================================================================================

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                           WASHINGTON, D.C. 20549-1004

                                   ----------
                                    Form 10-K
                                   ----------

(Mark One)
         [X]  ANNUAL REPORT  PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES
              EXCHANGE ACT OF 1934

                   For the fiscal year ended December 31, 1997

                                       OR

         [ ]  TRANSITION  REPORT  PURSUANT  TO  SECTION  13  OR  15(d)  OF  THE
              SECURITIES EXCHANGE ACT OF 1934 For the transition period from to

                                   ----------

                          Commission file number 1-1861

                               The CIT Group, Inc.
             (Exact name of registrant as specified in its charter)

              Delaware                                     13-2994534
    (State or other jurisdiction                        (I.R.S. Employer
 of incorporation or organization)                     Identification No.)

   1211 Avenue of the Americas, New York, New York            10036
      (Address of principal executive offices)             (Zip Code)

       Registrant's telephone number, including area code: (212) 536-1950

                                   ----------

           Securities registered pursuant to Section 12(b) of the Act:

                                                        Name of each exchange on
           Title of each class                              which registered
           -------------------                          ------------------------
Class A Common Stock, par value $0.01 per share ......   New York Stock Exchange
8 3/4% Notes Due April 15, 1998 ......................   New York Stock Exchange
5 7/8% Notes Due October 15, 2008 ....................   New York Stock Exchange

                                   ----------

           Securities registered pursuant to Section 12(g) of the Act:

                                      None

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

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

     The aggregate  market value of the voting stock held by  non-affiliates  of
the  registrant,  based on the most  recent  New York Stock  Exchange  Composite
Transaction closing price of the Class A Common Stock ($33.00 per share),  which
occurred  on  February  27,  1998,  was  $1,070,617,185.  For  purposes  of this
computation, all officers, directors, and 5% beneficial owners of the registrant
are  deemed  to be  affiliates.  Such  determination  should  not be  deemed  an
admission that such  officers,  directors,  and beneficial  owners are, in fact,
affiliates of the  registrant.  At February 27, 1998,  37,173,527  shares of the
Company's Class A Common Stock, par value $0.01 per share,  were outstanding and
126,000,000  shares of the Company's  Class B Common Stock,  par value $0.01 per
share, were outstanding.

                      DOCUMENTS INCORPORATED BY REFERENCE*

           Document                                   Where Incorporated
           --------                                   ----------\--------
   Proxy Statement for 1998                   Part III (Items 10, 11, 12 and 13)
Annual Meeting of Stockholders

--------------
*  As stated under various Items of this Report, only certain specified portions
   of such document are incorporated by reference herein.

================================================================================
<PAGE>

                                TABLE OF CONTENTS


 Form 10-K
 Item No.                          Name of Item                             Page
 --------                          ------------                             ----

                                     Part I
Item  1.   Business .......................................................    1
                Overview ..................................................    1
                Industry Concentration ....................................    8
                Competition ...............................................    8
                Regulation ................................................    9
Item  2.   Properties .....................................................   10
Item  3.   Legal Proceedings ..............................................   10
Item  4.   Submission of Matters to a Vote of Security Holders ............   10
                                                                            
                                     Part II                                
                                                                            
Item  5.   Market for Registrant's Common Equity and Related                
             Stockholder Matters ..........................................   11
Item  6.   Selected Financial Data ........................................   12
Item  7.   Management's Discussion and Analysis of Financial                
             Condition and Results of Operations ..........................   15
Item  8.   Financial Statements and Supplementary Data ....................   34
Item  9.   Changes in and Disagreements with Accountants on                 
             Accounting and Financial Disclosure ..........................   60
                                                                            
                                    Part III                                
                                                                            
Item  10.  Directors and Executive Officers of the Registrant .............   61
Item  11.  Executive Compensation .........................................   61
Item  12.  Security Ownership of Certain Beneficial Owners and Management .   61
Item  13.  Certain Relationships and Related Transactions .................   61
                                                                            
                                     Part IV                                
                                                                            
Item  14.  Exhibits, Financial Statement Schedule and Reports 
             on Form 8-K ..................................................   62

<PAGE>
                                                                           
                                     PART I

Item 1.  Business

OVERVIEW

     The CIT Group, Inc., formerly The CIT Group Holdings, Inc. (the "Company"),
a Delaware corporation,  is a leading diversified finance organization with over
$22 billion of managed  assets at December 31, 1997.  The Company offers secured
commercial  and consumer  financing  primarily in the United  States to smaller,
middle-market  and larger  businesses  and to  individuals  through a nationwide
distribution network. The Company commenced operations in 1908 and has developed
a broad array of "franchise" businesses that focus on specific industries, asset
types and  markets,  which are  balanced  by  client,  industry  and  geographic
diversification.  The Company has its principal executive offices at 1211 Avenue
of the  Americas,  New York,  New York  10036 and its telephone  number is (212)
536-1390.

     The Company operates through two business segments:  (i) commercial,  which
is comprised of Equipment Financing (equipment  financing and leasing),  Capital
Finance  (commercial   aircraft  and  rail  equipment  financing  and  leasing),
Commercial   Services   (factoring),   Business  Credit  (secured  financing  to
middle-market and larger-sized businesses) and Credit Finance (secured financing
to smaller-sized and  middle-market  businesses)  strategic  business units, and
(ii)  consumer,  which is comprised of Consumer  Finance (home equity) and Sales
Financing  (recreation  vehicle,  manufactured  housing  and  recreational  boat
financing)  strategic  business  units.  These  strategic  business  units offer
products  and  services  designed  to satisfy  the  financing  needs of specific
customers, industries and markets.

     In November 1997, the Company  issued  36,225,000  shares of Class A common
stock in an initial public  offering (the  "Offering").  Prior to November 1997,
The  Dai-Ichi  Kangyo  Bank,  Limited  ("DKB")  owned  80%  of  the  issued  and
outstanding stock of the Company.  The remaining 20% of the Company's issued and
outstanding  stock  was  owned by The  Chase  Manhattan  Corporation  ("Chase"),
through a wholly-owned subsidiary.  DKB had an option expiring December 15, 2000
to purchase the  remaining  20% common stock  interest  from Chase.  In November
1997, the Company purchased DKB's option at its fair market value, exercised the
option to  purchase  the stock held by Chase and  recapitalized  the  Company by
converting  the previous  common stock to  157,500,000  shares of Class B common
stock.  Twenty  percent of the Class B common stock shares (which has five votes
per share) were converted to Class A common stock shares (which has one vote per
share) and, in addition to an underwriter's overallotment option, were issued in
the Offering. The issuance of Class A common stock pursuant to the underwriter's
overallotment  resulted in an increase to the Company's  stockholders' equity of
$117.7 million. At December 31, 1997, DKB owns 100% of the outstanding shares of
Class B common  stock of the  Company,  77.2% of the  economic  interest  in the
Company,  and 94.4% of the combined  voting power of all classes of voting stock
of the Company.

     The business  segments  within which the Company  operates are described in
greater detail below.

Commercial

     The Company's commercial operations are diverse and provide a wide range of
financing and leasing  products to small,  midsize and larger companies across a
wide variety of industries, including aerospace, retailing,  construction, rail,
machine tool,  business aircraft, apparel, textiles, electronics and technology,
chemicals,  manufacturing and transportation.  The secured lending,  leasing and
factoring products of the Company's  commercial  operations include direct loans
and leases,  operating  leases,  leveraged and single investor  leases,  secured
revolving lines of credit and term loans, credit protection, accounts receivable
collection, import and export financing and factoring,  debtor-in-possession and
turnaround financing and acquisition and expansion financing.


                                       1
<PAGE>

     The  following  table sets forth the  financing  and leasing  assets of the
Company's  commercial  segment  at  December  31 of  each  of the  years  in the
five-year period ended December 31, 1997.

<TABLE>
<CAPTION>
                                                                  December 31,
                                      -------------------------------------------------------------------
                                        1997           1996           1995          1994           1993
                                        ----           ----           ----          ----           ----
                                                               Dollars in millions
<S>                                   <C>            <C>           <C>           <C>            <C>      
Equipment Financing and Leasing ....  $11,709.7      $11,321.6     $10,591.6     $ 9,631.1      $ 9,027.4
Factoring ..........................    2,113.1        1,804.7       1,743.3       1,896.2          981.9
Commercial Finance .................    2,137.7        2,033.4       2,229.7       2,161.7        1,927.8
                                      ---------      ---------     ---------     ---------      ---------
                                      $15,960.5      $15,159.7     $14,564.6     $13,689.0      $11,937.1
                                      =========      =========     =========     =========      =========
</TABLE>

     The Company's  commercial  operations generate  transactions through direct
calling efforts with borrowers, lessees, equipment end-users,  manufacturers and
distributors and through referral sources and other intermediaries. In addition,
the Company's strategic business units jointly structure  transactions and refer
or  cross-sell  transactions  to other  Company  units to best  meet  customers'
overall financing needs. The Company's marketing efforts are supplemented by its
Multi-National  Marketing  Group,  which promotes the Company's  products to the
U.S.  subsidiaries  of foreign  corporations  in need of asset-based  financing,
developing  business  through  referrals  from DKB and  through  direct  calling
efforts.  The Company also buys and sells  participations in and syndications of
finance  receivables  and/or lines of credit. In addition,  from time to time in
the normal course of business, the Company purchases finance receivables in bulk
to supplement its own originations  and sells selected  finance  receivables and
equipment under operating leases for risk management  and/or other balance sheet
management purposes.

Equipment Financing and Leasing

     The  Company's   Equipment  Financing  and  Leasing  operations  had  total
financing and leasing assets of $11.7 billion at December 31, 1997, representing
58.7% of the  Company's  total  financing  and  leasing  assets.  The  Company's
Equipment  Financing and Leasing  operations are conducted through two strategic
business units: (i) The CIT Group/Equipment  Financing ("Equipment  Financing"),
which focuses on the broad  distribution of its products through  manufacturers,
dealers/distributors,  intermediaries  and  direct  calling  primarily  with the
construction,  transportation  and  machine  tool  industries;  and (ii) The CIT
Group/Capital Finance ("Capital Finance"), which focuses on the direct marketing
of customized  transactions  relating primarily to commercial  aircraft and rail
equipment.

     Equipment  Financing and Capital Finance personnel have extensive expertise
in  managing  equipment  over its full  life  cycle,  including,  in the case of
Capital Finance, the expertise to repossess  commercial aircraft,  if necessary,
to obtain required  maintenance and repairs for such aircraft,  and to recertify
such aircraft with appropriate  authorities.  Equipment  Financing's and Capital
Finance's  equipment and industry expertise enable them to evaluate  effectively
residual value risk and to manage equipment and residual value risks by locating
alternative  equipment  users and/or  purchasers  in order to minimize such risk
and/or the risk of equipment  remaining idle for extended  periods of time or in
amounts that could materially impact profitability.  For the period 1993 through
1997, Equipment Financing and Capital Finance have realized in excess of 100% of
the aggregate booked residual value in connection with equipment sales.

     The following table sets forth certain information concerning the financing
and leasing assets of Equipment  Financing and Leasing at December 31 of each of
the years in the five-year period ended December 31, 1997.

<TABLE>
<CAPTION>
                                                                      December 31,
                                          -------------------------------------------------------------------
                                            1997           1996           1995          1994           1993
                                            ----           ----           ----          ----           ----
                                                                   Dollars in millions
<S>                                       <C>            <C>           <C>            <C>            <C>     
Finance receivables - loans ...........   $ 5,671.7      $ 6,357.5     $ 6,383.4      $5,852.6       $5,607.3
Finance receivables - leases ..........     4,132.4        3,562.0       3,095.2       2,910.6        2,668.2
Operating lease equipment, net ........     1,905.6        1,402.1       1,113.0         867.9          751.9
                                          ---------      ---------     ---------      --------       --------
    Total financing and leasing assets    $11,709.7      $11,321.6     $10,591.6      $9,631.1       $9,027.4
                                          =========      =========     =========      ========       ========
</TABLE>

     On January 1, 1997,  $1,519.2  million of financing and leasing  assets and
related marketing and servicing operations were transferred from Capital Finance
to  Equipment  Financing.  The  transferred  financing  and  leasing  assets and
operations  were  considered  more  complementary  to  the  Equipment  Financing
business and 


                                       2
<PAGE>

the transfers  were  undertaken  to increase  Equipment  Financing's  nationwide
market reach and further utilize its existing  systems and  infrastructure.  The
transfer has also enabled Capital  Finance to focus on the  specialized  markets
and industries best served by its ability to handle larger customized financings
of capital equipment, particularly commercial aircraft and railcars.

Equipment Financing

     Equipment  Financing  is the largest of the  Company's  strategic  business
units with total  financing  and leasing  assets of $8.0 billion at December 31,
1997,  representing  40.2% of the Company's  total financing and leasing assets.
Equipment  Financing offers secured  equipment  financing and leasing  products,
including  direct secured loans,  leases,  revolving lines of credit,  operating
leases,  sale and  leaseback  arrangements,  vendor  financing  and  specialized
wholesale and retail financing for distributors and manufacturers.

     Equipment Financing is a leading nationwide  asset-based  equipment lender.
At December  31,  1997,  its  portfolio  included  significant  outstandings  to
customers  in a number of different  industries,  with  manufacturing  being the
largest  as  a  percentage  of  financing  and  leasing   assets,   followed  by
construction  and printing.  The Equipment  Financing  portfolio at December 31,
1997  included  many  different  types  of  equipment,  including  construction,
transportation, and manufacturing equipment and business aircraft.

     Equipment  Financing  originates  its products  through  direct  calling on
customers and through its relationships with manufacturers, dealers/distributors
and intermediaries that have leading or significant marketing positions in their
respective  industries.  This provides Equipment Financing with efficient access
to equipment end-users in many industries across a variety of equipment types.

     The following table sets forth certain information concerning the financing
and leasing assets of Equipment Financing at December 31 of each of the years in
the five-year period ended December 31, 1997.

<TABLE>
<CAPTION>

                                                                      December 31,
                                          --------------------------------------------------------------------
                                            1997           1996           1995          1994           1993
                                            ----           ----           ----          ----           ----
                                                                   Dollars in millions
<S>                                        <C>            <C>           <C>           <C>            <C>     
Finance receivables - loans .............  $4,622.8       $3,859.0      $3,657.0      $3,081.7       $2,690.0
Finance receivables - leases ............   2,780.6        1,757.8       1,272.9       1,188.0        1,191.0
Operating lease equipment, net ..........     623.8          426.6         363.0         219.2          186.2
                                           --------       --------      --------      --------       --------
    Total financing and leasing assets ..  $8,027.2       $6,043.4      $5,292.9      $4,488.9       $4,067.2
                                           ========       ========      ========      ========       ========
</TABLE>

Capital Finance

     Capital  Finance  had  financing  and  leasing  assets of $3.7  billion  at
December 31, 1997, which  represented 18.5% of the Company's total financing and
leasing assets.  Capital Finance  specializes in customized  secured  financing,
including  leases,  loans,  operating leases,  single investor leases,  debt and
equity  portions  of  leveraged  leases,  and  sale and  leaseback  arrangements
relating  primarily to end-users of commercial  aircraft and  railcars.  Typical
Capital Finance customers are middle-market to larger-sized companies.

     Capital Finance has provided  financing to commercial  airlines for over 30
years. The Capital Finance aerospace portfolio includes most of the leading U.S.
and  foreign   commercial   airlines.   Capital  Finance  has  developed  strong
relationships  with most major  airlines  and all major  aircraft  and  aircraft
engine  manufacturers,  which provide   Capital Finance with access to technical
information,  which supports  customer  service,  and provides  opportunities to
finance new business.

     Capital  Finance  has  over 25  years  experience  in  financing  the  rail
industry,  contributing  to its  knowledge  of asset  values,  industry  trends,
product  structuring  and customer needs. To strengthen its position in the rail
financing  market,  Capital  Finance formed a dedicated rail equipment  group in
1994  and  currently  maintains   relationships  with  several  leading  railcar
manufacturers in the United States.  The Capital Finance rail portfolio includes
all of the U.S.  and  Canadian  Class I railroads  and  numerous  shippers.  The
Capital  Finance  operating lease fleet includes  primarily  covered hopper cars
used to ship grain and agricultural  products and plastic pellets,  gondola cars
for coal, steel coil and mill service, open hopper cars for coal and aggregates,
center beam flat cars for lumber, and boxcars for paper and auto parts.

     New  business is generated by Capital  Finance  through (i) direct  calling
efforts with  equipment  end-users  and  borrowers,  including  major  airlines,
railroads and shippers,  (ii)  relationships  with aerospace,  railcar and other
manufacturers and (iii) intermediaries and other referral sources.


                                       3
<PAGE>


     The following table sets forth certain information concerning the financing
and leasing assets of Capital Finance at December 31 of each of the years in the
five-year period ended December 31, 1997.

<TABLE>
<CAPTION>
                                                                      December 31,
                                           ------------------------------------------------------------------
                                            1997           1996           1995          1994           1993
                                            ----           ----           ----          ----           ----
                                                                   Dollars in millions
<S>                                        <C>            <C>           <C>           <C>            <C>     
Finance receivables - loans                $1,048.9       $2,498.5      $2,726.4      $2,770.9       $2,917.3
Finance receivables - leases                1,351.8        1,804.2       1,822.3       1,722.6        1,477.2
Operating lease equipment, net              1,281.8          975.5         750.0         648.7          565.7
                                           --------       --------      --------      --------       --------
    Total financing and leasing assets     $3,682.5       $5,278.2      $5,298.7      $5,142.2       $4,960.2
                                           ========       ========      ========      ========       ========
</TABLE>

Factoring

     The  CIT  Group/Commercial   Services  ("Commercial   Services")  factoring
operation had total financing and leasing assets of $2.1 billion at December 31,
1997,  which  represented  10.6% of the  Company's  total  financing and leasing
assets.  Commercial  Services offers a full range of domestic and  international
customized  credit  protection  and lending  services  that  include  factoring,
working  capital  and  term  loans,  receivable  management  outsourcing,   bulk
purchases  of accounts  receivable,  import and export  financing  and letter of
credit programs.

     Commercial  Services provides financing to its clients through the purchase
of  accounts  receivables  owed to  clients  by their  customers,  usually  on a
non-recourse  basis,  as well as by  guaranteeing  amounts due under  letters of
credit issued to the clients'  suppliers  which are  collateralized  by accounts
receivable   and  other   assets.   The  purchase  of  accounts   receivable  is
traditionally known as "factoring" and results in the payment by the client of a
factoring  fee,  generally a  percentage  of the  factored  sales  volume.  When
Commercial  Services  "factors"  (i.e.,  purchases)  a customer  invoice  from a
client,  it records the customer  receivable as an asset and also  establishes a
liability  for the  funds  due to the  client  ("credit  balances  of  factoring
clients").  Commercial  Services  also may advance funds to its clients prior to
collection of receivables, typically in an amount up to 80% of eligible accounts
receivable (as defined for that transaction), charging interest on such advances
(in  addition  to  any  factoring   fees)  and  satisfying  such  advances  from
receivables collections.

     Clients  use  Commercial   Services'  products  and  services  for  various
purposes,  including improving cash flow, mitigating or reducing the risk of bad
debt  charge  offs,  increasing  sales,  improving  management  information  and
converting the high fixed cost of operating a credit and  collection  department
into a lower and variable expense based on sales volume.

     Commercial  Services  generates  business  regionally  from  a  variety  of
sources,  including direct calling and referrals from existing clients and other
referral sources.

     The following table sets forth certain information concerning the financing
and leasing assets of Commercial Services at December 31 of each of the years in
the five-year period ended December 31, 1997.

<TABLE>
<CAPTION>
                                                                      December 31,
                                           ------------------------------------------------------------------
                                            1997           1996           1995          1994           1993
                                            ----           ----           ----          ----           ----
                                                                   Dollars in millions
<S>                                        <C>            <C>           <C>           <C>              <C>   
Total financing and leasing assets .....  $2,113.1       $1,804.7      $1,743.3      $1,896.2         $981.9
</TABLE>

Commercial Finance

     At December  31,  1997,  the  financing  and leasing  assets of  Commercial
Finance  totaled  $2.1  billion,  representing  10.7%  of  the  Company's  total
financing and leasing assets.  The Company's  Commercial  Finance operations are
conducted  through two  strategic  business  units:  (i) The CIT  Group/Business
Credit  ("Business  Credit"),  which  provides  secured  financing  primarily to
middle-market to larger-sized  borrowers;  and (ii) The CIT Group/Credit Finance
("Credit Finance"),  which provides secured financing primarily to smaller-sized
to middle-market borrowers.


                                       4
<PAGE>

     The following table sets forth certain information concerning the financing
and leasing assets of Commercial  Finance at December 31 of each of the years in
the five-year period ended December 31, 1997.

<TABLE>
<CAPTION>
                                                                      December 31,
                                          --------------------------------------------------------------------
                                            1997           1996           1995          1994           1993
                                            ----           ----           ----          ----           ----
                                                                   Dollars in millions
<S>                                        <C>            <C>           <C>           <C>            <C>     
Business Credit ........................   $1,247.9       $1,235.6      $1,471.0      $1,442.1       $1,282.1
Credit Finance .........................      889.8          797.8         758.7         719.6          645.7
                                           --------       --------      --------      --------       --------
 Total financing and leasing assets ....   $2,137.7       $2,033.4      $2,229.7      $2,161.7       $1,927.8
                                           ========       ========      ========      ========       ========
</TABLE>

     In  October  1997,  $95.0  million  of  small  ticket  commercial   finance
receivables were transferred from Business Credit to Credit Finance.

Business Credit

     Financing  and leasing  assets of Business  Credit  totaled $1.2 billion at
December 31, 1997 and  represented  6.3% of the  Company's  total  financing and
leasing assets.  Business Credit offers senior  revolving and term loans secured
by  accounts  receivable,  inventories  and fixed  assets to  middle-market  and
larger-sized  companies.  Such loans are used by clients  primarily  for growth,
expansion,  acquisitions,  refinancings and  debtor-in-possession and turnaround
financings.  Business Credit sells and purchases participation interests in such
loans to and from other lenders.

     Through its variable interest rate senior revolving and term loan products,
Business  Credit  meets its  customers'  financing  needs for  working  capital,
growth,  acquisition  and other financing  situations  otherwise not met through
bank or  other  unsecured  financing  alternatives.  Business  Credit  typically
structures  financings on a fully secured basis,  though,  from time to time, it
may look to a customer's cash flow to support a portion of the credit  facility.
Revolving  and term loans are made on a variable  interest  rate basis  based on
published indexes such as LIBOR or a prime rate of interest.

     Business is originated  through direct calling efforts and intermediary and
referral  sources.  Business  Credit has focused on increasing the proportion of
direct  business  origination  to  improve  its  ability  to  capture  or retain
refinancing opportunities and to enhance finance income.

Credit Finance

     Financing and leasing  assets of Credit  Finance  totaled $889.8 million at
December 31, 1997 and  represented  4.5% of the  Company's  total  financing and
leasing assets.  Credit Finance offers revolving and term loans to smaller-sized
and  middle-market  companies  secured by accounts  receivable,  inventories and
fixed assets. Such loans are used by clients for working capital,  refinancings,
acquisitions,  leveraged buyouts, reorganizations,  restructurings,  turnarounds
and  Chapter  11  financing  and  confirmation   plans.   Credit  Finance  sells
participation   interests  in  such  loans  to  other   lenders  and   purchases
participation  interests  in such  loans  originated  by other  lenders.  Credit
Finance  borrowers  are  generally  smaller  and  cover a wider  range of credit
quality than those of Business  Credit.  While both  Business  Credit and Credit
Finance offer financing  secured by accounts  receivable,  inventories and fixed
assets,  Credit  Finance places a higher degree of reliance on collateral and is
generally more focused on credit monitoring in its business.

     Business is originated  through the sales and regional  offices and is also
developed through  intermediaries and referral  relationships and through direct
calling  efforts.  Credit  Finance has developed  long-term  relationships  with
selected  finance  companies,  banks and other lenders and with many diversified
referral sources.

Consumer

     At December 31, 1997, the Company's  consumer segment financing and leasing
assets totaled $3.9 billion, representing 19.7% of the Company's total financing
and leasing assets.  The consumer  segments' managed assets were $6.3 billion at
December 31, 1997, representing 28.3% of total managed assets.

     The Company's consumer business is focused primarily on home equity lending
and on retail  sales  financing  secured by  recreation  vehicles,  manufactured
housing and  recreational  boats.  Home equity  lending is  performed by The CIT
Group/Consumer  Finance ("Consumer  Finance") business unit. Sales financing for


                                       5
<PAGE>

consumer  products  sold through  dealers is  performed  by The CIT  Group/Sales
Financing ("Sales Financing")  business unit. During 1997, Sales Financing began
to  provide   wholesale   inventory   financing  to  manufactured   housing  and
recreational boat dealers  utilizing its dealer and manufacturer  relationships.
Sales Financing also provides contract servicing for  securitization  trusts and
other  third  parties  through  a  centralized  Asset  Service  Center  ("ASC").
Additionally,  in the ordinary  course of business,  Consumer  Finance and Sales
Financing  purchase loans and portfolios of loans from banks,  thrifts and other
originators of consumer loans.

     The following table sets forth certain information  regarding the Company's
consumer  business segment at December 31 for each of the years in the five-year
period ended December 31, 1997.

