UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

Dana Corporation

(Exact name of registrant as specified in its charter)

(419) 535-4500

(Registrant’s telephone number, including area code)

     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 þ

      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 þ          Accelerated filer o          Non-accelerated filer o

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

Yes o          No þ

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

DANA CORPORATION

INDEX

PART I — FINANCIAL INFORMATION

DANA CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEET

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

DANA CORPORATION

CONDENSED CONSOLIDATED STATEMENT OF INCOME (Unaudited)

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

DANA CORPORATION

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)

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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(In millions, except per share amounts)

Note 1.     Basis of Presentation

      In our opinion, the accompanying condensed consolidated financial statements include all normal recurring adjustments necessary for a fair presentation of financial condition, results of operations and cash flows for the interim periods presented. Interim results are not necessarily indicative of full-year results. We have reclassified certain amounts in 2004 to conform to the 2005 presentation.

      As described in Note 2, we have restated our financial statements for the first and second quarter of 2005 and the year 2004. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our amended Annual Report on Form 10-K/ A for the fiscal year ended December 31, 2004 (2004 Form 10-K/ A) and our amended Quarterly Reports on Forms 10-Q/ A for the quarterly periods ended March 31 and June 30, 2005.

Note 2.     Restatement of Financial Statements

      In the second quarter of 2005, senior management at our corporate office identified an unsupported asset sale transaction in our Commercial Vehicle business unit and recorded the necessary adjustments to correct for the accounting related to this matter before the accounting and reporting was completed for the quarter. During the third quarter, management initiated an investigation into the matter, found other incorrect accounting entries related to a customer agreement within the same business unit, and informed the Audit Committee of the Board of Directors of its findings. In September 2005, the Audit Committee engaged outside counsel to conduct an independent investigation of the situation. The independent investigation included interviews with nearly one hundred present and former employees with operational and financial management responsibilities for each of the company’s business units. The investigations also included a review and assessment of accounting transactions identified through the interviews noted above, and through other work performed by the company and the independent investigators engaged by the Audit Committee. The independent investigators also reviewed and assessed certain items identified as part of the annual audit performed by our independent public registered accounting firm. In announcements during October and November 2005, we reported on the preliminary findings of the ongoing management and Audit Committee investigations, including the determination that we would restate our consolidated financial statements for the first and second quarters of 2005 and for years 2002 through 2004.

      The table below shows not only the restatement effects of the investigations, but also other restatement effects that are unrelated to the investigations. The years prior to 2004 required restatement as a result of amounts recorded in 2004 that were attributable to earlier periods. Other restatement effects in the following table include differences that were identified during audits of the company and stand alone audits of businesses to be sold. We had determined that these items were individually and in the aggregate immaterial to the financial statements. In conjunction with the restatements, we corrected these items by recording them in the periods to which they were attributable. These other restatement items affected the timing of reported income, but, since they had previously been recorded, did not significantly affect the cumulative income over the periods restated.

      As a result of the restatements, our originally reported net income was increased by $2 ($.01 per share) and reduced by $15 ($.10 per share) for the three and nine months ended September 30, 2004, respectively.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited) (In millions, except per share amounts) — (Continued)

      The following table reconciles the net income and earnings per share as originally reported to amounts restated for the applicable periods.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited) (In millions, except per share amounts) — (Continued)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited) (In millions, except per share amounts) — (Continued)

CONDENSED CONSOLIDATED STATEMENT OF INCOME

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited) (In millions, except per share amounts) — (Continued)

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

      In May 2005, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 154, “Accounting Changes and Error Corrections.” SFAS No. 154 replaces Accounting Principles Board Opinion No. 20, “Accounting Changes,” and SFAS No. 3, “Reporting Accounting Changes in Interim Financial Statements,” and requires the direct effects of accounting principle changes to be retrospectively applied. The existing guidance with respect to accounting estimate changes and corrections of errors is carried forward in SFAS No. 154. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. We do not expect the adoption of SFAS No. 154 to have a material effect on our financial statements.

      In March 2005, FASB issued Interpretation No. 47 (FIN 47), “Accounting for Conditional Asset Retirement Obligations.” FIN 47 is an interpretation of SFAS No. 143, “Accounting for Asset Retirement Obligations,” and clarifies that liabilities associated with asset retirement obligations whose timing or settlement method are conditional upon future events should be recognized at fair value as soon as fair value is reasonably estimable. FIN 47 also provides guidance on the information required to reasonably estimate the fair value of the liability. We will review this matter and assess whether the obligations are reasonably estimable. FIN 47 is effective no later than December 31, 2005.

