TABLE OF CONTENTS




|                                              |                                                   |  |  |  |  |  |  | 
|--------------------------------------------- | ------------------------------------------------- |  |  |  |  |  |  | 
|PART I                                       
|PART II                                      
|PART III                                     
|PART IV                                      
|                                              | Consolidated Statements of Income                
|                                              | Consolidated Balance Sheets                      
|                                              | Consolidated Statements of Stockholders Equity  
|                                              | Consolidated Statements of Cash Flows            
|                                              | Notes to Consolidated Financial Statements       
|                                              | 17. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
|                                              | Report of Management                             
|                                              | Independent Auditors Report                     
|                                              | INDEPENDENT AUDITORS REPORT ON SCHEDULE         
|SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
|SIGNATURES                                   
|EXHIBIT INDEX                                

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K



|(X) |  | Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended December 31, 1999OR           
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------
|   
|( ) |  | Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ________ to _________

Commission File No. 1-12394

DETROIT DIESEL CORPORATION
(Exact name of registrant as specified in its charter)

|                                                               |  |                                  
|-------------------------------------------------------------- |  | ---------------------------------
|Delaware                                                       |  | 38-2772023                       
|                                                               |  |                                  
|(State or other jurisdiction
of incorporation or organization) |  | (IRS Employer Identification No.)

13400 Outer Drive West, Detroit, Michigan 48239-4001
(Address of principal executive offices, including zip code)

313-592-5000
(Registrants telephone number, including area code)

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

|                             |  |                                          
|---------------------------- |  | -----------------------------------------
|Common Stock $0.01 Par Value |  | New York Stock Exchange                  
|                             |  |                                          
|Title of each class          |  | Name of each exchange on which registered

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 voting stock held by non-affiliates of the
Registrant as of March 15, 2000 was approximately $124 million.

The number of shares of Common Stock outstanding as of March 15, 2000 were
23,294,091 shares.

DOCUMENTS INCORPORATED BY REFERENCE

Certain information in Detroit Diesel Corporations Proxy Statement in
connection with the Annual Meeting of Stockholders to be held on April 19, 2000
which will be filed with the Securities and Exchange Commission pursuant to
Regulation 14A, not later than 120 days after the end of the fiscal year, is
incorporated by reference into Part III (Items 10, 11, 12 and 13) of this Form
10-K.

This document contains 74 pages. The Exhibit Index begins on page 58.





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PART I

Item 1. Business.

General

Detroit Diesel Corporation (the Company, Detroit Diesel or DDC)
designs, manufactures, markets, services and provides aftermarket and
remanufactured products for a full range of high performance diesel and
alternative fuel engines. The Company offers a complete line of diesel engines
from 22 to 11,000 horsepower for the on-highway, off-road (including power
generation) and automotive markets through a worldwide network of more than
2,700 authorized distributor and dealer locations. The Company primarily sells
its engines directly to original equipment manufacturers (OEMs). In 1999,
approximately 71% of the Companys net revenues were derived from sales made
directly to U.S.-based customers, with the balance sold to international
accounts. A portion of U.S. sales were exported as part of equipment built by
U.S. customers.

Detroit Diesel Remanufacturing Corporation, a wholly-owned subsidiary
of DDC, remanufactures four-cycle and two-cycle engines and component parts at
facilities located in Tooele, Utah; Emporia, Kansas; Cambridge, Ohio; and Grand
Rapids, Michigan. Remanufactured products are sold directly to the Companys
authorized distributors through the Companys Parts Distribution Center in
Canton, Ohio, under the Companys reliabilt(R) tradename.

Detroit Diesels world headquarters is located in Detroit, Michigan.
The Company operates diesel engine manufacturing plants in Redford, Michigan and
Cento, Italy and engine assembly facilities in Emporia, Kansas and Curitiba,
Brazil. Additionally, the Company operates a worldwide Parts Distribution Center
in Canton, Ohio, complemented by service parts warehouses located in the
Netherlands and in Singapore.

The Company was incorporated in the State of Delaware on November 23,
1987.

Products

The following table shows the number of heavy-duty engines, light-duty
engines, and other engines sold by the Company during the periods indicated:

|              |       |  |                          |         |      |  |        |         |  |  |        |         | 
|------------- | ----- |  | ------------------------ | ------- | ---- |  | ------ | ------- |  |  | ------ | ------- | 
|              |       |  | Years
Ended December 31,
|(Units)       |       |  | 1999                     |         | 1998 |  | 1997  
|              |       |  |                          |         |      |  |       
|Heavy-Duty    |       |  | 101,993                  |         |      |  | 92,049 |         |  |  | 83,020 |        
|             
|             
|             
|             
|Light-Duty    |       |  | 62,370                   |         |      |  | 61,226 |         |  |  | 76,946 |        
|             
|             
|             
|             
|Other engines |       |  | 2,337                    |         |      |  | 2,760  |         |  |  | 3,225  |        
|              |       |  |                          |         |      |  |        |         |  |  |        |        
|              | Total |  |                          | 166,700 |      |  |        | 156,035 |  |  |        | 163,191 | 
|              |       |  |                          |         |      |  |        |         |  |  |        |        

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The Company offers the following heavy-duty four-cycle engines: the
Series 60 engine, the Series 50 engine, the DDC/MTU Series 2000 (Series 2000)
engine and the MTU/DDC Series 4000 (Series 4000) engine. The Series 60 is a
six-cylinder engine offering a horsepower range of 300 to 700 horsepower. The
Series 50 is a four-cylinder version of the Series 60 engine offering 250 to 320
horsepower. The Series 2000 and Series 4000 engines are available in eight,
twelve and sixteen-cylinder configurations and offer horsepower ranges from 490
to 3,650 horsepower.

The Series 60 engine is the Companys highest volume heavy-duty engine
product, accounting for approximately 52%, 46% and 41% of the Companys net
revenues in 1999, 1998 and 1997, respectively. The Series 60 engine is sold
primarily in the on-highway market, however, the Company sells this product in
other market applications such as marine, construction and industrial, and power
generation. The Series 50 engine is also principally sold in the on-highway
market, but has expanded into other markets as the Company targets applications
that have horsepower requirements below the Series 60 range. The Series 2000 and
Series 4000 engines are designed to service the Companys off-road market
segments including construction and industrial, marine and power generation. The
Series 60, Series 50, Series 2000 and Series 4000 engines feature integral
electronic controls known as Detroit Diesel Electronic Controls (DDEC),
consisting of an electronic control module and electronic fuel injection
systems. The Company also continues to sell selected two-cycle engines to the
military under long-term supply arrangements.

During 1998 the Company introduced its PowerEvolution program.
PowerEvolution represents a comprehensive remake of the Companys off-road
products and services designed to update product technology, broaden its power
range, improve efficiency and increase shareholder value. This program is a
proactive response to the changing market needs and transitioned the Companys
customers to four-cycle products from two-cycle products. The Company continues
to produce two-cycle products to the extent required under long-term contracts
and will continue to support existing customer service parts requirements for
the foreseeable future. The success of this transition was highlighted this year
by DDC increasing top line sales by 5% year over year while experiencing a
reduction in two-cycle sales of $114 million.

VM Motori S.p.A. (VM), located in Cento, Italy, is a wholly owned
subsidiary of Detroit Diesel and is a major independent supplier of diesel
engines to the international automotive industry. The principal product for the
light-duty sector is a high-performance 2.5-liter, 4-cylinder, turbocharged
diesel engine, which is currently being used in passenger cars, mini-vans,
four-wheel drive and multi-purpose vehicles. Detroit Diesel Motores do Brasil
Ltda. (DDMB) is a wholly owned subsidiary of Detroit Diesel located in
Curitiba, Brazil. DDMB currently assembles the 2.5-liter, 4-cylinder automotive
diesel engine manufactured by VM. DDMB and VM have significant sales
relationships with DaimlerChrysler AG to provide automotive diesel engines for
both the Latin American and European markets for use in Chrysler products.

The Company also markets medium-duty diesel engines built in the United
States by Navistar International Transportation Corp. for market applications in
which the Company does not compete with Navistar. The Companys distribution
rights include applications that serve NAFTA and other worldwide markets. Within
NAFTA, the Company serves the transit bus industry, generator set and specialty
on-highway applications such as custom fire trucks, motor homes, refuse
vehicles, and trailer spotters. Outside NAFTA, the Company serves the same
applications, plus commercial on-highway vehicle manufacturers.

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In addition to its diesel-fueled engines, the Company currently offers
natural gas fueled engine products, service parts, remanufactured components and
engines as well as high horsepower gas turbine products. The Company also sells
to licensees completely knocked-down and semi knocked-down unassembled engine
kits for sale within selected markets.

Markets and Customers

Detroit Diesel serves the on-highway, off-road and automotive markets.
Following is a brief description of these markets.

On-Highway. The largest market for the Companys engines continues to
be the on-highway heavy-duty market. This market is served primarily by the
Companys four-cycle products. The Series 60 engine is the Companys highest
volume engine for this use, accounting for the greatest share of the Companys
on-highway unit sales in 1999. The Companys engines are available through all
major North American heavy-duty truck manufacturers. The Companys largest OEM
customers for this market in 1999 were Freightliner Corporation, Navistar
International Transportation Corp., Volvo GM Heavy Truck Corporation and PACCAR
Inc. which collectively represented approximately 49% of the Companys 1999
consolidated net revenues. Sales to Freightliner Corporation represented
approximately 58% of this total. The loss of any of these customers could have
an adverse effect on the Companys business.

The on-highway market also consists of sales for bus and coach applications.
This market is served primarily by the Companys four-cycle products. The
Companys engines are available through all major North American heavy-duty bus
manufacturers. The Series 50 and Series 60 engines are DDCs main offering. The
market is separated into transit bus, where DDC has a 65% market penetration
level, and the highway coach market where DDC has a 90% penetration level.

Off-Road. The off-road market consists of a variety of applications,
including construction, forestry, mining, earth moving, material handling,
stationary mechanical power, petroleum, commercial and pleasure craft marine,
power generation, and military combat and tactical vehicles. Traditionally, the
Companys two-cycle products have had a strong presence in this market. With the
initiation of PowerEvolution and the introduction of the Series 2000 and Series
4000 engines, four-cycle products are rapidly gaining market acceptance. The
Companys products are available from a variety of OEMs and Detroit Diesel
distributors worldwide.

Automotive. VM and DDMB currently serve the automotive market. These
two subsidiaries sell state-of-the-art turbo diesel engines to OEMs primarily
for use in the European and Latin American markets that are used in passenger
cars, mini-vans, trucks and sport utility vehicles. The Companys largest
customer in this market is DaimlerChrysler. The Company is currently pursuing
new opportunities with automotive OEMs to expand the customer base and
geographic penetration of the automotive engines marketed by VM and DDMB.
Additionally, DDC has developed two new automotive applications for use in the
domestic market and is currently pursuing OEM business.

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Sales and Distribution

Sales of the Companys products are made directly to major OEMs and
through a direct sales force and a worldwide network of independently-owned and
company-owned distributors who sell engines, components and parts and provide
service support to local OEMs, dealers and end-users. As of December 31, 1999
there were 27 distributors in North America operating a total of 173 authorized
facilities and 82 distributors outside of North America operating 126 authorized
facilities. The network of authorized service dealers, which is generally
administered by these distributors, consists of over 2,400 dealers worldwide, of
which approximately 2,100 are in North America. The Company has a controlling
interest in three distributors and investments in five other distributors
worldwide, of which five are located in North America and three overseas.

In support of its distribution system, the Company maintains a
worldwide Parts Distribution Center in Canton, Ohio and overseas regional
warehouses in the Netherlands and in Singapore. In addition, the Companys sales
and service activities are supported by four remanufacturing centers in the
United States that provide remanufactured engines, components and parts. The
Company also operates regional sales offices strategically located to support
customers in all markets.

Orders for service parts can be filled by the Companys Parts
Distribution Center (PDC) in less than twenty four hours. Long-term blanket
parts orders are also serviced by the PDC over periods covering one year or
more. Certain orders such as military contracts or bus orders may be placed up
to 12 months in advance of required delivery. On-highway OEM customers normally
place firm orders for Series 60 engines only one month in advance of their next
months production run. However, the Company typically negotiates annual volume
targets with each OEM, and certain programs are used to provide incentives for
the OEMs to purchase their targeted annual volume. Therefore, while firm orders
are only received monthly, there are reasonably anticipated annual requirements
that allow for production planning.

For the reasons stated above, the Companys backlog of firm orders
typically averages two to three months production, but the Company normally is
aware of reasonably anticipated future orders well in advance of the placement
of a firm order. At December 31, 1999 and 1998, the Companys backlog of firm
orders was approximately $388 million and $396 million, respectively.

The Companys business is moderately seasonal, as its major OEM
customers historically have two to four-week summer shutdowns of operations
during the third quarter. The Company typically shuts down its own operations
for one week each July, although a general shutdown of the Companys operation
did not occur in 1999. Additionally, the Companys automotive operations
typically shut down during the month of August. Consequently, the Companys
third quarter results reflect the effects of these shutdowns.

International

Significant portions of the Companys products are sold in overseas
markets, either directly as loose engines or indirectly in vehicles and
equipment made by North American OEMs. Sales of automotive products are
concentrated outside of North America. The Company has established foreign sales
subsidiaries in Europe, Asia and Latin America that also function in a service
and product support capacity. Parts warehousing operations are strategically
located in the Netherlands and in Singapore, and work in conjunction with the
Companys Parts Distribution Center located in Canton, Ohio to maintain a high
level of parts availability to overseas customers. The Company

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has also entered into technical assistance and license agreements in strategic
worldwide locations for the assembly and sale of products and components to meet
the needs of local markets, and is pursuing similar arrangements in other
locations. DDC also has indirect investment interests in Detroit Diesel
distributorships in the Asia-Pacific region. The Company operates manufacturing
and assembly facilities located in Cento, Italy and Curitiba, Brazil,
respectively.

With the increase in global business activity, the Company is subject
to risks of conducting business abroad, including currency exchange rate
fluctuations, limits on repatriation of funds, compliance with foreign laws and
other economic and political uncertainties that may threaten the Companys
operations or assets located in foreign countries. Changes in foreign currency
exchange rates are generally reported as a component of stockholders equity.
Changes in the value of the Italian Lira, the Singapore Dollar and the Brazilian
Real will impact the Companys translation adjustments in the future.
Additionally, the Company has entered into transactions denominated in Deutsche
Marks. Changes in the value of the Euro versus the United States dollar will
affect the Companys results of operations and financial position.

Summary information by geographic area is set forth in Segment
Information in Note 8 of the Notes to the Consolidated Financial Statements.

Research and Development

The Companys research and development efforts are intended to
facilitate its ability to respond to market needs and the technological demands
of the market. Total research and development expenditures were $105.8 million,
$93.9 million and $97.5 million for 1999, 1998 and 1997, respectively. In
addition, the Company conducts research and development that is funded by
various government agency-sponsored projects. Emissions-related research and
development activities, in compliance with the 1998 agreements with the U.S.
Environmental Protection Agency and the California Air Resources Board, affected
the levels of research and development spending during 1999.

Suppliers

The Company believes it has adequate sources for the supply of raw
materials and components for its manufacturing needs. Suppliers are located
primarily in North America, Latin America and Western Europe. In 1998, DDC
implemented its Continuous Customer Value Improvement (CCVI) program. This
program was aimed at strengthening its supplier relationships by working with
those suppliers to achieve mutually beneficial supply chain improvements.
This program has resulted in significant
cost savings over the past two years while at the same time improving component quality.

DDC has developed a policy of
concentrating its purchases for particular parts over a limited number of
suppliers for some critical components. The Company believes that this policy
contributes to quality control and cost control, as well as increasing the
suppliers commitment to the Company. The Company purchases its forgings
and casting from domestic, European and Latin American suppliers. Additionally, the
Company relies upon, and expects to continue to rely upon, single source suppliers for
the following critical components: electronic unit injectors from Diesel Technology Company (an
affiliated company); camshafts and cylinder liners from Dana

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Corporation; crankshafts from ThyssenKrupp Automotive; valves from Eaton
Corporation; engine retarders from Jacobs Vehicle Systems; turbochargers from
Honeywell-Garrett; fuel pumps from Robert Bosch, Inc. and electronic control
modules from Motorola, Inc. While the Company believes it has adequate
assurances of continued supply, the inability of a supplier to deliver or the
loss of any of these suppliers could have an adverse effect on the Companys
business.

Competition

The heavy-duty diesel engine business is highly competitive. The
Company competes based on price, quality, durability, fuel economy, emissions
compliance, reliability and availability of replacement parts and service, as
well as overall customer service. The distributor network plays a key
competitive role in providing parts and service to end-users. The Company
competes with independent diesel engine manufacturers as well as OEMs that
manufacture engines for their own products. Certain of these OEMs are also
customers of the Company. The Companys principal competitors in international
markets vary from country to country, with local manufacturers generally
predominating each particular market. In North America, the Companys principal
competitors in each of its markets are Caterpillar Inc. and Cummins Engine
Company, Inc. In its international markets, the Company also competes with
several other manufacturers in Europe and Japan. The Companys principal
competitors are larger than the Company and have substantial resources. There
can be no assurance that competitors will not be able to take actions, including
developing new technology or products, or offering prolonged reduced pricing,
which could adversely affect the Company.

Patents and Trademarks

The Company maintains, and has pending, various U.S. and foreign
patents and patent licenses relating to its business, which it believes are
appropriate to protect the Companys interest in existing products, new
inventions and product developments. VM also maintains various U.S. and foreign
patents relating to its business. The Company does not believe any single patent
is material to its business, nor would the expiration or invalidity of any
patent have a material adverse effect on its business or its ability to compete.
The Company is currently involved in a patent infringement lawsuit with one of
its principal competitors. Additionally, a second patent infringement lawsuit
with another one of the Companys principle competitors, was decided in the
Companys favor during 1999. Refer to Item 3 for a discussion involving these
matters.

The Company owns and maintains U.S. trademark registrations in all of
its principal trademarks, including Detroit Diesel(R), the spinning arrows
design, reliabilt(R) and Series 60(R). Registrations for its principal
trademarks are also maintained in other countries where a significant volume of
its products are sold and such registration is considered appropriate to protect
the Companys proprietary rights. All authorized distributors and
remanufacturing centers are licensed to use these trademarks in the conduct of
their businesses.

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Employees

At December 31, 1999, the Company (including its distributor and
remanufacturing subsidiaries) employed approximately 6,660 persons worldwide.
Approximately 1,970 of the Companys employees are represented by the
International Union, United Automobile, Aerospace and Agricultural Implement
Workers of America, Local 163 (UAW). UAW employees currently work under a
six-year
collective bargaining agreement that will expire on October 30, 2004.

Environmental Matters

Product Compliance. The Companys engines are subject to
extensive regulatory requirements. Specific emission standards are imposed by
the U.S. Environmental Protection Agency (EPA) the California Air Resources
Board (CARB) and foreign regulatory agencies. The Companys ability to comply
with current and future emission requirements is a critical element in
maintaining and improving the Companys position in the diesel engine
marketplace and the inability to comply could have a significant impact on the
Companys future financial results. Substantial resources are included in the
Companys capital and operating budgets to comply with emission requirements.

The Clean Air Act establishes the U.S. regulatory framework for air
quality and provides the EPA with authority for promulgating regulations and
setting emission standards, including those applicable to engines used in
heavy-duty, on-highway vehicles, as well as non-road vehicles and equipment. The
Federal Clean Air Act allows only the State of California to set its own
standards.

In 1998, the standard for nitrogen oxide (NOx) emissions from new
engines used in heavy-duty trucks and urban buses was reduced from 5.0 to 4.0
grams per brake horsepower-hour (g/bhp-hr). Engines used in trucks and buses
must also meet standards for particulate matter (PM), hydrocarbons (HC),
carbon monoxide (CO) and smoke opacity. The current standards for on-highway
diesel engines have been set to remain in effect through 2003. CARB standards
are identical to EPA standards for 1998 through 2003.

The Company has a full line of on-highway engines of various horsepower
ratings and configurations for trucks and buses that are divided into families.
The Company has received EPA and CARB certification for all of these families
for 2000.

In late 1997, the EPA and CARB advised the Company and other heavy-duty
engine manufacturers that emissions control strategies employed may be in
violation of the Clean Air Act. While the Company believes that the engine
control strategies it used were in compliance with applicable laws and
regulations, the Company engaged in discussions with the EPA, CARB and the U.S.
Department of Justice to address the agencys concerns. These discussions
resulted in the negotiation of a Consent Decree with the United States and a
settlement agreement with CARB which were signed on October 22, 1998. Similar
agreements were negotiated and agreed to by other heavy-duty engine
manufacturers. The Company believes that the settlements avoided the possibility
of prolonged and complicated litigation between the parties and that the
agreements are fair, reasonable and in the public interest. The Consent Decree
was entered with the court on July 1, 1999.

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Under the terms of the agreements, the Company agreed to: (1) limit
certain engine software control strategies, (2) demonstrate emission performance
for 1999 and later model year engines using specified supplemental test
procedures in addition to existing certification procedures, (3) provide
retrofit kits that can be used to reduce emissions when rebuilding existing
engines, (4) assist in the development of and conduct in-use testing on
in-service engines, (5) provide for certain low emission development programs,
(6) meet certain emission limits earlier than would otherwise be required under
existing regulations and (7) pay a civil penalty.

In addition to the diesel-fueled engine families noted above, the
Company also has obtained 2000 EPA and CARB certification of spark-ignited
Series 50G and Series 60G urban bus engine families which use natural gas for
fuel. Natural gas engines have NOx and PM emissions which are lower than
diesel-fueled engines and are an important alternative for customers seeking low
emission engines, such as in the urban bus market.

Aside from the procedures required to obtain the new engine
certification, the EPA has three principal means by which to verify compliance
with its emission standards: (1) voluntary emission audit testing by the
manufacturer, (2) Selective Enforcement Audits (SEAs) in which production
engines are taken off the assembly line and tested in the presence of EPA
compliance officers, and (3) in-use compliance testing in which the EPA removes
engines from in-service vehicles and performs emission tests. To date, the EPA
has relied on manufacturer audits and SEA testing. For several years, the
Company has maintained an active program of voluntary emission audits and has
reported test results to the agency. Successful completion of SEAs is important
since upon failure of a SEA, the EPA has the authority to void the engine family
certificate, require re-certification of the engine family and require the
manufacturer to recall non-complying engines.

