004. The difference between the
          cash
          paid to Navistar of $170.0 million and the carrying value of the debt of
          $173.1
          million and the fair value of the embedded derivative was credited to
*Paid-in capital* in the amount of $20.7 million. The terms of the
          assumption resulted in a legal extinguishment of debt for NFC. The change
          in
          fair value of the embedded derivative recorded in *Derivative expense
          (income)* for the years ended October 31, 2004 and 2003 was $(11.0) million
          and $2.3 million, respectively.
 
 ***Finance
          Receivables from Affiliates***
 
 Navistar
          has significant ownership interest, or is primary beneficiary of variable
          interest entities related to certain Dealcor dealers (“Dealcor” dealers) at
          October 31, 2005 and 2004. These dealers’ operations are consolidated with
          Navistar.  Other than being owned by Navistar, Dealcor dealers
          function and are treated on par with non-owned independent dealers. Total
          revenue in our consolidated statements of income includes revenue from
          Dealcor
          dealers of $10.7 million, $6.8 million and $5.0 million for the years ended
          October 31, 2005, 2004 and 2003, respectively. Included in our consolidated
          statements of financial condition are the following amounts due to or due
          from
          affiliates as of October 31, (in millions):
 
 **2005**
                
                
                2004
                    (Restated)Finance
                    receivables from affiliates (Dealcor retail)
                
                **$**
                **154.9**
                
                
                $
                102.2Finance
                    receivables from affiliates (Dealcor wholesale)
                
                ****
                **29.8**
                
                
                
                54.3Net
                    accounts due from affiliates
                
                ****
                **29.7**
                
                
                
                -Net
                    accounts due to affiliates
                
                ****
                **-**
                
                
                
                68.3
 
 
 **4.  DISCONTINUED
          OPERATIONS**
 
 On
          November 30, 2001, NFC completed the sale of all of the stock of Harco
          National
          Insurance Company ("Harco"), a wholly-owned insurance subsidiary, to IAT
          Reinsurance Syndicate Ltd. (“IAT”), a Bermuda reinsurance company. The Harco
          insurance segment was accounted for as a discontinued operation, and
          accordingly, amounts in the consolidated financial statements and notes
          thereto,
          for all periods affected reflect discontinued operations accounting. As
          part of
          the sales agreement with IAT, NFC agreed to guarantee the adequacy of Harco's
          loss reserves. During fiscal 2006, all required payments were made and
          the
          guarantee was terminated. NFC has provided disclosures about this guarantee
          in
          Note 12, *Commitments and Contingencies*. The loss on disposal of $2.4
          million recorded in the consolidated statement of income for the year ended
          October 31, 2003, represents payments made under the guarantee of $3.9
          million,
          less the related deferred tax benefit of $1.5 million.
  45
 ***Index***
  NAVISTAR
          FINANCIAL CORPORATION AND SUBSIDIARIES
 
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
  **5.
          FINANCE RECEIVABLES**
 
 ***Concentration
          of credit risk***
 
 Our
          primary business is to provide wholesale, retail and lease financing for
          new and
          used trucks sold by International and International’s dealers, and as a result,
          our receivables and leases have significant concentration in the trucking
          industry.  On a geographic basis, there is not a disproportionate
          concentration of credit risk in any region of the United States. 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 the equipment
          associated with wholesale notes and retail notes.
 
 Financial
          instruments with potential credit risk consist primarily of *Finance
          receivables*. *Finance receivables* primarily represent receivables
          under retail finance contracts, receivables arising from leasing transactions
          and notes receivable.  We generally maintain a secured interest in the
          equipment financed and perform regular credit evaluations of our dealers
          and
          customers.  At October 31, 2005 and 2004, respectively, no single
          customer represented a significant concentration of credit
          risk.
 
 *Finance
          receivables* balances, as of October 31, are summarized as follows (in
          millions):
 
 **2005**
                
                
                2004
                    (Restated)Retail
                    notes, net of unearned income
                
                **$**
                **2,894.7**
                
                
                $
                2,509.9Finance
                    leases, net of unearned income
                
                ****
                **170.2**
                
                
                
                143.7Wholesale
                    notes held for sale
                
                ****
                **98.1**
                
                
                
                127.7Accounts
                    (includes retail and wholesale)
                
                ****
                **76.1**
                
                
                
                96.5Finance
                    receivables from affiliates, net of unearned income
                
                ****
                **184.7**
                
                
                
                156.5Total
                    finance receivables
                
                ****
                **3,423.8**
                
                
                
                3,034.3Allowance
                    for losses
                
                ****
                **(13.6**
                **)**
                
                
                (13.6
                )Total
                    finance receivables, net
                
                **$**
                **3,410.2**
                
                
                $
                3,020.7
 
 
 Contractual
          maturities of finance receivables as of October 31, 2005 are summarized
          as
          follows (in millions):
 
 Retail
                    notes
                
                
                Finance
                    leases
                
                
                Wholesale
                    notes
                
                
                Accounts
                
                
                AffiliatesDue
                    in fiscal year:2006
                
                $
                955.8
                
                
                $
                15.6
                
                
                $
                98.1
                
                
                $
                76.1
                
                
                $
                74.72007
                
                
                812.2
                
                
                
                29.3
                
                
                
                -
                
                
                
                -
                
                
                
                40.52008
                
                
                657.2
                
                
                
                33.1
                
                
                
                -
                
                
                
                -
                
                
                
                32.82009
                
                
                458.8
                
                
                
                46.9
                
                
                
                -
                
                
                
                -
                
                
                
                22.92010
                
                
                251.1
                
                
                
                54.7
                
                
                
                -
                
                
                
                -
                
                
                
                12.5Thereafter
                
                
                68.9
                
                
                
                13.7
                
                
                
                -
                
                
                
                -
                
                
                
                3.4Gross
                    finance receivables
                
                
                3,204.0
                
                
                
                193.3
                
                
                
                98.1
                
                
                
                76.1
                
                
                
                186.8Unearned
                    finance income
                
                
                (309.3
                )
                
                
                (23.1
                )
                
                
                -
                
                
                
                -
                
                
                
                (2.1
                )Finance
                    receivables, net of unearned income
                
                $
                2,894.7
                
                
                $
                170.2
                
                
                $
                98.1
                
                
                $
                76.1
                
                
                $
                184.7
  46
 ***Index***
  NAVISTAR
          FINANCIAL CORPORATION AND SUBSIDIARIES
 
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
  The
          actual cash collections from finance receivables may vary from the contractual
          cash flows because of sales, prepayments, extensions, delinquencies, credit
          losses, and renewals.  The contractual maturities, therefore, should
          not be regarded as a forecast of future collections.
 
 **6.
          ALLOWANCE FOR LOSSES**
 
 The
          *Allowance for losses* for finance receivables is summarized as follows
          for the fiscal years ended October 31 (in millions):
 
 **2005**
                
                
                2004
                    (Restated)
                
                
                2003
                    (Restated)Allowance
                    for losses, beginning of year
                
                **$**
                **13.6**
                
                
                $
                15.8
                
                
                $
                17.2Provision
                    for credit losses
                
                ****
                **5.7**
                
                
                
                7.8
                
                
                
                12.9Charge-offs
                    charged to allowance
                
                ****
                **(5.7**
                **)**
                
                
                (10.0
                )
                
                
                (14.3
                )Allowance
                    for losses, end of year
                
                **$**
                **13.6**
                
                
                $
                13.6
                
                
                $
                15.8
 
 The
          outstanding balance of finance receivables with specific loss reserves
          was $2.6
          million and $0.5 million as of October 31, 2005 and 2004, respectively.
          Specific
          loss reserves were $0.3 million and $0.1 million as of October 31, 2005
          and
          2004, respectively. NFC continued to collect payments on these accounts.
          The
          outstanding balance of impaired finance receivables on which earnings had
          been
          suspended was $0.2 million and $1.3 million as of October 31, 2005 and
          2004,
          respectively.  The average balance of impaired receivables for the
          years ended October 31, 2005, 2004 and 2003 were $7.7 million, $17.9 million
          and
          $47.5 million, respectively. Interest income on suspended earnings that
          were
          netted against unearned income for impaired finance receivables during
          the years
          ended October 31, 2005, 2004, and 2003 was less than $0.1 million. Balances
          with
          payments past due over 90 days on on-balance sheet finance receivables
          totaled
          $3.2 million and $3.6 million as of October 31, 2005 and 2004,
          respectively.
 
 
 **7.
          VEHICLE INVENTORY**
 
 NFC
          has
          inventory relating to asset repossessions of defaulted receivables and
          leases
          that it reports separately on the consolidated statements of financial
          condition. Net losses were $1.3 million, $1.3 million and $2.6 million
          for the
          years ended October 31, 2005, 2004 and 2003 respectively, and are included
          in
*Other expenses*.
 
 NFC’s
          *Vehicle inventory* is summarized as follows for the fiscal year ended
          October 31 (in millions):
 
 **2005**
                
                
                2004
                    (Restated)Vehicle
                    inventory, beginning of year
                
                **$**
                **26.6**
                
                
                $
                34.8Proceeds
                    from sale of repossessed assets
                
                ****
                **(70.8**
                **)**
                
                
                (48.1
                )Additions
                
                ****
                **52.6**
                
                
                
                39.9Vehicle
                    inventory, end of year
                
                **$**
                **8.4**
                
                
                $
                26.6
  47
 ***Index***
  NAVISTAR
          FINANCIAL CORPORATION AND SUBSIDIARIES
 
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
  **8.
          NET INVESTMENT IN OPERATING LEASES**
 
 *Net
          investment in operating leases* at year-ended October 31 was as follows (in
          millions):
 
 **2005**
                
                
                2004
                    (Restated)Investment
                    in operating leases
                
                **$**
                **191.2**
                
                
                $
                275.4Less:
                    Accumulated depreciation
                
                ****
                **(86.0**
                **)**
                
                
                (124.0
                )Net
                    investment in equipment under operating leases
                
                ****
                **105.2**
                
                
                
                151.4Rent
                    receivable net of reserve for past due operating leases
                
                ****
                **0.5**
                
                
                
                0.5Net
                    investment in operating leases
                
                **$**
                **105.7**
                
                
                $
                151.9
 
 Future
          minimum rentals on operating leases are as follows: 2006, $19.2 million;
          2007,
          $15.5 million; 2008, $12.2 million; 2009, $8.2 million; 2010, $4.2 million
          and
          $2.1 million thereafter.
 
 
 **9.
          INCOME TAXES**
 
 Taxes
          on
          income from continuing operations for the years ended October 31 are summarized
          as follows (in millions):
 
 **2005**
                
                
                2004
                  (Restated)
                
                
                2003
                  (Restated)Current:Federal
                
                **$**
                **47.1**
                
                
                $
                27.6
                
                
                $
                17.3State
                    and local
                
                ****
                **2.7**
                
                
                
                1.7
                
                
                
                1.0Total
                    current
                
                ****
                **49.8**
                
                
                
                29.3
                
                
                
                18.3Deferred
                    (primarily federal)
                
                ****
                **(5.6**
                **)**
                
                
                9.9
                
                
                
                10.9Total
                    income tax expense from continuing operations
                
                **$**
                **44.2**
                
                
                $
                39.2
                
                
                $
                29.2
 
 A
          reconciliation of the statutory federal income tax rate from continuing
          operations is as follows:
 
 **2005**
                
                
                2004
                  (Restated)
                
                
                2003
                  (Restated)Current:Statutory
                    federal income tax rate
                
                ****
                **35.0**
                **%**
                
                
                35.0
                %
                
                
                35.0
                %State
                    income taxes net of federal income taxes
                
                ****
                **1.0**
                
                
                
                1.8
                
                
                
                1.6Exchangeable
                    note
                
                ****
                **-**
                
                
                
                (2.1
                )
                
                
                4.4Other
                
                ****
                **(0.2**
                **)**
                
                
                (0.2
                )
                
                
                (0.3
                )Effective
                    income tax rate
                
                ****
                **35.8**
                **%**
                
                
                34.5
                %
                
                
                40.7
                %
 
 NFC
          and
          its domestic subsidiaries are included in Navistar’s consolidated federal income
          tax returns.  Certain state income tax returns are required to be
          filed on a separate basis and others are included in various combined
          reports.  In accordance with its intercompany tax sharing agreement
          with Navistar, all federal income tax liabilities or credits are allocated
          to
          NFC and its domestic subsidiaries as if NFC filed its own consolidated
          return.  Total income tax payments made to Navistar during 2005, 2004
          and 2003 were $33.7 million, $39.0 million, and $20.4 million,
          respectively.  The amount of federal and state income taxes payable to
          Navistar as of October 31, 2005 and 2004 were $36.7 million and $23.3 million,
          respectively.  Accrued income tax is included in *Other
          liabilities* on the consolidated statements of financial
          condition.
  48
 ***Index***
  NAVISTAR
          FINANCIAL CORPORATION AND SUBSIDIARIES
 
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
  Contingent
          tax liabilities are accounted for separately from deferred tax assets and
          liabilities. An accrual is recorded when we believe it is probable that
          additional taxes will be assessed and the amount can be reasonably
          estimated.  Contingent tax liabilities are reviewed based on recent
          changes in tax laws and regulations, including judicial rulings. As of
          October
          31, 2005, we have $5.8 million of reserves for contingent tax liabilities
          included in *Other liabilities* on the consolidated statements of
          financial condition.
 
