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                                                                      EXHIBIT 13

FINANCIAL INFORMATION


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

Statement of Financial Reporting Responsibility......................      13

Independent Auditors' Report.........................................      14

Financial Statements

    Statement of Income..............................................      15
    Statement of Financial Condition.................................      16
    Statement of Cash Flow...........................................      17

Notes to Financial Statements

        1    Summary of accounting policies..........................      18
        2    Postretirement benefits.................................      22
        3    Income taxes............................................      25
        4    Marketable securities...................................      28
        5    Receivables.............................................      29
        6    Inventories.............................................      30
        7    Property and equipment..................................      30
        8    Debt....................................................      31
        9    Other liabilities.......................................      34
       10    Financial instruments...................................      35
       11    Commitments, contingencies, restricted assets,
               concentrations and leases.............................      37
       12    Legal proceedings and environmental matters.............      38
       13    Industry segment data...................................      39
       14    Preferred and preference stocks.........................      41
       15    Common shareowners' equity..............................      42
       16    Earnings per share......................................      43
       17    Stock compensation plans................................      44
       18    Selected quarterly financial data (unaudited)...........      46


Supplemental Financial Information (unaudited).......................      47

Five -Year Summary of Selected Financial and Statistical Data........      48

                                     - 1 -

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MANAGEMENT'S  DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION

     Certain   statements   under  this  caption   constitute   "forward-looking
statements"  under the  Reform  Act,  which  involve  risks  and  uncertainties.
Navistar  International  Corporation's  actual results may differ  significantly
from the results  discussed  in such  forward-looking  statements.  Factors that
might cause such a difference  include,  but are not limited to, those discussed
under the caption "Business Environment."

     Navistar  International  Corporation is a holding company and its principal
operating   subsidiary   is   Navistar   International    Transportation   Corp.
(Transportation).  In this  discussion  and  analysis,  "company" or  "Navistar"
refers to Navistar International Corporation and its consolidated  subsidiaries.
The  company's  manufacturing  operations  are  engaged in the  manufacture  and
marketing of Class 5 through 8 trucks,  including school buses, mid-range diesel
engines and service  parts  primarily in the United States and Canada as well as
in Mexico,  Brazil and other selected  export  markets.  The financial  services
operations of the company provide  wholesale,  retail and lease  financing,  and
domestic  commercial  physical  damage and liability  insurance  coverage to the
company's  dealers and retail  customers  and to the general  public  through an
independent insurance agency system.

     The  discussion and analysis  reviews the operating and financial  results,
and liquidity and capital  resources of  manufacturing  operations and financial
services operations.  Manufacturing  operations include the financial results of
the financial services  operations included on a one-line basis under the equity
method of accounting.  Financial services  operations include Navistar Financial
Corporation (NFC) and the company's foreign finance companies. See Note 1 to the
Financial Statements.

RESULTS OF OPERATIONS

     The company  reported  net income of $299  million  for 1998,  or $4.11 per
diluted common share,  reflecting higher sales of manufactured  products as well
as a $45 million reduction in the company's tax valuation allowance.  Net income
was $150 million,  or $1.65 per diluted common share in 1997 and $65 million, or
$.49 per diluted  common share in 1996.  Net income in 1996  included a one-time
$35  million  pretax  charge for costs  related to the  termination  of the next
generation  vehicle (NGV)  program.  In August 1997,  the company and the United
Automobile,  Aerospace  and  Agricultural  Implement  Workers of  America  (UAW)
reached  agreement on a master  contract  extension  that enabled the company to
reinstate this program.

     The company's manufacturing  operations reported income before income taxes
of $321 million in 1998  compared with pretax income of $164 million in 1997 and
$22 million in 1996. The increases in 1998 and 1997 over the prior years reflect
higher  sales of trucks and diesel  engines as well as the  effects of  improved
pricing and various cost improvement initiatives.

         NFC's pretax  income in 1998 was $85 million,  a 13% increase  from $75
million in 1997,  primarily as a result of an increase in  wholesale  and retail
financing  activity  partially offset by lower financing  margins.  NFC's pretax
income  decreased  $6  million  in 1997 from the $81  million  reported  in 1996
primarily  due to lower income on sales of retail  receivables  and a decline in
wholesale financing activity.

                                     - 2 -

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Sales and Revenues. U.S. and Canadian industry retail sales of Class 5 through 8
trucks totaled 390,900 units in 1998, a 13% increase from the 347,400 units sold
in 1997, and 15% higher than the 341,200 units sold in 1996. Class 8 heavy truck
sales  totaled  232,000  units,  an 18% increase  from the 196,800 units sold in
1997,  and 19% higher than the  195,400  units sold in 1996.  Industry  sales of
Class 5, 6 and 7 medium trucks, including school buses, totaled 158,900 units in
1998,  a 6%  increase  from 1997 when  150,600  units were sold,  which was a 3%
increase  over the 145,800 units sold in 1996.  Industry  sales of school buses,
which accounted for 20% of the medium truck market,  decreased  approximately 5%
from 1997 to 31,700 units.

     Sales and  revenues  of $7,885  million  in 1998 were 24%  higher  than the
$6,371 million  reported in 1997 and 37% higher than the $5,754 million reported
in 1996.  Sales of trucks,  mid-range  diesel  engines and service parts totaled
$7,629 million in 1998, 24% above the $6,147 million reported for 1997 and a 39%
increase from the $5,508 million reported in 1996.

     The company  maintained its position as sales leader in the combined United
States and  Canadian  Class 5 through 8 truck market in 1998 with a 28.9% market
share,  an  increase  from the 28.6%  share in 1997 and the 27.5%  share in 1996
(Sources:  American  Automobile  Manufacturers  Association,   Canadian  Vehicle
Manufacturers  Association  and R. L. Polk & Company).  Shipments  of  mid-range
diesel engines by the company to other original equipment  manufacturers  during
1998 were a record 213,700 units, a 16% increase over the 184,000 units in 1997,
which  represented a 13% improvement  over 1996.  Higher shipments to Ford Motor
Company to meet  consumer  demand  for the light  trucks and vans which use this
engine was the primary reason for the increase.

     Service parts sales of $848 million in 1998 increased from the $806 million
reported in 1997 and were 12% higher than the $760 million reported in 1996 as a
result of dealer and national account volume growth.

     Finance  and  insurance  revenue was $201  million for 1998,  a $27 million
increase  over 1997 revenue of $174  million as a result of increased  wholesale
and  retail  financing.  Revenue  in 1997 was 12%  lower  than the $197  million
reported  in 1996  primarily  as a result of a decline  in  wholesale  financing
activity.

Costs  and  Expenses.  Manufacturing  gross  margin  was 15.3% of sales in 1998,
compared with 14.2% in 1997 and 12.5% in 1996. The increases in gross margin are
primarily  due to lower unit  production  costs and improved  pricing  offset by
provisions for employee profit sharing.

     Postretirement benefits plan expense decreased to $174 million in 1998 from
$215  million in 1997 and from $220 million in 1996 mainly as a result of higher
expected return on plan assets.

     Engineering  and  research  expense  increased to $192 million in 1998 from
$124  million  in 1997  and  $129  million  in 1996,  reflecting  the  company's
continuing  investment in its NGV program as well as its  investment in its Next
Generation Diesel (NGD) program.

     Marketing and administrative expense was $427 million in 1998 compared with
$365 million in 1997 and $319 million in 1996.  The change between 1998 and 1997
reflects  investment in the company's  five-point truck strategy and an increase
in the  provision  for  payment  to  employees  as  provided  by  the  company's
performance  incentive programs.  The $46 million increase between 1997 and 1996
reflects  higher sales and  distribution  costs and an increase in the provision
for payment to  employees  as provided by the  company's  performance  incentive
programs.

                                     - 3 -

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     Interest expense increased to $105 million in 1998 from $74 million in 1997
and $83 million in 1996. The increase in 1998 is primarily due to a $374 million
net increase in debt driven by the issuance of $350 million of senior and senior
subordinated  notes. The decrease in 1997 was the result of lower wholesale note
funding requirements and declining interest rates.

     The increase in other  expenses  from 1997 to 1998  includes $14 million of
expenses  related to the secondary public offering of 19.9 million shares of the
company's  common  stock as  further  described  in the  liquidity  and  capital
resources section.

LIQUIDITY AND CAPITAL RESOURCES

     Cash flow is generated from the manufacture  and sale of trucks,  mid-range
diesel  engines and service  parts as well as product  financing  and  insurance
coverage  provided  to  Transportation's  dealers  and retail  customers  by the
financial services operations. The company's current debt ratings have made bank
borrowings and sales of finance  receivables  the most economic  sources of cash
for NFC. Insurance operations are self-funded.

     Total cash,  cash  equivalents  and  marketable  securities  of the company
amounted to $1,064  million at October  31,  1998,  $965  million at October 31,
1997, and $881 million at October 31, 1996.

     Cash  provided by operations  during 1998 totaled $361  million,  primarily
from net income of $299 million. In addition to regular  postretirement  benefit
payments,  the company  contributed $200 million to both the Retiree Health Care
Base Plan Trust and to the hourly  pension plan during 1998.  Income tax expense
for 1998 was $111  million,  composed of cash  payments of $7 million to federal
and certain  state and local  governments  and $149 million of federal and other
taxes which  reduced the deferred tax asset.  These were offset by a $45 million
reversal of a portion of the deferred tax asset valuation allowance.

     The net change in operating assets and liabilities of $188 million includes
a $192 million increase in receivables, reflecting higher sales in 1998 compared
to 1997,  offset by a $192 million increase in accounts payable  principally due
to higher production in engine  facilities as well as in Mexico and Brazil.  The
$202 million  increase in other  liabilities  is primarily due to an increase in
the accrual for the company's performance incentive programs.

     During 1998, investment programs used $898 million in cash primarily from a
net increase in marketable  securities of $266 million, a net increase in retail
notes and lease  receivables  of $192 million and a $125 million net increase in
property and equipment leased to others. Additionally,  $305 million was used to
fund capital  expenditures  including  $86 million for  construction  of a truck
assembly  facility in Mexico,  $106 million to increase  mid-range diesel engine
capacity and additional funds for truck product improvements.

     Financing activities provided a $374 million net increase in long-term debt
primarily  due to the issuance of $100 million 7% Senior Notes due 2003 and $250
million 8% Senior  Subordinated Notes due 2008 offset by the $26 million used to
repay the 8%  Secured  Note due 2002 and by the $45  million  used to redeem the
company's 9% Sinking Fund  Debentures due June 2004.  Financing  activities also
provided a $348  million net  increase in notes and debt  outstanding  under the
bank revolving  credit  facility and  asset-backed  and other  commercial  paper
programs.  Additionally,  $84 million  was  borrowed  under the  Mexican  credit
facility, of which approximately half is denominated in Mexican pesos. Financing
activities  used  cash of  $240  million  for the  redemption  of the  Series  G
Preferred  Stock and for the  payment of $11  million of related  dividends.  In
addition, $189 million of common stock was repurchased during 1998 offset by $28
million of proceeds from the reissuance of treasury shares.

                                     - 4 -

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     In June 1998,  a  secondary  public  offering  of the  common  stock of the
company was completed, in which the Navistar International  Transportation Corp.
Retiree  Supplemental  Benefit Trust (the Trust) sold approximately 19.9 million
shares of common  stock at an offering  price of $26.50 per share.  These shares
represented  the  Class B Common  Stock  held by the Trust  which  automatically
converted  into Common Stock upon the sale. In  conjunction  with this offering,
the company and certain of the company's pension plans purchased 2 million and 3
million,  respectively, of the shares being offered. The company did not receive
any  proceeds  from the sale of the shares in the  offering,  but paid  expenses
related to the offering of $14 million pursuant to a pre-existing agreement with
the Trust. These offering fees are included in other expenses.  The underwriters
subsequently  exercised their over-allotment  option and elected to purchase 1.1
million  shares  from the company at $26.50 per share.  The  company  offset the
dilution of this sale through open market purchases of its Common Stock.

     Cash  flow  from  the  company's   manufacturing  and  financial   services
operations are currently sufficient to cover planned investment in the business.
Capital  expenditures  for 1999 are  expected to be  approximately  $450 million
including  approximately  $130 million for the NGV and NGD programs.  Additional
capital  expenditures  are planned for increased  manufacturing  capacity at the
Indianapolis engine plant,  development of operations in Brazil and improvements
to  existing  facilities  and  products.  The company  had  outstanding  capital
commitments  of $153 million at October 31, 1998,  primarily for the NGV and NGD
programs and for increased  manufacturing  capacity at the  Indianapolis  engine
plant.

     The  company  currently  estimates  approximately  $515  million in capital
spending  and $330  million  in  development  expense  through  2003 for the NGV
program.  Approximately  $95 million of this development  expense is planned for
1999. During 1998, the company approved a plan for up to $600 million in capital
spending  over the next five  years in order to  manufacture  a next  generation
version  of  diesel  engines.   In  addition,   approximately  $110  million  of
development  expense was approved for the development of these engines, of which
approximately $30 million is planned for 1999.

     The  company's  truck  assembly  facility  located in  Escobedo,  Mexico is
encumbered  by a lien in favor of certain  lenders of the company as  collateral
for the $125 million revolving Mexican credit facility. At October 31, 1998, $19
million of a Mexican  subsidiary's  receivables  were pledged as collateral  for
bank  borrowings.   In  addition,  as  of  October  31,  1998,  the  company  is
contingently  liable  for  approximately  $75  million  for  various  purchasing
commitments,   credit  guarantees  and  buyback  programs;   however,  based  on
historical  loss trends,  the  company's  exposure is not  considered  material.
Additionally, restrictions under the terms on the senior and senior subordinated
notes and Mexican credit  facility  include a limitation on  indebtedness  and a
limitation on certain restricted payments.

