Edgar Filing: FORD MOTOR CO

form10q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2008

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

For the transition period from ________________ to ________________

Commission File Number: 1-3950

FORD MOTOR COMPANY

(Exact name of registrant as specified in its charter)

Delaware	38-0549190
(State of Incorporation)	(IRS Employer Identification No.)

One American Road, Dearborn, Michigan	48126
(Address of principal executive offices)	(Zip Code)

(313) 322-3000

(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.

T Yes £ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company in Rule 12b-2 of the Exchange Act.

Large accelerated filer T

Accelerated filer £

Non-accelerated filer £

Smaller reporting company £

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

£ Yes T No

As of October 27, 2008, the registrant had outstanding 2,318,003,459 shares of Common Stock and 70,852,076 shares of Class B Stock.

Exhibit index located on page number 64.

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

FORD MOTOR COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF INCOME

For the Periods Ended September 30, 2008 and 2007

(in millions, except per share amounts)

	Third Quarter						First Nine Months
	2008			2007			2008			2007
	(unaudited)						(unaudited)
Sales and revenues
Automotive sales	$	27,733		$	36,270		$	103,907		$	115,006
Financial Services revenues		4,312			4,808			13,178			13,333
Total sales and revenues		32,045			41,078			117,085			128,339

Costs and expenses
Automotive cost of sales		24,999			33,238			100,450			104,135
Selling, administrative and other expenses		4,574			4,904			16,974			15,828
Interest expense		2,382			2,733			7,339			8,210
Financial Services provision for credit and insurance losses		399			194			1,341			374
Total costs and expenses		32,354			41,069			126,104			128,547

Automotive interest income and other non-operating income/(expense), net		(244	)		(216	)		(344	)		672
Automotive equity in net income/(loss) of affiliated companies		13			51			109			262
Income/(Loss) before income taxes		(540	)		(156	)		(9,254	)		726
Provision for/(Benefit from) income taxes		(462	)		162			(811	)		467
Income/(Loss) before minority interests		(78	)		(318	)		(8,443	)		259
Minority interests in net income/(loss) of subsidiaries		51			62			262			205
Income/(Loss) from continuing operations		(129	)		(380	)		(8,705	)		54
Income/(Loss) from discontinued operations (Note 8)		—			—			9			34
Net income/(loss)	$	(129	)	$	(380	)	$	(8,696	)	$	88

AMOUNTS PER SHARE OF COMMON AND CLASS B STOCK (Note 9)
Basic income/(loss)
Income/(Loss) from continuing operations	$	(0.06	)	$	(0.19	)	$	(3.89	)	$	0.03
Income/(Loss) from discontinued operations		—			—			—			0.02
Net income/(loss)	$	(0.06	)	$	(0.19	)	$	(3.89	)	$	0.05
Diluted income/(loss)
Income/(Loss) from continuing operations	$	(0.06	)	$	(0.19	)	$	(3.89	)	$	0.03
Income/(Loss) from discontinued operations		—			—			—			0.02
Net income/(loss)	$	(0.06	)	$	(0.19	)	$	(3.89	)	$	0.05

The accompanying notes are part of the financial statements

Item 1. Financial Statements (Continued)

FORD MOTOR COMPANY AND SUBSIDIARIES

SECTOR STATEMENT OF INCOME

For the Periods Ended September 30, 2008 and 2007

(in millions, except per share amounts)

	Third Quarter						First Nine Months
	2008			2007			2008			2007
	(unaudited)						(unaudited)
AUTOMOTIVE
Sales	$	27,733		$	36,270		$	103,907		$	115,006
Costs and expenses
Cost of sales		24,999			33,238			100,450			104,135
Selling, administrative and other expenses		2,740			3,016			8,804			10,314
Total costs and expenses		27,739			36,254			109,254			114,449
Operating income/(loss)		(6	)		16			(5,347	)		557

Interest expense		462			563			1,475			1,720

Interest income and other non-operating income/(expense), net		(244	)		(216	)		(344	)		672
Equity in net income/(loss) of affiliated companies		13			51			109			262
Income/(Loss) before income taxes — Automotive		(699	)		(712	)		(7,057	)		(229	)

FINANCIAL SERVICES
Revenues		4,312			4,808			13,178			13,333
Costs and expenses
Interest expense		1,920			2,170			5,864			6,490
Depreciation		1,596			1,620			7,544			4,599
Operating and other expenses		238			268			626			915
Provision for credit and insurance losses		399			194			1,341			374
Total costs and expenses		4,153			4,252			15,375			12,378
Income/(Loss) before income taxes — Financial Services		159			556			(2,197	)		955

TOTAL COMPANY
Income/(Loss) before income taxes		(540	)		(156	)		(9,254	)		726
Provision for/(Benefit from) income taxes		(462	)		162			(811	)		467
Income/(Loss) before minority interests		(78	)		(318	)		(8,443	)		259
Minority interests in net income/(loss) of subsidiaries		51			62			262			205
Income/(Loss) from continuing operations		(129	)		(380	)		(8,705	)		54
Income/(Loss) from discontinued operations (Note 8)		—			—			9			34
Net income/(loss)	$	(129	)	$	(380	)	$	(8,696	)	$	88

AMOUNTS PER SHARE OF COMMON AND CLASS B STOCK (Note 9)
Basic income/(loss)
Income/(Loss) from continuing operations	$	(0.06	)	$	(0.19	)	$	(3.89	)	$	0.03
Income/(Loss) from discontinued operations		—			—			—			0.02
Net income/(loss)	$	(0.06	)	$	(0.19	)	$	(3.89	)	$	0.05
Diluted income/(loss)
Income/(Loss) from continuing operations	$	(0.06	)	$	(0.19	)	$	(3.89	)	$	0.03
Income/(Loss) from discontinued operations		—			—			—			0.02
Net income/(loss)	$	(0.06	)	$	(0.19	)	$	(3.89	)	$	0.05

The accompanying notes are part of the financial statements

Item 1. Financial Statements (Continued)

FORD MOTOR COMPANY AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET

(in millions)

	September 30, 2008			December 31, 2007
	(unaudited)
ASSETS
Cash and cash equivalents	$	24,894		$	35,283
Marketable securities		16,907			5,248
Loaned securities		—			10,267
Finance receivables, net		100,883			109,053
Other receivables, net		7,529			8,210
Net investment in operating leases		29,179			33,255
Retained interest in sold receivables		154			653
Inventories (Note 2)		12,048			10,121
Equity in net assets of affiliated companies		3,065			2,853
Net property		30,253			36,239
Deferred income taxes		3,032			3,500
Goodwill and other net intangible assets (Note 4)		1,805			2,069
Assets of discontinued/held-for-sale operations (Note 8)		—			7,537
Other assets		12,316			14,976
Total assets	$	242,065		$	279,264