 The
          net
          deferred tax asset from continuing operations is included in *Other
          assets* on the consolidated statements of financial
          condition.  The components of deferred tax assets and liabilities from
          continuing operations as of October 31 are as follows (in
          millions):
 
 **2005**
                
                
                2004
                  (Restated)Deferred
                    tax assets:Pension
                    and other postretirement benefits
                
                **$**
                **8.2**
                
                
                $
                8.9Allowance
                    for losses
                
                ****
                **4.9**
                
                
                
                4.9Secured
                    borrowings
                
                ****
                **46.4**
                
                
                
                59.8Other
                
                ****
                **6.8**
                
                
                
                5.9Less
                    valuation allowance
                
                ****
                **(0.7**
                **)**
                
                
                (0.6
                )Total
                    deferred tax assets
                
                **$**
                **65.6**
                
                
                $
                78.9Deferred
                    tax liabilities:Lease
                    transactions
                
                **$**
                **(16.7**
                **)**
                
                $
                (20.8
                )Property,
                    plant and equipment
                
                ****
                **(35.1**
                **)**
                
                
                (47.8
                )Other
                
                ****
                **-**
                
                
                
                (1.0
                )Total
                    deferred tax liabilities
                
                ****
                **(51.8**
                **)**
                
                
                (69.6
                )Net
                    deferred tax assets
                
                **$**
                **13.8**
                
                
                $
                9.3
 
 We
          have
          incurred net operating losses in certain states where we file separately
          from
          Navistar.  As a result of those losses and our net deferred tax asset
          position, we assessed the need for a valuation allowance based on a
          determination of whether it is more likely than not that deferred tax benefits
          will be realized through the generation of future taxable
          income.  Appropriate consideration was given to all available
          evidence, both positive and negative, in assessing the need for a valuation
          allowance.  As a result of that assessment, a valuation allowance was
          established in the amount of ($0.7) million and ($0.6) million as of October
          31,
          2005 and 2004, respectively.  We believe that the remaining deferred
          tax assets will more likely than not be realized.
  49
 ***Index***
  NAVISTAR
          FINANCIAL CORPORATION AND SUBSIDIARIES
 
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
  **10.
          SENIOR AND SUBORDINATED DEBT**
 
 *Senior
          and subordinated debt* outstanding as of October 31 is summarized as follows
          (dollars in millions):
 
 Weighted
                    Average Interest Rate**2005**
                
                
                2004
                    (Restated)
                
                
                **2005**
                
                
                2004Bank
                    revolving credit facility at variable rates due July 2010
                
                **$**
                **560.0**
                
                
                $
                672.0
                
                
                ****
                **5.9**
                **%**
                
                
                3.1
                %Revolving
                    retail warehouse facilities at variable rates between 4.2% and
                    4.5% due
                    June 2010
                
                ****
                **500.0**
                
                
                
                500.0
                
                
                ****
                **4.3**
                **%**
                
                
                2.2
                %Borrowing
                    secured by asset-backed securities at variable rates between
                    2.2% to 4.8%
                    due serially through 2014
                
                ****
                **2,778.6**
                
                
                
                1,992.0
                
                
                ****
                **3.6**
                **%**
                
                
                2.9
                %Borrowings
                    secured by operating and finance leases due serially
                    through  June 2011 at rates between 3.2% to 5.8%
                
                ****
                **123.5**
                
                
                
                155.4
                
                
                ****
                **4.5**
                **%**
                
                
                4.6
                %Total
                    senior and subordinated debt
                
                **$**
                **3,962.1**
                
                
                $
                3,319.4
                
                
                ****
                **4.0**
                **%**
                
                ****
                **2.9**
                **%**
 
 
 During
          2005, NFC entered into a Revolving Credit Agreement
          (“Agreement”).  The new contractually committed credit facility has
          two primary components, a term loan ($400.0 million originally) and a revolving
          bank loan ($800.0 million).  The latter has a Mexican sub-revolver
          ($100.0 million), which may be used by Navistar’s three Mexican subsidiaries. At
          October 31, 2005, and 2004, total availability under the Agreement was
          $607.0
          million and $123.0 million, respectively. The Mexican sub-revolver balance
          was
          $33.0 million and 25.0 million as of October 31, 2005 and 2004, respectively.
          The entire credit facility matures July 1, 2010, however, the term loan
          is to be
          repaid in 19 consecutive quarterly amounts of $1.0 million and a final
          payment
          of $381.0 million on July 1, 2010.  The first quarterly payment was
          paid on October 31, 2005.  Unlike the revolving portion, repayments of
          the term loan may not be re-borrowed.Under
          the terms of the Agreement, NFC is required to maintain a debt to tangible
          net
          worth ratio of no greater than 6.0 to 1.0, a twelve-month rolling fixed
          charge
          coverage ratio of no less than 1.25 to 1.0, and a twelve-month rolling
          combined
          retail/lease losses to liquidations ratio of no greater than 6%. As of
          October
          31, 2005, the maximum amount of dividends that were available for distribution
          to International, our parent company, under the most restrictive covenants
          was
          $279.2 million. The Agreement grants security interests in substantially
          all of
          NFC’s unsold assets to the participants in the
          Agreement.  Compensating cash balances are not required. Facility fees
          of 0.375% are paid quarterly on the revolving loan portion only, regardless
          of
          usage.  On March 28, 2007, NFC entered into a First Amendment to the
          Agreement increasing the term loan component by $220.0 million, the quarterly
          repayment to $1.6 million and increasing the maximum permitted consolidated
          leverage ratio from 6:1 to 7:1 through November 1, 2007, and from 6:1 to
          6.5:1
          for the period November 1, 2007, through April 30, 2008. After April 30,
          2008,
          the ratio returns to 6:1 for all periods thereafter. In addition, the First
          Amendment increased the amount of dividends permitted to be paid to our
          parent
          company to $400.0 million plus net income and any non-core asset sale proceeds
          from May 1, 2007, through the date of such payment.
 
 Certain
          affirmative covenants under the Agreement require that NFC and Navistar
          file
          their Annual Report on Form 10-K for the period ended October 31, 2005
          in
          accordance with SEC regulations.  On January 17, 2006, NFC received a
          waiver of the existing defaults under the Agreement through May 31, 2006,
          including potential future defaults for failure to provide financial statements
          to the lenders.  This waiver permitted NFC to incur additional
          borrowings under the Agreement through May 31, 2006, provided no other
          un-waived
          defaults occur.  On March 2, 2006, NFC received a Second Waiver and
          Consent, which  extended through January 31, 2007, the previous waiver
          covering a default or event of default created by NFC’s and Navistar’s failure
          to meet the filing requirements of Sections 13 and 15 of the Exchange Act
          of
          1934, as amended, when NFC and its parent failed to file its 2005 Annual
          Report
          on Form 10-K with the Securities and Exchange Commission, and further waived
          a
          default, if any, created by the right of the holders of our long-term debt
          to
          accelerate payment of such debt because of the late filing of required
          SEC
          reports.  In November 2006, NFC received a Third Waiver and Consent,
          which extended through October 31, 2007, and extended the previous waivers
          which
          waive any default or event of default that would result solely from NFC
          and
          Navistar’s failure to meet the filing requirements of Sections 13 and 15 of the
          Exchange Act of 1934, as amended, with
          respect to their Annual Reports on Form 10-K for 2005 and 2006 and their
          quarterly reports on Form 10-Q for the periods fromNovember
          1, 2005, through July 31, 2007.  On October 23, 2007, NFC received a
          Second Amendment and Fourth Waiver.  The waiver extends through
          December 31, 2007, and expands the previous waivers which waive any default
          or
          event of defaultthat
          would result solely from NFC’s and Navistar’s failure to meet the filing
          requirements mentioned in third waiver and including Sections 13 and 15
          of the
          Exchange Act of 1934, as amended, with respect to their Annual Reports
          on Form
          10-K for 2007.  During the period from November 1, 2007 until the
          waiver terminates, interest rate on certain loans under the Agreement shall
          be
          increased by 0.25%. In December 2007, NFC received a Fifth Waiver to the
          Agreement expanding the scope of certain default conditions covered by
          the
          waiver therein until November 30, 2008.
  50
 ***Index***
  NAVISTAR
          FINANCIAL CORPORATION AND SUBSIDIARIES
 
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
  In
          June
          2005, TRIP, a special purpose, wholly-owned subsidiary of NFC, entered
          into a
          new $500.0 million revolving facility to replace the 2000 facility that
          otherwise would have expired in October 2005.  The new notes mature in
          June 2010 and are subject to optional early redemption in full without
          penalty
          or premium upon satisfaction of certain terms and conditions on any date
          on or
          after April 15, 2010.  NFC uses TRIP to temporarily fund retail notes
          and retail leases, other than operating leases.  This facility is used
          primarily during the periods prior to a securitization of retail notes
          and
          finance leases. NFC retains a repurchase option against the retail notes
          and
          leases sold into TRIP; therefore, TRIP’s assets and liabilities are included in
          our consolidated statements of financial condition. As of October 31, 2005,
          NFC
          had $232.6 million in retail notes and finance leases in TRIP.
 
 The
          asset-backed debt is issued by consolidated SPEs and is payable out of
          collections on the finance receivables sold to the SPEs.  This debt is
          the legal obligation of the SPEs and not NFC. The balance outstanding was
          $2.8
          billion and $2.0 billion as of October 31, 2005 and 2004, respectively.
          Similar
          to the waivers obtained on the Agreement, we have obtained waivers for
          the
          private retail transactions and the private portion of the wholesale note
          transaction.  These waivers are similar in scope to those of the
          Agreement and expire on or about November 30, 2008.
 
 Failure
          to deliver audited financial statements could be declared a servicer default
          by
          the investors of various retail and wholesale securitizations. If default
          is
          declared, the remedy could be the replacement as servicer or accelerated
          debt
          amortization from assets in the trust. We do not believe the failure to
          deliver
          audited financials statements would be a material adverse event to the
          investors, as required for a servicer default. We have not obtained waivers
          on
          certain public securitizations including TRIP. No servicer defaults have
          been
          declared on these securitizations. Under the possible scenario of loss
          of
          servicing or accelerated amortization of debt, we do not believe these
          events
          would have a material adverse impact on us.
 
 NFC
          enters into secured borrowing agreements involving vehicles subject to
          operating
          and finance leases with retail customers.  The balances are classified
          under *Senior and subordinated debt*as borrowings secured by leases. In
          connection with the securitizations and secured borrowing agreements of
          certain
          of its leasing portfolio assets, NFC and its wholly-owned subsidiary, Navistar
          Leasing Service Corporation (“NLSC”) have established Navistar Leasing Company
          (“NLC”), a Delaware business trust.  NLSC was formerly known as Harco
          Leasing Company, Inc. prior to its name change effective September 21,
          2006. NLC
          holds legal title to leased vehicles and is the lessor on substantially
          all
          leases originated by NFC. NLSC owns beneficial interests in the titles
          held by
          NLC and has transferred other beneficial interests issued by NLC to purchasers
          under secured borrowing agreements and securitizations.  Neither the
          beneficial interests held by purchasers under secured borrowing agreements
          or
          the assets represented thereby, nor legal interest in any assets of NLC,
          are
          available to NLSC, NFC or its creditors.  The balance of all the
          above-mentioned secured borrowings issued by NLC totaled $68.6 million
          and
          $136.0 million as of October 31, 2005 and 2004, respectively.  The
          carrying amount of the finance and operating leases used as collateral
          was
          approximately $67.0 million as of October 31, 2005 and approximately $150.0
          million as of October 31, 2004..
 
 ITLC,
          a
          special purpose, wholly-owned subsidiary of NFC, was established in June
          2004 to
          provide NFC with another vehicle to obtain borrowings secured by
          leases.  The balances are classified under *Senior and subordinated
          debt* as borrowings secured by leases.  ITLC’s assets are
          available to satisfy its creditors’ claims prior to such assets becoming
          available for ITLC’s use or to NFC or affiliated companies.  The
          balance of all the above-mentioned secured borrowings issued by ITLC totaled
          $54.9 million and $19.4 million as of October 31, 2005 and 2004,
          respectively.  The carrying amount of the finance and operating leases
          used as collateral was $51.2 million as of October 31, 2005 and $18.1 million
          as
          of October 31, 2004.
  51
 ***Index***
  NAVISTAR
          FINANCIAL CORPORATION AND SUBSIDIARIES
 
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
  Amortization
          of debt issue costs included in *Cost of borrowing – other* were $7.8
          million, $8.1 million and $7.3 million for the years ended October 31,
          2005,
          2004 and 2003, respectively.
 
 The
          future aggregate annual contractual maturities and required payments of
          senior
          and subordinated debt as of October 31, 2005 are as follows (in
          millions):
 
 2006
                
                **$**
                **120.7**2007
                
                ****
                **78.2**2008
                
                ****
                **684.1**2009
                
                ****
                **422.0**2010
                
                ****
                **1,544.4**Thereafter
                
                ****
                **1,112.7**Total
                
                **$**
                **3,962.1**
  52
 ***Index***
  NAVISTAR
          FINANCIAL CORPORATION AND SUBSIDIARIES
 
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
  **11.  POSTRETIREMENT
          BENEFITS**
 
 ***Defined
          Benefit Plans***
 
 We
          provide postretirement benefits to some employees. Costs associated with
          postretirement benefits include pension and postretirement health care
          expenses
          for employees, retirees, and surviving spouses and dependents. We use an
          October
          31 measurement date for all of our defined benefit plans.
 
 Generally,
          the plans are non-contributory. Our policy is to fund pension plans in
          accordance with applicable United States government regulations. As of
          October
          31, 2005, all legal funding requirements had been met. We were not required
          to
          make contributions to our pension plans in 2006.
 