      In December 2004, the FASB issued SFAS No. 123(R), “Share-Based Payment.” SFAS No. 123(R) requires recognition of the cost of employee services provided in exchange for stock options and similar equity instruments based on the fair value of the instrument at the date of grant. The effective date for this guidance was delayed for public companies until January 1, 2006. The requirements of SFAS No. 123(R) will be applied to stock options granted subsequent to December 31, 2005, as well as the unvested portion of prior grants. On December 1, 2005, all unvested Dana stock options with an exercise price of $15.00 or more per share and all Dana stock appreciation rights (SARs) with a grant price of $15.00 or more held by our employees were immediately vested. (See Note 18 for further details.)

      We will begin recognizing compensation expense related to stock options and SARs in the first quarter of 2006. The amount of the total share-based compensation expense in 2006 will be affected by the accelerated vesting referred to above and in Note 18, as well as by the volume of grants and exercises, forfeitures, our dividend rate and the volatility of our stock price, but will be significantly less than the pro forma expense disclosed in the 2004 Form 10-K/ A . We expect to recognize approximately $4 of share-based compensation from 2006 through 2008, in the aggregate, with respect to the employee options and SARs that remain unvested at December 31, 2005.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited) (In millions, except per share amounts) — (Continued)

      The following table reconciles our average shares outstanding for purposes of calculating basic and diluted net income per share:

      The stock options excluded from the computations of diluted net earnings per share in the three and nine months ended September 30, 2005 and 2004, respectively, were excluded as their exercise prices were higher than the average price of our common stock during the respective periods.

      In accordance with our accounting policy for stock-based compensation, we have not recognized any expense relating to our stock options. The table below sets forth the amounts that would have been recorded as stock option expense for the three and nine months ended September 30, 2005 and 2004, if we had used the fair value method of accounting, the alternative policy set out in SFAS No. 123, “Accounting for Stock-Based Compensation.” As more fully discussed in Notes 3 and 18, on December 1, 2005, certain outstanding stock options and SARS were immediately vested. The resulting fourth-quarter 2005 pro forma share-based expense of $22 is not reflected in the table below, but will be shown in the notes to our financial statements for the year ended December 31, 2005.

      During the quarter ended March 31, 2005, we changed the method used to value stock option grants from the Black-Scholes method to the binomial method. We believe the binomial method provides a fair value that is more representative of our historical exercise and termination experience because the binomial method considers the possibility of early exercises of options. We have applied the binomial method to stock options granted after December 31, 2004. We are continuing to determine the fair value of prior grants using the Black-Scholes method.

      The weighted-average fair value of the 2,368,570 options granted in the first nine months of 2005 was $4.04 per share under the binomial method, using a weighted-average market value at date of grant of $14.90 and the following weighted-average assumptions: risk-free interest rate of 3.91%, a dividend yield of 2.69%, volatility of 30.8% to 31.5%, expected forfeitures of 17.93% and an expected life of 6.8 years.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited) (In millions, except per share amounts) — (Continued)

      The following table presents the stock compensation expense currently included in our financial statements related to restricted stock, restricted stock units, performance shares and stock awards, as well as the pro forma information showing results as if the stock option expense had been recorded under the fair value method.

      Our pro-forma compensation expense reported for the six months ended June 30, 2005 included tax benefits of $4 related to stock options. As a result of our providing a valuation allowance against our U.S. net deferred tax assets as of the beginning of the third quarter of 2005, no tax benefit related to stock compensation expense has been reflected for the three and nine months ended September 30, 2005. Tax benefits of $2 and $8 were reflected for the same periods in 2004.

      The components of net periodic benefit costs for the three and nine months ended September 30, 2005 and 2004 are shown in the tables below.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited) (In millions, except per share amounts) — (Continued)

      We made $45 in pension contributions to our defined benefit pension plans during the nine months ended September 30, 2005 and contributed approximately $35 during the last three months of the year.

      Comprehensive income includes net income and components of other comprehensive income, such as foreign currency translation and minimum pension liability adjustments that are charged or credited directly to shareholders’ equity.

      Our total comprehensive income (loss) for the three and nine months ended September 30, 2005 and 2004 was as follows:

      The deferred translation gain reported for the three months ended September 30, 2005 was $39, primarily the result of a stronger Canadian dollar ($28) and Brazilian real ($19) in relation to the U.S. dollar. For the nine months ended September 30, 2005, the Euro ($102), the British pound ($20) and the Swedish krona ($12) weakened against the U.S. dollar, while the Brazilian real ($49) and Canadian dollar ($18) strengthened.