The EPA also has an emission defect-reporting program and may require a
recall if defects are found in an emission-related component on 25 or more
engines. CARB regulations require the Company to report failure of
emission-related components through the monitoring of warranty claims. When the
failure rate reaches a specified level (the greater of 25 component failures or
one per cent of the engines built), reports are required to be filed with CARB.
A recall may be triggered if failures are found on the greater of 50 engines or
two percent of the engines built. The Company has submitted regular reports of
warranty failures to CARB, and no recalls have been conducted as a result of
these reports.

In 1993, the EPA issued a retrofit/rebuild rule for urban bus engines.
Under the provisions of the rule, certain transit bus operators are required to
use certified emission upgrade equipment when rebuilding their 1993 and earlier
urban bus engines. In 1998, the Company certified equipment for 1993 and earlier
6V-92 mechanically controlled urban bus engines that will reduce PM emissions to
below 0.10 g/bhp-hr. In 1999 equipment was certified for 1993 and earlier
electronically controlled 6V-92 engines that also achieves 0.10 g/hp-hr of PM.
This equipment is currently available for customer use.

The EPA also has promulgated regulations for engines used in non-road
vehicles and equipment used in mining, agriculture, industrial, construction and
other uses. The requirements phased in by engine power level categories
beginning in 1996 with engines having rated

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horsepower (hp) in the 175 to 750 range. Requirements for 100 to 175 hp and
50 to 100 hp took effect in 1997 and 1998, respectively. In 2000 requirements
take effect for engines over 750 hp. The EPAs regulations complement CARB
regulations which went into effect in 1996 for 175 to 750 hp engines and which
will apply to engines over 750 hp in 2000. More stringent Tier 2 requirements
will begin to phase in by power category beginning in 2001. The Company has
certified a complete line of non-road engines with various power ratings to
meet EPA and CARB requirements for 2000. The EPA finalized emission regulations
for propulsion and auxiliary engines over 50 hp used on commercial marine
vessels in late 1999. These rules will phase in by displacement category
beginning in 2004. The Company believes that many of the emission control
technologies developed for non-road engines can be adapted for use on marine
engines and that the Company will be well-positioned to offer a full line of
marine engines that comply with the emission requirements.

Emission regulations for heavy-duty engines are prevalent throughout
the world. In North America, Mexico and Canada have adopted U.S. emission
requirements for on-highway engines. In 1999 the Company signed a Memorandum of
Understanding with Environment Canada agreeing to market only U.S. certified
non-road engines in Canada. Europe also has emission requirements for on-highway
engines. Since the current regulations known as Euro II took effect in 1995,
the Company has obtained certification authority approval for several Series 50
and Series 60 engine ratings. New and more stringent Euro III regulations have
been adopted and will take effect in October 2000. Europe has also finalized
regulations applicable to engines used in non-road mobile machinery. These
regulations include two stages of standards which are being phased in by power
level beginning in 1999. The standards and phase-in dates are generally
compatible with the EPAs current and proposed standards for non-road engines.
The Company believes it is well positioned to meet these regulatory requirements
for products that it sells in those markets.

The EPA also regulates noise emissions from heavy-duty vehicles. The
Company works with vehicle OEMs to assure that vehicles with the Companys
engines comply with the noise requirements.

Facility Compliance. The Company believes that the facilities operated
by it and its subsidiaries are in material compliance with applicable
environmental statutes and regulations. Factory operations include machining,
plating, painting, assembly and testing of diesel engines. An environmental
engineering staff, under the direction of the Companys manufacturing operations
group, monitors air, water and solid waste discharge which result from factory
operations as well as on-going remediation activities undertaken by the Company
and prior operators of the facility. The Company operates, through subsidiaries,
an engine manufacturing facility in Cento, Italy and an engine assembly facility
in Curitiba, Brazil. The Company believes that these overseas facilities are in
material compliance with applicable environmental laws and regulations.

The distributor facilities, in the ordinary course of business, are
engaged in activities which involve steam and chemical cleaning of engines and
component parts. These facilities also use and handle petroleum products for the
fueling and lubrication of vehicles, vessels and equipment with diesel engines.
Remanufacturing facilities are engaged in similar activities as well as
assembling and testing new and remanufactured engines.

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Facilities purchased or leased by the Company are typically subject to
an environmental audit before commencing operations. Several of such facilities
are or have been subject to remedial activities. Amounts expended in such
remediation activities have been within anticipated budgets or covered under
indemnity agreements from prior owner/operators and none have individually or in
the aggregate been considered significant or material to the Company.

Item 2. Properties.

The Companys world headquarters is located in Detroit, Michigan and
its primary manufacturing facility is on adjoining premises located in the
township of Redford, Michigan. The 129-acre site includes almost three million
square feet of manufacturing and storage buildings, engineering laboratory and
administrative offices. The Company leases this facility on a long-term basis
with a right of first refusal and purchase option. The Company also operates a
575,000 square foot Parts Distribution Center in Canton, Ohio under a lease
which expires in 2005. The Company and its remanufacturing subsidiary also
operate a 300,000 square foot remanufacturing facility in Tooele, Utah. Its
regional sales offices in North America and Europe are operated from leased
facilities. The Companys automotive operations are located in Cento, Italy and
Curitiba, Brazil. The 19-acre site in Cento contains approximately 500,000
square feet of developed space for manufacturing, engineering and administrative
offices. In 1997, the Company developed a 50,000 square foot automotive engine
assembly facility in Curitiba. The Company believes its facilities are suitable
for its current needs.

The Company-owned distributors either own or lease their facilities.
The Company also subleases similar facilities in various locations to several
independently owned distributors. Lease terms generally range from 5 to 15 years
with renewal options. The Companys remanufacturing business is conducted from
four owned facilities located in Tooele, Utah; Emporia, Kansas; Cambridge, Ohio
and Grand Rapids, Michigan.

Item 3. Legal Proceedings.

The Company is presently involved in certain claims and litigation
arising in the ordinary course of its business, including claims relating to the
use of and performance of the Companys products. The Company does not believe
that the resolution of any of these matters will have a material adverse effect
on the Companys results of operations or financial position.

James M. Wright, and five other individuals, filed a class action
lawsuit against the Company and General Motors Corporation in the Superior Court
of New Jersey, Camden County Law Division, on January 28, 1993, alleging that
various two cycle engines, originally manufactured by either defendant were
defective as modified in different ways by various third parties for use in
yachts. Plaintiffs asserted claims on behalf of themselves and a proposed
nationwide class for alleged breach of warranty, fraud, negligent
misrepresentation and violation of the Magnuson-Moss Warranty Act, the New
Jersey Consumer Fraud Act and the Uniform Commercial Code. The court denied
class certification three times. In October 1998 defendants motions for summary
judgment on the individual claims were granted. Two of the plaintiffs
subsequently settled their individual claims, but four remaining plaintiffs
again appealed the denial of class certification and dismissal of their
individual claims. In March 2000, the parties

11



---



signed agreements settling the remaining individual claims, dismissing the
appeal and releasing the defendant from all claims, to bring this protracted
matter to a conclusion. While terms of the settlements are confidential, they
will not have a material adverse impact on the financial position or results of
operations of the Company.

Cummins Engine Company, Inc., a competitor of the Company, filed a
lawsuit on June 6, 1997 in the U. S. District Court, Southern District of
Indiana (Indianapolis Division) claiming that Detroit Diesel infringes a Cummins
patent which discloses a method and device to generate information and software
to calibrate electronic engine control modules. The complaint, as amended, seeks
an injunction and unspecified damages. The Company has responded to the
complaint denying infringement and has filed motions for summary judgment on
various grounds, including non-infringement and invalidity, which are currently
pending. The case is in the late discovery phase and a trial date is set for
early 2001. The Company believes it has meritorious defenses to all claims and
that the proceedings will not have a material adverse impact on the financial
position or results of operations of the Company.

On July 1, 1999, the U.S. District Court for the District of Columbia
formally entered the agreements negotiated by the Company and other engine
manufacturers with the United States Department of Justice and the EPA to settle
the lawsuits filed by the United States on October 22, 1998 for alleged
violations of the Clean Air Act. The court order also finalized similar
agreements with CARB. The agreements provide for the acceleration of lower NOx
standards previously established by EPA and CARB for both on-highway and
off-road engine applications and increase the stringency of testing procedures
relative to emissions standards. The Company and the other settling
manufacturers also agreed to modify electronic engine control strategies,
provide for research and development to further reduce emissions and make
specified settlement payments as previously reported. [Refer to Item One,
Environmental Matters under the sub-heading Product Compliance for additional
information.] The implementation of the agreements is underway.

Three other lawsuits have been filed by private litigants against the
Company and other manufacturers that arise out of the same operative facts of
the above case. In Environmental Law Foundation v. Cummins Engine Co., Inc. et
al., which was filed on October 2, 1998 in the Supreme Court of California, San
Francisco County, plaintiff alleged that the defendant heavy-duty vehicle and
engine manufacturers violated state emissions laws and the Unfair Competition
Law. Injunctive relief and restitution was sought on behalf of the public. On
February 11, 1999, the court ruled that plaintiff failed to state valid claims
and ordered the case dismissed. In Tri-State Express, Inc., et al. v. Cummins
Engine Co., Inc. et al., filed on January 29, 1999 in the United States District
Court for the District of Columbia, three trucking companies seek to represent a
nationwide class of purchasers of heavy-duty diesel engines, and seek damages
related to the same alleged violations of the Clean Air Act addressed in the EPA
and CARB settlement agreements. Plaintiffs further claim that the sale of
engines and trucks constituted breach of warranty and contract, unjust
enrichment, violation of the Magnuson-Moss Warranty Act and fraud in violation
of the Racketeer Influenced and Corrupt Organizations Act. Injunctive relief as
well as compensatory and statutory damages are being sought. A motion to dismiss
on behalf of all defendants is currently pending. Lastly, in California Dump
Truck Owners Association et al. v. Cummins Engine Co., et al., filed on October
4, 1999 in the Superior Court of California, Los Angeles County (and later
removed by defendants to the U.S. District Court

12



---



for the Central District of California), various purchasers of trucks equipped
with heavy-duty engines allege violations of the Clean Air Act and California
Health and Safety Code, breach of warranty, fraudulent misrepresentation, and
unfair business practices. Unspecified damages are claimed. On January 10, 2000,
the U.S. District Court granted the defendants motion for judgment on the
pleadings. An appeal has been filed.

The Company believes it has meritorious defense to all of these claims
and that these proceedings (including any appeals of the reported favorable
decisions) will not have a material adverse impact on the financial position or
results of operations of the Company.

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

None.

Executive Officers of the Registrant

The following table sets out the names and ages of the executive
officers of the Company, their present positions and their business experience
during the past five years.

|                   |  |     |    |                        |  |                                                                    
|------------------ |  | --- | -- | ---------------------- |  | -------------------------------------------------------------------
|Name               |  | Age |    | Positions with Company
|                   |  |     |    |                       
|Roger S. Penske    |  |     | 63 |                        |  | Chairman and Director                                              
|                  
|Ludvik F. Koci     |  |     | 63 |                        |  | Vice Chairman and Director                                         
|                  
|Charles G. McClure |  |     | 46 |                        |  | Chief Executive Officer, President and Director                    
|                  
|Robert R. Allran   |  |     | 57 |                        |  | Executive Vice President- Engineering and
Operations               
|                  
|Robert E. Belts    |  |     | 50 |                        |  | Senior Vice President-Finance and Chief
Financial Officer          
|                  
|A. Gordon Clark    |  |     | 78 |                        |  | Senior Vice President-Sales                                        
|                  
|Calvin C.  Sharp   |  |     | 48 |                        |  | Senior Vice President- Administration                              
|                  
|Robert A. Sisk     |  |     | 45 |                        |  | Senior Vice President -
Strategic Planning and Business Development
|                  
|Paul F. Walters    |  |     | 56 |                        |  | Senior Vice President                                              
|                  
|John F. Farmer     |  |     | 46 |                        |  | Vice President and General Counsel                                 

Roger S. Penske has been Chairman and a director of the Company since
its organization in 1987, and his current term as Class III director expires in
2002. Mr. Penske is also Chairman of the Board and Chief Executive Officer of
Penske Corporation. Penske Corporation is a privately- owned diversified
transportation services company which (among other things) holds, through its
subsidiaries, interests in a number of businesses, including Penske Truck
Leasing Co., L.P.,

13



---



UnitedAuto Group, Inc., International Speedway Corporation and Diesel Technology
Company. Mr. Penske is also a member of the Boards of Directors of General
Electric Company, UnitedAuto Group, Inc., International Speedway Corporation and
Delphi Automotive Systems Corporation.

Ludvik F. Koci has been a director of the Company since its
organization in 1987, and his current term as a Class II director expires in
2001. Mr. Koci has been Vice Chairman of the Company since November 1997. Before
that, he had been President and Chief Operating Officer of the Company from 1989
to 1997 and Executive Vice President from the Companys organization in 1987 to
1989. Prior to the Companys commencement of operations in January 1988, Mr.
Koci had been employed by General Motors since 1954. Mr. Koci is also a Director
of Wabash National Corporation.

Charles G. McClure has been Chief Executive Officer of the Company
since October 1999, President since August 1997 and a director since November
1997. His current term as a Class II director expires in 2001. Before joining
the Company in 1997, Mr. McClure had been President, and previously Vice
President and General Manager, of The Americas Division of Johnson Controls,
Inc. from 1995 to 1997. Mr. McClure is also a director of Williams Controls,
Inc.

Robert R. Allran was appointed to Executive Vice President of
Engineering and Operations in November 1999. Prior to that, Mr. Allran was
Executive Vice President-Operations since September 1997 and Senior Vice
President-Operations since the Companys organization in 1987.

Robert E. Belts was appointed Senior Vice President-Finance and Chief
Financial Officer in March 1998. Prior to this appointment, Mr. Belts was Vice
President and Controller of Detroit Diesel Corporation since 1995 and Controller
since 1987.

A. Gordon Clark has been Senior Vice President-Sales since October 1993. Before that, Mr. Clark had
been active in the Companys business in his capacity as Executive Vice President-Sales of Penske Transportation,
Inc. since 1989. Mr. Clark has an employment agreement with the Company that provides an annual salary of
$350,000.

Calvin C. Sharp was appointed Senior Vice President - Administration in
July 1997. Prior to this appointment, Mr. Sharp was Director - Industrial
Relations and Administration since the Companys organization in 1987.

Robert A. Sisk has been Senior Vice President - Strategic Planning and
Business Development since January 1997. Before that, he was Vice President,
Business Development from 1992 to 1997, and Vice President-Power Systems from
1989 to 1992.

Paul F. Walters has been Senior Vice President of the Company since
July 1997. Mr. Walters has also been the Executive Vice President-Administration
of Penske Corporation since July 1997. Prior to that, Mr. Walters was Senior
Vice President-Administration of the Company since its organization in 1987.

John F. Farmer has been General Counsel of the Company since 1988 and a
Vice President of the Company since April 1993. From 1988 to January 1994, Mr.
Farmer was also Secretary of the Company.

14



---



PART II

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

On March 15, 2000, the Company had 23,294,091 shares of its common
stock $.01 par value outstanding, which were owned by 2,411 stockholders of
record.

The Company paid quarterly dividends of $0.125 per shareholder
beginning with the first quarter of 1999 throughout the year. The Company did
not pay a dividend in 1998 or in any prior years since it became a public
company. The Companys current policy is to pay a quarterly dividend.

The common stock has been traded on the New York Stock Exchange under
the symbol DDC, since October 8, 1993. From that date to December 31, 1999,
the common stock has had a low market price of $15 1/2 per share and a high
market price of $36 7/8 per share.

|                                                |  |                           |  |                                |      |                          |  |                               
|----------------------------------------------- |  | ------------------------- |  | ------------------------------ | ---- | ------------------------ |  | ------------------------------
|Common Stock Quarterly Market Price Information
|                                               
|                                                |  | 1999                      |  |                                | 1998
|Fiscal Quarter                                  |  | High                      |  | Low                            |      | High                     |  | Low                           
|                                               
|First
Second
Third
Fourth                       |  | 23 1/8
25
24 11/16
20 3/8 |  | 20 3/16
21 1/8
18 1/8
17 15/16 |      | 23 3/4
25 3/4
22 3/16
23 |  | 17 15/16
20 3/16
16 1/4
15 1/2

15



---



Item 6. Selected Financial Data.

The following table sets forth selected Statement of Income and Balance
Sheet Data for the periods indicated. This table should be read in conjunction
with Managements Discussion and Analysis of Financial Condition and Results of
Operations, and the Companys Consolidated Financial Statements and related
notes included in Item 8.

|                                                 |                                                      |                          |      |         |      |  |      |         |      |  |      |         |  |  |   |         |     |  |   |         |    
|------------------------------------------------ | ---------------------------------------------------- | ------------------------ | ---- | ------- | ---- |  | ---- | ------- | ---- |  | ---- | ------- |  |  | - | ------- | --- |  | - | ------- | ---
|(In
millions, except per share and unit amounts) |                                                      | Years Ended December 31,
|                                                
|                                                 |                                                      |                          | 1999 |         | 1998 |  | 1997 |         | 1996 |  | 1995
|                                                
|                                                 | Net revenues                                         |                          | $    | 2,358.7 |      |  | $    | 2,250.6 |      |  | $    | 2,163.9 |  |  | $ | 1,962.9 |     |  | $ | 2,087.1 |    
|                                                
|                                                
|                                                
|                                                
|                                                
|                                                
|                                                
|                                                
|                                                 | Gross profit                                         |                          |      | 559.8   |      |  |      | 524.6   |      |  |      | 494.8   |  |  |   | 449.1   |     |  |   | 486.3   |    
|                                                
|                                                
|                                                
|                                                
|                                                 | Selling and administrative expenses                  |                          |      | 368.0   |      |  |      | 355.6   |      |  |      | 338.9   |  |  |   | 292.1   |     |  |   | 311.0   |    
|                                                
|                                                
|                                                
|                                                
|                                                 | Research and development expenses                    |                          |      | 105.8   |      |  |      | 93.9    |      |  |      | 97.5    |  |  |   | 105.2   |     |  |   | 94.8    |    
|                                                
|                                                
|                                                
|                                                
|                                                 | Interest expense                                     |                          |      | 7.9     |      |  |      | 11.8    |      |  |      | 12.9    |  |  |   | 12.1    |     |  |   | 9.7     |    
|                                                
|                                                
|                                                
|                                                
|                                                 | Special charge                                       |                          |      |        |      |  |      | 12.5    |      |  |      |        |  |  |   | 38.3    |     |  |   |        |    
|                                                
|                                                
|                                                
|                                                
|                                                 | Restructuring charge                                 |                          |      |        |      |  |      |        |      |  |      |        |  |  |   |        |     |  |   | 10.0    |    
|                                                
|                                                
|                                                
|                                                
|                                                 | Income before income taxes and minority
interests    |                          |      | 78.1    |      |  |      | 50.8    |      |  |      | 45.5    |  |  |   | 1.4     |     |  |   | 60.8    |    
|                                                
|                                                
|                                                
|                                                
|                                                 | Net income                                           |                          |      | 49.2    |      |  |      | 28.0    | (1)  |  |      | 29.9    |  |  |   | 3.8     | (2) |  |   | 40.1    | (3)
|                                                
|                                                
|                                                
|                                                
|                                                 | Basic net income per share                           |                          | $    | 2.00    |      |  | $    | 1.13    | (1)  |  | $    | 1.21    |  |  | $ | .16     | (2) |  | $ | 1.62    | (3)
|                                                
|                                                
|                                                
|                                                
|                                                 | Diluted net income per share                         |                          | $    | 1.99    |      |  | $    | 1.13    | (1)  |  | $    | 1.21    |  |  | $ | .16     | (2) |  | $ | 1.62    | (3)
|                                                
|                                                
|                                                
|                                                
|                                                 | Total assets                                         |                          | $    | 1,231.1 |      |  | $    | 1,240.7 |      |  | $    | 1,156.5 |  |  | $ | 1,112.6 |     |  | $ | 1,045.1 |    
|                                                
|                                                
|                                                
|                                                
|                                                 | Long-term debt                                       |                          |      | 47.1    |      |  |      | 62.6    |      |  |      | 73.8    |  |  |   | 92.6    |     |  |   | 58.5    |    
|                                                
|                                                
|                                                
|                                                
|                                                 | Total debt                                           |                          |      | 77.9    |      |  |      | 105.0   |      |  |      | 125.4   |  |  |   | 119.0   |     |  |   | 90.1    |    
|                                                
|                                                
|                                                
|                                                
|                                                 | Total liabilities                                    |                          |      | 837.4   |      |  |      | 868.4   |      |  |      | 811.7   |  |  |   | 791.4   |     |  |   | 734.7   |    
|                                                
|                                                
|                                                
|                                                
|                                                 | Total stockholders equity                           |                          |      | 393.7   |      |  |      | 372.3   |      |  |      | 344.8   |  |  |   | 321.2   |     |  |   | 310.4   |    
|                                                
|                                                
|                                                
|                                                
|                                                 | Working capital                                      |                          |      | 164.6   |      |  |      | 206.5   |      |  |      | 169.3   |  |  |   | 178.3   |     |  |   | 140.7   |    
|                                                
|                                                
|                                                
|                                                
|                                                 | Number of manufactured engines sold                  |                          |      | 164,363 |      |  |      | 153,275 |      |  |      | 159,966 |  |  |   | 132,272 |     |  |   | 143,951 |    
|                                                
|                                                
|                                                
|                                                
|                                                 | Income before interest, taxes and minority
interests |                          | $    | 86.0    |      |  | $    | 62.6    |      |  | $    | 58.4    |  |  | $ | 13.5    |     |  | $ | 70.5    |    
|                                                
|                                                
|                                                
|                                                
|                                                 | Capital expenditures                                 |                          |      | 60.8    |      |  |      | 42.4    |      |  |      | 61.9    |  |  |   | 44.9    |     |  |   | 76.5    |    



---

|(1) |  | Includes a $12.5 million charge related to agreements with the U.S.
Environmental Protection Agency and the California Air Resources Board.
Excluding the charge, net income would have been $40.5 million, or $1.64
per share.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|   
|   
|   
|(2) |  | Includes a $24.9 million, net of tax, special charge for product coverage
and to reduce the value of an investment in Mexico. Excluding this charge
net income would have been $28.7 million, or $1.17 per share.              
|   
|   
|   
|   
|(3) |  | Includes a $6.7 million, net of tax, restructuring charge to cover costs
of a reduction in salaried personnel. Excluding this charge, net income
would have been $46.8 million, or $1.90 per share.                            

