UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

þ		Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended: September 30, 2006

Dana Corporation

(Exact name of registrant as specified in its charter)

Virginia		34-4361040
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification Number)
4500 Dorr Street, Toledo, Ohio		43615
(Address of principal executive offices)		(Zip Code)

(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 þ      No 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 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.

Class		Outstanding at November 1, 2006
Common stock, $1 par value		150,346,688

 

 

DANA CORPORATION — FORM 10-Q
FOR THE QUARTERLY PERIOD
ENDED SEPTEMBER 30, 2006

Table of Contents

				10-Q
				Pages
Cover					1
Table of Contents					2
Forward-Looking Information					3
		PART I — FINANCIAL INFORMATION
Item 1.		Financial Statements			5
		Condensed Consolidated Statement of Operations (Unaudited) Three and Nine Months Ended September 30, 2006 and 2005			5
		Condensed Consolidated Balance Sheet (Unaudited) September 30, 2006 and December 31, 2005			6
		Condensed Consolidated Statement of Cash Flows (Unaudited) Nine Months Ended September 30, 2006 and 2005			7
		Notes to Condensed Consolidated Financial Statements			8
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			41
Item 3.		Quantitative and Qualitative Disclosures About Market Risk			70
Item 4.		Controls and Procedures			70
		PART II — OTHER INFORMATION
Item 1.		Legal Proceedings			72
Item 1A.		Risk Factors			72
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds			73
Item 6.		Exhibits			73
Signatures					74
Exhibit Index					75
EX-31A
EX-31B
EX-32

FORWARD-LOOKING INFORMATION

Statements in this report that are not entirely historical constitute “forward-looking” statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forwarding-looking statements – which are indicated by words such as “anticipates,” “expects,” “believes,” “intends,” “plans,” “estimates” and “projects” – represent the present expectations of Dana Corporation (Dana or we) based on our current information and assumptions. Forward-looking statements are inherently subject to risks and uncertainties. Our plans, actions and actual results could differ materially from our present expectations due to a number of factors, including the following and those discussed elsewhere in this report, in our Annual Report on Form 10-K for the fiscal year ended December 31, 2005 (our 2005 Form 10-K) and in our other filings with the Securities and Exchange Commission (SEC).

Bankruptcy-Related Risk Factors

	•		Our ability to continue as a going concern, operate pursuant to the terms of our debtor-in-possession credit facility, obtain court approval with respect to motions in the bankruptcy proceedings from time to time and develop and implement a plan of reorganization;
	•		Our ability to fund and execute our business plan;
	•		Our ability to obtain and maintain satisfactory terms with our customers, vendors and service providers and to maintain contracts that are critical to our operations; and
	•		Our ability to attract, motivate and/or retain key employees.

General Economic Risk Factors

	•		Adverse effects on our operations resulting from terrorism or hostilities; and
	•		Weakness of the U.S. dollar relative to other currencies in which we do business.

Risk Factors in the Vehicle Markets We Serve

	•		Increased fuel prices, rising interest rates and legislation regulating vehicle emissions;
	•		The cyclical nature of the heavy-duty commercial vehicle market;
	•		Shifting consumer preferences in the United States (U.S.) from pickup trucks and sport utility vehicles (SUVs) to cross-over vehicles (CUVs) and passenger cars;
	•		Market share declines and production cutbacks by our largest customers, including Ford Motor Company (Ford), General Motors Corporation (GM) and DaimlerChrysler AG (Chrysler);
	•		Increased costs of commodities used in our manufacturing processes, such as steel, other raw materials and energy, particularly costs that cannot be recovered from our customers; and

•

Adverse effects that could result from bankruptcies or consolidations of our customers, vendors and competitors.

Company-Specific Risk Factors

	•		Competitive pressures on our sales from other vehicle component suppliers;
	•		Changes in business relationships with our major customers and/or in the timing, size and duration of their programs for vehicles with Dana content;

	•		Price reduction pressures from our customers;
	•		Our vendors’ ability to maintain projected production levels and furnish us with critical components for our products and other necessary goods and services;
	•		Our success in achieving our cost-savings and lean manufacturing and value added/value engineering (VA/VE) goals;
	•		Adverse effects that could result from enactment of proposed U.S. federal legislation relating to asbestos personal injury claims;
	•		Our ability to successfully complete previously announced asset sales;
	•		Our ability to renegotiate expiring collective bargaining agreements with U.S. and Canadian unionized employees on satisfactory terms; and
	•		Our ability to successfully implement the restructuring initiatives discussed in “Management’s Discussions and Analysis of Financial Condition and Results of Operations” in this report.

While we continue our reorganization under Chapter 11 of the United States Bankruptcy Code, investments in our securities are highly speculative. Although shares of our common stock continue to trade on the OTC Bulletin Board under the symbol “DCNAQ,” the trading prices of the shares may have little or no relationship to the actual recovery, if any, by the holders under any eventual court-approved reorganization plan. The opportunity for any recovery by holders of our common stock under such reorganization plan is uncertain and shares of our common stock may be cancelled without any compensation pursuant to such plan.

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

DANA CORPORATION
(DEBTOR IN POSSESSION)

CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited)

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2006				2005				2006				2005
Net sales		$	2,009			$	2,119			$	6,506			$	6,565
Costs and expenses
Cost of sales			1,949				2,018				6,199				6,179
Selling, general and administrative expenses			90				120				329				357
Impairment of goodwill			46								46
Impairment of other assets			165								180
Other income (expense), net			44				9				114				62
Income (loss) from continuing operations before interest, reorganization items and income taxes			(197	)			(10	)			(134	)			91
Interest expense (contractual interest of $51 and $151 for the three and nine months ended September 30, 2006)			24				42				89				124
Reorganization items, net			25								114
Loss before income taxes			(246	)			(52	)			(337	)			(33	)
Income tax expense			(20	)			(921	)			(78	)			(919	)
Minority interests			(2	)							(5	)			(5	)
Equity in earnings of affiliates			(4	)			5				12				26
Loss from continuing operations			(272	)			(968	)			(408	)			(931	)
Loss from discontinued operations			(84	)			(306	)			(102	)			(301	)
Loss before effect of change in accounting			(356	)			(1,274	)			(510	)			(1,232	)
Effect of change in accounting							2								6
Net loss		$	(356	)		$	(1,272	)		$	(510	)		$	(1,226	)
Basic loss per common share
Loss from continuing operations before effect of change in accounting		$	(1.81	)		$	(6.47	)		$	(2.72	)		$	(6.23	)
Loss from discontinued operations			(0.57	)			(2.04	)			(0.68	)			(2.01	)
Effect of change in accounting							0.01								0.04
Net loss		$	(2.38	)		$	(8.50	)		$	(3.40	)		$	(8.20	)
Diluted loss per common share
Loss from continuing operations before effect of change in accounting		$	(1.81	)		$	(6.47	)		$	(2.72	)		$	(6.23	)
Loss from discontinued operations			(0.57	)			(2.04	)			(0.68	)			(2.01	)
Effect of change in accounting							0.01								0.04
Net loss		$	(2.38	)		$	(8.50	)		$	(3.40	)		$	(8.20	)
Cash dividends declared and paid per common share						$	0.12							$	0.36
Average shares outstanding — Basic			150				150				150				150
Average shares outstanding — Diluted			150				151				150				151

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

DANA CORPORATION
(DEBTOR IN POSSESSION)

CONDENSED CONSOLIDATED BALANCE SHEET (Unaudited)

		September 30,				December 31,
		2006				2005
Assets
Current assets
Cash and cash equivalents		$	785			$	762
Accounts receivable
Trade			1,266				1,064
Other			224				244
Inventories			732				664
Assets of discontinued operations			458				521
Other current assets			238				141
Total current assets			3,703				3,396
Investments and other assets			1,316				1,516
Investments in equity affiliates			627				818
Property, plant and equipment, net			1,805				1,628
Total assets		$	7,451			$	7,358
Liabilities and Shareholders’ Equity
Current liabilities
Notes payable, including current portion of long-term debt		$	478			$	2,578
Accounts payable			861				948
Liabilities of discontinued operations			209				201
Other accrued liabilities			745				1,137
Total current liabilities			2,293				4,864
Liabilities subject to compromise			3,970
Deferred employee benefits and other noncurrent liabilities			267				1,798
Long-term debt			16				67
Debtor-in-possession financing			700
Commitments and contingencies (Note 13)
Minority interest in consolidated subsidiaries			82				84
Shareholders’ equity			123				545
Total liabilities and shareholders’ equity		$	7,451			$	7,358

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

DANA CORPORATION
(DEBTOR IN POSSESSION)

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)

		Nine Months Ended
		September 30,
		2006				2005
Operating activities
Net loss		$	(510	)		$	(1,226	)
Depreciation and amortization			206				240
Impairment and divestiture-related charges			325				304
Reorganization items, net			114
Payment of reorganization charges			(65	)
Changes in working capital			29				(193	)
Deferred taxes			(14	)			728
Effect of change in accounting							(6	)
Other			(71	)			(146	)
Net cash flows provided by (used for) operating activities			14				(299	)
Investing activities
Purchases of property, plant and equipment			(239	)			(193	)
Acquisition of business, net of cash acquired			(17	)
Proceeds from sales of other assets			54				176
Payments from leases, loans and partnerships			20				70
Other			33				27
Net cash flows provided by (used for) investing activities			(149	)			80
Financing activities
Net change in short-term debt			(550	)			406
Payments of long-term debt			(4	)			(45	)
Proceeds from debtor-in-possession facility			700
Issuance of long-term debt			7				21
Dividends paid							(54	)
Other			(6	)			(12	)
Net cash flows provided by financing activities			147				316
Net increase in cash and cash equivalents			12				97
Cash and cash equivalents — beginning of period			762				634
Effect of exchange rate changes on cash balances held in foreign currencies			6				(1	)
Net change in cash of discontinued operations			5
Cash and cash equivalents — end of period		$	785			$	730

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

DANA CORPORATION
(DEBTOR IN POSSESSION)

INDEX TO NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS

1.		Basis of Presentation
2.		Reorganization Under Chapter 11 of the Bankruptcy Code
3.		Dissolution of Spicer S.A.
4.		Asset Disposals and Impairments
5.		Common Shares
6.		Goodwill
7.		Equity-Based Compensation
8.		Pension and Postretirement Benefit Plans
9.		Comprehensive Income
10.		Cash Deposits
11.		Financing Agreements
12.		Income Taxes
13.		Commitments and Contingencies
14.		Warranty Obligations
15.		Discontinued Operations and Realignment of Operations
16.		Segments

Notes to Condensed Consolidated Financial Statements

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 our 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 2005 to conform to the 2006 presentation.

The condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes included in our 2005 Form 10-K.

Accounting Requirements

As described in Note 2, Dana and certain subsidiaries are reorganizing under Chapter 11 of the United States Bankruptcy Code (the Bankruptcy Code). American Institute of Certified Public Accountants Statement of Position 90-7, “Financial Reporting by Entities in Reorganization under the Bankruptcy Code” (SOP 90-7), which is applicable to companies operating under Chapter 11, generally does not change the manner in which financial statements are prepared. However, it does require that the financial statements for periods subsequent to the filing of the Chapter 11 petition distinguish transactions and events that are directly associated with the reorganization from the ongoing operations of the business. We adopted SOP 90-7 effective March 3, 2006 (the Filing Date) and prepare our financial statements in accordance with its requirements. Revenues, expenses, realized gains and losses and provisions for losses that can be directly associated with the reorganization and restructuring of the business are reported separately as reorganization items in our statement of operations. Our balance sheet distinguishes pre-petition liabilities subject to compromise both from those pre-petition liabilities that are not subject to compromise and from post-petition liabilities. Liabilities that may be affected by our plan of reorganization are reported at the amounts expected to be allowed as claims by the Bankruptcy Court, although they may be settled for lesser amounts. In addition, cash provided by or used for reorganization items is disclosed separately in our statement of cash flows.

Recent Accounting Pronouncements

In December 2004, the FASB revised SFAS No. 123, “Share-Based Payment” (SFAS No. 123(R)), requiring that the compensation cost relating to share-based payment transactions be recognized in financial statements. The cost is to be measured based on the fair value of the equity or liability instruments issued. We adopted SFAS No. 123(R) on January 1, 2006 using the modified prospective transition method. (See Note 7.)

In December 2004, the FASB issued SFAS No. 151, “Inventory Costs, an amendment of ARB No. 43, Chapter 4.” SFAS No. 151, which became effective January 1, 2006, requires the treatment of certain abnormal costs such as idle facility expense and excessive freight and handling charges as period expenses and requires that allocation of fixed overhead be based on normal capacity. We adopted SFAS No. 151 as of January 1, 2006. The new guidance has not had a material effect on our 2006 consolidated financial statements.

In July 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109” (FIN 48). FIN 48 prescribes a comprehensive model for how a company should recognize, measure, present and disclose in its financial statements uncertain tax positions that the company has taken or expects to take on a tax return. FIN 48 is effective for fiscal years beginning after December 15, 2006. We are currently in the process of evaluating the effect, if any, FIN 48 will have on our consolidated financial statements for 2007 and subsequent periods.

In July 2006, the FASB issued FASB Staff Position No. 13-2 (FSP 13-2), “Accounting for a Change or Projected Change in the Timing of Cash Flows Relating to Income Taxes Generated by a Leveraged Lease Transaction,” which will require companies to recalculate the income recognition for a leveraged lease if there is a change or projected change in the timing of income tax cash flows directly related to the leveraged lease. FSP 13-2 is effective for fiscal years beginning after December 15, 2006. We currently comply with FSP 13-2, and there will be no impact on our consolidated financial statements.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” SFAS No. 157 defines fair value, establishes a framework for measuring fair value in accounting principles generally accepted in the United States (GAAP) and expands disclosures about fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. We are currently in the process of evaluating the effect, if any, SFAS No. 157 will have on our consolidated financial statements for 2008 and subsequent periods.

In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans.” SFAS No. 158 requires employers to fully recognize in their financial statements the unfunded obligations associated with single-employer defined benefit pension, retiree healthcare and other postretirement plans, along with any assets that exceed plan obligations. SFAS No. 158 is effective for fiscal years ending after December 15, 2006. We are currently in the process of evaluating the effect SFAS No. 158 will have on our consolidated financial statements for fiscal year 2006 and subsequent periods. Based on the funded status of our postretirement obligations at December 31, 2005, application of SFAS No. 158 to our 2005 financial statements would have resulted in the recognition of a liability of approximately $1,050, a deferred tax asset of approximately $70 and an increase of approximately $980 in our Other comprehensive loss. The impact at December 31, 2006 will differ based on the plan assets and obligations at that date.

In September 2006, the SEC issued Staff Accounting Bulletin (SAB) No. 108. SAB No. 108 provides guidance on quantifying and evaluating the materiality of unrecorded misstatements. The method established by SAB No. 108 requires each of a company’s financial statements and the related financial statement disclosures be considered when quantifying and assessing the materiality of any misstatement. SAB No. 108 is effective for annual financial statements covering the first fiscal year ending after November 15, 2006, with earlier application encouraged. The new guidance is not expected to have a material effect on our 2006 consolidated financial statements.

In September 2006, the FASB’s Emerging Issues Task Force (EITF) reached consensus on EITF Issue No. 06-3, “Taxes Collected from Customers and Remitted to Government Authorities.” EITF No. 06-3 requires that taxes assessed by a government authority be presented in the income statement on either a gross or net basis, with disclosure of the methodology in the accompanying footnotes. EITF No. 06-3 is effective for interim and annual reporting periods beginning after December 15, 2006.

We are evaluating the effect, if any, EITF No. 06-3 will have on our consolidated financial statements for 2007 and subsequent periods.

Note 2. Reorganization Under Chapter 11 of the Bankruptcy Code

Bankruptcy Cases

On March 3, 2006, Dana Corporation and forty of our wholly-owned domestic subsidiaries (collectively, the Debtors) filed voluntary petitions for reorganization under the Bankruptcy Code in the United States Bankruptcy Court for the Southern District of New York (the Bankruptcy Court). These Chapter 11 cases are collectively referred to as the “Bankruptcy Cases.” Neither Dana Credit Corporation (DCC) (including DCC's direct and indirect subsidiaries) nor any of our non-U.S. affiliates commenced any bankruptcy proceedings.

The wholly-owned subsidiaries included in the Bankruptcy Cases are Dakota New York Corp., Brake Systems, Inc., BWDAC, Inc., Coupled Products, Inc., Dana Atlantic LLC f/k/a Glacier Daido America, LLC, Dana Automotive Aftermarket, Inc., Dana Brazil Holdings I LLC f/k/a Wix Filtron LLC, Dana Brazil Holdings LLC f/k/a, Dana Realty Funding LLC, Dana Information Technology LLC, Dana International Finance, Inc., Dana International Holdings, Inc., Dana Risk Management Services, Inc., Dana Technology Inc., Dana World Trade Corporation, Dandorr L.L.C., Dorr Leasing Corporation, DTF Trucking, Inc., Echlin-Ponce, Inc., EFMG LLC, EPE, Inc., ERS LLC, Flight Operations, Inc., Friction, Inc., Friction Materials, Inc., Glacier Vandervell, Inc., Hose & Tubing Products, Inc., Lipe Corporation, Long Automotive LLC, Long Cooling LLC, Long USA LLC, Midland Brake, Inc., Prattville Mfg., Inc., Reinz Wisconsin Gasket LLC, Spicer Heavy Axle & Brake, Inc., Spicer Heavy Axle Holdings, Inc., Spicer Outdoor Power Equipment Components LLC, Torque-Traction Integration Technologies, LLC, Torque-Traction Manufacturing Technologies, LLC, Torque-Traction Technologies, LLC and United Brake Systems Inc.

The Bankruptcy Cases are being jointly administered, with the Debtors managing their businesses in the ordinary course as debtors in possession, subject to the supervision of the Bankruptcy Court. We are continuing normal business operations during the Bankruptcy Cases while we evaluate our businesses both financially and operationally and implement improvements as appropriate to enhance performance. We are proceeding with previously announced divestiture and restructuring plans, which include the sale of several non-core businesses, the closure of certain facilities and the shift of production to lower-cost locations or locations with excess capacity. In addition, we are taking steps to reduce costs, increase efficiency and enhance productivity. We intend to effect fundamental, not incremental, change to our business. While we cannot predict with precision how long the reorganization process will take, we expect it to take 18 to 24 months from the Filing Date. Under an order entered by the Bankruptcy Court on June 28, 2006, the Debtors have the exclusive right to file a plan of reorganization until January 3, 2007. The Debtors are permitted to request, and currently expect to seek, an extension of this exclusivity period.

Our continuation as a going concern is contingent upon, among other things, our ability (i) to comply with the terms and conditions of the DIP Credit Agreement described below; (ii) to obtain confirmation of a plan of reorganization under the Bankruptcy Code; (iii) to reduce wage and benefit costs and liabilities through the bankruptcy process; (iv) to obtain price increases from our customers (v) to return to profitability; (vi) to generate sufficient cash flow from operations; and (vii) to obtain financing sources to meet our future obligations. These matters create uncertainty relating to our ability to continue as a going concern.

The accompanying condensed consolidated financial statements do not reflect any adjustments relating to the recoverability of assets and classification of liabilities that might result from the outcome of these uncertainties. In addition, our plan of reorganization could materially change the amounts reported in our condensed consolidated financial statements. Our condensed consolidated financial statements as of September 30, 2006 do not give effect to all the adjustments to the carrying value of assets and liabilities that may become necessary as a consequence of reorganization under Chapter 11.

Our bankruptcy filing triggered the immediate acceleration of certain direct financial obligations, including, among others, an aggregate of $1,623 in principal and accrued interest on currently outstanding non-secured notes issued under our Indentures dated as of December 15, 1997, August 8, 2001, March 11, 2002 and December 10, 2004. Such amounts are characterized as unsecured debt for purposes of the reorganization proceedings, and the related obligations have been classified as liabilities subject to compromise in our Condensed Consolidated Balance Sheet as of September 30, 2006. In addition, the Chapter 11 filing created an event of default under certain of our lease agreements. The ability of our creditors to seeks remedies to enforce their rights under the agreements described above is automatically stayed as a result of our bankruptcy filings, and the creditors’ rights of enforcement are subject to the applicable provisions of the Bankruptcy Code.