     Through the  asset-backed  public  market,  NFC has been able to fund fixed
rate retail note receivables at rates offered to companies with investment grade
ratings.  During  1998 and  1997,  NFC sold  $1,001  million  and $987  million,
respectively,  of retail notes,  through Navistar  Financial Retail  Receivables
Corporation (NFRRC), a wholly owned subsidiary.  On August 28, 1998, NFRRC filed
a shelf registration statement with the Securities and Exchange Commission which
provides  for the  issuance  of an  additional  $2,500  million of  asset-backed
securities.  The aggregate shelf registration available to NFRRC for issuance of
asset-backed  securities  is  $2,972  million.  In  November  1998,  NFC sold an
additional  $545  million  of  retail  notes  through  NFRRC  to a  multi-seller
asset-backed   commercial   paper  conduit   sponsored  by  a  major   financial
institution.

     At October 31, 1998,  Navistar Financial  Securities  Corporation (NFSC), a
wholly  owned  subsidiary  of NFC,  had a  revolving  wholesale  note trust that
provides  for the funding of $700 million of  wholesale  notes  comprised of one
$100 million  tranche of investor  certificates  maturing in 1999 and three $200
million tranches of investor certificates maturing in 2003, 2004 and 2008.

                                     - 5 -

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     NFC has a $925 million bank  revolving  credit  facility and a $400 million
asset-backed  commercial  paper (ABCP)  program  supported  by a bank  liquidity
facility,  which mature in March 2001. As of October 31, 1998, available funding
under the bank revolving credit facility and the ABCP facility was $124 million,
of which $22 million  provided  funding  backup for the  outstanding  short-term
debt.

     NFC's  maximum  contractual  exposure  under all  receivable  sale recourse
provisions at October 31, 1998, was $259 million.  However,  management believes
the recorded reserves for losses on sold receivables are adequate.

     At October 31, 1998, the Canadian  operating  subsidiary  was  contingently
liable for retail customers' contracts and leases financed by a third party. The
Canadian operating  subsidiary is subject to maximum recourse of $203 million on
retail  contracts  and $16  million on retail  leases.  The  Canadian  operating
subsidiary,  NFC and certain other  subsidiaries  included in financial services
operations  are  parties to  agreements  that may result in the  restriction  of
amounts which can be distributed to  Transportation  in the form of dividends or
loans and advances.  At October 31, 1998, the maximum amount of dividends  which
were available for  distribution  under the most  restrictive  covenants was $91
million.

     The company and  Transportation are obligated under certain agreements with
public and private  lenders of NFC to maintain the  subsidiary's  income  before
interest  expense and income  taxes at not less than 125% of its total  interest
expense. No income maintenance  payments were required for the three years ended
October 31, 1998.

     It is the  opinion  of  management  that,  in the  absence  of  significant
unanticipated  cash  demands,  current and  forecasted  cash flow will provide a
basis for financing operating requirements and capital expenditures.  Management
also believes that collections on the outstanding receivables portfolios as well
as funds  available  from  various  funding  sources  will permit the  financial
services operations to meet the financing  requirements of the company's dealers
and customers.

ENVIRONMENTAL MATTERS

     In  October  1998,  Navistar,  along with other  heavy-duty  diesel  engine
manufacturers,   entered   into  a  Consent   Decree  with  the  United   States
Environmental  Protection  Agency  (U.S.  EPA) and a Settlement  Agreement  with
California  Air  Resource  Board  (CARB)   concerning   alleged  emissions  from
heavy-duty diesel engines which utilized  strategies to improve fuel economy and
may have affected  nitrogen oxide emissions.  The company's  settlement with the
U.S. EPA and CARB requires a payment of $3 million dollars which was expensed in
1998. The settlement  additionally requires changes to new engine configurations
which are to be produced  after  October  2002.  The changes are not expected to
have a material effect on the company's financial position or operating results.

     The  company  has been named a  potentially  responsible  party  (PRP),  in
conjunction  with  other  parties,  in  a  number  of  cases  arising  under  an
environmental  protection  law known as the Superfund  law.  These cases involve
sites  which  allegedly  have  received  wastes from  current or former  company
locations.  Based on information available to the company, which, in most cases,
consists of data related to quantities and characteristics of material generated
at, or shipped to, each site as well as cost  estimates from PRPs and/or federal
or state  regulatory  agencies  for the  cleanup of these  sites,  a  reasonable
estimate is calculated of the company's share, if any, of the probable costs and
is provided for in the financial  statements.  These  obligations  generally are
recognized no later than  completion of the remedial  feasibility  study and are
not  discounted to their present  value.  The company  reviews its accruals on a
regular basis and believes that, based on these  calculations,  its share of the
potential additional costs for the cleanup of each site will not have a material
effect on the company's financial results.

                                     - 6 -

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DERIVATIVE FINANCIAL INSTRUMENTS

     As disclosed  in Notes 1 and 10 to the  Financial  Statements,  the company
uses derivative financial instruments to transfer or reduce the risks of foreign
exchange and interest rate  volatility,  and potentially  increase the return on
invested funds.

     The  company's  manufacturing  operations,  as  conditions  warrant,  hedge
foreign  exchange  exposure on the purchase of parts and materials  from foreign
countries  and its  exposure  from  sales  of  manufactured  products  in  other
countries.  Contracted  purchases of commodities for  manufacturing  may also be
hedged.

     NFC may use  forward  contracts  to hedge the fair  value of its fixed rate
receivables against changes in market interest rates in anticipation of the sale
of such  receivables.  NFC also uses interest  rate swaps to reduce  exposure to
interest  rate changes when it sells fixed rate  receivables  on a variable rate
basis. For the protection of investors in NFC's debt  securities,  NFC may write
interest  rate caps when fixed  rate  receivables  are sold on a  variable  rate
basis.

MARKET RISK DISCLOSURE

     The company's  primary market risks include  fluctuations in interest rates
and  currency  exchange  rates.  The  company is also  exposed to changes in the
prices of commodities used in its manufacturing operations and to changes in the
prices of equity instruments owned by the company;  however commodity price risk
related to the company's  current  commodity  financial  instruments  and equity
price risk related to the company's  current  investments in equity  instruments
are not material.  The company does not hold any material  market risk sensitive
instruments for trading purposes.

     The company has established  policies and procedures to manage  sensitivity
to  interest  rate  and  foreign  currency  exchange  rate  market  risk.  These
procedures  include the  monitoring of the company's  level of exposures to each
market risk, the funding of variable rate  receivables  with variable rate debt,
and  limiting  the amount of fixed  rate  receivables  which may be funded  with
floating  rate  debt.  These  procedures  also  include  the  use of  derivative
financial  instruments to mitigate the effects of interest rate fluctuations and
to reduce the exposure to exchange rate risk.

     Interest rate risk is the risk that the company will incur economic  losses
due to adverse changes in interest rates. The company measures its interest rate
risk by estimating the net amount by which the fair value of all of its interest
rate sensitive assets and liabilities would be impacted by selected hypothetical
changes in market  interest  rates.  Assuming a  hypothetical  10%  decrease  in
interest rates as of October 31, 1998,  the net fair value of these  instruments
would  decrease  by  approximately  $5  million.  The  company's  interest  rate
sensitivity analysis assumes a parallel shift in interest rate yield curves. The
model,  therefore,  does not  reflect  the  potential  impact of  changes in the
relationship between short-term and long-term interest rates.

     Foreign  currency  risk is the risk that the  company  will incur  economic
losses due to adverse changes in foreign currency  exchange rates. The company's
primary  exposure to foreign  currency  exchange  fluctuations  are the Canadian
dollar/U.S.  dollar and Mexican  peso/U.S.  dollar.  As of October 31, 1998, the
potential  reduction in future  earnings from a hypothetical  instantaneous  10%
adverse  change in quoted  foreign  currency  exchange  rates applied to foreign
currency sensitive  instruments would be approximately $10 million.  The foreign
currency  sensitivity model is limited by the assumption that all of the foreign
currencies to which the company is exposed would simultaneously decrease by 10%,
because such synchronized  changes are unlikely to occur. The effects of foreign
currency  forward  contracts have been included in the above analysis;  however,
the  sensitivity  model does not include the inherent risks  associated with the
anticipated future transactions  denominated in foreign currency for which these
forward contracts have been entered into for hedging purposes.

                                     - 7 -

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YEAR 2000

     In 1995,  the  company  instituted  a  corporate-wide  Year 2000  readiness
project to identify all systems which will require  modification or replacement,
and to  establish  appropriate  remediation  and  contingency  plans to avoid an
impact on the  company's  ability  to  continue  to  provide  its  products  and
services.  Navistar has established a team of  professionals  within each of its
sites and  locations to implement  and complete this  initiative.  In 1997,  the
company  expanded  its Year 2000  readiness  project  to include  the  company's
products, external suppliers, dealers and facilities.

     The company's Year 2000 program is directed to four major areas:  products,
internal  systems  (including  information  technology (IT) and non-IT systems),
suppliers and dealers.

     The company has  completed  its  compliance  review of virtually all of its
products and has not learned of any  products  which it  manufactures  that will
cease  functioning or experience an interruption in operation as a result of the
transition to the Year 2000.

     The internal systems portion of the project addresses  personal  computing;
facilities,  including the physical "machines" inside a plant or office complex;
and computer  business  systems that are commonly run on larger  mainframes  and
mid-range  computers as well as the supporting  infrastructure for the company's
computer business systems. The company presently believes that it has identified
all significant applications that will require remediation,  which in some cases
will involve the  replacement  of the systems,  to achieve Year 2000  readiness.
Both  internal  and  external  resources  are  being  used to make the  required
modifications and test for Year 2000 compliance. The company currently estimates
approximately  85%  completion  of  conversion  or  compliance  checking  of its
internal systems including significant applications by the end of December 1998.
Integrated  testing of major systems is planned to begin in late December  1998.
The company currently  anticipates that the modifications and testing process of
all  significant  applications  will be  substantially  complete by August 1999,
which is prior to any anticipated impact on its operating systems.

     With  regard  to the  supplier  portion  of the  project,  the  company  is
currently  assessing  the Year 2000  readiness of  production  and service parts
suppliers  through a supplier survey process designed by an automotive  industry
trade association,  the Automotive Industry Action Group (AIAG).  Suppliers have
been  asked  to  respond  to a  compliance  questionnaire.  Responses  to  these
questionnaires  have been received from about 25% of these  suppliers.  Based on
these responses, the company believes that approximately half of these suppliers
are making acceptable  progress toward Year 2000 readiness.  The company is also
assessing  non-production  suppliers. The supplier assurance process is expected
to  be  substantially  complete  by  April  1999,  including  audits  of  select
suppliers.  NFC has received written assurances from its major suppliers of cash
management  services that they expect to address all of their  significant  Year
2000 issues on a timely basis.

     The  company is  working  with its  independent  dealers on their Year 2000
readiness and monitoring  their progress.  The company has contacted all dealers
and is working with its certified  Dealer Business Systems Vendors to assist the
dealers in becoming Year 2000  compliant.  Compliance  of all certified  dealers
systems is expected to be substantially complete by December 1999.

     The  company's  total cost of the Year 2000  project,  which will be funded
through  operating  cash flows,  is  estimated to be $34 million  including  $24
million  of  estimated   expense  and  $10  million  of  capital   expenditures.
Approximately  $14 million has been  expensed and  approximately  $4 million has
been capitalized  through October 31, 1998. The remaining costs are estimated to
be incurred  through fiscal year 2000. The company's annual 1999 expense for the
Year 2000 project is estimated to represent 5% of the company's 1999 information
technology budget.  Other non-Year 2000 information  technology efforts have not
been materially delayed or impacted by the Year 2000 project.

                                     - 8 -

<PAGE>

     The costs of the Year  2000  project  and the  dates on which  the  company
believes it will complete the Year 2000  modifications  and testing are based on
management's best estimates,  which were derived utilizing numerous  assumptions
regarding  future  events,  including  the  continued  availability  of  certain
resources,  third party modification plans and other factors. However, there can
be no guarantee that these estimates will be achieved,  and actual results could
differ  materially  from those currently  anticipated.  Examples of factors that
might  cause such  material  differences  include,  but are not  limited to, the
availability  and cost of personnel  trained in this area, the ability to locate
and correct all relevant  computer  codes and embedded  technology,  and similar
uncertainties.  In  addition,  there can be no  guarantee  that the  systems  or
products of other  entities,  including the company's  independent  dealers,  on
which the company relies will be converted on a timely basis,  or that a failure
to convert by another  company,  or a conversion that is  incompatible  with the
company's systems, would not have a material adverse effect on the company.

     The company  currently  believes that the most reasonably likely worst case
scenario  with  respect  to the Year 2000 issue is the  failure  of a  supplier,
including utility suppliers,  to become Year 2000 compliant,  which could result
in the temporary interruption of the supply of necessary products or services to
a manufacturing facility. This could result in interruptions in production for a
period of time,  which in turn could result in potential lost sales and profits.
Additionally,  marketing and administrative  expense could increase if automated
functions would need to be performed manually.

     The company  currently  believes that the most reasonably likely worst case
scenario for its  financial  services  operations  with respect to the Year 2000
issue would be the  inability to sustain its current  level of  performance  and
customer service.  Additionally, a significant failure of the banking systems or
key entities in the  financial  markets  could  adversely  affect the  financial
services operations' ability to access various credit and money markets.

     As part of its  continuous  assessment  process,  the company  will develop
contingency plans as necessary.  These plans could include,  but are not limited
to, material  banking,  use of alternate  suppliers and development of alternate
means to process dealer  orders.  The company  currently  plans to complete such
contingency planning by December 1999.

     Navistar  is using its best  efforts to ensure that the Year 2000 impact on
its  critical  systems  and  processes  will not affect  its supply of  product,
quality or service. However, in the event that the company is unable to complete
its  remedial  actions  described  above  and is unable  to  implement  adequate
contingency plans in the event problems arise, there could be a material adverse
effect on the company's business, financial position or results of operations.

     The  preceding  "Year 2000"  discussion  contains  various  forward-looking
statements  which  represent the  company's  beliefs or  expectations  regarding
future events.  When used in the "Year 2000"  discussion,  the words "believes,"
"expects," "estimates," "planned," "could," and similar expressions are intended
to identify  forward-looking  statements.  Forward-looking  statements  include,
without limitation,  the company's  expectations as to when it will complete the
remediation and testing phases of its Year 2000 program as well as its Year 2000
contingency plans; its estimated cost of achieving Year 2000 readiness;  and the
company's  belief  that its  internal  systems and  equipment  will be Year 2000
compliant in a timely manner. All forward-looking statements involve a number of
risks and uncertainties that could cause the actual results to differ materially
from the projected  results.  Factors that may cause these differences  include,
but are not  limited  to, the  availability  of  qualified  personnel  and other
information  technology  resources;  the ability to identify and  remediate  all
date-sensitive  lines of computer code or to replace embedded  computer chips in
affected systems or equipment; and the actions of governmental agencies or other
third parties with respect to Year 2000 problems.