LIABILITIES AND STOCKHOLDERS’ EQUITY
Payables	$	20,358		$	20,832
Accrued liabilities and deferred revenue		62,931			74,738
Debt		156,793			168,787
Deferred income taxes		2,514			3,034
Liabilities of discontinued/held-for-sale operations (Note 8)		—			4,824
Total liabilities		242,596			272,215

Minority interests		1,458			1,421

Stockholders’ equity
Capital stock
Common Stock, par value $0.01 per share (2,304 million shares issued)		23			21
Class B Stock, par value $0.01 per share (71 million shares issued)		1			1
Capital in excess of par value of stock		8,910			7,834
Accumulated other comprehensive income/(loss)		(571	)		(558	)
Treasury stock		(183	)		(185	)
Retained earnings/(Accumulated deficit)		(10,169	)		(1,485	)
Total stockholders’ equity		(1,989	)		5,628
Total liabilities and stockholders’ equity	$	242,065		$	279,264

The accompanying notes are part of the financial statements

Item 1. Financial Statements (Continued)

FORD MOTOR COMPANY AND SUBSIDIARIES

SECTOR BALANCE SHEET

(in millions)

	September 30, 2008			December 31, 2007
	(unaudited)
ASSETS
Automotive
Cash and cash equivalents	$	10,607		$	20,678
Marketable securities		11,477			2,092
Loaned securities		—			10,267
Total cash, marketable and loaned securities		22,084			33,037
Receivables, net		4,623			4,530
Inventories (Note 2)		12,048			10,121
Deferred income taxes		333			532
Other current assets		4,756			5,514
Current receivable from Financial Services		1,177			509
Total current assets		45,021			54,243
Equity in net assets of affiliated companies		2,466			2,283
Net property		30,027			35,979
Deferred income taxes		6,992			9,268
Goodwill and other net intangible assets (Note 4)		1,796			2,051
Assets of discontinued/held-for-sale operations (Note 8)		—			7,537
Other assets		5,826			5,614
Non-current receivable from Financial Services		2,520			1,514
Total Automotive assets		94,648			118,489
Financial Services
Cash and cash equivalents		14,287			14,605
Marketable securities		5,735			3,156
Finance receivables, net		103,796			112,733
Net investment in operating leases		25,838			30,309
Retained interest in sold receivables		154			653
Equity in net assets of affiliated companies		599			570
Goodwill and other net intangible assets (Note 4)		9			18
Other assets		5,492			7,217
Total Financial Services assets		155,910			169,261
Intersector elimination		(4,009	)		(2,023	)
Total assets	$	246,549		$	285,727

LIABILITIES AND STOCKHOLDERS' EQUITY
Automotive
Trade payables	$	15,154		$	15,718
Other payables		3,152			3,237
Accrued liabilities and deferred revenue		25,036			27,672
Deferred income taxes		2,728			2,671
Debt payable within one year		1,282			1,175
Total current liabilities		47,352			50,473
Long-term debt		24,856			25,779
Other liabilities		32,622			41,676
Deferred income taxes		736			783
Liabilities of discontinued/held-for-sale operations (Note 8)		—			4,824
Total Automotive liabilities		105,566			123,535
Financial Services
Payables		2,052			1,877
Debt		130,960			141,833
Deferred income taxes		3,534			6,043
Other liabilities and deferred income		5,280			5,390
Payable to Automotive		3,697			2,023
Total Financial Services liabilities		145,523			157,166
Minority interests		1,458			1,421

Stockholders' equity
Capital stock
Common Stock, par value $0.01 per share (2,304 million shares issued)		23			21
Class B Stock, par value $0.01 per share (71 million shares issued)		1			1
Capital in excess of par value of stock		8,910			7,834
Accumulated other comprehensive income/(loss)		(571	)		(558	)
Treasury stock		(183	)		(185	)
Retained earnings/(Accumulated deficit)		(10,169	)		(1,485	)
Total stockholders' equity		(1,989	)		5,628
Intersector elimination		(4,009	)		(2,023	)
Total liabilities and stockholders' equity	$	246,549		$	285,727

The accompanying notes are part of the financial statements.

Item 1. Financial Statements (Continued)

FORD MOTOR COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

For the Periods Ended September 30, 2008 and 2007

(in millions)

	First Nine Months
	2008			2007
	(unaudited)

Cash flows from operating activities of continuing operations
Net cash (used in)/provided by operating activities	$	3,269		$	13,242

Cash flows from investing activities of continuing operations
Capital expenditures		(4,875	)		(4,215	)
Acquisitions of retail and other finance receivables and operating leases		(36,932	)		(42,827	)
Collections of retail and other finance receivables and operating leases		32,278			34,509
Purchases of securities		(49,881	)		(9,085	)
Sales and maturities of securities		47,852			14,805
Settlements of derivatives		1,753			716
Proceeds from sales of retail and other finance receivables and operating leases		—			705
Proceeds from sale of businesses		6,293			1,236
Cash paid for acquisitions		(13	)		—
Transfer of cash balances upon disposition of discontinued/held-for-sale operations		(925	)		(83	)
Other		421			185
Net cash (used in)/provided by investing activities		(4,029	)		(4,054	)

Cash flows from financing activities of continuing operations
Sales of Common Stock		663			152
Purchases of Common Stock		—			(31	)
Changes in short-term debt		(4,422	)		(2,558	)
Proceeds from issuance of other debt		27,565			24,018
Principal payments on other debt		(32,768	)		(32,457	)
Other		(531	)		151
Net cash (used in)/provided by financing activities		(9,493	)		(10,725	)

Effect of exchange rate changes on cash		(136	)		64

Net increase/(decrease) in cash and cash equivalents from continuing operations		(10,389	)		(1,473	)

Cash flows from discontinued operations
Cash flows from operating activities of discontinued operations		—			16
Cash flows from investing activities of discontinued operations		—			—
Cash flows from financing activities of discontinued operations		—			—

Net increase/(decrease) in cash and cash equivalents	$	(10,389	)	$	(1,457	)

Cash and cash equivalents at January 1	$	35,283		$	28,896
Cash and cash equivalents of discontinued/held-for-sale operations at January 1		—			(2	)
Net increase/(decrease) in cash and cash equivalents		(10,389	)		(1,457	)
Less: cash and cash equivalents of discontinued/held-for-sale operations at September 30		—			—
Cash and cash equivalents at September 30	$	24,894		$	27,437

The accompanying notes are part of the financial statements

Item 1. Financial Statements (Continued)

FORD MOTOR COMPANY AND SUBSIDIARIES

CONDENSED SECTOR STATEMENT OF CASH FLOWS

For the Periods Ended September 30, 2008 and 2007

(in millions)