      The deferred translation gain reported for the three months ended September 30, 2004 was $65. The effects related to the euro ($22), the Canadian dollar ($15) and the Brazilian real ($15) were the largest components of the quarterly change. For the nine months ended September 30, 2004, the $12 deferred gain was primarily the result of a strengthening Canadian dollar ($9) and British pound ($4), partially offset by the effect of a weakening euro ($6) relative to the U.S. dollar.

      At September 30, 2005, we maintained cash deposits of $68 to provide credit enhancement for certain lease agreements and to support surety bonds that allow us to self-insure our workers compensation obligations. These financial instruments are expected to be renewed each year. A total of $66 of the deposits may not be withdrawn.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited) (In millions, except per share amounts) — (Continued)

      Bank Facility and Accounts Receivable Program — We have a five-year bank facility, maturing on March 4, 2010, which provides us with $400 in borrowing capacity. The interest rates under this facility equal the London interbank offered rate (LIBOR) or the prime rate, plus a spread that varies depending on our credit ratings. The facility requires us to meet specified financial ratios as of the end of calendar quarters, including the ratio of net senior debt to tangible net worth; the ratio of earnings before interest, taxes and depreciation and amortization (EBITDA) less capital expenditures to interest expense; and the ratio of net senior debt to EBITDA, with all terms as defined in the facility. As amended during June 2005, the ratios are: (i) net senior debt to tangible net worth of not more than 1.1:1; (ii) EBITDA less capital expenditures to interest expense of not less than 1.25:1 at September 30, 2005, 2.25:1 at December 31, 2005, and 2.50:1 thereafter; and (iii) net senior debt to EBITDA of not greater than 3.25:1 at September 30, 2005, 2.75:1 at December 31, 2005, and 2.50:1 thereafter. The ratio calculations are based on Dana’s consolidated financial statements with DCC accounted for on an equity basis. Prior to the end of the third quarter of 2005, we obtained waivers of compliance with these financial covenants at September 30, 2005. Subsequent extensions of the waivers were obtained as described below.

      We also have an accounts receivable securitization program to help meet our periodic demands for short-term financing. This program provides up to a maximum of $275 in borrowings. The amounts available under the program are subject to reduction based on adverse changes in the credit ratings of our customers, customer concentration levels or certain characteristics of the underlying accounts receivable. This program has an annual renewal date of April 15.

      At September 30, 2005, borrowings outstanding under the various Dana lines consisted of $255 under the bank facility, $220 under the accounts receivable securitization program and $27 drawn by non-U.S. subsidiaries against uncommitted lines.

      We announced in September and October 2005, that we had lowered our 2005 earnings estimate and that we would establish a valuation allowance against our U.S. deferred tax assets and restate our financial statements for the first and second quarters of 2005, full-year 2004 and prior periods. In connection with those announcements, we obtained waivers under our bank and accounts receivable agreements of covenants requiring that our previously issued financial statements be prepared in accordance with accounting principles generally accepted in the United States (GAAP), any events of default that might have resulted or might result in connection with the announcements, and a waiver under the bank facility for all three financial covenants for the end of the third quarter of 2005. During the fourth quarter of 2005, we amended both the bank and accounts receivable agreements and we obtained extensions of the existing waivers under these agreements, to May 31, 2006 for the bank facility and to the renewal date for the accounts receivable program. The extended waiver under the bank facility included a waiver of the financial covenants. In addition, the lenders waived non-compliance with other covenants related to the delayed filing or delivery of this report, as well as the reports for the earlier periods to be restated. As part of the amendment of the bank facility, we granted security interests in certain domestic current assets and machinery and equipment. As part of the amendments to the accounts receivable agreement, our minimum senior unsecured credit rating required thereunder was reduced from BB- from Standard and Poor’s and Ba3 from Moody’s to B- from Standard and Poor’s and B3 from Moody’s.

      As a result of the restatement of our financial statements for prior periods, the filing of this Form 10-Q for the quarterly period ended September 30, 2005 was delayed. By a notice dated November 25, 2005, an agent for the holders of at least 25% in the aggregate of outstanding notes issued under our 1997 Indenture notified us that the agent deemed our failure to timely file and deliver this Form 10-Q to be a default and asked us to remedy the default. Subsequently, by notices dated December 1, 2005, the trustee under our 1997 and 2004 Indentures notified us that defaults had occurred thereunder due to our failure to timely file and deliver this Form 10-Q and asked us to remedy the defaults. We have cured all such defaults with the filing of this Form 10-Q.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited) (In millions, except per share amounts) — (Continued)

      We are in discussions with our bank group about modifications to the bank facility or a successor facility. However, there can be no assurance of the outcome of these discussions. If we do not amend or replace our bank facility as contemplated, and if our lenders were to exercise their rights thereunder when the current waivers expire, we would experience liquidity problems which would have a material adverse effect on the company, unless we obtained additional waivers or forbearance, or restructured our debt.