                                     - 9 -

<PAGE>

NEW ACCOUNTING PRONOUNCEMENTS

     In June 1997, the Financial  Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting  Comprehensive  Income" (SFAS
130),  and Statement of Financial  Accounting  Standards  No. 131,  "Disclosures
about Segments of an Enterprise and Related  Information"  (SFAS 131).  SFAS 130
establishes  standards for reporting and display of comprehensive income and its
components.  SFAS 131  establishes  standards  for reporting  information  about
operating  segments  and  related   disclosures  about  products  and  services,
geographic areas and major customers.  These statements are effective for fiscal
years  beginning after December 15, 1997. SFAS 130 and SFAS 131 expand or modify
current  disclosures  and,  accordingly,  will have no  impact on the  company's
reported financial  position,  results of operations and cash flows. The company
is currently assessing the impact of SFAS 131 on its reported segments.

     In March 1998,  the  American  Institute of  Certified  Public  Accountants
issued  Statement  of  Position  98-1,  "Accounting  for the  Costs of  Computer
Software Developed or Obtained for Internal Use." This statement defines whether
or not certain costs related to the  development  or acquisition of internal use
software  should be expensed or  capitalized  and is effective  for fiscal years
beginning after December 15, 1998. The company is currently assessing the impact
of this statement on its results of operations and financial position.

     In June 1998, the Financial  Accounting Standards Board issued Statement of
Financial Accounting  Standards No. 133, "Accounting for Derivative  Instruments
and Hedging Activities," to establish accounting and reporting  requirements for
derivative  instruments.  This standard  requires  recognition of all derivative
instruments  in  the  statement  of  financial  position  as  either  assets  or
liabilities, measured at fair value, and is effective for fiscal years beginning
after June 15, 1999. This statement  additionally  requires  changes in the fair
value  of  derivatives  to be  recorded  each  period  in  current  earnings  or
comprehensive  income  depending  on the intended  use of the  derivatives.  The
company is currently  assessing  the impact of this  statement on its results of
operations, financial position and cash flows.

INCOME TAXES

     The Statement of Financial  Condition at October 31, 1998 and 1997 includes
a deferred  tax asset of $912  million and $934  million,  respectively,  net of
valuation allowances of $264 million and $309 million, respectively,  related to
future tax benefits.  The deferred tax assets have been reduced by the valuation
allowance as management believes it is more likely than not that some portion of
the deferred tax asset may not be realized in the future.

     The deferred tax asset includes the tax benefits associated with cumulative
tax losses of $1,597  million and  temporary  differences,  which  represent the
cumulative  expense of $1,437  million  recorded in the Statement of Income that
has not been deducted on the company's tax returns.  The valuation  allowance at
October 31, 1998 assumes that it is more likely than not that approximately $695
million of cumulative  tax losses will not be realized  before their  expiration
date.  Realization  of the net deferred tax asset is dependent on the generation
of approximately $2,400 million of future taxable income, of which an average of
approximately  $70 million  would need to be generated  annually for the 13-year
period 1999 through 2011. The remaining  taxable  income,  which  represents the
realization of tax benefits associated with temporary differences, does not need
to be generated  until  subsequent  to 2011.  Until the company has utilized its
significant NOL carryforwards,  the cash payment of federal income taxes will be
minimal. See Note 3 to the Financial Statements.

                                     - 10 -

<PAGE>

     The company  performs  extensive  analysis to  determine  the amount of the
deferred tax asset.  Such  analysis is based on the premise that the company is,
and will  continue  to be, a going  concern  and that it is more likely than not
that  deferred tax benefits  will be realized  through the  generation of future
taxable income.  Management  reviews all available  evidence,  both positive and
negative,  to assess  the  long-term  earnings  potential  of the  company.  The
financial  results  are  evaluated  using a number of  alternatives  in economic
cycles  at  various  industry  volume  conditions.  Factors  considered  are the
company's 18-consecutive-year leadership in the combined market share of Class 5
through 8 trucks and  recognition as a worldwide  leading  producer of mid-range
diesel engines.

     As a result of the continued successful implementation of its manufacturing
strategy, including the reinstatement of the NGV program, the continued strength
of  industry  volume  conditions,  extension  of the Ford diesel  contract,  new
program  initiatives  and  other  positive  operating   indicators,   management
initiated an extensive  review of its  projected  future  taxable  income.  This
review  was  completed  during  the fourth  quarter  of 1998 and  resulted  in a
reduction to the deferred tax asset valuation allowance of $45 million which has
been recorded as a reduction in income tax expense resulting in an effective tax
rate of 27%.  Management  believes that,  with the  combination of available tax
planning  strategies and the maintenance of significant  market share,  earnings
are achievable in order to realize the net deferred tax asset of $912 million.

     Reconciliation  of the  company's  income before income taxes for financial
statement  purposes to United States  taxable income for the years ended October
31 is as follows:

Millions of dollars                       1998            1997           1996
------------------------------------------------------------------------------
Income before income taxes. ...........  $  410           $ 242          $ 105
Exclusion of (income) loss
  of foreign subsidiaries..............      (7)             (3)             3
State income taxes.....................      (3)             (2)            (2)
Temporary differences..................    (169)            145           (284)
Other .................................     (12)              6              -
                                         ------          ------         ------
  Taxable income (loss)..... ..........  $  219          $  388         $ (178)
                                         ------          ------         ------

BUSINESS ENVIRONMENT

     Sales of Class 5 through 8 trucks have been cyclical,  with demand affected
by such economic  factors as  industrial  production,  construction,  demand for
consumer durable goods, interest rates and the earnings and cash flow of dealers
and customers.  Reflecting the stability of the general economy,  demand for new
trucks  remained  strong during 1998. An  improvement in the number of new truck
orders has increased the company's  order backlog to 72,100 units at October 31,
1998,  from 45,300 units at October 31, 1997.  Historically,  retail  deliveries
have  been  impacted  by the  rate at  which  new  truck  orders  are  received.
Therefore,   the  company  continually  evaluates  order  receipts  and  backlog
throughout the year and will balance production with demand as appropriate.

     The company  currently  projects  1999 United  States and Canadian  Class 8
heavy truck demand to be 224,700 units, a 3% decrease from 1998.  Class 5, 6 and
7 medium truck demand,  excluding  school buses,  is forecast at 124,100  units,
slightly  lower than in 1998.  Demand for school  buses is  expected to decrease
slightly in 1999 to 31,300  units.  Mid-range  diesel  engine  shipments  by the
company to original  equipment  manufacturers in 1999 are expected to be 259,100
units, 21% higher than in 1998. The company's  service parts sales are projected
to grow 10% to approximately $935 million.

                                     - 11 -

<PAGE>

     At current demand levels, the entire truck industry is operating at or near
capacity. Accordingly,  constraints have been placed on the company's ability to
meet certain customers' demands because of component parts availability.

     During 1997, the company entered into a 10-year  agreement,  effective with
model year 2003, to supply newly designed,  advanced  technology engines through
the year 2012 to Ford Motor Company for use in its  diesel-powered  light trucks
and vans. The company's  current engine agreement with Ford was extended through
model year 2002.  During  March  1998,  the company  announced  that it had been
selected to negotiate an extended  term  agreement to supply  diesel  engines to
Ford Motor  Company for certain under 8,500 lbs. GVW light duty trucks and sport
utility vehicles beginning with the 2002 model year.

     In  September  1998,  the  company  formally  announced  the  start  of its
distribution of medium and heavy trucks to customers in Brazil. The company also
announced  its  intent  to form a  joint  venture  to  develop  and  manufacture
proprietary next generation  diesel fuel injectors  incorporating  digital valve
technology.  In October 1998,  the company  announced that it signed a letter of
intent to form a joint venture with a Brazilian  company to  manufacture  diesel
engines in South America for a broad range of truck applications.

                                     - 12 -

<PAGE>

STATEMENT OF FINANCIAL REPORTING RESPONSIBILITY


     Management of Navistar  International  Corporation and its  subsidiaries is
responsible  for the  preparation  and for the integrity and  objectivity of the
accompanying  financial  statements  and  other  financial  information  in this
report. The financial statements have been prepared in accordance with generally
accepted   accounting   principles  and  include   amounts  that  are  based  on
management's estimates and judgments.

     The  accompanying  financial  statements  have been  audited by  Deloitte &
Touche LLP,  independent  auditors.  Management has made available to Deloitte &
Touche LLP all the company's  financial records and related data, as well as the
minutes  of the  Board of  Directors'  meetings.  Management  believes  that all
representations  made to  Deloitte  & Touche LLP during its audit were valid and
appropriate.

     Management is  responsible  for  establishing  and  maintaining a system of
internal controls throughout its operations that provides  reasonable  assurance
as to the integrity and reliability of the financial statements,  the protection
of assets from  unauthorized use and the execution and recording of transactions
in accordance  with  management's  authorization.  Management  believes that the
company's   system  of  internal   controls  is  adequate  to  accomplish  these
objectives.  The system of internal  controls,  which  provides for  appropriate
division of responsibility, is supported by written policies and procedures that
are updated by  management,  as  necessary.  The system is tested and  evaluated
regularly  by the  company's  internal  auditors  as well as by the  independent
auditors in connection with their annual audit of the financial statements.  The
independent  auditors conduct their audit in accordance with generally  accepted
auditing  standards and perform such tests of transactions  and balances as they
deem  necessary.  Management  considers  the  recommendations  of  its  internal
auditors and independent  auditors  concerning the company's  system of internal
controls  and  takes  the  necessary  actions  that  are  cost-effective  in the
circumstances to respond appropriately to the recommendations presented.

     The  Audit   Committee  of  the  Board  of  Directors,   composed  of  four
non-employee  Directors,  meets  periodically  with  the  independent  auditors,
management,  general  counsel and internal  auditors to satisfy itself that such
persons are properly  discharging  their  responsibilities  regarding  financial
reporting and auditing.  In carrying out these  responsibilities,  the Committee
has full access to the independent auditors,  internal auditors, general counsel
and financial  management in scheduled joint sessions or private  meetings as in
the Committee's judgment seem appropriate.  Similarly, the company's independent
auditors,  internal auditors, general counsel and financial management have full
access to the Committee  and to the Board of Directors  and each is  responsible
for bringing before the Committee or its Chair,  in a timely manner,  any matter
deemed appropriate to the discharge of the Committee's responsibility.


John R. Horne
Chairman, President and
Chief Executive Officer


Robert C. Lannert
Executive Vice President
and Chief Financial Officer

                                     - 13 -

<PAGE>


INDEPENDENT AUDITORS' REPORT


Navistar International Corporation,
Its Directors and Shareowners:


     We  have  audited  the   Statement  of  Financial   Condition  of  Navistar
International  Corporation and Consolidated  Subsidiaries as of October 31, 1998
and 1997, and the related  Statements of Income and of Cash Flow for each of the
three years in the period ended October 31, 1998. These  consolidated  financial
statements   are  the   responsibility   of  the   company's   management.   Our
responsibility  is  to  express  an  opinion  on  these  consolidated  financial
statements based on our audits.

     We conducted  our audits in accordance  with  generally  accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable  assurance about whether the  consolidated  financial  statements are
free of material  misstatement.  An audit includes  examining,  on a test basis,
evidence  supporting the amounts and disclosures in the  consolidated  financial
statements.  An audit also includes assessing the accounting principles used and
significant  estimates  made by  management,  as well as evaluating  the overall
financial  statement  presentation.   We  believe  that  our  audits  provide  a
reasonable basis for our opinion.

     In our opinion, the accompanying  consolidated financial statements present
fairly,  in  all  material   respects,   the  financial   position  of  Navistar
International  Corporation and Consolidated Subsidiaries at October 31, 1998 and
1997,  and the results of their  operations  and their cash flow for each of the
three years in the period ended October 31, 1998, in conformity with generally
accepted accounting principles.




Deloitte & Touche LLP
December 14, 1998
Chicago, Illinois

                                     - 14 -

<PAGE>


STATEMENT OF INCOME

                                           Navistar International Corporation
                                             and Consolidated Subsidiaries
                                           ----------------------------------
For the Years Ended October 31
(Millions of dollars,
 except per share data)                      1998         1997         1996
----------------------------------------------------------------------------

Sales and revenues
Sales of manufactured products ...........  $7,629       $6,147       $5,508
Finance and insurance revenue ............     201          174          197
Other income .............................      55           50           49
                                            ------       ------       ------
  Total sales and revenues ...............   7,885        6,371        5,754
                                            ------       ------       ------
Costs and expenses
Cost of products and services sold .......   6,498        5,292        4,827
Postretirement benefits ..................     174          215          220
Engineering and research expense .........     192          124          129
Marketing and administrative expense .....     427          365          319
Interest expense .........................     105           74           83
Other expenses ...........................      79           59           71
                                            ------       ------       ------
  Total costs and expenses ...............   7,475        6,129        5,649
                                            ------       ------       ------

    Income before income taxes ...........     410          242          105

    Income tax expense ...................     111           92           40
                                            ------       ------       ------

Net income ...............................     299          150           65

Less dividends on
  Series G preferred stock ...............      11           29           29
                                            ------       ------       ------

Net income applicable to common stock ....  $  288       $  121       $   36
                                            ======       ======       ======
----------------------------------------------------------------------------

Earnings per share
    Basic ................................  $ 4.16       $ 1.66       $  .49
    Diluted ..............................  $ 4.11       $ 1.65       $  .49
Average shares outstanding (millions)
    Basic ................................    69.1         73.1         73.7
    Diluted ..............................    70.0         73.6         73.8

----------------------------------------------------------------------------

See Notes to Financial Statements.