<TABLE>
<CAPTION>
                                                                      December 31,
                                          --------------------------------------------------------------------
                                            1997           1996           1995          1994           1993
                                            ----           ----           ----          ----           ----
                                                                   Dollars in millions
<S>                                        <C>            <C>           <C>            <C>            <C>    
Consumer Finance
   Financing and leasing assets ........   $1,992.3       $2,005.5      $1,039.0       $ 570.8        $ 131.3
   Finance receivables previously
        securitized and currently
        managed by the Company .........      453.8             --            --            --             --
                                           --------       --------      --------      --------       --------
            Managed assets .............   $2,446.1       $2,005.5      $1,039.0      $  570.8       $  131.3
                                           ========       ========      ========      ========       ========
Sales Financing
   Financing and leasing assets ........   $1,940.7       $1,349.8      $1,416.9      $1,471.2       $1,458.0
   Finance receivables previously
        securitized and currently
        managed by the Company .........    1,931.8        1,437.4         916.5         306.7          175.6
                                           --------       --------      --------      --------       --------
            Managed assets .............   $3,872.5       $2,787.2      $2,333.4      $1,777.9       $1,633.6
                                           ========       ========      ========      ========       ========
Total financing and leasing assets .....   $3,933.0       $3,355.3      $2,455.9      $2,042.0       $1,589.3
Consumer finance receivables
   previously securitized and
   currently  managed by the
   Company .............................    2,385.6        1,437.4         916.5         306.7          175.6
                                            -------        -------       -------       -------        -------
Total managed assets ...................    6,318.6        4,792.7       3,372.4       2,348.7        1,764.9
                                           --------       --------      --------      --------       --------
Consumer finance receivables
   serviced for third parties ..........    1,451.6          549.2         338.2         191.5          240.5
                                           --------       --------      --------      --------       --------
Total serviced assets ..................   $7,770.2       $5,341.9      $3,710.6      $2,540.2       $2,005.4
                                           ========       ========      ========      ========       ========
</TABLE>

Consumer Finance

     Financing and leasing assets of Consumer  Finance,  which  aggregated  $2.0
billion at December 31, 1997, represented 10.0% of the Company's total financing
and leasing assets.  The managed assets of Consumer Finance were $2.4 billion at
December 31, 1997, or 10.9% of total managed assets.  Consumer Finance commenced
operations in December 1992.  Its products  include both fixed and variable rate
closed-end  loans and variable rate lines of credit.  The lending  activities of
Consumer Finance consist primarily of originating,  purchasing and selling loans
secured  by first  or  second  liens  on  detached,  single  family  residential
properties.  Such loans are  primarily  made for the  purpose  of  consolidating
debts,  refinancing  an existing  mortgage,  funding home  improvements,  paying
education  expenses  and, to a lesser  extent,  purchasing  a home,  among other
reasons. Consumer Finance originates loans through brokers and correspondents as
well as on a direct marketing basis.

     The Company believes that its network of Consumer Finance offices,  located
in most major U.S.  markets,  enables  it to  provide a  competitive,  extensive
product  offering  complemented  by high  levels of  service  delivery.  Through
experienced  lending  professionals  and automation,  Consumer  Finance provides
rapid  turnaround  time  from  application  to loan  funding,  a  characteristic
considered to be critical by its broker and correspondent relationships.


                                       6
<PAGE>

 Sales Financing

     The financing and leasing assets of Sales Financing,  which aggregated $1.9
billion at December 31, 1997,  represented 9.7% of the Company's total financing
and leasing  assets.  The managed assets of Sales Financing were $3.9 billion at
December 31, 1997, or 17.3% of total managed assets.  The lending  activities of
Sales Financing consist  primarily of providing  nationwide retail financing for
the  purchase  of new and used  recreation  vehicles,  manufactured  housing and
recreational  boats.  During 1997,  Sales Financing  began  providing  wholesale
manufactured  housing and  recreational  boat  inventory  financing  directly to
dealers.  Sales Financing  originates  loans  predominantly  through  recreation
vehicle,  manufactured  housing and recreational  boat dealer,  manufacturer and
broker relationships.

     The  following  table sets forth  certain  information  with respect to the
managed  assets of Sales  Financing  at December 31 for each of the years in the
five-year period ended December 31, 1997.

<TABLE>
<CAPTION>
                                                                      December 31,
                                          --------------------------------------------------------------------
                                            1997           1996           1995          1994           1993
                                            ----           ----           ----          ----           ----
                                                                   Dollars in millions
<S>                                        <C>            <C>           <C>           <C>            <C>     
Retail recreation vehicle
   finance receivables .................   $1,596.5       $1,256.9      $1,144.2      $1,016.3       $1,022.4
                                           --------       --------      --------      --------       --------
Retail manufactured
   housing finance receivables .........   $1,471.9       $1,202.5      $1,032.3     $   690.0      $   572.3
                                           --------       --------      --------      --------       --------
Retail recreational
   boat finance receivables ............   $  682.5       $  327.8      $  156.9     $    71.6      $    38.9
                                           --------       --------      --------      --------       --------
Wholesale inventory
   financing finance receivables .......   $  121.6       $     --      $     --     $      --      $      --
                                           --------       --------      --------      --------       --------
Total managed assets ...................   $3,872.5       $2,787.2      $2,333.4      $1,777.9       $1,633.6
                                           ========       ========      ========      ========       ========
</TABLE>

Servicing

     The ASC centrally services and collects  substantially all of the Company's
consumer  finance  receivables  including loans originated or purchased by Sales
Financing or Consumer  Finance,  as well as loans  originated  or purchased  and
subsequently  securitized with servicing retained.  The servicing portfolio also
includes loans owned by third parties that are serviced by Sales Financing for a
fee on a "contract"  basis. At December 31, 1997, the consumer finance servicing
portfolio  aggregated  approximately  282,000  loans,  including $1.5 billion of
finance receivables serviced for third parties.

Securitization Program

     The Company  funds most of its assets on balance  sheet using its access to
the commercial  paper,  medium-term  note and capital  markets.  In an effort to
broaden its funding  sources and to provide an  additional  source of liquidity,
the Company,  in 1992,  established  a program to  opportunistically  access the
public  and  private  asset  backed  securitization  markets.  Current  products
utilized in the Company's  program include  consumer loans secured by recreation
vehicles,  recreational  boats and residential real estate. The Company has sold
$3.3 billion of finance  receivables  since the inception of the Company's asset
backed  securitization  program and the  remaining  pool balance at December 31,
1997 was $2.4 billion or 10.7% of the Company's total managed assets.

     Under a typical asset backed securitization,  the Company sells a "pool" of
secured loans to a special purpose entity,  that, in turn,  issues  certificates
and/or  notes  that are  collateralized  by the loan pool and that  entitle  the
holders  thereof to  participate  in certain  loan pool cash flows.  The Company
retains the servicing of the securitized  loans, for which it is paid a fee, and
also  participates in certain  "residual" loan pool cash flows (cash flows after
payment of principal and interest to  certificate  and/or note holders and after
losses).  At the date of  securitization,  the Company  estimates the "residual"
cash  flows to be  received  over the life of the  securitization,  records  the
present  value of these cash  flows as an  interest-only  receivable,  or I/O (a
retained interest in the securitization), and recognizes a gain. The I/O is then
amortized over the estimated life of the related loan pool.


                                       7
<PAGE>

     The Company,  in its  estimation  of residual  cash flows and related I/Os,
inherently  employs a variety  of  financial  assumptions,  including  loan pool
credit losses,  prepayment  speeds and discount  rates.  These  assumptions  are
empirically   supported  by  both  the  Company's   historical   experience  and
anticipated trends relative to the particular products  securitized.  Subsequent
to the  recognition  of I/Os,  the  Company  regularly  reviews  such assets for
valuation impairment. These reviews are performed on a disaggregated basis. Fair
values of I/Os are calculated  utilizing current and anticipated  credit losses,
prepayment  speeds and  discount  rates and are then  compared to the  Company's
carrying  values.  Carrying value of the Company's I/Os at December 31, 1997 was
$155.5 million and approximated fair value.

Equity Investments

     The CIT Group/Equity  Investments and its subsidiary The CIT  Group/Venture
Capital (together "Equity Investments")  originate and participate in merger and
acquisition transactions,  purchase private equity and equity-related securities
and arrange transaction  financing.  Equity Investments also invests in emerging
growth  opportunities  in  selected  industries,  including  the life  sciences,
information technology,  communications and consumer products industries. Equity
Investments made its first investment in 1991 and had total investments of $65.8
million at December 31, 1997.

INDUSTRY CONCENTRATION

     See the "Industry  Composition" and "Commercial  Airline Industry" sections
of "Financing and Leasing Assets Composition" in Item 7. Management's Discussion
and Analysis of Financial Condition and Results of Operations.

COMPETITION

     The  Company's  markets are highly  competitive  and are  characterized  by
competitive  factors that vary based upon  product and  geographic  region.  The
Company's   competitors  include  captive  and  independent  finance  companies,
commercial banks and thrift  institutions,  industrial banks, leasing companies,
manufacturers and vendors. Substantial national financial services networks have
been formed by insurance  companies and bank holding companies that compete with
the Company.  On a local level,  community banks and smaller independent finance
and/or  mortgage  companies  are a  competitive  force.  Some  competitors  have
substantial local market  positions.  Many of the competitors of the Company are
large  companies  that have  substantial  capital,  technological  and marketing
resources.  Some of these  competitors  are larger than the Company and may have
access  to  capital  at a lower  cost  than the  Company.  Also,  the  Company's
competitors  include  businesses that are not related to bank holding  companies
and, accordingly,  may engage in activities,  for example,  short-term equipment
rental and servicing, which currently are prohibited to the Company. Competition
has  been  enhanced  in  recent  years  by  an  improving  economy  and  growing
marketplace  liquidity.  The  markets  for most of the  Company's  products  are
characterized by a large number of competitors. However, with respect to some of
the Company's products, competition is more concentrated.

     The  Company  competes  primarily  on  the  basis  of  pricing,  terms  and
structure,  with other primary competitive factors including industry experience
and client  service and  relationships.  From time to time,  competitors  of the
Company  seek to  compete  aggressively  on the basis of these  factors  and the
Company  may lose  market  share to the  extent  it is  unwilling  to match  its
competitors'  pricing and terms in order to maintain its interest margins and/or
credit standards.

     Other primary  competitive  factors include industry  experience and client
service and relationships.  In addition,  demand for the Company's products with
respect to certain industries,  such as the commercial airline industry, will be
affected by demand for such  industry's  services  and  products and by industry
regulations.


                                       8
<PAGE>

REGULATION

     DKB is a bank  holding  company  within  the  meaning  of the Bank  Holding
Company  Act of 1956 (the  "Act"),  and is  registered  as such with the Federal
Reserve.  As a result,  the Company is subject to certain  provisions of the Act
and is subject to examination by the Federal Reserve. In general, the Act limits
the activities in which a bank holding company and its  subsidiaries  may engage
to those of banking or managing or controlling banks or performing  services for
their  subsidiaries  and to continuing  activities which the Federal Reserve has
determined to be "so closely related to banking or managing or controlling banks
as to be a proper incident  thereto." The Company's current  principal  business
activities constitute  permissible activities for a nonbank subsidiary of a bank
holding company.

     In addition to being subject to the Act, DKB is subject to Japanese banking
laws,  regulations,  guidelines and orders that affect permissible activities of
the  Company.  DKB and the Company  have  entered  into an agreement in order to
facilitate  DKB's  compliance with applicable U.S. and Japanese banking laws, or
the regulations, interpretations, policies, guidelines, requests, directives and
orders of the applicable regulatory authorities or the staffs thereof or a court
(collectively,  the "Banking Laws").  That agreement  prohibits the Company from
engaging in any new activity or entering  into any  transaction  for which prior
approval,  notice or filing is required  under Banking Laws without the required
prior approval  having been obtained,  prior notice having been given or made by
DKB and  accepted  or  such  filings  having  been  made.  The  Company  is also
prohibited  from engaging in any activity as would cause DKB, the Company or any
affiliate of DKB or the Company to violate any Banking  Laws. In the event that,
at any time, it is  determined  by DKB that any activity  then  conducted by the
Company is  prohibited  by any Banking  Law, the Company is required to take all
reasonable steps to cease such activity.  Under the terms of that agreement, DKB
is responsible  for making all  determinations  as to compliance with applicable
Banking Laws.

     Two of the subsidiaries of the Company are investment  companies  organized
under Article XII of the New York Banking Law and, as a result,  the  activities
of  these   subsidiaries   are  restricted  by  state  banking  laws  and  these
subsidiaries  are subject to examination by state banking  examiners.  Also, any
person or entity seeking to purchase  "control" of the Company would be required
to apply for and obtain the prior approval of the Superintendent of Banks of the
State of New York.  "Control" is presumed to exist if a person or entity  would,
directly or indirectly, own, control or hold (with power to vote) 10% or more of
the voting stock of the Company.

     The  operations  of the  Company  are  subject,  in certain  instances,  to
supervision and regulation by state and federal governmental authorities and may
be subject to various laws and judicial and  administrative  decisions  imposing
various  requirements and restrictions,  which, among other things, (i) regulate
credit granting  activities,  (ii) establish  maximum  interest  rates,  finance
charges and other charges,  (iii) regulate customers' insurance coverages,  (iv)
require disclosures to customers,  (v) govern secured  transactions and (vi) set
collection,  foreclosure,  repossession and claims handling procedures and other
trade practices.

     The Company's consumer finance business is subject to detailed  enforcement
and supervision by state  authorities  under  legislation and regulations  which
generally  require  licensing of the lender.  Licenses are  renewable and may be
subject to suspension or revocation for violations of such laws and regulations.
Applicable  state laws generally  regulate  interest rates and other charges and
require certain  disclosures.  In addition,  most states have other laws, public
policies  and  general  principles  of  equity  relating  to the  protection  of
consumers,  unfair and deceptive  practices and practices  that may apply to the
origination,  servicing and collection of consumer  finance loans.  Depending on
the provision of the  applicable  law and the specific  facts and  circumstances
involved,  violations  of these  laws,  policies  and  principles  may limit the
Company's  ability to collect  all or part of the  principal  of or  interest on
consumer  finance  loans,  may  entitle  the  borrower  to a refund  of  amounts
previously  paid and,  in  addition,  could  subject  the Company to damages and
administrative sanctions.

     Federal laws preempt state usury ceilings on first mortgage loans and state
laws which restrict various types of alternative  dwelling secured  receivables,
except in those states which have  specifically  opted out, in whole or in part,
of such preemption.  Loans may also be subject to other federal laws, including:
(i) the Federal  Truth-in-Lending  Act and Regulation Z promulgated  thereunder,
which require certain  disclosures to borrowers and other parties regarding loan
terms;  (ii)  the  Real  Estate  Settlement  Procedures  Act  and  


                                       9
<PAGE>

Regulation X  promulgated  thereunder,  which  require  certain  disclosures  to
borrowers and other parties  regarding  certain loan terms and regulates certain
practices with respect to such loans; (iii) the Equal Credit Opportunity Act and
Regulation  B  promulgated  thereunder,  which  prohibit  discrimination  in the
extension  of credit  and  administration  of loans on the  basis of age,  race,
color,  sex,  religion,  marital  status,  national  origin,  receipt  of public
assistance  or the  exercise of any right under the Consumer  Credit  Protection
Act; (iv) the Fair Credit  Reporting Act, which  regulates the use and reporting
of  information  related to a  borrower's  credit  experience;  and (v) the Fair
Housing Act, which prohibits discrimination on the basis of, among other things,
familial status or handicap.

     Depending on the  provisions of the  applicable  law and the specific facts
and  circumstances  involved,  violations of these laws may limit the ability of
the Company to collect all or part of the principal of or interest on applicable
loans,  may  entitle the  borrower  to rescind  the loan and any  mortgage or to
obtain a refund of amounts  previously paid and, in addition,  could subject the
Company to damages and administrative sanctions.

      The above federal and state  regulation  and  supervision  could limit the
Company's discretion in operating its businesses.  For example, state laws often
establish  maximum allowable finance charges for certain consumer and commercial
loans. Noncompliance with applicable statutes or regulations could result in the
suspension or revocation of any license or registration at issue, as well as the
imposition of civil fines and criminal penalties. No assurance can be given that
applicable  laws or  regulations  will not be amended or construed  differently,
that new laws and  regulations  will not be adopted or that  interest  rates the
Company  charges  will not rise to state  maximum  levels,  the effect of any of
which could be to adversely  affect the business or results of operations of the
Company. Under certain  circumstances,  the Federal Reserve has the authority to
issue  orders  which could  restrict the ability of the Company to engage in new
activities or to acquire  additional  businesses or to acquire assets outside of
the normal course of business.

Item 2.  Properties

     The operations of the Company and its subsidiaries are generally  conducted
in leased  office  space  located in numerous  cities and towns  throughout  the
United  States.  Such leased office space is suitable and adequate for the needs
of the Company.  The Company  utilizes,  or plans to utilize in the  foreseeable
future, substantially all of its leased office space.

Item 3.  Legal Proceedings

     The  Company is a defendant  in various  lawsuits  arising in the  ordinary
course of its business.  The Company  aggressively  manages its  litigation  and
assesses appropriate  responses to its lawsuits in light of a number of factors,
including  potential  impact of the  actions  on the  conduct  of the  Company's
operations.  In the  opinion  of  management,  none of the  pending  matters  is
expected to have a material adverse effect on the Company's  financial condition
or results of  operations.  However,  there can be no assurance  that an adverse
decision  in one or more of such  lawsuits  will  not  have a  material  adverse
effect.

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

     No matters were  submitted to a vote of security  holders during the fourth
quarter of 1997.


                                       10
<PAGE>

                                     PART II

Item 5.  Market for Registrant's Common Equity and Related Stockholder Matters

     The Class A common  stock of the Company was priced at $27.00 per share and
was listed on the New York Stock Exchange on November 13, 1997. The high and low
sales  prices for the Class A common  stock for the fourth  quarter of 1997 were
$32 13/16 and $29 1/8, respectively.  The Class B common stock of the Company is
entirely owned by DKB and is not publicly traded.

     Commencing  with the 1996 second quarter and ceasing prior to the Offering,
the Company  operated  under a policy  requiring the payment of dividends by the
Company equal to and not exceeding 30% of net operating  earnings on a quarterly
basis.  Previously,  the Company's dividend policy required payment of dividends
of 50% of net operating  earnings on a quarterly basis. Such dividends were paid
to DKB and Chase based upon their respective stock ownership in the Company.  In
connection  with the Offering,  the Company  terminated  its dividend  policy in
favor of a new policy  beginning  with the  payment of a dividend  for the first
quarter of 1998.  It is  expected  that the  dividend  in respect of the quarter
ending March 31, 1998, which is the first dividend following the consummation of
the Offering,  will be $0.10 per share (a rate of $0.40 annually) for both Class
A common  stock  and  Class B common  stock.  The  declaration  and  payment  of
dividends  by the  Company  are  subject  to the  discretion  of  the  Board  of
Directors.  By agreement  with DKB and Chase,  the final cash dividend under the
Company's  terminated  dividend  policy was paid to DKB and Chase for the fourth
quarter of 1997 (based upon net  operating  earnings  through  October 31, 1997)
prior to the consummation of the Offering.

     On December 24, 1996, with the consent of the Company's  stockholders,  the
Company paid a special dividend in the aggregate amount of $165.0 million to its
stockholders. Each stockholder immediately contributed an aggregate amount equal
to the special dividend to the Company as additional paid-in capital.

     Below are the dividends paid during the past two years:

         Dividends Paid                                1997           1996
         --------------                                ----           ----
                                                       Dollars in millions
      Regular Dividends
         First Quarter ............................   $ 21.0        $  37.9
         Second Quarter ...........................     27.6           22.5
         Third Quarter ............................     23.2           19.7
         Fourth Quarter ...........................      7.5           18.8
                                                       -----         ------
             Sub-total ............................     79.3           98.9
      Special Dividend ............................       --          165.0
                                                      ------         ------
             Total ................................   $ 79.3         $263.9
                                                      ======         ======

     As of February 27, 1998,  stockholders of record of the Company included 76
holders of Class A common stock,  representing  approximately  11,500 beneficial
holders, and one holder of Class B common stock.


                                       11
<PAGE>

Item 6.  Selected Financial Data

     The following table sets forth selected consolidated  financial information
regarding  the  Company's  results of operations  and balance  sheet.  This data
presented  below  should  be  read in  conjunction  with  Item  7.  Management's
Discussion  and Analysis of Financial  Condition and Results of  Operations  and
Item 8. Financial Statements and Supplementary Data.

<TABLE>
<CAPTION>


                                                                Years Ended December 31,
                                           -------------------------------------------------------------------
                                            1997           1996           1995          1994           1993
                                            ----           ----           ----          ----           ----
                                                      Dollars in millions, except per share data
<S>                                          <C>            <C>           <C>           <C>            <C>   
Results of Operations
Net finance income ......................    $887.5         $797.9        $697.7        $649.8         $603.9
Total operating revenue (1) .............   1,193.3        1,042.0         882.4         824.2          737.7
Salaries and general operating
   expenses .............................     428.4          393.1         345.7         337.9          282.2
Provision for credit losses .............     113.7          111.4          91.9          96.9          104.9
Net income ..............................     310.1          260.1         225.3         201.1          182.3
Net income per diluted share ............      1.95           1.64          1.43          1.28           1.16

<CAPTION>
                                                                     At December 31,
                                           -------------------------------------------------------------------
                                            1997           1996           1995          1994           1993
                                            ----           ----           ----          ----           ----
                                                                   Dollars in millions
<S>                                       <C>            <C>           <C>           <C>            <C>      
Balance Sheet Data
Finance receivables:
Commercial .............................. $14,054.9      $13,757.6     $13,451.5     $12,821.2      $11,185.2
Consumer ................................   3,664.8        3,239.0       2,344.0       1,973.2        1,438.9
                                          ---------      ---------     ---------     ---------      ---------
Total finance receivables ............... $17,719.7      $16,996.6     $15,795.5     $14,794.4      $12,624.1
Reserve for credit losses ...............     235.6          220.8         206.0         192.4          169.4
Operating lease equipment, net ..........   1,905.6        1,402.1       1,113.0         867.9          751.9
Consumer finance receivables
   held for sale ........................     268.2          116.3         112.0          68.7          150.4
Total assets ............................  20,464.1       18,932.5      17,420.3      15,959.7       13,725.0
Commercial paper ........................   5,559.6        5,827.0       6,105.6       5,660.2        6,516.1
Variable rate senior notes ..............   2,861.5        3,717.5       3,827.5       3,812.5        1,686.5
Fixed rate senior notes .................   6,593.8        4,761.2       3,337.0       2,619.4        2,389.0
Subordinated fixed-rate notes ...........     300.0          300.0         300.0         300.0          200.0
Company-obligated mandatorily
   redeemable preferred securities of
   subsidiary trust holding solely
   debentures of the Company ............     250.0             --            --            --             --
Stockholders' equity ....................   2,432.9        2,075.4       1,914.2       1,793.0        1,692.2

<CAPTION>
                                                         At or for the Years Ended December 31,
                                           -------------------------------------------------------------------
                                            1997           1996           1995          1994           1993
                                            ----           ----           ----          ----           ----
<S>                                           <C>            <C>           <C>           <C>            <C>  
Selected Data and Ratios
Profitability
Net interest margin as a
   percentage of average
   earning assets ("AEA") (2) ...........     4.87%          4.82%         4.54%         4.77%          4.93%
Return on average stockholders'
   equity ...............................     14.0%          13.0%         12.1%         11.5%          11.0%
Return on AEA (2) .......................     1.70%          1.57%         1.46%         1.48%          1.49%
Ratio of earnings to fixed charges ......     1.51x          1.49x         1.44x         1.52x          1.60x
Salaries and general operating
   expenses as a percentage of
   average managed assets
   ("AMA") (3) ..........................     2.16%          2.22%         2.16%         2.44%          2.28%
Efficiency ratio (4)                          41.6%          42.7%         43.1%         44.5%          40.4%
Dividend payout ratio (5) ...............       26%            38%           46%           50%            50%

</TABLE>

                                       12
<PAGE>

<TABLE>
<CAPTION>
                                                         At or for the Years Ended December 31,
                                           -------------------------------------------------------------------
                                              1997           1996           1995          1994           1993
                                              ----           ----           ----          ----           ----
<S>                                           <C>            <C>           <C>           <C>            <C>  
Credit Quality
60+ days contractual delinquency
   (as a  percentage of finance
   receivables)
      Consumer - managed (as a
         percentage of managed finance
         receivables) (6) ...............     2.92%          1.97%         1.34%         0.57%          0.99%
      Consumer - owned ..................     3.48%          2.24%         1.50%         0.51%          1.13%
      Commercial - owned ................     1.20%          1.60%         1.70%         1.30%          1.79%
         Total - owned ..................     1.67%          1.72%         1.67%         1.20%          1.71%
Net credit losses (as a percentage
   of average  finance receivables)
      Consumer - managed (as a
         percentage of average managed
         finance receivables) ...........     0.91%          0.70%         0.45%         0.54%          0.75%
      Consumer - owned ..................     1.09%          0.75%         0.44%         0.55%          0.77%
      Commercial - owned ................     0.47%          0.59%         0.51%         0.62%          0.77%
         Total - owned ..................     0.59%          0.62%         0.50%         0.61%          0.77%
Total nonperforming assets (as a
   percentage of  finance
   receivables) (7)
      Consumer - owned ..................     2.78%          1.64%         1.02%         0.46%          0.95%
      Commercial - owned ................     0.75%          1.17%         1.33%         1.50%          1.99%
         Total - owned ..................     1.17%          1.26%         1.28%         1.36%          1.87%
Reserve for credit losses as a
   percentage of finance
   receivables ..........................     1.33%          1.30%         1.30%         1.30%          1.34%
Ratio of reserve for credit losses
   to current period net credit losses ..     2.33x          2.18x         2.67x         2.29x          1.79x
Leverage
Total debt to stockholders' equity and 
  Company-obligated  mandatorily redeemable
   preferred securities of subsidiary trust 
   holding solely debentures of the Company   5.71x          7.04x         7.09x         6.91x          6.38x
Total debt to stockholders'
   equity (8) ...........................     6.40x          7.04x         7.09x         6.91x          6.38x
Other
Total managed assets (in millions) (9) .. $22,344.9      $20,005.4     $17,978.6     $16,072.1      $13,723.6
Employees ...............................     3,025          2,950         2,750         2,700          2,400
</TABLE>

---------------
(1) Includes a gain of $58.0 million recorded in 1997 on the sale  of  an equity
    interest  acquired in connection with a loan workout.
(2) "AEA"  reflects  the  average  of  finance   receivables,   operating  lease
    equipment,   consumer   finance   receivables  held  for  sale  and  certain
    investments, less credit balances of factoring clients.
(3) "AMA" reflects  average earning assets plus the average of consumer  finance
    receivables previously securitized and currently managed by the Company.
(4) Efficiency  ratio  reflects  the ratio of  salaries  and  general  operating
    expenses to the sum of  operating  revenue  less  depreciation  of operating
    lease  equipment and minority  interest in subsidiary  trust holding  solely
    debentures of the Company.
(5) In 1995, the Company  operated under a dividend policy requiring the payment
    of  dividends  equal to and not  exceeding  50% of operating  earnings.  The
    actual  ratio for 1995,  however,  fell below 50% due to the deferral of the
    declaration  and payment of dividends  on December  1995  earnings  into the
    first quarter of 1996. In 1996, the Company  changed its dividend  policy to
    require the payment of dividends equal to and not exceeding 30% of operating
    earnings.
(6) Managed  finance  receivables  include owned finance  receivables,  consumer
    finance  receivables  held for sale and the  remaining  balance of  consumer
    finance  receivables  previously  securitized and currrently  managed by the
    Company.