      Debt Reclassification — When we amended the bank facility in June 2005, we believed that we would meet the financial covenants established at that time during the following 12-month period. However, as a result of the restatement of our financial statements and changes in our earnings forecast, although we have obtained waivers of those financial covenants through May 31, 2006, we have determined that following the expiration of the waivers it is unlikely that we will be able to comply with the financial covenants for the 12-month period ending September 30, 2006. Non-compliance would trigger cross-acceleration provisions in some of our indenture agreements. Therefore, under the accounting requirements for debt classification, we have reclassified the $1,695 of our long-term debt that is subject to cross-acceleration as debt payable within one year. The $208 of outstanding notes issued under our August 2001 and March 2002 Indentures, $55 of DCC’s non-recourse debt and $17 of certain international borrowings continue to be classified as long-term debt.

      Swap Agreements — We are a party to two interest rate swap agreements, expiring in August 2011, under which we have agreed to exchange the difference between fixed rate and floating rate interest amounts on notional amounts corresponding with the amount and term of our August 2011 notes. Converting the fixed interest rate to a variable rate was intended to provide a better balance of fixed and variable rate debt. Both swap agreements have been designated as fair value hedges of the August 2011 notes. Based on the aggregate fair value of these agreements, we recorded a $3 non-current liability at September 30, 2005, which was offset by a decrease in the carrying value of long-term debt. This adjustment of long-term debt, which does not affect the scheduled principal payments, will fluctuate with the fair value of the agreements and will not be amortized as long as the swap agreements remain open. Additional adjustments to the carrying value of long-term debt resulted from the modification or replacement of swap agreements which generated cash receipts prior to 2004. These valuation adjustments, which are being amortized as a reduction of interest expense over the remaining life of the notes, totaled $9 at September 30, 2005.

      As of September 30, 2005, the interest rate swap agreements provided for us to receive an average fixed rate of 9.0% on a notional amount of $114 and pay variable rates based on LIBOR, plus a spread. The average variable rate under these contracts approximated 8.9% at September 30, 2005.

      Accounting Treatment — Estimated taxes payable or refundable on our tax returns for the current year are recognized as current tax liabilities and assets. Deferred income taxes are provided for temporary differences between the recorded values of assets and liabilities for financial reporting purposes and the basis of such assets and liabilities as measured by tax laws and regulations. Deferred income taxes are also provided for net operating losses, tax credits and other carryforwards. The amounts are stated at enacted tax rates expected to be in effect when taxes are actually paid or recovered. We provide a valuation allowance against our deferred tax assets if, based upon available evidence, we determine that it is more likely than not that some portion or all of the recorded deferred tax assets will not be realized in future periods. Creating a valuation allowance serves to increase income tax expense during the reporting period. Once created, a valuation allowance against deferred tax assets is maintained until realization of the deferred tax asset is judged more likely than not to occur. Reducing a valuation allowance against deferred tax assets serves to reduce income tax expense unless the reduction occurs due to expiration of the underlying loss or tax credit carryforward period.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited) (In millions, except per share amounts) — (Continued)

      To the extent that asset sales or other transactional activities result in capital gains, the tax liability on the capital gains is offset by the release of a portion of the valuation allowance recorded against the deferred tax asset related to our existing capital loss carryforward. Any tax benefit recognized on this basis is limited to the lower of the expected overall net gain on the transaction or the expected amount of capital loss carryforward valuation allowances to be released in connection with the transaction. The release of the valuation allowance is recognized when sales of assets or other capital gain transactions are determined to be more likely than not to occur.

      Valuation Allowance Against U.S. Deferred Tax Assets — In accordance with SFAS No. 109, “Accounting for Income Taxes,” we evaluate the carrying value of deferred tax assets on a quarterly basis as to whether it is more likely than not that we will generate sufficient future taxable income to realize our deferred income tax assets. This assessment requires significant judgment and, in making this evaluation, we consider all available positive and negative evidence. Such evidence includes historical results, trends and expectations for future pre-tax operating income, the time period over which our temporary differences will reverse and the implementation of feasible and prudent tax planning strategies.