	First Nine Months 2008						First Nine Months 2007
	Automotive			Financial Services			Automotive			Financial Services
	(unaudited)						(unaudited)
Cash flows from operating activities of continuing operations
Net cash (used in)/provided by operating activities	$	(7,242	)	$	8,088		$	5,932		$	5,247

Cash flows from investing activities
Capital expenditures		(4,815	)		(60	)		(4,176	)		(39	)
Acquisitions of retail and other finance receivables and operating leases		—			(36,932	)		—			(42,827	)
Collections of retail and other finance receivables and operating leases		—			32,643			—			34,545
Net (increase)/decrease of wholesale receivables		—			2,058			—			2,027
Purchases of securities		(33,430	)		(16,721	)		(1,428	)		(7,657	)
Sales and maturities of securities		33,676			14,176			1,469			13,336
Settlements of derivatives		1,063			690			748			(32	)
Proceeds from sales of retail and other finance receivables and operating leases		—			—			—			705
Proceeds from sale of businesses		2,595			3,698			1,079			157
Cash paid for acquisitions		(13	)		—			—			—
Transfer of cash balances upon disposition of discontinued/held-for-sale operations		(925	)		—			(83	)		—
Investing activity from Financial Services		9			—			—			—
Investing activity to Financial Services		—			—			(8	)		—
Other		144			277			(20	)		205
Net cash (used in)/provided by investing activities		(1,696	)		(171	)		(2,419	)		420

Cash flows from financing activities
Sales of Common Stock		663			—			152			—
Purchases of Common Stock		—			—			(31	)		—
Changes in short-term debt		56			(4,478	)		(69	)		(2,489	)
Proceeds from issuance of other debt		116			27,449			189			23,829
Principal payments on other debt		(456	)		(32,042	)		(617	)		(31,840	)
Financing activity from Automotive		—			—			—			8
Financing activity to Automotive		—			(9	)		—			—
Other		(206	)		(325	)		207			(56	)
Net cash (used in)/provided by financing activities		173			(9,405	)		(169	)		(10,548	)

Effect of exchange rate changes on cash		(64	)		(72	)		342			(278	)
Net change in intersector receivables/payables and other liabilities		(1,242	)		1,242			(777	)		777
Net increase/(decrease) in cash and cash equivalents from continuing operations		(10,071	)		(318	)		2,909			(4,382	)

Cash flows from discontinued operations
Cash flows from operating activities of discontinued operations		—			—			16			—
Cash flows from investing activities of discontinued operations		—			—			—			—
Cash flows from financing activities of discontinued operations		—			—			—			—

Net increase/(decrease) in cash and cash equivalents	$	(10,071	)	$	(318	)	$	2,925		$	(4,382	)

Cash and cash equivalents at January 1	$	20,678		$	14,605		$	16,022		$	12,874
Cash and cash equivalents of discontinued/held-for-sale operations at January 1		—			—			(2	)		—
Net increase/(decrease) in cash and cash equivalents		(10,071	)		(318	)		2,925			(4,382	)
Less: cash and cash equivalents of discontinued/held-for-sale operations at September 30		—			—			—			—
Cash and cash equivalents at September 30	$	10,607		$	14,287		$	18,945		$	8,492

The accompanying notes are part of the financial statements

Item 1. Financial Statements (Continued)

FORD MOTOR COMPANY AND SUBSIDIARIES

NOTES TO THE FINANCIAL STATEMENTS

NOTE 1. PRINCIPLES OF PRESENTATION AND CONSOLIDATION

Our financial statements are presented in accordance with generally accepted accounting principles ("GAAP") in the United States for interim financial information and instructions to the Quarterly Report on Form 10-Q and Rule 10-01 of Regulation S-X. We show our financial statements on both a consolidated and a sector basis for our Automotive and Financial Services sectors. All intercompany items and transactions have been eliminated in both the consolidated and sector basis financial statements. Reconciliations of certain line items are explained below in this Note, where the presentation of these intercompany eliminations or consolidated adjustments differ between the consolidated and sector financial statements.

In the opinion of management, these unaudited financial statements reflect a fair statement of the results of operations and financial condition of Ford Motor Company and its consolidated subsidiaries and consolidated variable interest entities ("VIEs") of which we are the primary beneficiary for the periods and at the dates presented. The operating results for interim periods are not necessarily indicative of results that may be expected for any other interim period or for the full year. Reference should be made to the financial statements contained in our Annual Report on Form 10-K for the year ended December 31, 2007, updated in our Current Report on Form 8-K filed on June 2, 2008 ("2007 Form 10-K Report"). For purposes of this report, "Ford," the "Company," "we," "our," "us" or similar references mean Ford Motor Company and our consolidated subsidiaries and our consolidated VIEs of which we are the primary beneficiary, unless the context requires otherwise. All held-for-sale assets and liabilities are excluded from the footnotes unless otherwise noted. See Note 8 for details of held-for-sale operations.

Presentation of Balance Sheet

Deferred Tax Assets and Liabilities. The difference between the total assets and total liabilities as presented in our sector balance sheet and consolidated balance sheet is the result of netting of deferred income tax assets and liabilities. The reconciliation between total sector and consolidated balance sheets is as follows (in millions):

	September 30, 2008			December 31, 2007
Sector balance sheet presentation of deferred income tax assets:
Automotive sector current deferred income tax assets	$	333		$	532
Automotive sector non-current deferred income tax assets		6,992			9,268
Financial Services sector deferred income tax assets*		191			163
Total		7,516			9,963
Reclassification for netting of deferred income taxes		(4,484	)		(6,463	)
Consolidated balance sheet presentation of deferred income tax assets	$	3,032		$	3,500

Sector balance sheet presentation of deferred income tax liabilities:
Automotive sector current deferred income tax liabilities	$	2,728		$	2,671
Automotive sector non-current deferred income tax liabilities		736			783
Financial Services sector deferred income tax liabilities		3,534			6,043
Total		6,998			9,497
Reclassification for netting of deferred income taxes		(4,484	)		(6,463	)
Consolidated balance sheet presentation of deferred income tax liabilities	$	2,514		$	3,034

__________

*	Financial Services deferred income tax assets are included in Financial Services other assets on our sector balance sheet.

Ford Acquisition of Ford Motor Credit Company LLC ("Ford Credit") Debt. In connection with our Registration Statement (No. 333-151355) filed on Form S-3 and the related prospectus dated June 2, 2008 and the prospectus supplements dated August 14, 2008 and October 2, 2008, we issued shares of Ford Common Stock from time to time in market transactions and used the proceeds therefrom to purchase outstanding Ford Credit debt securities maturing prior to 2012.