16



---



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

The following discussion of Detroit Diesel Corporations (Detroit Diesel,
DDC or the Company) historical results of operations and of its liquidity
and capital resources should be read in conjunction with the Consolidated
Financial Statements and related notes thereto.

Overview

Detroit Diesel Corporation achieved new records in several areas during 1999.
Heavy-duty engine shipments exceeded 100,000 units, including over 91,900 Series
60 engines, both record levels. The Company sold nearly 1,600 DDC/MTU Series
2000 and MTU/DDC Series 4000 engines, more than double the number sold in the
previous year. In addition, the Companys PowerEvolution program, a program
designed to transition customers from two-stroke to four-stroke products, was
completed. Total revenues also achieved a new company high, totaling $2.4
billion, an increase of approximately 5% over 1998.

DDCs earnings for 1999 also marked a new Company record. Net income was $49.2
million, an increase of 21% when compared to 1998 (excluding a special charge)
resulting in basic earnings per share of $2.00. The increase in net income was
driven by revenue growth combined with aggressive cost reduction activities,
which resulted in a 0.4 percentage point increase in gross margin. Additionally,
Detroit Diesels EBIT margin (earnings before interest and taxes divided by net
revenues) grew to 3.6%, an increase of 0.3 percentage points compared to 1998
(excluding the special charge) and nearly a full percentage point increase over
1997.

During the fourth quarter of 1999, DDCs board of directors approved a stock
repurchase program which authorized the acquisition of up to 10% of the
Companys outstanding common stock over a period of two years. DDC repurchased
approximately 4%, or 1.1 million shares through the end of 1999 at an average
share price of $18 7/8.

Detroit Diesels balance sheet remained strong with total assets of $1.2
billion, essentially level with the prior year. Favorable cash flow, driven by
improved operating performance, enabled the Company to reduce debt levels by
approximately $27 million, to $78 million, at December 31, 1999. The debt
reduction is especially significant considering the expenditures of $20 million
to repurchase stock, $9 million in dividend payments and over $60 million in
capital investment into the business. As a result, DDCs debt to total
capitalization ratio was 16.5% at the end of 1999 compared to 22.0% at the end
of 1998.

17



---



Results of Operations

For the periods indicated, the following table sets forth the percentage of net
revenues represented by certain items included in the Companys Consolidated
Statements of Income.

|                                        |       |  |                          |      |      |  |       |      |  |  |       |      | 
|--------------------------------------- | ----- |  | ------------------------ | ---- | ---- |  | ----- | ---- |  |  | ----- | ---- | 
|                                        |       |  | Years Ended December 31,
|                                        |       |  |                         
|                                        |       |  | 1999                     |      | 1998 |  | 1997 
|                                        |       |  |                          |      |      |  |      
|Net revenues                            |       |  | 100.0                    | %    |      |  | 100.0 | %    |  |  | 100.0 | %   
|                                       
|                                       
|                                       
|                                       
|Cost of sales                           |       |  | 76.3                     |      |      |  | 76.7  |      |  |  | 77.1  |     
|                                        |       |  |                          |      |      |  |       |      |  |  |       |     
|Gross profit                            |       |  | 23.7                     |      |      |  | 23.3  |      |  |  | 22.9  |     
|                                       
|                                       
|                                       
|                                       
|Expenses:                              
|                                       
|                                       
|                                       
|                                       
|Selling and administrative              |       |  | 15.6                     |      |      |  | 15.8  |      |  |  | 15.7  |     
|                                       
|                                       
|                                       
|                                       
|Research and development                |       |  | 4.5                      |      |      |  | 4.2   |      |  |  | 4.5   |     
|                                       
|                                       
|                                       
|                                       
|Special charge                          |       |  |                         |      |      |  | .5    |      |  |  |      |     
|                                       
|                                       
|                                       
|                                       
|                                        |       |  |                          |      |      |  |       |      |  |  |       |     
|                                       
|                                       
|                                       
|                                       
|                                        | Total |  |                          | 20.1 |      |  |       | 20.5 |  |  |       | 20.2 | 
|                                       
|                                       
|                                       
|                                       
|Income before interest and income
taxes |       |  | 3.6                      |      |      |  | 2.8   |      |  |  | 2.7   |     
|                                       
|                                       
|                                       
|                                       
|Interest                                |       |  | .3                       |      |      |  | .5    |      |  |  | .6    |     
|                                       
|                                       
|                                       
|                                       
|                                        |       |  |                          |      |      |  |       |      |  |  |       |     
|                                       
|                                       
|                                       
|                                       
|Income before income taxes              |       |  | 3.3                      |      |      |  | 2.3   |      |  |  | 2.1   |     
|                                       
|                                       
|                                       
|                                       
|Provision for income taxes              |       |  | 1.2                      |      |      |  | 1.1   |      |  |  | .7    |     
|                                       
|                                       
|                                       
|                                       
|                                        |       |  |                          |      |      |  |       |      |  |  |       |     
|                                       
|                                       
|                                       
|                                       
|Net income                              |       |  | 2.1                      | %    |      |  | 1.2   | %    |  |  | 1.4   | %   
|                                        |       |  |                          |      |      |  |       |      |  |  |       |     

The following table summarizes the Companys net revenues for each of its
markets during the last three years:

|              |  |                          |       |      |  |      |       |  |  |   |       | 
|------------- |  | ------------------------ | ----- | ---- |  | ---- | ----- |  |  | - | ----- | 
|(In millions) |  | Years Ended December 31,
|              |  |                         
|              |  | 1999                     |       | 1998 |  | 1997
|              |  |                          |       |      |  |     
|On-Highway    |  | $                        | 1,545 |      |  | $    | 1,341 |  |  | $ | 1,210 | 
|             
|             
|             
|             
|Off-Road      |  |                          | 620   |      |  |      | 724   |  |  |   | 714   | 
|             
|             
|             
|             
|Automotive    |  |                          | 194   |      |  |      | 186   |  |  |   | 240   | 
|             
|             
|             
|             
|              |  |                          |       |      |  |      |       |  |  |   |       | 
|             
|             
|             
|             
|Net revenues  |  | $                        | 2,359 |      |  | $    | 2,251 |  |  | $ | 2,164 | 
|              |  |                          |       |      |  |      |       |  |  |   |       | 

1999 Compared to 1998

Net Revenues. Total 1999 net revenues of $2.4 billion were nearly 5% higher
than 1998 net revenues of $2.3 billion. The increase in net revenues during 1999
reflects the overall strength of the North American on-highway heavy-duty truck
market coupled with increased sales of the Companys DDC/MTU Series 2000 and
MTU/DDC Series 4000 engines. Series 60 engine unit sales totaled over 91,900
units versus 77,500 units in 1998, an increase of 14,400 units, or 19% over 1998
levels. Additionally, unit sales of the DDC/MTU Series 2000 and MTU/DDC Series
4000 engines more than doubled in 1999 as the Company completed its
PowerEvolution program to transition customers from two-cycle to four-cycle
products. Based on the strength of the increase in unit volumes, net revenues
from four-cycle engine sales increased by $240 million and were somewhat offset
by the decrease in two-cycle engine sales of $114 million. Net revenues from
service parts and remanufactured products were consistent with 1998 levels
despite the weakness experienced in the petroleum and mining sectors during most
of the year.

18



---



Net revenues in the on-highway market, which represented approximately 65% of
the Companys total revenues, reflected the strength of the Companys Series 60
products as well as the overall strength of the North American on-highway
heavy-duty truck market. DDCs market share ended 1999 at approximately 27.5%,
down slightly from 28.5% in 1998, as overall market share was held down by
capacity constraints early in the year. With increased production capacity in
place during the second half of 1999, fourth quarter market share averaged
approximately 29%, further reflecting the market strength of the Series 60
engine. Net revenues in the off-road market were $620 million or approximately
26% of the Companys total revenues. The off-road market has shown improving
fundamentals during the fourth quarter of 1999. Net revenues in the automotive
market represent 9% of total revenues, up slightly from 1998, as net revenues
increased 4% on a 1% increase in unit volume.

Gross Profit. Gross profit for 1999 was $559.8 million, or 23.7% of net
revenues compared to $524.6 million, or 23.3% of net revenues for 1998, an
increase of $35.2 million, or 7%. The improvement in gross margin is
attributable to increased engine sales and the sales mix of the Companys
heavy-duty diesel engines and automotive products, combined with the Companys
cost reduction efforts under its Continuous Customer Value Improvement (CCVI)
program.

Selling and Administrative Expenses. Selling and administrative expenses for
1999 were $368.0 million, or 15.6% of net revenues, compared to $355.6 million,
or 15.8% of net revenues for 1998. While selling and administrative expenses
increased $12.4 million over 1998 due to higher sales volumes, selling and
administrative expenses as a percentage of sales decreased.

Research and Development Expenses. Research and development expenses were
$105.8 million for 1999 compared to $93.9 million for 1998, an increase of $11.9
million. The increase reflects investments to develop new automotive products
and Series 60 applications as well as emission-related activities.

Interest Expense. Interest expense was $7.9 million for 1999 compared to $11.8
million for 1998, a decrease of $3.9 million. The lower level of interest
expense in 1999 is attributable to the Companys strong cash flow during the
year, combined with low interest rates on the Companys revolving credit
facility and low debt levels throughout the year.

Income Tax Expense. Income tax expense for 1999 was $28.9 million compared to
$22.8 million in 1998. The Companys annual effective tax rate for 1999 was
approximately 37%. The increase in tax expense during 1999 reflects the
Companys higher level of earnings in 1999.

Net Income. Net income for 1999 was $49.2 million, compared to $28.0 million
for 1998, an increase of $21.2 million. This amount represents the highest level
of net income in Detroit Diesels history.

19



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1998 Compared to 1997

Net Revenues. Record total 1998 net revenues of $2.3
billion were 4% higher than 1997 net revenues of $2.2 billion. The increase in
net revenues during 1998 reflects the overall strength of the North American
on-highway heavy-duty truck market coupled with increased sales of the Companys
DDC/MTU Series 2000 and MTU/DDC Series 4000 engines. Series 60 engine unit sales
totaled over 77,500 units versus 65,700 units in 1997, an increase of 11,800
units, up 18% over 1997 levels. Additionally, unit sales of the DDC/MTU Series
2000 and MTU/DDC Series 4000 engines grew to over 660 units in 1998, an increase
of over 500 units versus 1997. Also, revenues from the Companys remanufacturing
operations increased 14% versus the prior year. These increases were somewhat
offset by the anticipated decline in two-stroke unit sales of 17% as the Company
began implementation of its PowerEvolution program. Additionally, automotive
sales decreased from record 1997 revenues reflecting the completion of certain
supply contracts during 1998. Service parts sales during the year were
consistent with 1997 levels.

Gross Profit. Gross profit for 1998 was $524.6 million, or 23.3% of net
revenues, compared to $494.8 million, or 22.9% of net revenues for 1997, an
increase of $29.8 million, or 6%. The increase in gross margin is attributable
to increased engine sales and the sales mix of the Companys heavy-duty diesel
engines and automotive products, combined with the Companys cost reduction
efforts.

Selling and Administrative Expenses. Selling and administrative expenses for
1998 were $355.6 million, or 15.8% of net revenues, compared to $338.9 million,
or 15.7% of net revenues for 1997, an increase of $16.7 million. The increase in
selling and administrative expenses is attributable to higher sales volume for
the Companys products partially offset by the Companys focus on controlling
expenses through its cost reduction efforts.

Research and Development Expenses. Research and development expenses were
$93.9 million for 1998 compared to $97.5 million for 1997, a decrease of $3.6
million. The decrease reflects lower expenditures for DDC/MTU Series 2000 and
MTU/DDC Series 4000 engine development following these products introduction
during 1997.

Interest Expense. Interest expense was $11.8 million for 1998 compared to
$12.9 million for 1997, a decrease of $1.1 million. The lower level of interest
expense in 1998 is attributable to lower interest rates, improved cash flow and
the decrease in capital expenditures versus the prior year.

Special Charge. The Company recorded a special charge during 1998 of $12.5
million related to agreements with the U.S. Environmental Protection Agency and
the California Air Resources Board to resolve the agencies concerns about the
levels of oxides of nitrogen emissions from heavy-duty trucks under certain
driving conditions. The special charge is payable in four annual installments,
the first of which was paid in July 1999.

Income Tax Expense. Income tax expense for 1998 was $22.8 million compared to
$15.6 million for 1997. The effective tax rate for 1998 was 44.9% and reflects
the Companys earnings

20



---



in 1998 including the effect of the special charge which
is not tax deductible. Excluding the effect of this charge, the Companys
effective tax rate for 1998 would have been 36%.

Net Income. Net income for 1998 was $28.0 million, compared to $29.9
million for 1997, a decrease of $1.9 million. Excluding the special charge, net
income would have been $40.5 million, or $1.64 per share, an increase of $10.6
million over 1998.

Liquidity and Capital Resources

During the three years ended December 31, 1999,
Detroit Diesel funded its working capital, investments and capital expenditure
requirements using cash flow from operations and bank borrowings under various
revolving lines of credit and bank notes.

The Company has a $300 million, unsecured revolving credit agreement with a bank
group, including The Chase Manhattan Bank (Chase), as participant and agent
for the other participating banks, which expires in June of 2000. Borrowings
under this agreement bear interest at LIBOR-based rates, prime-based rates and
rates determined by competitive bidding among the participating banks. The
Company had available credit under this agreement totaling approximately $294.7
million at December 31, 1999. Additionally, the Company has interest rate swap
agreements, which extend through May 2000 and may be extended through May 2001,
that effectively convert $50 million of its variable rate debt to a fixed rate
of 6.05%.

The Companys subsidiary, VM Motori S.p.A. (VM) has approximately $61 million
in unsecured, short-term lines of credit with several banks. In addition VM has
a long-term revolving credit arrangement with several banks, of which Chase is a
participant, in the amount of approximately $26 million. At December 31, 1999,
VM had available credit of approximately $41.3 million under short-term lines of
credit.

The Company generated cash flows from operations of $ 117.9 million, $78.4
million and $54.9 million for 1999, 1998 and 1997, respectively, which reflects
the Companys net income, adjusted for non-cash items and changes in working
capital.

Capital expenditures increased during 1999 to $60.8 million compared to $42.4
million in 1998 and $61.9 million in 1997. The majority of the increase in
capital expenditures is attributed to the acquisition of a remanufacturing
facility, which was previously leased, for approximately $11 million. Capital
expenditures in 1999 were also used to expand and enhance production capacity of
the Companys Series 60, DDC/MTU Series 2000, MTU/DDC Series 4000 and automotive
products, to upgrade and enhance engineering and information systems and upgrade
facilities. The Companys capital expenditure program for 2000 is approximately
$64 million.

At December 31, 1999, the Company was contingently liable for letters of credit
of approximately $12.8 million and guarantees to banks of approximately $14.6
million. The Company had commitments of approximately $11.0 million to complete
various capital projects.

The Company is subject to risk of changes in foreign currency exchange rates due
to operations located outside the United States. Changes in foreign currency
exchange rates are generally reported as a component of stockholders equity.
Changes in the value of the Italian Lira, the

21



---



Singapore Dollar and the Brazilian
Real will impact the Companys translation adjustments in the future.
Additionally, the Company has recorded liabilities approximating 43.8 million
Deutsche Marks as of December 31, 1999. Changes in the value of the Euro versus
the United States dollar will effect the Companys results of operation and
financial position.

The Companys primary revolving credit facility with Chase expires in June 2000
and the Company is in the process of evaluating potential new credit facilities.
The Company believes that it will be able to satisfy on-going cash requirements
(including capital expenditures for environmental compliance and other projects)
for the next twelve months and thereafter, with cash flow from operations,
supplemented as necessary, by borrowings under the current or new facility.

Year 2000

The Year 2000 issue is generally used to describe various problems
that may result from the improper processing of dates related to the year 2000
and beyond by computers and other types of equipment, including embedded
technology in production machinery and equipment. These problems are attributed
to computer hardware and software that has been developed to use only two digits
to identify the year in a date. This generally means that affected computer
hardware and software will be unable to distinguish dates in the twenty-first
century from similar dates in the twentieth century.

Costs to Address the Year 2000 Issue.  The costs associated with Year 2000 compliance primarily consist of
personnel expenses for those persons dedicated to the effort and for
professional fees paid to third party providers for assistance and audit related
activities. It is the Companys policy to expense these costs as incurred.
Additionally, the Company has invested in new and upgraded hardware and software
to mitigate any potential Year 2000 issues. In these instances, the Company has
capitalized allowable costs in accordance with its policies and procedures.
Costs to complete the Year 2000 project were approximately $2.5 million. This
cost does not include the Companys potential share of Year 2000 costs that may
be incurred by partnerships and joint ventures in which the Company participates
but is not the operator.

Risks Presented by Year 2000 Issues.  The Company did not experience any
business interruption related to the Year 2000 issue. Management of the Company
believes that there is a reasonably low level of risk that DDC will experience
any significant collateral Year 2000 related problems that have not materialized
to date. If any collateral problems, which are beyond the control of the
Company, occur, there could be an interruption in, or failure of, the Companys
normal business activities.

Contingency Plans.  While the Company had a Year 2000 contingency plan in place
as part of its final Year 2000 plan, Detroit Diesel did not experience any Year
2000 related business interruptions that are known at this time. The Company
would generally expect to manage business interruptions relating to Year 2000
issues that may still occur in a manner similar to other potential interruption
issues encountered in the regular course of business. The Company intends to
execute contingency plans as necessary as the year progresses. However, the
contingency plans are expected to provide relief only for short periods, after
which there could be an interruption in, or failure of, the Companys normal
business activities, that could have a

22



---



material adverse effect on the Companys
operations, liquidity and financial condition.

Segment Information

The Company
has one reportable operating segment consistent with managements approach of
making internal operating decisions. All products produced by the Company are
aggregated into one reportable operating segment since the nature of the
products, production processes, distribution methods, and the Companys
principal customers are similar. The Companys principal customers generally
consist of original equipment manufacturers (OEMs), while the ultimate
customers are major fleet carriers and end users. (See Note 8 of Notes to
Consolidated Financial Statements for additional information.)

Seasonality

The
Companys business is moderately seasonal, as its major OEM customers
historically have two- to four-week summer shutdowns during the third quarter.
The Company typically shuts down its own operation for one week each July
although a general shutdown did not occur in 1999. Additionally, VM typically
shuts down its operations during the month of August. Consequently, the
Companys third quarter results reflect the effects of these shutdowns.

Effects of Inflation

The Company believes that the relatively moderate inflation
rate over the last few years has not had a significant impact on the Companys
revenues or profitability. The Company does not expect inflation to have any
near-term material effect on the sales of its products, although there can be no
assurance that such an effect will not occur in the future.

Foreign Operations

Approximately 29% of the Companys 1999 net revenues were
derived from sales made to purchasers in foreign countries. Included are the
Companys subsidiary locations in Cento, Italy and Curitiba, Brazil, which
operate manufacturing facilities located in these countries. Because of these
foreign factors, the Companys business is subject to the risks of conducting
business abroad, including currency exchange rate fluctuations, limits on
repatriation of funds, compliance with foreign laws and other economic and
political uncertainties. (See Note 8 of Notes to Consolidated Financial
Statements.)

Introduction of the Euro

On January 1, 1999, eleven of the fifteen member states of the European Union
(Participating Countries) established fixed conversion rates from their
existing currencies (Legacy Currencies) to the Euro and have agreed to adopt
the Euro as their common legal currency as of that same date. During a
transition period from January 1, 1999 until January 1, 2002 the Legacy
Currencies will remain legal tender and parties will have the option to pay in
Euros or Legacy Currencies of Participating Countries. On January 1, 2002
Participating Countries are expected to issue Euro currency and withdraw all
bills and coinage of Legacy Currencies by July 1, 2002.

23



---



The Company has committed resources to conduct risk assessments and to take
corrective actions, where required, to ensure that the Company is prepared for
the introduction of the Euro. The Company is in the process of reviewing areas
such as operations, finance, treasury, legal, information management, purchasing
and others, both in participating and non-participating European Union countries
where the Company operates. Also, existing Legacy Currency accounting and
business systems are in the process of review for Euro compliance. Compliance
will be achieved primarily through upgraded systems, which were previously
planned to be upgraded. Remaining systems will be modified to achieve
compliance.

The Company does not currently expect to experience any significant operational
disruptions or to incur any significant costs related to the Euro implementation
that would materially affect the Companys liquidity or capital resources. Euro
conversion is expected to have little impact on prices and competition due to
the fact that the Companys product offerings and pricing strategies do not vary
greatly among the Participating Countries. The conversion to the Euro is also
not expected to impact material contracts of the Company. The Companys overall
costs of conversion to the Euro are not expected to be material.

Prospective Information

The Company anticipates reduced demand in the on-highway
heavy-duty truck market during 2000 and expects the reduction in this market to
have an effect on the Companys operating performance during the next year. The
effect that this reduced demand may have on the Company cannot be assessed at
this time. The Company expects to increase its market share in the on-highway
heavy-duty truck market, but the increase in market share is not expected to
totally offset the overall effect of the expected market decline. Cost reduction
programs such as CCVI are expected to continue to have a positive impact on
operating margins and earnings and the Company believes the effect of these
programs will help to offset the effect of the decline in the on-highway
heavy-duty truck market. Additionally, increased DDC/MTU Series 2000 and MTU/DDC
Series 4000 engine shipments in off-road markets are expected to positively
impact the Companys operations. The Company will also continue to pursue merger
and acquisition opportunities that meet the Companys criteria and strategic
objectives.

New Accounting Pronouncements

In June 1998, the Financial Accounting Standards
Board issued SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities. This Statement requires companies to record derivatives on the
balance sheet as assets and liabilities, measured at fair value. Gains or losses
resulting from changes in the values of those derivatives would be accounted for
depending on the use of the derivative and whether it qualifies for hedge
accounting. This Statement is not expected to have a material impact on the
Companys consolidated financial statements. This Statement is effective for
fiscal years beginning after June 15, 2000.

24



---



Cautionary Statement for purposes of Safe Harbor under the Private Securities
Litigation Reform Act of 1995

The Company may, from time to time, make
forward-looking statements, including statements projecting, forecasting or
estimating Company performance and industry trends. The achievement of the
projections, forecasts or estimates contained in these statements is subject to
certain risks and uncertainties, and actual results and events may differ
materially from those projected, forecasted or estimated.