      In performing this analysis during the third quarter of 2005, we considered the impact on our 2005 operating results of the revised outlook of our profitability in the U.S. The revised outlook of profitability was due in part to the lower than previously anticipated levels of performance, resulting from manufacturing inefficiencies and our failure to achieve projected cost reductions, as well as higher-than-expected costs for steel, other raw materials and energy which we have not been able to recover fully. In light of these developments, there was sufficient negative evidence and uncertainty as to our ability to generate the necessary level of U.S. taxable earnings to realize our net deferred tax assets in the U.S. for us to conclude, in accordance with the requirements of SFAS No. 109 and our accounting policies, that a full valuation allowance against the U.S. deferred tax assets is required. These statements reflect a valuation allowance against U.S. net deferred tax assets as of the beginning of the third quarter of 2005, as well as against deferred tax assets related to U.S. losses generated during the quarter ended September 30, 2005.

      Income Tax Expense — Income (loss) before income taxes and income tax benefits from continuing operations for the three and nine months ended September 30, 2005 and 2004 consisted of the following:

      Our income tax expense of $929 for the third quarter of 2005 included a non-cash charge of $907 for a valuation allowance against the restated net deferred tax assets in the U.S. and $13 for a valuation allowance against the U.K. net deferred tax assets as of the beginning of the third quarter of 2005. Since tax benefits relating to U.S. and U.K. losses will no longer be recognized until such time that the U.S. and U.K. operations return to sustained profitability, the expected benefit of $123 on the $351 pre-tax loss at the U.S. federal statutory rate is no longer applicable. Thus, the income tax expense of $9 represents primarily the tax provision relating to our operations outside the U.S. and U.K.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited) (In millions, except per share amounts) — (Continued)

      For the nine months ended September 30, 2005, these third-quarter factors are also the principal reasons that the tax expense differed significantly from the expected benefit at the 35% U.S. federal statutory rate.

      The $83 of income tax benefit recognized on a pre-tax loss of $32 for the three months ended September 30, 2004, differed significantly from an expected benefit of $11 at a U.S. federal statutory tax rate of 35%. The primary reasons for this difference were a $57 reduction in our valuation allowance against deferred tax assets, a $9 benefit related to the finalization of prior-year returns and a $7 benefit recorded due to an adjustment of our estimated annual effective tax rate. The adjustment to the valuation allowance was based primarily on our determination that a portion of our capital loss carryforward would be realized in connection with DCC asset sales and the settlement of Internal Revenue Service (IRS) examinations for years prior to 1999.

      Our income from discontinued operations for the three months ended September 30, 2004 included a $20 tax charge related to the divestiture of substantially all of our automotive aftermarket business, which closed in November 2004. As of June 30, 2004, we had determined that it was more likely than not that the transaction would result in the utilization of a portion of our capital loss carryforward. During our assessment of deferred tax assets as of September 30, 2004, we determined that the projected utilization of our capital loss carryforward no longer supported the reduction of the related valuation allowance, effectively reversing the benefit recorded during the prior quarter.

      For the nine months ended September 30, 2004, an $87 reduction in the valuation allowance related to the capital loss carryforward was the primary reason that we recorded a tax benefit of $85 rather than an expected expense provision of $22 derived by applying the 35% U.S. federal statutory rate.

      Other Tax Matters — The American Jobs Creation Act of 2004 (JOBS Act), enacted on October 22, 2004, provides for a temporary incentive for U.S. corporations to repatriate earnings from foreign subsidiaries. Corporations may deduct 85% for certain dividends received from controlled foreign corporations. Qualifying dividends must exceed a base amount and be invested in the U.S. pursuant to a domestic reinvestment plan. We have elected to forego claiming this deduction as it would still require us to pay cash taxes on 15% of any such dividends (i.e., the balance of the dividends not covered by the deduction) and neither U.S. net operating losses nor foreign tax credits could be used to offset these payments.

      At June 30, 2005, the State of Ohio enacted new tax legislation which replaced the state’s current income-based system with a new gross receipts-based system. With the enactment of this legislation, we increased tax expense to eliminate certain deferred tax assets relating to Ohio that would no longer be realized. This charge was partially offset by a credit to selling, general and administrative expenses (consistent with the treatment of receipts-based tax charges) to recognize tax credits recoverable under the new system. The net impact of this legislation was a $5 reduction to second-quarter 2005 net income.