As of September 30, 2008, we issued 88,325,372 shares resulting in proceeds of $434 million. During the quarter, we purchased, with $270 million of cash, debt securities of Ford Credit with a carrying value of $305 million and recorded a gain on extinguishment of debt in the amount of $35 million in Automotive interest income and other non-operating income/(expense), net.

On our consolidated balance sheet, the debt is no longer reported in our Debt balances.

Item 1. Financial Statements (Continued)

NOTE 1. PRINCIPLES OF PRESENTATION AND CONSOLIDATION (Continued)

On our sector balance sheet, the debt is still considered outstanding as it has not been retired or cancelled by Ford Credit. Accordingly, on our sector balance sheet, the $305 million of debt is reported as Financial Services debt. Likewise, included in Automotive marketable securities is $305 million related to Ford's purchase of the Ford Credit debt securities. Consolidating elimination adjustments for these debt securities, and a related $7 million of accrued interest, are included in the Intersector elimination lines on the sector balance sheet.

Presentation of Cash Flows

Trading Securities. Beginning with our statement of cash flows for the period ended March 31, 2008, we changed the presentation of cash flows to separately disclose the purchases of trading securities and the sale and maturities of trading securities as gross amounts within Cash flows from investing activities instead of Cash flows from operating activities of continuing operations. This change is in response to our election to apply the fair value option to our available-for-sale and held-to-maturity securities upon adoption of Statement of Financial Accounting Standards ("SFAS") No. 159, The Fair Value Option for Financial Assets and Financial Liabilities – including an amendment of FASB Statement No. 115 ("SFAS No. 159") on January 1, 2008.

Wholesale and Other Finance Receivables. The reconciliation between total sector and consolidated cash flows from operating activities of continuing operations is as follows (in millions):

	First Nine Months
	2008		2007
Sum of sector cash flows from operating activities of continuing operations	$	846	$	11,179
Reclassification of wholesale receivable cash flows from investing to operating for consolidated presentation (a)		2,058		2,027
Reclassification of finance receivable cash flows from investing to operating for consolidated presentation (b)		365		36
Consolidated cash flows from operating activities of continuing operations	$	3,269	$	13,242

__________

(a)

In addition to vehicles sold by us, the cash flows from wholesale finance receivables being reclassified from investing to operating include financing by Ford Credit of used and non-Ford vehicles. 100% of cash flows from wholesale finance receivables have been reclassified for consolidated presentation as the portion of these cash flows from used and non-Ford vehicles is impracticable to separate.

(b)	Includes cash flows of finance receivables purchased from certain divisions and subsidiaries of the Automotive sector.

Ford Acquisition of Ford Credit Debt. The $270 million cash outflow related to our acquisition of Ford Credit's debt securities is presented differently on our consolidated and sector statements of cash flows. The cash outflow is reclassified from Automotive purchases of securities within Cash flows from investing activities on our sector statement of cash flows to Principal payments on other debt line item within Cash flows from financing activities on our consolidated statement of cash flows.

NOTE 2. INVENTORIES

Inventories are summarized as follows (in millions):

	September 30, 2008			December 31, 2007
Raw materials, work-in-process and supplies	$	4,367		$	4,360
Finished products		8,722			6,861
Total inventories under first-in, first-out method ("FIFO")		13,089			11,221
Less: Last-in, first-out method ("LIFO") adjustment		(1,041	)		(1,100	)
Total inventories	$	12,048		$	10,121

Inventories are stated at lower of cost or market. About one-fourth of inventories were determined under the LIFO method.

Item 1. Financial Statements (Continued)

NOTE 3. IMPAIRMENT OF LONG-LIVED ASSETS

Automotive Sector

Based upon the financial impact of rapidly-changing U.S. market conditions during the second quarter of 2008, we projected a decline in net cash flows for the Ford North America segment. The decline primarily reflected: (1) a more pronounced and accelerated shift in consumer preferences away from full-size trucks and traditional sport utility vehicles ("SUVs") to smaller, more fuel-efficient vehicles as a result of higher fuel prices; (2) lower-than-anticipated U.S. industry demand; and (3) greater-than-anticipated escalation of commodity costs. As a result, in the second quarter of 2008 we tested the long-lived assets of this segment for recoverability and recorded in Automotive cost of sales a pre-tax impairment charge of $5.3 billion, representing the amount by which the carrying value of these assets exceeded the estimated fair value.

The table below describes the significant components of the second quarter 2008 long-lived asset impairment of the Ford North America segment (in millions):

	Ford North America
Land	$	—
Buildings and land improvements		698
Machinery, equipment and other		2,833
Special tools		1,769
Total	$	5,300

Financial Services Sector

During the second quarter of 2008, higher fuel prices and the weak economic climate in the United States and Canada resulted in a more pronounced and accelerated shift in consumer preferences away from full-size trucks and traditional SUVs to smaller, more fuel-efficient vehicles. This shift in consumer preferences combined with a weak economic climate caused a significant reduction in auction values for used full-size trucks and traditional SUVs. As a result, in the second quarter of 2008 we tested Ford Credit's operating leases in its North America segment for recoverability and recorded a pre-tax impairment charge in Selling, administrative and other expenses on our consolidated income statement and in Financial Services depreciation on our sector income statement of $2.1 billion, representing the amount by which the carrying value of certain vehicle lines in Ford Credit's lease portfolio exceeded the estimated fair value.

NOTE 4. GOODWILL AND OTHER NET INTANGIBLES

Changes in the carrying amount of goodwill are as follows (in millions):

	Automotive Sector												Financial Services Sector

	Ford North America			Ford Europe			Volvo			Total			Ford Credit			Total Company
Balances at December 31, 2007	$	89		$	37		$	1,360		$	1,486		$	18		$	1,504
Changes in goodwill:
Goodwill acquired		—			—			—			—			—			—
Other disposals		(1	)		—			—			(1	)		(9	)		(10	)
Dealer goodwill impairment*		(88	)		—			—			(88	)		—			(88	)
Effect of foreign currency translation and other		—			(2	)		(65	)		(67	)		—			(67	)
Balances at September 30, 2008	$	—		$	35		$	1,295		$	1,330		$	9		$	1,339

__________

Based on our expected reduction of our Ford North America dealership base, we recorded an other-than-temporary impairment of our investment in our consolidated North America dealerships. We recorded the $88 million impairment of our investment in the first quarter of 2008 by writing down the related goodwill to its fair value of $0.