                                     - 15 -

<PAGE>


STATEMENT OF FINANCIAL CONDITION

                                           Navistar International Corporation
                                             and Consolidated Subsidiaries
                                           ----------------------------------

As of October 31 (Millions of dollars)           1998                1997
----------------------------------------------------------------------------

ASSETS

Cash and cash equivalents ................     $    440            $   609
Marketable securities ....................          624                356
                                               --------            -------
                                                  1,064                965
Receivables, net .........................        2,146              1,755
Inventories ..............................          505                496
Property and equipment, net .............         1,106                835
Investments and other assets .............          246                319
Intangible pension assets ................          199                212
Deferred tax asset, net ..................          912                934
                                               --------           --------
Total assets .............................     $  6,178           $  5,516
                                               ========           ========

LIABILITIES AND SHAREOWNERS' EQUITY

Liabilities
Accounts payable, principally trade ......     $  1,273           $  1,100
Debt:
  Manufacturing operations ...............          450                 92
  Financial services operations ..........        1,672              1,224
Postretirement benefits liability ........          934              1,186
Other liabilities ........................        1,080                894
                                               --------           --------
    Total liabilities ....................        5,409              4,496
                                               --------           --------
Commitments and contingencies

Shareowners' equity
Series G convertible preferred stock ......           -                240
Series D convertible
   junior preference stock ................           4                  4
Common stock (75.3 million and 52.2 million
   shares issued)..........................       2,139              1,659
Class B Common stock
 (0 million and 23.1 million shares issued)           -                471
Retained earnings (deficit) ...............      (1,160)            (1,301)
Common stock held in treasury, at cost
 (9.1 million and 2.9 million shares held).        (214)               (53)
                                               --------           --------
    Total shareowners' equity .............         769              1,020
                                               --------           --------
Total liabilities and shareowners' equity .    $  6,178           $  5,516
                                               ========           ========
--------------------------------------------------------------------------
See Notes to Financial Statements.

                                     - 16 -

<PAGE>


STATEMENT OF CASH FLOW

                                            Navistar International Corporation
                                              and Consolidated Subsidiaries
                                            ----------------------------------
For the Years Ended October 31
(Millions of dollars)                        1998         1997         1996
------------------------------------------------------------------------------

Cash flow from operations
Net income ..............................   $    299     $    150     $     65
Adjustments to reconcile net income
  to cash provided by operations:
    Depreciation and amortization .......        159          120          105
    Deferred income taxes ...............        149           82           37
    Deferred tax asset valuation
      allowance adjustment ..............        (45)           -            -
    Postretirement benefits funding
      in excess of expense ..............       (373)        (128)          33
    Other, net ..........................        (16)         (51)         (28)
Change in operating assets and liabilities:
    Receivables .........................       (192)        (194)         186
    Inventories .........................        (13)         (25)         (47)
    Prepaid and other current assets ....         (1)           4            1
    Accounts payable ....................        192          288         (110)
    Other liabilities ...................        202          137         (123)
                                            --------     --------     --------
  Cash provided by operations ...........        361          383          119
                                            --------     --------     --------

Cash flow from investment programs
Purchase of retail notes
  and lease receivables .................     (1,263)        (970)      (1,108)
Collections/sales of retail notes
  and lease receivables .................      1,071        1,054        1,109
Purchase of marketable securities .......       (787)        (512)        (585)
Sales or maturities
  of marketable securities ..............        521          557          752
Capital expenditures ....................       (305)        (172)        (117)
Property and equipment
  leased to others ......................       (125)         (42)         (73)
Other investment programs, net ..........        (10)           3           (8)
                                            --------     --------     --------
  Cash used in investment programs ......       (898)         (82)         (30)
                                            --------     --------     --------

Cash flow from financing activities
Issuance of debt .........................       493          211            -
Principal payments on debt ...............      (119)         (46)        (136)
Net increase (decrease)in notes and debt
  outstanding under bank revolving credit
  facility and asset-backed and other
  commercial paper programs ..............       348         (285)          81
Mexican credit facility ..................        84            -            -
Redemption of Series G preferred stock ...      (240)           -            -
Dividends paid ...........................       (11)         (29)         (29)
Repurchase of common stock ...............      (189)         (23)           -
Proceeds from reissuance of Treasury shares       28            -            -
Debt and equity issuance costs ...........       (26)          (7)          (3)
                                            --------     --------     --------
  Cash provided by (used in)
    financing activities .................       368         (179)         (87)
                                            --------     --------     --------

Cash and cash equivalents
  (Decrease) increase during the year ....      (169)         122            2
  At beginning of the year ...............       609          487          485
                                            --------     --------     --------
Cash and cash equivalents
  at end of the year .....................  $    440     $    609     $    487
                                            ========     ========     ========

------------------------------------------------------------------------------

See Notes to Financial Statements.

                                     - 17 -

<PAGE>

                          NOTES TO FINANCIAL STATEMENTS
                   FOR THE THREE YEARS ENDED OCTOBER 31, 1998


1.   SUMMARY OF ACCOUNTING POLICIES

Basis of Consolidation

     Navistar  International  Corporation is a holding company,  whose principal
operating   subsidiary   is   Navistar   International    Transportation   Corp.
(Transportation).  As used hereafter, "company" or "Navistar" refers to Navistar
International  Corporation and its consolidated  subsidiaries.  The consolidated
financial  statements  include  the  results  of  the  company's   manufacturing
operations and its wholly owned financial services subsidiaries.  The effects of
transactions  between the manufacturing and financial  services  operations have
been eliminated to arrive at the consolidated  totals.  The distinction  between
current and  long-term  assets and  liabilities  in the  Statement  of Financial
Condition is not meaningful when finance, insurance and manufacturing operations
are combined;  therefore, the company has adopted an unclassified  presentation.
Certain  1997 and 1996  amounts  have  been  reclassified  to  conform  with the
presentation used in the 1998 financial statements.

     The company operates in two principal industry segments:  manufacturing and
financial services. Manufacturing operations are responsible for the manufacture
and marketing of medium and heavy  trucks,  including  school  buses,  mid-range
diesel  engines and service  parts  primarily in the United States and Canada as
well as in Mexico, Brazil and other selected export markets. Based on assets and
revenues,  manufacturing  operations  represent  the  majority of the  company's
business  activities.  The financial  services  operations  consist primarily of
Navistar   Financial   Corporation  (NFC)  and  the  company's  foreign  finance
subsidiaries.  The financial services  operations provide wholesale,  retail and
lease financing, and domestic commercial physical damage and liability insurance
coverage to the company's dealers and retail customers and to the general public
through an independent insurance agency system.

Use of Estimates

     The  preparation  of financial  statements  in  conformity  with  generally
accepted  accounting  principles  requires  management  to  make  estimates  and
assumptions  that  affect the  reported  amounts of assets and  liabilities  and
disclosure of  contingent  assets and  liabilities  at the date of the financial
statements  and the  reported  amounts  of  revenues  and  expenses  during  the
reporting period. Actual results could differ from those estimates.

Revenue Recognition

     Manufacturing  operations  recognize  shipments  of new trucks and  service
parts to independent  dealers and retail customers as sales.  Price  allowances,
expected in the normal  course of  business,  and the cost of special  incentive
programs are recorded at the time of sale.  Engine sales are  recognized  at the
time of shipment to original equipment manufacturers. An allowance for losses on
receivables is maintained at an amount that management considers  appropriate in
relation  to the  outstanding  receivables  portfolio,  and it is  charged  when
receivables are determined to be uncollectible.

     Financial  services   operations   recognize  finance  charges  on  finance
receivables  as income over the term of the  receivables  utilizing the interest
method. Operating lease revenues are recognized on a straight-line basis over

                                     - 18 -

<PAGE>

                          NOTES TO FINANCIAL STATEMENTS
                                   (Continued)


1.   SUMMARY OF ACCOUNTING POLICIES (continued)

Revenue Recognition (continued)

the life of the lease.  Selected  receivables are sold and securitized to public
and  private  investors  with  limited  recourse.  Gains or  losses  on sales of
receivables  are  credited or charged to revenue in the period in which the sale
occurs.  Financial services  operations continue to service the sold receivables
and receive a fee for such services  from the investor.  An allowance for losses
is  maintained  at a level deemed  appropriate  based on such factors as overall
portfolio quality, historical loss experience and current economic conditions.

     Insurance  premiums  are  earned on a prorata  basis  over the terms of the
policies. Underwriting losses and outstanding loss reserve balances are based on
individual case estimates of the ultimate cost of settlement,  including  actual
losses,  and  determinations  of amounts  required  for losses  incurred but not
reported.

Cash and Cash Equivalents

     All highly liquid financial  instruments with maturities of three months or
less  from date of  purchase,  consisting  primarily  of  bankers'  acceptances,
commercial paper,  United States government  securities and floating rate notes,
are classified as cash  equivalents in the Statement of Financial  Condition and
Statement of Cash Flow.

Marketable Securities

     Marketable securities are classified as  available-for-sale  securities and
are reported at fair value. The difference between amortized cost and fair value
is recorded as an adjustment to shareowners'  equity, net of applicable deferred
taxes.

Inventories

     Inventories are valued at the lower of average cost or market.

Property and Other Long-Lived Assets

     Significant expenditures for replacement of equipment,  tooling and pattern
equipment,  and major rebuilding of machine tools are capitalized.  Depreciation
and  amortization  are generally  provided on the  straight-line  basis over the
estimated  useful lives of the assets,  which average 35 years for buildings and
improvements  and eight years for machinery and  equipment.  Gains and losses on
property disposals are included in other income and expense. The carrying amount
of all long-lived assets is evaluated periodically to determine if adjustment to
the  depreciation  and  amortization  period or to the  unamortized  balance  is
warranted.  Such evaluation is based principally on the expected  utilization of
the  long-lived  assets  and  the  projected,  undiscounted  cash  flows  of the
operations in which the long-lived assets are deployed.

                                     - 19 -

<PAGE>

                          NOTES TO FINANCIAL STATEMENTS
                                   (Continued)


1.   SUMMARY OF ACCOUNTING POLICIES (continued)

Engineering and Research Expense

     Engineering and research expense includes research and development expenses
and routine  ongoing  costs  associated  with  improving  existing  products and
manufacturing  processes.  Research  and  development  expenses,  which  include
activities  for the  introduction  of new truck and diesel  engine  products and
major improvements to existing products and processes, totaled $138 million, $85
million and $90 million in 1998, 1997 and 1996, respectively.

Product Related Costs

     The  company  accrues  warranty  expense at the time of end  product  sale.
Product  liability  expense is accrued  based on the  estimate  of total  future
payments to settle product liability claims.

Derivative Financial Instruments

     The  company  uses  derivatives  to  transfer  or reduce  risks of  foreign
exchange and interest rate volatility and to potentially  increase the return on
invested  funds.  NFC may use forward  contracts  to hedge the fair value of its
fixed rate receivables  against changes in market interest rates in anticipation
of the sale of such  receivables.  NFC also uses  interest  rate swaps to reduce
exposure to interest  rate  changes  when it sells fixed rate  receivables  on a
variable rate basis.  For the protection of investors in NFC's debt  securities,
NFC may write  interest  rate caps when  fixed  rate  receivables  are sold on a
variable rate basis. The company also uses derivatives such as forward contracts
to reduce its exposure to foreign exchange volatility.

     Derivative financial instruments are generally held for purposes other than
trading.  Gains or losses  related  to hedges of  anticipated  transactions  are
deferred  and are  recognized  in income  when the  effects  of the  anticipated
transactions  are recognized in earnings.  The principal  balance of receivables
owned and  expected to be sold by NFC equals or exceeds the  notional  amount of
open forward  contracts.  Additionally,  the value of committed  Canadian dollar
truck sales  generally  exceeds the notional  amount of related open  derivative
contracts.

Stock-Based Compensation

     Effective  November  1,  1996,  the  company  adopted  the  disclosure-only
provisions of Statement of Financial  Accounting  Standards No. 123, "Accounting
for Stock-Based  Compensation" (SFAS 123).  Accordingly,  the company elected to
continue to account for stock-based compensation plans consistent with prior
years.

Foreign Currency

     The financial  statements of foreign  subsidiaries  are  translated to U.S.
dollars  using the  period-end  exchange rate for assets and  liabilities  and a
weighted-average  exchange rate for each period for revenues and  expenses.  The
local  currency is the  functional  currency for most of the  company's  foreign
subsidiaries and translation  adjustments for these subsidiaries are recorded in
shareowners'  equity.  The  U.S.  dollar  is the  functional  currency  for  the
company's  Mexican  subsidiaries and,  accordingly,  their translation gains and
losses are  included in  earnings.  Transaction  gains and losses  arising  from
fluctuations  in  currency   exchange  rates  on  transactions   denominated  in
currencies other than the functional  currency,  except those transactions which
hedge sales commitments, are recorded in earnings as incurred.

                                     - 20 -

<PAGE>

                          NOTES TO FINANCIAL STATEMENTS
                                   (Continued)


1.   SUMMARY OF ACCOUNTING POLICIES (continued)


Earnings Per Share

     Basic  earnings  per share  excludes  dilution  and is computed by dividing
income available to common shareowners by the  weighted-average  number of basic
common shares outstanding for the period. Diluted earnings per share assumes the
issuance  of Common  Stock  for other  potentially  dilutive  equivalent  shares
outstanding.

New Accounting Pronouncements

     In June 1997, the Financial  Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting  Comprehensive  Income" (SFAS
130),  and Statement of Financial  Accounting  Standards  No. 131,  "Disclosures
about Segments of an Enterprise and Related  Information"  (SFAS 131).  SFAS 130
establishes  standards for reporting and display of comprehensive income and its
components.  SFAS 131  establishes  standards  for reporting  information  about
operating  segments  and  related   disclosures  about  products  and  services,
geographic areas and major customers.  These statements are effective for fiscal
years  beginning after December 15, 1997. SFAS 130 and SFAS 131 expand or modify
current  disclosures  and,  accordingly,  will have no  impact on the  company's
reported financial  position,  results of operations and cash flows. The company
is assessing the impact of SFAS 131 on its reported segments.