As required by SOP 90-7, in the first quarter of 2006 we recorded the Debtors’ pre-petition debt instruments at the allowed claim amount, as defined by SOP 90-7. Accordingly, we accelerated the amortization of the related deferred debt issuance costs, the original issuance discounts and the valuation adjustment related to the termination of interest rate swaps, which resulted in a pre-tax expense of $17 during March 2006 that is included in reorganization items in our Condensed Consolidated Statement of Operations.

Official committees of the Debtors’ unsecured creditors, retirees not represented by unions (Retiree Committee) and Dana’s equity security holders have been appointed in the Bankruptcy Cases and, in accordance with the provisions of the Bankruptcy Code, have the right to be heard on all matters that come before the Bankruptcy Court. The Debtors are required to bear certain of the committees’ costs and expenses, including those of their counsel and other professional advisors.

While we continue our reorganization under Chapter 11, investments in our securities are highly speculative. Although shares of our common stock continue to trade on the OTC Bulletin Board under the symbol “DCNAQ,” the trading prices of the shares may have little or no relationship to the actual recovery, if any, by the holders under any eventual court-approved reorganization plan. The opportunity for any recovery by holders of our common stock under such reorganization plan is uncertain and shares of our common stock may be cancelled without any compensation pursuant to such plan.

In August 2006, the Bankruptcy Court entered a Final Order Establishing Procedures for Trading in Claims and Equity Securities, which is designed to protect the Debtors’ potentially valuable tax attributes (such as net operating loss carryforwards). Under the Order, holders or acquirers of 4.75% or more of Dana stock are subject to certain notice and consent procedures prior to acquiring or disposing of Dana common shares. Holders of claims against the Debtors that would entitle them to more than 4.75% of the common shares of a reorganized Dana under a confirmed plan of reorganization utilizing the tax benefits provided under section 382(l)(5) of the Internal Revenue Code may be subject to a requirement to sell down the excess claims if necessary to implement such a plan of reorganization.

Under the Bankruptcy Code, the Debtors have the right to assume or reject executory contracts (i.e., contracts that are to be performed by both contract parties after the Filing Date) and unexpired leases, subject to Bankruptcy Court approval and other limitations. In this context, “assuming” an executory contract or unexpired lease generally means that a Debtor will agree to perform its obligations and cure certain existing defaults under the contract or lease, and “rejecting” it means that a Debtor will be relieved of its obligations to perform further under the contract or lease, which will give rise to an unsecured pre-petition claim for damages for the breach thereof. The Bankruptcy Court has authorized the Debtors to reject certain unexpired leases and executory contracts.

The Debtors have received approval from the Bankruptcy Court to pay or otherwise honor certain of their pre-petition obligations, subject to certain restrictions, including employee wages, salaries, certain benefits and other employee obligations; claims of foreign vendors and certain suppliers that are critical to our continued operation; and certain customer program and warranty claims.

Plan of Reorganization

We anticipate that substantially all of the Debtors’ liabilities as of the Filing Date will be addressed under, and treated in accordance with, a plan of reorganization to be proposed to and voted on by creditors in accordance with the provisions of the Bankruptcy Code. Although we intend to file and seek confirmation of such a plan, there can be no assurance as to when the plan will be filed or that the plan will be confirmed by the Bankruptcy Court and consummated. Nor can there be any assurance that we will be successful in achieving our restructuring goals, or that any measures that are achievable will result in sufficient improvement to our financial position. Accordingly, until the time that the Debtors emerge from bankruptcy, there will be no certainty about our ability to continue as a going concern. If a restructuring is not completed, we could be forced to sell a significant portion of our assets to retire debt outstanding or, under certain circumstances, to cease operations.

Pre-petition Claims

On June 30, 2006, the Debtors filed their schedules of the assets and liabilities existing on the Filing Date with the Bankruptcy Court. In July 2006, the Bankruptcy Court set September 21, 2006 as the general bar date (the date by which most entities that wished to assert a pre-petition claim against a Debtor had to file a proof of claim in writing). Asbestos-related personal injury and wrongful death claimants were not required to file proofs of claim by the bar date, and such claims will be addressed as part of the Chapter 11 proceedings.

The Debtors are now in the process of evaluating the claims that were submitted and investigating unresolved proofs of claim and are establishing procedures to reconcile and resolve them. Our Liabilities subject to compromise represent our current estimate of claims expected to be allowed by the Bankruptcy Court. At this time we cannot reasonably estimate the value of the claims that will ultimately be allowed by the Bankruptcy Court since our evaluation of the filed claims has just begun.

DIP Credit Agreement

In March 2006, the Bankruptcy Court approved our $1,450 Senior Secured Superpriority Debtor-in-Possession Credit Agreement (the DIP Credit Agreement). This facility provides funding to Dana to continue our operations without disruption and meet our obligations to suppliers, customers and employees during the Chapter 11 reorganization process. (See Note 11.)

DCC Notes

Dana’s bankruptcy filing created an event of default under DCC’s outstanding medium-term and private placement notes (together, the DCC Notes). DCC is engaged in discussions with an Ad Hoc Committee formed by certain of its noteholders regarding a potential forbearance agreement with respect to the default. (See Note 4.) Two DCC noteholders that are currently not part of the Ad Hoc Committee commenced a lawsuit against DCC for nonpayment of principal of $7 and accrued interest on their DCC Notes that were due in April 2006. In October 2006, the court ruled in favor of the plaintiffs and entered a judgment against DCC for outstanding loans in the amount of $7, plus interest. DCC is assessing its options with respect to this judgment.

Financial Statement Presentation

Our condensed consolidated financial statements have been prepared in accordance with SOP 90-7 and on a going-concern basis, which contemplates continuity of operations, realization of assets and liquidation of liabilities in the ordinary course of business. However, as a result of our bankruptcy filing, such realization of assets and liquidation of liabilities are subject to uncertainty. While operating as debtors in possession under the protection of Chapter 11 of the Bankruptcy Code, all or some of the Debtors may sell or otherwise dispose of assets and liquidate or settle liabilities for amounts other than those reflected in the condensed consolidated financial statements, subject to Bankruptcy Court approval or as otherwise permitted in the ordinary course of business. Further, Dana’s plan of reorganization could materially change the amounts and classification of items reported in our historical consolidated financial statements.

Substantially all of the Debtors’ pre-petition debt is now in default due to the bankruptcy filing. As described below, the accompanying condensed consolidated financial statements present the Debtors’ pre-petition debt of $1,585 within Liabilities subject to compromise. In accordance with SOP 90-7, following the Filing Date, we discontinued recording interest expense on debt classified as Liabilities subject to compromise. Contractual interest on all debt, including the portion classified as Liabilities subject to compromise, amounted to $151 for the nine months ended September 30, 2006. As required by SOP 90-7, the amount of the Liabilities subject to compromise represents our estimate of known or potential pre-petition claims to be addressed in connection with the Bankruptcy Cases. Such claims are subject to future adjustments. Adjustments may result from, among other things, negotiations with creditors, rejection of executory contracts and unexpired leases and orders of the Bankruptcy Court. Payment terms and amounts for these claims will be established in connection with the Bankruptcy Cases.

Liabilities Subject to Compromise

The Liabilities subject to compromise in the Condensed Consolidated Balance Sheet include the Liabilities subject to compromise of the discontinued operations and consist of the following at September 30, 2006:

Accounts payable		$	332
Pension and postretirement plan obligations			1,381
Debt (including accrued interest of $38)			1,623
Other			634
Consolidated Liabilities subject to compromise			3,970
Payables to non-debtor subsidiaries			440
Debtor Liabilities subject to compromise		$	4,410

The amount of payables to non-Debtor subsidiaries has decreased from the amount reported in our Form 10-Q for the quarter ended June 30, 2006 due to elimination of intercompany liabilities that were determined to have been improperly classified as Debtor obligations. The amounts were offset against Investment in non-Debtor subsidiaries in the Debtor-in-Possession Balance Sheet. Other includes accrued liabilities for environmental, asbestos and other product liability, income tax, deferred compensation, other postemployment benefits and warranty obligations and lease rejection claims. Liabilities subject to compromise may change due to reclassifications, settlements or reorganization activities that give rise to claims or increases in existing claims.

Reorganization Items

Professional advisory fees and other costs directly associated with the reorganization are reported separately as reorganization items pursuant to SOP 90-7. Professional fees include underwriting fees paid in connection with the DIP Credit Agreement and other financings undertaken as part of the reorganization process. Reorganization items also include provisions and adjustments to reflect the carrying value of certain pre-petition liabilities at their estimated allowable claim amounts. The debt valuation adjustments and the underwriting fees related to the DIP Credit Agreement and other financings generally represent one-time charges. Certain actions within the non-Debtor companies have occurred as a result of the Debtors’ bankruptcy proceedings. The costs associated with these actions are also reported as reorganization items. The reorganization items in the Condensed Consolidated Statement of Operations for the three and nine months ended September 30, 2006 consisted of the following items:

		Three Months				Nine Months
		Ended September 30,				Ended September 30,
		2006				2006
Debtor Reorganization items
Professional fees		$	24			$	88
Debt valuation adjustments							17
Loss on rejection of leases			1				12
Investment income			(1	)			(4	)
Gain on settlement of claims			(2	)			(5	)
Debtor Reorganization items			22				108
Non-Debtor Reorganization items
Professional fees			3				6
Total Reorganization items		$	25			$	114

Debtor in Possession Financial Information

In accordance with SOP 90-7, aggregate financial information of the Debtors is presented below as of and for the three and nine months ended September 30, 2006. Intercompany balances between Debtors and non-Debtors are not eliminated. The investment in non-Debtor subsidiaries is accounted for on an equity basis and, accordingly, the net loss reported in the Debtor In Possession Statement of Operations is equal to the consolidated net loss.