Item 1. Financial Statements (Continued)

NOTE 4. GOODWILL AND OTHER NET INTANGIBLES (Continued)

Other Net Intangibles

The components of net identifiable intangible assets are as follows (in millions):

	September 30, 2008							December 31, 2007
	Gross Carrying Amount		Less: Accumulated Amortization			Net Intangible Assets		Gross Carrying Amount		Less: Accumulated Amortization			Net Intangible Assets
Automotive Sector
Distribution networks	$	322	$	(104	)	$	218	$	335	$	(103	)	$	232
Manufacturing and production incentive rights		271		(118	)		153		297		(74	)		223
Other		191		(96	)		95		199		(89	)		110
Total Automotive sector		784		(318	)		466		831		(266	)		565
Total Financial Services Sector		4		(4	)		—		4		(4	)		—
Total	$	788	$	(322	)	$	466	$	835	$	(270	)	$	565

Our identifiable intangible assets are comprised of distribution networks with a useful life of 40 years, manufacturing and production incentive rights acquired in 2006 with a useful life of 4 years, and other intangibles with various amortization periods (primarily patents, customer contracts, technology, and land rights). Pre-tax amortization expense, excluding the effects of foreign currency translation, was as follows (in millions):

	Third Quarter				First Nine Months
	2008		2007		2008		2007
Pre-tax amortization expense	$	27	$	32	$	77	$	80

Excluding the impact of foreign currency translation, intangible asset amortization is forecasted to range from $95 million to $105 million per year for the next three years, and $20 million to $30 million per year thereafter.

NOTE 5. VARIABLE INTEREST ENTITIES

We consolidate VIEs of which we are the primary beneficiary. The liabilities recognized as a result of consolidating these VIEs do not necessarily represent additional claims on our general assets; rather, they represent claims against the specific assets of the consolidated VIEs. Conversely, assets recognized as a result of consolidating these VIEs do not necessarily represent additional assets that could be used to satisfy claims against our general assets.

The total consolidated VIE assets reflected on our September 30, 2008 and December 31, 2007 balance sheets are as follows (in millions):

	September 30, 2008		December 31, 2007
Automotive Sector
Cash and cash equivalents	$	938	$	742
Other assets		5,088		5,599
Total assets	$	6,026	$	6,341

Financial Services Sector
Cash and cash equivalents	$	4,407	$	4,605
Finance receivables		61,513		60,361
Net investment in operating leases		12,232		17,461
Total assets	$	78,152	$	82,427

Ford Credit uses special purpose entities ("SPEs") that are considered VIEs for most of its on-balance sheet securitizations. Ford Credit's FCAR Owner Trust retail securitization program ("FCAR") issues commercial paper externally. On occasion, we purchase the debt issued by FCAR. At September 30, 2008, the asset-backed securities of FCAR supported $9.8 billion of FCAR's asset-backed commercial paper held by external investors and the remaining $1.1 billion was held by Ford Credit. Further, Ford Credit repurchased $2.5 billion of asset-backed securities from FCAR during the third quarter of 2008 and FCAR used the proceeds to pay off maturing FCAR commercial paper.

Item 1. Financial Statements (Continued)

NOTE 5. VARIABLE INTEREST ENTITIES (Continued)

We also have investments in other non-securitization related entities determined to be VIEs of which we are not the primary beneficiary. The risks and rewards associated with our interests in these entities are based primarily on ownership percentages. Therefore, we do not consolidate these entities and we account for them as equity method investments. Our maximum exposure at September 30, 2008 and December 31, 2007, respectively, was $424 million and $357 million for our Automotive sector and $148 million and $76 million for our Financial Services sector. Any potential losses associated with these VIEs would be limited to the value of our invested capital or equity rights and, where applicable, receivables due from the VIEs.

NOTE 6. JOB SECURITY BENEFITS RESERVE AND EMPLOYEE SEPARATION ACTIONS

Automotive Sector

Job Security Benefits Reserve

We are required to pay most idled unionized hourly employees in North America a portion of their wages and benefits for a specified period of time ("Job Security Benefits"). We expense in Automotive cost of sales Job Security Benefits expected to be provided to our hourly employees at facilities that will be closed or at which shifts will be eliminated or, in the case of some Automotive Components Holdings, LLC ("ACH") plants, sold (see Note 18 of the Notes to the Financial Statements in our 2007 Form 10-K Report).

The Job Security Benefits reserve includes an amount for benefits expected to be provided in their present form under the current International Union, United Automobile, Aerospace and Agricultural Implement Workers of America ("UAW") and National Automobile, Aerospace, Transportation and General Workers Union of Canada ("CAW") collective bargaining agreements. The Job Security Benefits provided to our hourly employees are expensed when it becomes probable that employees will be permanently idled. The following table summarizes the activity in the related Job Security Benefits reserve:

	Reserve (in millions)						Number of Employees
	First Nine Months 2008			Full Year 2007			First Nine Months 2008			Full Year 2007
Beginning balance	$	817		$	1,036			8,316			10,728
Additions to Job Security Benefits reserve/Transfers from voluntary separation program (i.e., rescissions)		77			232			728			2,220
Voluntary separations and relocations		(239	)		(311	)		(2,764	)		(4,632	)
Benefit payments and other adjustments		(129	)		(140	)		(1,821	)		—
Ending balance	$	526		$	817			4,459			8,316

Included in "Benefit payments and other adjustments" above is a $344 million decrease in the third quarter of 2008, primarily due to a reduction in the number of employees in the reserve as a result of three ACH plants whose employees are no longer probable to be permanently idled.

The reserve balance above takes into account several factors, including the demographics of the population at each affected facility, redeployment alternatives, and recent experience relative to voluntary redeployments. Due to the complexities inherent in estimating this reserve, our actual costs could differ materially. We continue to expense costs associated with the small number of employees who are temporarily idled on an as-incurred basis.

Separation Actions

The costs of voluntary employee separation actions are recorded at the time of an employee's acceptance, unless the acceptance requires explicit approval by the Company. The costs of conditional voluntary separations are accrued when all conditions are satisfied. The costs of involuntary separation programs are accrued when management has approved the program, the affected employees have been identified, and termination is probable.

Item 1. Financial Statements (Continued)

NOTE 6. JOB SECURITY BENEFITS RESERVE AND EMPLOYEE SEPARATION ACTIONS (Continued)

UAW Voluntary Separations. The following table summarizes the activity in the related separation reserve, with the expense recorded in Automotive cost of sales:

	Reserve (in millions)						Number of Employees
	First Nine Months 2008			Full Year 2007			First Nine Months 2008			Full Year 2007
Beginning balance	$	225		$	2,435			1,374			26,351
Voluntary acceptances		222			—			1,832			—
Payments/Terminations		(297	)		(1,912	)		(2,440	)		(21,587	)
Rescissions and other adjustments		14			(298	)		(61	)		(3,390	)
Ending balance	$	164		$	225			705			1,374

The ending balances shown above represent the cost of separation packages for employees who accepted packages but have not yet left the Company, as well as employees who accepted a retirement package and ceased duties, but who will remain on our employment rolls until they reach retirement eligibility. Excluded from the table are 3,389 acceptances during the first nine months of 2008 of voluntary retirement incentive packages, the costs for which are included in pension and other postretirement employee benefits ("OPEB") separation costs.