      Class Action Lawsuits — As described in more detail in Item 1 of Part II of this report, five purported class actions have been filed in the U.S. District Court for the Northern District of Ohio naming Dana and our Chief Executive Officer (CEO) and Chief Financial Officer (CFO) as defendants. The complaints in these actions allege violations of the U.S. securities laws and claim that the price at which Dana’s shares traded at various times between February 2004 and November 2005 was artificially inflated as a result of the defendants’ alleged wrongdoing. Motions have been filed to consolidate these cases and appoint a lead plaintiff.

      A separate purported class action has also been filed in the same court, alleging violations of the Employee Retirement Income Security Act (ERISA) on behalf of persons who have participated in the “Dana Employee Stock Option Plan” since April 21, 2004. The claims at issue in this case arise out of the same facts on which the federal securities law class actions are based and are asserted against the same

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited) (In millions, except per share amounts) — (Continued)

defendants, as well as against the “Dana Corporation Investment Committee.” The plaintiffs allege breaches of the defendants’ ERISA fiduciary duties to the plan and plan participants and seek damages allegedly incurred by the plan participants as a result.

      In addition, a derivative action has been filed in the same court, naming our CEO and CFO and our Board of Directors as defendants. Among other things, the complaint in this action alleges breaches of the defendants’ fiduciary duties to Dana arising from the same facts on which the federal securities law class actions are based.

      Dana has also received letters from five shareholders demanding that the company commence legal proceedings against our directors and senior officers for alleged breaches of their fiduciary duties to the company arising from the same facts on which the federal securities law class actions are based. The shareholders seek damages allegedly incurred by Dana. The claims in these letters, as well as the derivative action described above, are being reviewed by the Audit Committee of our Board.

      Due to the preliminary nature of these lawsuits and demands, at this time we cannot predict their outcome or estimate Dana’s potential exposure related thereto. We have insurance coverage with respect to these matters, subject to a $25 deductible for lawsuits related to alleged violations of the federal securities laws, and we do not currently believe that any liabilities that may result from these proceedings are reasonably likely to have a material adverse effect on our liquidity, financial condition or results of operations. However, there can be no assurance that the impact of any loss not covered by insurance would not be material.

      Legal Proceedings Arising in the Ordinary Course of Business — We are a party to various pending judicial and administrative proceedings arising in the ordinary course of business. These include, among others, proceedings based on product liability claims and alleged violations of environmental laws. We have reviewed these pending legal proceedings, including the probable outcomes, our reasonably anticipated costs and expenses, the availability and limits of our insurance coverage and surety bonds, and our established reserves for uninsured liabilities. We do not believe that any liabilities that may result from these proceedings are reasonably likely to have a material adverse effect on our liquidity, financial condition or results of operations.

      Asbestos-Related Product Liabilities — We had approximately 88,000 active pending asbestos-related product liability claims at September 30, 2005, compared to 116,000 at December 31, 2004, including at both dates 10,000 claims that were settled but awaiting final documentation and payment. The reduced number of pending claims at September 30, 2005, was due primarily to the dismissal or removal to a suspense docket of a large number of claims during the third quarter, including approximately 12,000 claims in Mississippi. We had accrued $112 for indemnity and defense costs for pending asbestos-related product liability claims at September 30, 2005, compared to $139 at December 31, 2004. We accrue for pending claims based on our claims settlement and dismissal history.

      In the past, we accrued only for pending asbestos-related product liability claims because we did not believe our historical trend data was sufficient to provide us with a reasonable basis to estimate potential costs for future claims. However, more recently, our claims activity has become more stable following the dissolution of the Center for Claims Resolution (CCR), as described below, the implementation of our post-CCR legal and settlement strategy, and legislative actions that have reduced the volume of claims in the legal system. In the third quarter of 2005, we concluded that our historical claims activity had stabilized over a sufficient duration of time to enable us to project possible future claims and related costs. Therefore, in consultation with Navigant Consulting, Inc. (a specialized consulting firm providing dispute, financial, regulatory and operational advisory services), we analyzed our potential future costs for such claims. Based on this analysis, we estimated our potential liability for the next fifteen years to be within a range of $70 to $120. Since the outcomes within that range are equally probable, we accrued the lower end of the range at September 30, 2005. While the process of estimating future claims is highly uncertain, we believe there are

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited) (In millions, except per share amounts) — (Continued)

reasonable scenarios in which our expenditures beyond fifteen years related to asbestos-related product liability claims would be de minimis. The effect of recording the $70 was reduced by our estimate of the portion of this liability that we expect to recovery under our insurance policies and through amounts received from insurance settlements that had been deferred. During the third quarter, we also reduced our estimated liability for pending claims, and our expected insurance recovery, for the decrease in active claims outstanding. These items resulted in an increase in pre-tax income of approximately $3 during the quarter.