                                       13
<PAGE>

(7) Owned nonperforming  assets reflect finance receivables on nonaccrual status
    and assets received in satisfaction of loans.
(8) Total debt includes,  and stockholders'  equity excludes,  $250.0 million of
    Company-obligated  mandatorily redeemable preferred securities of subsidiary
    trust holding solely debentures of the Company issued in February 1997.
(9) "Managed   assets"  include  (i)  financing  and  leasing  assets  and  (ii)
    off-balance sheet consumer finance  receivables  previously  securitized and
    currently managed by the Company.


                                       14
<PAGE>

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

1997 vs. 1996

Overview

      For the year ended December 31, 1997,  net income totaled $310.1  million,
up 19.2% from the $260.1 million for 1996,  representing  the tenth  consecutive
increase in annual earnings and the seventh  consecutive year of record earnings
for the Company. Return on equity for 1997 rose to 14.0% from 13.0% in 1996. The
1997 results  reflect  stronger  revenues  from a higher level of financing  and
leasing assets and a $58.0 million pretax gain on the sale of an equity interest
acquired in a loan workout.  These increased  revenues were partially  offset by
higher operating expenses  principally due to a $10.0 million pretax charge that
related to the termination of a long-term  incentive plan in connection with the
Company's  initial public offering (the  "Offering"),  higher  performance based
incentive accruals, and a provision for vacant leased space.

      Managed  assets  totaled  $22.3  billion,  an increase of 11.7% over $20.0
billion in 1996. Financing and leasing assets totaled a record $20.0 billion, an
increase  of 7.5%  over  1996.  The  increase  is the  result  of  growth in the
operating  lease  portfolio  and  factoring  receivables  as well as strong  new
business originations in the consumer businesses,  offset by certain liquidating
portfolios  and high levels of paydowns.  During 1997,  the Company  securitized
$1.4 billion of recreation  vehicle,  home equity and recreational  boat finance
receivables,   compared  with   securitizations   of   recreation   vehicle  and
recreational boat finance receivables of $774.9 million in 1996.

Net Finance Income

      A comparison of the  components of 1997 and 1996 net finance income is set
forth below.

<TABLE>
<CAPTION>
                                          Years Ended December 31,                Increase
                                       ----------------------------        ----------------------
                                          1997              1996            Amount        Percent
                                       ----------        ----------        ---------      -------
                                                             Dollars in Millions
<S>                                      <C>               <C>                <C>           <C>  
Finance income .......................   $1,824.7          $1,646.2           $178.5        10.8%
Interest expense .....................      937.2             848.3             88.9        10.5
                                        ---------         ---------         --------        ----
Net finance income ...................     $887.5            $797.9            $89.6        11.2%
                                        =========         =========         ========        ====
AEA ..................................  $18,224.5         $16,543.1         $1,681.4        10.2%
Net finance income as a % of AEA .....      4.87%             4.82%
</TABLE>

      Net finance income increased $89.6 million or 11.2% in 1997,  primarily as
a result of growth in the Company's earning assets.

      Finance  income  totaled  $1,824.7  million in 1997, up $178.5  million or
10.8% over 1996. As a percentage of AEA (excluding  interest  income relating to
short-term  interest-bearing  deposits),  finance  income  was 9.92% in 1997 and
9.90% in 1996.  Despite  continued  competitive  pressure on yields,  commercial
segment finance income,  as a percentage of commercial AEA, was 10.02% and 9.93%
for 1997 and 1996, respectively. Consumer segment finance income as a percentage
of consumer AEA was 9.57% for 1997, compared with 9.85% for 1996. The decline in
the consumer  segment yield primarily  reflects the purchase of a lower yielding
variable rate home equity credit line portfolio in December 1996 and the sale of
certain higher  yielding high  loan-to-value  loans during the second quarter of
1997. 

      Interest expense totaled $937.2 million in 1997, up $88.9 million or 10.5%
over 1996. As a percentage of AEA, 1997 interest expense decreased to 5.05% from
5.08% in 1996,  excluding  dividends related to the Company's  preferred capital
securities.  


                                       15
<PAGE>

      The Company seeks to mitigate interest rate risk by matching the repricing
characteristics  of its assets with its liabilities.  This strategy is, in part,
accomplished  through the use of interest rate swaps. A comparative  analysis of
the  weighted  average  principal  outstanding  and  interest  rates paid on the
Company's  debt before and after the effect of  interest  rate swaps is shown in
the following table.

<TABLE>
<CAPTION>
                                                          Years Ended December 31,
                            -----------------------------------------------------------------------------------
                                                1997                                      1996
                            ----------------------------------------- -----------------------------------------
                                 Before Swaps         After Swaps          Before Swaps         After Swaps
                            --------------------  ------------------- -------------------- --------------------
                                                             Dollars in Millions
<S>                           <C>          <C>     <C>          <C>    <C>           <C>    <C>           <C>  
Commercial paper and
 variable rate senior
 notes ....................   $ 9,574.2    5.61%   $ 6,443.2    5.54%  $ 9,952.2     5.48%  $ 6,774.3     5.42%
Fixed rate senior and
 subordinated notes .......     5,497.6    6.52%     8,628.6    6.52%    3,917.0     6.83%    7,094.9     6.68%
                              ---------            ---------           ---------            ---------
Composite .................   $15,071.8    5.94%   $15,071.8    6.10%  $13,869.2     5.86%  $13,869.2     6.06%
                              =========            =========           =========            =========
</TABLE>

      The Company's  interest rate swaps principally  convert floating rate debt
to fixed rate debt.  The  increases in the  composite  interest  rates after the
effect of hedging  activity  reflect the greater  proportion of debt effectively
paying fixed  interest  rates.  The weighted  average  interest rates before the
effect of swap hedging activity do not necessarily  reflect the interest expense
that would have been  incurred had the Company  chosen to manage  interest  rate
risk without the use of such swaps. See-"Asset/Liability Management" for further
discussion.

Fees and Other Income

      Fees and other income improved $3.7 million to $247.8 million during 1997,
primarily due to higher  factoring  commissions  and gains from higher levels of
securitization  activity  offset by a lower level of gains on leasing  equipment
sales.
      The following table sets forth the components of fees and other income.

                                                             Years Ended
                                                             December 31,
                                                     ---------------------------
                                                       1997               1996
                                                     ---------         ---------
                                                          Dollars in Millions

      Factoring commissions .......................    $ 95.2             $ 91.0
      Fees and other ..............................      72.9               74.2
      Gains on sales of leasing equipment and
        other  investments(1) .....................      46.9               54.6
      Gans on securitizations and sales of 
        finance receivables .......................      32.8               24.3
                                                       ------             ------
                                                       $247.8             $244.1
                                                       ======             ======
-----------
(1) Includes $12.9 million and $15.2 million  from  the sale of venture  capital
    investments in 1997 and 1996, respectively.

Gain On Sale of Equity Interest Acquired in Loan Workout

      The  Company  originated  a loan  in the  1980's  to a  telecommunications
company that  subsequently went into default.  Pursuant to a workout  agreement,
the stock of that company was  transferred  to the Company and a  co-lender.  In
1991,  the Company  received all amounts due and retained an equity  interest in
such  telecommunications  company,  which was sold in the second quarter of 1997
for a pretax gain to the Company of $58.0 million.

Salaries and General Operating Expenses

      Salaries and general operating expenses increased $35.3 million or 9.0% to
$428.4  million in 1997 from  $393.1  million  in 1996.  Salaries  and  employee
benefits rose $30.5 million (13.7%) while general  operating  expenses rose $4.8
million (2.8%).  Personnel increased to 3,025 at December 31, 1997 from 2,950 at
December 31, 1996.


                                       16
<PAGE>

      The increase in expenses  from 1996 to 1997 is  primarily  the result of a
$10.0 million pretax charge relating to the termination of a long-term incentive
plan  ("LTIP")  in  connection  with  the  Offering,  higher  performance  based
incentive  accruals  and a provision  for vacant  leased  space.  Subsequent  to
termination, the LTIP was replaced with a stock-based compensation plan.

      Management monitors productivity via the analysis of efficiency ratios and
the ratio of salaries and general operating expenses to AMA. AMA is comprised of
average  earning  assets  plus  the  average  of  consumer  finance  receivables
previously  securitized and currently managed by the Company. The improvement in
the ratios in the following table reflects continuing productivity initiatives.

                                                                Years Ended
                                                                December 31,
                                                         ----------------------
                                                           1997          1996
                                                         ---------    ---------

      Efficiency ratio .................................    41.6%         42.7%
      Salaries and general operating expenses 
        as a percentage of AMA .........................    2.16%         2.22%

      The Company manages expenditures using a comprehensive  budgetary process.
Expenses are  monitored  closely by business  unit  management  and are reviewed
monthly with senior  management of the Company.  To ensure overall  project cost
control,  an  approval  and  review  procedure  is in place  for  major  capital
expenditures,    such   as   purchases   of   computer   equipment,    including
post-implementation evaluation.

Provision and Reserve for Credit Losses/Credit Quality

      The provision for credit  losses for 1997 was $113.7  million  compared to
$111.4 million for 1996.  Comparative  net credit loss experience is provided in
the following table.

<TABLE>
<CAPTION>
                                                            Years Ended December 31,
                                       ------------------------------------------------------------------
                                                     1997                               1996
                                       -------------------------------      -----------------------------
                                         Total  Commercial    Consumer      Total  Commercial    Consumer
                                         -----  ----------    --------      -----  ----------    --------
                                                               Dollars in Millions
<S>                                     <C>        <C>          <C>         <C>       <C>          <C>  
Net credit losses ....................  $101.0     $65.5        $35.5       $101.5    $80.4        $21.1
Net credit losses as a percentage
 of average finance receivables,
 excluding consumer  finance
 receivables held for sale ...........    0.59%     0.47%        1.09%        0.62%    0.59%        0.75%
</TABLE>

      The decrease in commercial  net credit  losses  reflects  improved  credit
quality in the  commercial  portfolio and the  continued  strength of the United
States  economy.  The  increase in consumer net credit  losses is primarily  the
result of  portfolio  seasoning.  As a  percentage  of average  managed  finance
receivables,  consumer net credit  losses were 0.91% for 1997,  versus 0.70% for
1996.
      The  Company   strengthened  its  credit  loss  reserve  position  as  the
consolidated  reserve for credit losses  increased to $235.6  million  (1.33% of
finance receivables) at December 31, 1997, from $220.8 million (1.30% of finance
receivables)  at December 31, 1996. This increase  primarily  reflects growth in
finance  receivables.  The ratio of reserve to current  period net credit losses
also improved to 2.33 times at December 31, 1997 from 2.18 times at December 31,
1996. The  consolidated  reserve for credit losses is periodically  reviewed for
adequacy  based on the  nature and  characteristics  of the  obligors,  economic
conditions  and  trends,  charge-off  experience,  delinquencies  and  value  of
underlying   collateral  and  guarantees  (including  recourse  to  dealers  and
manufacturers).  It is management's  judgment that the consolidated  reserve for
credit  losses is adequate  to provide  for  potential  credit  losses.  Finance
receivables  are reviewed  periodically  to determine the  probability  of loss.
Chargeoffs are taken after  considering such factors as the obligor's  financial
condition  and the value of  underlying  collateral  and  guarantees.  Automatic
charge-offs are recorded on consumer finance  receivables at intervals beginning
at 180 days of contractual  delinquency,  based upon  historical  loss severity,
with  charge-offs  finalized upon  disposition of the foreclosed  property.  The
consolidated reserve for credit losses is intended to provide for future events,
which by their nature are uncertain.  Therefore,  changes in economic conditions
or  other  events  adversely  affecting  specific  obligors  or  industries  may
necessitate additions to the consolidated reserve for credit losses.


                                       17
<PAGE>

Past Due and Nonperforming Assets

      The following table sets forth certain information concerning past due and
total nonperforming  assets (and the related percentages of finance receivables)
at December 31, 1997 and 1996.

                                                      At December 31,
                                         --------------------------------------
                                                1997                 1996
                                         ----------------     -----------------
                                                  Dollars in Millions
Finance receivables, past due 
 60 days or more
  Commercial .........................   $168.9     1.20%     $219.8      1.60%
  Consumer ...........................    127.7     3.48%       72.5      2.24%
                                         ------     -----     ------      -----
    Total ............................   $296.6     1.67%     $292.3      1.72%
                                         ======     =====     ======      =====
Total nonperforming assets                                              
  Commercial .........................   $105.5     0.75%     $160.4      1.17%
  Consumer ...........................    101.9     2.78%       53.1      1.64%
                                         ------     -----     ------      -----
    Total ............................   $207.4     1.17%     $213.5      1.26%
                                         ======     =====     ======      =====
                                                                            
      Total nonperforming  assets reflect both finance receivables on nonaccrual
status and assets received in satisfaction of loans.

Operating Lease Equipment

      The operating lease  equipment  portfolio was $1.9 billion at December 31,
1997, up 35.9% from December 31, 1996.  As a result,  depreciation  on operating
lease  equipment for 1997 was $146.8  million,  up from $121.7 million for 1996.
See "Financing  and Leasing  Assets" for further  discussion on operating  lease
portfolio growth.
      From time to time,  financial or  operational  difficulties  may adversely
affect future payments to the Company relating to operating lease equipment.  At
December 31, 1997, operators of certain aircraft assets and operations at an oil
refinery were subject to such difficulties.  The approximate  aggregate carrying
values of these assets were $57.7  million.  The Company does not believe  these
difficulties will have a material effect on its consolidated  financial position
or results of operations.

Income Taxes

      The provision for federal and state and local income taxes totaled  $178.0
million in 1997,  compared with $155.7 million in 1996. The effective income tax
rate for 1997  declined to 36.5%,  compared  with 37.4% in 1996,  as a result of
lower state and local taxes.


                                       18
<PAGE>

Financing and Leasing Assets

      Managed assets grew $2.3 billion  (11.7%) to $22.3 billion.  Financing and
leasing  assets rose $1.4 billion  (7.5%) to $20.0 billion in 1997, as presented
in the following table.

<TABLE>
<CAPTION>
                                             At December 31,          Change
                                          -------------------   -------------------
                                           1997        1996       Amount    Percent
                                         --------   ---------   ---------   -------
                                                      Dollars in Millions
<S>                                      <C>         <C>         <C>         <C>    
Commercial
Equipment Financing and Leasing
Finance receivables
  Capital Finance (1) .................  $ 2,400.7   $ 4,302.7   $(1,902.0)  (44.2)%
  Equipment Financing (1) .............    7,403.4     5,616.8     1,786.6    31.8
                                         ---------   ---------    --------   ---- 
                                           9,804.1     9,919.5      (115.4)   (1.2)
                                         ---------   ---------    --------   ---- 
Operating lease equipment, net
  Capital Finance (1) .................    1,281.8       975.5       306.3    31.4
  Equipment Financing (1) .............      623.8       426.6       197.2    46.2
                                         ---------   ---------    --------   ---- 
                                           1,905.6     1,402.1       503.5    35.9
                                         ---------   ---------    --------   ---- 
Total Equipment Financing and Leasing .   11,709.7    11,321.6       388.1     3.4
                                         ---------   ---------    --------   ---- 
Factoring
  Commercial Services .................    2,113.1     1,804.7       308.4    17.1
                                         ---------   ---------    --------   ---- 
Commercial Finance
  Business Credit (2) .................    1,247.9     1,235.6        12.3     1.0
  Credit Finance (2) ..................      889.8       797.8        92.0    11.5
                                         ---------   ---------    --------   ---- 
Total Commercial Finance ..............    2,137.7     2,033.4       104.3     5.1
                                         ---------   ---------    --------   ---- 
  Total commercial ....................   15,960.5    15,159.7       800.8     5.3
                                         ---------   ---------    --------   ---- 
Consumer
Consumer Finance ......................    1,992.3     2,005.5       (13.2)   (0.7)
Sales Financing .......................    1,940.7     1,349.8       590.9    43.8
                                         ---------   ---------    --------   ---- 
  Total consumer ......................    3,933.0     3,355.3       577.7    17.2
                                         ---------   ---------    --------   ---- 
Corporate and other ...................       65.8        53.0        12.8    24.2
                                         ---------   ---------    --------   ---- 
  Total financing and leasing assets ..   19,959.3    18,568.0     1,391.3     7.5
                                         ---------   ---------    --------   ---- 
Consumer finance receivables previously
   securitized and currently managed by
   the Company
  Consumer Finance ....................      453.8      --           453.8   100.0
  Sales Financing .....................    1,931.8     1,437.4       494.4    34.4
                                         ---------   ---------    --------   ---- 
                                           2,385.6     1,437.4       948.2    66.0
                                         ---------   ---------    --------   ---- 

  Total managed assets ................  $22,344.9   $20,005.4    $2,339.5   11.7%
                                         =========   =========    ========   ==== 
</TABLE>
 
------------
(1) On January 1, 1997,  $1,519.2 million of financing  and leasing  assets were
    transferred from Capital Finance to Equipment Financing.
(2) In October 1997, $95.0 million of finance receivables were transferred  from
    Business Credit to Credit Finance.

      Total  commercial  financing  and  leasing  assets grew 5.3% due to strong
growth  in  the  operating   lease   portfolio  and  an  increase  in  factoring
receivables.  The  operating  lease  portfolio  growth was focused  primarily in
commercial  aircraft ($198.7 million),  railroad  equipment ($155.8 million) and
business  aircraft ($127.8  million).  Factoring  finance  receivable  growth is
attributable  to an improved  retail sales  environment  and strong new business
signings. These increases were partially offset by high customer paydowns in the
commercial  financing  sector due to the strong economy and the  availability of
alternative  sources of capital.  Portfolio  growth was moderated as a result of
the Company's decision to liquidate its oceangoing maritime and power generation
project  portfolios.  Consumer  managed  assets  increased  $1.5 billion to $6.3
billion from $4.8 billion at December 31, 1996.  This increase  reflects  strong
home equity  originations,  and growth in Sales  Financing new business  volume,
primarily  in  recreation   vehicle  and  recreational  boat  products  and  the
introduction of wholesale inventory financing.


                                       19
<PAGE>

Financing and Leasing Assets Composition

      The Company's ten largest financing and leasing asset accounts at December
31, 1997 in the aggregate  represented 4.2% of the Company's total financing and
leasing assets. All ten of such accounts are commercial accounts and are secured
by equipment, accounts receivable and/or inventory.

Geographic Composition

      The following  table  presents  financing  and leasing  assets by customer
location.

                                                     At December 31,
                                     -------------------------------------------
                                            1997                    1996
                                     -------------------     -------------------
                                     Amount      Percent     Amount     Percent
                                     ------      -------     ------     -------
                                                 Dollars in Millions
United States
  West ...........................  $ 4,642.1      23.3%   $ 4,599.4      24.8%
  Northeast ......................    4,501.9      22.6      4,279.4      23.0
  Midwest ........................    4,290.0      21.5      3,727.1      20.1
  Southeast ......................    2,802.9      14.0      2,814.1      15.1
  Southwest ......................    2,360.7      11.8      2,036.6      11.0
Foreign (principally
  commercial aircraft) ...........    1,361.7       6.8      1,111.4       6.0
                                    ---------     -----    ---------     ----- 
  Total ..........................   $19,959.3     100.0%   $18,568.0     100.0%
                                    =========     =====    =========     ===== 

      The  Company's   managed  asset  geographic   diversity  does  not  differ
significantly from its owned asset geographic diversity.
      The  Company's  financing and leasing asset  portfolio is  diversified  by
state. At December 31, 1997, with the exception of California (12.8%),  New York
(7.9%) and Texas (7.7%),  no state  represented  more than 5.0% of financing and
leasing assets.

Industry Composition

      The  following  table  presents  financing  and  leasing  assets  by major
industry class.

                                                       At December 31,
                                          --------------------------------------
                                                 1997               1996
                                          ----------------     -----------------
                                          Amount    Percent    Amount    Percent
                                          ------    -------    ------    -------
                                                 Dollars in Millions
Manufacturing(1)
  (none greater than 4.4%) ...........   $ 4,440.4    22.2%   $ 4,472.8    24.0%
Commercial airlines(2) ...............     2,077.6    10.4      1,910.0    10.3
Home mortgage(3) .....................     1,992.3    10.0      2,005.5    10.8
Retail ...............................     1,807.5     9.1      1,651.1     8.9
Construction equipment ...............     1,791.4     9.0      1,683.1     9.1
Transportation(4) ....................     1,283.7     6.4      1,184.5     6.4
Manufactured housing(5) ..............     1,125.7     5.6        790.3     4.3
Other (none greater than 3.5%)(6) ....     5,440.7    27.3      4,870.7    26.2
  Total ..............................   $19,959.3   100.0%   $18,568.0   100.0%
                                                            
-----------
(1) Includes  manufacturers  of steel and metal products,  textiles and apparel,
    printing and paper products, and other industries.
(2) See "Concentrations" for a discussion of the commercial airline portfolio.
(3) On a managed asset basis, home mortgage  outstandings were $2.4 billion,  or
    10.9% of managed  assets at December 31, 1997 as compared to $2.0 billion or
    10.0% at December 31, 1996.
(4) Includes rail,  bus, and  over-the-road  trucking  industries,  and business
    aircraft.
(5) On a  managed  asset  basis,  manufactured  housing  outstandings  were $1.5
    billion or 6.5% of managed  assets at December  31, 1997 as compared to $1.2
    billion or 6.0% at December 31, 1996.
(6) On a managed asset basis,  recreation vehicle outstandings were $1.6 billion
    or 7.2% of managed  assets at December  31, 1997 as compared to $1.3 billion
    or 6.3% at December 31, 1996.  On a managed asset basis,  recreational  boat
    outstandings  were $682.5  million or 3.1% of managed assets at December 31,
    1997 as compared to $327.8 million or 1.6% of managed assets at December 31,
    1996.


                                       20
<PAGE>

Concentrations

Commercial Airline Industry

      Commercial  airline  financing  and leasing  assets  totaled  $2.1 billion
(10.4% of total  financing  and leasing  assets) at December 31, 1997,  compared
with $1.9 billion (10.3%) in 1996. From 1992 to 1996, the Company limited growth
in the commercial  airline portfolio due to a general weakness in the commercial
aerospace  industry.  Given current industry  performance and improved equipment
values, the Company has determined to grow this portfolio,  but will continue to
monitor the size of the portfolio  relative to the Company's total financing and
leasing  assets.  The  Company  continues  to reduce  its Stage II  exposure  as
evidenced by the fact that 93.1% of the  portfolio at December 31, 1997 consists
of Stage III aircraft versus 90.7% at December 31, 1996.

      The following  table presents  information  about the  commercial  airline
industry portfolio. See also "--Operating Lease Equipment."

                                                        At December 31,
                                                   ------------------------
                                                     1997            1996
                                                   ---------       --------
                                                       Dollars in Millions
      Finance receivables
        Amount outstanding(1) ...................  $1,254.9        $1,286.0
        Number of obligors ......................        54              54
      Operating lease equipment, net
        Net carrying value ......................    $822.7          $624.0
        Number of obligors ......................        33              32
         Total ..................................  $2,077.6        $1,910.0
      Number of obligors(2) .....................        67              72
      Number of aircraft(3) .....................       225             239

-----------
(1) Includes  accrued rents on operating  leases that are  classified as finance
    receivables in the Consolidated Balance Sheets.
(2) Certain  obligors are obligors  under both finance  receivable and operating
    lease transactions.
(3) Regulations  established by the Federal Aviation  Administration (the "FAA")
    limit the maximum permitted noise an aircraft may make. A Stage III aircraft
    meets a more restrictive  noise level  requirement than a Stage II aircraft.
    The FAA has issued  rules that phase out the use of Stage II aircraft in the
    United  States  through  the year 2000.  The  International  Civil  Aviation
    Organization has issued similar  requirements for Europe.  At year-end 1997,
    the portfolio  consisted of Stage III aircraft of $1,933.5  million  (93.1%)
    and Stage II aircraft of $115.7  million (5.6%) versus Stage III aircraft of
    $1,733.2  million  (90.7%) and Stage II aircraft of $149.1 million (7.8%) at
    year-end 1996.

      The  continued  shift in  commercial  aircraft  product  mix from  secured
financings to operating lease equipment  reflects the Company's  strong industry
and equipment expertise which enables the Company to compete more effectively in
commercial aircraft operating lease transactions.

Foreign Outstandings

      The Company is primarily a domestic lender, with foreign exposures limited
mainly to the  commercial  airline  industry.  Financing  and leasing  assets to
foreign  obligors are all U. S. dollar  denominated  and totaled $1.4 billion at
December 31, 1997.  The largest  exposures at December 31, 1997 were to obligors
in Mexico,  $128.2  million  (0.64% of financing  and leasing  assets),  France,
$125.9 million (0.63%), and the Republic of Ireland, $108.9 million (0.55%). The
remaining foreign exposure was geographically dispersed with no other individual
country representing more than 0.51% of financing and leasing assets.
      At December 31, 1996,  financing  and leasing  assets to foreign  obligors
totaled  $1.1  billion.  The  largest  exposures  at  December  31, 1996 were to
obligors in Mexico, $141.5 million (0.76%),  France, $130.4 million (0.70%), and
the United Kingdom,  $126.9 million (0.68%).  The remaining foreign exposure was
geographically dispersed with no other individual country representing more than
0.51% of financing and leasing assets.

Highly Leveraged Transactions ("HLTs")

      HLTs which the Company  originated  and in which it  participated  totaled
less than 2.0% of  financing  and leasing  assets at both  December 31, 1997 and
1996,  respectively.  The Company's HLT  outstandings  are generally  secured by
collateral,  as  distinguished  from HLTs that rely primarily on cash flows from
operations.  Unfunded  commitments to lend in secured HLT financings were $165.5
million at December 31, 1997, compared with $144.1 million at year-end 1996.


                                       21
<PAGE>

Recent Accounting Pronouncements

      In 1997,  the Financial  Accounting  Standards  Board issued  Statement of
Financial Accounting Standards No. 130, "Reporting  Comprehensive  Income". This
statement does not change the reporting of net income. However, it requires that
all items that are  required to be  recognized  under  accounting  standards  as
components of comprehensive income be reported in a separate financial statement
that is displayed with the same prominence as other financial  statements.  This
statement also requires that an enterprise  display the  accumulated  balance of
other comprehensive income separately from retained earnings and paid-in-capital
in the equity section of a statement of financial position.  The Company adopted
this statement on January 1, 1998.