     In March 1998,  the  American  Institute of  Certified  Public  Accountants
issued  Statement  of  Position  98-1,  "Accounting  for the  Costs of  Computer
Software Developed or Obtained for Internal Use." This statement defines whether
or not certain costs related to the  development  or acquisition of internal use
software  should be expensed or  capitalized  and is effective  for fiscal years
beginning after December 15, 1998. The company is currently assessing the impact
of this statement on its results of operations and financial position.

     In June 1998, the Financial  Accounting Standards Board issued Statement of
Financial Accounting  Standards No. 133, "Accounting for Derivative  Instruments
and Hedging Activities," to establish accounting and reporting  requirements for
derivative  instruments.  This standard  requires  recognition of all derivative
instruments  in  the  statement  of  financial  position  as  either  assets  or
liabilities, measured at fair value, and is effective for fiscal years beginning
after June 15, 1999. This statement  additionally  requires  changes in the fair
value  of  derivatives  to be  recorded  each  period  in  current  earnings  or
comprehensive  income  depending  on the intended  use of the  derivatives.  The
company is currently  assessing  the impact of this  statement on the  company's
results of operations, financial position and cash flows.

                                     - 21 -

<PAGE>

                          NOTES TO FINANCIAL STATEMENTS
                                   (Continued)


2.   POSTRETIREMENT BENEFITS

     Effective  October 31,  1998,  the company  adopted  Statement of Financial
Accounting Standards No. 132,  "Employers'  Disclosures about Pensions and Other
Postretirement Benefits" (SFAS 132). The information for 1998, 1997 and 1996 has
been presented in conformity with the requirements of SFAS 132.

     The company provides  postretirement  benefits to substantially  all of its
employees.  Costs  associated with  postretirement  benefits include pension and
postretirement  health care  expenses  for  employees,  retirees  and  surviving
spouses and dependents.  In addition,  as part of the 1993  restructured  health
care  and  life  insurance  plans,   profit  sharing  payments  to  the  Retiree
Supplemental Benefit Trust are required.

     The cost of postretirement  benefits is segregated as a separate  component
in the Statement of Income and is as follows:

Millions of dollars                          1998         1997         1996
----------------------------------------------------------------------------
Pension expense.........................    $   74       $  129       $  160
Health/life insurance...................        42           66           60
Profit sharing provision to Trust.......        58           20            -
                                            ------       ------       ------
Total postretirement benefits expense...    $  174       $  215       $  220
                                            ======       ======       ======

     Generally, the pension plans are non-contributory.  The company's policy is
to fund its  pension  plans in  accordance  with  applicable  United  States and
Canadian  government  regulations and to make  additional  payments as funds are
available to achieve  full funding of the  accumulated  benefit  obligation.  At
October 31, 1998, all legal funding requirements had been met.

     In 1993,  a trust was  established  to provide a vehicle  for  funding  the
health care liability through company  contributions  and retiree premiums.  The
company was  required to make a prefunding  contribution  of $200 million to the
trust on or prior to June 30, 1998. This  contribution  was made during November
1997.

Postretirement Benefits Expense

     Net  periodic  benefits  expense  included  in the  Statement  of Income is
composed of the following:

<TABLE>
<CAPTION>
                                       Pension Benefits               Other Benefits
                                    ----------------------      -----------------------
Millions of dollars                 1998     1997     1996      1998     1997     1996
---------------------------------------------------------------------------------------
<S>                                <C>      <C>      <C>       <C>      <C>      <C>
Service cost for benefits
   earned during the period...     $   37   $   34   $   34    $   14   $   13   $   14
Interest on obligation........        231      238      231        98       96       84
Net amortization
  costs and other.............         88       99      104         2        -        -
Less expected return on assets       (282)    (242)    (209)      (72)     (43)     (38)
                                   ------   ------   ------    -------  ------   ------

Net postretirement benefits
  expense.....................     $   74   $  129   $  160     $   42  $   66   $   60
                                   ======   ======   ======     ======  ======   ======

                                     - 22 -

</TABLE>



<PAGE>


                          NOTES TO FINANCIAL STATEMENTS
                                   (Continued)


2.   POSTRETIREMENT BENEFITS (continued)

Postretirement Expense (continued)

     "Amortization  costs" include  amortization of cumulative  gains and losses
over the expected  remaining  service life of employees and  amortization of the
initial transition liability over 15 years. Also included is the expense related
to yearly lump-sum  payments to retirees  required by negotiated labor contracts
and  amortization  of plan  amendments.  Plan amendments are recognized over the
remaining  service life of employees,  except for those plan amendments  arising
from  negotiated  labor  contracts,  which are amortized  over the length of the
contract.

     The funded  status of the  company's  plans as of October 31, 1998 and 1997
and a  reconciliation  with  amounts  recognized  in the  Statement of Financial
Condition are provided below.

                                   Pension Benefits          Other Benefits
                                   ----------------         ----------------
Millions of dollars                 1998      1997          1998       1997
----------------------------------------------------------------------------
Change in benefit obligation
Benefit obligation
  at beginning of year........     $3,299    $3,034        $1,374      $1,225
Service cost  ................         37        34            14          13
Interest on obligation........        231       238            98          96
Actuarial net loss............        186       257           164         123
Benefits paid ................       (272)     (264)          (90)        (83)
                                   ------    ------        ------      ------
Benefit obligation
  at end of year..............      3,481     3,299         1,560       1,374
                                   ------    ------        ------      ------

Change in plan assets
Fair value of plan assets
  at beginning of year.........     2,900     2,427           486         401
Actual return on plan assets...       187       505            47         102
Employer contribution..........       212       227           210          11
Benefits paid .................      (267)     (259)          (50)        (28)
                                   ------    ------        ------      ------
Fair value of plan assets
  at end of year...............     3,032     2,900           693         486
                                   ------    ------        ------      ------

Funded status .................      (449)     (399)         (867)       (888)
Unrecognized actuarial net loss       587       322           344         152
Unrecognized transition amount.       133       167             -           -
Unrecognized prior service cost        69        89            (5)         (5)
                                  -------    ------        ------      ------
Net amount recognized..........   $   340    $  179        $ (528)     $ (741)
                                  =======    ======        ======      ======

Amounts recognized
  in the Statement of
  Financial Condition consist of:
     Prepaid benefit cost......   $    39    $  120        $    -      $    -
     Accrued benefit liability.      (406)     (445)         (528)       (741)
     Intangible asset..........       199       212             -           -
     Accumulated reduction in
       shareowners' equity.....       508       292             -           -
                                   ------    ------        ------      ------
Net amount recognized..........    $  340    $  179        $ (528)     $ (741)
                                   ======    ======        ======      ======

     The  accumulated  reduction  in  shareowners'  equity  is  recorded  in the
Statement of Financial  Condition  net of deferred  income taxes of $172 million
and $97 million at October 31, 1998 and 1997, respectively.

                                     - 23 -

<PAGE>


                          NOTES TO FINANCIAL STATEMENTS
                                   (Continued)


2.   POSTRETIREMENT BENEFITS (continued)

Postretirement Expense (continued)

     The projected benefit  obligation,  accumulated benefit obligation and fair
value of plan assets for the pension plans with accumulated  benefit obligations
in excess of plan assets were $3,393 million, $3,336 million and $2,931 million,
respectively,  as of October 31, 1998,  and $2,067  million,  $2,064 million and
$1,621 million, respectively, as of October 31, 1997.

     During 1998, the pension plans  purchased 3 million shares of the company's
Common Stock. At October 31, 1998, these shares  accounted for  approximately 2%
of the plans' assets.

     The weighted  average rate  assumptions  used in  determining  expenses and
benefit obligations were:

<TABLE>
<CAPTION>
                                       Pension Benefits             Other Benefits
                                    ----------------------      -----------------------
Millions of dollars                 1998     1997     1996      1998     1997     1996
---------------------------------------------------------------------------------------
<S>                                  <C>      <C>      <C>      <C>      <C>      <C>
Discount rate used
   to determine present value
   of benefit obligation
   at end of year...............     6.8%     7.3%     8.1%      7.1%     7.4%     8.2%
Expected long-term rate
  of return on plan assets
  for the year..................     9.7%     9.8%     9.0%     10.8%    11.1%    10.5%
Expected rate of increase
  in future compensation levels.     3.5%     3.5%     3.5%      N/A      N/A      N/A
</TABLE>


     For 1999,  the weighted  average rate of increase in the per capita cost of
covered  health care benefits is projected to be 9.7%.  The rate is projected to
decrease to 5.0% by the year 2005 and remain at that level each year thereafter.
The effect of changing the health care cost trend rate by  one-percentage  point
for each future year is as follows:

                                    One-Percentage-             One-Percentage-
                                    Point Increase              Point Decrease
                                    --------------              --------------

Effect on total of service
  and interest cost components..         $  18                       $ (15)
Effect on postretirement
  benefit obligation............           191                        (158)

                                     - 24 -

<PAGE>


                          NOTES TO FINANCIAL STATEMENTS
                                   (Continued)


3.   INCOME TAXES

     The domestic and foreign  components  of income  (loss) before income taxes
consist of the following:

Millions of dollars                       1998            1997           1996
------------------------------------------------------------------------------
Domestic................................ $  403          $  239         $  108
Foreign.................................      7               3             (3)
                                         ------          ------         ------
Total income before income taxes........ $  410          $  242         $  105
                                         ======          ======         ======


     The components of income tax expense consist of the following:

Millions of dollars                       1998            1997           1996
------------------------------------------------------------------------------
Current:
  Federal..............................  $    4          $    8         $    1
  State and local......................       3               2              2
                                         ------          ------         ------
  Total current expense................       7              10              3
                                         ------          ------         ------

Deferred:
  Federal..............................     127              71             32
  State and local......................      19              11              5
  Foreign..............................       3               -              -
                                         ------          ------         ------
  Total deferred expense...............     149              82             37
                                         ------          ------         ------

Less valuation allowance adjustment....     (45)              -              -
                                          ------         ------         ------

Total income tax expense...............   $  111         $   92         $   40
                                          ======         ======         ======

     The deferred tax expense  does not  represent  cash payment of income taxes
and was  primarily  generated by the  utilization  of net  operating  loss (NOL)
carryforwards  and the increase of temporary  differences,  and will not require
future cash payments.  Consolidated tax payments made during 1998, 1997 and 1996
were $7 million, $10 million and $3 million, respectively.

                                     - 25 -

<PAGE>


                          NOTES TO FINANCIAL STATEMENTS
                                   (Continued)


3. INCOME TAXES (continued)

     The  relationship  of the tax expense to income before taxes for 1998, 1997
and 1996  differs  from the U.S.  statutory  rate (35%)  because of state income
taxes and the benefit of NOLs in foreign countries. Also, the 1998 effective tax
rate  reflects a $45  million  reduction  in the  deferred  tax asset  valuation
allowance.  A valuation  allowance has been provided for those NOL carryforwards
and  temporary  differences  which  are  estimated  to  expire  before  they are
utilized.  The effective tax rates for the years 1998, 1997 and 1996 were 27.0%,
38.0% and 38.1%, respectively.

     Undistributed  earnings  of foreign  subsidiaries  were $50 million and $35
million at October 31, 1998 and 1997, respectively. Taxes have not been provided
on these earnings because no withholding  taxes are applicable upon repatriation
and U.S. tax would be substantially offset by utilization of NOL carryforwards.

     Taxpaying  entities  of the  company  offset  all  deferred  tax assets and
liabilities  within each tax  jurisdiction.  The  components of the deferred tax
asset (liability) at October 31 are as follows:

Millions of dollars                              1998                1997
--------------------------------------------------------------------------
United States
Deferred tax assets:
Net operating loss carryforwards..........      $  590              $  680
Alternative minimum tax...................          24                  19
Product liability and warranty............         106                  97
Other liabilities.........................         232                 168
Postretirement benefits...................         347                 353
                                                ------              ------
Total deferred tax assets.................       1,299               1,317
                                                ------              ------

Deferred tax liabilities:
Prepaid pension assets....................        (117)                (58)
Depreciation..............................         (30)                (37)
                                                ------              ------
Total deferred tax liabilities............        (147)                (95)
                                                ------              ------

Total deferred tax assets.................       1,152               1,222
Less valuation allowance..................        (243)               (288)
                                                ------              ------
Net deferred U.S. tax assets..............      $  909              $  934
                                                ======              ======

Foreign
Deferred tax assets:
Net operating loss carryforwards..........      $    5              $    2
Postretirement benefits...................          19                  19
                                                ------              ------
Total deferred tax assets.................          24                  21
Less valuation allowance..................         (21)                (21)
                                                ------              ------
Net deferred foreign tax assets...........           3                   -
                                                ------              ------

Other deferred  tax liabilities...........         (20)                (16)
                                                ------              ------
Net deferred foreign tax liabilities......      $  (17)             $  (16)
                                                ======              ======

Amounts recognized in the
  Statement of Financial Condition:
Deferred  tax assets......................      $  912              $  934
                                                ======              ======

Other liabilities.........................      $  (20)             $  (16)
                                                ======              ======

                                     - 26 -

<PAGE>


                          NOTES TO FINANCIAL STATEMENTS
                                   (Continued)


3.   INCOME TAXES (continued)

     At October 31,  1998,  the company had $1,581  million of domestic  and $16
million of foreign NOL carryforwards  available to offset future taxable income.
Such  carryforwards  reflect  income tax losses  incurred  which will  expire as
follows, in millions of dollars:

           2001  ........................................        $  104
           2002  ........................................            47
           2004  ........................................           235
           2005  ........................................             7
           2006  ........................................           127
           2007  ........................................            53
           2008 through 2011.............................         1,024
                                                                 ------
           Total ........................................        $1,597
                                                                 ======


     Additionally,  the reversal of net temporary  differences of $1,437 million
as of October 31, 1998 will create net tax  deductions  which,  if not  utilized
previously, will expire subsequent to 2011.

                                     - 27 -

<PAGE>


                          NOTES TO FINANCIAL STATEMENTS
                                   (Continued)


4.   MARKETABLE SECURITIES

     The fair value of marketable securities is estimated based on quoted market
prices,  when  available.  If a quoted  price is not  available,  fair  value is
estimated using quoted market prices for similar financial instruments.