The applicable risks and uncertainties include general economic and industry
conditions that affect all international businesses, as well as matters that are
specific to the Company and the markets it serves. For example, the achievement
of projections, forecasts or estimates contained in the Companys
forward-looking statements may be impacted by national and international
economic conditions; compliance with U.S. and foreign treaties, laws and
regulations; and the general risks associated with doing business abroad, such
as currency exchange rate fluctuations, limits on repatriation of funds;
political uncertainties and the Year 2000 issue.

Risks that are specific to the Company and its markets include compliance with
increasingly stringent emissions controls standards applicable to diesel
engines; the cyclical demand for engines, particularly in the on-highway
heavy-duty truck market; competition in pricing and new product development from
larger companies with substantial resources; the concentration of a substantial
percentage of the Companys sales with a few major OEM customers, the loss of,
or change in demand from, any of which could have a material impact on the
Company; increasing diversification in overseas markets and operations; labor
relations at the Company and its customers and suppliers; and the Companys
single-source supply and just-in-time inventory strategies, which could
adversely affect production if a single-source supplier is unable for any reason
to meet the Companys requirements.

Item 8. Financial Statements and Supplementary Data.

Refer to Index to Financial Statements and Schedule on page 31.

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

None.




PART III

Item 10. Directors and Executive Officers of the Registrant.

As to directors, the information under the caption Proposals-Election
of Directors and Board of Directors-Directors Continuing in Office in the
Proxy Statement furnished in connection with the solicitation by the Board of
Directors of the Company of proxies for the 2000 Annual Meeting of Stockholders
to be held April 19, 2000 (the Proxy Statement) is incorporated herein by
reference. As to executive officers, information is contained under the caption
Executive Officers of the Registrant hereof.  Information contained under the
caption Board of

25



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Directors-Section 16(a) Beneficial Ownership Reporting
Compliance in the Proxy Statement is incorporated herein by reference.

Item 11. Executive Compensation.

The information under the captions Board of Directors-Director
Compensation and Executive Compensation, and Appendix A  Performance Graph
and Appendix C  Executive Compensation, of the Proxy Statement is incorporated
herein by reference.

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

The information under the caption Appendix B  Stockholdings of the
Proxy Statement is incorporated herein by reference, and the information
regarding beneficial owners of more than 5% of the shares of the Companys
common stock of the Proxy Statement is incorporated herein by reference.

Item 13. Certain Relationships and Related Transactions.

The information under the caption Certain Stockholders of the Proxy
Statement is incorporated herein by reference.




PART IV

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

The following documents are filed as part of this report:



|(a) |  | Financial Statements and Schedule                                                                                                                   
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | Refer to the Index to Financial Statements and Schedule on page 31
for a list of financial statements and schedule filed as a part of this
report.
|   
|(b) |  | Reports on Form 8-K                                                                                                                                 
|   
|    |  | The Company filed no current reports on Form 8-K with the Securities
and Exchange Commission during the quarter ended December 31, 1999.            
|   

26



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|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit
|Number  |  | Description of Exhibit                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|       
|       
|       
|       
|3.1     |  | Certificate of Incorporation, as amended, which is incorporated by reference from
Exhibit 3.1 of the Companys Registration Statement on Form S-1, File No. 33-66760,
filed with the Securities and Exchange Commission on July 30, 1993, as amended.                                                                                                                                                                                                                                                                                        
|       
|       
|       
|       
|3.2     |  | Amended and Restated Bylaws of Detroit Diesel
Corporation, which is incorporated by reference from
Exhibit 3.2 of the Companys Registration Statement
on Form S-1, File No. 33-66760, filed with the
Securities and Exchange Commission on July 30, 1993,
as amended.                                                                                                                                                                                                                                                                       
|       
|       
|       
|       
|4.1     |  | Termination, Replacement and Restatement Agreement
dated as of June 7, 1995 among Detroit Diesel
Corporation, the Lenders listed on Exhibit A and
Chemical Bank, as agent for the lenders, which is
incorporated by reference from Exhibit 10.1 of the
Company Form 10-Q, File No. 1-12394, filed with the
Securities and Exchange Commission on August 10,
1995.                                                                                                                                                                            
|       
|       
|       
|       
|4.1.1   |  | First Amendment to the Termination, Replacement and Restatement Agreement, dated
November 22, 1996, among Detroit Diesel Corporation, the several banks and other
financial institutions and Chemical Bank, as agent for the Lenders and the predecessor
in interest of The Chase Manhattan Bank, now acting as agent for the Lenders, which is
incorporated by reference from Exhibit 4.1.1 of the Companys Annual Report on Form
10-K, File No. 1-12394, filed with the Securities and Exchange Commission on March 27,
1997.             
|       
|       
|       
|       
|4.1.2   |  | Second Amendment to the Termination, Replacement and Restatement Agreement dated
February 27, 1998, among Detroit Diesel Corporation, the several banks and other
financial institutions parties thereto and Chemical Bank, as agent for the Lenders and
the predecessor in interest of the Chase Manhattan Bank, now acting as agent for the
Lenders, which is incorporated by reference from Exhibit 4 of the Companys Quarterly
Report on Form 10-Q, File No. 1-12394, filed with the Securities and Exchange
Commission on May 14, 1998.
|       
|       
|       
|       
|4.2     |  | Specimen Form of Certificate for Common Stock, which
is incorporated by reference from Exhibit 4.4 of the
Companys Registration Statement on Form S-1, File
No. 33-66760, filed with the Securities and Exchange
Commission on July 30, 1993, as amended.                                                                                                                                                                                                                                                                                   
|       
|       
|       
|       
|        |  | Long-term debt instruments and credit facility
agreements of the Detroit Diesel Corporation, under
each of which the authorized debt is equal to less
than 10% of the total assets of the Detroit Diesel
Corporation and its subsidiaries on a consolidated
basis, are not filed as exhibits to this report.
Detroit Diesel Corporation agrees to furnish to the
Commission, upon request, copies of any such unfiled
instruments.                                                                                                           
|       
|       
|       
|       
|10.1    |  | Form of 1993 Stock Incentive Plan, which is incorporated by reference                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

27



---



|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                   
|------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit
|Number  |  | Description of Exhibit                                                                                                                                                                                                                                                                                                                                                                                            
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                   
|       
|       
|       
|       
|        |  | from Exhibit 10.1 of the Companys Registration Statement on Form S-1, File No. 33-66760, filed with the
Securities and Exchange Commission on July 30, 1993, as amended.                                                                                                                                                                                                                                         
|       
|       
|       
|       
|10.1.1  |  | Form of 1993 Stock Incentive Plan Restricted Stock
Award and Deferred Stock Award, which is incorporated
by reference from Exhibit 10.1.1 of the Companys
Registration Statement on Form S-1, File no.
33-66760, filed with the Securities and Exchange
Commission on July 30, 1993, as amended.                                                                                                                 
|       
|       
|       
|       
|10.2    |  | Collaboration Agreement, dated as of January 31,
1993, between Detroit Diesel Corporation and
Mercedes-Benz AG, which is incorporated by reference
from Exhibit 10.2 of the Companys Registration
Statement on Form S-1, File No. 33-66760, filed with
the Securities and Exchange Commission on July 30,
1993, as amended.                                                                                      
|       
|       
|       
|       
|10.3    |  | Financing Agreement between Diesel Project
Development, Inc. and Detroit Diesel Corporation,
dated as of April 30, 1993, which is incorporated by
reference from Exhibit 10.5 of the Companys
Registration Statement on Form S-1, File No.
33-66760, filed with the Securities and Exchange
Commission on July 30, 1993, as amended.                                                                             
|       
|       
|       
|       
|10.4    |  | Amended and Restated Lease Agreement by and between
Corporate Property Associates 8, L.P., and Corporate
Property Associates 9, L.P. and Detroit Diesel
Corporation, dated as of May 24, 1994, which is
incorporated by reference from Exhibit 10.6 of
Amendment No. 1 to the Companys Registration
Statement on Form S-1, File No. 33-79286, filed with
the Securities and Exchange Commission on June 15,
1994.
|       
|       
|       
|       
|10.5    |  | Lease Agreement, dated June 30, 1988, between the
Timken Company and Detroit Diesel Corporation, which
is incorporated by reference from Exhibit 10.7 of the
Companys Registration Statement on Form S-1, File
No. 33-66760, filed with the Securities and Exchange
Commission on July 30, 1993, as amended.                                                                                                     
|       
|       
|       
|       
|10.6    |  | Master Lease Agreement between Detroit Diesel
Corporation and GECC, dated as of May 26, 1992, which
is incorporated by reference from Exhibit 10.11 of
the Companys Registration Statement on Form S-1,
File No. 33-66760, filed with the Securities and
Exchange Commission on July 30, 1993, as amended.                                                                                                       
|       
|       
|       
|       
|10.7    |  | Employment Agreement, dated February 1, 1989, between
Penske Transportation, Inc. and A. Gordon Clark, as
amended, assumed by Detroit Diesel Corporation, which
is incorporated by reference from                                                                                                                                                                                                                 

28



---



|        |  |                                                                                                                                                                                                                                                                                                                                                                                                            
|------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit
|Number  |  | Description of Exhibit                                                                                                                                                                                                                                                                                                                                                                                     
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                            
|       
|       
|       
|       
|        |  | Exhibit 10.19 of the Companys Registration Statement on Form S-1,
File No. 33-66760, filed with the Securities and
Exchange Commission on July330, 1993, as amended.                                                                                                                                                                                                                                      
|       
|       
|       
|       
|10.7.1  |  | Second Amendment to Employment Agreement dated as of
January 31, 1995, between Detroit Diesel Corporation,
as assignee of Penske Transportation, Inc., and A.
Gordon Clark, which is incorporated by reference from
Exhibit 10.12.1 of the Companys Annual Report on
Form 10-K, File No. 1-12394, filed with the
Securities and Exchange Commission on March 31, 1995,
as amended.                        
|       
|       
|       
|       
|10.7.2  |  | Third Amendment to Employment agreement dated as of
January 31, 1998, between Detroit Diesel Corporation,
as assignee of Penske Transportation, Inc., and A.
Gordon Clark.                                                                                                                                                                                                                                 
|       
|       
|       
|       
|#10.8   |  | TED Joint Development and License Agreement by and among Detroit Diesel Corporation and
Mercedes-Benz Aktiengesellschaft and MTU Motoren- und Turbinen-Union Friedrichschafen
GmbH, dated September 5, 1994, which is incorporated
by reference from Exhibit 10.3 of the Companys
Quarterly Report on Form 10-Q, File No. 1-12394,
filed with the Securities and Exchange Commission on
November 11, 1994.
|       
|       
|       
|       
|#10.9   |  | FEAT Joint Development and License Agreement by and
between MTU Motoren- und Turbinen-Union
Friedrichschafen GmbH and Detroit Diesel Corporation,
dated June 28, 1994, which is incorporated by
reference from Exhibit 10.4 of the Companys
Quarterly Report on Form 10-Q, File No. 1-12394,
filed with the Securities and Exchange Commission on
November 11, 1994.                                      
|       
|       
|       
|       
|10.9.1  |  | Amendment to FEAT Joint Development and License
Agreement by and between MTU Motoren- und
Turbinen-Union Friedrichschafen GmbH and Detroit
Diesel Corporation, dated June 28, 1994, which is
incorporated by reference from Exhibit 10.4.1 of the
Companys Quarterly Report on Form 10-Q, File No.
1-12394, filed with the Securities and Exchange
Commission on November 11, 1994.                       
|       
|       
|       
|       
|10.10   |  | Mutual Distribution Agreement by and between Detroit Diesel Corporation and MTU
Motoren- und Turbinen-Union Friedrichschafen GmbH, dated June 28, 1994, which is
incorporated by reference from Exhibit 10.5 of the Companys Quarterly Report on Form
10-Q, File No. 1-12394, filed with the Securities and Exchange Commission on November
11, 1994.                                                     
|       
|       
|       
|       
|10.11   |  | Joinder Agreement by and between Detroit Diesel Corporation, Mercedes-                                                                                                                                                                                                                                                                                                                                     

29



---



|        |  |                                                                                                                                                                                                                                                                                   
|------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit
|Number  |  | Description of Exhibit                                                                                                                                                                                                                                                            
|        |  |                                                                                                                                                                                                                                                                                   
|       
|       
|       
|       
|        |  | Benz AG and Motoren- und Turbinen-Union Friedrichschafen GmbH, dated July 13, 1994, which is
incorporated by reference from Exhibit 10.6 of the Companys Quarterly Report on Form
10-Q, File No. 1-12394, filed with the Securities and Exchange Commission on November
11, 1994.
|       
|       
|       
|       
|10.12   |  | Detroit Diesel Corporation 1998 Stock Incentive Plan incorporated by reference from
Exhibit 10.1 of the Companys Quarterly Report on Form 10-Q, File No. 1-12394, file
with the Securities and Exchange Commission on May 14, 1999.                                              
|       
|       
|       
|       
|11.1    |  | Statement re: Computation of Per Share Earnings                                                                                                                                                                                                                                   
|       
|       
|       
|       
|21.1    |  | List of Subsidiaries                                                                                                                                                                                                                                                              
|       
|       
|       
|       
|23.1    |  | Consent of Deloitte & Touche LLP                                                                                                                                                                                                                                                  
|       
|       
|       
|       
|24.1    |  | Powers of Attorney of Directors and Officers of the Registrant                                                                                                                                                                                                                    
|       
|       
|       
|       
|27      |  | Financial Data Schedule                                                                                                                                                                                                                                                           



| |  | # Does not include certain information as to which the Company has been
granted confidential treatment.
| |  | -------------------------------------------------------------------------------------------------------

30



---



INDEX TO FINANCIAL STATEMENTS AND SCHEDULE

|                                                                                                      |  |      |    | 
|----------------------------------------------------------------------------------------------------- |  | ---- | -- | 
|                                                                                                      |  | Page
|                                                                                                      |  |     
|Consolidated Statements of Income for the years ended December 31, 1999, 1998, and 1997               |  |      | 32 | 
|                                                                                                     
|                                                                                                     
|                                                                                                     
|                                                                                                     
|Consolidated Balance Sheets at December 31, 1999 and 1998                                             |  |      | 33 | 
|                                                                                                     
|                                                                                                     
|                                                                                                     
|                                                                                                     
|Consolidated Statements of Stockholders Equity for the years ended December 31, 1999,
1998, and 1997 |  |      | 34 | 
|                                                                                                     
|                                                                                                     
|                                                                                                     
|                                                                                                     
|Consolidated Statements of Cash Flows for the years ended December 31, 1999, 1998, and 1997           |  |      | 35 | 
|                                                                                                     
|                                                                                                     
|                                                                                                     
|                                                                                                     
|Notes to Consolidated Financial Statements                                                            |  |      | 36 | 
|                                                                                                     
|                                                                                                     
|                                                                                                     
|                                                                                                     
|Quarterly Financial Data                                                                              |  |      | 51 | 
|                                                                                                     
|                                                                                                     
|                                                                                                     
|                                                                                                     
|Report of Management                                                                                  |  |      | 52 | 
|                                                                                                     
|                                                                                                     
|                                                                                                     
|                                                                                                     
|Independent Auditors Report                                                                          |  |      | 53 | 
|                                                                                                     
|                                                                                                     
|                                                                                                     
|                                                                                                     
|Independent Auditors Report on Schedule                                                              |  |      | 54 | 
|                                                                                                     
|                                                                                                     
|                                                                                                     
|                                                                                                     
|Schedule II  Valuation and Qualifying Accounts                                                       |  |      | 55 | 

31



---



Detroit Diesel Corporation




Consolidated Statements of Income

(In millions, except per share amounts)

|                                          |              |   |                          |       |      |   |         |       |  |   |         |       | 
|----------------------------------------- | ------------ | - | ------------------------ | ----- | ---- | - | ------- | ----- |  | - | ------- | ----- | 
|                                          |              |   | Years Ended December 31,
|                                          |              |   |                         
|                                          |              |   | 1999                     |       | 1998 |   | 1997   
|                                          |              |   |                          |       |      |   |        
|Net revenues                              |              | $ | 2,358.7                  |       |      | $ | 2,250.6 |       |  | $ | 2,163.9 |      
|                                         
|                                         
|                                         
|                                         
|Cost of sales                             |              |   | 1,798.9                  |       |      |   | 1,726.0 |       |  |   | 1,669.1 |      
|                                          |              |   |                          |       |      |   |         |       |  |   |         |      
|                                          | Gross profit |   |                          | 559.8 |      |   |         | 524.6 |  |   |         | 494.8 | 
|                                         
|                                         
|                                         
|                                         
|Expenses:                                
|                                         
|                                         
|                                         
|                                         
|Selling and administrative                |              |   | 368.0                    |       |      |   | 355.6   |       |  |   | 338.9   |      
|                                         
|                                         
|                                         
|                                         
|Research and development                  |              |   | 105.8                    |       |      |   | 93.9    |       |  |   | 97.5    |      
|                                         
|                                         
|                                         
|                                         
|Special charge (Note 2)                   |              |   |                         |       |      |   | 12.5    |       |  |   |        |      
|                                          |              |   |                          |       |      |   |         |       |  |   |         |      
|                                          | Total        |   |                          | 473.8 |      |   |         | 462.0 |  |   |         | 436.4 | 
|                                          |              |   |                          |       |      |   |         |       |  |   |         |      
|Earnings before interest and income taxes |              |   | 86.0                     |       |      |   | 62.6    |       |  |   | 58.4    |      
|                                         
|                                         
|                                         
|                                         
|Interest                                  |              |   | 7.9                      |       |      |   | 11.8    |       |  |   | 12.9    |      
|                                          |              |   |                          |       |      |   |         |       |  |   |         |      
|Earnings before income taxes              |              |   | 78.1                     |       |      |   | 50.8    |       |  |   | 45.5    |      
|                                         
|                                         
|                                         
|                                         
|Provision for income taxes                |              |   | 28.9                     |       |      |   | 22.8    |       |  |   | 15.6    |      
|                                          |              |   |                          |       |      |   |         |       |  |   |         |      
|Net income                                |              | $ | 49.2                     |       |      | $ | 28.0    |       |  | $ | 29.9    |      
|                                          |              |   |                          |       |      |   |         |       |  |   |         |      
|Basic net income per share (Note 3)       |              | $ | 2.00                     |       |      | $ | 1.13    |       |  | $ | 1.21    |      
|                                          |              |   |                          |       |      |   |         |       |  |   |         |      
|Diluted net income per share (Note 3)     |              | $ | 1.99                     |       |      | $ | 1.13    |       |  | $ | 1.21    |      
|                                          |              |   |                          |       |      |   |         |       |  |   |         |      

The accompanying notes are an integral part of this statement.

32



---



Detroit Diesel Corporation




Consolidated Balance Sheets

(In millions, except per share amounts)

|                                     |                                                                                                  |                                     |                                            |       |              |         |      |       |       |         | 
|------------------------------------ | ------------------------------------------------------------------------------------------------ | ----------------------------------- | ------------------------------------------ | ----- | ------------ | ------- | ---- | ----- | ----- | ------- | 
|                                     |                                                                                                  |                                     |                                            |       | December 31,
|                                     |                                                                                                  |                                     |                                            |       |             
|                                     |                                                                                                  |                                     |                                            |       | 1999         |         | 1998
|                                     |                                                                                                  |                                     |                                            |       |              |         |     
|ASSETS                              
|                                    
|                                    
|                                    
|                                    
|                                     | Current Assets:                                                                                 
|                                    
|                                    
|                                    
|                                    
|                                     | Cash                                                                                             |                                     | $                                          | 2.9   |              |         | $    | 3.2   |      
|                                    
|                                    
|                                    
|                                    
|                                     | Accounts and notes receivable, net                                                               |                                     |                                            | 310.2 |              |         |      | 313.3 |      
|                                    
|                                    
|                                    
|                                    
|                                     | Inventories                                                                                      |                                     |                                            | 344.3 |              |         |      | 344.2 |      
|                                    
|                                    
|                                    
|                                    
|                                     | Prepaid expenses, deferred charges and other current assets                                      |                                     |                                            | 10.3  |              |         |      | 14.9  |      
|                                    
|                                    
|                                    
|                                    
|                                     | Deferred tax assets                                                                              |                                     |                                            | 62.0  |              |         |      | 61.8  |      
|                                     |                                                                                                  |                                     |                                            |       |              |         |      |      
|                                     |                                                                                                  | Total Current Assets                |                                            |       | 729.7        |         |      |       | 737.4 |        
|                                     |                                                                                                  |                                     |                                            |       |              |         |      |      
|                                     | Property, Plant and
Equipment:                                                                  
|                                    
|                                    
|                                    
|                                    
|                                     | Land and buildings                                                                               |                                     |                                            | 98.4  |              |         |      | 85.2  |      
|                                    
|                                    
|                                    
|                                    
|                                     | Machinery, equipment and tooling                                                                 |                                     |                                            | 441.7 |              |         |      | 415.8 |      
|                                     |                                                                                                  |                                     |                                            |       |              |         |      |      
|                                     |                                                                                                  | Total Property, Plant and Equipment |                                            |       | 540.1        |         |      |       | 501.0 |        
|                                    
|                                    
|                                    
|                                    
|                                     | Less: accumulated depreciation                                                                   |                                     |                                            | 226.7 |              |         |      | 191.6 |      
|                                     |                                                                                                  |                                     |                                            |       |              |         |      |      
|                                     |                                                                                                  | Net Property, Plant and Equipment   |                                            |       | 313.4        |         |      |       | 309.4 |        
|                                     |                                                                                                  |                                     |                                            |       |              |         |      |      
|                                     | Deferred Tax Assets                                                                              |                                     |                                            | 15.9  |              |         |      | 15.1  |      
|                                    
|                                    
|                                    
|                                    
|                                     | Intangible Assets, net                                                                           |                                     |                                            | 118.5 |              |         |      | 144.7 |      
|                                    
|                                    
|                                    
|                                    
|                                     | Other Assets                                                                                     |                                     |                                            | 53.6  |              |         |      | 34.1  |      
|                                     |                                                                                                  |                                     |                                            |       |              |         |      |      
|                                     |                                                                                                  |                                     | Total Assets                               |       | $            | 1,231.1 |      |       | $     | 1,240.7 | 
|                                     |                                                                                                  |                                     |                                            |       |              |         |      |      
|LIABILITIES AND
STOCKHOLDERS EQUITY
|                                    
|                                    
|                                    
|                                    
|                                     | Current Liabilities:                                                                            
|                                    
|                                    
|                                    
|                                    
|                                     | Notes payable                                                                                    |                                     | $                                          | 27.4  |              |         | $    | 38.3  |      
|                                    
|                                    
|                                    
|                                    
|                                     | Accounts payable                                                                                 |                                     |                                            | 294.8 |              |         |      | 278.2 |      
|                                    
|                                    
|                                    
|                                    
|                                     | Accrued expenses                                                                                 |                                     |                                            | 239.5 |              |         |      | 210.3 |      
|                                    
|                                    
|                                    
|                                    
|                                     | Current portion of long-term debt and capital leases                                             |                                     |                                            | 3.4   |              |         |      | 4.1   |      
|                                     |                                                                                                  |                                     |                                            |       |              |         |      |      
|                                     |                                                                                                  | Total Current Liabilities           |                                            |       | 565.1        |         |      |       | 530.9 |        
|                                     |                                                                                                  |                                     |                                            |       |              |         |      |      
|                                     | Long-Term Debt and Capital
Leases                                                                |                                     |                                            | 47.1  |              |         |      | 62.6  |      
|                                    
|                                    
|                                    
|                                    
|                                     | Other Liabilities                                                                                |                                     |                                            | 196.0 |              |         |      | 240.5 |      
|                                    
|                                    
|                                    
|                                    
|                                     | Deferred Tax Liabilities                                                                         |                                     |                                            | 24.2  |              |         |      | 28.9  |      
|                                    
|                                    
|                                    
|                                    
|                                     | Deferred Income                                                                                  |                                     |                                            | 5.0   |              |         |      | 5.5   |      
|                                    
|                                    
|                                    
|                                    
|                                     | Commitments and
Contingencies (Note 13)                                                         
|                                    
|                                    
|                                    
|                                    
|                                     | Stockholders Equity:                                                                           
|                                    
|                                    
|                                    
|                                    
|                                     | Preferred Stock, par value $.01 per share: authorized
10 million shares; no shares issued        |                                     |                                            |      |              |         |      |      |      
|                                    
|                                    
|                                    
|                                    
|                                     | Common Stock, par value $.01 per share: authorized
40 million shares; 24.7 million shares issued |                                     |                                            | .2    |              |         |      | .2    |      
|                                    
|                                    
|                                    
|                                    
|                                     | Additional paid-in capital                                                                       |                                     |                                            | 224.3 |              |         |      | 224.2 |      
|                                    
|                                    
|                                    
|                                    
|                                     | Treasury stock (Note 4)                                                                          |                                     |                                            | (20.6 | )            |         |      |      |      
|                                    
|                                    
|                                    
|                                    
|                                     | Accumulated other comprehensive income                                                           |                                     |                                            | (14.0 | )            |         |      | (18.9 | )    
|                                    
|                                    
|                                    
|                                    
|                                     | Retained earnings                                                                                |                                     |                                            | 203.8 |              |         |      | 166.8 |      
|                                     |                                                                                                  |                                     |                                            |       |              |         |      |      
|                                     | Total Stockholders Equity                                                                       |                                     |                                            | 393.7 |              |         |      | 372.3 |      
|                                     |                                                                                                  |                                     |                                            |       |              |         |      |      
|                                     |                                                                                                  |                                     | Total Liabilities and
Stockholders Equity |       | $            | 1,231.1 |      |       | $     | 1,240.7 | 
|                                     |                                                                                                  |                                     |                                            |       |              |         |      |      

The accompanying notes are an integral part of this
statement.