DANA CORPORATION
DEBTOR-IN-POSSESSION STATEMENT OF OPERATIONS (Unaudited)

		Three Months				Nine Months
		Ended				Ended
		September 30,				September 30,
		2006				2006
Net sales
Customers		$	971			$	3,205
Non-debtor subsidiaries			67				193
			1,038				3,398
Costs and expenses
Cost of sales			1,091				3,472
Selling, general and administrative expenses			53				214
Impairment of goodwill			7				7
Other income (expense), net			51				136
Loss from operations before interest, reorganization items and income taxes			(62	)			(159	)
Interest expense (contractual interest of $43 and $121 for the three and nine months ended September 30, 2006)			16				59
Reorganization items, net			22				108
Loss before income taxes			(100	)			(326	)
Income tax expense			(54	)			(64	)
Equity in earnings of affiliates			(100	)			(107	)
Loss from continuing operations			(254	)			(497	)
Loss from discontinued operations			(27	)			(70	)
Equity in earnings of non-Debtor subsidiaries			(75	)			57
Net loss		$	(356	)		$	(510	)

Income tax expense is incurred in the Debtor in Possession Statement of Operations as a result of DCC (a non-Debtor) being reported here on an equity basis. At the DCC level, tax benefits are recognized in accordance with tax sharing arrangements with Dana. A tax benefit of $61 was recorded by DCC against the asset impairment in Equity in earnings of affiliates in these Debtor in Possession statements. (See Note 4.) However, DCC is consolidated with the Debtor companies for U.S. income tax purposes, and due to Dana’s uncertainty as to whether U.S. tax benefits will be realized, a valuation allowance against the deferred tax asset recorded by DCC is provided by a charge to Income tax expense in these Debtor in Possession statements.

DANA CORPORATION
DEBTOR-IN-POSSESSION BALANCE SHEET (Unaudited)

		September 30,
		2006
Assets
Current assets
Cash and cash equivalents		$	252
Accounts receivable
Trade			547
Other			60
Inventories			257
Assets of discontinued operations			267
Other current assets			21
Total current assets			1,404
Investments and other assets			297
Investments in equity affiliates			302
Investments in non-debtor subsidiaries			3,224
Property, plant and equipment, net			712
Total assets		$	5,939
Liabilities and Shareholders’ Equity
Current liabilities
Accounts payable		$	279
Liabilities of discontinued operations			81
Other accrued liabilities			344
Total current liabilities			704
Liabilities subject to compromise			4,410
Debtor-in-possession financing			700
Minority interest in consolidated subsidiaries			2
Shareholders’ equity			123
Total liabilities and shareholders’ equity		$	5,939

DANA CORPORATION
DEBTOR-IN-POSSESSION STATEMENT OF CASH FLOWS (Unaudited)

		Nine Months
		Ended September 30,
		2006
Operating activities
Net income (loss)		$	(510	)
Depreciation and amortization			91
Charges related to divestitures and asset sales			30
Reorganization charges			107
Payment of reorganization charges			(64	)
Equity in earnings of non-debtor subsidiaries			(58	)
Working capital			199
Other			114
Net cash flows used for operating activities			(91	)
Investing activities
Purchases of property, plant and equipment			(129	)
Other			32
Net cash flows used for investing activities			(97	)
Financing activities
Proceeds from debtor-in-possession facility			700
Net change in short-term debt			(546	)
Net cash flows provided by financing activities			154
Net increase in cash and cash equivalents			(34	)
Cash and cash equivalents — beginning of period			286
Cash and cash equivalents — end of period		$	252

Note 3. Dissolution of Spicer S.A.

In July 2006, Dana and Desc Automotriz, S.A. de C.V. (Desc) completed the dissolution of their Mexican joint venture, Spicer S.A. de C.V. (Spicer S.A.). The transaction included the sale by Dana of our 49% interest in Spicer S.A. to Desc and the purchase by Dana of the Spicer S.A. subsidiaries in Mexico that manufacture and assemble axles, driveshafts, gears, forgings and castings (in which we previously held an indirect 49% interest). Desc, in turn, acquired full ownership of the subsidiaries that hold the transmission and aftermarket gasket operations in which it previously held a 51% interest. Prior to the sale we loaned $20 to two subsidiaries of Spicer S.A. that we later acquired. For the sale of our 49% interest in Spicer S.A. we received a $166 note receivable and $15 of cash from Desc. The aggregate proceeds of $181 exceeded our investment in Spicer S.A. by $19, including $9 related to the transmission and gasket operations. The $9 was recognized as a gain on sale of assets in our results of operations in the quarter ended September 30, 2006, along with $4 of related tax expense. The remainder of the excess of the proceeds over our investment ($10) relates to the assets we ultimately retained and was recorded as a reduction of the basis of those assets.

The aggregate purchase price for the subsidiaries we acquired was $166, which we satisfied through the return of the $166 note receivable from Desc. The $166 assigned to the net assets acquired has been reduced by the remaining excess of the proceeds over our investment of $10 and by $3 for the cash acquired, resulting in net assets acquired of $153. The following table presents the assets acquired and liabilities assumed at their adjusted fair value, net of $3 of cash acquired and net of the assumption of the intercompany loans noted above.

		July 1, 2006
Current assets
Accounts receivable		$	73
Inventories			33
Other current assets			3
Other assets			7
Property, plant and equipment, net			131
Total assets acquired			247
Accounts payable			40
Other current liabilities			24
Intercompany			20
Pension obligation			10
Total liabilities assumed			94
Net assets acquired		$	153

The allocation of the purchase price was based on preliminary valuations and estimated tax obligations and could change when a final valuation is completed.

The operating results of the five manufacturing subsidiaries that Dana acquired have been included in our results of operations since July 1, 2006. These units had total 2005 sales of $296, a substantial portion of which was to Dana. Dana expects to benefit from the addition of these technologically advanced operations that support our core axle and driveshaft businesses and from the manufacturing cost efficiencies that will come from expanding our global presence in this key competitive location.

The incremental sales impact of the acquired operations is not significant given that a substantial portion of the Spicer S.A. revenues were intercompany sales to Dana. In addition, the earnings impact is not material since Spicer S.A. has operated near break-even in recent years, and 49% of the income (loss) was previously included in our Equity in earnings of affiliates.

Note 4. Asset Disposals and Impairments

DCC Asset Disposals

DCC has been divesting its businesses and assets in accordance with plans originally announced in October 2001, and these activities continued during the nine months ended September 30, 2006 as DCC sold assets in individually structured transactions. DCC had reduced its assets to $375 at September 30, 2006 through asset sales, normal portfolio runoff and the impairment discussed below. Asset reductions and after-tax gains and losses during the three and nine months ended September 30, 2006 and 2005 are shown in the table below.

		Three Months								Nine Months
		Ended September 30,								Ended September 30,
		2006				2005				2006				2005
Asset reduction
Sales and portfolio runoff		$	(8	)		$	(35	)		$	(78	)		$	(225	)
Impairment			(165	)							(180	)
		$	(173	)		$	(35	)		$	(258	)		$	(225	)
Earnings impact
Gain on sales		$	1			$				$	3			$	(10	)
Impairment			(165	)							(180	)
		$	(164	)		$				$	(177	)		$	(10	)

Following Dana’s bankruptcy filing in March 2006, the holders of the majority of the outstanding principal amount of DCC Notes formed an Ad Hoc Committee to address the default under the DCC notes that resulted from our filing. DCC and the Ad Hoc Committee have been engaged in ongoing discussions regarding a forbearance agreement with respect to the default. If finalized, this agreement is expected to provide that DCC will continue to use commercially reasonable efforts to sell its lease and other portfolio assets over a period of 24 months and use the proceeds to make payments to the holders of the DCC Notes who agree to forbear.

DCC Asset Impairment

On September 29, 2006, DCC’s Board of Directors adopted a plan to proceed with the accelerated sale of substantially all of DCC’s remaining assets regardless of whether a forbearance agreement is executed. As a result, on that date, Dana’s management concluded that an impairment charge should be recorded against certain of the DCC assets. An impairment charge of $165 was recorded in the third quarter of 2006 to reduce lease and other assets which had a carrying value of $375 to their fair value less cost to sell. We had also recognized an impairment of $15 in the first six months of 2006 based on the planned sale of a specific investment at an amount below its carrying value less cost to sell.

The remaining DCC assets, having a net book value of $100, are primarily equity investments. The underlying assets of these equity investments have not been impaired by the investees and there is not a readily determinable market value for these investments. However, at currently estimated fair values, DCC expects that the future sale of these assets could result in a loss on sale in the range of $30 to $40. These impairment charges will be recorded in the periods when their fair values can be determined, generally when DCC enters into agreements for the sale of these investments.

We have not recognized a tax benefit on the anticipated pre-tax loss because of the uncertainty about our ability to realize this tax benefit. (See Note 12.)

Other impairments

Impairment of goodwill is discussed in Note 6, and impairments in the discontinued operations are discussed in Note 15.

Note 5. Common Shares

The following table reconciles the average shares outstanding used in determining basic earnings per share to the number of shares used in the diluted earnings per share calculation for the three and nine months ended September 30, 2006 and 2005 (in millions):

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2006				2005				2006				2005
Average shares outstanding for the period — basic			149.8				149.6				149.8				149.5
Plus: Incremental shares from:
Deferred compensation units			0.5				0.5				0.5				0.5
Restricted stock			0.0				0.3				0.0				0.3
Stock options			0.0				0.5				0.0				0.5
Potentially dilutive shares			0.5				1.3				0.5				1.3
Average shares outstanding for the period — diluted			150.3				150.9				150.3				150.8

We excluded the potentially dilutive shares shown above from the computation of earnings per share for the three and nine months ended September 30, 2006 as the loss from continuing operations for these periods caused the shares to have an anti-dilutive effect.

In addition, we excluded potential common shares of 12.8 million and 13.6 million for the 2006 and 2005 periods from the computation of earnings per share, as the effect of including them would be anti-dilutive in all periods shown. These shares represent stock options with exercise prices higher than the average per share trading price of our stock during the respective periods.