      Also in 1997, the Financial Accounting Standards Board issued Statement of
Financial  Accounting  Standards  No.  131,  "Disclosures  About  Segments of an
Enterprise  and  Related  Information",  which is  effective  for  fiscal  years
beginning  after  December 15, 1997.  The  Statement  establishes  standards for
reporting  information about operating  segments in annual financial  statements
and  requires  reporting of selected  information  about  operating  segments in
interim financial reports issued to stockholders.  It also establishes standards
for related disclosures about products and services, geographic areas, and major
customers.  The  Company  plans  to  adopt  Statement  of  Financial  Accounting
Standards No. 131 in the year ended December 31, 1998.

Year 2000 Compliance

      The Year 2000  compliance  issue arises out of the inability of computers,
software and other equipment utilizing microprocessors to recognize and properly
process data fields  containing a 2 digit year.  In response to this issue,  the
Company  has  developed  a  comprehensive  project to ensure  that its  software
applications  and systems  are Year 2000  compliant.  The scope of this  project
includes,  among other  things,  the  assessment of "at risk"  applications  and
systems,  an  assessment  of the  interdependencies  of various  systems and the
relative importance of each system to the business,  the design and execution of
required  modifications  to  achieve  Year  2000  compliance,  and the plans for
testing of modifications to verify Year 2000 compliance.  The Company expects to
complete  substantially  all Year 2000 remediation and testing by the end of the
first quarter of 1999.  The Company's  ability to meet this timetable is in part
dependent  upon the  ability of third  parties,  such as  software  vendors  and
developers,  to meet  their  stated  deadlines.  In  addition,  the  Company  is
communicating  with  other  third  parties,  including  vendors,  borrowers  and
obligors,  to determine the status of their Year 2000 compliance in an effort to
reduce the Company's potential exposure to such third parties' Year 2000 issues.
While the Company has made and will continue to make certain investments related
to this project, the financial impact to the Company of such investments has not
been,  and is not  anticipated  to be,  material  to its  financial  position or
results of operations.

Credit Risk Management

      The Company has developed systems  specifically  designed to manage credit
risk in its commercial  and consumer  business  segments.  Financing and leasing
assets  are  evaluated  for credit and  collateral  risk both  during the credit
granting process and periodically after the advancement of funds.

      Credit  authority  is  delegated to each  strategic  business  unit by the
Executive  Credit  Committee  of the Company  ("ECC").  The ECC is  comprised of
members  of senior  management,  including  the Chief  Executive  Officer,  Vice
Chairman, Executive Vice President--Credit Administration, Senior Executive Vice
President  and  Executive  Vice   President--Multi-National   Marketing   Group.
Generally,  all  non-standard  transactions,  transactions  outside  of  certain
established target market  definitions and transactions  outside of certain risk
acceptance criteria must be approved by members of the ECC.


      Each  of  the  Company's   strategic  business  units  has  developed  and
implemented a formal credit management process in accordance with formal uniform
guidelines  established  by  the  ECC.  These  ECC  guidelines  set  forth  risk
acceptance  criteria for: (i) the acceptable  maximum credit line; (ii) selected
target markets and products; (iii) the creditworthiness of borrowers,  including
credit  history,  financial  condition,  adequacy  of cash flow and  quality  of
management;  and (iv) the type and value of underlying collateral and guarantees
(including  recourse to dealers and  manufacturers.)  The Company also employs a
risk adjusted  pricing  process  where the perceived  credit risk is a factor in
determining  the interest rate or fees charged for


                                       22
<PAGE>

the Company's financing and leasing products.  As economic and market conditions
change,   credit  risk  management  practices  are  reviewed  and  modified,  if
necessary, to seek to minimize the risk of credit loss.

      Compliance  with  established  corporate  policies and  procedures and the
credit management  processes at each strategic business unit are reviewed by the
credit audit group of the Company's internal audit department.  The credit audit
group examines  adherence with  established  credit  policies and procedures and
tests for inappropriate  credit  practices,  including whether potential problem
accounts are being detected and reported on a timely basis. The General Auditor,
who oversees the credit audit group,  reports to the Chief Executive  Officer of
the Company and to the Audit Committee.

Commercial

      The Company has developed  systems  specifically  designed to  effectively
manage credit risk in its  commercial  operations.  The process  starts with the
initial  evaluation  of credit  risk and  underlying  collateral  at the time of
origination  and continues over the life of the finance  receivable or operating
lease,  including  collecting  past  due  balances  and  liquidating  underlying
collateral.

      Credit  personnel for the applicable  strategic  business unit review each
potential  borrower's financial  condition,  results of operations,  management,
industry,  customer  base,  operations,  collateral and other data such as third
party  credit  reports  to  perform  a  thorough  evaluation  of the  customer's
borrowing  and  repayment  ability.  Borrowers  are graded  according  to credit
quality based upon the Company's  uniform  credit grading  system,  which grades
both the  borrower's  financial  condition  and  underlying  collateral.  Credit
facilities are subject to approval within the Company's  overall credit approval
and  underwriting  guidelines  and  are  issued  commensurate  with  the  credit
evaluation performed of each borrower.

      The  Company's  ongoing  review  and  monitoring  of credit  exposures  is
designed  to  identify,  as  early  as  possible,  those  customers  that may be
experiencing  declining  creditworthiness  or financial  difficulty.  Commercial
finance  receivables  are  periodically  evaluated  based upon  credit  criteria
developed under the Company's uniform credit grading system.  Concentrations are
monitored by borrower, industry, geographic region and equipment type and limits
are adjusted by management as conditions warrant to seek to minimize the risk of
credit loss.

      Periodically,  the status of finance  receivables greater than $500,000 to
obligors with higher (riskier)  credit grades is individually  reviewed with the
Asset  Quality  Review  committee,  which is  comprised  of  members  of  senior
management,  including the Vice Chairman,  the Executive Vice  President--Credit
Administration and the Chief Financial Officer, and certain senior executives of
the applicable strategic business unit.

Consumer

      For consumer loans,  management has developed and implemented  proprietary
automated credit scoring models for each loan type (e.g.,  recreation  vehicles,
manufactured  housing,  recreational  boat and home  equity)  that  include both
customer demographics and credit bureau characteristics. The profiles emphasize,
among other things, occupancy status, length of residence, length of employment,
debt to income ratio (ratio of total  installment  debt and housing  expenses to
gross monthly income),  bank account  references,  credit bureau information and
combined  loan to  value  ratio.  The  models  are used to  assess  a  potential
borrower's  credit  standing  and  repayment  ability  considering  the value or
adequacy  of property  offered as  collateral.  The  Company's  credit  criteria
include  reliance  on  credit  scores,  including  those  based  upon  both  its
proprietary  internal  credit scoring model and external  credit bureau scoring,
combined with judgment.  The credit  scoring  models are regularly  reviewed for
effectiveness   utilizing   statistical  tools.  Consumer  loans  are  regularly
evaluated using past due, vintage curve and other  statistical  tools to analyze
trends and credit  performance  by loan type,  including  analysis  of  specific
credit characteristics and other selected subsets of the portfolios. Adjustments
to credit  scorecards  and lending  programs  are made when deemed  appropriate.
Individual   underwriters   are  assigned  credit  authority  based  upon  their
experience,  performance  and  understanding  of the  underwriting  policies and
procedures of the Company's consumer  operations and a credit approval hierarchy
exists to ensure that all  applications  are reviewed by an underwriter with the
appropriate level of authority.

      See -- "Provision and Reserve for Credit Losses".


                                       23
<PAGE>

Asset/Liability Management

      Management strives to manage interest rate and liquidity risk and optimize
net finance  income  under  formal  policies  established  and  monitored by the
Capital Committee, which is comprised of members of senior management, including
the Chief Executive Officer, the Vice Chairman,  the Chief Financial Officer and
senior  representatives  of DKB. Three members of the Capital Committee are also
members of the Company's Board of Directors.  The Capital Committee  establishes
and regularly reviews interest rate sensitivity,  funding needs, liquidity,  and
asset-pricing  to  determine   short-term  and  long-term  funding   strategies,
including the use of off-balance sheet derivative financial instruments.

      The Company uses off-balance  sheet derivatives for hedging purposes only.
The Company does not enter into derivative financial  instruments for trading or
speculative  purposes.  To  ensure  both  appropriate  use as a hedge  and hedge
accounting treatment, all derivatives entered into are designated,  according to
the  applicable  hedge  objective,  against  commercial  paper,  a  specifically
underwritten  debt issue,  or a specific pool of assets.  The Company's  primary
hedge  objectives  include the conversion of variable rate  liabilities to fixed
rates, the conversion of fixed rate liabilities to variable rates, the fixing of
spreads  on  variable  rate  liabilities  to  various  market  indices  and  the
elimination of interest rate risk on finance receivables  classified as held for
sale prior to securitization.

      Derivative  positions  are  managed  in such a way  that the  exposure  to
interest rate, credit or foreign exchange risk is in accordance with the overall
operating  goals  established  by the Capital  Committee.  There is an approved,
diversified list of creditworthy  counterparties  used for derivative  financial
instruments,  each of whom has specific credit exposure limits,  which are based
on market value. The Executive Credit Committee  approves each  counterparty and
its related market value and credit  exposure limit annually or more  frequently
if any changes are  recommended.  Credit  exposures  for each  counterparty  are
measured  based upon market  value of the  outstanding  derivative  instruments.
Market values are calculated periodically for each swap contract,  summarized by
counterparty and reported to the Capital Committee.  For additional  information
regarding  the  Company's  derivative  portfolio,  refer to "Note  7--Derivative
Financial Instruments" in Item 8. Financial Statements and Supplementary Data.

Interest Rate Risk Management

      Changes  in  market  interest  rates  or  in  the  relationships   between
short-term and long-term market interest rates or in the  relationships  between
different interest rate indices (i.e., basis risk) can affect the interest rates
charged on  interest-earning  assets differently than the interest rates paid on
interest-bearing  liabilities,  which can  result  in an  increase  in  interest
expense relative to finance income.

      The Capital Committee  actively manages interest rate risk by changing the
proportion of fixed and floating rate debt and by utilizing  primarily  interest
rate swaps and, to a lesser extent,  other derivative  instruments to modify the
repricing characteristics of existing interest-bearing liabilities.  Issuing new
debt or hedging the interest  rate on existing  debt through the use of interest
rate swaps and other derivative  instruments are both tools in managing interest
rate risk.  The  decision  to use one or the other or a  combination  of both is
driven  by the  relationship  between  the  relative  interest  rate  costs  and
effectiveness  of the  alternatives,  and  liquidity  needs of the Company.  For
example,  a fixed rate,  fixed term loan  transaction may initially be funded by
commercial  paper,  resulting in interest  rate risk.  To reduce this risk,  the
Company may enter into a hedge that has an inverse  correlation  to the interest
rate  sensitivity  created,  whereby the Company would pay a fixed interest rate
and receive a commercial  paper  interest rate thereby  matching the fixed rate,
fixed  term loan with fixed  rate,  fixed  term  debt.  Basis risk is  similarly
managed  through the issuance of new debt or the  utilization  of interest  rate
swaps or other derivative instruments.

      The  Company's   degree  of  interest  rate  sensitivity  is  continuously
monitored and  simulated  through  computer  modeling by measuring the repricing
characteristics of interest-sensitive assets, liabilities, and off-balance sheet
derivatives.  The results of this  modeling are reviewed  monthly by the Capital
Committee.  The interest rate sensitivity  modeling  techniques  employed by the
Company  essentially include the creation of prospective twelve month "baseline"
and "rate shocked" net interest  income  simulations.  At the date that interest
rate  sensitivity  is  modeled,   "baseline"  net  interest  income  is  derived
considering the current level of  interest-sensitive  assets and related run-off
(including both contractual repayment and historical prepayment experience), the
current level of  interest-sensitive  liabilities and related maturities and the
current level of off-


                                       24
<PAGE>

balance sheet derivatives. The "baseline" simulation also assumes that, over the
next  successive  twelve  months,  market  interest  rates  (as of the  date  of
simulation)  are held  constant  and that no new  loans are  extended.  Once the
"baseline"  net interest  income is known,  market  interest  rates,  which were
previously  held  constant,  are raised  100 basis  points  instantaneously  and
parallel across the entire yield curve, and a "rate shocked"  simulation is run.
Interest rate sensitivity is then measured as the difference  between calculated
"baseline" and "rate shocked" net interest income.

      Utilizing the Company's computer  modeling,  if no new fixed rate loans or
leases  were  extended  and no  actions  to alter  the  existing  interest  rate
sensitivity   were  taken   subsequent   to  December  31,  1997,  an  immediate
hypothetical  100 basis  points  parallel  rise in the yield curve on January 1,
1998 would reduce net income by an estimated  $0.1  million  after-tax  over the
next twelve months.  Although  management  believes that this measure provides a
meaningful  estimate of the  Company's  interest rate  sensitivity,  it does not
adjust for  potential  changes  in the credit  quality,  size,  composition  and
prepayment  characteristics of the balance sheet and other business developments
that could affect net income. Accordingly, no assurance can be given that actual
results would not differ  materially from the potential outcome simulated by the
Company's  computer  modeling.   Further,  it  does  not  necessarily  represent
management's current view of future market interest rate movements.

      The Company periodically enters into structured financings (involving both
the  issuance  of debt and an  interest  rate swap with  corresponding  notional
principal  amount  and  maturity)  that not only  improve  liquidity  and reduce
interest  rate risk,  but result in a lower  overall  funding cost than could be
achieved  by solely  issuing  debt.  For  example,  in order to fund  fixed rate
assets, a medium-term variable rate note based upon the U. S. federal funds rate
can be issued  and  coupled  with an  interest  rate swap  exchanging  the U. S.
federal funds rate for a fixed interest rate. This creates,  in effect,  a lower
cost fixed rate medium-term obligation.

      Interest  rate swaps with  notional  principal  amounts of $3.6 billion at
December  31, 1997 and $5.3  billion at December  31,  1996 were  designated  as
hedges against outstanding debt and were principally used to effectively convert
the interest  rate on variable rate debt to a fixed rate that sets the Company's
fixed rate term debt  borrowing  cost over the life of the swap and  reduces the
Company's  exposure to rising interest rates but reduces the Company's  benefits
from lower interest rates.

      Interest rate swaps are further discussed in Note 7--Derivative  Financial
Instruments in Item 8. Financial Statements and Supplementary Data.

Liquidity

      The Company manages  liquidity risk by monitoring the relative  maturities
of assets and liabilities and by borrowing  funds,  primarily in the U. S. money
and capital markets.  Such cash is used to fund asset growth (including the bulk
purchase of finance  receivables  and the  acquisition of other  finance-related
businesses) and to meet debt  obligations and other  commitments on a timely and
cost-effective  basis.  The  primary  sources of funding  are  commercial  paper
borrowings,   medium-term  notes,   other  debt  securities,   and  asset-backed
securitizations.

      Commercial paper  outstanding  decreased $267.4 million to $5.6 billion at
December 31, 1997 from $5.8 billion at December 31, 1996.

      During 1997, the Company issued $2.0 billion of prime-based  variable rate
term debt.  During  1997,  the Company  issued $2.5  billion of fixed rate debt.
Repayments of debt totaled $3.6 billion for 1997.

      At December  31, 1997,  $6.5 billion of  registered,  but  unissued,  debt
securities remained available under shelf registration statements.

      The Company's  commercial  paper,  publicly issued variable rate and fixed
rate senior debt,  and senior  subordinated  long-term  notes and debentures are
rated by Moody's  Investors  Service,  Duff & Phelps Credit  Rating  Company and
Standard & Poor's Corporation.

      At December 31, 1997,  commercial  paper borrowings were supported by $5.0
billion of committed  revolving  credit-line  facilities.  At December 31, 1997,
such  credit-line  facilities  represented  91% of  operating  commercial  paper
outstanding  (commercial paper outstanding less interest-bearing  deposits),  as
compared to 90% at December 31, 1996. No borrowings  have been made under credit
lines supporting commercial paper since 1970.


                                       25
<PAGE>

      As part of the  Company's  continuing  program of accessing the public and
private asset-backed  securitization  markets as an additional liquidity source,
recreation  vehicle,  home equity and recreational  boat finance  receivables of
$1.4  billion  were   securitized  by  the  Company  during  1997.  The  Company
securitized recreation vehicle finance receivables and recreational boat finance
receivables of $774.9 million in 1996.

      The Company had $1.5 billion of  registered,  but unissued,  securities at
December 31, 1997, relating to the Company's asset-backed securitization program
available under shelf registration statements.

Capitalization

      The following table presents  information  regarding the Company's capital
structure.

                                                              At December 31,
                                                       -------------------------
                                                         1997             1996
                                                       ---------       ---------
                                                           Dollars in Millions
Commercial paper ...................................   $ 5,559.6       $ 5,827.0
Term debt ..........................................     9,755.3         8,778.7
Company-obligated mandatorily redeemable
  preferred securities of subsidiary trust 
  holding solely debentures of the Company .........       250.0            --

Stockholders' equity ...............................     2,432.9         2,075.4
                                                       ---------       ---------
Total capitalization ...............................   $17,997.8       $16,681.1
                                                       =========       =========
Total debt to stockholders' equity and 
  Company-obligated mandatorily redeemable
  preferred securities of subsidiary
  trust holding solely debentures of the Company ...       5.71x           7.04x
Total debt and Company-obligated mandatorily 
  redeemable preferred securities of subsidiary 
  trust holding solely debentures of  the Company 
  to  stockholders'  equity ........................       6.40x           7.04x

      In February 1997,  CIT Capital Trust I, a  wholly-owned  subsidiary of the
Company,  issued  $250.0  million of 7.70%  Preferred  Capital  Securities,  the
proceeds of which were invested in Junior Subordinated Debentures of the Company
having identical rates and payment dates.

      In November 1997, the Company issued  36,225,000  shares of Class A common
stock in the Offering.  Prior to November  1997, DKB owned 80% of the issued and
outstanding stock of the Company.  The remaining 20% of the Company's issued and
outstanding stock was owned by Chase, through a wholly-owned subsidiary. DKB had
an option expiring  December 15, 2000 to purchase the remaining 20% common stock
interest from Chase. In November 1997, the Company purchased DKB's option at its
fair market value,  exercised the option to purchase the stock held by Chase and
recapitalized the Company by converting the previous common stock to 157,500,000
shares of Class B common  stock.  Twenty  percent  of the  Class B common  stock
shares  (which has five votes per share) were  converted to Class A common stock
shares  (which has one vote per share)  and,  in  addition  to an  underwriter's
overallotment  option,  were  issued in the  Offering.  The  issuance of Class A
common stock pursuant to the underwriter's overallotment resulted in an increase
to the Company's  stockholders'  equity of $117.7 million. At December 31, 1997,
DKB owns 100% of the outstanding  shares of Class B common stock of the Company,
which are not publicly traded.

      Through  March 31,  1996,  the Company  operated  under a dividend  policy
requiring the payment of dividends by the Company equal to and not exceeding 50%
of net operating earnings on a quarterly basis.  Commencing with the 1996 second
quarter dividend,  the dividend policy of the Company was changed to require the
payment of  dividends  by the  Company  of 30% of net  operating  earnings  on a
quarterly basis.  During 1997,  1996, and 1995,  regular cash dividends of $79.3
million, $98.9 million and $104.1 million, respectively,  were paid. On December
24, 1996,  with the consent of the  Company's  stockholders,  the Company paid a
special dividend in the aggregate amount of $165.0 million to its  stockholders.
DKB and Chase  immediately  contributed an aggregate amount of $165.0 million to
the paid-in capital of the Company in proportion to their respective 80% and 20%
ownership interests.

      In connection with the Offering,  the Company  terminated its pre existing
dividend  policy.  It is  expected  that the  dividend in respect of the quarter
ending  March  31,  1998,  which  will  be  the  first  dividend  following  the
consummation  of the  Offering,  will be  $0.10  per  share  (a  rate  of  $0.40
annually).


                                       26
<PAGE>

1996 vs. 1995

Overview

      For the year ended December 31, 1996,  net income totaled $260.1  million,
an increase of 15.5% from the $225.3 million for 1995, and represented the ninth
consecutive increase in annual earnings and the sixth consecutive year of record
earnings.  The 1996 results  reflect  stronger  revenues from increased  finance
income and higher  fees and other  income,  partially  offset by an  increase in
operating expenses.

      Financing and leasing assets  totaled a record $18.6 billion,  an increase
of 8.8% over 1995. This increase was the result of growth in the operating lease
portfolio  as well  as  strong  new  business  originations  across  all  units,
particularly  in the areas of  consumer  and small to  medium  ticket  equipment
financing,  offset  by  paydowns.   Additionally,   the  Company  continued  its
securitization  activity,  securitizing $774.9 million of recreation vehicle and
recreational boat finance receivables during 1996, compared with securitizations
of recreation  vehicle and  manufactured  housing finance  receivables of $723.2
million in 1995. Managed assets totaled $20.0 billion, an increase of 11.3% over
$18.0 billion in 1995.

Net Finance Income

      A comparison of the  components of 1996 and 1995 net finance income is set
forth below.

<TABLE>
<CAPTION>
                                          Years Ended December 31,                  Increase
                                         --------------------------          --------------------
                                          1996             1995              Amount      Percent
                                          -----            -----            --------     --------
                                                           Dollars in Millions
<S>                                      <C>              <C>               <C>             <C> 
Finance income .......................   $ 1,646.2        $ 1,529.2         $  117.0        7.7%
Interest expense .....................       848.3            831.5             16.8        2.0
                                         ---------        ---------         --------       ----
Net finance income ...................   $   797.9        $   697.7         $  100.2       14.4%
                                         =========        =========         ========       ====
AEA ..................................   $16,543.1        $15,377.5         $1,165.6        7.6%
Net finance income as a % of AEA .....        4.82%            4.54%
</TABLE>

      Net finance income increased  $100.2 million or 14.4% in 1996,  surpassing
the growth in AEA as a result of both  lower  borrowing  costs and higher  yield
related fees on account terminations.

      Finance income totaled $1,646.2 million in 1996, up $117.0 million or 7.7%
over 1995. As a percentage of AEA, finance income was 9.90% for both periods.

      Commercial  segment finance income, as a percentage of commercial AEA, was
9.93%  for each of 1996  and  1995 and  consumer  segment  finance  income  as a
percentage  of consumer  AEA was 9.85% for 1996,  compared  with 9.79% for 1995.
Interest  expense  totaled $848.3 million in 1996, up $16.8 million or 2.0% over
1995.  As a percentage of AEA,  1996  interest  expense  decreased to 5.08% from
5.36% in 1995.

      A comparative  analysis of the weighted average principal  outstanding and
interest  rates  paid on the  Company's  debt  before  and after  the  effect of
interest rate swaps is shown in the following table.

<TABLE>
<CAPTION>
                                                             Years Ended December 31,
                                 ----------------------------------------------------------------------------
                                                    1996                                   1995
                                 --------------------------------------   -----------------------------------
                                      Before Swaps        After Swaps         Before Swaps       After Swaps
                                 -----------------     ----------------   ----------------    ---------------
                                                               Dollars in Millions
<S>                               <C>        <C>       <C>        <C>      <C>        <C>      <C>       <C>  
Commercial paper and
  variable rate senior notes ..   $9,952.2   5.48%     $6,774.3   5.42%    $9,785.4   6.03%    $7,226.0  6.02%
Fixed rate senior and
  subordinated notes ..........    3,917.0   6.83%      7,094.9   6.68%     3,194.5   7.09%     5,753.9  6.78%
                                 ---------            ---------           ---------           ---------
Composite .....................  $13,869.2   5.86%    $13,869.2   6.06%   $12,979.9   6.29%   $12,979.9  6.36%
                                 =========            =========           =========           =========
</TABLE>

      The Company's  interest rate swaps principally  convert floating rate debt
to fixed rate debt and resulted in lowered  variable and fixed rates during both
periods.  The  increases  in the  composite  interest  rates after the effect of
hedging activity reflect the greater proportion of debt effectively paying fixed
interest rates.  The weighted  average  interest rates before the effect of swap
hedging activity do not necessarily reflect the interest expense that would have
been  incurred had the Company  chosen to manage  interest rate risk without the
use of such swaps.


                                       27
<PAGE>

Fees and Other Income

      Fees and other income  improved  $59.4  million to $244.1  million  during
1996,  primarily due to higher gains from  equipment  sales and venture  capital
investment  transactions  and,  to a lesser  extent,  increased  servicing  fees
associated with the Company's managed third party portfolio and higher factoring
commissions.

      The following table sets forth the components of fees and other income.

                                                             Years Ended
                                                             December 31,
                                                     --------------------------
                                                       1996                1995
                                                       -----               -----
                                                          Dollars in Millions
      Factoring commissions .........................  $ 91.0             $ 86.3
      Fees and other ................................    74.2               61.6
      Gains on sales of leasing equipment 
        and other investments .......................   54.6(1)            10.5
      Gains on securitizations and sales of 
        finance receivables .........................   24.3               26.3
                                                       ------             ------
                                                       $244.1             $184.7
                                                       ======             ======
----------
(1) Includes $15.2 million from the sale of venture capital investments.

Salaries and General Operating Expenses

      Salaries and general operating  expenses  increased $47.4 million or 13.7%
to $393.1  million in 1996 from $345.7  million in 1995.  Salaries  and employee
benefits rose $29.6 million (15.3%) while general operating  expenses rose $17.8
million (11.7%). Personnel increased to 2,950 at December 31, 1996 from 2,750 at
December 31, 1995.

      The increase in expenses from 1995 to 1996 was primarily due to strong new
business originations and 10.5% growth in AMA as well as the Company's continued
investment in its consumer related infrastructure.

                                                        Years Ended December 31,
                                                       -------------------------
                                                         1996              1995
                                                         -----             -----
                                                           Dollars in Millions
      Efficiency ratio ...............................  42.7%              43.1%
      Salaries and general operating expenses
         as a percentage of AMA ......................  2.22%              2.16%

Provision and Reserve for Credit Losses/Credit Quality

      Net credit losses were $101.5 million in 1996, compared with $77.2 million
in 1995,  primarily  reflecting  provisions  related to certain nonaccrual loans
secured by oceangoing  carriers and cruise line vessels, as well as seasoning of
the consumer portfolio.  Information concerning the provisions for credit losses
is summarized in the following table.