33



---



Detroit Diesel Corporation




Consolidated Statements of Stockholders Equity

(In millions)

|                                                                                 |  |                                              |       |       |  |        |      |         |  |         |            |          |  |               |       |          |  |               |       |   |  |             |       |   |  |   |       |   |  |   |      |  
|-------------------------------------------------------------------------------- |  | -------------------------------------------- | ----- | ----- |  | ------ | ---- | ------- |  | ------- | ---------- | -------- |  | ------------- | ----- | -------- |  | ------------- | ----- | - |  | ----------- | ----- | - |  | - | ----- | - |  | - | ---- | -
|                                                                                 |  | Years Ended December 31, 1999, 1998 and 1997
|                                                                                 |  |                                             
|                                                                                 |  |                                              |       |       |  |        |      |         |  |         |            |          |  |               |       |          |  |               |       |   |  | Accumulated
|                                                                                 |  |                                              |       |       |  |        |      |         |  | Common  | Additional |          |  | Other        
|                                                                                 |  |                                              |       |       |  | Common |      | Stock   |  | Paid-in |            | Treasury |  | Comprehensive |       | Retained |  | Comprehensive
|                                                                                 |  | Total                                        |       | Stock |  | Amount |      | Capital |  | Stock   |            | Income   |  | Earnings      |       | Income  
|                                                                                 |  |                                              |       |       |  |        |      |         |  |         |            |          |  |               |       |         
|Balance at January 1, 1997                                                       |  | $                                            | 321.2 |       |  |        | 24.7 |         |  | $       | 0.2        |          |  | $             | 217.8 |          |  | $             |      |   |  | $           | (5.7  | ) |  | $ | 108.9 |   |  | $ | 29.9 |  
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Net income                                                                       |  |                                              | 29.9  |       |  |        |      |         |  |         |            |          |  |               |       |          |  |               |       |   |  |             |       |   |  |   | 29.9  |  
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Transfer of income tax
benefits                                                  |  |                                              | 6.4   |       |  |        |      |         |  |         |            |          |  |               | 6.4   |         
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Additional minimum pension
adjustment, net of taxes of
$3.4 million              |  |                                              | (7.2  | )     |  |        |      |         |  |         |            |          |  |               |       |          |  |               |       |   |  |             | (7.2  | ) |  |   |       |   |  |   | (7.2 | )
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Currency translation
adjustment                                                  |  |                                              | (5.7  | )     |  |        |      |         |  |         |            |          |  |               |       |          |  |               |       |   |  |             | (5.7  | ) |  |   |       |   |  |   | (5.7 | )
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Deferred compensation on
restricted stock                                        |  |                                              | 0.2   |       |  |        |     |         |  |         |           |          |  |               |      |          |  |               |      |   |  |             | 0.2   |   |  |   |      |   |  |   |     |  
|                                                                                 |  |                                              |       |       |  |        |      |         |  |         |            |          |  |               |       |          |  |               |       |   |  |             |       |   |  |   |       |   |  |   |      |  
|Comprehensive income                                                             |  |                                              |       |       |  |        |      |         |  |         |            |          |  |               |       |          |  |               |       |   |  |             |       |   |  |   |       |   |  | $ | 17.0 |  
|                                                                                 |  |                                              |       |       |  |        |      |         |  |         |            |          |  |               |       |          |  |               |       |   |  |             |       |   |  |   |       |   |  |   |      |  
|Balance at December 31, 1997                                                     |  |                                              | 344.8 |       |  |        | 24.7 |         |  |         | 0.2        |          |  |               | 224.2 |          |  |               |      |   |  |             | (18.4 | ) |  |   | 138.8 |  
|                                                                                 |  |                                              |       |      
|Net income                                                                       |  |                                              | 28.0  |       |  |        |      |         |  |         |            |          |  |               |       |          |  |               |       |   |  |             |       |   |  |   | 28.0  |   |  |   | 28.0 |  
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Currency translation
adjustment                                                  |  |                                              | (0.5  | )     |  |        |     |         |  |         |           |          |  |               |      |          |  |               |      |   |  |             | (0.5  | ) |  |   |      |   |  |   | (0.5 | )
|                                                                                 |  |                                              |       |       |  |        |      |         |  |         |            |          |  |               |       |          |  |               |       |   |  |             |       |   |  |   |       |   |  |   |      |  
|Comprehensive income                                                             |  |                                              |       |       |  |        |      |         |  |         |            |          |  |               |       |          |  |               |       |   |  |             |       |   |  |   |       |   |  | $ | 27.5 |  
|                                                                                 |  |                                              |       |       |  |        |      |         |  |         |            |          |  |               |       |          |  |               |       |   |  |             |       |   |  |   |       |   |  |   |      |  
|Balance at December 31, 1998                                                     |  |                                              | 372.3 |       |  |        | 24.7 |         |  |         | 0.2        |          |  |               | 224.2 |          |  |               |       |   |  |             | (18.9 | ) |  |   | 166.8 |  
|                                                                                 |  |                                              |       |      
|Net income                                                                       |  |                                              | 49.2  |       |  |        |      |         |  |         |            |          |  |               |       |          |  |               |       |   |  |             |       |   |  |   | 49.2  |   |  |   | 49.2 |  
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Exercise of stock options                                                        |  |                                              | 0.1   |       |  |        |      |         |  |         |            |          |  |               | 0.1   |         
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Purchase of treasury stock, at
cost                                              |  |                                              | (20.6 | )     |  |        | (1.1 | )       |  |         |            |          |  |               |       |          |  |               | (20.6 | )
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Dividends declared                                                               |  |                                              | (12.2 | )     |  |        |      |         |  |         |            |          |  |               |       |          |  |               |       |   |  |             |       |   |  |   | (12.2 | )
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Reduction in additional
minimum pension
adjustment, net of taxes of
$5.3 million |  |                                              | 9.7   |       |  |        |      |         |  |         |            |          |  |               |       |          |  |               |       |   |  |             | 9.7   |   |  |   |       |   |  |   | 9.7  |  
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Currency translation
adjustment                                                  |  |                                              | (4.8  | )     |  |        |     |         |  |         |           |          |  |               |      |          |  |               |      |   |  |             | (4.8  | ) |  |   |      |   |  |   | (4.8 | )
|                                                                                 |  |                                              |       |       |  |        |      |         |  |         |            |          |  |               |       |          |  |               |       |   |  |             |       |   |  |   |       |   |  |   |      |  
|Comprehensive income                                                             |  |                                              |       |       |  |        |      |         |  |         |            |          |  |               |       |          |  |               |       |   |  |             |       |   |  |   |       |   |  | $ | 54.1 |  
|                                                                                 |  |                                              |       |       |  |        |      |         |  |         |            |          |  |               |       |          |  |               |       |   |  |             |       |   |  |   |       |   |  |   |      |  
|Balance at December 31, 1999                                                     |  | $                                            | 393.7 |       |  |        | 23.6 |         |  | $       | 0.2        |          |  | $             | 224.3 |          |  | $             | (20.6 | ) |  | $           | (14.0 | ) |  | $ | 203.8 |  
|                                                                                 |  |                                              |       |       |  |        |      |         |  |         |            |          |  |               |       |          |  |               |       |   |  |             |       |   |  |   |       |  

The accompanying notes are an integral part of this
statement.

34



---



Detroit Diesel Corporation




Consolidated Statements of Cash Flows

(In millions)

|                                                                                  |                                                   |                                           |                                                               |                                                             |       |                          |      |       |       |      |       |       |       |      |       |  
|--------------------------------------------------------------------------------- | ------------------------------------------------- | ----------------------------------------- | ------------------------------------------------------------- | ----------------------------------------------------------- | ----- | ------------------------ | ---- | ----- | ----- | ---- | ----- | ----- | ----- | ---- | ----- | -
|                                                                                  |                                                   |                                           |                                                               |                                                             |       | Years Ended December 31,
|                                                                                  |                                                   |                                           |                                                               |                                                             |       |                         
|                                                                                  |                                                   |                                           |                                                               |                                                             |       | 1999                     |      | 1998  |       | 1997
|                                                                                  |                                                   |                                           |                                                               |                                                             |       |                          |      |       |       |     
|CASH FLOWS FROM OPERATING
ACTIVITIES:                                            
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Net income                                                                        |                                                   | $                                         | 49.2                                                          |                                                             |       | $                        | 28.0 |       |       | $    | 29.9  |      
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Adjustments to reconcile net
income to net cash
Provided by operating activities:
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  |                                                   |                                           | Depreciation and amortization                                 |                                                             |       | 50.3                     |      |       |       | 45.7 |       |       |       | 38.8 |      
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  |                                                   |                                           | Changes in assets and liabilities which
provided (used) cash:
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  |                                                   |                                           |                                                               | Accounts and notes receivable                               |       |                          | (6.5 | )     |       |      | 9.9   |       |       |      | (34.5 | )
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  |                                                   |                                           |                                                               | Inventories                                                 |       |                          | (6.6 | )     |       |      | (36.7 | )     |       |      | (19.7 | )
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  |                                                   |                                           |                                                               | Prepaid expenses, deferred charges and other current assets |       |                          | 3.9  |       |       |      | (1.7  | )     |       |      | 6.3   |  
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  |                                                   |                                           |                                                               | Deferred taxes                                              |       |                          | (7.9 | )     |       |      | (3.8  | )     |       |      | 8.8   |  
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  |                                                   |                                           |                                                               | Accounts payable                                            |       |                          | 28.6 |       |       |      | (22.1 | )     |       |      | 27.0  |  
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  |                                                   |                                           |                                                               | Accrued expenses and other liabilities                      |       |                          | 4.2  |       |       |      | 66.3  |       |       |      | 13.2  |  
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  |                                                   |                                           |                                                               | Intangible and other assets                                 |       |                          | 2.7  |       |       |      | (7.2  | )     |       |      | (14.9 | )
|                                                                                  |                                                   |                                           |                                                               |                                                             |       |                          |      |       |       |      |       |      
|                                                                                  |                                                   | Net Cash Provided By
Operating Activities |                                                               |                                                             | 117.9 |                          |      |       | 78.4  |      |       |       | 54.9  |     
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|CASH FLOWS FROM INVESTING
ACTIVITIES:                                            
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  | Acquisition of property, plant and equipment, net |                                           |                                                               | (60.8                                                       | )     |                          |      | (42.4 | )     |      |       | (61.9 | )    
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  | Investments in and advances to affiliates         |                                           |                                                               | (9.5                                                        | )     |                          |      |      |       |      |       | (2.5  | )    
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  | Acquisition of subsidiaries, net                  |                                           |                                                               | (4.6                                                        | )     |                          |      | (10.1 | )     |      |       | (3.3  | )    
|                                                                                  |                                                   |                                           |                                                               |                                                             |       |                          |      |       |       |      |       |      
|                                                                                  |                                                   | Net Cash Used In Investing
Activities     |                                                               |                                                             | (74.9 | )                        |      |       | (52.5 | )    |       |       | (67.7 | )   
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|CASH FLOWS FROM FINANCING
ACTIVITIES:                                            
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  | Net (payments on) proceeds from notes payable     |                                           |                                                               | (7.3                                                        | )     |                          |      | (7.6  | )     |      |       | 30.0  |      
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  | Purchase of treasury stock                        |                                           |                                                               | (20.6                                                       | )     |                          |      |      |       |      |       |      |      
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  | Payments of dividends                             |                                           |                                                               | (9.3                                                        | )     |                          |      |      |       |      |       |      |      
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  | Net payment on other long-term borrowings         |                                           |                                                               | (7.1                                                        | )     |                          |      | (16.3 | )     |      |       | (17.1 | )    
|                                                                                  |                                                   |                                           |                                                               |                                                             |       |                          |      |       |       |      |       |      
|                                                                                  |                                                   | Net Cash Provided By
Financing Activities |                                                               |                                                             | (44.3 | )                        |      |       | 23.9  |      |       |       | 12.9  |     
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  | Effect of Exchange Rate
Changes on Cash           |                                           |                                                               | 1.0                                                         |       |                          |      | (2.0  | )     |      |       | .1    |      
|                                                                                  |                                                   |                                           |                                                               |                                                             |       |                          |      |       |       |      |       |      
|                                                                                  | Net (Decrease) Increase In
Cash                   |                                           |                                                               | (.3                                                         | )     |                          |      |      |       |      |       | .2    |      
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  | Cash At The Beginning Of
The Year                 |                                           |                                                               | 3.2                                                         |       |                          |      | 3.2   |       |      |       | 3.0   |      
|                                                                                  |                                                   |                                           |                                                               |                                                             |       |                          |      |       |       |      |       |      
|                                                                                  | Cash At The End Of The
Year                       |                                           | $                                                             | 2.9                                                         |       |                          | $    | 3.2   |       |      | $     | 3.2   |      
|                                                                                  |                                                   |                                           |                                                               |                                                             |       |                          |      |       |       |      |       |      
|SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:                               
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  |                                                   | Cash paid during the period for:         
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  |                                                   | Interest                                  |                                                               | $                                                           | 7.7   |                          |      | $     | 11.6  |      |       | $     | 12.5  |     
|                                                                                  |                                                   |                                           |                                                               |                                                             |       |                          |      |       |       |      |       |      
|                                                                                  |                                                   | Income taxes                              |                                                               | $                                                           | 37.2  |                          |      | $     | 20.1  |      |       | $     | 5.0   |     
|                                                                                  |                                                   |                                           |                                                               |                                                             |       |                          |      |       |       |      |       |      
|SUPPLEMENTAL SCHEDULE OF
NON-CASH ACTIVITIES:                                    
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  |                                                   | Issuance of debt to acquire subsidiary    |                                                               | $                                                           |      |                          |      | $     |      |      |       | $     | 7.2   |     
|                                                                                  |                                                   |                                           |                                                               |                                                             |       |                          |      |       |       |      |       |      
|                                                                                  |                                                   | Reserve transferred to equity             |                                                               | $                                                           |      |                          |      | $     |      |      |       | $     | 6.4   |     
|                                                                                  |                                                   |                                           |                                                               |                                                             |       |                          |      |       |       |      |       |      
|                                                                                  |                                                   | Capital lease obligations incurred        |                                                               | $                                                           |      |                          |      | $     |      |      |       | $     | .2    |     
|                                                                                  |                                                   |                                           |                                                               |                                                             |       |                          |      |       |       |      |       |      

The accompanying notes are an integral part of this
statement.

35



---



Detroit Diesel Corporation




Notes to Consolidated Financial Statements

1. ORGANIZATION AND BUSINESS

Detroit Diesel Corporation (the Company, Detroit Diesel or DDC) is engaged
in the design, manufacture, sale and service of heavy-duty diesel and
alternative fuel engines, automotive diesel engines, and engine-related
products. The Company offers a complete line of diesel engines from 22 to 11,000
horsepower for the on-highway, off-road, and automotive markets. Detroit Diesel
services these markets directly and through a worldwide network of more than
2,700 authorized distributors and dealers. DDC is a QS-9000 certified company.

Detroit Diesels major shareholders are Penske Corporation (47.6%), a
closely-held diversified transportation services company, Diesel Project
Development, Inc. (DPD) (20.9%) and public stockholders (31.5%).

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The consolidated financial statements include the
accounts of the Company and its majority-owned subsidiaries. Affiliated
companies in which the Company owns at least 20% of the voting securities are
accounted for using the equity method. All significant intercompany transactions
have been eliminated in consolidation.

Foreign Currency

The Company is subject to the risk of changes in foreign currency exchange rates
due to operations located outside the United States. Changes in foreign currency
exchange rates are generally reported as a component of stockholders equity.
Changes in the value of the Italian Lira, Singapore Dollar and Brazilian Real
will impact the Companys translation adjustments in the future. Additionally,
the Company has recorded liabilities approximating 43.8 million Deutsche Marks
as of December 31, 1999.

Accounts and Notes Receivable

The accounts and notes receivable are net of an allowance of $4.7 million and $5.0 million at December
31, 1999 and 1998, respectively. The carrying value of accounts and notes
receivable approximates fair value.

Inventories

Substantially all inventories are
stated at the lower of cost or market, with cost determined by the first-in,
first-out method.

36



---



Property, Plant and Equipment

Property, plant and equipment are recorded at cost. Depreciation is computed
using the straight-line method. The estimated service lives range from 5 to 35
years for buildings and improvements and 5 to 28 years for machinery, computer
equipment, equipment and tooling, and leasehold improvements.

Intangible Assets

The Company amortizes the excess of cost over fair value of net assets acquired
(Goodwill) on a straight-line basis over periods ranging from 5 to 40 years and
other intangible assets over periods ranging from 3 to 30 years. Intangible
assets are reported net of accumulated amortization of $34.1 million and $26.4
million at December 31, 1999 and 1998, respectively. The Company periodically
evaluates the carrying value of its intangible assets for impairment. This
evaluation is based principally on the projected, undiscounted cash flows
generated by the related tangible assets.

Income Taxes

Deferred tax assets and
liabilities reflect the impact of temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and the
amounts used for income tax purposes.

Special Charge

The Company recorded a special charge during 1998 of $12.5 million related to
agreements with the U.S. Environmental Protection Agency (EPA), the California
Air Resources Board (CARB) and major heavy-duty engine manufacturers. The
special charge is payable in four annual installments, the first of which was
paid in July 1999.

Product Coverage Programs

Estimated costs of product coverage, including warranty, are charged to
operations at the time the Company sells its products. Such costs were $127.0
million, $113.8 million, and $103.3 million in 1999, 1998 and 1997,
respectively. In addition to amounts included in accrued expenses (Note 10),
other liabilities includes $71.8 million and $70.5 million at December 31, 1999
and 1998, respectively, for these programs.

Derivative Financial Instruments

The
Company may enter into derivative financial instruments to manage its exposure
to fluctuations in interest and currency exchange rates. Derivative financial
instruments are not used for speculative or investment purposes. The Company is
exposed to market risks arising from changes in interest and foreign currency
exchange rates. Interest rate swap agreements that effectively change the
interest rate characteristics of existing debt are accounted for as an
adjustment to interest expense.

37



---



Long Lived Assets

The Company evaluates the carrying value of its long lived assets for impairment whenever events or changes in
circumstances indicate that the carrying value of an asset may be impaired.

Research and Development

Research and development expenditures are charged to operations as incurred.

Post-retirement and Post-employment Benefits Other than Pensions

The Company
records post-retirement healthcare benefit costs during the period employees
provide service to the Company. The Company funds its post-retirement healthcare
benefit obligation as benefits are paid. The Company amortizes the initial
accumulated benefit obligation over a 20 year period (Note 15).

The Company provides other post-employment benefits to its employees.
Post-employment benefits offered include disability benefits, supplemental
unemployment benefits, workers compensation benefits, and continuation of
health care benefits and life insurance coverage. The costs of providing these
other post-employment benefits are not significant.

Use of Estimates

The
preparation of the Companys financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts of assets and liabilities reported therein.
Actual results reported in future periods may differ from these
estimates.

Reclassifications

Certain reclassifications have been made to prior
year amounts to conform with the classifications used in 1999.

New Accounting Pronouncement

In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 133, Accounting for Derivative Instruments
and Hedging Activities. This Statement requires companies to record derivatives
on the balance sheet as assets and liabilities, measured at fair value. Gains or
losses resulting from changes in the values of those derivatives would be
accounted for depending on the use of the derivative and whether it qualifies
for hedge accounting. This Statement is not expected to have a material impact
on the Companys consolidated financial statements. This Statement is effective
for fiscal years beginning after June 15, 2000.