Note 6. Goodwill

Changes in goodwill during the nine months ended September 30, 2006 in the Automotive Systems Group (ASG) and the Heavy Vehicle Technology Systems Group (HVTSG) were as follows:

		ASG				HVTSG				Total
Balance as of January 1, 2006		$	328			$	111			$	439
Impairment of goodwill			(46	)							(46	)
Impact of foreign exchange and other			13				3				16
Balance as of September 30, 2006		$	295			$	114			$	409

The Traction Products business in the ASG segment was tested for impairment in the third quarter of 2006. Due to lower production volumes, pricing pressures and higher costs, operating profits and cash flows for this business were lower than expected in the third quarter. Based on the significant cuts to customer production schedules that were announced by our major U.S. customers in the third quarter and the declining sales of the light pick-up truck and SUV platforms on which we have significant axle content, our earnings outlook for this business has declined. Based on our revised outlook, the fair value of the Traction Products business as determined using the estimated present value of future cash flows, does not support any goodwill. Accordingly, our third quarter 2006 results include a goodwill impairment charge of $46 to write off the goodwill we had been carrying on this business. This amount is recorded as Impairment of goodwill.

Note 7. Equity-Based Compensation

Stock Incentive Plan

Our Stock Incentive Plan (SIP) provides for the issuance of up to 28,850,000 shares of Dana common stock. Awards may be in the form of stock options, stock appreciation rights (SARs), restricted stock or units, performance shares or units, stock or other stock-based awards, at the discretion of the Compensation Committee of our Board.

Stock Options

All outstanding options under the SIP were granted at exercise prices equal to the market price of our underlying common shares on the date of the grant. The option grants generally provide that the options will vest and be exercisable in 25% increments at each of the first four anniversary dates of the grant and expire ten years from the date of the grant, with vesting accelerated upon retirement if age and service minimums are met.

The following table contains information about stock options granted, exercised and lapsed or canceled in the nine months ended September 30, 2006:

						Weighted Average
		Number				Exercise				Remaining
		of				Price				Contractual
		Options				(in $)				Life (Years)
Outstanding at December 31, 2005			15,300,698			$	23.83				5.9
Lapsed or canceled			(2,684,575	)		$	25.26
Outstanding at September 30, 2006			12,616,123			$	23.52				5.3
Exercisable at September 30, 2006			11,970,707			$	24.23				5.2

We adopted SFAS No. 123(R) as of January 1, 2006 using the modified prospective transition method. Under this method, our share-based compensation expense for the first nine months of 2006 includes expense for all share-based awards granted prior to but not vested as of January 1, 2006, based on the grant date fair values. This expense is recognized on a straight-line basis over the period during which the employee is required to provide service to earn the award. For the three and nine months ended September 30, 2006, such compensation expense, determined under the “fair value-based” method of accounting, totaled $0 and $1 and reduced our earnings per share by $0.00 and $0.01.

Prior to 2006, as allowed by SFAS No. 123, we accounted for stock options using the “intrinsic-value” method in APB No. 25. Under that method, no compensation expense was recognized on the grant date, since the option exercise price equaled the market price of the underlying common shares on that date. The intrinsic value for options outstanding and exercisable at September 30, 2006 was $0.

The following table contains information about non-vested stock options that were granted, vested or forfeited during the nine months ended September 30, 2006. No stock options were granted in the first nine months of 2006.

		Number				Weighted Average
		of				Grant Date Fair
		Options				Values (in $ per share)
Non-vested at December 31, 2005			1,370,818			$	3.40
Vested			(573,929	)			3.43
Forfeited			(151,473	)			3.40
Non-vested at September 30, 2006			645,416				3.39

At September 30, 2006, there was $1 of total unrecognized compensation cost related to non-vested stock options, which we expect to recognize over a period of approximately one year. The total fair value of options that vested during the three and nine months ended September 30, 2006, was $0 and $2.

Prior to 2006, as permitted by SFAS No. 123, we chose the “nominal vesting period approach” for recognizing the amount of stock option expense to be included in the pro forma compensation expense for retirement-eligible employees. Under this method, expense was recognized over the four-year vesting period. Under SFAS No. 123(R), we are required to continue applying this approach for unvested options granted prior to January 1, 2006, rather than the “non-substantive vesting period approach,”

where expense recognition is made over the period from grant date to the date retirement eligibility is achieved, if expected to occur during the nominal vesting period. Our compensation expense for the three and nine months ended September 30, 2006 would not have increased had we utilized the non-substantive vesting period approach for these period.

Under the modified prospective transition method, our financial results for the years prior to 2006 have not been restated. The following table contains information about our stock option expense for the three and nine months ended September 30, 2005 on a pro-forma basis as if we had applied the fair value recognition provisions of SFAS No. 123(R):

		Three Months Ended				Nine Months Ended
		September 30,				September 30,
		2005				2005
Stock compensation expense, as reported		$	3			$	5
Stock option expense, pro forma			9				15
Stock compensation expense, pro forma		$	12			$	20
Net loss, as reported		$	(1,272	)		$	(1,226	)
Net loss, pro forma			(1,281	)			(1,241	)
Basic earnings per share
Net loss, as reported		$	(8.51	)		$	(8.20	)
Net loss, pro forma			(8.57	)			(8.30	)
Diluted earnings per share
Net loss, as reported		$	(8.51	)		$	(8.20	)
Net loss, pro forma			(8.57	)			(8.30	)

The weighted average fair values of options granted during the three and nine months ended September 30, 2005 were $3.61 and $4.04 per share under the binomial method, using weighted average market values at date of grant of $13.35 and $14.90 and the following weighted average assumptions: risk-free interest rates of 4.05% and 3.91%, dividend yields of 3.17% and 2.69%, volatility of 31.50% to 35.00% and 30.80% to 31.50%, expected forfeitures of 45.78% and 17.93% and expected option lives of 5.81 and 6.75 years. The total intrinsic value of options exercised during these three-and nine-month periods in 2005 was $0.

On December 1, 2005, our Compensation Committee approved the immediate vesting of all unvested stock options and SARs granted under the SIP with an option exercise price or a SAR grant price of $15.00 or more per share. As a result, unvested stock options to purchase 3,584,646 shares of our common stock, with a weighted average exercise price of $21.97 per share, became exercisable on December 1, 2005, rather than on the later dates when they would have vested in the normal course. The decision to accelerate the vesting of these stock options and SARs was made to reduce the compensation expense that we would have otherwise been required to record following our adoption of SFAS No. 123(R). If the vesting of these stock options and SARs had not been accelerated, we would have expected to recognize an incremental share-based compensation expense of approximately $19 in the aggregate from 2006 through 2008. As a result of the acceleration, the stock option expense reported for the nine months ended September 30, 2006 was substantially lower than the amount disclosed for the comparable period in 2005.

Restricted Shares and Restricted Stock Units

Restricted shares and restricted stock units granted under the SIP are subject to forfeiture until the restrictions lapse or terminate. At December 31, 2005, there were 250,000 restricted shares and 50,000 restricted stock units outstanding, with an aggregate fair value of approximately $6. Unrecognized compensation for these shares and units was $2 at September 30, 2006. We expect to recognize that amount over the related vesting periods, the longest of which extends into 2015. No restricted shares or restricted stock units were granted in the first nine months of 2006. Claims with respect to restricted stock units that were not vested prior to our bankruptcy filing are pre-petition claims.

Performance Stock Awards (Performance Shares)

Performance shares awarded under the SIP will vest if Dana achieves certain pre-established performance goals selected by the Compensation Committee over two three-year performance periods (2004-2006 and 2005-2007). Generally, the employee must be actively employed with Dana at the end of the performance period for his performance shares to vest. Upon vesting, certain of the performance share awards will be payable in cash, while others will be payable in shares of Dana common stock. At December 31, 2005, there were 627,031 performance shares outstanding, 280,520 payable in stock and 346,511 payable in cash. No performance shares were granted in the first nine months of 2006. We recorded compensation expense of $0 and $1 for the three and nine months ended September 30, 2005 with respect to the performance shares. No expense was recorded in the first nine months of 2006, as we no longer expect the performance goals to be met for either three-year performance period.

1999 Restricted Stock Plan

The Compensation Committee may also grant restricted shares to key employees under our 1999 Restricted Stock Plan (1999 RSP). These shares are subject to forfeiture until the restrictions lapse or terminate. Generally, the employee must remain employed by Dana for at least three years after the date of grant to avoid forfeiting the shares. Historically, dividends have been credited on granted restricted shares in the form of additional restricted shares.

Before 2005, participants in the 1999 RSP could elect to convert their unvested restricted stock into an equal number of restricted stock units under certain conditions. The 1999 RSP provides that such units be credited with the equivalent of dividends and be payable in unrestricted stock upon the employee’s retirement or termination of employment unless subject to forfeiture at such time.

The following table contains information about the restricted shares granted, vested and forfeited under the 1999 RSP in the nine months ended September 30, 2006:

		Weighted Average
		Grant Date
		Fair Value				Shares
Balance, December 31, 2005		$	16.45				815,070
Granted
Vested			16.81				(235,612	)
Forfeited			16.73				(148,735	)
Balance, September 30, 2006		$	16.16				430,723

The aggregate fair value of the restricted shares that vested in the three and nine months ended September 30, 2006 was less than $1 for each period. Compensation expense recognized under the 1999 RSP with respect to these shares was less than $1 in these two periods. The remaining unrecognized compensation related to these shares totaled $4 at September 30, 2006. We expect to recognize that amount over the related vesting periods, the longest of which extends into 2011.

Note 8. Pension and Postretirement Benefit Plans

Components of net periodic benefit costs for the three and nine months ended September 30, 2006 and 2005 were as follows:

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2006				2005				2006				2005
Pension Benefits
Service cost		$	11			$	13			$	34			$	39
Interest cost			42				40				124				120
Expected return on plan assets			(50	)			(52	)			(151	)			(156	)
Amortization of prior service cost							1				2				3
Recognized net actuarial loss			8				6				24				18
Loss on settlements			3								14
Net periodic benefit cost		$	14			$	8			$	47			$	24
Other Benefits
Service cost		$	2			$	3			$	8			$	9
Interest cost			23				25				68				75
Amortization of prior service cost			(3	)			(3	)			(10	)			(9	)
Recognized net actuarial loss			10				9				30				27
Net periodic benefit cost		$	32			$	34			$	96			$	102

Based on the amount of lump sum payments of pension benefits during the nine months ended September 30, 2006, we recognized settlement costs of $14, representing a pro-rata portion of the previously unrecognized net actuarial loss.