     Information related to the company's marketable securities at October 31 is
as follows:
                                          1998                    1997
                                  --------------------   ---------------------
                                  Amortized     Fair      Amortized     Fair
Millions of dollars                  Cost       Value       Cost        Value
-----------------------------------------------------------------------------
Corporate securities.............  $  336      $  338      $  150      $   150
U.S. government securities.......     171         174          88           89
Mortgage and
  asset-backed securities........      85          86          86           86
Foreign government securities....       6           7          10           10
                                   ------      ------      ------       ------
   Total debt securities.........     598         605         334          335
Equity securities................      17          19          16           21
                                   ------      ------      ------       ------

Total marketable securities......  $  615      $  624      $  350       $  356
                                   ======      ======      ======       ======


     Contractual  maturities of marketable  debt securities at October 31 are as
follows:

                                          1998                   1997
                                  --------------------   ---------------------
                                  Amortized     Fair      Amortized     Fair
Millions of dollars                  Cost       Value       Cost        Value
------------------------------------------------------------------------------
Due in one year or less..........  $  189      $  190      $  113      $  114
Due after one year
  through five years.............     297         301         100         100
Due after five years
  through 10 years...............      17          18          25          25
Due after 10 years...............      10          10          10          10
                                   ------      ------      ------      ------
                                      513         519         248         249
Mortgage and
  asset-backed securities........      85          86          86          86
                                   ------      ------      ------      ------

Total debt securities............  $  598      $  605      $  334      $  335
                                   ======      ======      ======      ======

     Gross  gains and  losses  realized  on sales or  maturities  of  marketable
securities  were not material for each of the two years. At October 31, 1998 and
1997,  a  domestic  insurance  subsidiary  had  $13  million  and  $15  million,
respectively,  of marketable securities which were on deposit with various state
departments  of insurance or  otherwise  not  available.  These  securities  are
included in total marketable securities balances at October 31, 1998 and 1997.

                                     - 28 -

<PAGE>


                          NOTES TO FINANCIAL STATEMENTS
                                   (Continued)


5.  RECEIVABLES

     Receivables  at  October  31 are  summarized  by  major  classification  as
follows:

Millions of dollars                              1998                1997
--------------------------------------------------------------------------
Accounts receivable.......................      $  611              $  671
Retail notes and lease financing..........         925                 706
Wholesale notes...........................         261                  46
Amounts due from sales of receivables.....         246                 233
Notes receivable..........................         109                 101
Other ....................................          27                  29
Allowance for losses......................         (33)                (31)
                                                ------              ------

      Total receivables, net..............      $2,146              $1,755
                                                ======              ======

     NFC  purchases  the majority of the  wholesale  notes  receivable  and some
retail notes and accounts receivable arising from Transportation's operations in
the United States.

     A portion of NFC's funding for retail and wholesale  notes comes from sales
of  receivables  by NFC to third  parties with limited  recourse.  Proceeds from
sales of retail notes receivable,  net of underwriting  costs, were $953 million
in 1998, $958 million in 1997 and $982 million in 1996.  Uncollected sold retail
and wholesale  receivable  balances totaled $2,145 million and $1,968 million as
of October 31, 1998 and 1997, respectively.

     Contractual  maturities  of  accounts  receivable,  retail  notes and lease
financing and wholesale notes, including unearned finance income, at October 31,
1998 were: 1999 - $1,079 million, 2000 - $325 million, 2001 - $219 million, 2002
- $175  million,  2003 - $119  million,  and 2004 and  thereafter - $28 million.
Unearned  finance  income  totaled  $148  million at  October  31,  1998.  Notes
receivable  are due upon demand from a limited  partnership  that invests in S&P
500 stock index arbitrage.

                                     - 29 -

<PAGE>


                          NOTES TO FINANCIAL STATEMENTS
                                   (Continued)


6.  INVENTORIES

     Inventories at October 31 are as follows:

Millions of dollars                              1998                1997
--------------------------------------------------------------------------
Finished products.........................      $  223              $  225
Work in process...........................          69                 106
Raw materials and supplies................         213                 165
                                                ------              ------

Total inventories.........................      $  505              $  496
                                                ======              ======


7.  PROPERTY AND EQUIPMENT

     At October 31, property and equipment includes the following:

Millions of dollars                              1998                1997
--------------------------------------------------------------------------
Land  ....................................      $   18              $   18
                                                ------              ------

Buildings, machinery and equipment at cost:
    Plants................................       1,419               1,200
    Distribution..........................          94                  86
    Construction in progress..............         130                 117
    Net investment in operating leases....         218                 124
    Other.................................         203                 137
                                                ------              ------

    Total property........................       2,082               1,682

    Less accumulated depreciation
      and amortization....................        (976)               (847)
                                                ------              ------

        Total property and equipment, net.      $1,106              $  835
                                                ======              ======


     Total property includes property under capitalized lease obligations of $25
million at October 31, 1998 and 1997.  Future minimum rentals on net investments
in  operating  leases are: 1999 - $63  million,  2000 - $54 million,  2001 - $35
million, 2002 - $18 million and thereafter - $5 million. Each of these assets is
depreciated  on a  straight-line  basis  over the term of the lease in an amount
necessary to reduce the leased  vehicle to its estimated  residual  value at the
end of the lease term.
                                     - 30 -

<PAGE>


                          NOTES TO FINANCIAL STATEMENTS
                                   (Continued)


8.  DEBT

Millions of dollars                              1998                1997
--------------------------------------------------------------------------
Manufacturing operations
   Notes payable and current maturities
     of long-term debt...................       $    4              $   13
                                                ------              ------

   8% Senior Subordinated Notes, due 2008          250                   -
   7% Senior Notes, due 2003.............          100                   -
   9% Sinking Fund Debentures, due 2004..            -                  45
   8% Secured Note, due 2002,
     secured by plant assets ............            -                  21
   Mexican credit facility...............           84                   -
   Capitalized leases and other..........           12                  13
                                                ------              ------
      Total long-term debt...............          446                  79
                                                ------              ------
   Manufacturing operations debt.........          450                  92
                                                ------              ------

Financial services operations
   Commercial paper......................           22                 141
   Capitalized leases....................           39                  13
   Current maturities of long-term debt..           82                   -
                                                ------              ------
      Total short-term debt..............          143                 154
                                                ------              ------

   Bank revolver, variable rate, due 2003           19                   -
   Bank revolver, variable rate, due 2005           20                   -
   Asset-backed commercial paper program,
      variable rate, due 2001............          401                 400
   Bank revolver, variable rate, due 2001          815                 393
                                                ------              ------
      Total senior debt..................        1,255                 793
                                                ------              ------

   8 7/8% Subordinated Senior Notes,
     due 1998.............................           -                  94
   9% Subordinated Senior Notes, due 2002.         100                 100
                                                ------              ------
      Total subordinated debt.............         100                 194
                                                ------              ------
   Capitalized leases, 4.8% to 5.6%,
     due serially through 2004............         174                  83
                                                ------              ------

      Total long-term debt................       1,529               1,070
                                                ------              ------

Financial services operations debt........       1,672               1,224
                                                ------              ------

Total debt................................      $2,122              $1,316
                                                ======              ======


     The effective annual interest rate on manufacturing  notes payable was 6.8%
in 1998, 8.3% in 1997 and 8.9% in 1996. Consolidated interest payments were $103
million, $66 million and $83 million in 1998, 1997 and 1996, respectively.

                                     - 31 -

<PAGE>


                          NOTES TO FINANCIAL STATEMENTS
                                   (Continued)


8.  DEBT (continued)

     During  1998,  the company  arranged  financing  for $164  million of funds
denominated  in U.S.  dollars and Mexican pesos to be used for investment in the
company's Mexican operations.  As of October 31, 1998, borrowings outstanding of
this line were $123  million of which 54% is  denominated  in dollars and 46% in
pesos. The interest rates on the dollar-denominated  debt are a negotiated fixed
rate or a variable  rate based  either on LIBOR or the Federal  Funds  Rate.  On
peso-denominated  debt the  interest  rate is based  on the  Interbank  Interest
Equilibrium Rate. The effective interest rate for the period was 16.8%.

     During the second quarter of 1998, the company's  manufacturing  operations
issued  $100  million  7%  Senior  Notes  due 2003 and $250  million  8%  Senior
Subordinated  Notes due 2008.  The  proceeds  of the  Senior  Notes were used to
prepay the 8% Secured  Note due 2002 and were used to redeem the 9% Sinking Fund
Debentures on June 15, 1998. The proceeds of the Senior  Subordinated Notes were
used to  redeem  the  Series G  Preferred  Stock  and to pay  related  dividends
thereon.

     NFC  issues   commercial  paper  with  varying  terms  and  has  short-term
borrowings  with  various  banks  on a  noncommitted  basis.  Compensating  cash
balances and commitment fees are not required under these borrowings.

     The aggregate annual maturities for debt for the years ended October 31 are
as follows:

                                                           Financial
                                          Manufacturing     Services
Millions of dollars                         Operations     Operations    Total
-------------------------------------------------------------------------------
1999    ..................................    $    4         $  143       $ 147
2000    ..................................        27             48          75
2001    ..................................        33          1,269       1,302
2002    ..................................        31            142         173
2003    ..................................       101             50         151
Thereafter................................       254             20         274
                                              ------         ------      ------
   Total..................................    $  450         $1,672      $2,122
                                              ======         ======      ======

Weighted  average  interest rate on total debt,  including  short-term,  and the
  effect of discounts and related amortization for the years ended:

     October 31, 1998.....................      9.3%           6.4%        7.1%
     October 31, 1997.....................     10.3%           6.4%        6.8%

     At October 31, 1998,  NFC has a $925 million  contractually  committed bank
revolving  credit  facility and a $400  million  asset-backed  commercial  paper
(ABCP) program supported by a bank liquidity  facility plus $14 million of trust
certificates  issued  in  connection  with  the  formation  of the  ABCP  trust.
Available  funding under the bank revolving credit facility and the ABCP program
was  $124  million,  of  which  $22  million  provided  funding  backup  for the
outstanding short-term debt at October 31, 1998.

                                     - 32 -

<PAGE>


                          NOTES TO FINANCIAL STATEMENTS
                                   (Continued)


8.  DEBT (continued)

     NFC's wholly owned  subsidiaries,  Navistar  Financial  Retail  Receivables
Corporation (NFRRC) and Navistar Financial Securities Corporation (NFSC), have a
limited purpose of purchasing  retail and wholesale  receivables,  respectively,
and transferring an undivided ownership interest in such notes to investors. The
subsidiaries  have limited recourse on the sold receivables and their assets are
available to satisfy the claims of their creditors prior to such assets becoming
available to NFC or affiliated companies.

     NFSC  has in place a $700  million  revolving  wholesale  note  trust  that
provides for the continuous  sale of eligible  wholesale notes on a daily basis.
The trust is  comprised  of one $100  million  tranche of investor  certificates
maturing in 1999 and three $200  million  tranches  maturing  in 2003,  2004 and
2008.

     During  1998,  NFC sold  $1,001  million of retail  notes,  net of unearned
finance income,  through NFRRC. The owner trusts in turn issued securities which
were sold to investors.  The net proceeds,  after  underwriting costs and credit
enhancements,  were used by NFC for general working capital purposes.  On August
28, 1998,  NFRRC filed a shelf  registration  statement  with the Securities and
Exchange  Commission  which  provides for the issuance of an  additional  $2,500
million of asset-backed  securities.  The aggregate shelf registration available
to NFRRC for issuance of asset-backed securities is $2,972 million.

     NFC has entered into various  sale/leaseback  agreements involving vehicles
subject to retail  finance and  operating  leases with end users.  The remaining
balance as of October 31, 1998 is classified under Financial Services operations
as  capitalized  leases.  These  agreements  grant a  security  interest  in the
underlying vehicles and lease receivables to the purchasers.

     In November  1998,  NFC sold $545 million of retail notes,  net of unearned
finance income,  through NFRRC to a multi-seller  asset-backed  commercial paper
conduit sponsored by a major financial institution.

                                     - 33 -

<PAGE>


                          NOTES TO FINANCIAL STATEMENTS
                                   (Continued)


9.  OTHER LIABILITIES

     Major classifications of other liabilities at October 31 are as follows:

Millions of dollars                              1998                1997
--------------------------------------------------------------------------
Product liability and warranty.............     $  323              $  302
Employee incentive programs................        215                  95
Payroll, commissions
  and employee-related benefits............        104                  96
Loss reserves and unearned premiums........         95                  99
Taxes    ..................................         67                  68
Sales and marketing........................         54                  26
Long-term disability
  and workers' compensation................         53                  54
Environmental..............................         27                  31
Interest ..................................         22                  15
Other    ..................................        120                 108
                                                ------              ------
   Total other liabilities.................     $1,080              $  894
                                                ======              ======

                                     - 34 -

<PAGE>


                          NOTES TO FINANCIAL STATEMENTS
                                   (Continued)


10.  FINANCIAL INSTRUMENTS

Fair Value of Financial Instruments

     The carrying amounts of financial instruments, as reported in the Statement
of  Financial  Condition  and  described  in  various  Notes  to  the  Financial
Statements, and their fair values at October 31 are as follows:

                                          1998                    1997
                                  --------------------   ---------------------
                                  Carrying     Fair      Carrying      Fair
Millions of dollars                Amount      Value      Amount       Value
------------------------------------------------------------------------------
Receivables, net..............     $2,146      $2,166     $1,755       $1,764
Investments and other assets..        246         249        319          330
Debt..........................      2,122       2,119      1,316        1,321


     Cash and cash  equivalents  approximate fair value. The cost and fair value
of marketable securities are disclosed in Note 4.

     Customer receivables, wholesale notes, retail and wholesale accounts, notes
receivable  and other  variable-rate  retail notes  approximate  fair value as a
result of the short-term maturities of the financial instruments. The fair value
of truck retail notes is estimated based on quoted market prices of similar sold
receivables.  The  fair  value of  amounts  due from  sales  of  receivables  is
estimated by discounting expected cash flows at estimated current market rates.

     The fair value of investments and other assets is estimated based on quoted
market prices or by discounting future cash flows.