38



---



3. NET INCOME PER SHARE

Basic net income per share represents net income available to common
stockholders divided by the weighted average number of common shares outstanding
during the period. For the years ended December 31, 1999, 1998 and 1997 the
weighted average number of shares outstanding were 24,598,000 shares, 24,702,000
shares and 24,698,000 shares, respectively.

Diluted net income per share represents net income available to common
stockholders divided by the weighted average number of common shares outstanding
plus the weighted average dilutive effect of the Companys incentive stock
options outstanding (See Note 16) during the period calculated using the
treasury stock method. The dilutive effect of the Companys incentive stock
options for the years ended December 31, 1999, 1998 and 1997 were 76,000 shares,
52,000 shares and 81,000 shares, respectively.

Weighted average shares outstanding for the year ended December 31, 1999 were
affected by a common stock repurchase program initiated during the fourth
quarter (Note 4).

4. COMMON STOCK REPURCHASE PROGRAM

In November 1999, the Board of Directors approved a plan to repurchase up to 10%
of the outstanding common stock of the Company either through open market
purchases or negotiated transactions.

The Company has up to two years to complete repurchases under this discretionary
program. During 1999, 1,090,000 shares were repurchased at a cost of
approximately $20.6 million, which represented approximately 4% of the
outstanding common stock of the Company.

5. INVENTORIES

At December 31 inventories consist of the following:

|                                            |  |              |       |      |  |   |       |  
|------------------------------------------- |  | ------------ | ----- | ---- |  | - | ----- | -
|(In millions)                               |  | December 31,
|                                            |  |             
|                                            |  | 1999         |       | 1998
|                                            |  |              |       |     
|Productive                                  |  | $            | 174.3 |      |  | $ | 187.4 |  
|                                           
|                                           
|                                           
|                                           
|Service parts                               |  |              | 109.2 |      |  |   | 106.2 |  
|                                           
|                                           
|                                           
|                                           
|Remanufacturing parts                       |  |              | 53.1  |      |  |   | 44.3  |  
|                                           
|                                           
|                                           
|                                           
|Non-productive                              |  |              | 7.7   |      |  |   | 6.3   |  
|                                            |  |              |       |      |  |   |       |  
|Total                                       |  | $            | 344.3 |      |  | $ | 344.2 |  
|                                            |  |              |       |      |  |   |       |  
|The components of productive inventory are:
|                                           
|                                           
|                                           
|                                           
|Raw materials                               |  |              | 60    | %    |  |   | 58    | %
|                                           
|                                           
|                                           
|                                           
|Work in process                             |  |              | 21    | %    |  |   | 23    | %
|                                           
|                                           
|                                           
|                                           
|Finished product                            |  |              | 19    | %    |  |   | 19    | %

39



---



6. INTANGIBLE ASSETS

At December 31 intangible assets, net of accumulated amortization, consist of
the following:

|                              |  |              |       |      |  |   |       | 
|----------------------------- |  | ------------ | ----- | ---- |  | - | ----- | 
|(In millions)                 |  | December 31,
|                              |  |             
|                              |  | 1999         |       | 1998
|                              |  |              |       |     
|Goodwill                      |  | $            | 72.3  |      |  | $ | 82.5  | 
|                             
|                             
|                             
|                             
|Pension plan intangible asset |  |              | 21.1  |      |  |   | 31.9  | 
|                             
|                             
|                             
|                             
|Other                         |  |              | 25.1  |      |  |   | 30.3  | 
|                              |  |              |       |      |  |   |       | 
|Total                         |  | $            | 118.5 |      |  | $ | 144.7 | 
|                              |  |              |       |      |  |   |       | 

7. RELATED PARTY TRANSACTIONS

The Companys payments to Penske Corporation and its affiliates, for
miscellaneous expenses and other items for the years ended December 31, 1999,
1998 and 1997 were $22.0 million, $16.4 million, and $11.5 million,
respectively.

During the years ended December 31, 1999, 1998 and 1997, the
Company had sales to affiliates of DaimlerChrysler AG (DaimlerChrysler),
indirect parent corporation of DPD, of $831.6 million, $728.6 million and $644.8
million, respectively. Purchases from DaimlerChrysler affiliates were $45.4
million in 1999, $61.2 million in 1998 and $45.1 million in 1997. At December
31, 1999 and 1998, the Company had accounts receivable of $81.8 million and
$72.4 million, respectively due from such affiliates. Accounts payable to
DaimlerChrysler affiliates were $2.9 million and $13.2 million at December 31,
1999 and 1998, respectively.

The Company is a lessee under agreements with GE Capital Corporation, a partner
in a Penske Corporation affiliate, for certain manufacturing equipment. Rent
expense was $6.4 million in 1999, $7.6 million in 1998 and $9.1 million in 1997.
Future minimum rental payments are $6.4 million in 2000, $4.0 million in 2001
and $1.5 million in 2002.

8. SEGMENT INFORMATION

Detroit Diesel has one reportable operating segment,
consistent with managements approach of making internal operating decisions.
All products produced by the Company are aggregated into one reportable
operating segment, since the nature of the products, production processes,
distribution methods, and the Companys principal customers are similar. The
Companys principal customers generally consist of original equipment
manufacturers (OEMs), while the ultimate customers are major fleet carriers and
end users. The Company offers a complete line of diesel engines and related
products and sells its products principally in the on-highway (truck and bus),
off-road (marine, military, power generation and construction and industrial)
and automotive markets.

The on-highway heavy-duty truck market is the Companys largest market and is
served primarily by DDCs four-stroke products. The on-highway market comprised
approximately 65%, 60% and 56% of the Companys net revenues for 1999, 1998 and
1997, respectively. The Companys largest customer is DaimlerChrysler, which
comprised approximately 35%, 32% and 30% of the Companys net revenues in 1999,
1998 and 1997, respectively. Additionally, within

40



---



the on-highway heavy-duty truck market, the Companys largest OEM customers are
Freightliner Corporation, Navistar International Transportation Corp., Volvo GM
Heavy Truck Corporation and PACCAR Inc., from which approximately 49%, 38% and
39% of the Companys net revenues in 1999, 1998 and 1997, respectively, were
derived.

The following data include revenues based on the geographic region from which
the sale was generated and long lived assets based on physical location.

Net Revenues:

|                        |  |                          |         |      |  |      |         |  |  |   |         | 
|----------------------- |  | ------------------------ | ------- | ---- |  | ---- | ------- |  |  | - | ------- | 
|(In
millions)           |  | Years Ended December 31,
|                        |  |                         
|                        |  | 1999                     |         | 1998 |  | 1997
|                        |  |                          |         |      |  |     
|United States           |  | $                        | 1,679.9 |      |  | $    | 1,558.2 |  |  | $ | 1,411.9 | 
|                       
|                       
|                       
|                       
|Italy                   |  |                          | 210.7   |      |  |      | 203.7   |  |  |   | 289.2   | 
|                       
|                       
|                       
|                       
|Other foreign countries |  |                          | 468.1   |      |  |      | 488.7   |  |  |   | 462.8   | 
|                        |  |                          |         |      |  |      |         |  |  |   |         | 
|Total                   |  | $                        | 2,358.7 |      |  | $    | 2,250.6 |  |  | $ | 2,163.9 | 
|                        |  |                          |         |      |  |      |         |  |  |   |         | 

Long Lived Assets:

|                        |  |              |       |      |  |   |       | 
|----------------------- |  | ------------ | ----- | ---- |  | - | ----- | 
|(In
millions)           |  | December 31,
|                        |  |             
|                        |  | 1999         |       | 1998
|                        |  |              |       |     
|United States           |  | $            | 342.4 |      |  | $ | 322.5 | 
|                       
|                       
|                       
|                       
|Italy                   |  |              | 127.4 |      |  |   | 148.5 | 
|                       
|                       
|                       
|                       
|Other foreign countries |  |              | 15.7  |      |  |   | 17.2  | 
|                        |  |              |       |      |  |   |       | 
|Total                   |  | $            | 485.5 |      |  | $ | 488.2 | 
|                        |  |              |       |      |  |   |       | 

9. NOTES PAYABLE, LONG-TERM DEBT AND CAPITAL LEASES

The Company and its
subsidiaries have $27.4 million and $38.3 million in debt under certain short
term lines of credit and bank loan agreements at December 31, 1999 and 1998,
respectively, of which approximately $19.8 million is denominated in Italian
Lira at December 31, 1999. The weighted average interest rate at December 31,
1999 was 4.4%. The amount available for borrowing under these agreements was
approximately $105.8 million at December 31, 1999 and $93 million at December
31, 1998. The carrying value of notes payable approximates fair value.

41



---



Long-term debt and capital leases consist of the following at December 31:

|                                                                                                                |  |              |      |      |  |   |      | 
|--------------------------------------------------------------------------------------------------------------- |  | ------------ | ---- | ---- |  | - | ---- | 
|(In millions)                                                                                                   |  | December 31,
|                                                                                                                |  |             
|                                                                                                                |  | 1999         |      | 1998
|                                                                                                                |  |              |      |     
|Unsecured, revolving line of credit denominated in Italian Lira, bearing interest at
4.0%, expires in 2001      |  | $            | 26.0 |      |  | $ | 42.2 | 
|                                                                                                               
|                                                                                                               
|                                                                                                               
|                                                                                                               
|Unsecured lines of credit with a weighted average interest rate of 5.6%, expired in
1999                        |  |              |     |      |  |   | 2.7  | 
|                                                                                                               
|                                                                                                               
|                                                                                                               
|                                                                                                               
|Government loan maturing in 2007                                                                                |  |              | 5.1  |      |  |   | 7.5  | 
|                                                                                                               
|                                                                                                               
|                                                                                                               
|                                                                                                               
|Various loans with a weighted average interest rate of 5.8%, due in varying
installments from 2001 through 2014 |  |              | 9.1  |      |  |   | 11.5 | 
|                                                                                                               
|                                                                                                               
|                                                                                                               
|                                                                                                               
|Term loan bearing interest at 7.9% due in quarterly installments through 2002                                   |  |              | 9.7  |      |  |   |     | 
|                                                                                                               
|                                                                                                               
|                                                                                                               
|                                                                                                               
|Capital leases with a weighted average interest rate of 9.5%, due in varying
installments through 2001          |  |              | .6   |      |  |   | 2.8  | 
|                                                                                                                |  |              |      |      |  |   |      | 
|Total long-term debt and capital leases                                                                         |  |              | 50.5 |      |  |   | 66.7 | 
|                                                                                                               
|                                                                                                               
|                                                                                                               
|                                                                                                               
|Less current portion                                                                                            |  |              | 3.4  |      |  |   | 4.1  | 
|                                                                                                                |  |              |      |      |  |   |      | 
|Total                                                                                                           |  | $            | 47.1 |      |  | $ | 62.6 | 
|                                                                                                                |  |              |      |      |  |   |      | 

Principal repayment requirements on long-term debt and minimum lease payments on
capitalized leases are as follows:

|                     |                                    |   |      |   |        |   |         |    |  |   |      |    | 
|-------------------- | ---------------------------------- | - | ---- | - | ------ | - | ------- | -- |  | - | ---- | -- | 
|(In
millions)       
|                     |                                    |   |      |   |        |   | Capital
|                     |                                    |   | Debt |   | Leases |   | Total  
|                     |                                    |   |      |   |        |   |        
|2000                 |                                    | $ | 2.8  |   |        | $ | .7      |    |  | $ | 3.5  |   
|                    
|                    
|                    
|                    
|2001                 |                                    |   | 28.1 |   |        |   |        |    |  |   | 28.1 |   
|                    
|                    
|                    
|                    
|2002                 |                                    |   | 10.2 |   |        |   |        |    |  |   | 10.2 |   
|                    
|                    
|                    
|                    
|2003                 |                                    |   | .3   |   |        |   |        |    |  |   | .3   |   
|                    
|                    
|                    
|                    
|2004                 |                                    |   | .3   |   |        |   |        |    |  |   | .3   |   
|                    
|                    
|                    
|                    
|2005 and thereafter  |                                    |   | 8.2  |   |        |   |        |    |  |   | 8.2  |   
|                     |                                    |   |      |   |        |   |         |    |  |   |      |   
|Total payments       |                                    |   | 49.9 |   |        |   | .7      |    |  |   | 50.6 |   
|                    
|                    
|                    
|                    
|                     | Less: amount representing interest |   |      |  |        |   |         | .1 |  |   |      | .1 | 
|                     |                                    |   |      |   |        |   |         |    |  |   |      |   
|Total long-term debt |                                    | $ | 49.9 |   |        | $ | .6      |    |  | $ | 50.5 |   
|                     |                                    |   |      |   |        |   |         |    |  |   |      |   

The Company has a $300 million, unsecured variable rate credit facility which
expires in June 2000. This facility has several covenants which require the
maintenance of a certain level of net worth, restrict the Companys ability to
incur additional debt and require maintenance of minimum interest coverage and
leverage ratios. The Company expects to enter into a new credit facility during
the first half of 2000. At December 31, 1999, the Company had approximately
$294.7 million available under its revolving lines of credit. At December 31,
1999, approximately $30.2 million of long-term debt is denominated in Italian
Lira. The carrying value of long-term debt approximates fair value.

The Company has interest rate swap agreements, which extend through May 2000 and
may be extended through May 2001, that effectively converts $50 million of its
variable rate debt to a fixed rate of 6.05%.

42



---



10. ACCRUED EXPENSES

At December 31
accrued expenses consist of the following:

|                                  |  |              |       |      |  |   |       | 
|--------------------------------- |  | ------------ | ----- | ---- |  | - | ----- | 
|(In millions)                     |  | December 31,
|                                  |  |             
|                                  |  | 1999         |       | 1998
|                                  |  |              |       |     
|Policy and warranty               |  | $            | 79.9  |      |  | $ | 69.3  | 
|                                 
|                                 
|                                 
|                                 
|Accrued payroll and related taxes |  |              | 36.7  |      |  |   | 39.6  | 
|                                 
|                                 
|                                 
|                                 
|Other                             |  |              | 122.9 |      |  |   | 101.4 | 
|                                  |  |              |       |      |  |   |       | 
|Total                             |  | $            | 239.5 |      |  | $ | 210.3 | 
|                                  |  |              |       |      |  |   |       | 

11. INCOME TAXES

For the years ended December 31 the Companys provision for income taxes consists of the
following:

|                           |                     |                          |       |      |      |   |      |      |   |   |      |      |  
|-------------------------- | ------------------- | ------------------------ | ----- | ---- | ---- | - | ---- | ---- | - | - | ---- | ---- | -
|(In
millions)              |                     | Years Ended December 31,
|                           |                     |                         
|                           |                     |                          | 1999  |      | 1998 |   | 1997
|                           |                     |                          |       |      |      |   |     
|Current:                  
|                          
|                          
|                          
|                          
|                           | Federal             |                          | $     | 28.7 |      |   | $    | 22.1 |   |   | $    | 1.4  |  
|                          
|                          
|                          
|                          
|                           | State & local       |                          |       | .6   |      |   |      | .8   |   |   |      | .1   |  
|                          
|                          
|                          
|                          
|                           | Foreign             |                          |       | 10.6 |      |   |      | 2.7  |   |   |      | 2.1  |  
|                           |                     |                          |       |      |      |   |      |      |   |   |      |     
|Total current              |                     |                          | 39.9  |      |      |   | 25.6 |      |   |   | 3.6  |     
|                           |                     |                          |       |      |      |   |      |      |   |   |      |     
|Deferred:                 
|                          
|                          
|                          
|                          
|                           | Federal             |                          |       | (6.9 | )    |   |      | (5.4 | ) |   |      | 9.8  |  
|                          
|                          
|                          
|                          
|                           | State and local     |                          |       | (.4  | )    |   |      | (.6  | ) |   |      | .4   |  
|                          
|                          
|                          
|                          
|                           | Foreign             |                          |       | (3.7 | )    |   |      | 3.2  |   |   |      | 5.6  |  
|                          
|                          
|                          
|                          
|                           | Enacted rate change |                          |       |     |      |   |      |     |   |   |      | (3.8 | )
|                           |                     |                          |       |      |      |   |      |      |   |   |      |     
|Total deferred             |                     |                          | (11.0 | )    |      |   | (2.8 | )    |   |   | 12.0 |     
|                           |                     |                          |       |      |      |   |      |      |   |   |      |     
|Total income tax provision |                     | $                        | 28.9  |      |      | $ | 22.8 |      |   | $ | 15.6 |     
|                           |                     |                          |       |      |      |   |      |      |   |   |      |     

Income before income taxes and minority interests consists of the following:

|                    |  |                          |      |      |  |      |      |  |  |   |      | 
|------------------- |  | ------------------------ | ---- | ---- |  | ---- | ---- |  |  | - | ---- | 
|(In millions)       |  | Years Ended December 31,
|                    |  |                         
|                    |  | 1999                     |      | 1998 |  | 1997
|                    |  |                          |      |      |  |     
|Domestic            |  | $                        | 61.9 |      |  | $    | 33.0 |  |  | $ | 20.6 | 
|                   
|                   
|                   
|                   
|Foreign             |  |                          | 16.2 |      |  |      | 17.8 |  |  |   | 24.9 | 
|                    |  |                          |      |      |  |      |      |  |  |   |      | 
|Total pretax income |  | $                        | 78.1 |      |  | $    | 50.8 |  |  | $ | 45.5 | 
|                    |  |                          |      |      |  |      |      |  |  |   |      | 

43



---



Temporary differences which give rise to deferred tax assets and liabilities at
December 31 are as follows:

|                               |                       |              |       |      |      |   |       |      | 
|------------------------------ | --------------------- | ------------ | ----- | ---- | ---- | - | ----- | ---- | 
|(In
millions)                  |                       | December 31,
|                               |                       |             
|                               |                       |              | 1999  |      | 1998
|                               |                       |              |       |      |     
|Deferred tax assets:          
|                              
|                              
|                              
|                              
|                               | Accrued expenses      |              | $     | 91.0 |      |   | $     | 90.7 | 
|                              
|                              
|                              
|                              
|                               | State and local taxes |              |       | 5.3  |      |   |       | 4.9  | 
|                              
|                              
|                              
|                              
|                               | Inventory             |              |       | 4.9  |      |   |       | 3.0  | 
|                              
|                              
|                              
|                              
|                               | Other                 |              |       | 12.2 |      |   |       | 8.5  | 
|                               |                       |              |       |      |      |   |       |     
|Total deferred tax assets      |                       | $            | 113.4 |      |      | $ | 107.1 |     
|                               |                       |              |       |      |      |   |       |     
|Deferred tax liabilities:     
|                              
|                              
|                              
|                              
|                               | Fixed assets          |              | $     | 48.9 |      |   | $     | 47.4 | 
|                              
|                              
|                              
|                              
|                               | Other                 |              |       | 10.8 |      |   |       | 11.7 | 
|                               |                       |              |       |      |      |   |       |     
|Total deferred tax liabilities |                       | $            | 59.7  |      |      | $ | 59.1  |     
|                               |                       |              |       |      |      |   |       |     

The consolidated income tax provision differs from the amount computed on pretax
income using the U.S. statutory income tax rate for the years ended December 31
for the following reasons:

|                                      |                                         |                          |      |      |      |   |      |      |   |   |      |      |  
|------------------------------------- | --------------------------------------- | ------------------------ | ---- | ---- | ---- | - | ---- | ---- | - | - | ---- | ---- | -
|(In millions)                         |                                         | Years Ended December 31,
|                                      |                                         |                         
|                                      |                                         |                          | 1999 |      | 1998 |   | 1997
|                                      |                                         |                          |      |      |      |   |     
|Federal income tax
at statutory rates |                                         | $                        | 27.3 |      |      | $ | 17.7 |      |   | $ | 15.9 |     
|                                     
|                                     
|                                     
|                                     
|Increase (decrease) in taxes:        
|                                     
|                                     
|                                     
|                                     
|                                      | Nondeductible goodwill                  |                          |      | 1.4  |      |   |      | 1.4  |   |   |      | 1.3  |  
|                                     
|                                     
|                                     
|                                     
|                                      | State, local taxes, net                 |                          |      | 1.3  |      |   |      | .9   |   |   |      | .6   |  
|                                     
|                                     
|                                     
|                                     
|                                      | Foreign sales corporation benefit       |                          |      | (2.6 | )    |   |      | (3.4 | ) |   |      | (3.6 | )
|                                     
|                                     
|                                     
|                                     
|                                      | Foreign taxes at other than 35%         |                          |      | 1.4  |      |   |      | 1.3  |   |   |      | 3.7  |  
|                                     
|                                     
|                                     
|                                     
|                                      | Impact of rate change on deferred taxes |                          |      |     |      |   |      |     |   |   |      | (3.8 | )
|                                     
|                                     
|                                     
|                                     
|                                      | EPA settlement                          |                          |      |     |      |   |      | 4.4  |   |   |      |     |  
|                                     
|                                     
|                                     
|                                     
|                                      | Other                                   |                          |      | .1   |      |   |      | .5   |   |   |      | 1.5  |  
|                                      |                                         |                          |      |      |      |   |      |      |   |   |      |     
|Provision for income taxes            |                                         | $                        | 28.9 |      |      | $ | 22.8 |      |   | $ | 15.6 |     
|                                      |                                         |                          |      |      |      |   |      |      |   |   |      |     
|Effective tax rate                    |                                         |                          | 37.0 | %    |      |   | 44.9 | %    |   |   | 34.2 | %   
|                                      |                                         |                          |      |      |      |   |      |      |   |   |      |     

In 1997, the Company reassessed its deferred taxes associated with tax losses
which were acquired with the purchase of VM Motori S.p.A. (VM) in 1995. These
loss carryforwards were realized by VM during 1997. The review resulted in a
reduction in deferred tax liabilities and goodwill of approximately $6.3
million.

The Company has not recorded deferred taxes on the undistributed earnings of
foreign subsidiaries which are deemed to be indefinitely reinvested. Such
undistributed earnings aggregate to approximately $27.3 million, $22.0 million
and $17.9 million at December 31, 1999, 1998 and 1997, respectively.