 Net
          periodic postretirement benefits expense included on the consolidated statements
          of income is comprised of the following:
 
 **Pension
                    Benefits**
                
                
                **Other
                    Benefits**Millions
                    of dollars
                
                **2005**
                
                
                2004
                
                
                2003
                
                
                **2005**
                
                
                2004
                
                
                2003(Restated)
                
                
                (Restated)
                
                
                
                
                
                (Restated)
                
                
                (Restated)Service
                    cost for benefitsearned
                    during the period
                
                **$**
                **.4**
                
                
                $
                .5
                
                
                $
                .5
                
                
                **$**
                **.2**
                
                
                $
                .3
                
                
                $
                .3Interest
                    on obligation
                
                ****
                **3.9**
                
                
                
                3.8
                
                
                
                3.8
                
                
                ****
                **1.4**
                
                
                
                1.5
                
                
                
                1.7Amortization
                    of cumulative losses
                
                ****
                **1.5**
                
                
                
                1.1
                
                
                
                1.0
                
                
                ****
                **.6**
                
                
                
                .6
                
                
                
                .9Other
                
                ****
                **.6**
                
                
                
                .5
                
                
                
                -
                
                
                ****
                **-**
                
                
                
                -
                
                
                
                -Less
                    expected return on assets
                
                ****
                **(4.8**
                **)**
                
                
                (4.7
                )
                
                
                (4.3
                )
                
                ****
                **(.7**
                **)**
                
                
                (.7
                )
                
                
                (.5
                )Net
                    postretirement benefits expense
                
                **$**
                **1.6**
                
                
                $
                1.2
                
                
                $
                1.0
                
                
                **$**
                **1.5**
                
                
                $
                1.7
                
                
                $
                2.4
 
 “Other”
          includes the expense related to defined contribution plans, and other
          postretirement benefit costs. Cumulative gains and losses are amortized
          over the
          average remaining service life of active employees.  Plan amendments
          are amortized over the average remaining service lives of active
          employees.
  53
 ***Index***
  NAVISTAR
          FINANCIAL CORPORATION AND SUBSIDIARIES
 
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
  The
          funded status of our plans as of October 31, 2005 and 2004, and reconciliation
          with amounts recognized on our consolidated statements of financial condition
          are provided below.
 
 **Pension
                    Benefits**
                
                
                **Other
                    Benefits**Millions
                    of dollars
                
                **2005**
                
                
                2004
                  (Restated)
                
                
                **2005**
                
                
                2004
                  (Restated)**Change
                    in benefit obligation**Benefit
                    obligation at beginning of year
                
                **$**
                **72.3**
                
                
                $
                67.2
                
                
                **$**
                **26.3**
                
                
                $
                29.9Service
                    cost
                
                ****
                **.4**
                
                
                
                .5
                
                
                ****
                **.2**
                
                
                
                .3Interest
                    on obligation
                
                ****
                **3.9**
                
                
                
                3.8
                
                
                ****
                **1.4**
                
                
                
                1.5Actuarial
                    net (gain) loss
                
                ****
                **(1.7**
                **)**
                
                
                4.5
                
                
                ****
                **(.8**
                **)**
                
                
                (4.0
                )Plan
                    participants’ contributions
                
                ****
                **-**
                
                
                
                -
                
                
                ****
                **.3**
                
                
                
                -Benefits
                    paid
                
                ****
                **(4.0**
                **)**
                
                
                (3.7
                )
                
                ****
                **(1.6**
                **)**
                
                
                (1.4
                )Benefit
                    obligation at end of year
                
                **$**
                **70.9**
                
                
                $
                72.3
                
                
                **$**
                **25.8**
                
                
                $
                26.3**Change
                    in plan assets**Fair
                    value of plan assets at beginning of year
                
                **$**
                **55.4**
                
                
                $
                54.5
                
                
                **$**
                **7.5**
                
                
                $
                7.5Actual
                    return on plan assets
                
                ****
                **5.1**
                
                
                
                4.2
                
                
                ****
                **.7**
                
                
                
                .2Employer
                    contributions
                
                ****
                **-**
                
                
                
                -
                
                
                ****
                **.1**
                
                
                
                .2Benefits
                    paid
                
                ****
                **(3.5**
                **)**
                
                
                (3.3
                )
                
                ****
                **(.4**
                **)**
                
                
                (.4
                )Fair
                    value of plan assets at end of year
                
                **$**
                **57.0**
                
                
                $
                55.4
                
                
                **$**
                **7.9**
                
                
                $
                7.5Unfunded
                    status
                
                **$**
                **(13.9**
                **)**
                
                $
                (17.0
                )
                
                **$**
                **(17.9**
                **)**
                
                $
                (18.8
                )Unrecognized
                    actuarial net loss
                
                ****
                **16.5**
                
                
                
                20.0
                
                
                ****
                **6.5**
                
                
                
                8.0Unrecognized
                    prior service cost
                
                ****
                **-**
                
                
                
                .1
                
                
                ****
                **-**
                
                
                
                -Net
                    amount recognized
                
                **$**
                **2.6**
                
                
                $
                3.1
                
                
                **$**
                **(11.4**
                **)**
                
                $
                (10.8
                )
 
 **Amounts
                    recognized in the consolidated statements of financial condition
                    consist
                    of**Prepaid
                    benefit cost
                
                **$**
                **6.0**
                
                
                $
                6.0
                
                
                **$**
                **-**
                
                
                $
                -Accrued
                    benefit liability
                
                ****
                **(16.2**
                **)**
                
                
                (18.6
                )
                
                ****
                **(11.4**
                **)**
                
                
                (10.8
                )Intangible
                    asset
                
                ****
                **.1**
                
                
                
                .2
                
                
                ****
                **-**
                
                
                
                -Accumulated
                    other comprehensive loss
                
                ****
                **12.7**
                
                
                
                15.5
                
                
                ****
                **-**
                
                
                
                -Net
                    amount recognized
                
                **$**
                **2.6**
                
                
                $
                3.1
                
                
                **$**
                **(11.4**
                **)**
                
                $
                (10.8
                )
 
 The
          accumulated benefit obligation for pension benefits, a measure which excludes
          the effect of salary and wage increases, was $67.2 million and $67.8 million
          as
          of October 31, 2005 and 2004, respectively.
 
 The
          minimum pension liability adjustment included in *Accumulated other
          comprehensive loss (net of tax)* is net of deferred income taxes of $4.8
          million and $5.8 million at October 31, 2005 and 2004,
          respectively.
  54
 ***Index***
  NAVISTAR
          FINANCIAL CORPORATION AND SUBSIDIARIES
 
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
  The
          weighted average rate assumptions used in determining benefit obligations
          were:
 
 **Pension
                    Benefits**
                
                
                **Other
                    Benefits****2005**
                
                
                2004
                  (Restated)
                
                
                **2005**
                
                
                2004
                  (Restated)Discount
                    rate used to determinepresent
                    value of  benefit obligation at end of year
                
                ****
                **5.6**
                **%**
                
                
                5.5
                %
                
                ****
                **5.6**
                **%**
                
                
                5.4
                %Expected
                    rate of increase in futurecompensation
                    levels
                
                ****
                **3.5**
                **%**
                
                
                3.5
                %
                
                **N/A**
                
                
                N/A
 
 The
          weighted average rate assumptions used in determining net postretirement
          benefit
          expense were:
 
 **Pension
                    Benefits**
                
                
                **Other
                    Benefits****2005**
                
                
                2004
                  (Restated)
                
                
                2003
                  (Restated)
                
                
                **2005**
                
                
                2004
                  (Restated)
                
                
                2003
                  (Restated)Discount
                    rate
                
                ****
                **5.5**
                **%**
                
                
                5.8
                %
                
                
                6.3
                %
                
                ****
                **5.4**
                **%**
                
                
                5.8%
                %
                
                
                6.3
                %Expected
                    long-term rate of return onplan
                    assets
                
                ****
                **9.0**
                **%**
                
                
                9.0
                %
                
                
                9.0
                %
                
                ****
                **9.0**
                **%**
                
                
                9.0%
                %
                
                
                9.0
                %Expected
                    rate of increase in futurecompensation
                    levels
                
                ****
                **3.5**
                **%**
                
                
                3.5
                %
                
                
                3.5
                %
                
                **N/A**
                
                
                N/A
                
                
                N/A
 
 We
          determine our expected return on plan assets assumption by evaluating both
          historical returns as well as estimates of future
          returns.  Specifically, we analyzed the average historical broad
          market returns for various periods of time over the past 100 years for
          equities
          and over a 30 year period for fixed income securities, and adjusted the
          computed
          amount for any expected changes in the long-term outlook for both the equity
          and
          fixed income markets.  We consider the current asset mix as well as
          our targeted asset mix when establishing the expected return on plan
          assets.
 
 As
          of
          October 31, 2005 and 2004, the weighted average percentage of plan assets
          by
          category is as follows:
 
 **Pension
                    Benefits**
                
                
                **Other
                    Benefits**Asset
                    Category
                
                **Target**
                  **Range**
                
                
                **2005**
                
                
                2004(1)
                  (Restated)
                
                
                **Target**
                  **Range**
                
                
                **2005**
                
                
                2004
                  (Restated)Equity
                    securitiesNavistar
                    common
                    stock
                
                
                
                
                ****
                **0**
                **%**
                
                
                0
                %
                
                
                
                
                ****
                **7**
                **%**
                
                
                9
                %Other
                    equity
                    securities
                
                
                
                
                ****
                **69**
                **%**
                
                
                48
                %
                
                
                
                
                ****
                **67**
                **%**
                
                
                67
                %Hedge
                    funds
                
                
                
                
                ****
                **0**
                **%**
                
                
                0
                %
                
                
                
                
                ****
                **11**
                **%**
                
                
                9
                %Total
                    equity
                    securities
                
                ****
                **60-80**
                **%**
                
                ****
                **69**
                **%**
                
                
                48
                %
                
                ****
                **75-85**
                **%**
                
                ****
                **85**
                **%**
                
                
                85
                %Debt
                    securities
                
                ****
                
                
                
                ****
                **31**
                **%**
                
                
                52
                %
                
                ****
                
                
                
                ****
                **14**
                **%**
                
                
                14
                %Other,
                    including cash
                
                ****
                
                
                
                ****
                **0**
                **%**
                
                
                0
                %
                
                
                
                
                
                ****
                **1**
                **%**
                
                
                1
                %Total
                    debt securities and
                    other
                
                ****
                **20-40**
                **%**
                
                ****
                **31**
                **%**
                
                
                52
                %
                
                ****
                **15-25**
                **%**
                
                ****
                **15**
                **%**
                
                
                15
                %
  (1)  In
          fiscal year 2005, the asset allocation target was changed to 70% equity
          and 30%
          debt. Prior to that change, the target had been 40% equity and 60%
          debt.
 
 Our
          investment strategy is consistent with our policy to maximize returns while
          considering overall investment risk and the funded status of the plans
          relative
          to their benefit obligations. Our investment strategy takes into account
          the
          long-term nature of the benefit obligations, the liquidity needs of the
          plans
          and the expected risk/return tradeoffs of the asset classes in which the
          plans
          may choose to invest.  Asset allocations are established through an
          investment policy, which is updated periodically
          and reviewed by a fiduciary committee and the board of directors.  We
          believe that returns on common stock over the long term will be higher
          than
          returns from fixed-income securities as the historical broad market indices
          have
          shown. Equity and fixed-income investments are made across a broad range
          of
          industries and companies to provideprotection
          against the impact of volatility in any single industry or company. The
          long-term performance of our funds generally has outperformed our long-term
          return assumptions.
  55
 ***Index***
  NAVISTAR
          FINANCIAL CORPORATION AND SUBSIDIARIES
 
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
  The
          actuarial assumptions used to compute the net periodic pension cost and
          postretirement benefit cost are based upon information available as of
          the
          beginning of the year, specifically, market interest rates, past experience
          and
          our best estimate of future economic conditions.  Changes in these
          assumptions may impact future benefit costs and obligations.  In
          computing future costs and obligations, we must make assumptions about
          such
          things as employee mortality and turnover, expected salary and wage increases,
          discount rates, expected returns on plan assets, and expected future cost
          increases.  Three of these items have a significant impact on the
          level of cost: (1) discount rates; (2) expected rates of return on plan
          assets;
          and (3) healthcare cost trend rates.
 
 Prior
            to
            the 2005 year-end valuations, we estimated the discount rate for our
            pension and
            other post employment benefits (“OPEB”) obligations by reference to the average
            of the Moody’s AA Corporate Bond Index and the Merrill Lynch Ten Year + High
            Quality Corporate Bond Index.  Beginning with 2005 year-end
            valuations, we estimate the discount rate for our pension and OPEB
            obligations by matching anticipated future benefit payments for the plans
            to the
            Citibank yield curve to establish a weighted average discount rate for
            each
            plan.  This improved methodology, considered a change in estimate, was
            adopted because it was deemed superior to the previously applied methodology
            in
            that it provides for a matching of expected investment yields available
            considering the timing of future cash outflows.  Using this new
            methodology, we have established for the pension plans and the OPEB plan
            discount rates of 5.6% and 5.6%, respectively, for year-end
            2005.
 
 Health
            care cost trend rates are established through a review of actual recent
            cost
            trends and projected future trends.  Our retiree medical trend
            assumptions are the best estimate of expected inflationary increases
            to
            healthcare costs. The assumptions used are based upon both our specific
            trends
            and nationally expected trends.  Recently, our average increases have
            been lower than the nationally expected trends.
 