<TABLE>
<CAPTION>
                                                    Years Ended December 31,
                                 -----------------------------------------------------------------
                                            1996                               1995
                                           ------                             ------
                                 Total  Commercial    Consumer      Total   Commercial    Consumer
                                 -----  -----------  ----------     -----   -----------  ----------
                                                     Dollars in Millions
<S>                             <C>        <C>          <C>        <C>         <C>          <C>  
Net credit losses ...........  $101.5     $80.4        $21.1      $77.2       $67.1        $10.1
Net credit losses as a
 percentage of average
 finance receivables,
 excluding consumer
 finance receivables
 held for sale ..............    0.62%     0.59%        0.75%      0.50%       0.51%        0.44%
</TABLE>

      The  reserve  for credit  losses  increased  to $220.8  million  (1.30% of
finance receivables) at December 31, 1996, from $206.0 million (1.30% of finance
receivables)  at  December  31,  1995,  primarily  reflecting  growth in finance
receivables.


                                       28
<PAGE>

Past Due and Nonperforming Assets

      The following table sets forth certain information concerning past due and
total nonperforming assets at December 31, 1996 and 1995.

                                                     At December 31,
                                        ---------------------------------------
                                              1996                    1995
                                             -------                 ------
                                                    Dollars in Millions
Finance receivables, past due 
  60 days or more
   Commercial .......................   $219.8     1.60%       $228.7      1.70%
   Consumer .........................     72.5     2.24%         35.2      1.50%
                                        ------     ----        ------      ----
     Total ..........................   $292.3     1.72%       $263.9      1.67%
                                        ======     ====        ======      ====
Total nonperforming assets
   Commercial .......................   $160.4     1.17%       $178.7      1.33%
   Consumer .........................     53.1     1.64%         24.0      1.02%
                                        ------     ----        ------      ----
     Total ..........................   $213.5     1.26%       $202.7      1.28%
                                        ======     ====        ======      ====

Operating Lease Equipment

      Depreciation on operating lease equipment for 1996 was $121.7 million,  up
from $79.7 million for 1995 due to growth in the operating lease portfolio.

      From time to time,  certain  operators of leased  equipment may experience
financial or  operational  difficulties  that may affect  their  ability to meet
their contractual obligations with the Company. At December 31, 1996, commercial
aircraft  with an  approximate  carrying  value of $30.9 million were subject to
agreements with an operator that is experiencing such difficulties.  The Company
does  not  believe  these  difficulties  will  have  a  material  effect  on its
consolidated financial position or results of operations.


Income Taxes

      The provision for federal and state and local income taxes totaled  $155.7
million in 1996,  compared with $139.8 million in 1995. The effective income tax
rate for 1996  declined to 37.4%,  compared  with 38.3% in 1995,  as a result of
lower state and local taxes.


                                       29
<PAGE>

Financing and Leasing Assets

      Financing and leasing  assets rose $1.5 billion (8.8%) to $18.6 billion in
1996 as presented in the following table.

                                            At December 31,          Change
                                          ------------------   -----------------
                                           1996      1995       Amoun   Percent
                                          ------    ------     -------- --------
                                                  Dollars in Millions
Commercial
Equipment Financing and Leasing
Finance receivables
  Capital Finance ....................  $ 4,302.7  $ 4,548.7  $ (246.0)   (5.4)%
  Equipment Financing ................    5,616.8    4,929.9     686.9    13.9
                                        ---------  ---------  --------    ---- 
                                          9,919.5    9,478.6     440.9     4.7
                                        ---------  ---------  --------    ---- 
Operating lease equipment, net                                
  Capital Finance ....................      975.5      750.0     225.5    30.1
  Equipment Financing ................      426.6      363.0      63.6    17.5
                                        ---------  ---------  --------    ---- 
                                          1,402.1    1,113.0     289.1    26.0
                                        ---------  ---------  --------    ---- 
Total Equipment Financing and Leasing    11,321.6   10,591.6     730.0     6.9
                                        ---------  ---------  --------    ---- 
Factoring                                                     
  Commercial Services ................    1,804.7    1,743.3      61.4     3.5
                                        ---------  ---------  --------    ---- 
Commercial Finance                                            
  Business Credit ....................    1,235.6    1,471.0    (235.4)  (16.0)
  Credit Finance .....................      797.8      758.7      39.1     5.2
                                        ---------  ---------  --------    ---- 
Total Commercial Finance .............    2,033.4    2,229.7    (196.3)   (8.8)
                                        ---------  ---------  --------    ---- 
  Total commercial ...................   15,159.7   14,564.6     595.1     4.1
                                        ---------  ---------  --------    ---- 
Consumer                                                      
Consumer Finance .....................    2,005.5    1,039.0     966.5    93.0
Sales Financing ......................    1,349.8    1,416.9     (67.1)   (4.7)
                                        ---------  ---------  --------    ---- 
  Total consumer .....................    3,355.3    2,455.9     899.4    36.6
                                        ---------  ---------  --------    ---- 
Corporate and other ..................       53.0       41.6      11.4    27.4
                                        ---------  ---------  --------    ---- 
  Total financing and leasing assets .   18,568.0   17,062.1   1,505.9     8.8
Sales Financing receivables previously                        
   securitized and currently managed                          
   by the Company ....................    1,437.4      916.5     520.9    56.8
                                        ---------  ---------  --------    ---- 
  Total managed assets ...............  $20,005.4  $17,978.6  $2,026.8    11.3%
                                        =========  =========  ========    ==== 
                                                             
      Total  commercial  financing  and  leasing  assets grew 4.1% due to strong
growth  in  equipment   financing,   particularly  in  small  to  medium  ticket
originations,  and an  increased  level  of  operating  lease  equipment.  These
increases were offset by high customer paydowns reducing outstanding balances in
the commercial financing sector. Consumer financing and leasing assets increased
$899.4 million from December 31, 1995 due to higher home equity originations and
recreational  boat  originations  and  $468.7  million  in home  equity  finance
receivables portfolio purchases.


                                       30
<PAGE>

Financing and Leasing Assets Composition

Geographic Composition

      The following  table  presents  financing  and leasing  assets by customer
location.

                                                    At December 31,
                                      ------------------------------------------
                                               1996                 1995
                                      --------------------   -------------------
                                        Amount     Percent    Amount     Percent
                                      --------     -------   -------     -------
                                                Dollars in Millions
United States
  West ...........................   $ 4,599.4      24.8%   $ 4,019.2      23.6%
  Northeast ......................     4,279.4      23.0      4,117.6      24.1
  Midwest ........................     3,727.1      20.1      3,227.9      18.9
  Southeast ......................     2,814.1      15.1      2,653.0      15.5
  Southwest ......................     2,036.6      11.0      1,958.5      11.5
Foreign (principally
  commercial aircraft) ...........     1,111.4       6.0      1,085.9       6.4
                                     ---------     -----    ---------     -----
  Total ..........................   $18,568.0     100.0%   $17,062.1     100.0%
                                     =========     =====    =========     =====

      The  Company's   managed  asset  geographic   diversity  does  not  differ
significantly from its owned asset geographic diversity.

Industry Composition

      The  following  table  presents  financing  and  leasing  assets  by major
industry class.

                                                    At December 31,
                                        ----------------------------------------
                                               1996                  1995
                                        ------------------     -----------------
                                         Amount    Percent      Amount   Percent
                                        --------   -------     -------   -------
                                                  Dollars in Millions
Manufacturing(1)
  (none greater than 3.9%) ...........  $ 4,472.8    24.0%    $ 4,385.7    25.7%
Home mortgage ........................    2,005.5    10.8       1,039.0     6.1
Commercial airlines(2) ...............    1,910.0    10.3       1,911.6    11.2
Construction equipment ...............    1,683.1     9.1       1,463.9     8.6
Retail ...............................    1,651.1     8.9       1,519.3     8.9
Transportation(3) ....................    1,184.5     6.4       1,043.1     6.1
Manufactured housing(4) ..............      790.3     4.3         561.5     3.3
Other (none greater than 4.1%)(5) ....    4,870.7    26.2       5,138.0    30.1
                                        ---------   -----     ---------   -----
  Total ..............................  $18,568.0   100.0%    $17,062.1   100.0%
                                        =========   =====     =========   =====
------------
(1) Includes  manufacturers  of steel and metal products,  textiles and apparel,
    printing and paper products, and other industries.
(2) See "Concentrations" for a discussion of the commercial airline portfolio.
(3) Includes rail,  bus, and  over-the-road  trucking  industries,  and business
    aircraft.
(4) On a  managed  asset  basis,  manufactured  housing  outstandings  were $1.2
    billion or 6.0% of managed  assets at December  31, 1996 as compared to $1.0
    billion or 5.7% at December 31, 1995.
(5) On a managed asset basis,  recreation vehicle outstandings were $1.3 billion
    or 6.3% of managed  assets at December  31, 1996 as compared to $1.1 billion
    or 6.4% at December 31, 1995.  On a managed asset basis,  recreational  boat
    outstandings  were $327.8  million or 1.6% of managed assets at December 31,
    1996 as compared to $156.9 million or 1.0% at December 31, 1995.

Concentrations

Commercial Airline Industry

      Commercial  airline  financing  and leasing  assets  totaled  $1.9 billion
(10.3% of total  financing  and leasing  assets) at December 31, 1996,  compared
with $1.9  billion  (11.2%) in 1995.  The  portfolio  is  secured by  commercial
aircraft and related equipment.


                                       31
<PAGE>

      The following  table presents  information  about the  commercial  airline
industry portfolio.

                                                               At December 31,
                                                        ------------------------
                                                          1996            1995
                                                          -----          -------

                                                            Dollars in Millions

      Finance receivables
        Amount outstanding(1) .......................   $1,286.0       $1,412.2
        Number of obligors                                    54             51

      Operating lease equipment, net
        Net carrying value ..........................   $  624.0       $  499.4
        Number of obligors ..........................         32             24
          Total .....................................   $1,910.0       $1,911.6
      Number of obligors(2) .........................         72             68
      Number of aircraft(3) .........................        239            256

------------
(1) Includes  accrued rents on operating  leases that are  classified as finance
    receivables in the Consolidated Balance Sheets.
(2) Certain  obligors are obligors  under both finance  receivable and operating
    lease transactions.
(3) At year-end 1996, the portfolio  consisted of Stage III aircraft of $1,733.2
    million  (90.7%) and Stage II aircraft of $149.1 million (7.8%) versus Stage
    III  aircraft  of $1,664.3  million  (87.1%) and Stage II aircraft of $207.7
    million (10.9%) at year-end 1995.

Foreign Outstandings

      Financing  and  leasing  assets  to  foreign  obligors,  primarily  to the
commercial  airline industry,  are all U.S. dollar  denominated and totaled $1.1
billion at December 31, 1996. The largest exposures at December 31, 1996 were to
obligors in Mexico,  $141.5  million  (0.76% of financing  and leasing  assets),
France, $130.4 million (0.70%), and the United Kingdom,  $126.9 million (0.68%).
The  remaining  foreign  exposure  was  geographically  dispersed  with no other
individual country representing more than 0.51% of financing and leasing assets.

      At December 31, 1995,  financing  and leasing  assets to foreign  obligors
totaled  $1.1  billion.  The  largest  exposures  at  December  31, 1995 were to
obligors in the United Kingdom,  $145.5 million (0.85%),  France, $122.0 million
(0.72%),  Mexico, $115.8 million (0.68%), and Australia,  $97.0 million (0.57%).
The  remaining  foreign  exposure  was  geographically  dispersed  with no other
individual country representing more than 0.51% of financing and leasing assets.

Highly Leveraged Transactions

      The Company uses the following  criteria to classify a buyout financing or
recapitalization  that  equals or  exceeds  $20  million  as a highly  leveraged
transaction (HLT):

      o  The transaction at least doubles the borrower's liabilities and results
         in a leverage ratio (as defined) higher than 50%, or

      o  The transaction results in a leverage ratio higher than 75%, or

      o  The transaction is designated as an HLT by a syndication agent.

      A  transaction  originally  reported  as an HLT can be  removed  from this
classification  ("delisted")  if the  leveraged  company  has  demonstrated  the
ability to operate  successfully as a highly  leveraged  entity for at least two
years after the original financing and meets one of the following criteria:

      o  The original financing has been repaid using cash flow from operations,
         planned asset sales, or a capital infusion, or

      o  The debt has been serviced  without undue  reliance on unplanned  asset
         sales,  and certain  leverage ratios (related to the original  criteria
         under which the financing qualified as an HLT) have been maintained.


                                       32
<PAGE>

      HLTs which the Company  originated  and in which it  participated  totaled
$321.4 million (1.7% of financing and leasing assets) at December 31, 1996, down
from $412.6 million (2.4%) at December 31, 1995. The decline in HLT outstandings
during  1996 was  primarily  due to payoff of accounts as well as the removal of
two  companies  that met the  delisting  criteria,  partially  offset by new HLT
fundings. The Company's HLT outstandings are generally secured by collateral, as
distinguished  from HLTs that rely  primarily  on cash  flows  from  operations.
Unfunded  commitments to lend in secured HLT  financings  were $144.1 million at
December 31, 1996, compared with $220.4 million at year-end 1995.

      At December  31,  1996,  the HLT  portfolio  consisted of 27 obligors in 3
different  industry  groups,  with  29.5%  of the  outstandings  located  in the
Northeast  region of the United States and 23.8% in the  Southeast.  One account
totaling  $16.0  million  and $20.1  million was  classified  as  nonaccrual  at
December 31, 1996 and 1995, respectively.


Forward-Looking Statements

      Certain statements contained herein under "Business",  "Legal Proceedings"
and "Management's  Discussion and Analysis of Financial Condition and Results of
Operations",  including,  without limitation, those concerning the Company's (i)
liquidity,  (ii)  Year 2000  compliance,  (iii)  credit  risk  management,  (iv)
asset/liability  risk  management,  (v) operational and legal risks and (vi) the
effects on the Company of certain legal proceedings,  constitute forward-looking
statements  concerning  the  Company's  operations,   economic  performance  and
financial  condition.  Because such statements  involve risks and uncertainties,
actual  results may differ  materially  from those  expressed or implied by such
forward-looking statements.


                                       33
<PAGE>

Item 8. Financial Statements and Supplementary Data.

                          INDEPENDENT AUDITORS' REPORT

The Stockholders and Board of Directors of
The CIT Group, Inc.:

      We have audited the  accompanying  consolidated  balance sheets of The CIT
Group,  Inc. and  subsidiaries as of December 31, 1997 and 1996, and the related
consolidated  statements of income,  changes in stockholders'  equity,  and cash
flows for each of the years in the  three-year  period ended  December 31, 1997.
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 financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management as well as evaluating the overall financial  statement  presentation.
We believe that our audits provide a reasonable basis for our opinion.

      In our opinion,  the consolidated  financial  statements referred to above
present  fairly,  in all material  respects,  the financial  position of The CIT
Group,  Inc. and  subsidiaries at December 31, 1997 and 1996, and the results of
their  operations and cash flows for each of the years in the three-year  period
ended  December  31,  1997 in  conformity  with  generally  accepted  accounting
principles.

                                                KPMG PEAT MARWICK LLP

Short Hills, New Jersey
January 28, 1998


                                       34
<PAGE>

                      THE CIT GROUP, INC. AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS

                                     Assets
                                                               December 31,
                                                           -------------------
                                                           1997          1996
                                                           -----         -----
                                                           Dollars in Millions
Financing and leasing assets
Loans
    Commercial ......................................   $ 9,922.5     $10,195.6
    Consumer ........................................     3,664.8       3,239.0
Lease receivables ...................................     4,132.4       3,562.0
                                                        ---------     ---------
   Finance receivables (Note 3) .....................    17,719.7      16,996.6
Reserve for credit losses (Note 4) ..................      (235.6)       (220.8)
                                                        ---------     ---------
   Net finance receivables ..........................    17,484.1      16,775.8
Operating lease equipment, net (Note 5) .............     1,905.6       1,402.1
Consumer finance receivables held for sale ..........       268.2         116.3
Cash and cash equivalents ...........................       140.4         103.1
Other assets ........................................       665.8         535.2
                                                        ---------     ---------
        Total assets ................................   $20,464.1     $18,932.5
                                                        =========     =========
                                                                     
                      Liabilities and Stockholders' Equity
                                                                     
Debt (Notes 6 and 7)                                                 
Commercial paper ....................................   $ 5,559.6     $ 5,827.0
Variable rate senior notes ..........................     2,861.5       3,717.5
Fixed rate senior notes .............................     6,593.8       4,761.2
Subordinated fixed rate notes .......................       300.0         300.0
                                                        ---------     ---------
        Total debt ..................................    15,314.9      14,605.7
Credit balances of factoring clients ................     1,202.6       1,134.1
Accrued liabilities and payables ....................       660.1         594.0
Deferred federal income taxes (Note 12) .............       603.6         523.3
                                                        ---------     ---------
        Total liabilities ...........................    17,781.2      16,857.1
Company-obligated mandatorily redeemable                             
  preferred securities of subsidiary trust                           
  holding solely debentures of the Company                           
  (Note 8) ..........................................       250.0            --
Stockholders' equity (Notes 1 and 9)                                 
Common stock - 1,000 shares authorized,                              
  issued and outstanding ............................          --         250.0 
Class A common stock, par value $0.01 per share,                           
  700,000,000 shares authorized and 37,173,527                       
  issued and outstanding ............................         0.4            --
Class B common stock, par value $0.01 per                            
  share, 510,000,000 shares authorized and                           
  126,000,000 issued and outstanding ................         1.3            --
Paid-in capital .....................................       948.3         573.3
Retained earnings ...................................     1,482.9       1,252.1
                                                        ---------     ---------
        Total stockholders' equity ..................     2,432.9       2,075.4
                                                        ---------     ---------
        Total liabilities and stockholders' equity ..   $20,464.1     $18,932.5
                                                        =========     =========
                                                                    
See accompanying notes to consolidated financial statements.


                                       35
<PAGE>

                      THE CIT GROUP, INC. AND SUBSIDIARIES

                        CONSOLIDATED STATEMENTS OF INCOME

                                                    Years Ended December 31,
                                              ----------------------------------
                                                 1997        1996         1995
                                              --------     --------     --------
                                                      Dollars in Millions
                                                  (except per share amounts)


Finance income .............................  $1,824.7     $1,646.2     $1,529.2
Interest expense ...........................     937.2        848.3        831.5
                                              --------     --------     --------
    Net finance income .....................     887.5        797.9        697.7
                                                                        
Fees and other income (Note 10) ............     247.8        244.1        184.7
Gain on sale of equity interest acquired                                
  in loan workout ..........................      58.0           --           --
                                              --------     --------     --------
    Operating revenue ......................   1,193.3      1,042.0        882.4
                                              --------     --------     --------
Salaries and general operating expenses                                 
  (Note 11) ................................     428.4        393.1        345.7
Provision for credit losses (Note 4) .......     113.7        111.4         91.9
Depreciation on operating lease equipment                               
  (Note 5) .................................     146.8        121.7         79.7
Minority interest in subsidiary trust                                   
  holding solely debentures of the                                      
  Company (Note 8) .........................      16.3           --           --
                                              --------     --------     --------
    Operating expenses .....................     705.2        626.2        517.3
                                              --------     --------     --------
    Income before provision for income taxes     488.1        415.8        365.1
Provision for income taxes (Note 12) .......     178.0        155.7        139.8
                                              --------     --------     --------
    Net income .............................  $  310.1     $  260.1     $  225.3
                                              ========     ========     ========
Net income per basic share (Note 13) .......  $   1.96     $   1.65     $   1.43
 Net income per diluted share (Note 13) ....  $   1.95     $   1.64     $   1.43

See accompanying notes to consolidated financial statements.


                                       36
<PAGE>

                      THE CIT GROUP, INC. AND SUBSIDIARIES

           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
                                             Class A       Class B                                              Total
                              Common         Common        Common       Paid-in     Treasury     Retained   Stockholders'
                               Stock          Stock         Stock       Capital       Stock      Earnings      Equity
                             --------        -------       -------      -------      -------     --------    -----------
                                                                 Dollars in Millions

<S>                            <C>            <C>           <C>         <C>          <C>           <C>          <C>     
Balance, December 31, 1994     $ 250.0                                  $ 408.3                   $ 1,134.7    $ 1,793.0
Net income                                                                                            225.3        225.3
Cash dividends                                                                                       (104.1)      (104.1)
                               -------        -----         -----       -------      --------      --------     --------
Balance, December 31, 1995       250.0                                    408.3                     1,255.9      1,914.2
Net income                                                                                            260.1        260.1
Cash dividends-regular                                                                                (98.9)       (98.9)
Cash dividends-special                                                                               (165.0)      (165.0)
Capital contribution                                                      165.0                                    165.0
                               -------        -----         -----       -------      --------      --------     --------
Balance, December 31, 1996       250.0                                    573.3                     1,252.1      2,075.4
Net income                                                                                            310.1        310.1
Cash dividends                                                                                        (79.3)       (79.3)
Recapitalization to
  Class B common
  stock shares (Note 1)         (250.0)                     $ 1.6         248.4                                      0.0
Twenty percent of Class
  B common shares bought 
  pursuant to option agreement
  (Note 1)                                                   (0.3)                   $ (808.0)                    (808.3)
Conversion of Class B
  treasury stock shares to
  Class A common stock
  shares and issuance of
  Class A to the public
  (Note 1)                                    $ 0.3                                     808.0                      808.3
Issuance of underwriters
  over-allotment of Class
  A common stock shares,
  net (Note 1)                                  0.1                       117.6                                    117.7
Restricted Class A
  common  stock grants                                                      9.0                                      9.0
                               -------        -----         -----       -------      --------      --------     --------
Balance, December 31, 1997     $   0.0        $ 0.4         $ 1.3       $ 948.3      $    0.0      $1,482.9     $2,432.9
                               =======        =====         =====       =======      ========      ========     ========
</TABLE>

See accompanying notes to consolidated financial statements.


                                       37
<PAGE>

                      THE CIT GROUP, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
                                                                               Years Ended December 31,
                                                                      -----------------------------------------
                                                                          1997          1996           1995
                                                                         -----          -----          -----
                                                                                  Dollars in Millions
<S>                                                                   <C>             <C>            <C>      
Cash flows from operations
Net income ........................................................   $    310.1      $   260.1      $   225.3
Adjustments to reconcile net income to net cash
   flows from operations:
      Provision for credit losses .................................        113.7          111.4           91.9
      Depreciation and amortization ...............................        168.6          140.3           88.7
      Provision for deferred federal income taxes .................         80.3           54.1           42.5
      Gains on asset and receivable sales .........................       (137.7)         (78.9)         (36.8)
      Increase in accrued liabilities and payables ................         66.1          108.1          131.2
      Increase in other assets ....................................        (54.0)         (65.9)         (17.7)
      Other .......................................................          8.0           (3.7)         (22.7)
                                                                      ----------      ---------       --------
               Net cash flows provided by operations ..............        555.1          525.5          502.4
                                                                      ----------      ---------       --------
Cash flows from investing activities
Loans extended ....................................................    (33,332.9)     (32,647.2)     (31,292.7)
Collections on loans ..............................................     31,419.7       31,132.2       29,463.7
Proceeds from asset and receivable sales ..........................      1,747.5        1,144.9          816.8
Purchases of assets to be leased ..................................       (802.8)        (431.2)        (354.7)
Net (increase) decrease in short-term factoring receivables .......       (238.8)          (0.3)         123.6
Purchases of finance receivables portfolios .......................       (176.6)        (661.3)         (22.7)
Proceeds from sales of assets received in satisfaction of loans ...         37.7           76.7           26.2
Purchases of investment securities ................................        (27.5)         (20.8)         (12.1)
Other .............................................................        (23.1)         (25.5)         (43.4)
                                                                      ----------      ---------       --------
   Net cash flows used for investing activities ...................     (1,396.8)      (1,432.5)      (1,295.3)
                                                                      ----------      ---------       --------
Cash flows from financing activities
Proceeds from the issuance of variable and fixed rate notes .......      4,532.7        4,776.0        3,698.6
Repayments of variable and fixed rate notes .......................     (3,556.1)      (3,461.8)      (2,966.0)
Proceeds from issuance of common stock, net .......................        926.0             --             --
Purchase of Class B common stock pursuant to
   option agreement ...............................................       (808.3)            --             --
Net (decrease) increase in commercial paper .......................       (267.4)        (278.6)         445.4
 Proceeds  from  the  issuance  of  Company-obligated   
  mandatorily   redeemable preferred securities of 
  subsidiary trust holding solely debentures of the Company .......        250.0             --             --
Repayments of nonrecourse leveraged lease debt ....................       (162.3)        (146.2)        (135.7)
Cash dividends paid ...............................................       (79.3)         (263.9)        (104.1)
Proceeds from nonrecourse leveraged lease debt ....................         43.7           58.1            9.7
Capital contribution from stockholders ............................          --           165.0             --
                                                                      ----------      ---------       --------
              Net cash flows provided by financing activities .....        879.0          848.6          947.9
                                                                      ----------      ---------       --------
Net increase (decrease) in cash and cash equivalents ..............         37.3          (58.4)         155.0
Cash and cash equivalents, beginning of year ......................        103.1          161.5            6.5
                                                                      ----------      ---------       --------
Cash and cash equivalents, end of year ............................   $    140.4      $   103.1       $  161.5
                                                                      ==========      =========       ========
Supplemental disclosures
Interest paid .....................................................   $    917.5      $   842.6       $  958.8
Federal and state and local income taxes paid .....................   $    102.1      $   102.5       $   95.0
Noncash transfer of finance receivables to finance receivables
    held for sale .................................................   $       --      $   246.6       $  243.6
Noncash transfers of finance receivables to assets
    received in satisfaction of loans .............................   $     26.0      $    91.8       $   30.8
Noncash transfer of assets received in satisfaction of .
    loans to finance receivables ..................................   $      5.4      $    10.9       $   40.6
Noncash transfer of finance receivables to operating
    lease equipment ...............................................   $       --      $    14.4       $     --
</TABLE>

    See accompanying notes to consolidated financial statements.


                                       38
<PAGE>

                      THE CIT GROUP, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1--The Company

      The CIT  Group,  Inc.  (the  "Company"),  formerly  known as The CIT Group
Holdings, Inc., engages in commercial and consumer financial services activities
through a nationwide distribution network.