Note 9. Comprehensive Loss

Comprehensive loss includes our net loss and components of other comprehensive income (loss), such as foreign currency translation gains and losses that are charged or credited directly to shareholders’ equity. The components of our total comprehensive loss for the three and nine months ended September 30, 2006 and 2005 follow:

		Three Months								Nine Months
		Ended September 30,								Ended September 30,
		2006				2005				2006				2005
Net loss		$	(356	)		$	(1,272	)		$	(510	)		$	(1,226	)
Other comprehensive income (loss):
Deferred translation gain (loss)			(6	)			39				84				(79	)
Other							(4	)							1
Total comprehensive loss		$	(362	)		$	(1,237	)		$	(426	)		$	(1,304	)

The $6 deferred translation loss reported for the three months ended September 30, 2006 was due to a weaker euro ($7) and South African rand ($3), offset in part by a stronger British pound ($3). The $84 deferred gain for the nine months ended September 30, 2006 was due to a stronger euro ($53), Brazilian real ($22) and British pound ($18), partially offset by a weaker rand ($9).

The $39 deferred translation gain reported for the three months ended September 30, 2005 was primarily the result of a stronger Canadian dollar ($28) and Brazilian real ($19) in relation to the U.S. dollar. We reported a $79 deferred translation loss for the nine months ended September 30, 2005, because the euro ($102), the British pound ($20) and the Swedish krona ($12) were weaker against the U.S. dollar, while the Brazilian real ($49) and Canadian dollar ($18) strengthened.

Note 10. Cash Deposits

At September 30, 2006, we maintained cash deposits of $105 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 typically renewed each year and are recorded in Cash and cash equivalents. In most jurisdictions, these cash deposits can be withdrawn if we provide comparable security in the form of letters of credit. Our banking facilities provide for the issuance of letters of credit, and the availability at September 30, 2006 was adequate to cover the amounts on deposit.

At September 30, 2006, Cash and cash equivalents held outside the U.S. amounted to $469 including $22 of cash deposits. Several countries have local regulatory requirements that significantly restrict the ability of the Debtors to access the cash. In addition, $70 was held by operations that are majority owned and consolidated by Dana, but which have third party minority ownership with varying levels of participation rights involving cash withdrawals. Beyond these restrictions, there are practical limitations on repatriation of cash from certain countries because of the resulting tax cost.

At September 30, 2006 cash and cash equivalents held in the U.S. amounted to $316 including $83 of cash deposits and $64 was held by DCC, a non-Debtor subsidiary, whose cash is expected to be restricted by the forbearance agreement discussed in Notes 4 and 11.

Note 11. Financing Agreements

DIP Credit Agreement

Dana, as borrower, and our Debtor U.S. subsidiaries, as guarantors, are parties to a Senior Secured Superpriority Debtor-in-Possession Credit Agreement (the DIP Credit Agreement) with Citicorp North America, Inc., as agent, initial lender and an issuing bank, and with Bank of America, N.A. and JPMorgan Chase Bank, N.A., as initial lenders and issuing banks. The DIP Credit Agreement, as amended, was approved by the Bankruptcy Court in March 2006. The aggregate amount of the facility is $1,450, including a $750 revolving credit facility (of which $400 is available for the issuance of letters of credit) and a $700 term loan facility.

All of the loans and other obligations under the DIP Credit Agreement will be due and payable on the earlier of 24 months after the effective date of the DIP Credit Agreement or the consummation of a plan of reorganization under the Bankruptcy Code. Prior to maturity, Dana will be required to make mandatory prepayments under the DIP Credit Agreement in the event that loans and letters of credit exceed the available commitments, and from the proceeds of certain asset sales, unless reinvested. Such prepayments, if required, are to be applied first to the term loan facility and second to the revolving credit facility with a permanent reduction in the amount of the commitments thereunder.

Interest for both the term loan facility and the revolving credit facility under the DIP Credit Agreement accrues, at our option, at either the London interbank offered rate (LIBOR) plus a per annum margin of 2.25% or the prime rate plus a per annum margin of 1.25%. Amounts currently borrowed are at a rate of LIBOR plus 2.25% (7.65% at September 30, 2006). We are paying a fee for issued and undrawn letters of credit in an amount per annum equal to the LIBOR margin applicable to the revolving credit facility, a per annum fronting fee of 25 basis points and a commitment fee of 0.375% per annum for unused committed amounts under the revolving credit facility.

The DIP Credit Agreement is guaranteed by substantially all of our domestic subsidiaries, excluding DCC. As collateral, we and each of our guarantor subsidiaries have granted a security interest in, and lien on, effectively all of their assets, including a pledge of 66% of the equity interests of each material foreign subsidiary directly or indirectly owned by us.

Under the DIP Credit Agreement, we and each of our subsidiaries (other than certain excluded subsidiaries) are required to comply with customary covenants for facilities of this type. These include (i) affirmative covenants as to corporate existence, compliance with laws, insurance, payment of taxes, access to books and records, use of proceeds, retention of a restructuring advisor and financial advisor, maintenance of cash management systems, use of proceeds, priority of liens in favor of the lenders, maintenance of properties and monthly, quarterly, annual and other reporting obligations, and (ii) negative covenants, including limitations on liens, additional indebtedness (beyond that permitted by the DIP Credit Agreement), guarantees, dividends, transactions with affiliates, claims in the bankruptcy proceedings, investments, asset dispositions, nature of business, payment of pre-petition obligations, capital expenditures, mergers and consolidations, amendments to constituent documents, accounting changes, and limitations on restrictions affecting subsidiaries and sale-leasebacks.

Additionally, the DIP Credit Agreement requires us to (i) maintain a minimum amount of consolidated earnings before interest, taxes, depreciation, amortization, restructuring and reorganization costs (EBITDAR), for each period beginning on March 1, 2006 and ending on the last day of each month from May 2006 through February 2007, and (ii) a rolling 12-month cumulative EBITDAR for Dana and our direct and indirect subsidiaries, on a consolidated basis, beginning on March 31, 2007 and ending on February 28, 2008, at levels set forth in the DIP Credit Agreement. We must also maintain minimum availability of $100 under the DIP Credit Agreement at all times. The DIP Credit Agreement provides for certain events of default customary for debtor-in-possession financings of this type, including cross default with other indebtedness. Upon the occurrence and during the continuance of any event of default under the DIP Credit Agreement, interest on all outstanding amounts would be payable on demand at 2% above the then applicable rate. We were in compliance with the requirements of the DIP Credit Agreement at September 30, 2006.

In March 2006, we borrowed $700 under the $1,450 DIP Credit Agreement and used the proceeds to pay off debt obligations outstanding under our prior five-year bank facility (which had provided us with $400 in borrowing capacity), our accounts receivable securitization program (which had provided us with up to $275 borrowing capacity to meet periodic demand for short-term financing), and certain other pre-petition obligations, as well as to provide for working capital and general corporate expenses. Based on our borrowing base collateral, we had availability under the DIP Credit Agreement at September 30, 2006 of $571. We had utilized $237 of this for letters of credit, leaving unused availability of $334.

Canadian Credit Agreement

In June 2006, Dana Canada Corporation (Dana Canada), as borrower, and certain of its Canadian affiliates, as guarantors, entered into a Credit Agreement (the Canadian Credit Agreement) with Citibank Canada as agent, initial lender and an issuing bank, and with JPMorgan Chase Bank, N.A., Toronto Branch and Bank of America, N.A., Canada Branch, as initial lenders and issuing banks. The Canadian Credit Agreement provides for a $100 revolving credit facility, of which $5 is available for the issuance of letters of credit. At September 30, 2006, there were no borrowings and no utilization of the net availability under the facility for the issuance of letters of credit.

All loans and other obligations under the Canadian Credit Agreement will be due and payable on the earlier of (i) 24 months after the effective date of the Canadian Credit Agreement or (ii) the termination of the DIP Credit Agreement.

Interest under the Canadian Credit Agreement will accrue, at Dana Canada’s option, either at (i) LIBOR plus a per annum margin of 2.25% or (ii) the Canadian prime rate plus a per annum margin of 1.25%. Dana Canada will pay a fee for issued and undrawn letters of credit in an amount per annum equal to 2.25% and is paying a commitment fee of 0.375% per annum for unused committed amounts under the facility.

The Canadian Credit Agreement is guaranteed by substantially all of the Canadian affiliates of Dana Canada. As collateral, Dana Canada and each of its guarantor affiliates has granted a security interest in, and lien on, effectively all of its assets, including a pledge of 100% of the equity interests of each direct foreign subsidiary owned by Dana Canada and each of its Canadian affiliates.

Under the Canadian Credit Agreement, Dana Canada and each of its Canadian affiliates are required to comply with customary affirmative covenants for facilities of this type, including covenants as to corporate existence, compliance with laws, insurance, payment of taxes, access to books and records, use of proceeds, maintenance of cash management systems, priority of liens in favor of the lenders, maintenance of properties and monthly, quarterly, annual and other reporting obligations. Dana Canada and each of its Canadian affiliates are also required to comply with customary negative covenants for facilities of this type, including limitations on liens, additional indebtedness, guarantees, dividends, transactions with affiliates, investments, asset dispositions, nature of business, capital expenditures, mergers and consolidations, amendments to constituent documents, accounting changes, restrictions affecting subsidiaries, and sale and lease-backs. In addition, Dana Canada must maintain a minimum availability under the Canadian Credit Agreement of $20.

The Canadian Credit Agreement provides for certain events of default customary for facilities of this type, including cross default with the DIP Credit Agreement. Upon the occurrence and continuance of an event of default, Dana Canada’s lenders may have the right, among other things, to terminate their commitments under the Canadian Credit Agreement, accelerate the repayment of all of Dana Canada’s obligations thereunder and foreclose on the collateral granted to them.