 For
          2006,
          the weighted average rate of increase in the per capita cost of post retirement
          health care benefits is projected to be 8.9%.  The rate is projected
          to decrease to 5% by the year 2011 and remain at that level each year
          thereafter.  The effect of changing the health care cost trend rate by
          one-percentage point for each future year is as follows, in
          millions:
 
 One-Percentage
                  Point
                    Increase
                
                
                One-Percentage
                  Point
                    DecreaseEffect
                    on total of serviceand
                    interest cost components
                
                $
                -
                
                
                $
                -Effect
                    on postretirementbenefit
                    obligation
                
                $
                3.0
                
                
                $
                (3.0
                )
 
 On
          December 8, 2003, the Medicare Prescription Drug, Improvement and Modernization
          Act of 2003 (the Act) was signed into law.  The Act introduces a
          voluntary prescription drug benefit under Medicare as well as a federal
          subsidy
          to sponsors of retiree healthcare plans that provide prescription drug
          benefits
          that are at least actuarially equivalent to Medicare Part D.  This
          subsidy covers a defined portion of an individual beneficiary’s annual covered
          prescription drug costs, and is exempt from federal taxation.
 
 In
          May
          2004, the FASB issued FASB Staff Position No. FAS 106-2, *Accounting and
          Disclosure Requirements Related to the Medicare
          Prescription****Drug, Improvement and Modernization Act of
          2003,* which provides guidance on the accounting for the effects of the
          Act.  We adopted the provisions of FASB Staff Position No. FAS 106-2
          in the third quarter of 2004, retroactive to December 8, 2003.  The
          retroactive application of the Medicare subsidy reduced our 2004 postretirement
          benefit expense by $0.6 million.**Our accumulated postretirement
          benefit obligation (“APBO”) was reduced by $4.1 million at October 31, 2004, and
          $3.9 million at December 8, 2003 for the subsidy related to benefits attributed
          to past service. We
  56
 ***Index***
  NAVISTAR
          FINANCIAL CORPORATION AND SUBSIDIARIES
 
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
  used
          a
          5.8% discount rate to value the related APBO at December 8, 2003, which
          was the
          same discount rate used at October 31, 2003, and therefore caused no change
          in
          the APBO as of that date.
 Our
          expected future benefit payments and federal subsidy receipts for the years
          ending October 31, 2006 through 2010 and the five years ending October
          31, 2015,
          are estimated as follows:
 
 Millions
                    of dollars
                
                Pension
                  Benefit
                    Payments
                
                
                Other
                    Postretirement
                  Benefit
                    Payments
                
                
                Postretirement
                  Benefit
                    Subsidy Receipts2006
                
                $
                4.4
                
                
                $
                1.6
                
                
                $
                .22007
                
                
                4.6
                
                
                
                1.7
                
                
                
                .22008
                
                
                4.7
                
                
                
                1.8
                
                
                
                .22009
                
                
                4.9
                
                
                
                1.9
                
                
                
                .22010
                
                
                5.0
                
                
                
                2.0
                
                
                
                .22011
                    through 2015
                
                
                25.3
                
                
                
                10.6
                
                
                
                1.4
 
 ***Defined
          Contribution Plans***
 
 The
          defined contribution plans cover a substantial portion of our employees.
          The
          defined contribution plans contain a 401(k) feature and provides a company
          match.  Defined contribution expense pursuant to these plans was $0.6
          million, $ 0.5 million, and $ (0.0) in 2005, 2004, and 2003, respectively,
          which
          approximates the amount we fund.
 
 
 **12.
          COMMITMENTS AND CONTINGENCIES**
 
 ***Leases***
 
 NFC
          is
          obligated under non-cancelable operating leases for the majority of its
          office
          facilities.  These leases are generally renewable and provide that
          property taxes and maintenance costs are to be paid by the lessee.  As
          of October 31, 2005, future minimum lease commitments under non-cancelable
          operating leases with remaining terms in excess of one year are as
          follows:
 
 Year
                    Ended October 31 (in millions)2006
                
                $
                1.72007
                
                
                1.32008
                
                
                1.32009
                
                
                1.12010
                
                
                0.92011
                    and beyond
                
                
                4.0Total
                
                $
                10.3
 
 The
          total
          operating lease expense was $3.0 million,$1.6 million, and $2.0 million
          for the
          years ended October 31, 2005, 2004, 2003, respectively .
 
 ***Guarantees
          of Debt***
 
 NFC
          periodically guarantees the outstanding debt of affiliates.  The
          guarantees allow for diversification of funding sources for the
          affiliates.  As of October 31, 2005, NFC has numerous guarantees
          related to Navistar's three Mexican finance subsidiaries, Navistar Financial,
          S.A. de C.V. SOFOM E.N.R. (“NF”), Arrendadora Financiera Navistar, S.A. de C.V.
          SOFOM E.N.R. (“Arrendadora”) and Navistar Comercial S.A. de C.V.  As
          of October 31, 2005, NFC’s maximum exposure under
          these guarantees is $158.9 million, the total amount outstanding at that
          date.
          During the years ended October 31, 2005, 2004, 2003, no fees were paid
          to us by
          the affiliates for the guarantees.
  57
 ***Index***
  NAVISTAR
          FINANCIAL CORPORATION AND SUBSIDIARIES
 
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
  The
          following table summarizes the borrowings as of October 31, 2005 (in
          millions):
 
 Type
                    of Funding
                
                Maturity
                
                Maximum
                  Amount
                    of Guaranty
                
                
                Outstanding
                    BalanceRevolving
                    credit facility
                
                (2)
                
                July
                    2010
                
                $
                100.0
                
                
                $
                33.0Revolving
                    credit facility
                
                (1)
                
                October
                    2008
                
                
                18.5
                
                
                
                18.5Revolving
                    credit facility
                
                (1)
                
                October
                    2010
                
                
                11.1
                
                
                
                14.1Revolving
                    credit facility
                
                (1)
                
                October
                    2010
                
                
                18.5
                
                
                
                17.3Revolving
                    credit facility
                
                (1)
                
                Jan
                    2006
                
                
                11.6
                
                
                
                11.6Revolving
                    credit facility
                
                (1)
                
                Dec
                    2005
                
                
                9.3
                
                
                
                9.2Revolving
                    credit facility
                
                (1)
                
                Nov
                    2005
                
                
                4.6
                
                
                
                4.6Commercial
                    Paper
                
                (1)
                
                September
                    2006
                
                
                46.4
                
                
                
                46.4Retail
                    Note Term Securitization
                
                (1)
                
                December
                    2007
                
                
                11.1
                
                
                
                4.2Total
                
                $
                231.1
                
                
                $
                158.9
 
 (1) 
          Peso-denominated.
 (2)  Revolving
          credit facility guaranteed jointly with Navistar.
 
 
 ***Guarantees
          of Derivatives***
 
 As
          of
          October 31, 2005, NFC had guaranteed derivative contracts for foreign currency
          forwards and interest rate swaps related to NF and Arrendadora.  NFC
          is liable up to the fair market value of these derivative contracts only
          in
          cases of default by NF and Arrendadora.
 
 
 The
          following table summarizes the guaranteed derivative contracts as of October
          31,
          2005 (in millions):
 
 Instrument
                Maturity
                
                Outstanding
                  Notional
                
                
                Fair
                  ValueInterest
                    rate swaps (1)
                September
                    2008
                
                $
                93.4
                
                
                $
                (0.8
                )Interest
                    rate swaps (2)
                September
                    2008
                
                $
                1.9
                
                
                $
                -
 
 (1)
          Peso-denominated related to SOFOL and Arrendadora
 (2)
          U.S.
          Dollar – denominated related to SOFOL and Arrendadora
 
 The
          foreign currency conversion rate at October 31, 2005, of 10.8:1 was used
          by NFC
          to convert the peso-denominated guarantees to United States
          dollars.
  NFC
          has
          not recognized a liability related to any of these guarantees since FASB
          Interpretation 45 *Guarantor’s Accounting and Disclosure Requirements for
          Guarantees, including Indirect Guarantees of Indebtedness of Others* does
          not apply to the measurement of a subsidiary’s guarantee of the debt owed to a
          third party by either its parent or another subsidiary of that
          parent.
  58
 ***Index***
  NAVISTAR
          FINANCIAL CORPORATION AND SUBSIDIARIES
 
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
  ***Other***
 
 On
          November 30, 2001, NFC completed the sale of all of the stock of Harco,
          a
          wholly-owned insurance subsidiary, to IAT Reinsurance Syndicate Ltd. (“IAT”), a
          Bermuda reinsurance company.  As part of its sales agreement with IAT,
          NFC has agreed to guarantee the adequacy of Harco's loss reserves at the
          time of
          sales.  There is no limit to the potential amount of future payments
          required by NFC related to this reserve.  The guarantee under the
          sales agreement was scheduled to expire in November 2008.  The
          carrying amount of NFC's liability under this guarantee was estimated at
          $1.0
          million as of October 31, 2005 and is included in *Other liabilities* in
          the consolidated statements of financial condition. During fiscal 2006
          all
          required payments were made and the guarantee was terminated without any
          gain or
          loss recognized.
 
 
 **13.
          SHAREOWNER’S EQUITY**
 
 The
          number of authorized shares of capital stock as of October 31, 2005 and
          2004 was
          2,000,000, of which 1,600,000 shares were issued and
          outstanding.  International owns all issued and outstanding capital
          stock.  No shares are reserved for officers and employees, or for
          options, warrants, conversions and other rights.
 
 
 **14.
          DERIVATIVE FINANCIAL INSTRUMENTS**
 
 NFC
          manages its exposure to fluctuations in interest rates by limiting the
          amount of
          fixed rate assets funded with variable rate debt.  This is
          accomplished by selling fixed rate receivables on a fixed rate basis and
          by
          utilizing derivative financial instruments.  These derivative
          financial instruments may include forward contracts, interest rate swaps,
          and
          interest rate caps.  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 in case of changes in market conditions or interest
          rates.  NFC manages exposure to counterparty credit risk by entering
          into derivative financial instruments with major financial institutions
          that can
          be expected to fully perform under the terms of such agreements.  NFC
          does not require collateral or other security to support derivative financial
          instruments, if any, with credit risk.  NFC’s counterparty credit
          exposure is limited to the positive fair value of contracts at the reporting
          date. Notional amounts of derivative financial instruments do not represent
          exposure to credit loss.
 
 As
          discussed in Note 2, we valued an embedded derivative that was a key component
          to the issuance of Exchangeable Notes in 2002. All changes in fair value
          were
          recorded in *Derivatives expense (income)*. The following table presents
          the various fair values during the life of the derivative included in *Other
          liabilities* (in millions):
 
 
 **Fair
                    Value**March
                    25, 2002 (Inception date)
                
                $
                61.5October
                    31, 2002
                
                
                26.3October
                    31, 2003
                
                
                28.6May
                    28, 2004 (Termination date)
                
                
                17.6
  59
 ***Index***
  NAVISTAR
          FINANCIAL CORPORATION AND SUBSIDIARIES
 
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
  As
          of
          October 31, 2005, the notional amounts and fair values of NFC’s derivative
          financial instruments are summarized as follows (in millions):
 
 Inception
                Maturity
                Instrument
                
                **Notional**
                
                
                **Fair
                    Value**October
                    2000
                November
                    2012
                Interest
                    rate cap purchased
                
                **$**
                **500.0**
                
                
                **$**
                **0.2**October
                    2000
                November
                    2012
                Interest
                    rate cap sold
                
                ****
                **500.0**
                
                
                ****
                **(0.2**
                **)**July
                    2001
                April
                    2006
                Interest
                    rate swap
                
                ****
                **12.4**
                
                
                ****
                **-**October
                    2003
                December
                    2006
                Interest
                    rate swap
                
                ****
                **54.7**
                
                
                ****
                **(1.1**
                **)**October
                    2003
                December
                    2006
                Interest
                    rate swap
                
                ****
                **138.5**
                
                
                ****
                **1.6**June
                    2005
                June
                    2016
                Interest
                    rate cap purchased
                
                ****
                **500.0**
                
                
                ****
                **5.8**June
                    2005
                June
                    2016
                Interest
                    rate cap sold
                
                ****
                **500.0**
                
                
                ****
                **(5.8**
                **)**
 
 NFC’s
          derivatives are all accounted for as free standing derivatives with no
          hedge
          designation, whereas, the change in unrealized gains or losses are recorded
          against earnings each period. The fair values of unrealized gains and losses
          are
          recorded in *Other assets* and *Other liabilities,*respectively.
 
 In
          October 2000, NFC’s wholly-owned subsidiary TRIP entered into a $500.0 million
          retail revolving facility as a method to fund retail notes and finance
          leases.  In June 2005, TRIP entered into a new $500.0 million
          revolving facility to replace the 2000 facility that expired in October
          2005.  Under the terms of these agreements TRIP finances receivables
          through the issuance of commercial paper.  NFC purchased interest rate
          caps for the benefit of TRIP to protect it against the potential of rising
          commercial paper interest rates.  To offset the economic cost of these
          caps, NFC entered into interest rate caps which offset those purchased
          for the
          benefit of TRIP.
 
 In
          July
          2001, NFC entered into an interest rate swap agreement which has a remaining
          notional amount of $12.4 million to fix a portion of its floating rate
          revolving
          debt.
 