     The short-term debt and variable-rate borrowings under NFC's bank revolving
credit  agreement,  which are repriced  frequently,  approximate fair value. The
fair value of long-term debt is estimated  based on quoted market  prices,  when
available.  If a quoted market price is not  available,  fair value is estimated
using quoted  market prices for similar  financial  instruments  or  discounting
future cash flows.
                                     - 35 -

<PAGE>


                          NOTES TO FINANCIAL STATEMENTS
                                   (Continued)


10.  FINANCIAL INSTRUMENTS   (continued)

Derivatives Held or Issued for Purposes Other Than Trading

     The  company  uses  derivatives  to  transfer  or reduce  risks of  foreign
exchange and interest rate volatility and to potentially  increase the return on
invested funds.

     The company  periodically  enters into forward contracts in order to reduce
exposure to exchange rate risk between the U.S.  dollar and the Canadian  dollar
related to committed Canadian dollar truck sales.

     NFC manages its exposure to  fluctuations in interest rates by limiting the
amount of fixed rate assets funded with variable rate debt  generally by selling
fixed  rate  receivables  on a fixed  rate  basis  and by  utilizing  derivative
financial  instruments.  These  derivative  financial  instruments  may  include
interest rate swaps, interest rate caps and forward interest rate contracts. The
fair value of these  instruments  is subject to market risks as the  instruments
may become less valuable due to changes in market  conditions or interest rates.
NFC manages  exposure to  counter-party  credit risk by entering into derivative
financial instruments with major financial  institutions that can be expected to
fully  perform  under the terms of such  agreements.  NFC's  credit  exposure is
limited  to the fair  value  of  contracts  with a  positive  fair  value at the
reporting  date.  At  October  31,  1998,  none of  NFC's  derivative  financial
instruments have positive fair values.  Notional amounts are used to measure the
volume of derivative  financial  instruments  and do not  represent  exposure to
credit loss.

     NFC enters into forward  interest rate  contracts to manage its exposure to
fluctuations  in the fair  value of retail  notes  anticipated  to be sold.  NFC
manages such risk by entering into either  forward  contracts to sell fixed debt
securities or forward interest rate swaps whose fair value is highly  correlated
with that of NFC's  receivables.  Gains or losses  incurred  with the closing of
these  agreements  are  included as a  component  of the gain or loss on sale of
receivables.

     At October 31, 1998, NFC held forward interest rate contracts with notional
amounts of $450  million and $50 million in  anticipation  of retail  receivable
sales to occur in November  1998 and May 1999,  respectively.  In addition,  the
company held Canadian  dollar  forward  contracts  with notional  amounts of $33
million and other derivative  contracts with notional amounts of $14 million. At
October 31, 1998, the unrealized loss on the $450 million  forward  contract was
$5 million,  and the  unrealized  net gain on the  remaining  contracts  was not
material.
                                     - 36 -

<PAGE>


                          NOTES TO FINANCIAL STATEMENTS
                                   (Continued)


11.  COMMITMENTS, CONTINGENCIES, RESTRICTED ASSETS, CONCENTRATIONS AND LEASES

Commitments, Contingencies and Restricted Assets

     At October 31, 1998,  commitments for capital expenditures in progress were
approximately  $153 million.  The company's truck assembly  facility  located in
Escobedo,  Mexico is  encumbered  by a lien in favor of  certain  lenders of the
company as collateral for the $125 million revolving Mexican credit facility. At
October 31, 1998, $19 million of a Mexican subsidiary's receivables were pledged
as collateral  for bank  borrowings.  In addition,  as of October 31, 1998,  the
company is  contingently  liable  for  approximately  $75  million  for  various
purchasing commitments,  credit guarantees and buyback programs;  however, based
on historical loss trends,  the company's  exposure is not considered  material.
Additionally, restrictions under the terms on the senior and senior subordinated
notes and Mexican credit  facility  include a limitation on  indebtedness  and a
limitation on certain restricted payments.

     At October 31, 1998, the Canadian  operating  subsidiary  was  contingently
liable for retail customers' contracts and leases financed by a third party. The
Canadian operating  subsidiary is subject to maximum recourse of $203 million on
retail  contracts  and $16  million on retail  leases.  The  Canadian  operating
subsidiary,  NFC and certain other  subsidiaries  included in financial services
operations  are  parties to  agreements  that may result in the  restriction  of
amounts which can be distributed to  Transportation  in the form of dividends or
loans and advances.  At October 31, 1998, the maximum amount of dividends  which
were available for  distribution  under the most  restrictive  covenants was $91
million.

     The company and  Transportation are obligated under certain agreements with
public and private  lenders of NFC to maintain the  subsidiary's  income  before
interest  expense and income  taxes at not less than 125% of its total  interest
expense. No income maintenance  payments were required for the three years ended
October 31, 1998. NFC's maximum  contractual  exposure under all receivable sale
recourse  provisions at October 31, 1998 was $259 million;  however,  management
believes that the allowance for credit losses on sold receivables is adequate.

Concentrations

     At October 31, 1998, the company  employed  12,212 hourly workers and 4,960
salaried  workers in the  United  States and  Canada.  Approximately  89% of the
hourly employees and 28% of the salaried employees are represented by unions. Of
these represented employees,  92% of the hourly workers and 100% of the salaried
workers are represented by the United  Automobile,  Aerospace,  and Agricultural
Implement Workers of America (UAW) or the National  Automobile,  Aerospace,  and
Agricultural  Implement  Workers  of  Canada  (CAW).  During  August  1997,  the
company's current master contract with the UAW was extended from October 1, 1998
to October 1, 2002. The collective  bargaining agreement with the CAW expires on
October 24,  1999.  Additionally,  of the  company's  309  employees  in Mexico,
approximately 48% are also represented by a union.

     Reflecting  higher  consumer  demand for light  trucks  and vans,  sales of
mid-range  diesel engines to Ford Motor Company were 14% of  consolidated  sales
and revenues in 1998,  1997 and 1996.  During 1997,  the company  entered into a
10-year  agreement,  effective with model year 2003, to continue  supplying Ford
Motor Company with diesel engines for use in its diesel-powered light trucks and
vans.
                                     - 37 -

<PAGE>


                          NOTES TO FINANCIAL STATEMENTS
                                   (Continued)


11.  COMMITMENTS, CONTINGENCIES, RESTRICTED ASSETS, CONCENTRATIONS, AND LEASES
     (continued)

Leases

     The  company  has  long-term  noncancellable  leases  for  use  of  various
equipment and facilities. Lease terms are generally for five to 25 years and, in
many cases,  provide for renewal options. The company is generally obligated for
the cost of property taxes, insurance and maintenance. The company leases office
buildings,   distribution  centers,  furniture  and  equipment,   machinery  and
equipment, and computer equipment.

     The majority of the company's lease payments are for operating  leases.  At
October 31, 1998,  future minimum lease payments under  operating  leases having
lease terms in excess of one year are: 1999 - $42  million,  2000 - $41 million,
2001 - $31 million,  2002 - $19 million, 2003 - $17 million and thereafter - $31
million.  Total  operating lease expense was $36 million in 1998, $40 million in
1997 and $35  million in 1996.  Income  received  from  sublease  rentals was $7
million in 1998 and $6 million in 1997 and 1996.

12.  LEGAL PROCEEDINGS AND ENVIRONMENTAL MATTERS

     The company and its  subsidiaries  are subject to various claims arising in
the ordinary  course of business,  and are parties to various legal  proceedings
which constitute  ordinary routine litigation  incidental to the business of the
company and its subsidiaries.  In the opinion of the company's management,  none
of these  proceedings  or claims is  material to the  business or the  financial
condition of the company.

     The  company  has been named a  potentially  responsible  party  (PRP),  in
conjunction  with  other  parties,  in  a  number  of  cases  arising  under  an
environmental  protection  law known as the Superfund  law.  These cases involve
sites  which  allegedly  have  received  wastes from  current or former  company
locations.  Based on information available to the company, which, in most cases,
consists of data related to quantities and characteristics of material generated
at or shipped to each site as well as cost estimates from PRPs and/or federal or
state regulatory  agencies for the cleanup of these sites, a reasonable estimate
is  calculated  of the  company's  share,  if any, of the probable  costs and is
provided  for in the  financial  statements.  These  obligations  generally  are
recognized no later than  completion of the remedial  feasibility  study and are
not  discounted to their present  value.  The company  reviews its accruals on a
regular basis and believes that, based on these  calculations,  its share of the
potential additional costs for the cleanup of each site will not have a material
effect on the company's financial results.

                                     - 38 -

<PAGE>


                          NOTES TO FINANCIAL STATEMENTS
                                   (Continued)


13.  INDUSTRY SEGMENT DATA

     Information concerning operations by industry segment is as follows:

                                                 Financial
                               Manufacturing      Services
Millions of dollars             Operations       Operations      Consolidated
-----------------------------------------------------------------------------
October 31, 1998
----------------
Total sales and revenues.....     $7,678           $  280           $7,885
Operating profit.............      1,165              126            1,226
Depreciation and amortization        123               36              159
Capital expenditures.........        305                -              305
Identifiable assets..........      4,326            2,309            6,178

October 31, 1997
----------------
Total sales and revenues.....     $6,191           $  239           $6,371
Operating profit.............        873              112              932
Depreciation and amortization         97               23              120
Capital expenditures.........        172                -              172
Identifiable assets..........      4,111            1,857            5,516

October 31, 1996
----------------
Total sales and revenues.....     $5,550          $   258           $5,754
Operating profit.............        690              121              762
Depreciation and amortization         90               15              105
Capital expenditures.........        117                -              117
Identifiable assets..........      3,815            1,843            5,326


     Intersegment  sales and revenues  were not material in 1998,  1997 or 1996.
Transactions between manufacturing  operations and financial services operations
have been  eliminated  from the  consolidated  column.  Operating  profit of the
financial services operations includes investment income and interest expense.

                                     - 39 -

<PAGE>


                          NOTES TO FINANCIAL STATEMENTS
                                   (Continued)


13.  INDUSTRY SEGMENT DATA  (continued)

     Geographic Area Data

     Information  concerning  operations  by  principal  geographic  area was as
follows:


                                United               Interarea
Millions of dollars             States   Foreign    Eliminations   Consolidated
-------------------------------------------------------------------------------

October 31, 1998
----------------
Sales and revenues, customers.  $7,065    $  820       $    -         $7,885
Interarea transfers...........     486     1,293       (1,779)             -
                                ------    ------       ------         ------
     Total sales and revenues.   7,551     2,113       (1,779)         7,885

Operating profits.............   1,324        87         (185)         1,226
Identifiable assets...........   5,766       703         (291)         6,178


October 31, 1997
----------------
Sales and revenues, customers.  $5,807    $  564       $    -         $6,371
Interarea transfers...........     326       967       (1,293)             -
                                ------    ------       ------         ------
     Total sales and revenues.   6,133     1,531       (1,293)         6,371

Operating profits............      965        63          (96)           932
Identifiable assets..........    5,238       550         (272)         5,516


October 31, 1996
----------------
Sales and revenues, customers   $5,351    $  403      $     -         $5,754
Interarea transfers..........      253       816       (1,069)             -
                                ------    ------      -------         ------
     Total sales and revenues    5,604     1,219       (1,069)         5,754

Operating profits............      754        46          (38)           762
Identifiable assets..........    5,131       300         (105)         5,326


     Interarea  transfer  prices are  established  by an  agreement  between the
buying and selling locations.
                                     - 40 -

<PAGE>


                          NOTES TO FINANCIAL STATEMENTS
                                   (Continued)


14.   PREFERRED AND PREFERENCE STOCKS

     The company's  Nonconvertible  Junior Preference Stock Series A is held for
the Retiree  Supplemental  Benefit Program by the  Supplemental  Trust.  The UAW
holds the  Nonconvertible  Junior  Preference  Stock  Series B and is  currently
entitled to elect one member of the company's Board of Directors. At October 31,
1998,  there  was one  share  each of  Series A and  Series B  Preference  stock
authorized and outstanding. The value of the preference shares is minimal.

     During  1998,  the company  redeemed  all 4.8  million  shares of its $6.00
Series G Convertible Cumulative Preferred Stock at a redemption price of $50 per
share plus accrued dividends.  At October 31, 1998, there were 172,000 shares of
Series D  Convertible  Junior  Preference  Stock  (Series D)  outstanding  and 3
million authorized and issued with an optional  redemption price and liquidation
preference of $25 per share plus accrued  dividends.  The Series D converts into
common  stock  (subject to  adjustment  in certain  circumstances)  at .3125 per
share. The Series D ranks senior to common stock as to dividends and liquidation
and receives  dividends at a rate of 120% of the cash  dividends on common stock
as declared on an as-converted basis.

     Under  the  General  Corporation  Law  of the  State  of  Delaware  (DGCL),
dividends  may only be paid out of surplus or out of net  profits for the fiscal
year in which the  dividend is declared or the  preceding  fiscal  year,  and no
dividend  may be paid on Common  Stock at any time  during  which the capital of
outstanding  preferred  stock or preference  stock exceeds the net assets of the
company. At October 31, 1998, the company had surplus of $761 million as defined
under DGCL.

                                     - 41 -

<PAGE>


                          NOTES TO FINANCIAL STATEMENTS
                                   (Continued)


15. COMMON SHAREOWNERS' EQUITY

     Changes in the common shareowners' equity accounts are as follows:

Millions of dollars                       1998            1997           1996
------------------------------------------------------------------------------
Common Stock
Beginning of year.....................   $1,659          $1,642         $1,641
Conversion of Class B
  Common Stock and other..............      480              17              1
                                         ------          ------         ------
End of year...........................   $2,139          $1,659         $1,642
                                         ------          ------         ------

Class B Common Stock
Beginning of year.....................   $  471          $  491         $  491
Repurchase of stock...................     (471)            (20)             -
                                         ------          ------         ------
End of year...........................   $    -          $  471         $  491
                                         ------          ------         ------

Retained Earnings (Deficit)
Beginning of year.....................  $(1,301)        $(1,431)       $(1,478)
Net income............................      299             150             65
Preferred dividends...................      (11)            (29)           (29)
Minimum pension liability
  adjustments and other...............     (147)              9             11
                                         ------          ------         ------
End of year...........................  $(1,160)        $(1,301)       $(1,431)
                                         ------          ------         ------

Common Stock Held in Treasury
Beginning of year.....................   $  (53)         $  (30)        $  (28)
Repurchase of  common stock and other.     (189)            (23)            (2)
Reissuance of Treasury shares.........       28               -              -
                                         ------          ------         ------
End of year...........................   $ (214)         $  (53)        $  (30)
                                         ------          ------         ------

Common Stock

     The company has  authorized  110 million  shares of Common Stock with a par
value of $.10 per share.  At October 31, 1998 and 1997,  there were 66.2 million
and 49.3 million shares of Common Stock outstanding, net of Common Stock held in
Treasury, respectively. The number of shares of Class B Common Stock outstanding
at October 31, 1997 was 23.1 million.