      Generally accepted methods of projecting future asbestos-related product claims and costs require a complex modeling of data and assumptions about occupational exposures, disease incidence, mortality, litigation patterns and strategy, and settlement values. Although we do not believe that Dana products have ever caused any asbestos-related diseases, for modeling purposes we combined historical data relating to claims filed against us with labor force data in an epidemiological model, in order to project past and future disease incidence and resulting claims propensity. Then we compared our claims history to historical incidence estimates and applied these relationships to the projected future incidence patterns, in order to estimate future compensable claims. We then established a cost for such claims, based on historical trends in claim settlement amounts. In applying this methodology, we made a number of key assumptions, including labor force exposure, the calibration period, the nature of the diseases and the resulting claims that might be made, the number of claims that might be settled, the settlement amounts, and the defense costs we might incur. Given the inherent variability of our key assumptions, the methodology produced the range of estimated potential values described above.

      At September 30, 2005, we had recorded $87 as an asset for probable recovery from our insurers for both the pending and projected claims, compared to $118 recorded at December 31, 2004, solely for pending claims. During the second quarter of 2005, we received the final payment due us under an insurance settlement agreement that we had entered into with some of our carriers in December 2004. The asset recorded at September 30, 2005, reflects our assessment of the capacity of our remaining insurance agreements to provide for the payment of anticipated defense and indemnity costs for pending and future claims, assuming elections under our existing coverage which we intend to adopt in order to maximize our insurance recovery.

      In October 2005, we signed a settlement agreement with another of our insurers pursuant to which we will receive cash payments totaling $8 from the insurer in exchange for the release of all rights to coverage for asbestos-related bodily injury claims under the settled insurance policies. We will receive the payments under this agreement in installments in 2006, and will apply them to reduce any recorded recoverable amount. Any excess over the recoverable amount will then be evaluated to assess whether any portion of the excess represents payments by the insurer for potential future liability. That amount will be deferred, and the balance, if any, will be reported as income.

      In addition, we had a net amount recoverable from our insurers and others of $24 at September 30, 2005, compared to $26 at December 31, 2004. This recoverable represents reimbursements for settled asbestos-related product liability claims, including billings in progress and amounts subject to alternate dispute resolution proceedings with some of our insurers.

      Other Product Liabilities — We had accrued $13 for contingent non-asbestos product liability costs at September 30, 2005, compared to $11 at December 31, 2004, with no recovery expected from third parties at either date. The difference between our minimum and maximum estimates for these liabilities was $10 at both dates. We estimate these liabilities based on assumptions about the value of the claims and about the likelihood of recoveries against us, derived from our historical experience and current information. If there is a range of equally probable outcomes, we accrue the lower end of the range.

      Environmental Liabilities — We had accrued $66 for contingent environmental liabilities at September 30, 2005, compared to $73 at December 31, 2004. The difference between our minimum and maximum

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estimates for these liabilities was $1 at both dates. We estimate these liabilities based on the most probable method of remediation, current laws and regulations and existing technology. Estimates are made on an undiscounted basis and exclude the effects of inflation. If there is a range of equally probable remediation methods or outcomes, we accrue the lower end of the range.

      Included in these accruals are amounts relating to the Hamilton Avenue Industrial Park Superfund site in New Jersey, where we are presently one of four potentially responsible parties (PRPs). We estimate our liability for this site quarterly. There have been no material changes in the facts underlying these estimates since December 31, 2004, and, accordingly, our estimated liabilities for the three Operable Units at this site at September 30, 2005, remained unchanged and were as follows:

      Other Liabilities Related to Asbestos Claims — Until 2001, most of our asbestos-related claims were administered, defended and settled by the CCR, which settled claims for its member companies on a shared settlement cost basis. In that year, the CCR was reorganized and discontinued negotiating shared settlements. Since then, we have independently controlled our legal strategy and settlements, using Peterson Asbestos Consulting Enterprise (PACE), a unit of Navigant Consulting, Inc., to administer our claims, bill our insurance carriers and assist us in claims negotiation and resolution. Some former CCR members defaulted on the payment of their shares of some of the CCR-negotiated settlements and some of the settling claimants have sought payment of the unpaid shares from Dana and the other companies that were members of the CCR at the time of the settlements. We have been working with the CCR, other former CCR members, our insurers and the claimants over a period of several years in an effort to resolve these issues. Through September 30, 2005, we had paid $47 to claimants and collected $29 from our insurance carriers with respect to these claims. At September 30, 2005, we had a net receivable of $10 that we expect to recover from available insurance and surety bonds relating to these claims.