 In
          October 2003, NFC entered into an interest rate swap agreement in connection
          with a sale of retail notes and finance leases receivables.  The
          purpose and structure of this swap was to convert the floating rate portion
          of
          the asset backed securities into fixed rate interest to match the interest
          basis
          of the receivables pool sold to the owner trust, and to protect NFC from
          interest rate volatility.  The notional amount of this swap is
          calculated as the difference between the actual pool balances and the projected
          pool balances.  The outcome of the swap results in NFC paying a fixed
          rate of interest on the projected balance of the pool.  To the extent
          that actual pool balances differ from the projected pool balances, NFC
          has
          retained interest rate exposure on this difference.
 
 *Derivative
          expense (income)* includes**swap (gains) and losses of $(0.3)
          million, $(4.7) million and $11.5 million for the years ended October 31,
          2005,
          2004 and 2003, respectively.
 
 **15.
          SECURITIZATION TRANSACTIONS**
 
 NFC
          finances receivables through NFRRC, NFSC, TRAC, TERFCO and ITLC, all special
          purpose, wholly-owned subsidiaries of NFC. In accordance with SFAS No.
          140,
          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 a secured borrowing.
          We provide limited recourse for all subordinated receivables. The recourse
          is
          limited to our subordinated interest and relates to credit risk
          only.
  60
 ***Index***
  NAVISTAR
          FINANCIAL CORPORATION AND SUBSIDIARIES
 
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
  ***Off
          balance sheet securitizations***
 
 NFC
          sold
          wholesales notes through NFSC, which has in place a revolving wholesale
          note
          trust that provides for the funding of eligible wholesale notes. As of
          October
          31, 2005 and 2004, the trust owned $1.4 billion and $1.2 billion, respectively,
          of wholesale notes and marketable securities. Components of the wholesale
          note
          trust funding certificates as of October 31, 2005 were a $200.0 million
          tranche
          of investor certificates maturing in July 2008, three $212.0 million tranches
          of
          investor certificates and notes expected to mature equally on June 26,
          2006, May
          25, 2007 and February 25, 2010, variable funding certificates (“VFC”) with a
          maximum capacity of $400.0 million expected to mature December 26, 2005
          and a
          seller’s subordinated interest of $202.1 million as of October 31, 2005 and
          $170.4 million as of October 31, 2004. On June 26, 2006, the wholesale
          note
          trust paid off $212.0 million of the investor certificates and on May 25,
          2007
          paid off $212.0 million of the investor notes. In May 2006 the VFC was
          increased
          to $600.0 million, then to $800.0 million in October 2006. In January 2007
          the
          expiration date was extended from May 2007 to January 2008. In December
          2007
          funding under the VFC was extended from January 2008 to November
          2008.
 
 During
          the second quarter of 2004, TRAC obtained financing for its retail accounts
          with
          a bank conduit that provides for the funding of up to $100.0 million of
          eligible
          retail accounts. The revolving retail account facility expired on August
          13,
          2006 and was renewed with an expiration date, as amended, of August 8,
          2008.  As of October 31, 2005, this facility was fully utilized. TRAC
          had a subordinated interest in the facility of $175.0 million as of October
          31,
          2005 and $167.9 million as of October 31, 2004.
 
 TERFCO
          had in place a trust to provide funding of $100.0 million of unsecured
          trade
          receivables generated by the sale of diesel engines and engine service
          parts
          from International to Ford Motor Company.  This facility was fully
          utilized as of October 31, 2005.  TERFCO had a subordinated interest
          in the trust of $64.0 million as of October 31, 2005 and $72.4 million
          as of
          October 31, 2004.  On December 15, 2005, the trust was fully repaid
          and will no longer be used.
 
 ***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 over
          collateralizations 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 $441.2 million and $410.7
          million as of October 31, 2005 and October 31, 2004, respectively. Our
          retained
          interests in the related trusts or assets held by the trusts are reflected
          on
          our consolidated statements of financial condition in *Amounts due from sales
          of receivables*.  The following is a summary of *Amounts due
          from sales of receivables*(in millions):
 
 **2005**
                
                
                2004
                    (Restated)Excess
                    seller’s interests  (1)
                
                **$**
                **401.8**
                
                
                $
                385.2Interest
                    only strip
                
                ****
                **15.9**
                
                
                
                10.6Restricted
                    cash reserves
                
                ****
                **23.5**
                
                
                
                14.9Total
                    amounts due from sales of receivables
                
                **$**
                **441.2**
                
                
                $
                410.7
 (1)Excess
          seller’s interest includes
          amounts contractually required to be retained of $ 35.6 million and excess
          collateral of $142.5 million as of October 31, 2005 and $ 31.0 million
          and $
          119.2 million, respectively, as of October 31, 2004.
 
 We
          estimate the payment speed for the receivables sold, expected net credit
          losses
          and the discount rate used to determine the fair value of the retained
          interests.  Estimates of payment speeds, expected credit losses, and
          discount rates are based on historical experience, anticipated future portfolio
          performance and other factors and are made separately for each securitization
          transaction.  In addition, we estimate the fair value of the retained
          interests on a quarterly basis utilizing updated estimates of these
          factors.
  61
 ***Index***
  NAVISTAR
          FINANCIAL CORPORATION AND SUBSIDIARIES
 
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
  The
          key
          economic assumptions as of October 31, 2005, and the sensitivity of the
          current
          fair values of residual cash flows to an immediate adverse change of 10
          and 20
          percent in that assumption are as follows (dollars in millions):
 
 Fair
                    Value Change at
                  October
                    31, 2005**2005**
                
                Adverse
                    10%
                
                
                Adverse
                    20%Discount
                    rate (annual)
                **9.2  to 17.8  %**
                
                **$**
                2.4
                
                
                $
                4.7Estimated
                    credit losses
                **0
                    to 0.18  %**
                
                
                0.1
                
                
                
                0.2Payment
                    speed (percent of portfolio per month)
                **10.3  to  80.0 
                    %**
                
                
                0.2
                
                
                
                0.4
 
 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
          and
          TERFCO retail account securitizations. No percentage for estimated credit
          losses
          were assumed for TERFCO or 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.
 
 These
          sensitivities are hypothetical and should be used with caution. The effect
          of a
          variation of a particular assumption on the fair value of the retained
          interests
          is calculated without changing any other assumption.  In reality,
          changes in one factor may result in changes in another which might magnify
          or
          counteract these reported sensitivities.
 
 The
          following tables reconcile the total serviced portfolio to the on balance
          sheet
          portfolio, net of unearned income, as of October 31 (in millions):
 
 **2005**
                
                **Retail
                    Notes**
                
                
                **Finance
                    Leases**
                
                
                **Wholesale
                    Notes**
                
                
                **Accounts**
                
                
                **Affiliates**
                
                
                **Total**Serviced
                    portfolio
                
                **$**
                **2,894.7**
                
                
                **$**
                **170.2**
                
                
                **$**
                **1,454.4**
                
                
                **$**
                **76.1**
                
                
                **$**
                **184.7**
                
                
                **$**
                **4,780.1**Less
                      sold receivables - off balance sheet
                
                ****
                **-**
                
                
                ****
                **-**
                
                
                ****
                **(1,356.3**
                **)**
                
                ****
                **-**
                
                
                ****
                **-**
                
                
                ****
                **(1,356.3**
                **)**Total
                    on balance sheet
                
                **$**
                **2,894.7**
                
                
                **$**
                **170.2**
                
                
                **$**
                **98.1**
                
                
                **$**
                **76.1**
                
                
                **$**
                **184.7**
                
                
                **$**
                **3,423.8**
 
 
 2004
                    (Restated)
                
                Retail
                    Notes
                
                
                Finance
                    Leases
                
                
                Wholesale
                    Notes
                
                
                Accounts
                
                
                Affiliates
                
                
                TotalServiced
                    portfolio
                
                $
                2,509.9
                
                
                $
                143.7
                
                
                $
                1,260.1
                
                
                $
                96.5
                
                
                $
                156.5
                
                
                $
                4,166.7Less
                      sold receivables – off balance sheet
                
                
                -
                
                
                
                -
                
                
                
                (1,132.4
                )
                
                
                -
                
                
                
                -
                
                
                
                (1,132.4
                )Total
                    on balance sheet
                
                $
                2,509.9
                
                
                $
                143.7
                
                
                $
                127.7
                
                
                $
                96.5
                
                
                $
                156.5
                
                
                $
                3,034.3
 
 For
          sold
          receivables, wholesale notes balances past due over 90 days were $0.7 million
          and $1.0 million, respectively, as of October 31, 2005, and 2004. There
          were no
          past due retail balances for TERFCO or TRAC at either date.
  62
 ***Index***
  NAVISTAR
          FINANCIAL CORPORATION AND SUBSIDIARIES
 
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
  The
          following table sets forth the activity related to off balance sheet
          securitizations reported in *Securitization income*on the consolidated
          statements of income (in millions):
 
 **2005**
                
                
                2004
                  (Restated)
                
                
                2003
                  (Restated)Fair
                    value adjustments
                
                **$**
                **(6.5**
                **)**
                
                $
                (1.1
                )
                
                $
                (1.4
                )Excess
                    spread income
                
                ****
                **62.0**
                
                
                
                45.3
                
                
                
                41.3Servicing
                    fees revenue
                
                ****
                **14.4**
                
                
                
                11.4
                
                
                
                8.9Losses
                    on sales of receivables
                
                ****
                **(2.1**
                **)**
                
                
                (4.7
                )
                
                
                (6.4
                )Investment
                    income
                
                ****
                **6.7**
                
                
                
                3.5
                
                
                
                4.7Securitization
                    income
                
                **$**
                **74.5**
                
                
                $
                54.4
                
                
                $
                47.1
 
 Cash
          flows from off balance sheet securitization transactions are as follows
          (in
          millions):
 
 **2005**
                
                
                2004
                  (Restated)
                
                
                2003
                  (Restated)Proceeds
                    from sales of finance receivables
                
                **$**
                **8,715.6**
                
                
                $
                6,705.8
                
                
                $
                5,220.9Servicing
                    fees
                
                ****
                **14.2**
                
                
                
                11.2
                
                
                
                8.9Cash
                    from net excess spread
                
                ****
                **63.1**
                
                
                
                45.4
                
                
                
                41.8Investment
                    income
                
                ****
                **4.5**
                
                
                
                1.9
                
                
                
                2.5Net
                    cash from securitization transactions
                
                **$**
                **8,797.4**
                
                
                $
                6,764.3
                
                
                $
                5,274.1
  63
 ***Index***
  NAVISTAR
          FINANCIAL CORPORATION AND SUBSIDIARIES
 
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
  **16.
          FAIR VALUE OF FINANCIAL INSTRUMENTS**
 
 The
          carrying amounts and estimated fair values of our financial instruments
          as of
          October 31 were as follows (in millions):
 
 **2005**
                
                
                2004 (Restated)**Carrying
                    Value**
                
                
                **Fair**
                  **Value**
                
                
                Carrying
                    Value
                
                
                Fair
                  ValueFinancial
                    assets:Cash
                    and cash equivalents
                
                **$**
                **23.0**
                
                
                **$**
                **23.0**
                
                
                $
                22.8
                
                
                $
                22.8Finance
                    receivables:Retail
                    notes
                
                ****
                **2,894.7**
                
                
                ****
                **2,648.8**
                
                
                
                2,509.9
                
                
                
                2,325.3Affiliates
                
                ****
                **184.7**
                
                
                ****
                **175.9**
                
                
                
                156.5
                
                
                
                153.3Accounts
                    (wholesale & retail)
                
                ****
                **76.1**
                
                
                ****
                **76.1**
                
                
                
                96.5
                
                
                
                96.4Wholesale
                    notes
                
                ****
                **98.1**
                
                
                ****
                **98.1**
                
                
                
                127.7
                
                
                
                127.8Restricted
                    cash and cash  equivalents
                
                ****
                **543.8**
                
                
                ****
                **543.8**
                
                
                
                274.6
                
                
                
                274.6Amounts
                    due from sales of receivables
                
                ****
                **441.2**
                
                
                ****
                **441.2**
                
                
                
                410.7
                
                
                
                410.7Financial
                    liabilities:Senior
                    and subordinated debt
                
                ****
                **3,962.1**
                
                
                ****
                **3,899.1**
                
                
                
                3,319.4
                
                
                
                3,298.7Derivative
                    financial instruments
                
                ****
                **0.5**
                
                
                ****
                **0.5**
                
                
                
                (0.7
                )
                
                
                (0.7
                )
 
 The
          estimated fair values for all other financial instruments approximate their
          carrying values as the result of the short-term nature or variable interest
          terms inherent in the financial instruments.
 
 The
          fair
          value of *Retail notes and finance leases* is estimated by discounting
          the future contractual cash flows using an estimated discount rate reflecting
          interest rates currently being offered for notes with similar
          terms.
 
 The
          majority of derivatives are valued by our derivative counterparty. For
          all
          others we use a discounted cash flow methodology.
 
 The
          fair
          values of the *Amounts due from the sales of receivables* are estimated
          by discounting the probable future cash flows using an estimated discount
          rate
          that reflects the inherent risk of the underlying assets.
 
 **17.
          LEGAL PROCEEDINGS**
 
 We
          are
          subject to various claims arising in the ordinary course of business, and
          are
          parties to various legal proceedings, which constitute ordinary, routine
          litigation incidental to our business.  In our opinion, the
          disposition of these proceedings and claims will not have a material adverse
          effect on the business or our results of operations, cash flows or financial
          condition.
 