      In November 1997, the Company issued  36,225,000  shares of Class A common
stock in an initial public  offering (the  "Offering").  Prior to November 1997,
The  Dai-Ichi  Kangyo  Bank,  Limited  ("DKB")  owned  80%  of  the  issued  and
outstanding stock of the Company.  The remaining 20% of the Company's issued and
outstanding stock was owned by The Chase Manhattan  Corporation  ("Chase").  DKB
had an option  expiring  December 15, 2000 to purchase the  remaining 20% common
stock interest from Chase. In November 1997, the Company  purchased DKB's option
at its fair market  value,  exercised  the option to purchase  the stock held by
Chase and  recapitalized  the Company by converting the previous common stock to
157,500,000 shares of Class B common stock. Twenty percent of the Class B common
stock shares  (which has five votes per share) were  converted to Class A common
stock shares (which has one vote per share)and,  in addition to an underwriter's
overallotment  option,  were  issued in the  Offering.  The  issuance of Class A
common stock pursuant to the underwriter's overallotment resulted in an increase
to the Company's  stockholders'  equity of $117.7 million. At December 31, 1997,
DKB owns 100% of the outstanding  shares of Class B common stock of the Company,
77.2% of the economic interest in the Company,  and 94.4% of the combined voting
power of all classes of voting stock of the Company.

Note 2--Summary of Significant Accounting Policies

Basis of Presentation

      The consolidated  financial  statements and accompanying notes include the
accounts  of  The  CIT  Group,  Inc.  and  its  subsidiaries.   All  significant
intercompany   transactions   have  been   eliminated.   Prior  period  amounts,
principally  in the  Consolidated  Balance  Sheets and Statements of Cash Flows,
have been reclassified to conform to the current presentation.

Financing and Leasing Assets

      The  Company  provides  funding  for a variety of  financing  arrangements
including  term  loans,  lease  financing  and  operating  leases.  The  amounts
outstanding on loans and leases are referred to as finance receivables and, when
combined  with consumer  finance  receivables  held for sale,  net book value of
operating lease  equipment,  and certain  investments,  represent  financing and
leasing assets.

Income Recognition

      Finance  income  includes  interest on loans,  the  accretion of income on
direct financing leases, and rents on operating leases.  Related origination and
other nonrefundable fees and direct origination costs are deferred and amortized
as  an  adjustment  of  finance  income  over  the   contractual   life  of  the
transactions.  Income on  finance  receivables  other than  leveraged  leases is
recognized on an accrual  basis  commencing  in the month of  origination  using
methods that generally  approximate the interest method.  Leveraged lease income
is recognized  on a basis  calculated  to achieve a constant  after-tax  rate of
return  for  periods  in which the  Company  has a  positive  investment  in the
transaction, net of related deferred tax liabilities. Rental income on operating
leases is recognized on an accrual basis.

      The  accrual  of  finance  income on  commercial  finance  receivables  is
suspended  and an account is placed on  nonaccrual  status  either  when:  (i) a
payment of principal and/or interest is contractually  delinquent for 90 days or
more or (ii) at the time, in the opinion of management,  full  collection of all
principal  and interest due is  doubtful.  Given the nature of revolving  credit
facilities,  including  those combined with term loan  facilities  (advances and
interest accruals increase revolving loan balances and payments reduce revolving
loan  balances),  the  placement of revolving  credit  facilities  on nonaccrual
status includes the review of other  qualitative and quantitative  factors,  and
generally does not result in the reversal of any accrued  interest.  Accrued but
uncollected  income at the date an  account  is placed on  nonaccrual  status is
reversed and charged  against  income to the extent the estimated  fair value of
collateral  does not satisfy both the principal and 


                                       39
<PAGE>

                      THE CIT GROUP, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

accrued  income  outstanding.   Such  accrued  but  uncollected  income  is  not
significant.  Subsequent income received is applied to the outstanding principal
balance until such time as the account is collected,  charged-off or returned to
accrual  status.  The accrual of finance  income on consumer loans is suspended,
and all previously accrued but uncollected  income is reversed,  when payment of
principal  and/or  interest on consumer  finance  receivables  is  contractually
delinquent for 90 days or more.

      Fees and other income includes: (1) factoring commissions, (2) commitment,
facility,  letters of credit and  syndication  fees,  (3) servicing fees and (4)
gains and losses from the sales of equipment,  other investments,  and the sales
and securitizations of finance receivables.

Lease Financing

      Direct financing leases are recorded at the aggregate future minimum lease
payments plus estimated residual values less unearned finance income.  Operating
lease  equipment  is  carried  at  cost  less  accumulated  depreciation  and is
depreciated to estimated residual value using the straight-line  method over the
lease term or  projected  economic  life of the  asset.  Equipment  acquired  in
satisfaction of loans and subsequently  placed on operating lease is recorded at
the lower of  carrying  value or  estimated  fair  value  when  acquired.  Lease
receivables  include leveraged leases,  for which a major portion of the funding
is provided by third party  lenders,  on a nonrecourse  basis,  with the Company
providing the balance and acquiring title to the property.  Leveraged leases are
recorded at the aggregate  value of future minimum lease payments plus estimated
residual value, less amounts due to nonrecourse third party lenders and unearned
finance income.  Management  performs periodic reviews of the estimated residual
values,  with other than temporary  impairment,  if any, being recognized in the
current period.

Reserve for Credit Losses on Finance Receivables

      The  consolidated  reserve for credit losses is periodically  reviewed for
adequacy  based  on  the  nature  and  characteristics  of  obligors,   economic
conditions  and  trends,  charge-off  experience,  delinquencies  and  value  of
underlying   collateral  and  guarantees  (including  recourse  to  dealers  and
manufacturers).  It is management's  judgment that the consolidated  reserve for
credit losses is adequate to provide for potential  credit  losses.  Charge-offs
are taken after  considering such factors as the obligor's  financial  condition
and the value of underlying  collateral  and guarantees  (including  recourse to
dealers and manufacturers).  Therefore,  changes in economic conditions or other
discrete  events  adversely   affecting  specific  obligors  or  industries  may
necessitate additions to the consolidated reserve for credit losses.

Charge-off of Finance Receivables

      Finance receivables are reviewed periodically to determine the probability
of loss.  Charge-offs are taken after considering such factors as the borrower's
financial  condition  and the  value of  underlying  collateral  and  guarantees
(including recourse to dealers and manufacturers). Such charge-offs are deducted
from the carrying value of the related finance  receivables.  To the extent that
an  unrecovered  balance  remains due, a final  charge-off  is taken at the time
collection  efforts  are no longer  deemed  useful.  Automatic  charge-offs  are
recorded on consumer  finance  receivables  beginning at 180 days of contractual
delinquency based upon historical loss severity, with charge-offs finalized upon
disposition of foreclosed assets.

Impaired Loans

      Impaired  loans are measured  based upon 1) the present  value of expected
future cash flows discounted at the loan's effective interest rate or, 2) at the
fair value of the collateral, if the loan is collateral dependent.

      Impaired loans include any loan  transaction  on nonaccrual  status or any
troubled debt  restructuring  entered into after  December 31, 1994,  subject to
periodic review by the Company's Asset Quality Review Committee ("AQR"). The AQR
is comprised of members of senior management,  which reviews finance receivables
of $500,000 or more meeting  certain  credit risk grading  parameters.  Excluded
from  impaired  loans  are:  1)  certain   individual  small  dollar  commercial
nonaccrual  loans (under  $500,000) for which the collateral  value supports the
outstanding   balance,  2)  consumer  loans,  which  are  subject  to  automatic
charge-


                                       40
<PAGE>

                      THE CIT GROUP, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

off procedures,  and 3) short-term  factoring  customer  receivables,  generally
having  terms of no more  than 30 days.  In  general,  the  impaired  loans  are
collateral  dependent.   Any  shortfall  between  the  value  and  the  recorded
investment in the loan is recognized by providing a provision for credit losses.

Long-Lived Assets

      A review for  impairment of  long-lived  assets,  such as operating  lease
equipment,  is performed  whenever events or changes in  circumstances  indicate
that  the  carrying  amount  of  long-lived   assets  may  not  be  recoverable.
Recoverability  of assets to be held and used is measured by a comparison of the
carrying amount of an asset to future net cash flows expected to be generated by
the asset.  If such assets are  considered to be impaired,  the impairment to be
recognized is measured by the amount by which the carrying  amount of the assets
exceed the fair value of the assets.  Assets to be  disposed of are  reported at
the lower of the carrying amount or fair value less costs to sell.

Other Assets

      The Company adopted  Statement of Financial  Accounting  Standards No. 125
"Accounting for Transfers and Servicing of Financial Assets and  Extinguishments
of Liabilities"  ("SFAS 125"),  as amended,  on January 1, 1997. SFAS 125 uses a
"financial  components" approach that focuses on control to determine the proper
accounting  for financial  asset  transfers and  addresses  the  accounting  for
servicing   rights  on   financial   assets  in  addition  to  mortgage   loans.
Securitizations of finance receivables are accounted for as sales when legal and
effective control over the related receivables is surrendered.  Servicing assets
or  liabilities  are  recognized  when the servicing  rights are retained by the
seller.

      In  accordance  with the  transition  rules  set  forth in SFAS  125,  the
Company,  on January 1, 1997,  reclassified  as servicing  assets the portion of
previously  recognized excess servicing assets that did not exceed contractually
specified servicing fees. The remaining balances of previously recognized excess
servicing   assets  are  included  in  other  assets  and  are   classified   as
available-for-sale  investment securities subject to the provisions of Statement
of Financial Accounting Standards No. 115 "Accounting for Certain Investments in
Debt and Equity Securities".

      The  adoption  of SFAS  125  did  not  have a  significant  impact  on the
Company's financial position or results of operations.

      At the time management  decides to proceed with a securitization of loans,
such loans are  considered  available  for sale,  classified as other assets and
carried at the lower of aggregate cost or market value.  Certain  consumer loans
are originated and sold to trusts which, in turn, issue asset-backed  securities
to investors.  The Company  retains the  servicing  rights and  participates  in
certain cash flows from the loans.  The present value of expected net cash flows
which exceeds the estimated cost of servicing is recorded at the time of sale as
"interest-only  receivables" with related gain recognized.  The Company,  in its
estimation  of residual  cash flows and  interest-only  receivables,  inherently
employs a variety of financial  assumptions,  including loan pool credit losses,
prepayment  speeds  and  discount  rates.   These  assumptions  are  empirically
supported by both the Company's  historical  experience and  anticipated  trends
relative to the particular products  securitized.  Subsequent to the recognition
of  interest-only  receivables,  the Company  regularly  reviews such assets for
valuation impairment. These reviews are performed on a disaggregated basis. Fair
values  of  interest-only  receivables  are  calculated  utilizing  current  and
anticipated  credit  losses,  prepayment  speeds and discount rates and are then
compared to the  Company's  carrying  values.  Carrying  value of the  Company's
interest-only receivables at December 31, 1997 approximated fair value.

      The excess of  purchase  price over fair market  value of assets  acquired
(goodwill) in connection  with business  acquisitions is amortized on a straight
line basis over a period not to exceed 20 years.

      Assets  received  in  satisfaction  of loans are  carried  at the lower of
carrying value or estimated fair value less selling costs,  with  write-downs at
the time of receipt recognized by recording a charge-off. Subsequent write-downs
of such assets,  which may be required due to a decline in estimated fair market
value after receipt, are reflected in general operating expenses.


                                       41
<PAGE>

                      THE CIT GROUP, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

      Fixed  assets  are  stated  at  cost  less  accumulated  depreciation  and
amortization.  Depreciation and amortization are computed  principally using the
straight-line method over the estimated useful lives of the related assets.

Derivative Financial Instruments

      The  Company  enters into  interest  rate swap  agreements  as part of its
overall  interest rate risk management.  These  transactions are entered into as
hedges  against  the  effects  of  future   interest  rate   fluctuations   and,
accordingly,  are not  carried at fair value.  The  Company  does not enter into
derivative financial instruments for trading or speculative purposes.

      The net interest  differential,  including  premiums paid or received,  if
any, on interest  rate swaps is  recognized on an accrual basis as an adjustment
to finance  income or interest  expense to  correspond  with the hedged asset or
liability  position,  respectively.  In the event  that early  termination  of a
derivative instrument occurs, the net proceeds paid or received are deferred and
amortized  over the  shorter  of the  remaining  original  contract  life of the
interest rate swap or the maturity of the hedged asset or liability position.

      The Company will also utilize derivative instruments to hedge the interest
rate used to price the anticipated  securitization  of loans.  Such transactions
are designated as hedges against a securitization that is probable and for which
the  significant  characteristics  and terms have been  identified but for which
there  is no  legally  binding  obligation.  The  loans  to be  securitized  are
considered  held for sale and  reclassified  to other  assets.  The net interest
differential on the derivative  instrument,  including premium paid or received,
if any, is recognized as an adjustment to the basis of the corresponding  assets
at the time of sale. In the event the anticipated securitization does not occur,
the related hedge position would be liquidated  with any gain or loss recognized
at  such  time,  and  the  related  assets  would  be  reclassified  to  finance
receivables.

Income Taxes

      Deferred  tax assets and  liabilities  are  recognized  for the future tax
consequences   attributable  to  temporary  differences  between  the  financial
statement  carrying  amounts  of  existing  assets  and  liabilities  and  their
respective tax bases.  Deferred tax assets and liabilities are determined  using
enacted  tax  rates  expected  to apply in the  year in  which  those  temporary
differences are expected to be recovered or settled.

      The effect on deferred tax assets and liabilities of a change in tax rates
is recognized in income at the time of enactment.

      Federal  investment tax credits  realized for income tax purposes on lease
financing  transactions have been deferred for financial  statement purposes and
are included in deferred  federal income taxes.  Such credits are amortized as a
reduction of the provision  for income taxes using an actuarial  method over the
related lease term.

Consolidated Statements of Cash Flows

      Cash and cash  equivalents  includes cash and  interest-bearing  deposits,
which  generally  represent  overnight  money market  investments of excess cash
borrowed in the commercial  paper market and maintained for liquidity  purposes.
Cash inflows and outflows from  commercial  paper  borrowings and most factoring
receivables  are  presented  on a net basis in the  Statements  of Cash Flows as
their term is generally less than 90 days.

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 


                                       42
<PAGE>

                      THE CIT GROUP, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

reported  amounts of income and expenses  during the  reporting  period.  Actual
results could differ from those estimates.

Note 3--Finance Receivables

      Included in lease  receivables at December 31, 1997 and 1996 are leveraged
lease receivables of $716.5 million and $648.8 million, respectively.  Leveraged
lease  receivables  exclude the portion of lease  receivables  offset by related
nonrecourse debt payable to third party lenders of $1.9 billion and $2.1 billion
at  December  31,  1997  and  1996,  respectively,  including  amounts  owed  to
affiliates  of DKB that  totaled  $459.0  million at year-end  1997,  and $486.6
million at year-end  1996.  Also  excluded  from  finance  receivables  are $2.4
billion of consumer  finance  receivables  at December 31, 1997 ($1.4 billion in
1996) previously securitized and currently managed by the Company.

      Commercial  and consumer  loans are  presented  net of unearned  income of
$605.8 million and $540.4  million at December 31, 1997 and 1996,  respectively.
Lease  receivables are presented net of unearned income of $1.1 billion and $1.0
billion at December 31, 1997 and 1996.

      The  following  table sets  forth the  contractual  maturities  of finance
receivables.

                                                  At December 31,
                                    --------------------------------------------
                                            1997                    1996
                                    ------------------        ------------------
                                     Amount    Percent        Amount     Percent
                                    --------   -------        -------    -------
                                                 Dollars in Millions
Due Within One Year .............  $ 6,540.9     36.9%      $  5,698.2     33.5%
Due Within One to Two Years .....    2,797.1     15.8          2,515.6     14.8
Due Within Two to Four Years ....    3,288.0     18.6          3,647.0     21.5
Due After Four Years ............    5,093.7     28.7          5,135.8     30.2
                                   ---------    -----       ----------    ----- 
 Total ..........................  $17,719.7    100.0%      $ 16,996.6    100.0%
                                   =========    =====       ==========    ===== 

      Information   about   concentrations  of  credit  risk  is  set  forth  in
"Geographic Composition",  "Industry Composition" and "Concentration" in Item 7.
Management's  Discussion  and  Analysis of  Financial  Condition  and Results of
Operations.

      The following table sets forth information  regarding total  nonperforming
assets.

                                                              At December 31,
                                                           ---------------------
                                                            1997          1996
                                                            ----          ----
                                                            Dollars in Millions
Nonaccrual finance receivables:
  Commercial ...........................................   $ 79.5        $119.6
  Consumer .............................................     84.9          46.0
                                                           ------        ------
 .......................................................    164.4         165.6
                                                           ------        ------
Assets received in satisfaction of loans:
  Commercial ...........................................     26.0          40.8
  Consumer .............................................     17.0           7.1
                                                           ------        ------
 .......................................................     43.0          47.9
                                                           ------        ------
    Total nonperforming assets .........................   $207.4        $213.5
                                                           ------        ------
Percent to finance receivables .........................     1.17%         1.26%
                                                           ======        ======

      The amount of finance income recognized on year-end commercial  nonaccrual
finance receivables totaled $6.8 million, $8.5 million and $8.0 million in 1997,
1996 and 1995,  respectively.  The amount of finance income that would have been
recorded  under  contractual  terms  for  such  commercial   nonaccrual  finance
receivables  totaled $27.6 million,  $24.7  million,  and $29.3 million in 1997,
1996 and 1995,


                                       43
<PAGE>

                      THE CIT GROUP, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

respectively. Finance income recognized on and the amount of finance income that
would  have  been  recorded  under   contractual  terms  for  year-end  consumer
nonaccrual finance  receivables for 1997, 1996 and 1995,  respectively,  was not
significant.

      At December 31, 1997 and 1996, the recorded  investment in impaired loans,
which are  generally  collateral  dependent,  totaled  $53.2  million and $103.9
million,  respectively.  Given  that the fair  value  of the  collateral  or the
present  value of expected  future cash flows  equaled or exceeded  the recorded
investment  for the impaired  loans,  no SFAS 114 reserve for credit  losses was
required.  The average  monthly  recorded  investment in the impaired  loans was
$71.6 million, $89.4 million and $116.9 million for the years ended December 31,
1997, 1996 and 1995, respectively. There was no finance income recorded on these
loans  during 1997 or 1996 after being  classified  as  impaired.  During  1995,
finance  income of $1.0  million  was  recognized  on these  loans  after  being
classified as impaired loans.

Note 4--Reserve for Credit Losses

      The following table presents changes in the reserve for credit losses.

                                                        At December 31,
                                               --------------------------------
                                                 1997         1996       1995
                                                 ----         ----       ----
                                                      Dollars in Millions
Balance, January 1 .........................   $  220.8    $  206.0    $  192.4
                                               --------    --------    --------
Finance receivables charged-off ............     (123.5)     (122.2)      (96.9)
Recoveries on finance receivables
  previously charged-off ...................       22.5        20.7        19.7
                                               --------    --------    --------
      Net credit losses ....................     (101.0)     (101.5)      (77.2)
                                               --------    --------    --------
Provision for credit losses ................      113.7       111.4        91.9
Portfolio acquisitions 
  (dispositions), net ......................        2.1         4.9        (1.1)
                                               --------    --------    --------
      Net addition to the reserve for
       credit losses .......................      115.8       116.3        90.8
                                               --------    --------    --------
Balance, December 31 .......................   $  235.6    $  220.8    $  206.0
                                               --------    --------    --------
Reserve for credit losses as a percentage
  of finance receivables ...................       1.33%       1.30%       1.30%
                                               ========    ========    ========

Note 5--Operating Lease Equipment

      The following  table provides an analysis of operating  lease equipment by
equipment  type, net of accumulated  depreciation  of $375.6 million in 1997 and
$287.7 million in 1996.

                                                           At December 31,
                                                         -------------------
                                                         1997          1996
                                                         ----          ----
                                                         Dollars in Millions
Commercial aircraft ..........................      $    822.7       $    624.0
Railroad equipment ...........................           429.0            273.2
Business aircraft ............................           295.6            167.8
Trucks, trailers and buses ...................           172.2            160.1
Other ........................................           186.1            177.0
                                                    ----------       ----------
 Total .......................................      $  1,905.6       $  1,402.1
                                                    ==========       ==========

      Included in the  preceding  table is equipment  not  currently  subject to
lease agreements of $2.4 million and $1.9 million at December 31, 1997 and 1996,
respectively.

      Rental income on operating  leases,  included in finance  income,  totaled
$231.8  million in 1997,  $182.4 million in 1996 and $128.8 million in 1995. The
following  table  presents  future  minimum  lease  rentals  on   noncancellable
operating leases as of December 31, 1997.  Excluded from this table are variable
rentals calculated on the level of asset usage, re-leasing rentals, and expected
sales proceeds from remarketing


                                       44
<PAGE>

                      THE CIT GROUP, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

operating  lease  equipment  at lease  expiration,  all of which  are  important
components of operating lease profitability.

                                              Years Ended December 31,
                                              ------------------------
                                                 Dollars in Millions
      1998 ..................................        $   257.8
      1999 ..................................            209.1
      2000 ..................................            171.1
      2001 ..................................            143.5
      2002 ..................................             94.6
      Thereafter ............................            143.8
                                                     ---------
            Total ...........................        $ 1,019.9
                                                     =========

Note 6--Debt

      The following table presents data on commercial paper borrowings.

                                                      At December 31,
                                             ------------------------------
                                              1997         1996        1995
                                              ----         ----        ----
                                                    Dollars in Millions
Borrowings outstanding .................   $ 5,559.6    $ 5,827.0   $ 6,105.6
Weighted average interest rate .........        5.86%        5.45%       5.75%
Weighted average maturity ..............     43 days      32 days     45 days

                                             For the Years ended December 31,
                                             ------------------------------
                                              1997         1996        1995
                                              ----         ----        ----
Daily average borrowings ...............   $ 6,245.7    $ 5,817.7   $ 5,800.1
Maximum amount outstanding .............   $ 6,964.4    $ 6,591.3   $ 6,672.1
Weighted average interest rate .........        5.56%        5.44%       5.95%
(excluding amounts related to 
  interest-bearing deposits)

      The following  tables present the contractual  maturities of total debt at
December 31, 1997.

<TABLE>
<CAPTION>
                                                                           At December 31,
                                                                       ----------------------
                                          Commercial   Variable rate      1997         1996
                                             paper     senior notes       Total        Total
                                             -----     ------------       -----        ----
                                                             Dollars in Millions
<S>                                         <C>          <C>           <C>           <C>      
Due in 1997 (rates ranging from
   5.25% to 5.76%) ......................   $    --      $     --      $      --     $ 8,683.0
Due in 1998 (rates ranging from
   5.47% to 5.90%)(1) ...................   5,559.6       2,461.5        8,021.1         461.5
Due in 1999 (rates ranging from
   5.48% to 5.94%) ......................        --         380.0          380.0         380.0
Due after 2002 (rate of 5.96%) ..........        --          20.0           20.0          20.0
                                          ---------     ---------      ---------     ---------
      Total ............................. $ 5,559.6     $ 2,861.5      $ 8,421.1     $ 9,544.5
                                          =========     =========      =========     =========
</TABLE>
----------
(1)   $61.5  million  may be repaid at the  option of the  holder  upon 30 days'
      notice.


                                       45
<PAGE>

                      THE CIT GROUP, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

<TABLE>
<CAPTION>
                                                                                At December 31,
                                                                            ----------------------
                                                    Fixed rate notes           1997         1996
                                                 Senior     Subordinated       Total        Total
                                                 ------     ------------       -----        -----
<S>                                             <C>            <C>          <C>           <C>    
Due in 1997 (rates ranging from
   5.50% to 8.75%) ...........................  $     --       $    --      $      --     $   700.2
Due in 1998 (rates ranging from
   5.63% to 8.75%)(1) ........................   1,550.0         100.0        1,650.0       1,550.0
Due in 1999 (rates ranging from
   5.38% to 6.63%) ...........................   1,881.0            --        1,881.0       1,070.0
Due in 2000 (rates ranging from
   6.13% to 6.80%) ...........................   1,095.0            --        1,095.0          20.0
Due in 2001 (rates ranging from
   5.63% to 9.25%) ...........................     500.0         200.0          700.0         700.0
Due in 2002 (rates ranging from
   6.15% to 7.13%) ...........................     950.0            --          950.0         300.0
Due after 2002 (rates ranging from
   5.53% to 6.98%) ...........................     628.6            --          628.6         728.6
                                               ---------       -------      ---------     ---------
Face amount of maturities ....................   6,604.6         300.0        6,904.6       5,068.8
Issue discount ...............................     (10.8)           --          (10.8)         (7.6)
                                               ---------       -------      ---------     ---------
      Total .................................. $ 6,593.8       $ 300.0      $ 6,893.8     $ 5,061.2
                                               =========       =======      =========     =========
</TABLE>
----------
(1)   $100.0  million  may be repaid at the option of the  holder  upon 30 days'
      notice.

      Fixed rate senior and subordinated  debt outstanding at December 31, 1997,
matures at various  dates  through 2008 at interest  rates ranging from 5.38% to
9.25%. The consolidated weighted average interest rates on fixed rate senior and
subordinated  debt  at  December  31,  1997  and  1996  were  6.39%  and  6.52%,
respectively.  Variable rate senior notes  outstanding at December 31, 1997 with
interest rates ranging from 5.48% to 5.96% mature at various dates through 2003.
The  consolidated  weighted average interest rates on variable rate senior notes
at December 31, 1997 and 1996 were 5.66% and 5.44%, respectively.

      The following table represents information on unsecured revolving lines of
credit with 53 banks that support  commercial  paper  borrowings at December 31,
1997.

                                                           Maturity Amount
                                                          ----------------
                                                         Dollars in Millions

      April 1998 ......................................      $ 1,240.0
      April 2002 ......................................        3,720.0
                                                             ---------
      Total credit lines ..............................      $ 4,960.0
                                                             =========

      The credit  line  agreements  contain  clauses  that allow the  Company to
extend the termination dates upon written consent from the participating  banks.
There have been no borrowings  under credit lines  supporting  commercial  paper
since 1970.