Other Employee Separation Actions. In the second quarter of 2008, we announced plans to reduce salaried employee costs in North America by 15%. We completed those actions by the third quarter and recognized pre-tax charges in the United States of $65 million and $78 million for the third quarter and first nine months of 2008, respectively. In 2007, we completed our previously-announced North American salaried employee reduction and incurred $154 million of pre-tax charges in the United States through the first nine months of 2007. These charges are reported in Automotive cost of sales and Selling, administrative and other expenses and exclude costs for pension and OPEB.

In addition, we had pre-tax charges for other hourly and salaried employee separation actions outside the United States. We recognized $70 million and $28 million for the third quarter of 2008 and 2007, respectively, and $108 million and $280 million for the first nine months of 2008 and 2007, respectively. These charges are reported in Automotive cost of sales and Selling, administrative and other expenses and exclude costs for pension and OPEB.

Financial Services Sector

Separation Actions

In 2007, we recognized pre-tax charges of $45 million in Selling, administrative and other expenses for employee separation actions. The majority of these actions were associated with Ford Credit's North American business transformation initiative (i.e., the consolidation of its North American branches into its seven existing business centers). These charges exclude costs for pension and OPEB.

NOTE 7. INCOME TAXES

Generally, for interim tax reporting we estimate one single tax rate for tax jurisdictions not subject to a valuation allowance, which is applied to the year-to-date ordinary income/(loss). However, we manage our operations by multi-jurisdictional business units and thus are unable to reasonably compute one overall effective tax rate. Accordingly, our worldwide tax provision is calculated pursuant to Financial Accounting Standards Board ("FASB") Interpretation No. 18, Accounting for Income Taxes in Interim Periods, which provides that tax (or benefit) in each foreign jurisdiction not subject to valuation allowance be separately computed as ordinary income/(loss) occurs within the jurisdiction.

SFAS No. 109, Accounting for Income Taxes ("SFAS No. 109") requires that the provision for/(benefit from) income taxes be allocated between continuing operations and other categories of earnings (such as discontinued operations or other comprehensive income) for each tax jurisdiction. In periods in which there is a year-to-date pre-tax loss from continuing operations and pre-tax income in other categories of earnings, tax provision is first allocated to the other categories of earnings. A related tax benefit is then recorded in continuing operations. Included in Provision for/(Benefit from) income taxes are tax benefits of $630 million for the third quarter of 2008 and $1.3 billion for the first nine months of 2008 related to these intraperiod allocations.

Also included in third quarter 2008 Provision for/(Benefit from) income taxes is a $94 million tax provision that represents a correction to amounts that were incorrectly recorded in Accumulated other comprehensive income for the periods beginning with the fourth quarter of 2006 related to foreign deferred tax assets. We have not restated our prior-period financial statements because we have concluded that the effect of correcting for this item and other immaterial out-of-period adjustments is not material.

Item 1. Financial Statements (Continued)

NOTE 7. INCOME TAXES (Continued)

Uncertain tax benefits are recognized in accordance with FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109 ("FIN 48") on a more-likely-than-not standard. At any point in time, Ford's cross-border transfer prices are being evaluated by multiple governments around the world. Over the next several months, bilateral discussions are expected to occur between the United States and a major trading partner. It is reasonably possible that the total amount of unrecognized tax benefits related to these unresolved transfer pricing disputes may significantly increase or decrease in the next twelve months as a result of these discussions; an estimate of the reasonably possible change cannot be made at this time.

NOTE 8. DISCONTINUED OPERATIONS, HELD-FOR-SALE OPERATIONS, OTHER DISPOSITIONS, AND ACQUISITIONS

Automotive Sector

Discontinued Operations

Automotive Protection Corporation ("APCO"). Our North American operation APCO was sold in the second quarter of 2007. Third quarter and first nine months results for this discontinued operation are shown in the table below (in millions):

	Third Quarter				First Nine Months
	2008		2007		2008		2007
Sales and revenues	$	—	$	—	$	—	$	13

Operating income/(loss) from discontinued operations	$	—	$	—	$	—	$	2
Gain/(Loss) on discontinued operations		—		—		—		51
(Provision for)/Benefit from income taxes		—		—		—		(19	)
Income/(Loss) from discontinued operations	$	—	$	—	$	—	$	34

Held-for-Sale Operations

Jaguar Land Rover. During 2007, we committed to sell our Jaguar Land Rover operations in order to focus on our core Automotive operations and to build liquidity. At December 31, 2007, we classified the assets and liabilities of these operations as held for sale on our balance sheet. On March 25, 2008, we entered into a definitive agreement with Tata Motors Limited pursuant to which we would sell all of our interest in Jaguar Land Rover for $2.3 billion, subject to customary purchase price adjustments upon completion (e.g., relating to working capital, cash, and debt), and agreed to contribute up to about $600 million to Jaguar and Land Rover pension plans. In the first quarter of 2008, we recorded a pre-tax impairment charge of $421 million reported in Automotive cost of sales related to the disposal of these operations.

On June 2, 2008, we completed the sale of Jaguar Land Rover. At the time of the sale, we received $2.4 billion in cash proceeds and recognized a second quarter pre-tax loss of $106 million, reported in Automotive interest income and other non-operating income/(expense), net.

During the third quarter, we received $132 million in cash, which reflected final settlement of purchase price adjustments and recognized an additional pre-tax loss of $30 million reported in Automotive interest income and other non-operating income/(expense), net. With this, our pre-tax loss is $136 million.

The assets and liabilities of Jaguar Land Rover that were classified as held-for-sale operations at December 31, 2007 are summarized as follows (in millions):

	December 31, 2007
Assets
Receivables	$	758
Inventories		1,530
Net property		2,246
Goodwill and other net intangibles		2,010
Pension assets		696
Other assets		297
Total assets of the held-for-sale operations	$	7,537

Liabilities
Payables	$	2,395
Pension liabilities		19
Warranty liabilities		645
Other liabilities		1,765
Total liabilities of the held-for-sale operations	$	4,824

Item 1. Financial Statements (Continued)

NOTE 8. DISCONTINUED OPERATIONS, HELD-FOR-SALE OPERATIONS, OTHER DISPOSITIONS, AND ACQUISITIONS (Continued)

As part of the transaction, we will continue to supply Jaguar Land Rover with powertrains, stampings, and other vehicle components. We also committed to provide transitional support, including engineering, information technology, accounting, and other services. Ford Credit will provide financing for Jaguar Land Rover dealers and customers during a transition period, which can vary by market, for up to 12 months.