 In
          December 2004, we announced that we would restate our financial results
          for the
          fiscal years 2002 and 2003 and the first three quarters of fiscal
          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.  We were subsequently informed by the SEC that it was
          expanding the investigation to include this current restatement. On November
          8,
          2006, we announced that we would restate our financial results for fiscal
          years
          2002 through 2004 and for the first three quarters of fiscal
          2005.  Since April of 2006, we have been providing information to the
          SEC regarding the current restatement.  We are fully cooperating with
          the SEC on this investigation.  Based on the status of the
          investigation, we are not able to predict its final outcome.
  64
 ***Index***
  NAVISTAR
          FINANCIAL CORPORATION AND SUBSIDIARIES
 
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
  **18.
          SUBSEQUENT EVENTS**
 
 Beginning
          in January 2006 with the Annual Report on Form 10-K for the period ended
          October
          31, 2005, NFC and Navistar have failed to file the required annual and
          quarterly
          reports as outlined in Sections 13 and 15 of the Exchange Act of 1934,
          as
          amended.  However, both companies have filed the required notice of
          non-filing.  In each notice of non-filing, each registrantstated they would
          be
          unable to file the required report because Navistar and its registered
          independent public accountants were investigating numerous significant
          and
          complex accounting issues and it was not possible to estimate when the
          items
          would be resolved.
 
 Failure
          to file the 2005 reports required NFC to obtain waivers from the lenders
          under
          its $1.2 billion Credit Agreement (see Note 10), *Senior and subordinated
          debt*so as to cure an Event of Default for failure to file financial
          statements timely. The waiver was set to expire at the earlier of May 31,
          2006
          or when the holders of any of the outstanding debt of Navistar had the
          right to
          accelerate payment in accordance with the term of the indenture under which
          the
          debt was issued.
 
 Navistar
          was notified by the requisite number of holders of several of its outstanding
          debt issuance that it was in default and the debt holders intended to request
          acceleration.  Navistar responded by negotiating an unsecured $1.5
          billion credit facility so as to either make a tender offer for the outstanding
          public debt or pay the debt holders in case of an approved
          acceleration.  These developments forced NFC to obtain a Second Waiver
          and Consent on March 2, 2006, from its lenders to extend the expiration
          date of
          the first waiver until January 31, 2007.  The Second Waiver and
          Consent also established a five day cure period for Navistar to respond
          to
          acceleration claims before NFC’s Credit Agreement would be in default and thus,
          subject to immediate payment.
 
 On
          April
          12, 2006, NFC and Navistar filed a current report on Form 8-K announcing
          the
          dismissal of their long term independent registered public accounting
          firm.  On that date, the Audit Committee of the Board of Directors of
          NFC also announced the approval of the retention of KPMG LLP (“KPMG”) as the
          company’s independent registered public accounting firm with respect to the
          audit of the company’s financial statements for its fiscal years ended October
          31, 2005 and October 31, 2006.
 
 On
          November 8, 2006, with the concurrence of its Audit Committee, NFC announced
          that the company’s previously issued audited financial statements and the
          independent auditors' reports thereon for the years ended October 31, 2002
          through 2004, and all quarterly financial statements for periods after
          November
          1, 2002 should no longer be relied upon because of errors in such financial
          statements.
 
 In
          November 2006, NFC obtained a Third Waiver and Consent which expired upon
          the
          earlier of October 31, 2007 or the date on which date NFC and Navistar
          shall
          have timely filed a report on Form 10-K or 10-Q with the Securities Exchange
          Commission.
 
 On
          March
          28, 2007, NFC entered into a First Amendment to the Amended and Restated
          Credit
          Agreement providing for additional term loans in the amount of $220.0 million
          to
          be used for general corporate purposes including payment of a dividend
          to
          International.
 
 On
          October 23, 2007, NFC received a Second Amendment and Fourth
          Waiver.  The waiver extends through December 31, 2007, and expands the
          previous waivers which waive any default or event of default that would
          result solely from NFC’s and the company’s failure to meet the filing
          requirements mentioned in third waiver and including Sections 13 and 15
          of the
          Exchange Act of 1934, as amended, with respect to their Annual Reports
          on Form
          10-K for 2007.  During the period from November 1, 2007 until the
          waiver terminates, interest rate on certain loans under the Agreement shall
          be
          increased by 0.25%.
 
 In
          December 2007, NFC received a Fifth Waiver to the Agreement expanding the
          scope
          of certain default conditions covered by the waiver therein until November
          30,
          2008.
  65
 ***Index***
  NAVISTAR
          FINANCIAL CORPORATION AND SUBSIDIARIES
 
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
  In
          November 2007, NFC obtained waivers for the private retail securitizations and
          the private portion of the wholesale note securitizations.  These
          waivers are similar in scope to those of the Agreement and expire on or
          about
          November 30, 2008.
 
 
 **19.
          SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)**
 
 We
          have
          restated our condensed consolidated financial statements for the quarters
          ended
          January 31, 2005, April 30, 2005, and July 31, 2005. The following tables
          present selected financial data derived from those restated financial
          statements. We did not undertake to prepare restated condensed consolidated
          financial statements for quarters within the year ended October 31, 2004.
          Accordingly, we have not presented selected quarterly financial data for
          2004 as
          required by Item 302(a) of Regulation S-K. For additional information and
          a
          detailed discussion of the nature of the restatement adjustments see Note
          2,
 
 Quarterly
          condensed consolidated statements of income data (in millions):
 
 Three
                    months ended
                  January
                    31, 2005
                
                
                Three
                    months ended
                  April
                    30, 2005Previously
                    Reported
                
                
                Restated
                
                
                Previously
                    Reported
                
                
                RestatedRevenue
                
                $
                64.7
                
                
                $
                81.3
                
                
                $
                64.2
                
                
                $
                84.7Interest
                    expense
                
                
                10.2
                
                
                
                28.2
                
                
                
                11.1
                
                
                
                28.3Credit,
                    collection and administrative
                
                
                10.4
                
                
                
                9.4
                
                
                
                13.6
                
                
                
                14.1Depreciation
                    on operating leases
                
                
                8.2
                
                
                
                8.2
                
                
                
                8.1
                
                
                
                7.5Net
                    income
                
                
                19.1
                
                
                
                19.8
                
                
                
                14.9
                
                
                
                18.5
 
 
 Three
                    months ended
                  July
                    31, 2005
                
                
                Three
                    months ended
                  October
                    31, 2005Previously
                    Reported
                
                
                RestatedRevenue
                
                $
                64.7
                
                
                $
                91.8
                
                
                
                
                $
                96.2Interest
                    expense
                
                
                15.3
                
                
                
                36.1
                
                
                
                
                
                40.7Credit,
                    collection and administrative
                
                
                12.6
                
                
                
                11.3
                
                
                
                
                
                10.5Depreciation
                    on operating leases
                
                
                7.8
                
                
                
                7.4
                
                
                
                
                
                6.6Net
                    income
                
                
                14.5
                
                
                
                19.6
                
                
                
                
                
                21.3
  66
 ***Index***
  NAVISTAR
          FINANCIAL CORPORATION AND SUBSIDIARIES
 
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
  Quarterly
          condensed consolidated statements of financial condition data (in
          millions):
 
 As
                    of
                  January
                    31, 2005
                
                
                As
                    of
                  April
                    30, 2005Previously
                    Reported
                
                
                Restated
                
                
                Previously
                    Reported
                
                
                RestatedFinance
                    receivables, net
                
                $
                965.3
                
                
                $
                3,077.9
                
                
                $
                886.1
                
                
                $
                3,192.1Amounts
                    due from sales of receivables
                
                
                394.7
                
                
                
                501.0
                
                
                
                442.1
                
                
                
                533.2Restricted
                    cash and cash equivalents
                
                
                315.7
                
                
                
                529.6
                
                
                
                507.8
                
                
                
                740.8Total
                    assets
                
                
                1,873.2
                
                
                
                4,355.8
                
                
                
                2,014.4
                
                
                
                4,675.5Senior
                    and subordinated debt
                
                
                1,297.4
                
                
                
                3,737.9
                
                
                
                1,317.1
                
                
                
                3,933.1Total
                    liabilities and shareowner’s equity
                
                
                1,873.2
                
                
                
                4,355.8
                
                
                
                2,014.4
                
                
                
                4,675.5
 
 
 As
                    of
                  July
                    31, 2005
                
                
                As
                    of
                  October
                    31, 2005Previously
                    Reported
                
                
                RestatedFinance
                    receivables, net
                
                $
                733.8
                
                
                $
                3,267.7
                
                
                
                
                $
                3,410.2Amounts
                    due from sales of receivables
                
                
                481.8
                
                
                
                434.4
                
                
                
                
                
                441.2Restricted
                    cash and cash equivalents
                
                
                1,013.9
                
                
                
                1,636.7
                
                
                
                
                
                543.8Total
                    assets
                
                
                2,431.3
                
                
                
                5,558.6
                
                
                
                
                
                4,618.0Senior
                    and subordinated debt
                
                
                1,825.9
                
                
                
                4,931.7
                
                
                
                
                
                3,962.1Total
                    liabilities and shareowner’s equity
                
                
                2,431.3
                
                
                
                5,558.6
                
                
                
                
                
                4,618.0
 
  67
 ***Index***
  **NAVISTAR
          FINANCIAL CORPORATION AND SUBSIDIARIES**
 
 
 **Report
          of Independent Registered Public Accounting Firm**
 
 The
          Board
          of Directors and Shareowner
 Navistar
          Financial Corporation:
 
 We
          have
          audited the accompanying consolidated statements of financial condition
          of
          Navistar Financial Corporation and subsidiaries (the Company) as of October
          31,
          2005 and 2004, and the related consolidated statements of income, shareowner’s
          equity and comprehensive income and cash flows for each of the years in
          the
          three-year period ended October 31, 2005.  These consolidated
          financial statements are the responsibility of the Company’s
          management.  Our responsibility is to express an opinion on these
          consolidated financial statements based on our audits.
 
 We
          conducted our audits in accordance with the standards of the Public Company
          Accounting Oversight Board (United States). Those standards require that
          we plan
          and perform the audit to obtain reasonable assurance about whether the
          financial
          statements are free of material misstatement. An audit includes consideration
          of
          internal control over financial reporting as a basis for designing audit
          procedures that are appropriate in the circumstances, but not for the purpose
          of
          expressing an opinion on the effectiveness of Navistar Financial Corporation’s
          internal control over financial reporting. Accordingly, we express no such
          opinion. An audit includes examining, on a test basis, evidence supporting
          the
          amounts and disclosures in the financial statements. An audit also includes
          assessing the accounting principles used and significant estimates made
          by
          management, as well as evaluating the overall financial statement presentation.
          We believe that our audits provide a reasonable basis for our
          opinion.
 
 As
          discussed in Note 2 to the accompanying consolidated financial statements,
          the
          Company has restated its consolidated statement of financial condition
          as of
          October 31, 2004, and the related consolidated statements of income,
          shareowner’s equity and comprehensive income and cash flows for the years ended
          October 31, 2004 and 2003, which were previously audited by other
          auditors.
 
 In
          our
          opinion, the consolidated financial statements referred to above present
          fairly,
          in all material respects, the financial position of Navistar Financial
          Corporation and subsidiaries as of October 31, 2005 and 2004, and the results
          of
          their operations and their cash flows for each of the years in the three-year
          period ended October 31, 2005, in conformity with U.S. generally accepted
          accounting principles.
 
 The
          Company has not presented the 2004 selected quarterly financial data, as
          specified by Item 302(a) of Regulation S-K, that the Securities and Exchange
          Commission requires as supplementary information to the basic financial
          statements.
 
 /s/
                    KPMG LLP
  Chicago,
          Illinois
 December
          7, 2007
  68
 ***Index***
  **Item
          9.  Changes in and Disagreements with Accountants on
          Accounting and Financial Disclosure**
 
 In
          April
          2006, the Audit Committee of the Board of Directors dismissed our former
          independent registered public accounting firm, Deloitte & Touche LLP
          (“Deloitte”).
 
 The
          audit
          reports of Deloitte on our financial statements as of and for the two years
          ended October 31, 2004 and October 31, 2003 neither contained any adverse
          opinion or disclaimer of opinion, nor, were such reports qualified or modified
          as to uncertainty, audit scope or accounting principles, except as described
          in
          the following sentence.  The audit report of Deloitte on our
          consolidated financial statements for the year ended October 31, 2004 indicated
          that, as described in Note 2 to such consolidated financial statements,
          the
          consolidated financial statements for the two years ended October 31, 2003
          and
          October 31, 2002 had been restated.
 
 During
          the two years ended October 31, 2005 and October 31, 2004, and during the
          subsequent interim period through April 7, 2006, there was no “Disagreement” as
          that term is described in Item 30(a)(1)(iv) of Regulation S-K between us
          and
          Deloitte on any matter of accounting principles or practices, financial
          statement disclosure, or auditing scope or procedure that, if not resolved
          to
          Deloitte’s satisfaction, would have caused Deloitte to make reference to the
          subject matter of the disagreement in connection with its audit
          report.
 
 There
          were no “reportable events” as that term is described in Item 304(a)(1)(v) of
          Regulation S-K during the years ended October 31, 2005 and October 31,
          2004, or
          during the subsequent interim period through April 7, 2006, except as described
          in the following paragraphs.
 
 Deloitte
          previously identified the following deficiencies in our internal controls
          that
          existed on October 31, 2004 and that in Deloitte’s judgment were considered to
          be material weaknesses: (i) the design of internal controls to appropriately
          apply certain generally accepted accounting principles at NFC that resulted
          in a
          restatement of the financial statements; and, (ii) the lack of timely resolution
          of outstanding reconciling items in NFC’s collection (suspense) account
          reconciliations.
 