      Assumptions — The amounts we have recorded for contingent asbestos-related liabilities and recoveries are based on assumptions and estimates reasonably derived from our historical experience and current information. The actual amount of our liability for asbestos-related claims and the effect on Dana could differ materially from our current expectations if our assumptions about the outcome of the pending unresolved bodily injury claims, the volume and outcome of projected future bodily injury claims, the outcome of claims relating to the CCR-negotiated settlements, the costs to resolve these claims and the amount of available insurance and surety bonds prove to be incorrect, or if currently proposed U.S. federal legislation impacting asbestos personal injury claims is enacted. In particular, although we have projected our liability for asbestos-related product liability claims that may be brought against us in the future based upon historical trend data that we deem to be reliable, there can be no assurance that our actual liability will not differ significantly from what we currently project.

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      We record a liability for estimated warranty obligations at the dates our products are sold. Adjustments are made as new information becomes available. Changes in our warranty liability for the three and nine months ended September 30, 2005 and 2004 follow.

      In June 2005, we changed our method of accounting for warranty liabilities from estimating the liability based on the credit issued to the customer to accounting for the warranty liability based on our cost to settle the claim. Management believes that this is a change to a preferable method in that the new method more accurately reflects the cost of settling the warranty liability. In accordance with GAAP, the $6 pre-tax cumulative effect of the change was recognized as of January 1, 2005 and included in the results of operations for the three months ended March 31, 2005. In the third quarter of 2005, the previously recorded tax expense of $2 was offset by the valuation allowance established against our U.S. net deferred tax assets.

      Warranty obligations are reported as current liabilities in the condensed consolidated balance sheet.

      Our segments consist of our two manufacturing business units — the Automotive Systems Group (ASG) and the Heavy Vehicle Technologies and Systems Group (HVTSG) — and Dana Credit Corporation (DCC).

      Management evaluates the operating segments as if DCC were accounted for on an equity method of accounting rather than on the fully consolidated basis used for external reporting. This is done because DCC is not homogeneous with our manufacturing operations, its financing activities do not support the sales of our other operating segments, and its financial and performance measures are inconsistent with those of our other operating segments. Moreover, the financial covenants contained in our five-year bank facility are measured with DCC accounted for on an equity basis.

      Management currently uses several performance metrics to measure segment profitability. The key internal measure of performance used by our management, including our chief operating decision maker, as a measure of segment profitability is Operating profit after tax (PAT).

      With the exception of DCC, Operating PAT represents earnings before interest and taxes (EBIT), tax-effected at 39% (our estimated long-term effective rate), plus equity in earnings of affiliates. Net Profit (Loss), which is Operating PAT less allocated corporate expenses and net interest expense, provides a secondary measure of profitability for our segments that is more comparable to that for a free-standing entity. The allocation is based on segment sales because it is readily calculable, easily understood and, we believe, provides a reasonable distribution of the various components of our corporate expenses among our business units.

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      The Other category includes businesses unrelated to the segments, trailing liabilities for certain closed plants and the expense of corporate administrative functions.

      We have been divesting DCC’s businesses and assets in accordance with plans announced in October 2001 and these activities continued during the third quarter of 2005. As a result of asset sales and the continuing collection of payments, DCC’s total portfolio assets were reduced by $35 during the third quarter of 2005, leaving assets of approximately $605 at September 30, 2005. While we are continuing to pursue the sale of the remaining DCC assets, we expect to retain certain of them for varying periods of time because tax attributes and/or market conditions make disposal uneconomical at this time. As of September 30, 2005, we expected to retain approximately $310 of the $605 of DCC assets held at that date; however, changes in market conditions may change our expectation. DCC’s liabilities include certain asset-specific financing and general obligations that are uneconomical to pay off in advance of their scheduled maturities. We expect that the cash flow generated from DCC’s assets, including proceeds from asset sales, will be sufficient to service DCC’s debt.

      Information used to evaluate the segments is as follows:

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      The following table reconciles the EBIT amount reported for our segments to our consolidated income before income taxes as presented in the condensed consolidated statement of income.

      Our presentation of segment information includes separate reporting of Unusual items excluded from performance measures. These items include, among other things, gains and losses on divestitures and related expenses, and restructuring expenses such as severance, lease continuation and asset impairment charges.

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      The following tables describe the Unusual items excluded from performance measures for the three and nine months ended September 30, 2005 and 2004.