     In January 1998, the company  repurchased 3.2 million shares of the Class B
Common Stock that was outstanding. During June 1998, a secondary public offering
of the  common  stock  of the  company  was  completed,  in which  the  Navistar
International  Transportation  Corp.  Retiree  Supplemental  Benefit  Trust (the
Trust) sold  approximately  19.9  million  shares of common stock at an offering
price of $26.50 per share.  These  shares  represented  the Class B Common Stock
held by the Trust which automatically converted into Common Stock upon the sale.
In  conjunction  with this  offering,  the company and certain of the  company's
pension  plans  purchased 2 million and 3 million,  respectively,  of the shares
being  offered.  The company did not receive any  proceeds  from the sale of the
shares in the offering but paid expenses  related to the offering of $14 million
pursuant  to  a  pre-existing   agreement  with  the  Trust.  In  addition,  the
underwriters  exercised their over-allotment  option and elected to purchase 1.1
million  shares  from the company at $26.50 per share.  The  company  offset the
dilution through open market purchases.

                                     - 42 -

<PAGE>

                          NOTES TO FINANCIAL STATEMENTS
                                   (Continued)


15. COMMON SHAREOWNERS' EQUITY (continued)

     At October  31,  1998,  the company  recorded  its annual  minimum  pension
liability  adjustment which resulted in a $144 million reduction in shareowners'
equity.   The  minimum  pension   liability  and  the  resulting   reduction  in
shareowners'  equity will change from year to year as a result of  revisions  to
actuarial assumptions, experience gains or losses, and settlement rate changes.

16.  EARNINGS PER SHARE

     Earnings per share was computed as follows:

Millions of dollars,
except share and per share data           1998            1997           1996
------------------------------------------------------------------------------
Net income............................   $  299          $  150         $   65
Less dividends on
  Series G Preferred Stock............       11              29             29
                                         ------          ------         ------
Net income applicable to common stock.
   (Basic and Diluted)................   $  288          $  121         $   36

Average shares outstanding (millions)
     Basic............................     69.1            73.1           73.7
         Dilutive effect of options
           outstanding and other
           dilutive securities........       .9              .5             .1
                                         ------          ------         ------
     Diluted  ........................     70.0            73.6           73.8

Earnings per share
     Basic    ........................    $ 4.16         $ 1.66         $  .49
     Diluted  ........................    $ 4.11         $ 1.65         $  .49


     Unexercised  employee stock options to purchase .5 million, 1.5 million and
2.2 million  shares of Navistar  Common Stock during the years ended October 31,
1998,  1997 and 1996,  respectively,  were not  included in the  computation  of
diluted  shares  outstanding  because the exercise  prices were greater than the
average  market  prices of  Navistar  Common  Stock.  Additionally,  the diluted
calculations  exclude  the effects of the  conversion  of the Series G Preferred
Stock as such conversion would be anti-dilutive.

                                     - 43 -

<PAGE>


                          NOTES TO FINANCIAL STATEMENTS
                                   (Continued)

17.  STOCK COMPENSATION PLANS

     The company has stock-based  compensation plans,  approved by the Committee
on Organization  of the Board of Directors,  which provide for granting of stock
options to  employees  for  purchase of Common Stock at the fair market value of
the stock on the date of grant. The grants generally have a 10-year life.

     The company has elected to continue to account for stock  option  grants in
accordance  with  Accounting   Principles  Board  Opinion  No.  25  and  related
interpretations. Accordingly, no compensation cost has been recognized for fixed
stock options  because the exercise prices of the stock options equal the market
value of the company's Common Stock at the date of grant. Had compensation  cost
for the plans  been  determined  based  upon the fair  value at the  grant  date
consistent  with SFAS 123,  pro forma net income would have been $297 million in
1998,  $147 million in 1997 and $63 million in 1996; pro forma diluted  earnings
per share would have been $4.09 in 1998,  $1.61 in 1997 and $.46 in 1996 and pro
forma basic earnings per share would have been $4.14 in 1998,  $1.62 in 1997 and
$.46 in 1996. The pro forma effect on net income for 1998, 1997 and 1996 may not
be  representative of the pro forma effect on net income of future years because
it does not take into consideration pro forma  compensation  expense relating to
grants made prior to November  1, 1995.  The pro forma  effect on net income for
1998 may not be  representative  of the pro forma effect on net income of future
years as in 1998, one-third of the options granted became exercisable on each of
the first,  second and third  anniversaries of grant. Prior to 1998, grants were
generally exercisable after one year.

     The  weighted-average  fair  values  at date of grant for  options  granted
during 1998, 1997 and 1996 were $7.53, $5.71 and $5.34,  respectively,  and were
estimated  using  the  Black-Scholes  option-pricing  model  with the  following
assumptions:
                                            1998          1997          1996
                                            ----          ----          ----

Risk-free interest rate                      5.7%          6.6%          6.1%
Dividend yield                                 0%            0%            0%
Expected volatility                         31.9%         29.8%         30.9%
Expected life in years                       3.5            10            10

     The following  summarizes stock option activity for the years ended October
31:

<TABLE>
<CAPTION>
                                  1998                  1997                  1996
                            -----------------   --------------------   ------------------
                                     Weighted              Weighted              Weighted
                                     Average               Average               Average
                                     Exercise              Exercise              Exercise
Shares in thousands         Shares     Price    Shares      Price      Shares      Price
-------------------         ------   --------   ------     --------    ------   ---------
<S>                         <C>       <C>        <C>        <C>        <C>        <C>

Options outstanding
  at beginning of  year.    2,430     $18.73     2,346      $20.34     1,762      $24.25
Granted.................      809      23.93       876       10.13       718       10.45
Exercised...............     (592)     28.52      (715)      12.45         -           -
Canceled................     (109)     45.45       (77)      28.52      (134)      18.75
                           ------     ------    ------      ------    ------      ------

Options outstanding
  at year-end...........    2,538     $20.29     2,430       $18.73     2,346     $20.34
                           ======     ======    ======       ======    ======     ======

Options exercisable
  at year-end...........    1,765     $18.73     1,579       $23.35     1,682     $24.25
                           ======     ======    ======       ======    ======     ======

Options available
  for grant at year-end       443                    -                      -
                           ======               ======                 ======
</TABLE>

                                     - 44 -

<PAGE>


                          NOTES TO FINANCIAL STATEMENTS
                                   (Continued)


17.  STOCK COMPENSATION PLANS  (continued)

     The following table summarizes  information about stock options outstanding
and exercisable at October 31, 1998.

<TABLE>
<CAPTION>
                                 Outstanding Options                Options Exercisable
                       ---------------------------------------   -------------------------
       <S>                 <S>          <S>           <S>        <S>              <S>
                                         Weighted
                                          Average     Weighted                    Weighted
       Range of            Number        Remaining    Average        Number       Average
       Exercise         Outstanding     Contractual   Exercise    Exercisable     Exercise
        Prices         (in thousands)      Life         Price    (in thousands)    Price
--------------------   --------------   ----------    --------   ------------     --------
<C>       <C> <C>           <C>             <C>        <C>           <C>          <C>

$  9.31   -   $13.75        1,047           7.3        $10.94        1,047        $10.94
  17.40   -    26.66        1,213           7.6         23.58          494         23.81
  27.96   -    37.50          152           6.3         34.18           98         36.66
  43.75   -    61.88          126           2.6         49.51          126         49.51
</TABLE>

                                     - 45 -

<PAGE>


                          NOTES TO FINANCIAL STATEMENTS
                                   (Continued)


18.  SELECTED QUARTERLY FINANCIAL DATA  (Unaudited)
<TABLE>
<CAPTION>
                              1st Quarter           2nd Quarter           3rd Quarter           4th Quarter
                           -----------------     -----------------     -----------------     -----------------
(Millions of dollars,
except per share data)      1998       1997       1998       1997       1998       1997       1998       1997
--------------------------------------------------------------------------------------------------------------
<S>                        <C>        <C>        <C>        <C>        <C>        <C>        <C>        <C>
Sales and revenues......   $1,727     $1,296     $2,042     $1,551     $1,874     $1,586     $2,242     $1,938
                           ======     ======     ======     ======     ======     ======     ======     ======

Manufacturing
  gross margin..........    13.4%      13.6%      14.4%      13.8%      14.5%      13.8%      18.2%      15.2%
                           ======     ======     ======     ======     ======     ======     ======     ======

Net income  ............   $   38     $   15     $   67     $   30     $   50     $   35     $  144     $   70
Earnings per share
    Basic   ............   $  .43     $  .10     $  .90     $  .31     $  .73     $  .38     $ 2.16     $  .87
    Diluted ............   $  .42     $  .10     $  .89     $  .31     $  .72     $  .38     $ 2.14     $  .85

Market price range
  - Common Stock........
    High    ............   $28        $10 3/8    $35 7/8    $11 3/8    $34        $21 5/16   $28 1/2    $29 1/2
    Low     ............   $20 1/16   $ 9        $27 1/4    $ 9 1/8    $26 1/8    $11 1/4    $17        $17 1/4
</TABLE>

                                     - 46 -

<PAGE>


SUPPLEMENTAL FINANCIAL INFORMATION AS OF OCTOBER 31
AND FOR THE YEARS THEN ENDED  (Unaudited)


Navistar  International  Corporation (with financial  services  operations on an
equity basis) in millions of dollars:

Condensed Statement of Income             1998            1997           1996
------------------------------------------------------------------------------
Sales of manufactured products......     $7,629          $6,147         $5,508
Other income........................         49              44             42
                                         ------          ------         ------
     Total sales and revenues.......      7,678           6,191          5,550
                                         ------          ------         ------

Cost of products sold...............      6,464           5,274          4,818
Postretirement benefits.............        174             214            219
Engineering and research expense....        192             124            129
Marketing and administrative expense        390             332            282
Other expenses......................        137              83             80
                                         ------          ------         ------
Total costs and expenses............      7,357           6,027          5,528
                                         ------          ------         ------

Income before income taxes
  Manufacturing operations..........        321             164             22
  Financial services operations.....         89              78             83
                                         ------          ------         ------
    Income before income taxes......        410             242            105
Income tax expense..................        111              92             40
                                         ------          ------         ------
Net income..........................     $  299          $  150         $   65
                                         ======          ======         ======


Selected Statements
of Financial Condition
and Cash Flow Data                        1998            1997
------------------------------------     ------          ------
Cash, cash equivalents
  and marketable securities.........     $  904          $  802

Total assets........................     $4,326          $4,111

Total liabilities...................     $3,557          $3,091


                                          1998            1997           1996
                                         ------          ------         ------
Capital expenditures................     $ (305)         $ (172)        $ (117)
Depreciation and amortization.......        123              97             90
Change in operating assets
  and liabilities...................        331             263           (189)
Cash provided by operations.........        492             438              -
Cash (used in) provided
  by investment programs............       (588)           (241)            39
Cash used in financing activities...        (76)            (76)           (48)

                                     - 47 -

<PAGE>

FIVE-YEAR SUMMARY OF SELECTED FINANCIAL AND STATISTICAL DATA
------------------------------------------------------------------------------
For the Years Ended October 31
(Millions of dollars,
except per share data,
units shipped and percentages)        1998     1997     1996     1995     1994
------------------------------------------------------------------------------
RESULTS OF OPERATIONS

Total sales and revenues.......     $7,885   $6,371   $5,754   $6,342   $5,337

Income of continuing operations        299      150       65      164      102

Net income ....................        299      150       65      164       82

Income of continuing operations
  per share
    Basic  ....................       4.16     1.66      .49     1.83      .99
    Diluted....................       4.11     1.65      .49     1.83      .99


Earnings per share
   Basic  .....................       4.16     1.66      .49     1.83      .72
   Diluted.....................       4.11     1.65      .49     1.83      .72

Average number of shares
  outstanding (millions)
   Basic.......................       69.1     73.1     73.7     74.2     74.5
   Diluted ....................       70.0     73.6     73.8     74.3     74.6
------------------------------------------------------------------------------
FINANCIAL DATA

Total assets...................     $6,178   $5,516   $5,326   $5,566   $5,047

Debt
   Manufacturing operations....        450       92      115      127      127
   Financial services
     operations................      1,672    1,224    1,305    1,330    1,091
                                    ------   ------   ------   ------   ------
Total debt.....................      2,122    1,316    1,420    1,457    1,218

Shareowners' equity............        769    1,020      916      870      817

Total manufacturing operations
  debt as a percent of total
  manufacturing capitalization.      36.9%     8.3%    11.2%    12.7%    13.4%
Return on equity (a)...........      38.9%    14.7%     7.1%    18.9%    12.5%
------------------------------------------------------------------------------
SUPPLEMENTAL DATA

Capital expenditures...........     $  305   $  172   $  117   $  139   $   87
Engineering and
  research expense.............        192      124      129      113       97
------------------------------------------------------------------------------
OPERATING DATA

United States and
  Canadian market share (b)....      28.9%    28.6%    27.5%    26.7%    27.0%
Unit shipments worldwide
  Trucks ......................    127,500  104,400   95,200  112,200   95,000
  OEM engines..................    213,700  184,000  163,200  154,200  130,600
Service parts sales............     $  848   $  806   $  760   $  730   $  714


(a) Return on equity is calculated based on income of continuing operations.

(b) Based  on  retail  deliveries  of  medium  trucks  (Classes  5, 6 and  7),
    including school buses, and heavy trucks (Class 8).

                                     - 48 -