 On
          February 16, 2006, Navistar’s Board of Directors reassigned their former
          Controller, who was also one of our directors.  The reassignment of
          the former Controller was in response to Deloitte having advised the Audit
          Committee that Deloitte was no longer willing to rely on the representations
          of
          the former Controller.
 
 Simultaneously
          with this reassignment, we also reassigned our former Treasurer to a position
          within Navistar’s treasury department in response to Deloitte’s request that the
          former Treasurer no longer serve as one of our officers.
 
 In
          connection with our ongoing review of accounting matters in connection
          with the
          preparation of our financial statements for 2005, Deloitte identified a
          number
          of accounting issues that warranted further review primarily at
          Navistar.  The outcome of such review might or might not have led
          Deloitte to expand the scope of its audit had it continued as our independent
          registered public accounting firm.
 
 In
          accordance with Item 4.01 of form 8-K and Item 304 of Regulation S-K, we
          provided Deloitte with a copy of our disclosures to the SEC announcing
          Deloitte’s dismissal and requesting that Deloitte furnish us with a letter
          addressed to the SEC stating whether or not it agreed with the statements
          made
          by us.  On April 26, 2006, we received Deloitte’s response
          letter.
 
 In
          its
          letter, Deloitte stated that there was no “disagreement as that term is
          described in Item 304(a)(l)(iv) of Regulation S-K between us and Deloitte
          on any
          matter of accounting principles or practices, financial statement disclosure,
          or
          auditing scope or procedure that if not resolved to Deloitte’s satisfaction,
          would have caused Deloitte to make reference to the subject matter of the
          disagreement in connection with its audit report.
 
 Deloitte
          also made certain statements in its letter regarding “reportable events” as that
          term is described in Item 304(a)(l)(v) of Regulation S-K.  Deloitte
          stated in its letter that our disclosure contained “inaccurate or incomplete
          descriptions of significant matters which had already led us to substantially
          expand our audit scope prior to our dismissal.”  Those statements are
          summarized below:
  69
 ***Index***
  **Accounting
          Matters**
 
 The
          accounting matters that had been identified by us and discussed with the
          Company
          and the Audit Committee in connection with our incomplete audit of the
          Company’s
          fiscal 2005 financial statements included, but were not limited to the
          following:
 
 ·
                Appropriateness
                    of sale accounting for certain transactions with leaseback terms,
                    including certain transactions which also involved International;
                    whether
                    certain leases should have been accounted for as capital leases
                    rather
                    than as operating leases; the appropriateness of revenue recognition
                    at
                    International and related implications to us; and, the existence
                    of
                    unreconciled differences in reconciliations of inter-company
                    accounts.
 
 ·
                It
                    is possible that the ultimate resolution of the above matters
                    could also
                    affect the Company’s financial statements for fiscal years prior to
                    2005.  None of these accounting matters were resolved to our
                    satisfaction prior to our
                    dismissal.
 
 **Internal
          Controls Over Financial Reporting**
 
 In
          our
          February 20, 2006 meeting with the Audit Committee and other independent
          members
          of the Board of Directors, we informed these individuals that we were concerned
          with the appropriateness of certain aspects of the Company’s internal control
          environment, including management’s commitment to effective internal control and
          accurate financial reporting and the lack of personnel with appropriate
          qualifications and training within the financial reporting and closing
          process.  We had not reached a final conclusion as to whether or not
          such concerns represented material weaknesses in internal control over
          financial
          reporting as we were dismissed prior to the completion of our
          audit.
 
 In
          April,
          2006, the Audit Committee approved the engagement of KPMG LLP (“KPMG”) as our
          independent registered public accounting firm.  We did not consult
          with KPMG in the past regarding the application of accounting principles
          to a
          specified transaction to the type of audit opinion that might be rendered
          on our
          consolidated financial statements, or as to any disagreement or reportable
          event
          as described in Item 30(a)(l)(iv) of Regulation S-K.
 
 We
          authorized Deloitte to respond fully to the inquiries of KPMG concerning
          the
          subject matter of the foregoing.
 
 
 **Item
          9A***.***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.
 
 Based
          on the material weaknesses
          identified below, our Chief Executive Officer and Chief Financial Officer
          have
          concluded that, as of October 31, 2005, our disclosure controls and procedures
          were not effective.  The following material weaknesses were
          identified:
  70
 ***Index***
  **Material
                    Weakness Description**
                
                **Remediation
                    Actions**1.*Control
                    Environment:*As of October 31, 2005, management had not established a
                    strong
                    consciousness regarding the application of ethics across all
                    areas of the
                    Company and the importance of internal controls over financial
                    reporting
                    including adherence to generally accepted accounting principles.
                    This
                    weakness in the control environment likely contributed to many
                    of the
                    other material weaknesses disclosed herein.  As identified by an
                    independent investigation initiated by Navistar’s Board of Directors,
                    certain members of management and other employees, in place at
                    that time,
                    were involved in instances of intentional misconduct.  With
                    respect to these instances, these individuals are no longer employed
                    by
                    the Company.
                
                We
                    are committed to strengthening our control environment and reemphasizing
                    the importance of ethics, integrity and internal control overall
                    and
                    especially related to financial reporting. We are actively engaged
                    in the
                    planning for, and implementation of, remediation efforts to address
                    the
                    control deficiencies. Herein we describe specific activities
                    we are
                    implementing which are designed to strengthen our overall control
                    environment. More specifically related to ethics and integrity,
                    we are
                    performing the following:
                  ·We
                    have strengthened
                    our finance and accounting team as described in detail under
                    *Accounting Personnel*below.
                  ·We
                    are actively
                    refreshing and disseminating the Code of Conduct developed by
                    Navistar.  Under our process training will be refreshed, and 100
                    percent of our employees will be trained and will sign the code
                    of
                    conduct.
                  ·Our
                    top leaders will
                    continue to reinforce the importance of conducting business and
                    accounting
                    activities in compliance with the code of conduct, with the highest
                    integrity and ethical behavior, and living up to our Company’s core
                    values.  They also will meet with the top 200 leaders throughout
                    Navistar on   a regular basis to discuss these values and
                    other topics.
                  ·Our
                    company’s core
                    values expect our people to do the right thing.  We are
                    enhancing our communication and the visibility of our core values
                    through
                    group meetings and other communication efforts such as training,
                    posters,
                    desk reminders, information pamphlets, etc.  We will also be
                    refreshing some of the definitions of the core values to ensure
                    that they
                    reflect contemporary challenges and issues. Our efforts are designed
                    to
                    ensure that the values become a more visible and sustainable
                    foundation of
                    what we do and how we behave.
                  ·We
                    are investigating
                    approaches to design a robust finance/accounting organization,
                    including
                    the appropriate number of people, the right skill sets and certifications,
                    technology, and training/education.   We will implement
                    greater oversight and monitoring of accounting policies and procedures
                    in
                    all critical accounting areas, including areas involving management
                    judgment and discretion.
                  ·We
                    will increase our
                    efforts to educate our people as to their obligations to report
                    inappropriate behavior, and enhance communication and support
                    for doing
                    the right thing even if it’s unpopular.  We will reemphasize and
                    invigorate our communications to all our employees regarding
                    the
                    availability of our Employee Hotline, through which all employees
                    at all
                    levels can anonymously submit information or express concerns
                    regarding
                    accounting, financial reporting, or other irregularities they
                    have become
                    aware of or have observed.  In addition, these communications
                    will emphasize the existence and availability of other reporting
                    avenues
                    or forums for all employees, such as their management chain,
                    their Human
                    Resources representatives, International’s Compliance Office, the Legal
                    Department, Navistar’s Internal Audit Department and direct contact with
                    the Chief Financial Officer of the Company or International or
                    the
                    Company’s or Navistar’s Audit Committee.
                  ·International
                    is
                    evaluating the best practices for the role of Chief Ethics and
                    Compliance
                    Officer. International will make a decision around filling the
                    role, and
                    as part of this effort, they will determine the appropriate
                    responsibilities and monitoring programs.
                  ·International
                    has
                    launched a new website designed to heighten our people’s awareness of
                    internal controls. The site is a portal to many of the company’s policies
                    and procedures, internal control training documents, contact
                    references
                    for inquiries about internal controls, and reemphasize’s the importance of
                    the company’s core values.
                  ·Our
                    General Counsel,
                    Assistant General Counsel, and CFO are members of Navistar’s Disclosure
                    Committee.  These individuals and our Controller constitute our
                    Disclosure Committee.  Navistar’s Disclosure Committee charter
                    was benchmarked against best practices and appropriate revisions
                    were
                    made.
  71
 ***Index***
  **Material
                    Weakness Description**
                
                **Remediation
                    Actions**2.*Accounting
                    Personnel*: As set forth in the Company’s Form 10-K for fiscal year
                    2004 and in the Company’s Form 10-Q’s for the first three quarters of
                    2005, there was a material weakness concerning the lack of sufficient
                    specialized securitization accounting personnel.  We did not
                    have a sufficient number of accounting personnel with an appropriate
                    level
                    of accounting knowledge, experience and training in the application
                    of
                    generally accepted accounting principles (“GAAP”).  This
                    includes a previously identified material weakness, disclosed
                    in fiscal
                    2004, which related to accounting for receivable securitization
                    transactions. This weakness resulted in an inadequate segregation
                    of
                    duties and an insufficient review of information pertaining to
                    securitization accounting.
                  There
                    was also a material weakness related to the accounting for allowance
                    for
                    losses.  We did not maintain effective controls to properly
                    account for the timing of losses associated with repossessed
                    assets and
                    the calculation of loss factors used in determining the allowance
                    for
                    losses.  Specifically, we did not record the loss at the time
                    that the repossession occurred and instead recorded the loss
                    when the
                    repossessed asset was sold.
                
                We
                    have hired additional accounting personnel with appropriate levels
                    of
                    accounting knowledge, experience and training, and retained outside
                    consultants to supplement our staff. We increased education in
                    GAAP
                    accounting especially in the area of securitization accounting
                    for our
                    staff and executive management. We will continue to focus on
                    increasing
                    and improving skill sets through training.
                  
                  Additionally,
                    we hired an independent organization to assist in the development
                    of
                    various models necessary to value the various assets created
                    as a result
                    of a securitization transaction.
                  
                  We
                    established control procedures to require that losses associated
                    with
                    repossessed assets be recorded at the time the repossession occurs
                    and
                    changed procedures related to loss recoveries, loss sharing between
                    us and
                    International and other factors used in the calculation to determine
                    the
                    allowance for loss.
  72
 ***Index***
  **Material
                    Weakness Description**
                
                **Remediation
                    Actions**3.*Accounting
                    Policies and Procedures*:  As set forth in the Company’s
                    Form 10-K for fiscal year 2004, there were material weaknesses
                    concerning
                    a misapplication of GAAP related to securitization accounting
                    and an
                    associated lack of timely resolution of outstanding reconciling
                    items in
                    certain collection accounts.    Also, we did not have
                    a formalized process for monitoring, updating, disseminating,
                    and
                    implementing GAAP-compliant accounting policies and
                    procedures.
                
                The
                    Financial Reporting group of our parent, International Truck
                    and Engine
                    Corporation (“International”), has been enhanced to include experienced
                    technical accounting personnel to provide guidance about, and
                    help ensure
                    compliance with, GAAP.  The group has been updating policies and
                    procedures, confirming they are GAAP–compliant and conducting related
                    training for our accounting personnel. They have implemented
                    procedures
                    for tracking new accounting pronouncements, evaluating their
                    impact on our
                    financial reporting and refreshing policies as needed.  The
                    group will be instrumental in helping our accounting staff with
                    critical
                    accounting areas, including areas involving management judgment
                    and
                    discretion and non-routine transactions.
                  
                  We
                    will continue to update our policies and procedures, and our
                    Sarbanes-Oxley Compliance department and the Corporate Audit
                    and
                    Consulting department of International will help verify that
                    our
                    accounting personnel are complying with the revised policies
                    and
                    procedures.4.*Internal
                    Audit:*We utilize Navistar’s corporate internal audit function in lieu of
                    having a separate department. Navistar’s internal audit department was not
                    an effective monitoring control over financial reporting for
                    Navistar and
                    its subsidiaries.
                
                Navistar’s
                    corporate internal audit function now reports directly to the
                    Chair of the
                    Navistar Audit Committee. NFC is a wholly-owned subsidiary of
                    International Truck and Engine Corporation, which is a wholly-owned
                    subsidiary of Navistar. Under Navistar’s Audit Committee’s direction, the
                    new Vice President of the Corporate Audit and Consulting department
                    has
                    developed and implemented many specific action plans to improve
                    the
                    effectiveness of the internal audit function. Specifically, the
                    annual
                    risk assessment and strategic planning process has been revised
                    to include
                    additional qualitative and financial reporting-related risk factors
                    and
                    will be kept current; standard periodic management and Audit
                    Committee
                    communications, including new audit report formats and status
                    updates,
                    have been developed and implemented; the department has been
                    reorganized,
                    including increased minimum technical and audit experience requirements
                    for each position; outside consultants have been engaged to augment
                    the
                    current mix of skill sets and additional recruiting efforts are
                    underway;
                    and a new formal recommendation follow-up process has been developed
                    and
                    implemented including a database to maintain, track and report
                    the results
                    of follow-up activity to management and the Audit
                    Committee.  Finally, the charter of the internal audit function
                    has been updated to reflect these changes.
  73
 ***Index***
  **Material
                    Weakness Description**
                
                **Remediation
                    Actions***5.**Information
                    Technology (IT):*Our IT general controls over computer program
                    development, computer program changes, computer operations and
                    system user
                    access to programs and data were ineffectively designed. Additionally,
                    we
                    concluded that computer application controls were unreliable
                    and
                    ineffective.
                