ACH. On April 14, 2008, ACH completed the sale of its glass business to Zeledyne, LLC. The sale included the Nashville, Tulsa, and VidrioCar plants, along with the research and development, engineering, sales and aftermarket operations in Tennessee and Michigan. These facilities continue to supply Ford with automotive glass products. As a result of the transaction, we recognized a second quarter pre-tax loss of $285 million reported in Automotive interest income and other non-operating income/(expense), net. This loss was comprised of asset write-offs of $149 million, long-term contractual restructuring obligations of $104 million, and $32 million of transaction costs and other related expenses.

During the third quarter of 2008, the sale agreement between Ford and Zeledyne, LLC was amended resulting in an additional $19 million pre-tax loss reported in Automotive interest income and other non-operating income/(expense), net. The third quarter loss is primarily related to changes in long-term contractual restructuring obligations. With this, our pre-tax loss is $304 million.

In the second quarter of 2008, we disclosed that we expected the sale of the Milan plant, which produces fuel tanks and bumper fascias, would be completed by the end of this year. Accordingly, at June 30, 2008, ACH classified the assets and liabilities of the Milan plant as held for sale in our balance sheet. We also recorded a pre-tax impairment charge of $18 million in the second quarter of 2008, which represented the excess of net book value of the held-for-sale assets over the expected proceeds based on June 30, 2008 conditions.

During the third quarter of 2008, deteriorating domestic economic and industry conditions significantly reduced the probability of selling the Milan plant within the next 12 months, although negotiations are ongoing. Accordingly, at September 30, 2008, the Milan plant has been reclassified and reported as held and used. The pre-tax impairment charge of $18 million previously recorded in the second quarter of 2008 continues to be reported in Automotive cost of sales.

Other Dispositions

ACH. During 2008, ACH terminated the non-binding agreement for the sale of the business at the Sandusky plant, which primarily produces lighting components, and the Saline plant, which primarily produces cockpit modules, instrument panels, door trim, and floor console products. Neither of these businesses were classified as held for sale at September 30, 2008.

Financial Services Sector

Discontinued Operations

Triad Financial Corporation ("Triad"). In 2005, Ford Credit completed the sale of Triad. Triad specialized in automobile retail installment sales contracts with borrowers who generally would not be expected to qualify, based on their credit worthiness, for traditional financing sources such as those provided by commercial banks or automobile manufacturers' affiliated finance companies, primarily through non-Ford dealerships. In 2005, Ford Credit recognized a $4 million after-tax gain on disposal of discontinued operations. For the nine months ended September 30, 2008, Ford Credit received additional proceeds primarily based on better-than-anticipated securitized portfolio performance, and recognized a $9 million after-tax gain in Income/(Loss) from discontinued operations.

Other Dispositions

Nordic Operations. During the second quarter of 2008, Ford Credit completed the creation of a new legal entity and transferred into it the majority of its business and assets from Denmark, Finland, Norway, and Sweden. By the end of the second quarter, Ford Credit had sold 50% of the new legal entity. As a result of the sale, Ford Credit reduced Finance receivables, net by $1.7 billion, and we recognized a pre-tax gain in Financial Services revenues of $85 million, net of transaction costs and including $35 million of foreign currency translation adjustments. Ford Credit reports its ownership interest in the new legal entity as an equity method investment. The new legal entity will support the sale of Ford vehicles in these markets.

Item 1. Financial Statements (Continued)

NOTE 8. DISCONTINUED OPERATIONS, HELD-FOR-SALE OPERATIONS, OTHER DISPOSITIONS, AND ACQUISITIONS (Continued)

PRIMUS Financial Services Inc. ("PRIMUS Japan"). In April 2008, Ford Credit completed the sale of 96% of its ownership interest in PRIMUS Japan, Ford Credit's operation in Japan that offers automotive retail and wholesale financing of Ford and Mazda vehicles. As a result of the sale, Finance Receivables, net were reduced by $1.8 billion, Debt was reduced by $252 million, and we recognized a pre-tax gain of $22 million, net of transaction costs and including $28 million of foreign currency translation adjustments, in Financial Services revenues. Ford Credit reports its remaining ownership interest as a cost method investment.

Primus Finance and Leasing, Inc. ("Primus Philippines"). During the second quarter of 2008, Ford Credit completed the sale of its 60% ownership interest in Primus Philippines, which is Ford Credit's operation in the Philippines offering automotive retail and wholesale financing of Ford and Mazda vehicles. Ford Credit also completed the sale of its 40% ownership interest in PFL Holdings, Inc., a holding company in the Philippines that owns the remaining 40% ownership interest in Primus Philippines. As a result of the sale, we recognized a pre-tax gain of $5 million, net of transactions costs and including $1 million of foreign currency translation adjustments, in Financial Services revenues.

AB Volvofinans ("Volvofinans"). During the third quarter of 2007, Ford Credit sold a majority of its interest in Volvofinans, an unconsolidated subsidiary that finances the sale of Volvo and Renault vehicles through Volvo dealers in Sweden. As a result of the transaction, we received $157 million as proceeds from the sale, and recognized a pre-tax gain of $51 million reported in Financial Services revenues.

NOTE 9. AMOUNTS PER SHARE OF COMMON AND CLASS B STOCK

The calculation of diluted income per share of Common and Class B Stock takes into account the effect of common stock equivalents, such as stock options and convertible securities, considered to be potentially dilutive. Basic and diluted income/(loss) per share were calculated using the following (in millions):

	Third Quarter						First Nine Months
	2008			2007			2008			2007
Basic and Diluted Income/(Loss)
Basic income/(loss) from continuing operations	$	(129	)	$	(380	)	$	(8,705	)	$	54
Effect of dilutive senior convertible notes (a)		—			—			—			—
Effect of dilutive 6.50% Cumulative Convertible Trust Preferred Securities ("Trust Preferred Securities") (b)		—			—			—			—
Diluted income/(loss) from continuing operations	$	(129	)	$	(380	)	$	(8,705	)	$	54

Basic and Diluted Shares
Average shares outstanding		2,280		2004				2,236			1,931
Restricted and uncommitted-ESOP shares		(1	)		(1	)		(1	)		(1	)
Basic shares		2,279			2,003			2,235			1,930
Net dilutive options and restricted and uncommitted-ESOP shares		—	(c)		—	(c)		—	(c)		12
Dilutive senior convertible notes (a)		—			—			—			—
Dilutive convertible trust preferred securities (b)		—			—			—			—
Diluted shares		2,279			2,003			2,235			1,942

__________

Not included in calculation of diluted earnings per share due to their antidilutive effect:

(a)

538 million shares and the related income effect for senior convertible notes.