Debt Reclassification

Dana’s bankruptcy filing triggered the immediate acceleration of the Debtors’ direct financial obligations including, among others, outstanding non-secured notes issued under our Indentures dated as of December 15, 1997, August 8, 2001, March 11, 2002 and December 10, 2004, and DCC’s obligations under the DCC Notes. The amounts accelerated under our Indentures are characterized as unsecured debt for purposes of the reorganization proceedings. The related Debtor obligations of $1,585 have been classified as Liabilities subject to compromise, and the unsecured DCC notes have been classified as part of the current portion of long-term debt in our Condensed Consolidated Balance Sheet. (See Note 2.) As a result of the first quarter 2006 agreement to sell DCC’s interest in a limited partnership, $55 of DCC non-recourse debt expected to be assumed by the buyer has been classified as a current liability. Certain non-U.S. borrowings totaling $16 continue to be classified as Long-term debt.

DCC Notes

At September 30, 2006, long-term debt at DCC included medium-term and private placement notes (together, the DCC Notes) totaling $399, including $275 outstanding under a $500 Medium Term Note Program established during 1999. The DCC Notes are general, unsecured obligations of DCC. Following Dana’s bankruptcy filing, the holders of a majority of the DCC Notes formed an Ad Hoc Committee of Noteholders with which DCC has been discussing the potential for restructuring the DCC Notes. A successful outcome of DCC’s efforts to complete a restructuring of the DCC Notes with the Ad Hoc Committee and its other noteholders cannot be assured. (See Note 4.)

Note 12. Income Taxes

Income taxes are accounted for in accordance with SFAS No. 109, “Accounting for Income Taxes.” Current and deferred income tax assets and liabilities are recognized based on events which have occurred and are measured under enacted tax laws. Based on our recent history of losses in the U.S. and our near-term prospects for continued losses, we established 100% valuation allowances against our U.S. deferred tax assets in the third quarter of 2005. Deferred tax assets resulting from subsequent U.S. losses have been offset by increases in the valuation allowances, effectively eliminating the benefit of those losses.

Since we no longer recognize income tax benefits on our U.S. losses, the income tax expense of $20 and $78 for the three and nine months ended September 30, 2006 differs from the tax benefits of $86 and $118 for these periods that would be expected using a U.S. federal statutory tax rate of 35%. With no U.S. tax benefit, the income tax expense reflected in the condensed consolidated financial statements for the three and nine months ended September 30, 2006, was primarily the tax on profits of our non-U.S. operations at the expected annual effective tax rates. Also affecting the difference between the actual effective rate and the U.S. federal rate was a $46 impairment charge in the third quarter of 2006 for goodwill which was not deductible for tax purposes.

We recognized $921 and $919 of income tax expense for the three and nine months ended September 30, 2005 as compared to tax benefits of $18 and $11 that would have been expected using a U.S. federal statutory rate of 35%. During the third quarter of 2005, we provided a valuation allowance of $907 against our net U.S. deferred tax assets and additional allowances of $13 against similar net deferred tax assets in the U.K.

Note 13. Commitments and Contingencies

Impact of Our Bankruptcy Filing

Under the Bankruptcy Code, the filing of our petition on March 3, 2006, automatically stayed most actions against us. Substantially all of our pre-petition liabilities will be addressed under our plan of reorganization, if not otherwise addressed pursuant to orders of the Bankruptcy Court.

Class Action Lawsuit and Derivative Actions

There is a consolidated securities class action (Howard Frank v. Michael J. Burns and Robert C. Richter) pending in the U.S. District Court for the Northern District of Ohio naming our CEO, Mr. Burns, and our former CFO, Mr. Richter, as defendants. Dana was formerly a defendant in this action, but was not named as a defendant in an amended complaint filed by the plaintiffs in August 2006. The plaintiffs in this action 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.

There are also two shareholder derivative actions (Steven Staehr v. Michael J. Burns, et al. and Roberta Casden v. Michael J. Burns, et al.) pending in the same court naming our current directors, certain former directors and Messrs. Burns and Richter as defendants. The derivative claims in these cases, alleging breaches of the defendants’ fiduciary duties to Dana, have been stayed. The plaintiff in the Casden action has also asserted class action claims alleging a breach of duties that purportedly forced Dana into bankruptcy.

The defendants have moved to dismiss or stay the class action claims in these cases, and a hearing on these motions has been set for January 2007.

Due to the preliminary nature of these lawsuits, at this time we cannot predict their outcome or estimate Dana’s related potential exposure. While we have insurance coverage with respect to these matters and 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, there can be no assurance that any uninsured loss would not be material.

SEC Investigation

In September 2005, we reported that management was investigating accounting matters arising out of incorrect entries related to a customer agreement in our Commercial Vehicle business unit, and that our Audit Committee had engaged outside counsel to conduct an independent investigation of these matters as well. Outside counsel informed the SEC of the investigation, which ended in December 2005, at which time we filed restated financial statements for the first two quarters of 2005 and the years 2002 through 2004. In January 2006, we learned that the SEC had issued a formal order of investigation with respect to matters related to our restatements. The SEC’s investigation is a non-public, fact-finding inquiry to determine whether any violations of the law have occurred. This investigation has not been suspended as a result of our bankruptcy filing. We are continuing to cooperate fully with the SEC in the investigation.

Tax Matters

In the ordinary course of business, we are involved in various tax matters, including transactions for which the related tax regulations are relatively new and/or subject to interpretation. A number of years may elapse before a particular matter is audited and a tax adjustment is proposed by the taxing authority. The years with open tax audits vary depending on the tax jurisdiction. We establish a liability when the payment of additional taxes related to certain matters is considered probable and the amount is reasonably estimable. We adjust these liabilities, including the related interest and penalties, in light of changing facts and circumstances, such as the progress of a tax audit. These liabilities are recorded in Other accrued liabilities in our Condensed Consolidated Balance Sheet. Favorable resolution of tax matters for which a liability had previously been recorded would result in a reduction of income tax expense when payment of the tax is no longer considered probable.

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

Under the Bankruptcy Code, our pending asbestos-related product liability lawsuits, as well as any new lawsuits against us alleging asbestos-related claims, have been stayed during our reorganization process. However, claimants may file proofs of asbestos-related claims in the Bankruptcy Cases. The September 21, 2006 claims bar date did not apply to claimants alleging asbestos-related personal injury claims, but it was the deadline for claimants who are not one of the allegedly injured individuals or their personal representatives (including insurers) to file proofs of claim with respect to other types of asbestos-related claims. Our obligations with respect to asbestos claims will be addressed in our plan of reorganization, if not otherwise addressed pursuant to orders of the Bankruptcy Court.

We had approximately 75,000 active pending asbestos-related product liability claims at September 30, 2006, compared to 77,000 at December 31, 2005, including 9,000 and 10,000 claims, respectively, that were settled but awaiting final documentation and payment. We had accrued $94 for indemnity and defense costs for pending asbestos-related product liability claims at September 30, 2006, compared to $98 at December 31, 2005. We accrue for pending claims based on our claims settlement and dismissal history.

The methodology we use for projecting future asbestos-related product claims and costs is described in our 2005 Form 10-K. Based on this analysis, we estimate our potential liability through 2021 to be within a range of $70 to $120. Since the outcomes within that range are equally probable, the accrual at September 30, 2006 represents the lower end of the range. While the process of estimating future demands is highly uncertain beyond 2021, we believe there are reasonable scenarios in which our expenditures related to asbestos-related product liability claims after that date would be de minimis.

At September 30, 2006, we had recorded $78 as an asset for probable recovery from our insurers for the pending and projected claims, the same balance as was recorded at December 31, 2005. The asset recorded reflects our assessment of the capacity of our current insurance agreements to provide for the payment of anticipated defense and indemnity costs for pending claims and projected future demands. These recoveries assume elections to extend existing coverage which we intend to exercise in order to maximize our insurance recovery. The asset recorded does not represent the limits of our insurance coverage, but rather the amount we would expect to recover if we paid the accrued indemnity and defense costs.

At December 31, 2005, we had recorded a receivable of $8 in connection with an October 2005 settlement agreement with one of our insurers. We received payments of $2 in the first quarter of 2006 and $6 in the second quarter of 2006. We apply proceeds from such insurance commutations first to reduce any recorded recoverable amount. We evaluate any excess over the recoverable amount to assess whether any portion of the excess represents payments by the insurer for potential future liabilities.

In addition, we had a net amount recoverable from our insurers and others of $14 at September 30, 2006 compared to $15 at December 31, 2005. 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. As a result of the stay in our asbestos litigation during the reorganization process, we do not expect to make any asbestos payments in the near term. However, we are continuing to pursue insurance collections with respect to asbestos-related amounts paid prior to the Filing Date.

Other Product Liabilities

We had accrued $8 for contingent non-asbestos product liability costs at September 30, 2006, compared to $13 at December 31, 2005, with no recovery expected from third parties at either date. 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. The difference between our minimum and maximum estimates for these liabilities was $10 at both dates.

Environmental Liabilities

We had accrued $62 for contingent environmental liabilities at September 30, 2006, compared to $62 at December 31, 2005. 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. The difference between our minimum and maximum estimates for these liabilities was $1 at both dates.

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. Our estimated aggregate liability for this site was $15 at both December 31, 2005 and September 30, 2006. Following our bankruptcy filing, we discontinued the remedial investigation/feasibility study (RI/FS) we had been conducting at one unit of the site and informed the Environmental Protection Agency (EPA) that since our alleged liabilities at this site occurred before the Filing Date, we believe they constitute pre-petition liabilities subject to resolution in the bankruptcy proceedings. In September 2006, EPA filed claims with the Bankruptcy Court, as an unsecured creditor, for all unreimbursed past and future response costs at this site; civil penalties, punitive damages and stipulated damages in connection with our termination of the RI/FS; and damages to natural resources. We expect that EPA’s claims will be resolved either through a negotiated settlement or through the claims process in the bankruptcy proceedings, where the validity and amounts of the asserted claims will have to be substantiated. We are reviewing EPA’s claims and will adjust our liability estimate and accrual in the future, if appropriate.