                We
                    have hired additional information technology resources. International
                    has
                    formed an IT Remediation team that includes employees from our
                    IT
                    Department, which created specific action plans to address the
                    deficiencies identified and develop new policies and procedures.
                    An
                    outside consulting firm was engaged to help with remediation
                    efforts and,
                    along with the internal audit function, to help evaluate the
                    effectiveness
                    of the corrective actions taken.  In December 2006, computer
                    application and operational change management disciplines were
                    implemented
                    which have enhanced our systems development life cycle and computer
                    program change management. In March 2007, we established the
                    requirement
                    for semi-annual system user access reviews, restricting access
                    to
                    sensitive financial system transactions and data. A significant
                    effort is
                    underway to address system user access deficiencies. Also in
                    March 2007,
                    user administration policies and procedures were enhanced to
                    establish
                    proper management approvals and timeliness of user additions,
                    deletions
                    and access changes. International also hired a new Chief Information
                    Officer in October 2007.*6.**Pension
                    Accounting:*We utilize the services of the pension and benefits group
                    at International to address our pension accounting needs. International
                    did not maintain effective controls to accurately estimate the
                    total
                    entity pension and OPEB obligations. Specifically, the application
                    of the
                    methodology used to determine historical discount rates was not
                    properly
                    documented and reviewed and lacked proper support for other assumptions
                    used in accounting for the obligations*.*
                
                International’s
                    pension and benefits group has transitioned to an accepted model
                    for
                    discount rates to reduce the judgment necessary in calculating
                    our pension
                    and OPEB obligations. Additionally, International’s pension and benefits
                    group now utilize external actuaries to perform the computations,
                    modeling
                    and reporting.  Prior to issuing our 2005 consolidated financial
                    statements, International has invested considerable resources
                    and
                    performed appropriate analysis to accurately account for and
                    disclose our
                    pension and OPEB matters.
  74
 ***Index***
  **Material
                    Weakness Description**
                
                **Remediation
                    Actions***7.**Income
                    Tax
                    Accounting:*We utilize the services of the corporate tax group at
                    International to address our tax accounting
                    needs.  International did not retain detailed supporting
                    documentation for our tax liabilities.
                
                International
                    has developed detailed schedules supporting all tax liability
                    requirements, and has taken steps to ensure they follow the corporate
                    record retention policies.*8.**Journal
                    Entries*: We did not maintain effective controls over review and
                    approval of journal entries.  Specifically, journal entries were
                    not reviewed thoroughly and approved by the appropriate level
                    of
                    management to ensure the accuracy and appropriateness of the
                    accounts used
                    when entries were recorded.
                
                Prior
                    to issuing our 2005 financial statements, we performed extensive
                    quality
                    control procedures to minimize the risk of errors and ensure
                    the
                    restatement journal entries were properly reviewed and
                    approved.  We also implemented quality control procedures to
                    minimize the risk of errors and ensure that journal entries are
                    properly
                    reviewed and approved going forward.
 
 In
          February 2006, in connection with the review of accounting matters identified
          during the preparation of our financial statements for fiscal year 2005,
          Navistar’s Audit Committee, with the assistance of independent counsel and
          forensic accountants, initiated an investigation into the propriety of
          accounting and auditing confirmation matters relating to vendor rebates.
          The
          investigation was subsequently expanded to include a review of various
          accounting issues that arose during the course of working on the financial
          restatements of fiscal years 2003 and 2004 and the first three quarters
          of
          fiscal year 2005.
 
 On
          December 29, 2006, Navistar’s Board of Directors formed an Investigatory
          Oversight Special Committee of independent directors to oversee and assist
          its
          Audit Committee in its investigation.  Independent counsel for
          Navistar’s Audit Committee provided regular updates on the status of the
          investigation to the staff of the Division of Enforcement of the
          SEC.
 
 Navistar’s
          Audit Committee’s extensive investigation identified various accounting errors,
          instances of intentional misconduct and certain weaknesses in our internal
          controls.  Navistar’s Audit Committee’s investigation found that we
          did not have the organizational accounting expertise during the fiscal
          years
          2003 through 2005 to effectively determine whether our financial statements
          were
          accurate. The investigation found that we did not have such expertise because
          we
          did not adequately support and invest in accounting functions, did not
          sufficiently develop our own expertise in technical accounting, and as
          a result,
          we relied more heavily than appropriate on our then outside auditor. The
          investigation also found that during the financial restatement period,
          this
          environment of weak financial controls and under supported accounting functions
          allowed accounting errors to occur, some of which arose from certain instances
          of intentional misconduct to improve the financial results. Navistar’s Audit
          Committee has discussed its findings and various recommended remediation
          procedures with the Investigatory Oversight Special Committee of Navistar’s
          Board of Directors, management and KPMG LLP.  As part of our
          commitment to strengthening our overall internal control over financial
          reporting, we have implemented various personnel actions, including hiring
          accounting personnel with appropriate levels of accounting knowledge, experience
          and training, and numerous other remediation actions that include the employees
          involved in the intentional misconduct being no longer employed by the
          Company.  Management also has implemented measures to improve the
          effectiveness of communications concerning the importance of ethics, integrity
          and internal control over financial reporting.  For additional
          information and a detailed description of our restatement, see Note 2 to
          the
          accompanying consolidated financial statements and within Item 7,
*Management’s Discussion and Analysis of Financial Condition and Results of
          Operations*.
  75
 ***Index***
  **Changes
          in Internal Control over Financial Reporting**
 
 Our
          management is responsible for establishing and maintaining adequate internal
          control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f)
          of
          the Exchange Act.  Along with the specific remediation actions we
          described above, to strengthen our disclosure controls and procedures we
          have
          made the following changes:
 
 ·
                Established
                    an Audit Committee specifically for Navistar Financial Corporation
                    and
                    appointed an independent member of the Board of Directors to
                    chair the
                    committee;
 ·
                Re-designed
                    our management certification process in June 2007 to help identify
                    any
                    matters that might require disclosure and to require sub-certifications
                    from multiple levels of management throughout the company. We
                    utilized
                    this process as part of the preparation of our fiscal year 2005
                    Annual
                    Report on Form 10-K.
 
 We
          believe the above measures have strengthened our accounting and financial
          reporting controls.  We intend to continue to take the necessary
          actions to remediate and eliminate our material weaknesses. We are committed
          to
          providing timely, thorough, and accurate financial reporting. Most importantly,
          prior to filing our fiscal year 2005 Annual Report on Form 10-K, we have
          made
          significant efforts to review our financial results in light of the
          aforementioned weaknesses to conclude that the financial statements included
          herein fairly present, in all material respects, our financial position,
          results
          of operations, and cash flows for the periods presented in conformity with
          GAAP.
 
 
 **Item
          9B.  Other Information**
 
 None.
  76
 ***Index***
  **PART
          III**
 
 **Items
          10, 11, 12 and 13**
 
 Intentionally
          omitted.  See the index page of this Report for
          explanation.
 
 **Item
          14.  Principal Accountant Fees and
          Services**
 
 Deloitte
          & Touche LLP ("Deloitte") was our independent registered public accounting
          firm in 2004 and 2005.  On April 7, 2006, our Audit Committee of the
          Board of Directors dismissed Deloitte and approved the engagement of KPMG
          LLP
          (“KPMG”) as our independent registered public accounting firm.  As a
          result of Deloitte’s dismissal, Deloitte did not complete its audit of our
          financial statements for 2005.  The following table presents aggregate
          fees billed by Deloitte including associated out-of-pocket costs for both
          audit
          and non-audit services rendered for the years ended October 31, 2005 and
          2004,
          on our behalf.
 
 
 (Amounts
                    in thousands)
                
                **2005**
                
                
                2004Audit
                    FeesBasic
                    Audit Fees(a)
                
                **$**
                **519.5**
                
                
                $
                918.6Audit
                    Related Fees (b)
                
                ****
                **352.5**
                
                
                
                192.5Total
                    Audit Fees
                
                **$**
                **872.0**
                
                
                $
                1,111.1Tax
                    Fees
                
                **$**
                **----**
                
                
                $
                ----All
                    Other Fees
                
                **$**
                **----**
                
                
                $
                ----
 
 (a)
                In
                    2004, includes fees for the restatement of NFC’s financial statements for
                    fiscal years 2003 and 2002.
 (b)
                Includes
                    fees for (i) examination reports on NFC’s minimum servicing standards for
                    its securitization transactions, (ii) Sarbanes Oxley Section
                    404
                    readiness, and (iii) data verification and agreed-upon procedures
                    related
                    to asset securitizations.
 
 All
          fees
          payable to KPMG related to the audit of the consolidated financial statements
          for the three year period ended October 31, 2005, have been billed to Navistar.
          Fees paid or payable to KPMG relating to audit related fees rendered to
          us for
          the year ending October 31, 2007 and 2006 were $158.0 thousand and $116.0
          thousand, respectively.
 
 **Audit
          Committee pre-approval policy**
 
 Information
          required by Item 14 of this Form and the audit committee’s pre-approval policies
          and procedures regarding the engagement of the principal accountant are
          incorporated herein by reference from Navistar’s definitive Proxy Statement for
          the March 23, 2005, Annual Meeting of Shareowners under the caption “Audit
          Committee Report – Independent Auditor Fees”.
 
 As
          part
          of this pre-approval process, our audit committee reviews the type of and
          fees
          for agreed upon procedures to be performed by our principal accountants
          and
          makes recommendations to Navistar’s audit committee.
  77
 ***Index***
  **PART
          IV**
 
 **Item
          15.  Exhibits, and Financial Statement Schedules and
          Report on Form 8K**
 
 **Exhibits,
          Including Those Incorporated By Reference and Financial Statement
          Schedules**
 
 
 Exhibits
          Index:
 
 3
                Articles
                    of Incorporation and By-Laws
                E-14
                Instruments
                    Defining Rights of Security Holders,
                  including
                    Indentures
                E-210
                Material
                    Contracts
                E-312
                Calculation
                    of Ratio of Earnings to Fixed Charges
                E-42815
                Financial
                    Statement Schedules
                E-42921
                Subsidiaries
                    of the Registrant
                E-43231.1
                CEO
                    Certification Pursuant to
                  Rule
                    13a-14(a) and 15d-14(a)
                E-43331.2
                CFO
                    Certification Pursuant to
                  Rule
                    13a-14(a) and 15d-14(a)
                E-43532
                CEO
                    and CFO Certification Pursuant to Section 1350 of Chapter 1350
                    of Chapter
                    63 of Title 18 of the United States Code
                E-437
 
 **Financial
          Statements**
 
 See
          Index
          to Financial Statements in Item 8.
 
 **Reports
          on Form 8-K**
  78
 ***Index***
  **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
                    Financial Corporation(Registrant)Date:  December
                    7, 2007
                By:  /s/
                **JOHN
                    V. MULVANEY, SR.**John
                    V. Mulvaney, Sr.VP,
                    CFO, & Treasurer(Principal
                    Financial Officer)
 79
 ***Index***
  **NAVISTAR
          FINANCIAL CORPORATION AND SUBSIDIARIES**
 **Exhibit
          24**
 **POWER
          OF ATTORNEY**
 
 Each
          person whose signature appears below does hereby make, constitute and appoint
          Pamela Turbeville, John V. Mulvaney, Sr. and David Derfelt and each of
          them
          acting individually, true and lawful attorneys-in-fact and agents with
          power to
          act without the other and with full power of substitution, to execute,
          deliver
          and file, for and on such person’s behalf, and in such person’s name and
          capacity or capacities as stated below, any amendment, exhibit or supplement
          to
          the Form 10-K Report making such changes in the report as such attorney-in-fact
          deems appropriate.
 
 **SIGNATURES**
 
 Pursuant
          to the requirements of the Securities Exchange Act of 1934, this report
          has been
          signed below by the following persons on behalf of the registrant and in
          the
          capacities and on the dates indicated:
 
 **Signature**
                
                **Title**
                
                **Date**/s/
                **JOHN
                    V. MULVANEY, SR.**
                  John
                    V. Mulvaney, Sr.
                
                Vice
                    President, Chief Financial Officer and Treasurer; Director
                  (Principal
                    Financial Officer and Principal Accounting Officer)
                
                December
                    7, 2007/s/
                **PAMELA
                    J. TURBEVILLE**
                  Pamela
                    J. Turbeville
                
                Chief
                    Executive Officer; Director
                  (Principal
                    Executive Officer)
                
                December
                    7, 2007/s/
                **TERRY
                    M. ENDSLEY**
                  Terry
                    M. Endsley
                
                Director
                
                December
                    7, 2007/s/
                **RICHARD
                    C. TARAPCHAK**
                  Richard
                    C. Tarapchak
                
                Director
                
                December
                    7, 2007/s/
                **WILLIAM
                    A. CATON**
                  William
                    A.  Caton
                
                President;
                    Director
                
                December
                    7, 2007/s/
                **DAVID
                    L.  DERFELT**
                  David
                    L. Derfelt
                
                Vice
                    President and Controller
                
                December
                    7, 2007/s/
                **ALICE
                    M. PETERSON**
                  Alice
                    M. Peterson
                
                Director
                
                December
                    7, 2007
 
 80