                                       46
<PAGE>

                      THE CIT GROUP, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Note 7--Derivative Financial Instruments

      As part of managing the exposure to changes in market interest rates,  the
Company,  as an end-user,  enters into various interest rate swap  transactions,
all of which are  transacted  in  over-the-counter  (OTC)  markets,  with  other
financial   institutions   acting   as   principal   counterparties,   including
subsidiaries of DKB and Chase.  The Company uses off-balance  sheet  derivatives
for hedging purposes only. The Company does not enter into derivative  financial
instruments for trading or speculative  purposes. To ensure both appropriate use
as a hedge and hedge  accounting  treatment,  all  derivatives  entered into are
designated,   according  to  hedge  objective,   against   commercial  paper,  a
specifically underwritten debt issue or a specific pool of assets. The Company's
primary hedge objectives  include the conversion of variable rate liabilities to
fixed rates,  the conversion of fixed rate  liabilities to variable  rates,  the
fixing of spreads on variable rate liabilities to various market indices and the
elimination of interest rate risk on finance receivables  classified as held for
sale  prior  to  securitization.   The  notional  amounts,  rates,  indices  and
maturities  of the  Company's  off-balance  sheet  derivatives  are  required to
closely match the related terms of the Company's hedged assets and liabilities.

      The following  table  presents the notional  principal  amounts,  weighted
average  interest  rates  expected to be  received  or paid and the  contractual
maturities of interest rate swaps at December 31, 1997.

<TABLE>
<CAPTION>

Years ending                 Floating to                     Fixed to                     Floating to
December 31,                 Fixed Rate                    Floating Rate                 Floating Rate
------------       -----------------------------   ----------------------------   ---------------------------
                                                   Notional Amounts in Millions
                   Notional    Receive     Pay     Notional   Receive      Pay    Notional    Receive     Pay
                    Amount      Rate      Rate      Amount     Rate       Rate     Amount      Rate      Rate
                   --------    -------    ----     --------   -------     ----     -------    ------     ----
<S>                <C>          <C>       <C>       <C>        <C>       <C>      <C>          <C>       <C>                
1998 ...........   $  700.0     5.75%     6.61%     $  --         --        --    $    --        --        --
1999 ...........      925.0     5.85%     6.15%        --         --        --      130.0      5.57%     6.11%
2000 ...........      700.0     5.90%     7.05%      20.0      6.15%     6.13%         --        --        --
2001 ...........      631.0     5.93%     6.66%     200.0      5.82%     5.82%         --        --        --
2002 ...........       95.0     5.86%     6.16%        --        --        --          --        --        --
2003-2008 ......         --       --        --      200.0      5.92%     5.97%         --        --        --
                   --------     -----     ----     ------      ----      ----     -------      ----      ----
                   $3,051.0                        $420.0                         $ 130.0    
                   ========                        ======                         =======    
Weighted                                                                                     
average rate ...                5.85%     6.71%                5.88%     5.91%                 5.57%     6.11%
                                ====      ====                 ====      ====                  ====      ==== 
</TABLE>

      All rates were those in effect at December  31, 1997.  Variable  rates are
based on the contractually  determined rate or other market rate indices and may
change significantly, affecting future cash flows.


                                       47
<PAGE>

                      THE CIT GROUP, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

      The following  table presents the notional  principal  amounts of interest
rate swaps by class and the corresponding hedged liability position.

                                Notional
                                 Amounts
Interest Rate Swaps            in Millions  Comments
-------------------            -----------  ---------
Floating to fixed rate swaps
  Hedging commercial paper     $2,401.0     Effectively  converts  the  interest
                                            rate  on  an  equivalent  amount  of
                                            commercial paper to a fixed rate.

  Hedging variable rate notes     650.0     Effectively  converts  the  interest
                                            rate  on  an  equivalent  amount  of
                                            variable  rate  notes  with  matched
                                            terms to a fixed rate.
                               --------     ------------------------------------
  Total floating to 
   fixed rate swaps             3,051.0
                               --------
Fixed to floating rate swaps
   Hedging fixed rate notes       420.0     Effectively  converts  the  interest
                                            rate  on  an  equivalent  amount  of
                                            fixed rate notes to a variable rate.
Basis swaps
   Hedging variable rate debt     130.0     Effectively fixes the spread between
                                            the rates on an equivalent amount of
                                            variable   rate  notes  and  various
                                            market interest rate indices.
                               --------     ------------------------------------
Total interest rate swaps      $3,601.0
                               ========

      The  Company's  hedging  activity  increased  interest  expense  by  $24.2
million,  $27.8 million and $7.8 million in 1997,  1996 and 1995,  respectively,
over the interest  expense that would have been incurred with an identical  debt
structure but without the Company's hedging activity.  However, this calculation
of interest  expense  does not take into  account any actions the Company  could
have taken to reduce interest rate risk in the absence of hedging activity, such
as  issuing  more fixed  rate debt that  would  also tend to  increase  interest
expense.

      Basis swap agreements  involve the exchange of two different floating rate
interest  payment  obligations  and are used to manage  the basis  risk  between
floating rate indices.

      Additionally,  there  were  cross-currency  interest  rate  swaps  with  a
notional  principal  amount of $218.6  million on which the  Company  was paying
interest  at a  weighted  average  rate of  5.93%  at  December  31,  1997  that
effectively  converted yen  denominated  fixed rate debt into variable rate U.S.
dollar  obligations.  These swaps have  maturities  ranging from 1999 to 2006 to
correspond with the terms of the debt.

      The Company is exposed to credit risk to the extent a  counterparty  fails
to perform  under the terms of an interest  rate swap.  This risk is measured as
the market value of interest rate swaps with a positive fair value which totaled
$6.4  million at December  31,  1997,  reduced by the effects of master  netting
agreements  as  presented  in Note 18 -- Fair Values of  Financial  Instruments.
However,  due to the investment grade credit ratings of all  counterparties  and
limits on the exposure with any individual  counterparty,  the Company's  actual
counterparty credit risk is not considered significant.

Note 8--Preferred Capital Securities

      In  February  1997,  CIT Capital  Trust I (the  "Trust"),  a  wholly-owned
subsidiary of the Company,  issued  $250.0  million of 7.70%  Preferred  Capital
Securities  (the  "Capital  Securities")  in  a  private  offering.   The  Trust
subsequently  invested the offering proceeds in Junior  Subordinated  Debentures
(the "Debentures") of the Company, having identical rates and payment dates. The
Debentures of the Company represent the sole assets of the Trust. Holders of the
Capital Securities are entitled to receive cumulative distributions at an annual
rate of 7.70% through either the  redemption  date or maturity of the Debentures
(February 15,  2027).


                                       48
<PAGE>

                      THE CIT GROUP, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Both the  Capital  Securities  issued  by the Trust  and the  Debentures  of the
Company  owned  by the  Trust  are  redeemable  in  whole or in part on or after
February  15,  2007  or at any  time in  whole  upon  changes  in  specific  tax
legislation,  bank regulatory guidelines or securities law. Distributions by the
Trust are  guaranteed  by the  Company  to the  extent  that the Trust has funds
available for  distribution.  The Company records  distributions  payable on the
Capital  Securities as an operating  expense in the  Consolidated  Statements of
Income.

Note 9--Stockholders' Equity

      Under  the  most   restrictive   provisions  of  agreements   relating  to
outstanding  debt,  the Company  may not,  without the consent of the holders of
such debt, permit stockholders' equity to be less than $300.0 million.

Note 10--Fees and Other Income

      The following table sets forth the components of fees and other income.


                                                   Years Ended December 31,
                                              -------------------------------
                                                1997        1996         1995
                                              -------      -------     -------
                                                      Dollars in Millions
Factoring commissions ......................  $  95.2     $  91.0      $  86.3
Fees and other .............................     72.9        74.2         61.6
Gains on sales of leasing equipment
 and other investments .....................     46.9        54.6         10.5
Gains on securitizations and sales 
 of finance receivables ....................     32.8        24.3         26.3
                                              -------     -------      -------
Total ......................................  $ 247.8     $ 244.1      $ 184.7
                                              =======     =======      =======

Note 11--Salaries and General Operating Expenses

      The  following  table sets forth the  components  of salaries  and general
operating expenses.

                                                   Years Ended December 31,
                                               -------------------------------
                                                1997        1996         1995
                                               ------      -------     -------
                                                      Dollars in Millions
Salaries and employee benefits .............  $ 253.5     $ 223.0      $ 193.4
General operating expenses .................    174.9       170.1        152.3
                                              -------     -------      -------
Total ......................................  $ 428.4     $ 393.1      $ 345.7
                                              =======     =======      =======


                                       49
<PAGE>

                      THE CIT GROUP, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Note 12--Income Taxes

      The  effective tax rate of the Company  varied from the statutory  federal
corporate income tax rate as follows:

                                                    Years Ended December 31,
                                             ----------------------------------
                                              1997           1996         1995
                                             ------         -------      ------
                                                 Percentage of Pretax Income
Federal income tax rate ..................   35.0%           35.0%       35.0%
Increase (decrease) due to:              
  State and local income taxes,          
   net of federal income tax benefit .....    3.7             4.5         5.1
  Investment tax credits .................   (0.2)           (0.3)       (0.3)
  Other ..................................   (2.0)           (1.8)       (1.5)
                                             ----            ----        ----
  Effective tax rate .....................   36.5%           37.4%       38.3%
                                             ====            ====        ====
                                       
      The provision for income taxes is comprised of the following:

                                                  Years Ended December 31,
                                             ----------------------------------
                                              1997           1996         1995
                                             ------         -------      ------
                                                     Dollars in Millions
Current federal income tax provision .....   $ 70.0         $ 72.9       $ 68.5
Deferred federal income tax provision ....    80.3            54.1         42.5
                                             ------         ------       ------
Total federal income taxes ...............    150.3          127.0        111.0
State and local income taxes .............     27.7           28.7         28.8
                                             ------         ------       ------
  Total provision for income taxes .......   $178.0         $155.7       $139.8
                                             ======         ======       ======

      The tax effects of  temporary  differences  that give rise to  significant
portions of the deferred federal income tax assets and liabilities are presented
below.

                                                         At December 31,
                                                     -----------------------
                                                       1997           1996
                                                       -----          -----
                                                        Dollars in Millions
ASSETS
  Provision for credit losses .....................   $(93.3)        $(83.8)
  Loan origination fees ...........................     (9.2)         (10.5)
  Other ...........................................    (47.1)         (37.8)
                                                      ------         ------
    Total deferred tax assets .....................   (149.6)        (132.1)
                                                      ------         ------
LIABILITIES
  Leasing transactions ............................    679.0          610.0
  Market discount income ..........................     55.8           23.8
  Amortization of intangibles .....................      9.9            9.2
  Depreciation of fixed assets ....................      1.5            2.7
  Prepaid pension costs ...........................      1.0            2.0
  Other ...........................................      1.8            2.7
                                                      ------         ------
    Total deferred tax liabilities ................    749.0          650.4
                                                      ------         ------
Net deferred tax liability ........................   $599.4         $518.3
                                                      ======         ======

      Also,  included  in  deferred  federal  income  taxes on the  Consolidated
Balance Sheets are  unamortized  investment tax credits of $4.2 million and $5.0
million at  December  31, 1997 and 1996,  respectively.  Included in the accrued
liabilities and payables  caption in the  Consolidated  Balance Sheets are state
and local  deferred  tax  liabilities  of $103.6  million  and $97.4  million at
December 31, 1997 and 1996, respectively, arising from the temporary differences
shown in the above tables.


                                       50
<PAGE>

                      THE CIT GROUP, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Note 13--Earnings Per Share

      In  February  1997,  the  Financial   Accounting  Standards  Board  issued
Statement of Financial  Accounting Standards No. 128 "Earnings per Share" ("SFAS
128").  SFAS 128 establishes  standards for the  presentation and disclosure for
earnings per share ("EPS").  It also  simplifies the standards for computing EPS
and makes them comparable to international EPS standards.  SFAS 128 replaces the
presentation  of  primary  and fully  diluted  EPS with basic and  diluted  EPS,
respectively,  and requires the  reconciliation of the numerator and denominator
of basic EPS with that of diluted  EPS.  Basic EPS is computed  by dividing  net
income  by the  weighted-average  number of common  shares  outstanding  for the
period.  The diluted EPS computation  includes the potential  impact of dilutive
securities  including  stock options and restricted  stock grants.  The dilutive
effect of stock  options is  computed  using the  treasury  stock  method  which
assumes the  repurchase  of common  shares by the Company at the average  market
price for the period.  The  reconciliation  of the numerator and  denominator of
basic  EPS with  that of  diluted  EPS is  presented  only for the  years  ended
December 31, 1997 and 1996,  as the Company had no dilutive  securities in 1995.
Restricted stock,  discussed in Note  14-Postretirement and Other Benefit Plans,
is not  included in the EPS  calculation  for 1995 as the  restricted  stock was
issued in conjunction  with the  termination of the 1996-1998  Career  Incentive
Plan and the Company's Offering.

                                         For the year ended December 31, 1997
                                       ---------------------------------------
                                         Income        Shares        Per-Share
                                       (Numerator)  (Denominator)     Amount
                                       -----------  -------------   ----------
                                                Dollars in Millions
                                             (except per share amounts)
Basic EPS
Income available to common 
 shareholders ........................    $310.1     158,134,315      $ 1.96
Effect of Dilutive Securities:
Restricted shares ....................        --         948,527       (0.01)
Stock options ........................        --          71,440          --
                                          ------     -----------      ------
Diluted EPS ..........................    $310.1     159,154,282      $ 1.95
                                          ======     ===========      ======

                                         For the year ended December 31, 1996
                                       ---------------------------------------
                                         Income        Shares        Per-Share
                                       (Numerator)  (Denominator)     Amount
                                       -----------  -------------   ----------
                                                Dollars in Millions
                                             (except per share amounts)
Basic EPS
Income available to common 
 shareholders ........................    $260.1     157,500,000      $ 1.65
Effect of Dilutive Securities:
Restricted shares ....................        --         948,527       (0.01)
                                          ------     -----------      ------
Diluted EPS ..........................    $260.1     158,448,527      $ 1.64
                                          ======     ===========      ======

Note 14--Postretirement and Other Benefit Plans

Retirement Plan

      Substantially  all employees of the Company who have completed one year of
service  and are 21 years of age  participate  in The CIT Group  Holdings,  Inc.
Retirement Plan (the "Plan").  The retirement  benefits under the Plan are based
on the employee's age, years of benefit service,  and a percentage of qualifying
compensation  during  the final  years of  employment.  Plan  assets  consist of
marketable securities,  including common stock and government and corporate debt
securities.  The Company funds the Plan to the extent it qualifies for an income
tax  deduction.  Such  funding is  charged to  salaries  and  employee  benefits
expense.


                                       51
<PAGE>

                      THE CIT GROUP, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

      The  accompanying  table sets forth the funded  status of the Plan and the
amounts recognized in the Consolidated Balance Sheets.

<TABLE>
<CAPTION>
                                                      At or For the Years Ended December 31,
                                                      --------------------------------------
                                                         1997           1996         1995
                                                        ------         -------      ------
                                                                 Dollars in Millions
<S>                                                     <C>            <C>          <C>   
Actuarial present value of benefit obligations:
 Accumulated benefit obligation including vested
  benefits of $65.6 in 1997, $54.8 in 1996,  
  and $54.0 in 1995 .................................   $ 73.4         $ 61.6       $ 58.1
                                                        ======         ======       ======
Plan assets at fair market value ....................   $128.5         $109.9       $101.2
Projected benefit obligation ........................   (100.4)         (84.0)       (79.9)
                                                        ------         ------       ------
Excess plan assets ..................................     28.1           25.9         21.3
Unrecognized prior service cost .....................     (1.6)          (1.8)        (1.9)
Unrecognized net gain ...............................    (18.2)         (15.9)       (10.5)
                                                        ------         ------       ------
Prepaid pension cost ................................   $  8.2         $  8.2       $  8.9
                                                        ======         ======       ======
Pension cost included the following components:
Service cost-benefits earned during the period ......   $  5.2         $  5.3       $  3.8
Interest cost on projected benefit obligation .......      6.2            5.7          4.9
Actual return on plan assets ........................    (21.4)         (11.5)       (21.9)
Net amortization and deferral .......................     10.0            1.2         14.1
                                                        ------         ------       ------
Pension cost ........................................   $   --         $  0.7       $  0.9
                                                        ======         ======       ======
</TABLE>

               The following assumptions were used for calculating
                       the projected benefit obligations.

                                              1997           1996         1995
                                             ------         -------      ------
Discount rate ...........................      7.00%          7.50%       7.25%
Rate of increase in compensation ........      4.50%          4.50%       4.50%
Expected long-term rate of return 
 on plan assets .........................     10.00%         10.00%      10.00%

Postretirement Medical and Life Insurance Benefits

      The Company  provides  certain health care and life insurance  benefits to
eligible retired employees.  Salaried participants generally become eligible for
retiree  health care  benefits  after  reaching  age 55 with 10 years of benefit
service and 11 years of medical plan participation. Generally, the medical plans
pay a stated percentage of most medical expenses reduced by a deductible as well
as by payments made by government  programs and other group coverage.  The plans
are unfunded.

      The postretirement  benefit liability at December 31, 1997 and 1996 is set
forth in the following table.

                                                           At December 31,
                                                         --------------------
                                                         1997            1996
                                                         -----          -----
                                                          Dollars in Millions
Accumulated postretirement benefit 
 obligation ("APBO"):
  Retirees ...........................................   $20.5         $ 22.5
  Fully eligible, active plan participants ...........     4.2            4.1
  Other active plan participants .....................    10.3            8.3
                                                         -----          -----
Unfunded postretirement obligation ...................    35.0           34.9
Unrecognized net gain ................................     8.3            7.7
Unrecognized transition obligation ...................   (24.6)         (26.2)
                                                         -----          -----
Accrued postretirement benefit obligation ............   $18.7          $16.4
                                                         =====          =====


                                       52
<PAGE>

                      THE CIT GROUP, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

      The  components  of net  periodic  postretirement  benefit  cost  were  as
follows.

<TABLE>
<CAPTION>
                                                          Years Ended December 31,
                                                       -------------------------------
                                                       1997           1996        1995
                                                       ----           ----        ----
                                                             Dollars in Millions
<S>                                                    <C>            <C>         <C> 
Service cost-benefits earned during the period ......  $1.3           $1.1        $1.1
Interest cost on accumulated postretirement 
  benefit obligation ................................   2.3            2.4         3.2
Amortization of unrecognized transition obligation ..   1.7            1.7         1.7
Amortization of gain ................................  (0.8)          (0.6)         --
Amortization of unrecognized prior service cost .....    --             --        (0.1)
                                                       ----           ----        ----
Net periodic postretirement benefit cost ............  $4.5           $4.6        $5.9
                                                       ====           ====        ====

 The following assumptions were used for calculating the APBO.

<CAPTION>
                                                       1997           1996        1995
                                                       ----           ----        ----
<S>                                                    <C>            <C>         <C>  
Discount rate .......................................  7.00%          7.50%       7.25%
Rate of increase in compensation ....................  4.50%          4.50%       4.50%
Assumed health care cost trend rate:
  Retirees prior to reaching age 65 .................  8.20%          9.00%      10.00%
  Retirees older than 65 ............................  5.70%          6.00%       7.00%
</TABLE>

      For 1997,  the assumed health care cost trend rates decline to an ultimate
level of 4.50% in 2004 for all  retirees;  for 1996,  4.75% in 2001 for retirees
prior to reaching age 65 and 4.75% in 1998 for  retirees  older than 65; and for
1995,  4.75% in 2003 for retirees prior to reaching age 65 and 4.75% in 2000 for
retirees older than 65.

      If the health care cost trend rate were increased by 1%, the APBO relating
to the medical  benefits as of December  31,  1997,  would be  increased by $2.4
million (10.0%), and the sum of the service cost and interest cost components of
net periodic  postretirement  benefit cost relating to the medical  benefits for
1997 would be increased by $0.3 million (13.0%).

Savings Incentive Plan

      Certain  employees of the Company  participate in The CIT Group  Holdings,
Inc.  Savings  Incentive  Plan.  This plan qualifies under section 401(k) of the
Internal Revenue Code. The Company's expense is based on specific percentages of
employee  contributions  and  plan  administrative  costs  and  aggregated  $9.0
million, $9.1 million and $8.2 million for 1997, 1996 and 1995, respectively.

Corporate Annual Bonus Plan

      The CIT Group Bonus Plan ("Bonus  Plan") is an annual bonus plan  covering
certain executive officers and other employees.  The amount of awards depends on
a variety of factors, including corporate performance and individual performance
during the calendar year for which awards are made.  All or part of a cash award
for a particular year may be paid currently or deferred and paid upon retirement
in up to five annual  installments at the option of the participant.  All awards
are subject to appropriate taxes and deferred amounts are credited annually with
interest.  For the years ended December 31, 1997, 1996 and 1995, amounts charged
to expense for the Bonus Plan amounted to $18.5 million, $17.4 million and $13.7
million, respectively.


                                       53
<PAGE>

                      THE CIT GROUP, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Long-Term Equity Compensation Plan

      The Company sponsors a Long-Term Equity Compensation Plan (the "ECP"). The
ECP allows the Company to issue to  directors  and  employees  up to  12,503,000
shares  of Class A Common  Stock  through  grants of  annual  incentive  awards,
incentive and non-qualified stock options, stock appreciation rights, restricted
stock,  performance  shares and performance  units.  Class A common stock issued
under the ECP may be either  authorized but unissued shares,  treasury shares or
any combination thereof.

      The ECP was established in November 1997 in conjunction with the Offering.
In November  1997, the Company  granted  4,047,816  non-qualified  stock options
pursuant  to the ECP with an option  price per  share  equal to the fair  market
value on the date of grant ($27.00 per share).  No compensation  expense related
to stock option  grants was recorded as the option  exercise  price was equal to
the fair  market  value on the date of grant.  All of the  options  have 10 year
terms.  Options of 2,867,516 will vest one-third on the first anniversary of the
date of grant (1998), an additional  one-third on the second  anniversary of the
date of grant (1999),  and in full on the third anniversary of the date of grant
(2000).  The  remaining  1,180,300  options  will  vest  one-third  on the third
anniversary of the date of grant (2000),  an additional  one-third on the fourth
anniversary of the date of grant (2001) and in full on the fifth  anniversary of
the date of grant (2002).  Options  exercisable  at December 31, 1997 were 1,062
and 9,518 options were forfeited during 1997.

Restricted Stock

      In November 1997, the Company issued 948,527 shares of restricted  Class A
Common Stock in  connection  with the  termination  of the CIT Career  Incentive
Plan. All restricted  shares were  outstanding at December 31, 1997. Such shares
were issued at fair market value,  which was $27.00 per share on the issue date.
These shares vest on the third  anniversary of the date of grant.  The holder of
restricted  stock  generally  has the rights of a  stockholder  of the  Company,
including the right to vote and to receive cash dividends.

CIT Career Incentive Plan

      Phantom  shares  granted under the CIT Career  Incentive Plan entitled the
participant  to  receive,  at the end of the three year  performance  period,  a
specified amount of cash. Following the end of the performance period, one-third
of the phantom shares vested immediately and one-third vested at the end of each
of the next two years. In conjunction with the Offering,  the Company terminated
the CIT Career  Incentive  Plan as of  November  13, 1997 and  extinguished  all
phantom shares of stock,  by cash payment  (payable in 1998) and the granting of
restricted  shares of Class A common stock and stock options.  At the employee's
option,  all or part of the cash  component of the  termination  could either be
paid in 1998 in cash or  deferred  in up to five  annual  installments.  For the
years ended December 31, 1997, 1996 and 1995, amounts charged to expense for the
CIT Career  Incentive  Plan  amounted to $20.1  million,  $9.5  million and $3.8
million,  respectively.  All charges  relating to the  termination of the Career
Incentive Plan are included in 1997 expense.

Accounting for Stock-Based Compensation Plans

      The Company has elected to apply  Accounting  Principles  Board Opinion 25
("APB 25")  rather  than the  optional  provisions  of  Statement  of  Financial
Accounting  Standards No. 123 "Accounting for Stock-Based  Compensation"  ("SFAS
123") in accounting for its stock-based  compensation  plans.  Under APB 25, the
Company  does not  recognize  compensation  expense on the issuance of its stock
options  because the option  terms are fixed and the  exercise  price equals the
market price of the underlying stock on the grant date. As required by SFAS 123,
the  Company  has  determined  the pro forma  information  as if the Company had
accounted for stock options granted under the fair value method of SFAS 123. Had
the  compensation  cost of the  Company's  stock-based  compensation  plans been
determined  based on the  operational  provisions of SFAS 123, the Company's net
income for 1997 and net income per diluted share would have been $288.7  million
and $1.81,  compared to $310.1  million and $1.95,  as  reported.  The  weighted
average fair value of all options  granted  during 1997 was $8.32 and fair value
was determined at the date of grant using the Black-


                                       54
<PAGE>

                      THE CIT GROUP, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Scholes  option-pricing  model that assumed a dividend yield of 1.33%,  expected
volatility  range  of  29.48%-31.39%,   a  risk  free  interest  rate  range  of
5.76%-5.90% and an expected option life range of 3-7 years.

Note 15--Lease Commitments

      The Company has entered into noncancellable long-term lease agreements for
premises and  equipment.  The following  table presents  future minimum  rentals
under such noncancellable  leases that have initial or remaining terms in excess
of one year at December 31, 1997.

 Years Ended December 31,                                   Dollars in Millions
 -----------------------                                    -------------------
         1998 ............................................      $  24.4
         1999 ............................................         21.2
         2000 ............................................         17.7
         2001 ............................................         15.3
         2002 ............................................         14.2
         Thereafter ......................................         48.5
                                                                -------
           Total .........................................      $ 141.3
                                                                =======

      In addition to fixed lease rentals,  leases require payment of maintenance
expenses  and  real  estate  taxes,  both of which  are  subject  to  escalation
provisions.  Minimum  payments have not been reduced by minimum sublease rentals
of $16.6 million due in the future under noncancellable subleases.

      Rental expense,  net of sublease income on premises and equipment,  was as
follows.

                                                 Years Ended December 31,
                                            -----------------------------------
                                              1997         1996          1995
                                              ----         ----          ----
                                                    Dollars in Millions
    Premises ............................   $ 19.6         $18.0        $ 18.0
    Equipment ...........................      6.0           6.3           5.7
    Less sublease income ................     (1.2)         (1.2)         (1.3)
                                            ------        ------        ------
      Total .............................   $ 24.4        $ 23.1        $ 22.4
                                            ======        ======        ======

Note 16--Legal Proceedings

      In the ordinary  course of business,  there are various legal  proceedings
pending against the Company. Management believes that the aggregate liabilities,
if any, arising from such actions will not have a material adverse effect on the
consolidated  financial  position,  results of  operations  or  liquidity of the
Company.