(b)

282 million shares and the related income effect for Trust Preferred Securities through August 2, 2007. As of August 3, 2007, following the conversion of about 43 million of our Trust Preferred Securities, 162 million shares and the related income effect are not included in the calculation. For further discussion of the conversion, see Note 16 of the Notes to the Financial Statements in our 2007 Form 10-K Report.

(c)

28 million, 19 million, and 26 million contingently-issuable shares (primarily reflecting restricted stock units) for the third quarter of 2008, third quarter of 2007, and first nine months of 2008, respectively.

Item 1. Financial Statements (Continued)

NOTE 10. FAIR VALUE MEASUREMENTS

We adopted SFAS No. 157, Fair Value Measurements ("SFAS No. 157"), on January 1, 2008. SFAS No. 157 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. SFAS No. 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value should be based on assumptions that market participants would use, including a consideration of non-performance risk.

In determining fair value, we use various valuation techniques and prioritize the use of observable inputs. The availability of observable inputs varies from instrument to instrument and depends on a variety of factors including the type of instrument, whether the instrument is actively traded, and other characteristics particular to the transaction. For many financial instruments, pricing inputs are readily observable in the market, the valuation methodology used is widely accepted by market participants, and the valuation does not require significant management discretion. For other financial instruments, pricing inputs are less observable in the marketplace and may require management judgment.

We assess the inputs used to measure fair value using a three-tier hierarchy based on the extent to which inputs used in measuring fair value are observable in the market. Level 1 inputs include quoted prices for identical instruments and are the most observable. Level 2 inputs include quoted prices for similar assets and observable inputs such as interest rates, currency exchange rates, commodity rates, and yield curves. Level 3 inputs are not observable in the market and include management's judgments about the assumptions market participants would use in pricing the asset or liability. The use of observable and unobservable inputs is reflected in our hierarchy assessment disclosed in the tables below.

Our fair value processes include controls that are designed to ensure that fair values are appropriate. Such controls include model validation, review of key model inputs, analysis of period-over-period fluctuations, and reviews by senior management.

The following section describes the valuation methodologies used to measure fair value, key inputs, and significant assumptions.

Cash Equivalents – Financial Instruments. We classify highly liquid investments, with a maturity of 90 days or less at the date of purchase, including U.S. Treasury bills, federal agency securities, and commercial paper rated A-1 / P-1 (or higher) as cash equivalents. Prior to the adoption of SFAS No. 157, we carried cash equivalents at amortized cost, which approximates fair value. Effective January 1, 2008, we measure financial instruments classified as cash equivalents at fair value. We use quoted prices where available to determine fair value for U.S. Treasury notes, and industry-standard valuation models using market-based inputs when quoted prices are unavailable, such as for government agency securities and corporate obligations.

Marketable Securities. Our marketable securities portfolios include investments in government securities, corporate obligations and equities, and asset-backed securities with a maturity of greater than 90 days at the date of purchase. Where available, including for U.S. Treasury notes and equities, we use quoted market prices to measure fair value. If quoted market prices are not available, such as for government agency securities, asset-backed securities, and corporate obligations, prices for similar assets and matrix pricing models are used. In certain cases, where there is limited transparency to valuation inputs, we may contact securities dealers and obtain dealer quotes.

Concurrent with our adoption of SFAS No. 157, we elected to apply the fair value option under SFAS No. 159 to our financial instruments, including marketable securities, loaned securities, and those classified as cash equivalents. SFAS No. 159 permits entities to measure certain financial assets and liabilities at fair value. The fair value option may be elected on an instrument-by-instrument basis and is irrevocable. Unrealized gains and losses on items for which the fair value option has been elected are recognized in earnings at each subsequent reporting date. This election resulted in a cumulative after-tax increase of approximately $12 million to the opening balance of Retained earnings. Prior to the election of SFAS No. 159, we classified our securities as trading, available-for-sale, or held-to-maturity. The unrealized gains and losses for available-for-sale securities were recorded in Accumulated other comprehensive income/(loss), and the unrealized gains and losses for held-to-maturity securities were not recognized.

Item 1. Financial Statements (Continued)

NOTE 10. FAIR VALUE MEASUREMENTS (Continued)

Derivative Financial Instruments. As part of our risk management strategy, we enter into derivative transactions to mitigate exposures. Our derivative instruments include interest rate swaps, currency swaps, currency and commodity forwards, currency and commodity options, and currency futures. The vast majority of our derivatives are not exchange-traded and are over-the-counter customized derivative transactions. Substantially all of our derivative exposures are with counterparties that have long-term credit ratings of single-A or better.

We estimate the fair value of our derivatives using industry-standard valuation models, including Black-Scholes and Curran's Approximation. These models project future cash flows and discount the future amounts to a present value using market-based expectations for interest rates, foreign exchange rates, and commodity prices, and the contractual terms of the derivative instruments.

We include an adjustment for non-performance risk in the recognized measure of fair value of derivative instruments. The adjustment reflects the full credit default spread (“CDS”) applied to a net exposure, by counterparty. We use our counterparty's CDS when we are in a net asset position and our own CDS when we are in a net liability position. At September 30, 2008, our adjustment for non-performance risk (relative to a measure based on unadjusted LIBOR) reduced derivative assets by $14 million and $52 million for Automotive and Financial Services sectors, respectively; and reduced derivative liabilities by $14 million and $88 million for Automotive and Financial Services sectors, respectively.

In certain cases, market data is not available and we use management judgment to develop assumptions which are used to determine fair value. This includes situations where there is illiquidity for a particular currency or commodity, or for longer-dated instruments. For longer-dated instruments where observable interest rates or foreign exchange rates are not available for all periods through maturity, we hold the last available data point constant through maturity. For certain commodity contracts, observable market data may be limited and, in those cases, we generally survey brokers and use the average of the surveyed prices in estimating fair value.

Retained Interests in Sold Receivables. We retain certain interests in receivables sold in off-balance sheet securitization transactions, including residual interest in securitizations and restricted cash. We estimate the fair value of retained interests using internal valuation models, market inputs, and our own assumptions. The three key inputs that affect the valuation of the residual interest cash flows include credit losses, prepayment speed, and the discount rate. The fair value of residual interest is estimated based on the present value of monthly collections on the sold finance receivables in excess of amounts needed for payment of the debt and other obligations issued or arising in the securitization transactions. The fair value of the residual interest in securitizations and the cash reserve account is determined using a discounted cash flow analysis.

Item 1. Financial Statements (Continued)

NOTE 10. FAIR VALUE MEASUREMENTS (Continued)

The following table summarizes the fair values of financial instruments measured at fair value on a recurring basis at September 30, 2008 (in millions):

Items Measured at Fair Value on a Recurring Basis

Quoted Price in Active Markets for Identical Assets

(Level 1)