44



---



12. FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company has the following derivative
financial instruments at December 31:

|                              |  |          |      |          |  |       |   |  |  |   |      |  
|----------------------------- |  | -------- | ---- | -------- |  | ----- | - |  |  | - | ---- | -
|(In millions)                
|                              |  | Notional |      | Carrying |  | Fair 
|                              |  | Amount   |      | Value    |  | Value
|                              |  |          |      |          |  |      
|1999                         
|                             
|                             
|                             
|                             
|Interest rate swap agreements |  | $        | 50.0 |          |  | $     |  |  |  | $ |     |  
|                             
|                             
|                             
|                             
|1998                         
|                             
|                             
|                             
|                             
|Interest rate swap agreements |  | $        | 50.0 |          |  | $     |  |  |  | $ | (1.2 | )

The fair value of the interest rate swap agreements was determined using
prevailing spot rates at December 31, 1999 and 1998, and discounted as
applicable.

13. COMMITMENTS, CONTINGENCIES AND CONCENTRATIONS

Several claims,
suits and complaints arising in the ordinary course of business have been
threatened or are pending against the Company. In the opinion of management, all
such matters are adequately covered by insurance or indemnification or, if not
so covered, there are meritorious defenses to all such claims, or they are of
such kind, or involve such amounts, as would not have a materially adverse
effect on the financial position or results of operations of the Company if
disposed of unfavorably.

Facilities purchased or leased since the Company began operations are typically
subject to an environmental audit before commencing operations. Several of such
facilities have been subject to remediation activities due to non-compliance
with applicable regulations. Amounts expended in such remediation activities
have generally been insignificant or have been covered under indemnity
agreements from prior owner/operators and none have individually or in the
aggregate been considered material to the Companys financial position or
results of operations.

At December 31, 1999, the Company was contingently liable for letters of credit
of $12.8 million and bank guarantees of $14.6 million. The Company had
commitments of approximately $11.0 million to complete various capital projects.

The Company leases its United States production facility and administrative
offices, certain distributor and remanufacturing facilities, certain production
machinery, equipment and tooling, its parts distribution center and various
transportation and office equipment. Certain leased properties are subleased to
distributors. The leases have terms of varying lengths and substantially all are
accounted for as operating leases. Certain of the leases contain several
covenants which require the maintenance of a certain level of net worth,
restrict the Companys ability to incur additional debt and require the
maintenance of minimum interest coverage and leverage ratios.

In accordance with the terms of the 1998 EPA and CARB settlement agreements, the
Company has committed to advanced research and development activities over the
next four years to generate further emission reductions. These expenditures will
be made as a part of the Companys continuing environmental research and
development efforts.

45



---



The Company believes it has adequate sources for the supply of raw materials and
components for its manufacturing requirements. The Companys suppliers are
located primarily in North America and Western Europe. The Company has a policy
of strengthening its supplier relationships by concentrating its purchases for
particular parts over a limited number of suppliers in order to maintain quality
and cost control and to increase the suppliers commitment to the Company. The
Company relies upon, and expects to continue to rely upon, several single source
suppliers for critical components.

Future minimum payments under non-cancelable operating leases and other
commitments, including related party leases, at December 31, 1999 are: $20.7
million in 2000; $16.7 million in 2001; $12.7 million in 2002; $10.1 million in
2003; $9.5 million in 2004 and $46.5 million in the year 2005 and thereafter.

Rental expense for the years ended December 31 are as follows:

|                       |  |                          |      |      |  |      |      |  |  |   |      | 
|---------------------- |  | ------------------------ | ---- | ---- |  | ---- | ---- |  |  | - | ---- | 
|(In millions)          |  | Years Ended December 31,
|                       |  |                         
|                       |  | 1999                     |      | 1998 |  | 1997
|                       |  |                          |      |      |  |     
|Rentals                |  | $                        | 18.8 |      |  | $    | 23.0 |  |  | $ | 24.2 | 
|                      
|                      
|                      
|                      
|Less: sublease rentals |  |                          | 1.7  |      |  |      | 2.5  |  |  |   | 2.9  | 
|                       |  |                          |      |      |  |      |      |  |  |   |      | 
|Net rentals            |  | $                        | 17.1 |      |  | $    | 20.5 |  |  | $ | 21.3 | 
|                       |  |                          |      |      |  |      |      |  |  |   |      | 

The Companys primary production facility located in Michigan employs
approximately 2,000 employees represented by the International Union, United
Automobile, Aerospace and Agricultural Implement Workers of America, Local 163
under a six-year collective bargaining agreement which expires on October 30,
2004.

14. PENSION AND OTHER EMPLOYEE BENEFITS

The Company has defined benefit pension plans covering the majority of its
employees. Benefits for salaried employees are provided under an account balance
type of defined benefit plan, under which the benefit is determined primarily on
the basis of annual contributions, with a minimum benefit related to an
employees highest average annual compensation determined over a 60-month period
selected out of the 120-month period immediately prior to retirement. Benefits
for eligible hourly employees are provided primarily on the basis of a monthly
amount for each year of credited service. The types of assets held by the plans
include equity, fixed income and real estate funds. It is the Companys policy
to make contributions to these plans to meet funding levels required by the
Employee Retirement Income Security Act of 1974.

46



---



The following tables set forth
the plans changes in benefit obligations, changes in plan assets, amount
recognized in the Companys balance sheet, assumptions, and components of net
periodic benefit cost at December 31:

Change in benefit obligation:

|                                        |  |              |       |      |  |   |       |  
|--------------------------------------- |  | ------------ | ----- | ---- |  | - | ----- | -
|(In millions)                           |  | December 31,
|                                        |  |             
|                                        |  | 1999         |       | 1998
|                                        |  |              |       |     
|Benefit obligation at beginning of year |  | $            | 371.3 |      |  | $ | 320.6 |  
|                                       
|                                       
|                                       
|                                       
|Service cost                            |  |              | 9.9   |      |  |   | 9.8   |  
|                                       
|                                       
|                                       
|                                       
|Interest cost                           |  |              | 26.4  |      |  |   | 22.6  |  
|                                       
|                                       
|                                       
|                                       
|Amendments                              |  |              |      |      |  |   | 20.7  |  
|                                       
|                                       
|                                       
|                                       
|Actuarial (gain)/loss                   |  |              | (16.0 | )    |  |   | 17.7  |  
|                                       
|                                       
|                                       
|                                       
|Benefits paid                           |  |              | (22.1 | )    |  |   | (20.1 | )
|                                        |  |              |       |      |  |   |       |  
|Benefit obligation at end of year       |  | $            | 369.5 |      |  | $ | 371.3 |  
|                                        |  |              |       |      |  |   |       |  

Change in plan assets:

|                                               |  |              |       |      |  |   |       |  
|---------------------------------------------- |  | ------------ | ----- | ---- |  | - | ----- | -
|(In millions)                                  |  | December 31,
|                                               |  |             
|                                               |  | 1999         |       | 1998
|                                               |  |              |       |     
|Fair value of plan assets at beginning of year |  | $            | 287.4 |      |  | $ | 267.4 |  
|                                              
|                                              
|                                              
|                                              
|Actual return on plan assets                   |  |              | 51.3  |      |  |   | 34.4  |  
|                                              
|                                              
|                                              
|                                              
|Employer contribution                          |  |              | 15.2  |      |  |   | 5.7   |  
|                                              
|                                              
|                                              
|                                              
|Benefits paid                                  |  |              | (22.1 | )    |  |   | (20.1 | )
|                                               |  |              |       |      |  |   |       |  
|Fair value of plan assets at end of year       |  | $            | 331.8 |      |  | $ | 287.4 |  
|                                               |  |              |       |      |  |   |       |  
|Funded status                                  |  | $            | (37.7 | )    |  | $ | (83.9 | )
|                                              
|                                              
|                                              
|                                              
|Unrecognized actuarial (gain)/loss             |  |              | (9.1  | )    |  |   | 30.6  |  
|                                              
|                                              
|                                              
|                                              
|Unrecognized prior service cost                |  |              | 34.5  |      |  |   | 37.5  |  
|                                               |  |              |       |      |  |   |       |  
|Net amount recognized                          |  | $            | (12.3 | )    |  | $ | (15.8 | )
|                                               |  |              |       |      |  |   |       |  

Amounts recognized in the statement of financial position consist of:

|                                       |  |              |       |      |  |   |       |  
|-------------------------------------- |  | ------------ | ----- | ---- |  | - | ----- | -
|(In millions)                          |  | December 31,
|                                       |  |             
|                                       |  | 1999         |       | 1998
|                                       |  |              |       |     
|Accrued benefit liability              |  | $            | (33.4 | )    |  | $ | (62.7 | )
|                                      
|                                      
|                                      
|                                      
|Intangible asset                       |  |              | 21.1  |      |  |   | 31.9  |  
|                                      
|                                      
|                                      
|                                      
|Accumulated other comprehensive income |  |              |      |      |  |   | 9.7   |  
|                                      
|                                      
|                                      
|                                      
|Deferred taxes                         |  |              |      |      |  |   | 5.3   |  
|                                       |  |              |       |      |  |   |       |  
|Net amount recognized                  |  | $            | (12.3 | )    |  | $ | (15.8 | )
|                                       |  |              |       |      |  |   |       |  

Weighted average assumptions:

|                               |  |              |       |      |  |  |      |  
|------------------------------ |  | ------------ | ----- | ---- |  |  | ---- | -
|                               |  | December 31,
|                               |  |             
|                               |  | 1999         |       | 1998
|                               |  |              |       |     
|Discount rate                  |  |              | 7.75  | %    |  |  | 7.0  | %
|                              
|                              
|                              
|                              
|Expected return on plan assets |  |              | 12.00 | %    |  |  | 11.0 | %

47



---



Components of net periodic benefit cost:

|                                    |  |                          |       |      |  |      |       |   |  |   |       |  
|----------------------------------- |  | ------------------------ | ----- | ---- |  | ---- | ----- | - |  | - | ----- | -
|(In millions)                       |  | Years Ended December 31,
|                                    |  |                         
|                                    |  | 1999                     |       | 1998 |  | 1997
|                                    |  |                          |       |      |  |     
|Service cost                        |  | $                        | 9.9   |      |  | $    | 9.8   |   |  | $ | 8.1   |  
|                                   
|                                   
|                                   
|                                   
|Interest cost                       |  |                          | 26.4  |      |  |      | 22.6  |   |  |   | 21.6  |  
|                                   
|                                   
|                                   
|                                   
|Expected return on plan assets      |  |                          | (30.2 | )    |  |      | (25.9 | ) |  |   | (22.4 | )
|                                   
|                                   
|                                   
|                                   
|Amortization of prior service costs |  |                          | 3.0   |      |  |      | 1.4   |   |  |   | 1.4   |  
|                                   
|                                   
|                                   
|                                   
|Recognized actuarial loss           |  |                          | 2.6   |      |  |      | 2.0   |   |  |   | 1.3   |  
|                                    |  |                          |       |      |  |      |       |   |  |   |       |  
|Net periodic benefit cost           |  | $                        | 11.7  |      |  | $    | 9.9   |   |  | $ | 10.0  |  
|                                    |  |                          |       |      |  |      |       |   |  |   |       |  

The Company also sponsors other defined contribution plans, including deferred
savings plans, covering a majority of its domestic employees. Employee
contributions are based on a percentage of payroll.

Certain plans require the Company to make matching contributions based on a
percentage of employee contributions. They also provide for the employer to make
discretionary contributions. Where contributions are made, amounts are based on
a percentage of payroll for eligible employees. Contributions to these plans in
1999, 1998 and 1997 totaled $8.1 million, $7.6 million and $6.8 million,
respectively.

The Company maintains profit sharing programs covering all of its domestic
employees and cash and stock bonus incentive plans covering certain senior
officers and other eligible employees. Contributions to these programs are based
on income before interest and taxes or earnings before taxes.

The Companys Italian subsidiary, VM, accrues employee termination indemnities
in accordance with local civil and labor laws based upon each employees length
of service, employment category and remuneration. There are no vesting periods
or funding requirements associated with this liability and benefits are payable
immediately upon separation. The liability is adjusted annually by a
cost-of-living index provided by the Italian government. The cost of providing
these benefits during 1999, 1998 and 1997 approximated $1.8 million, $1.8
million and $1.9 million, respectively. The termination liability recorded in
the balance sheet is the amount to which the employee would be entitled upon
separation from the Company.

15. POST-RETIREMENT BENEFITS OTHER THAN PENSIONS

The Company provides certain health care benefits for retired employees.
Eligibility is based on years of service and requires employees to remain
employed until retirement age. These benefits are either self-insured or are
provided through health insurance plans.

48



---



The following tables set forth the plans changes in benefit obligations,
changes in plan assets, amount recognized in the Companys balance sheet, and
components of net periodic benefit cost at December 31:

Change in benefit obligation:

|                                        |  |              |       |      |  |   |       |  
|--------------------------------------- |  | ------------ | ----- | ---- |  | - | ----- | -
|(In millions)                           |  | December 31,
|                                        |  |             
|                                        |  | 1999         |       | 1998
|                                        |  |              |       |     
|Benefit obligation at beginning of year |  | $            | 104.2 |      |  | $ | 100.2 |  
|                                       
|                                       
|                                       
|                                       
|Service cost                            |  |              | 1.2   |      |  |   | 1.4   |  
|                                       
|                                       
|                                       
|                                       
|Interest cost                           |  |              | 7.6   |      |  |   | 6.9   |  
|                                       
|                                       
|                                       
|                                       
|Actuarial gain                          |  |              | (2.9  | )    |  |   | (.4   | )
|                                       
|                                       
|                                       
|                                       
|Benefits paid                           |  |              | (5.1  | )    |  |   | (3.9  | )
|                                        |  |              |       |      |  |   |       |  
|Benefit obligation at end of year       |  | $            | 105.0 |      |  | $ | 104.2 |  
|                                        |  |              |       |      |  |   |       |  

Reconciliation of funded status:

|                                        |  |              |        |      |  |   |        |  
|--------------------------------------- |  | ------------ | ------ | ---- |  | - | ------ | -
|(In millions)                           |  | December 31,
|                                        |  |             
|                                        |  | 1999         |        | 1998
|                                        |  |              |        |     
|Funded status                           |  | $            | (105.0 | )    |  | $ | (104.2 | )
|                                       
|                                       
|                                       
|                                       
|Unrecognized transition obligation      |  |              | 33.8   |      |  |   | 36.4   |  
|                                       
|                                       
|                                       
|                                       
|Unrecognized actuarial loss             |  |              | 11.9   |      |  |   | 15.5   |  
|                                       
|                                       
|                                       
|                                       
|Unrecognized prior service cost         |  |              | .5     |      |  |   | .6     |  
|                                        |  |              |        |      |  |   |        |  
|Liability recorded in the balance sheet |  | $            | (58.8  | )    |  | $ | (51.7  | )
|                                        |  |              |        |      |  |   |        |  

Components of net periodic benefit cost:

|                                      |  |                          |      |      |  |      |      |  |  |   |      | 
|------------------------------------- |  | ------------------------ | ---- | ---- |  | ---- | ---- |  |  | - | ---- | 
|(In millions)                         |  | Years Ended December 31,
|                                      |  |                         
|                                      |  | 1999                     |      | 1998 |  | 1997
|                                      |  |                          |      |      |  |     
|Service cost                          |  | $                        | 1.2  |      |  | $    | 1.4  |  |  | $ | 1.4  | 
|                                     
|                                     
|                                     
|                                     
|Interest cost                         |  |                          | 7.6  |      |  |      | 6.9  |  |  |   | 6.7  | 
|                                     
|                                     
|                                     
|                                     
|Amortization of transition obligation |  |                          | 2.6  |      |  |      | 2.6  |  |  |   | 2.6  | 
|                                     
|                                     
|                                     
|                                     
|Amortization of prior service costs   |  |                          | .1   |      |  |      | .1   |  |  |   | .1   | 
|                                     
|                                     
|                                     
|                                     
|Recognized actuarial loss             |  |                          | .8   |      |  |      | .4   |  |  |   | .1   | 
|                                      |  |                          |      |      |  |      |      |  |  |   |      | 
|Net periodic benefit cost             |  | $                        | 12.3 |      |  | $    | 11.4 |  |  | $ | 10.9 | 
|                                      |  |                          |      |      |  |      |      |  |  |   |      | 

For measurement purposes, a 6.0% annual rate of increase in the per capita cost
of covered health care benefits was assumed for all years. The discount rate
used to calculate the benefit obligation was 7.75% and 7.0% for the years ended
December 31, 1999 and 1998, respectively. The health care cost trend rate
assumption has an effect on the amount reported. Changing the assumed health
care cost trends by one percentage point in each year would change the
accumulated post-retirement benefit obligation as of December 31, 1999 by
approximately $0.6 million, but net periodic post-retirement benefit cost would
not be affected for 2000, consistent with 1999. The estimate incorporates
defined dollar limits on Company costs for post-retirement benefits and is
supplemented by amounts contributed by the Company and the UAW to a fund that
can be used to reimburse costs which exceed the plan coverage limits.

49



---



16. STOCK INCENTIVE PLAN

The Company has stock incentive plans, adopted in 1993
and 1998, and has reserved shares of common stock for issuance pursuant to those
plans. All shares under the 1993 plan have been issued and the entire balance of
the 1.2 million options reserved under the 1998 plan remain unissued. Under the
plans, the Company can grant restricted or unrestricted stock, stock
appreciation rights, non-qualified options and options qualifying as incentive
stock options under the Internal Revenue Code of 1986, as amended.

The term of an option cannot exceed 10 years from the grant date and the option
price may not be less than market value at the date of grant. The Company
accounts for stock option grants in accordance with APB Opinion No. 25 and
related interpretations. No compensation cost has been recognized for stock
option grants since the options have exercise prices of not less than the market
value of the Companys common stock at the date of the grant. If compensation
cost for stock option grants had been determined based on the fair value at the
grant dates for 1999, 1998, and 1997 consistent with Statement of Financial
Accounting Standards No. 123 (SFAS No. 123), the Companys net income and net
income per share would not be materially different than the amounts presented in
the accompanying Statements of Income. Under SFAS No. 123, the fair value of
each option is estimated on the date of the grant using an option pricing model
with assumptions for dividend yield, volatility, risk-free interest and expected
life. The Company estimated the fair value of the options granted in 1998 and
1997 according to the following assumptions: dividend yield of zero, expected
price volatility of 32%, risk-free interest rates of 6% and expected lives of
five years.

Options exercisable as of December 31 were 572,779 shares in 1999, 460,779
shares in 1998 and 362,750 shares in 1997 at a weighted-average option price of
$20.40, $20.15 and $20.44, respectively. The option shares outstanding at
December 31, 1999 have a range of exercise prices between $17.00 and $23.94, a
weighted average exercise price of $20.44 and a weighted average remaining life
of 6.1 years.

50



---



A summary of options granted under the Companys stock incentive plans as of
December 31 and changes during the years then ended is presented below:

|                                                               |  |                          |         |       |  |          |       |       |  |         |         |          |  |   |           |  |  |          |         |   |  |   |           |  |  |  |  | 
|-------------------------------------------------------------- |  | ------------------------ | ------- | ----- |  | -------- | ----- | ----- |  | ------- | ------- | -------- |  | - | --------- |  |  | -------- | ------- | - |  | - | --------- |  |  |  |  | 
|                                                               |  | Years Ended December 31,
|                                                               |  |                         
|                                                               |  | 1999                     |         | 1998  |  | 1997    
|                                                               |  |                          |         |       |  |         
|                                                               |  |                          |         |       |  | Weighted |       |       |  |         |         | Weighted |  |   |           |  |  | Weighted
|                                                               |  |                          |         |       |  | Average  |       |       |  |         |         | Average  |  |   |           |  |  | Average 
|                                                               |  |                          |         |       |  | Exercise |       |       |  |         |         | Exercise |  |   |           |  |  | Exercise
|                                                               |  | Options                  |         | Price |  | Options  |       | Price |  | Options |         | Price   
|                                                               |  |                          |         |       |  |          |       |       |  |         |         |         
|                                                              
|                                                              
|                                                              
|                                                              
|Options, beginning of year                                     |  |                          | 904,685 |       |  | $        | 20.25 |       |  |         | 694,560 |          |  | $ | 19.49     |  |  |          | 474,060 |   |  | $ | 20.58     | 
|                                                              
|                                                              
|                                                              
|                                                              
|Granted                                                        |  |                          |        |       |  | $        |      |       |  |         | 219,250 |          |  | $ | 22.69     |  |  |          | 243,000 |   |  | $ | 17.47     | 
|                                                              
|                                                              
|                                                              
|                                                              
|Exercised                                                      |  |                          | (2,625  | )     |  | $        | 19.11 |       |  |         | (1,750  | )        |  | $ | 18.71     |  |  |          | (4,500  | ) |  | $ | 21.04     | 
|                                                              
|                                                              
|                                                              
|                                                              
|Forfeited                                                      |  |                          | (49,875 | )     |  | $        | 17.23 |       |  |         | (7,375  | )        |  | $ | 21.03     |  |  |          | (18,000 | ) |  | $ | 20.68     | 
|                                                               |  |                          |         |       |  |          |       |       |  |         |         |          |  |   |           |  |  |          |         |   |  |   |           | 
|Options, end of year                                           |  |                          | 852,185 |       |  | $        | 20.44 |       |  |         | 904,685 |          |  | $ | 20.25     |  |  |          | 694,560 |   |  | $ | 19.49     | 
|                                                               |  |                          |         |       |  |          |       |       |  |         |         |          |  |   |           |  |  |          |         |   |  |   |           | 
|Weighted average fair value
of options granted
during the year |  |                          |         |       |  | $        |      |       |  |         |         |          |  | $ | 1,937,663 |  |  |          |         |   |  | $ | 1,602,759 | 







17. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

|                                              |  |  |  |  |  |               |       |  |  |  |  |                |  |   |       |  |  |               |  |                |  |   |       |      |  |  |  |  |  |      |       |      |  |      |  |  |  |   |       |      |  |   |       |      |  |   |       |  |  |  |  |  |  |   |      
|--------------------------------------------- |  |  |  |  |  | ------------- | ----- |  |  |  |  | -------------- |  | - | ----- |  |  | ------------- |  | -------------- |  | - | ----- | ---- |  |  |  |  |  | ---- | ----- | ---- |  | ---- |  |  |  | - | ----- | ---- |  | - | ----- | ---- |  | - | ----- |  |  |  |  |  |  | - | -----
|(In millions, except per share amounts)      
|                                              |  |  |  |  |  | First Quarter |       |  |  |  |  | Second Quarter |  |   |       |  |  | Third Quarter |  | Fourth Quarter
|                                              |  |  |  |  |  |               |       |  |  |  |  |                |  |   |       |  |  |               |  |               
|                                              |  |  |  |  |  | 1999          |       |  |  |  |  | 1998           |  |   |       |  |  | 1999          |  |                |  |   |       | 1998 |  |  |  |  |  | 1999 |       | 1998 |  | 1999 |  |  |  |   |       | 1998
|                                              |  |  |  |  |  |               |       |  |  |  |  |                |  |   |       |  |  |               |  |                |  |   |       |      |  |  |  |  |  |      |       |      |  |      |  |  |  |   |       |     
|Net revenues                                  |  |  |  |  |  | $             | 591.5 |  |  |  |  |                |  | $ | 588.8 |  |  |               |  |                |  | $ | 585.2 |      |  |  |  |  |  | $    | 556.3 |      |  |      |  |  |  | $ | 588.2 |      |  | $ | 543.0 |      |  | $ | 593.8 |  |  |  |  |  |  | $ | 562.5
|                                             
|                                             
|                                             
|                                             
|Gross profit                                  |  |  |  |  |  |               | 139.2 |  |  |  |  |                |  |   | 134.4 |  |  |               |  |                |  |   | 140.1 |      |  |  |  |  |  |      | 131.0 |      |  |      |  |  |  |   | 140.0 |      |  |   | 127.5 |      |  |   | 140.5 |  |  |  |  |  |  |   | 131.7
|                                             
|                                             
|                                             
|                                             
|Net income (loss)                             |  |  |  |  |  |               | 12.5  |  |  |  |  |                |  |   | 9.7   |  |  |               |  |                |  |   | 12.8  |      |  |  |  |  |  |      | 10.4  |      |  |      |  |  |  |   | 11.9  |      |  |   | (2.4  | )(1) |  |   | 12.0  |  |  |  |  |  |  |   | 10.3 
|                                             
|                                             
|                                             
|                                             
|Basic and diluted net
income (loss) per
share |  |  |  |  |  | $             | .51   |  |  |  |  |                |  | $ | .39   |  |  |               |  |                |  | $ | .52   |      |  |  |  |  |  | $    | .42   |      |  |      |  |  |  | $ | .48   |      |  | $ | (.10  | )(1) |  | $ | .49   |  |  |  |  |  |  | $ | .42  



---

|(1) |  | Includes a $12.5 million special charge related to agreements with the EPA
and CARB. Excluding this charge, net income would have been $10.1 million, or
$.41 per share.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------

51



---



Detroit Diesel Corporation




The consolidated financial statements of Detroit Diesel Corporation have been
prepared by management and have been audited by Detroit Diesel Corporations
independent auditors, Deloitte & Touche LLP. Management is responsible for the
consolidated financial statements, which have been prepared in conformity with
generally accepted accounting principles and include amounts based on
managements judgments.