Other Liabilities Related to Asbestos Claims

Until 2001, most of our asbestos-related claims were administered, defended and settled by the Center for Claims Resolution (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. When some former CCR members defaulted on the payment of their shares of some of the CCR-negotiated settlements, some of the settling claimants 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 for some time to resolve these issues. Through September 30, 2006, we had paid $47 to claimants and collected $29 from our insurance carriers with respect to these claims. At September 30, 2006, we had a net receivable of $13 that we expect to recover from available insurance and surety bonds relating to these claims. We are continuing to pursue insurance collections with respect to asbestos-related amounts paid prior to the filing of our bankruptcy petition.

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 us 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 proposed U.S. federal legislation impacting asbestos personal injury claims is enacted. 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 from what we currently project.

Note 14. Warranty Obligations

We record a liability for estimated warranty obligations at the time our products are sold. Adjustments are made as new information becomes available. Changes in our warranty liabilities for the three and nine months ended September 30, 2006 and 2005 are as follows:

		Three Months								Nine Months
		Ended September 30,								Ended September 30,
		2006				2005				2006				2005
Balance, beginning of period		$	95			$	65			$	91			$	80
Amounts accrued for current period sales			12				20				37				35
Adjustments of prior accrual estimates			(3	)			(5	)			(2	)			(7	)
Divestiture			(1	)							(1	)
Change in accounting															(6	)
Settlements of warranty claims			(14	)			(11	)			(38	)			(31	)
Foreign currency translation											2				(2	)
Balance, end of period		$	89			$	69			$	89			$	69

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 liabilities based on our costs to settle the claim. Management believes that this is a change to a preferable method in that it more accurately reflects the cost of settling the warranty liability. In accordance with GAAP, the $6 pre-tax cumulative effect of the change was effective as of January 1, 2005 and was reflected in the financial statements for the nine months ended September 30, 2005. Warranty obligations of $39 are included in Liabilities subject to compromise with the remainder reported as Other accrued liabilities, in the Condensed Consolidated Balance Sheet.

Note 15. Discontinued Operations and Realignment of Operations

Discontinued Operations

The engine hard parts, fluid products and pump products businesses that we intend to divest by the end of the first quarter of 2007, are aggregated and presented as discontinued operations. In the motions and affidavits presented to the Bankruptcy Court on the Filing Date, we advised the court of our plan to sell the discontinued operations, and the anticipated proceeds were included in the DIP Credit Agreement budget. The sales of the engine hard parts and fluid products businesses will be subject to Bankruptcy Court approval.

The results of the discontinued operations for the three and nine months ended September 30, 2006 and 2005 are as follows:

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2006				2005				2006				2005
Sales		$	334			$	328			$	987			$	993
Cost of sales			331				321				938				946
Selling, general and administrative expenses			18				18				51				56
Impairment of goodwill							83								83
Impairment of assets			84				207				115				207
Other income (expense), net			1				3								4
Loss before income taxes			(98	)			(298	)			(117	)			(295	)
Income tax benefit (expense)			14				(8	)			15				(6	)
Loss from discontinued operations		$	(84	)		$	(306	)		$	(102	)		$	(301	)

In 2005, we had reduced the carrying value of certain businesses comprising our discontinued operations to fair value less costs to sell. In the third quarter of 2005, having determined that sales of these businesses were likely, we recorded goodwill impairment charges of $83 and long-lived asset impairment of $207. During the fourth quarter of 2005, additional charges of $121 were recorded to adjust the held-for-sale businesses to fair value less cost to sell. During 2006, we have monitored changes in both the expected proceeds and the value of the underlying net assets of these discontinued operations to determine whether additional adjustments were appropriate. In part due to softening demand in the North American light vehicle market and to higher raw material prices, the near term profit outlook for our discontinued businesses continues to be challenged. Based on our discussions with potential buyers in the third quarter of 2006 and our updated profit outlook, we determined that an additional provision of $84 was required to adjust the net assets of the discontinued operations to their fair value less cost to sell. Valuation adjustment charges for the nine months ended September 30, 2006 amounted to $115. These adjustments are recorded as an impairment of assets in the results of discontinued operations. Tax benefits of these adjustments related primarily to the non-U.S. entities and were $14 and $18 in the three months and nine months ended September 30, 2006, and $15 for the three and nine months ended September 30, 2005.

The assets and liabilities of discontinued operations reported in the Condensed Consolidated Balance Sheet as of September 30, 2006 and December 31, 2005 consisted of the following:

		September 30,				December 31,
		2006				2005
Assets of discontinued operations
Accounts receivable		$	234			$	212
Inventories			136				141
Cash and other current assets			11				7
Goodwill							4
Investments and other assets			50				101
Investments in leases			6				8
Property, plant and equipment			21				48
Total assets of discontinued operations		$	458			$	521
Liabilities of discontinued operations
Accounts payable		$	102			$	123
Accrued payroll and employee benefits			29				31
Other current liabilities			47				30
Other noncurrent liabilities			31				17
Total liabilities of discontinued operations		$	209			$	201

In the Condensed Consolidated Statement of Cash Flows, the cash flows of discontinued operations are not separately classified or aggregated. They are reported in the respective categories of the Condensed Consolidated Statement of Cash Flows along with those of our continuing operations.

Realignment of Operations

The following table shows the charges and payments for the realignment activity recorded in our continuing operations for the nine months ended September 30, 2006:

		Employee
		Termination				Exit
		Benefits				Costs				Total
Balance at December 31, 2005		$	41			$	15			$	56
Activity during the year-to-date period ended September 30, 2006:
Charges to expense			3				4				7
Adjustment of accrual			(3	)			(2	)			(5	)
Cash payments			(14	)			(5	)			(19	)
Balance at September 30, 2006		$	27			$	12			$	39

At September 30, 2006, $39 of restructuring charges remained in accrued liabilities. This balance was comprised of $27 for the reduction of approximately 1,200 employees to be completed in 2006 and $12 for lease terminations and other exit costs. The estimated annual cash expenditures will be approximately $10 for the remainder of 2006, $16 in 2007 and $13 thereafter.

Completion of realignment initiatives generally occurs over multiple reporting periods. In connection with the announced realignment initiatives that had not yet been completed at September 30, 2006, we have expensed $93, including $7 and $8 in the nine months ended September 30, 2006 and 2005. In addition to the $39 accrued at September 30, 2006, we estimate that an additional $31 will be expensed in connection with the completion of the pending initiatives.

The following table provides project-to-date and estimated future expenses for completion of our realignment initiatives by business unit:

		Expense Recognized
						Year-to-								Future
		Prior to				Date								Cost to
		2006				2006				Total				Complete
ASG		$	39			$	7			$	46			$	31
HVTSG			34								34
Corporate and other			13								13
Total		$	86			$	7			$	93			$	31

Note 16. Segments

SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information” establishes standards for reporting information about operating segments and related disclosures about products and services and geographic locations. SFAS No. 131 requires reporting on a single basis of segmentation. The components that management establishes for purposes of making decisions about an enterprise’s operating matters are referred to as “operating segments.” We currently have three operating segments — two manufacturing business units (ASG and HVTSG) and one non-manufacturing business unit (DCC).

Management evaluates the operating segments as if DCC were accounted for on the equity method of accounting rather than on the fully consolidated basis used for external reporting. This is done because DCC is not homogeneous with our manufacturing operations in that 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 the DIP Credit Agreement are measured with DCC accounted for on an equity basis.

Operating profit after tax (OPAT) is the key internal measure of performance used by management as a measure of profitability for our segments (other than DCC). OPAT, a non-GAAP financial measure, 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 OPAT less allocated corporate expenses and net interest expense, provides a secondary measure of profitability for our segments (other than DCC) that is more comparable to that of a free standing entity. The allocation is based on segment sales because this method is readily calculable, easily understood and, we believe, provides a reasonable distribution of the various components of our corporate expenses among our diverse business units.

The accounting guidance, which we follow, does not permit the allocation of corporate expenses to discontinued operations. Therefore, we have included the corporate expenses and interest expense previously allocated to the three ASG businesses held-for-sale in Other in the segment table below. These amounts totaled $3 and $6 in the three months ended September 30, 2006 and 2005 and $15 and $19 in the nine months ended September 30, 2006 and 2005. We believe this presentation avoids distorting the net profit (loss) previously reported for the remaining business units and presents amounts indicative of the reduced level of corporate expenses and interest expense anticipated following the sale of the three held-for-sale businesses.

The Other category includes businesses unrelated to the segments, trailing liabilities for certain closed plants and the expense of corporate administrative functions. Also included in Other are certain unusual items such as divestiture gains and losses which are not included in business segment OPAT for internal performance measurement. In addition, Other includes interest expense net of interest income, elimination of inter-segment income and adjustments to reflect the actual effective tax rate. In the Net Profit (Loss) column, Other includes the net profit or loss of businesses not assigned to the segments and certain divested businesses (but not discontinued operations), minority interest in earnings of unconsolidated affiliates and the tax differential between the actual taxes recorded and the tax shown for the segments using the 39% rate discussed above.

Information used to evaluate our operating segments for the three months ended September 30, 2006 and 2005 is as follows:

						Inter-								Net
		External				Segment								Profit
		Sales				Sales				OPAT				(Loss)
2006
ASG		$	1,279			$	34			$	(9	)		$	(25	)
HVTSG			724				2				24				11
DCC											1				1
			2,003				36				16				(13	)
Other			6				10				(52	)			(23	)
Total continuing operations			2,009				46				(36	)			(36	)
Impairment of goodwill											(46	)			(46	)
Impairment of other assets											(165	)			(165	)
Discontinued operations											(84	)			(84	)
Total operations			2,009				46				(331	)			(331	)
Reorganization items											(25	)			(25	)
Consolidated		$	2,009			$	46			$	(356	)		$	(356	)
2005
ASG		$	1,468			$	33			$	35			$
HVTSG			642				2				11				(9	)
DCC											3				3
			2,110				35				49				(6	)
Other			9				12				(97	)			(42	)
Total continuing operations			2,119				47				(48	)			(48	)
Valuation adjustment against deferred tax assets											(920	)			(920	)
Discontinued operations											(306	)			(306	)
Total operations			2,119				47				(1,274	)			(1,274	)
Effect of change in accounting											2				2
Consolidated		$	2,119			$	47			$	(1,272	)		$	(1,272	)