Note 17--Credit-Related Commitments

      In the normal course of meeting the financing needs of its customers,  the
Company  enters  into  various  credit-related   commitments.   These  financial
instruments  generate fees and involve,  to varying degrees,  elements of credit
risk in excess of the amounts recognized in the Consolidated  Balance Sheets. To
minimize  potential credit risk, the Company generally  requires  collateral and
other  credit-related  terms  and  conditions  from  the  customer.  At the time
credit-related  commitments are granted,  management  believes the fair value of
the underlying collateral and guarantees approximates or exceeds the contractual
amount of the  commitment.  In the event a customer  defaults on the  underlying
transaction,  the maximum  potential loss to the Company will be the contractual
amount outstanding less the value of all underlying collateral and guarantees.


                                       55
<PAGE>

                      THE CIT GROUP, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

      The   accompanying   table   summarizes   the   contractual   amounts   of
credit-related commitments.

<TABLE>
<CAPTION>
                                                                      At December 31,
                                                   -----------------------------------------------------------
                                                           Due to expire            
                                                   ----------------------------     Total             Total
                                                       Within         After      outstanding       outstanding
                                                      one year      one year        1997              1996
                                                    ------------   -----------   -----------      ------------
                                                                      Dollars in Millions
<S>                                                  <C>              <C>        <C>               <C>      
Unused commitments to extend credit
  Loans ..........................................   $ 1,508.2        $ 2.9      $ 1,511.1         $ 1,487.4
  Leases .........................................        97.1           --           97.1              50.9
Letters of credit and acceptances
  Standby letters of credit ......................       208.7          0.9          209.6             151.6
  Other letters of credit ........................       170.2         10.9          181.1             231.7
  Acceptances ....................................        24.0           --           24.0              14.6
Guarantees .......................................         5.3         23.9           29.2              79.9
Foreign exchange contracts .......................         1.1           --            1.1               0.8
</TABLE>

Note 18--Fair Values of Financial Instruments

      Statement of Financial  Accounting  Standards No. 107  "Disclosures  About
Fair Value of Financial  Instruments"  ("SFAS 107")  requires  disclosure of the
estimated fair value of the Company's financial  instruments,  excluding leasing
transactions accounted for under SFAS 13. The fair value estimates are made at a
discrete  point in time based on relevant  market  information  and  information
about the financial instrument. Since no established trading market exists for a
significant portion of the Company's financial instruments, fair value estimates
are based on  judgments  regarding  future  expected  loss  experience,  current
economic conditions, risk characteristics of various financial instruments,  and
other factors. These estimates are subjective in nature, involving uncertainties
and matters of significant  judgment and,  therefore,  cannot be determined with
precision. Changes in assumptions or estimation methods may significantly affect
the estimated fair values. Because of these limitations,  management provides no
assurance that the estimated fair values presented would necessarily be realized
upon disposition or sale.

      Actual fair values in the  marketplace  are affected by other  significant
factors,  such as supply and demand,  investment  trends and the  motivations of
buyers  and  sellers,  which  are  not  considered  in the  methodology  used to
determine the estimated fair values presented. In addition, fair value estimates
are based on existing on-and  off-balance  sheet financial  instruments  without
attempting to estimate the value of future business  transactions  and the value
of assets and liabilities  that are part of the Company's  overall value but are
not considered  financial  instruments.  Significant assets and liabilities that
are not considered financial  instruments include customer base, operating lease
equipment, premises and equipment, assets received in satisfaction of loans, and
deferred tax balances. In addition, tax effects relating to the unrealized gains
and losses  (differences in estimated fair values and carrying  values) have not
been  considered in these  estimates  and can have a significant  effect on fair
value estimates.  The carrying amounts for cash and cash equivalents approximate
fair value  because they have short  maturities  and do not present  significant
credit risks. Credit-related commitments, as disclosed in Note 17, are primarily
short term floating rate contracts  whose terms and conditions are  individually
negotiated,  taking into  account the  creditworthiness  of the customer and the
nature,  accessibility and quality of the collateral and guarantees.  Therefore,
the fair value of credit-related  commitments,  if exercised,  would approximate
their contractual amounts.


                                       56
<PAGE>

                      THE CIT GROUP, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

      Estimated fair values,  recorded  carrying values and various  assumptions
used in valuing the  Company's  financial  instruments  at December 31, 1997 and
1996 are set forth below.

<TABLE>
<CAPTION>
                                                                 1997                          1996
                                                      ---------------------------    ------------------------
                                                       Carrying       Estimated      Carrying       Estimated
                                                        Value        Fair Value       Value        Fair Value
                                                      ----------     -----------     ---------     ----------
                                                         Asset          Asset          Asset          Asset
                                                      (Liability)    (Liability)    (Liability)    (Liability)
                                                      ----------     -----------     ---------     ----------
                                                                          Dollars in Millions
<S>                                                    <C>             <C>           <C>            <C>      
Finance receivables - loans(a) .....................   $13,406.7       $13,607.0     $13,275.2      $13,480.1
Consumer finance receivables held for sale .........       268.2           268.2         116.3          116.3
Other assets(b) ....................................       383.9           420.9         273.4          308.1
Commercial paper(c) ................................    (5,559.6)       (5,559.6)     (5,827.0)      (5,827.0)
Fixed rate senior notes and subordinated
   fixed rate notes(d) .............................    (6,893.8)       (6,924.1)     (5,061.2)      (5,091.6)
Variable rate notes(d) .............................    (2,861.5)       (2,856.5)     (3,717.5)      (3,714.3)
Credit balances of factoring clients & accrued
   liabilities and payables(e) .....................    (1,714.0)       (1,714.0)     (1,578.9)      (1,578.9)
Company-obligated mandatorily
   redeemable preferred securities of
   subsidiary trust holding solely debentures
   of the Company(f) ...............................      (250.0)         (253.8)           --             --
Derivative Financial Instruments(g)
 Interest Rate Swaps
 Off-balance sheet assets ..........................          --             1.2            --            6.3
 Off-balance sheet liabilities .....................          --           (46.6)           --          (64.6)
 Cross currency assets .............................          --             5.2            --           14.1
 Cross currency liabilities ........................          --           (12.0)           --             --
</TABLE>

----------
(a)   The fair value of performing  fixed-rate  loans was estimated based upon a
      present value  discounted  cash flow  analysis,  using interest rates that
      were being  offered at the end of the year for loans with similar terms to
      borrowers of similar  credit  quality.  Discount rates used in the present
      value  calculation  range  from 8.21% to 9.20% for 1997 and 7.96% to 9.37%
      for 1996. The maturities used represent the average contractual maturities
      adjusted for prepayments.  For floating rate loans that reprice frequently
      and have no significant change in credit quality,  fair value approximates
      carrying  value.  The net carrying value of lease finance  receivables not
      subject to fair value  disclosure  totaled  $4.1  billion in 1997 and $3.5
      billion in 1996.

(b)   Other assets subject to fair value  disclosure  include  accrued  interest
      receivable  and  investment  securities.  The  carrying  amount of accrued
      interest  receivable   approximates  fair  value.   Investment  securities
      actively traded in a secondary  market were valued using quoted  available
      market prices.  Investments not actively traded in a secondary market were
      valued based upon recent  selling price or present value  discounted  cash
      flow  analysis.  The  carrying  value of other  assets not subject to fair
      value  disclosure  totaled  $281.9  million in 1997 and $261.8  million in
      1996.

(c)   The estimated fair value of commercial paper  approximates  carrying value
      due to the relatively short maturities.

(d)   Fixed rate notes were valued using a present  value  discounted  cash flow
      analysis  with a discount  rate  approximating  current  market  rates for
      issuances  by the  Company  of  similar  term debt at the end of the year.
      Discount rates used in the present value calculation  ranged from 5.23% to
      6.60% in 1997 and 5.53% to 6.95% in 1996.  The  estimated  fair  value for
      variable rate notes  differs from carrying  value as a result of a foreign
      denominated issuance.

(e)   The  estimated  fair  value  of  credit  balances  of  factoring   clients
      approximates  carrying value due to their short settlement terms.  Accrued
      liabilities and payables with no stated  maturities have an estimated fair
      value  that  approximates  carrying  value.  The  carrying  value of other
      liabilities not subject to fair value disclosure totaled $752.3 million in
      1997 and $672.5 million in 1996.

(f)   Company-obligated  mandatorily  redeemable preferred capital securities of
      subsidiary  trust  holding  solely  debentures  of the Company were valued
      using a present value  discounted  cash flow analysis with a discount rate
      approximating  current market rates of similar issuances at the end of the
      year.

(g)   As previously disclosed in Note 7--Derivative  Financial Instruments,  the
      notional  principal  amount of interest  rate swaps  designated  as hedges
      against the Company's debt totaled $3.6 billion at December 31, 1997 ($0.8
      billion of which  related to interest  rate swaps whose fair market  value
      represented an asset and $2.8 billion related to interest rate swaps whose
      fair market value  represented  a liability,  after  adjusting  for master
      netting agreements) and $5.3 billion at December 31, 1996 ($1.8 billion of
      assets and $3.5 billion of liabilities).  The notional principal amount of
      cross currency  interest rate swaps totaled $218.6 million at December 31,
      1997 and 1996,  respectively.  The  estimated  fair  values of  derivative
      financial  instruments  are obtained  from dealer quotes and represent the
      net amount  receivable or payable to terminate the agreement,  taking into
      account current market interest rates and counterparty credit risk.


                                       57
<PAGE>

                      THE CIT GROUP, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Note 19--Investments in Debt and Equity Securities

      At  December  31, 1997 and 1996,  the  Company's  investments  in debt and
equity securities designated as available for sale and subject to the provisions
of Statement of Financial  Accounting  Standards No. 115 "Accounting for Certain
Investments  in Debt and Equity  Securities"  totaled  $146.1  million and $24.4
million,  respectively.  The Company's investments in debt and equity securities
designated as trading  totaled  $38.2  million at December 31, 1997.  Unrealized
gains and losses, representing the difference between carrying value and current
fair market value were not significant.

Note 20--Certain Relationships and Related Transactions

      The  Company  has in the past and may in the  future  enter  into  certain
transactions  with  affiliates  of the  Company.  It is  anticipated  that  such
transactions will be entered into at a fair market value for the transaction.

      The Company's  interest-bearing  deposits  generally  represent  overnight
money  market  investments  of excess  cash that are  maintained  for  liquidity
purposes.  From time to time, the Company may maintain such deposits with DKB or
Chase.

      At December 31, 1997,  the  Company's  credit line  coverage with 53 banks
totaled $5.0 billion of committed facilities.  Additional  information regarding
these credit lines can be found in Note 6--Debt. At December 31, 1997, DKB was a
committed bank under a $1.2 billion revolving credit facility and a $3.7 billion
revolving  credit facility  (together,  the  "Facilities"),  with commitments of
$71.2 million and $213.8  million,  respectively.  Chase is both the agent and a
committed bank under the Facilities with commitments of $63.8 million and $191.2
million, respectively.

      At December 31, 1996,  the  Company's  credit line  coverage with 60 banks
totaled $5.2 billion of committed  facilities.  At December 31, 1996,  DKB was a
committed bank under a $3.6 billion revolving credit facility,  a $244.0 million
revolving credit  facility,  a $1.2 billion  revolving  credit facility,  and an
$81.0 million  revolving  credit  facility,  with commitments of $108.8 million,
$93.8 million, $36.3 million and $31.3 million,  respectively. DKB was the agent
under the $244.0 million facility and the $81.0 million facility. Chase was both
the agent and a committed bank under the $3.6 billion  revolving credit facility
and the $1.2  billion  revolving  credit  facility  with  commitments  of $187.5
million and $62.5 million, respectively.

      The  Company  has  entered  into  interest  rate swap and  cross  currency
interest rate swap  agreements with financial  institutions  acting as principal
counterparties, including affiliates of DKB and Chase. At December 31, 1997, the
notional  principal amount outstanding on interest rate swap agreements with DKB
and Chase totaled $220.0 million and $475.0 million,  respectively.  At December
31, 1996,  the  notional  principal  amount  outstanding  on interest  rate swap
agreements  with DKB and  Chase  totaled  $270.0  million  and  $705.0  million,
respectively.  The notional  principal  amount  outstanding on foreign  currency
swaps totaled $168.0 million with DKB at both year-end 1997 and 1996.

      The Company has entered into  leveraged  leasing  arrangements  with third
party loan participants, including affiliates of DKB. Amounts owed to affiliates
of DKB are discussed in Note 3--Finance Receivables.

      At December 31, 1997 and 1996,  the Company held a $9.0 million  letter of
credit from Chase as additional  collateral on a $20.8 million and $22.2 million
business  aircraft loan to a third party.  Chase is also indebted to the Company
in the amount of $6.7  million and $7.3  million for  financing  relating to the
purchase  of a  business  aircraft  by Chase,  at  December  31,  1997 and 1996,
respectively.

      The  Company  has  also  entered  into  various  noncancellable  long-term
facility lease agreements with Chase.  Future minimum rentals under these leases
are $0.5 million in 1998, $0.4 million in 1999, and $0.1 million in 2000. Rental
expense  paid to Chase  totaled $0.5  million,  $0.5 million and $0.6 million in
1997, 1996 and 1995, respectively.


                                       58
<PAGE>

                      THE CIT GROUP, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

      At December 31, 1997 and 1996, the Company had entered into credit-related
commitments with DKB in the form of letters of credit totaling $15.2 million and
$19.8 million, respectively,  equal to the amount of the single lump sum premium
necessary to provide group life insurance  coverage to certain  eligible retired
employees and an amount to fund certain overseas finance receivables.

      During 1997, the Company  entered into an arrangement  with Chase pursuant
to which the  Company  provides  servicing  for Chase's  recreation  vehicle and
recreational boat finance receivables  portfolio,  which had a remaining balance
of $1.1 billion at December 31, 1997.

      The Company purchased finance receivables totaling $39.6 million and $33.4
million from Chase during 1997 and 1996, respectively.

      The Company has entered  into cash  collateral  loan  agreements  with DKB
pursuant  to which DKB made loans to four  separate  cash  collateral  trusts in
order to provide  additional  security for payments on the  certificates  of the
related  contract  trusts.  These contract trusts were formed for the purpose of
securitizing  certain  recreational  vehicle  and  recreational  marine  finance
receivables.  At December 31, 1997 and 1996, the principal amount outstanding on
the cash collateral loans was $45.8 million and $40.7 million, respectively. The
Company has entered into multiple  trust  agreements  with Chase with respect to
certain securitization transactions.

Note 21--Business Segment Information

      The Company's primary business  activities are comprised of commercial and
consumer  operations.  The Company's  commercial segment is engaged in equipment
financing and leasing,  factoring and commercial finance. The Company's consumer
segment  offers  home  equity   lending,   secured  retail  sales  financing  of
manufactured  housing,  recreation  vehicles and recreational  boats, as well as
consumer loan servicing.

      Segment  total  revenue is defined as finance  income  plus fees and other
income.  Segment operating income (loss) is defined as total revenue less direct
segment  interest and  operating  expenses.  Other  includes  general  corporate
expenses,  and revenues and expenses related to other operations of the Company.
The  following  table sets forth  information  on the Company's  commercial  and
consumer business segments.

                                                       At December 31,
                                             ----------------------------------
                                             1997          1996          1995
                                             -----        ------         -----
                                                     Dollars in Millions
Total Assets
Commercial ............................    $16,010.2     $15,143.2    $14,590.5
Consumer ..............................      4,301.7       3,563.4      2,587.7
Other .................................        152.2         225.9        242.1
                                           ---------     ---------    ---------
  Total ...............................    $20,464.1     $18,932.5    $17,420.3
                                           =========     =========    =========

                                              For the Years Ended December 31,
                                             ----------------------------------
                                             1997           1996         1995
                                             -----         ------        -----
                                                     Dollars in Millions
Total Revenues
Commercial ............................     $1,675.5      $1,542.6     $1,443.0
Consumer ..............................        425.0         325.6        264.4
Other .................................         30.0          22.1          6.5
                                            --------      --------     --------
  Total ...............................     $2,130.5      $1,890.3     $1,713.9
                                            ========      ========     ========
Operating Income (Loss)
Commercial ............................       $465.3        $390.2       $341.5
Consumer ..............................         72.0          67.4         63.9
Other .................................        (49.2)        (41.8)       (40.3)
                                              ------        ------       ------
  Total ...............................       $488.1        $415.8       $365.1
                                              ======        ======       ======


                                       59
<PAGE>

                      THE CIT GROUP, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Note 22--Selected Quarterly Financial Data (Unaudited)

<TABLE>
<CAPTION>
                                                                               1997
                                                    ----------------------------------------------------------
                                                      First       Second       Third       Fourth
                                                     Quarter      Quarter     Quarter      Quarter      Year
                                                    ---------    --------    --------     --------     -------
                                                            Dollars in Millions (except per share data)
<S>                                                 <C>          <C>          <C>         <C>          <C>    
Net finance income .............................    $ 214.0      $ 218.3      $ 226.0     $ 229.2      $ 887.5
Fees and other income ..........................       57.7         49.4         78.9        61.8        247.8
Gain on sale of equity interest acquired
   in loan workout .............................         --         58.0           --          --         58.0
Salaries and general operating expenses ........       99.9        110.6        103.6       114.3        428.4
Provision for credit losses ....................       27.0         29.0         35.8        21.9        113.7
Depreciation on operating
   lease equipment .............................       32.1         33.9         42.3        38.5        146.8
Minority interest in subsidiary
   trust holding solely debentures
   of the Company ..............................        1.9          4.8          4.8         4.8         16.3
Provision for income taxes .....................       40.7         53.7         43.1        40.5        178.0
Net income .....................................      $70.1        $93.7        $75.3       $71.0       $310.1
Net income per diluted share ...................      $0.44        $0.59        $0.48       $0.44       $ 1.95

<CAPTION>
                                                                               1996
                                                    ----------------------------------------------------------
                                                      First       Second       Third       Fourth
                                                     Quarter      Quarter     Quarter      Quarter      Year
                                                    ---------    --------    --------     --------     -------
                                                            Dollars in Millions (except per share data)
<S>                                                  <C>          <C>          <C>         <C>          <C>   
Net finance income .............................     $195.4       $197.3       $201.4      $203.8       $797.9
Fees and other income ..........................       52.7         73.2         50.9        67.3        244.1
Salaries and general operating expenses ........       95.9         97.6         97.9       101.7        393.1
Provision for credit losses ....................       27.8         26.6         24.2        32.8        111.4
Depreciation on operating lease equipment ......       27.5         28.8         28.0        37.4        121.7
Provision for income taxes .....................       37.1         45.1         37.1        36.4        155.7
Net income .....................................     $ 59.8       $ 72.4       $ 65.1      $ 62.8       $260.1
Net income per diluted share ...................     $ 0.38       $ 0.45       $ 0.41      $ 0.40       $ 1.64
</TABLE>

Item 9.  Changes in and  Disagreements with Accountants on Accounting and
         Financial Disclosure.

      None.


                                       60
<PAGE>

                                    PART III

Item 10. Directors and Executive Officers of the Registrant.

      The  information  called for by Item 10 is  incorporated by reference from
the  information  under the caption  "Election of  Directors"  and  "Election of
Directors -- Executive Officers of the Company" in the Company's Proxy Statement
for its 1998 annual meeting of shareholders.

Item 11. Executive Compensation.

      The  information  called for by Item 11 is  incorporated by reference from
the  information  under the caption  "Compensation  of Directors  and  Executive
Officers"  in the  Company's  Proxy  Statement  for its 1998  annual  meeting of
shareholders.

Item 12. Security Ownership of Certain Beneficial Owners and Management.

      The  information  called for by Item 12 is  incorporated by reference from
the  information  under the caption  "Principal  Shareholders"  in the Company's
Proxy Statement for its 1998 annual meeting of shareholders.

Item 13. Certain Relationships and Related Transactions.

      The  information  called for by Item 13 is  incorporated by reference from
the  information   under  the  caption   "Certain   Relationships   and  Related
Transactions"  in the Company's  Proxy  Statement for its 1998 annual meeting of
shareholders.


                                       61
<PAGE>

                                     PART IV

Item 14.  Exhibits, Financial Statement Schedule and Reports on Form 8-K.

     (a)  The  following  documents are filed with the  Securities  and Exchange
          Commission as part of this report:

          1. The financial statements of The CIT Group, Inc. and Subsidiaries as
             set forth on pages 34-60.

          2. All  schedules  are  omitted  because  they are not  applicable  or
             because  the  required  information  appears  in  the  consolidated
             financial statements or the notes thereto.

          3. The  following is an index of the Exhibits  required by Item 601 of
             Regulation S-K filed with the Securities and Exchange Commission as
             part of this report:

             3.1    Amended and Restated Certificate of Incorporation of The CIT
                    Group,  Inc.,  dated  November  12,  1997  (incorporated  by
                    reference to Exhibit 3.1 to Form 8-A filed by the Company on
                    October 29, 1997).

             3.2    By-Laws of The CIT Group,  Inc.,  dated  November  12,  1997
                    (incorporated  by reference to Exhibit 3.2 to Form 8-A filed
                    by the Company on October 29, 1997).

             4.1    Form of certificate of Class A Common Stock (incorporated by
                    reference to Exhibit 4.1 to Form 8-A filed by the Company on
                    October 29, 1998).

             4.2    Upon the request  of the Securities and Exchange Commission,
                    the Company  will furnish a copy of all instruments defining
                    the  rights of holders of long-term debt of the Registrant.

             10.1   Regulatory  Compliance  Agreement,  dated  November 18, 1997
                    (incorporated  by reference to Exhibit 10.4 to Amendment No.
                    2 to Form S-2 filed by the Company on November 12, 1997).

             10.2   Registration  Rights  Agreement,  dated  November  18,  1997
                    (incorporated  by reference to Exhibit 10.5 to Amendment No.
                    2 to Form S-2 filed by the Company on November 12, 1997).

             10.3   Employment  Agreement of Albert R. Gamper,  Jr., dated April
                    1, 1997, comparable to the agreement for Joseph A. Pollicino
                    (incorporated  by reference to Exhibit 10.6 to Amendment No.
                    2 to Form S-2 filed by the Company on November 12, 1997).

             10.4   Employment  Agreement of Joseph M. Leone,  dated December 6,
                    1996,  comparable to the  agreements  for William M. O'Grady
                    and Ernest D. Stein  (incorporated  by  reference to Exhibit
                    10.7 to Amendment  No. 2 to Form S-2 filed by the Company on
                    November 12, 1997).

             10.5   The CIT Group  Bonus  Plan  (incorporated  by  reference  to
                    Exhibit  10 (d) to Form 10-K  filed by the  Company  for the
                    fiscal year ended December 31, 1992).

             10.6   The  CIT  Group  Holdings,   Inc.   Career   Incentive  Plan
                    (incorporated  by  reference  to Exhibit  10(e) to Form 10-K
                    filed by the Company for the fiscal year ended  December 31,
                    1992).

             10.7   The CIT  Group  Holdings,  Inc.  Supplemental  Savings  Plan
                    (incorporated  by  reference  to Exhibit  10(f) to Form 10-K
                    filed by the Company for the fiscal year ended  December 31,
                    1992).

             10.8   The CIT Group Holdings,  Inc.  Supplemental  Retirement Plan
                    (incorporated  by  reference  to Exhibit  10(g) to Form 10-K
                    filed by the Company for the fiscal year ended  December 31,
                    1992).

             10.9   The CIT Group Holdings,  Inc. Executive  Retirement Plan and
                    New Executive  Retirement Plan, each effective as of January
                    1, 1995  (incorporated  by  reference  to  Exhibit  10.12 to
                    Amendment No. 2 to Form S-2 filed by the Company on November
                    12, 1997).


                                       62
<PAGE>

             10.10  The CIT Group,  Inc.  Long-Term  Equity  Compensation  Plan,
                    dated November 1, 1997 (incorporated by reference to Exhibit
                    10.13 to Amendment No. 2 to Form S-2 filed by the Company on
                    November 12, 1997).

             12     Computation of Ratios of Earnings to Fixed Charges.
                  
             21     Subsidiaries of the Registrant.
                  
             23     Consent of KPMG Peat Marwick LLP.
                  
             24     Powers of Attorney
                  
             27     Financial Data Schedule (filed electronically)
               
     (b) A Current Report on Form 8-K, dated October 14, 1997 was filed with the
Commission  reporting the Corporation's  announcement of results for the quarter
ended September 30, 1997.

         A Current  Report on Form 8-K,  dated November 12, 1997, was filed with
the Commission  reporting the  Corporation's  announcement of its initial public
offering of its Class A Common Stock and setting forth the  "Business" and "Risk
Management" sections from the Prospectus.


                                       63
<PAGE>

                                   SIGNATURES

     Pursuant  to the  requirements  of  Section  13 or 15(d) of the  Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

                                         THE CIT GROUP, INC.

                                         By:  /S/ DONALD J. RAPSON
                                            --------------------------------
                                                    Donald J. Rapson
                                                 Senior Vice President, 
                                                Assistant General Counsel 
                                                 and Assistant Secretary

March 17, 1998

     Pursuant to the  requirements of the Securities  Exchange Act of 1934, this
report  has  been  signed  below  by the  following  persons  on  behalf  of the
Registrant and in the capacities and on the dates indicated:

     Signature and Title                                             Date
     -------------------                                             ----

    ALBERT R. GAMPER, JR.*
-------------------------------
  President, Chief Executive 
    Officer and Director
(principal executive officer)

      HISAO KOBAYASHI*
-------------------------------
          Director

       DANIEL P. AMOS*
-------------------------------
          Director

        YOSHIRO AOKI*
-------------------------------
          Director

      TAKASUKE KANEKO*             *By: /s/ DONALD J. RAPSON      March 17, 1998
-------------------------------         --------------------
          Director                        Donald J. Rapson
                                         Attorney-In-Fact
    JOSEPH A. POLLICINO*        
-------------------------------
          Director

        PAUL N. ROTH*
-------------------------------
          Director

       PETER J. TOBIN*
-------------------------------
          Director

       TOHRU TONOIKE*
-------------------------------
          Director

        KEIJI TORII*
-------------------------------
          Director

     /S/ JOSEPH M. LEONE                                         March 17, 1998
-------------------------------
       Joseph M. Leone
 Executive Vice President and
   Chief Financial Officer
(principal accounting officer)

     Original powers of attorney  authorizing  Albert R. Gamper,  Jr., Ernest D.
Stein,  and  Donald  J.  Rapson  and  each of them  to  sign  on  behalf  of the
above-mentioned  directors  are  held  by  the  Corporation  and  available  for
examination by the Securities and Exchange Commission pursuant to Item 302(b) of
Regulation S-T.


                                       64