Management is also responsible for maintaining internal accounting control
systems designed to provide reasonable assurance, at appropriate cost, that
assets are recorded in accordance with established policies and procedures.
Detroit Diesel Corporations systems are under continuing review and are
supported by, among other things, business conduct and other written guidelines,
an internal audit function and the selection and training of qualified
personnel.

The Board of Directors is responsible for the Companys financial and accounting
policies, practices and reports. Its Audit Committee, comprised of outside
directors, meets regularly with the independent auditors, representatives of
management and the internal auditors to discuss and make inquiries into their
activities. Both the independent auditors and the internal auditors have free
access to the Audit Committee, with and without management representatives in
attendance, to discuss the results of the audit, the adequacy of internal
accounting controls, and the quality of the financial reporting.

It is managements conclusion that the system of internal accounting controls at
December 31, 1999 provides reasonable assurance that the books and records
reflect the transactions of the Company and that the Company has complied with
its established policies and procedures.

/s/ Roger S. Penske

---

/s/ Robert E. Belts

---

January 28, 2000

52



---






Independent Auditors Report

To the Board of Directors and Shareholders of
Detroit Diesel Corporation

We have audited the accompanying consolidated balance sheets of Detroit Diesel
Corporation and subsidiaries (the Company) as of December 31, 1999 and 1998
and the related consolidated statements of income, stockholders equity, and
cash flows for each of the three years in the period ended December 31, 1999.
These financial statements are the responsibility of the Companys management.
Our responsibility is to express an opinion on these 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, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of December 31, 1999
and 1998 and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 1999, in conformity with generally
accepted accounting principles.

/s/ Deloitte & Touche LLP

Detroit, Michigan
January 28, 2000

53



---






INDEPENDENT AUDITORS REPORT

To the Board of Directors and Shareholders of
Detroit Diesel Corporation

We have audited the consolidated financial statements of Detroit Diesel
Corporation and subsidiaries (the Company) as of December 31, 1999 and 1998,
and for each of the three years in the period ended December 31, 1999, and have
issued our report thereon dated January 28, 2000; such report is included
elsewhere in this Form 10-K. Our audits also included the financial statement
schedule of Detroit Diesel Corporation and subsidiaries, listed in Item 14. This
consolidated financial statement schedule is the responsibility of the Companys
management. Our responsibility is to express an opinion based on our audits. In
our opinion such consolidated financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.

/s/ Deloitte & Touche LLP

Detroit, Michigan
January 28, 2000

54



---



DETROIT DIESEL CORPORATION







SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS

(In thousands)

|                                |      |  |           |        |           |  |                |       |                |  |             |   |             |  |   |        |   |  |   |        |  |  |  |  | 
|------------------------------- | ---- |  | --------- | ------ | --------- |  | -------------- | ----- | -------------- |  | ----------- | - | ----------- |  | - | ------ | - |  | - | ------ |  |  |  |  | 
|                                |      |  |           |        |           |  | Additions     
|                                |      |  |           |        |           |  |               
|                                |      |  |           |        |           |  | Charged to     |       |                |  |             |   | Deductions-
|                                |      |  | Balance   |        | costs and |  | Charged to     |       | write-offs and |  | Balance    
|                                |      |  | January 1 |        | expenses  |  | other accounts |       | disposals      |  | December 31
|                                |      |  |           |        |           |  |                |       |                |  |            
|DOUBTFUL ACCOUNTS RESERVES     
|                               
|                               
|                               
|                               
|For the Year Ended December 31,
|
|                                | 1999 |  | $         | 4,977  |           |  | $              | 2,024 |                |  |             |  |             |  | $ | (2,297 | ) |  | $ | 4,704  | 
|                               
|                               
|                               
|                               
|                                | 1998 |  | $         | 4,430  |           |  | $              | 4,162 |                |  |             |  |             |  | $ | (3,615 | ) |  | $ | 4,977  | 
|                               
|                               
|                               
|                               
|                                | 1997 |  | $         | 6,105  |           |  | $              | 2,959 |                |  |             |  |             |  | $ | (4,634 | ) |  | $ | 4,430  | 
|                               
|                               
|                               
|                               
|INVENTORY RESERVES             
|                               
|                               
|                               
|                               
|For the Year Ended December 31,
|                                | 1999 |  | $         | 11,006 |           |  | $              | 3,501 |                |  |             |  |             |  | $ | (3,113 | ) |  | $ | 11,394 | 
|                               
|                               
|                               
|                               
|                                | 1998 |  | $         | 10,351 |           |  | $              | 3,637 |                |  |             |  |             |  | $ | (2,982 | ) |  | $ | 11,006 | 
|                               
|                               
|                               
|                               
|                                | 1997 |  | $         | 11,014 |           |  | $              | 3,226 |                |  |             |  |             |  | $ | (3,889 | ) |  | $ | 10,351 | 
|                               
|                               
|                               
|                               
|TAX VALUATION ALLOWANCE        
|                               
|                               
|                               
|                               
|For the Year Ended December 31,
|                                | 1999 |  |           |       |           |  |                |      |                |  |             |  |             |  |   |       |   |  |   |       | 
|                               
|                               
|                               
|                               
|                                | 1998 |  |           |       |           |  |                |      |                |  |             |  |             |  |   |       |   |  |   |       | 
|                               
|                               
|                               
|                               
|                                | 1997 |  | $         | 2,685  |           |  |                |      |                |  |             |  |             |  | $ | (2,685 | ) |  | $ |       | 

55



---






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.

DETROIT DIESEL CORPORATION

|    |  |                                                                                                              
|--- |  | -------------------------------------------------------------------------------------------------------------
|By: |  | /s/ Charles G. McClure
Charles G. McClure
President and Chief Executive Officer
(Principal Executive Officer)

March 17, 2000

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.

|                                                                                 |  |                                                           |  |               
|-------------------------------------------------------------------------------- |  | --------------------------------------------------------- |  | --------------
|Signatures                                                                       |  | Title                                                     |  | Date          
|                                                                                 |  |                                                           |  |               
|/s/ Roger S. Penske
Roger S. Penske                                              |  | Chairman of the Board and
Director                        |  | March 17, 2000
|                                                                                
|/s/ Robert E. Belts
Robert E. Belts
(Principal Financial and
Accounting Officer) |  | Senior Vice President-Finance
and Chief Financial Officer |  | March 17, 2000
|                                                                                
|/s/ Ludvik F. Koci
Ludvik F. Koci                                                |  | Vice Chairman and Director                                |  | March 17, 2000
|                                                                                
|/s/ Charles G. McClure
Charles G. McClure                                        |  | President, Chief Executive Officer
and Director           |  | March 17, 2000

56



---



|                                                                 |  |          |  |               
|---------------------------------------------------------------- |  | -------- |  | --------------
|Signatures                                                       |  | Title    |  | Date          
|                                                                 |  |          |  |               
|                                                                
|/s/ Eckhard Cordes *
Eckhard Cordes                              |  | Director |  | March 17, 2000
|                                                                
|/s/ John E. Doddridge *
John E. Doddridge                        |  | Director |  | March 17, 2000
|                                                                
|/s/ Richard M. Donnelly *
Richard M. Donnelly                    |  | Director |  | March 17, 2000
|                                                                
|/s/ William E. Hoglund *
William E. Hoglund                      |  | Director |  | March 17, 2000
|                                                                
|/s/ Gary G. Jacobs *
Gary G. Jacobs                              |  | Director |  | March 17, 2000
|                                                                
|/s/ Joseph F. Welch *
Joseph F. Welch                            |  | Director |  | March 17, 2000
|                                                                
|/s/ R. Jamison Williams, Jr. *
R. Jamison Williams, Jr.          |  | Director |  | March 17, 2000
|                                                                
|/s/ Dieter E. Zetsche *
Dieter E. Zetsche                        |  | Director |  | March 17, 2000
|                                                                
|*By:       /s/ John F. Farmer                                   
|                                                                
|John F. Farmer
Vice President - General Counsel
Attorney-in-Fact

57



---






EXHIBIT INDEX

The following constitutes the exhibits to the report on Form 10-K of the Company
for the year ended December 31, 1999:

|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |  |            
|------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -----------
|Exhibit |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |  | Sequential 
|Number  |  | Description of Exhibit                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |  | Page Number
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |  |            
|3.1     |  | Certificate of Incorporation, as amended, which is incorporated by
reference from Exhibit 3.1 of the Companys Registration Statement on Form
S-1, File No. 33-66760, filed with the Securities and Exchange Commission
on July 30, 1993, as amended.                                                                                                                                                                                                                                                                            |  | N/A        
|       
|       
|       
|       
|3.2     |  | Amended and Restated Bylaws of Detroit Diesel Corporation, which is
incorporated by reference from Exhibit 3.2 of the Companys Registration
Statement on Form S-1, File No. 33-66760, filed with the Securities and
Exchange Commission on July 30, 1993, as amended.                                                                                                                                                                                                                                                           |  | N/A        
|       
|       
|       
|       
|4.1     |  | Termination, Replacement and Restatement Agreement dated as of June 7,
1995 among Detroit Diesel Corporation, the Lenders listed on Exhibit A and
Chemical Bank, as agent for the lenders, which is incorporated by
reference from Exhibit 10.1 of the Companys Quarterly Report on Form
10-Q, File No. 1-12394, filed with the Securities and Exchange Commission
on August 10, 1995.                                                                                                                                          |  | N/A        
|       
|       
|       
|       
|4.1.1   |  | First Amendment to the Termination, Replacement and Restatement Agreement,
dated November 22, 1996, among Detroit Diesel Corporation, the several
banks and other financial institutions and Chemical Bank, as agent for the
Lenders and the predecessor in interest of The Chase Manhattan Bank, now
acting as agent for the Lenders, which is incorporated by reference from
Exhibit 4.1.1 of the Companys Annual Report on Form 10-K, File No.
1-12394, filed with the Securities and Exchange Commission on March 27,
1997. |  | N/A        
|       
|       
|       
|       
|4.1.2   |  | Second Amendment to the Termination, Replacement and Restatement Agreement
dated February 27, 1998, among Detroit Diesel Corporation, the several
banks and other financial institutions parties thereto and Chemical Bank,
as agent for the Lenders and the predecessor in interest of the Chase
Manhattan Bank, now acting as agent for the Lenders, which is                                                                                                                                                                  |  | N/A        

58



---



|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                    |  |            
|------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -----------
|Exhibit |  |                                                                                                                                                                                                                                                                                                                                                                                                                                    |  | Sequential 
|Number  |  | Description of Exhibit                                                                                                                                                                                                                                                                                                                                                                                                             |  | Page Number
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                    |  |            
|       
|       
|       
|       
|        |  | incorporated
by reference from Exhibit 4 of the Companys Quarterly Report on Form
10-Q, File No. 1-12394, filed with the Securities and Exchange Commission
on May 14, 1998.                                                                                                                                                                                                                                                     
|       
|       
|       
|       
|4.2     |  | Specimen Form of Certificate for Common Stock, which is incorporated by
reference from Exhibit 4.4 of the Companys Registration Statement on Form
S-1, File No. 33-66760, filed with the Securities and Exchange Commission
on July 30, 1993, as amended.                                                                                                                                                                         |  | N/A        
|       
|       
|       
|       
|        |  | Long-term debt instruments and credit facility agreements of
the Detroit Diesel Corporation, under each of which the
authorized debt is equal to less than 10% of the total assets
of the Detroit Diesel Corporation and its subsidiaries on a
consolidated basis, are not filed as exhibits to this report.
Detroit Diesel Corporation agrees to furnish to the
Commission, upon request, copies of any such unfiled
instruments. |  | N/A        
|       
|       
|       
|       
|10.1    |  | Form of 1993 Stock Incentive Plan, which is incorporated by reference from
Exhibit 10.1 of the Companys Registration Statement on Form S-1, File No.
33-66760, filed with the Securities and Exchange Commission on July 30,
1993, as amended.                                                                                                                                                                                    |  | N/A        
|       
|       
|       
|       
|10.1.1  |  | Form of 1993 Stock Incentive Plan Restricted Stock Award and
Deferred Stock Award, which is incorporated by reference
from Exhibit 10.1.1 of the Companys Registration Statement on
Form S-1, File no. 33-66760, filed with the Securities and
Exchange Commission on July 30, 1993, as amended.                                                                                                                                  |  | N/A        
|       
|       
|       
|       
|10.2    |  | Collaboration Agreement, dated as of January 31, 1993, between Detroit
Diesel Corporation and Mercedes-Benz AG, which is incorporated by
reference from Exhibit 10.2 of the Companys Registration Statement on
Form S-1, File No. 33-66760, filed with the Securities and Exchange
Commission on July 30, 1993, as amended.                                                                                                       |  | N/A        
|       
|       
|       
|       
|10.3    |  | Financing Agreement between Diesel Project Development, Inc. and Detroit
Diesel Corporation, dated as of April 30,                                                                                                                                                                                                                                                                                                                 |  | N/A        

59



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|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                    |  |            
|------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | -----------
|Exhibit |  |                                                                                                                                                                                                                                                                                                                                                                                                                    |  | Sequential 
|Number  |  | Description of Exhibit                                                                                                                                                                                                                                                                                                                                                                                             |  | Page Number
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                    |  |            
|       
|       
|       
|       
|        |  | 1993, which is incorporated by
reference from Exhibit 10.5 of the Companys Registration Statement on
Form S-1, File No. 33-66760, filed with the Securities and Exchange
Commission on July 30, 1993, as amended.                                                                                                                                                                                                
|       
|       
|       
|       
|10.4    |  | Amended and Restated Lease Agreement by and between Corporate Property
Associates 8, L.P., and Corporate Property Associates 9, L.P. and Detroit
Diesel Corporation, dated as of May 24, 1994, which is incorporated by
reference from Exhibit 10.6 of Amendment No. 1 to the Companys
Registration Statement on Form S-1, File No. 33-79286, filed with the
Securities and Exchange Commission on June 15, 1994. |  | N/A        
|       
|       
|       
|       
|10.5    |  | Lease Agreement, dated June 30, 1988, between the Timken Company and
Detroit Diesel Corporation, which is incorporated by reference from
Exhibit 10.7 of the Companys Registration Statement on Form S-1, File No.
33-66760, filed with the Securities and Exchange Commission on July 30,
1993, as amended.                                                                                                      |  | N/A        
|       
|       
|       
|       
|10.6    |  | Master Lease Agreement between Detroit Diesel Corporation and GECC, dated
as of May 26, 1992, which is incorporated by reference from Exhibit 10.11
of the Companys Registration Statement on Form S-1, File No. 33-66760,
filed with the Securities and Exchange Commission on July 30, 1993, as
amended.                                                                                                        |  | N/A        
|       
|       
|       
|       
|10.7    |  | Employment Agreement, dated February 1, 1989, between Penske
Transportation, Inc. and A. Gordon Clark, as amended, assumed by Detroit
Diesel Corporation, which is incorporated by reference from Exhibit 10.19
of the Companys Registration Statement on Form S-1, File No. 33-66760,
filed with the Securities and Exchange Commission on July 30, 1993, as
amended.                                            |  | N/A        
|       
|       
|       
|       
|10.7.1  |  | Second Amendment to Employment Agreement dated as of January 31, 1995,
between Detroit Diesel Corporation, as assignee of Penske Transportation,
Inc., and A. Gordon Clark, which is incorporated by reference from Exhibit
10.12.1 of the Companys Annual Report on Form 10-K, File No. 1-12394,
filed with the Securities and Exchange Commission on March 31, 1995, as
amended.                                |  | N/A        
|       
|       
|       
|       
|10.7.2  |  | Third Amendment to Employment Agreement dated as of                                                                                                                                                                                                                                                                                                                                                                |  | N/A        

60



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|        |  |                                                                                                                                                                                                                                                                                                                                                                                                             |  |            
|------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -----------
|Exhibit |  |                                                                                                                                                                                                                                                                                                                                                                                                             |  | Sequential 
|Number  |  | Description of Exhibit                                                                                                                                                                                                                                                                                                                                                                                      |  | Page Number
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                             |  |            
|       
|       
|       
|       
|        |  | January 31, 1998,
between Detroit Diesel Corporation, as assignee of Penske Transportation,
Inc., and A. Gordon Clark.                                                                                                                                                                                                                                                                                      | 
|       
|       
|       
|       
|#10.8   |  | TED Joint Development and License Agreement by and among
Detroit Diesel Corporation and Mercedes-Benz
Aktiengesellschaft and MTU Motoren- und Turbinen-Union
Friedrichschafen GmbH, dated September 5, 1994, which is
incorporated by reference from Exhibit 10.3 of the Companys
Quarterly Report on Form 10-Q, File No. 1-12394, filed with
the Securities and Exchange Commission on November 11, 1994.
|       
|       
|       
|       
|#10.9   |  | FEAT Joint Development and License Agreement by and between MTU Motoren-
und Turbinen-Union Friedrichschafen GmbH and Detroit Diesel Corporation,
dated June 28, 1994, which is incorporated by reference from Exhibit 10.4
of the Companys Quarterly Report on Form 10-Q, File No. 1-12394, filed
with the Securities and Exchange Commission on November 11, 1994.                                       |  | N/A        
|       
|       
|       
|       
|10.9.1  |  | Amendment to FEAT Joint Development and License Agreement by and between
MTU Motoren- und Turbinen-Union Friedrichschafen GmbH and Detroit Diesel
Corporation, dated June 28, 1994, which is incorporated by reference from
Exhibit 10.4.1 of the Companys Quarterly Report on Form 10-Q, File No.
1-12394, filed with the Securities and Exchange Commission on November 11,
1994.                        |  | N/A        
|       
|       
|       
|       
|10.10   |  | Mutual Distribution Agreement by and between Detroit Diesel Corporation
and MTU Motoren- und Turbinen-Union Friedrichschafen GmbH, dated June 28,
1994, which is incorporated by reference from Exhibit 10.5 of the
Companys Quarterly Report on Form 10-Q, File No. 1-12394, filed with the
Securities and Exchange Commission on November 11, 1994.                                                      |  | N/A        
|       
|       
|       
|       
|10.11   |  | Joinder Agreement by and between Detroit Diesel Corporation, Mercedes-Benz
AG and Motoren- und Turbinen-Union Friedrichschafen GmbH, dated July 13,
1994, which is incorporated by reference from Exhibit 10.6 of the
Companys Quarterly Report on Form 10-Q, File No. 1-12394, filed with the
Securities and Exchange Commission on November 11, 1994.                                                    |  | N/A        

61



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|        |  |                                                                                                                                                                                                                                      |  |            
|------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | -----------
|Exhibit |  |                                                                                                                                                                                                                                      |  | Sequential 
|Number  |  | Description of Exhibit                                                                                                                                                                                                               |  | Page Number
|        |  |                                                                                                                                                                                                                                      |  |            
|       
|       
|       
|       
|10.12   |  | Detroit Diesel Corporation 1998 Stock Incentive Plan
incorporated by reference from Exhibit 10.1 of the Companys
Quarterly Report on Form 10-Q, File No. 1-12394, file with the
Securities and Exchange Commission on May 14, 1999.
|       
|       
|       
|       
|11.1    |  | Statement re: Computation of Per Share Earnings                                                                                                                                                                                      |  | 63         
|       
|       
|       
|       
|21.1    |  | List of Subsidiaries                                                                                                                                                                                                                 |  | 64         
|       
|       
|       
|       
|23.1    |  | Consent of Deloitte & Touche LLP                                                                                                                                                                                                     |  | 65         
|       
|       
|       
|       
|24.1    |  | Powers of Attorney of Directors and Officers of the Registrant                                                                                                                                                                       |  | 66         
|       
|       
|       
|       
|27      |  | Financial Data Schedule                                                                                                                                                                                                              |  | 74         



---

|# |  | Does not include certain information as to which the Company has been granted
confidential treatment.
|- |  | -----------------------------------------------------------------------------------------------------

62