<PAGE>   1
                                                                      EXHIBIT 13


                        CHIEF FINANCIAL OFFICER'S REVIEW
                    MANAGEMENT'S DISCUSSION AND ANALYSIS(1)


OVERVIEW AND OUTLOOK

                  Meritor's first year as a publicly-held company produced
record results and exceeded expectations. Fiscal 1998 sales were $3.8 billion, a
16 percent increase over last year's sales of $3.3 billion. Net income for the
year was $147 million, or $2.13 per share, an increase of 48 percent as compared
with 1997 pro forma net income of $99 million, or $1.44 per share. Operating
earnings of $299 million, reflecting operating margins of 7.8 percent, increased
$78 million from fiscal 1997 pro forma operating earnings of $221 million before
restructuring and spin-off costs, or operating margins of 6.7 percent. Our cash
flow from operations increased to $278 million, up $70 million or 34 percent
from a year ago. The increase in cash flow has allowed us to reduce our debt
significantly, improving our long-term debt to capitalization ratio to 51
percent at September 30, 1998 from 71 percent at September 30, 1997.

         The trends in the automotive supplier industry present both challenges
and opportunities. OEMs are becoming increasingly global and are expanding their
utilization of outsourcing. In addition, the manufacturing process is moving
towards systems and modules. The supplier base is being consolidated both by
merger and acquisition activity and by the decision of OEMs to reduce the number
of suppliers they utilize. There continue to be opportunities in emerging
markets. As a global manufacturer with diverse products, customers and
geographic base, technical leadership in core products and financial strength,
Meritor is well positioned to take full advantage of these trends. Meritor's
envisioned future is to be the partner of choice for those customers who value
exceptional service and to be an outstanding provider of quality automotive
systems and technology solutions worldwide.

         Enhancing the company's position as an increasingly broad-based
supplier in the global automotive components industry, the company recently
announced the signing of three definitive agreements for acquisitions. These
acquisitions reflect our efforts to 


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expand our presence in Europe and to provide HVS OEM and Worldwide Aftermarket
customers with a comprehensive offering of drivetrain systems and components.

         The company signed a definitive agreement to acquire the Heavy Vehicle
Braking Systems (HVBS) business of LucasVarity plc for $390 million in cash on
November 22, 1998. The LucasVarity HVBS components include air drum and disc
brakes, hydraulic brakes, wheel end components and aftermarket products which
complement the company's brake systems products. For the fiscal year ended
January 31, 1998 the HVBS business of LucasVarity had net sales of
approximately $290 million. We expect the HVBS acquisition to add annual sales
of approximately $400 million. The transaction is subject to regulatory
approvals in the U.S. and Europe and is expected to close in January 1999.

         On December 4, 1998, the company signed a definitive agreement with
Volvo Truck Corporation to acquire Volvo's heavy truck axle manufacturing
operations based in Lindesberg, Sweden. Under the terms of the agreement, the
company will become the primary supplier of heavy duty axles for Volvo's heavy
truck operations. The transaction is expected to add annual sales of
approximately $200 million with a purchase price of approximately $135 million
in cash, $44 million of which is deferred. The transaction is expected to close
in December 1998.

         The company also signed a definitive agreement to acquire Euclid
Industries on December 7, 1998. Euclid is a leading North American supplier and
manufacturer of aftermarket replacement parts for a wide range of medium- and
heavy-duty vehicles and has been a premier participant in the North American
heavy duty aftermarket. For the fiscal year ended August 31, 1998, Euclid
generated sales of more than $100 million. The transaction is subject to
regulatory approvals and is expected to close in December 1998.

         Based on our results and the success of our first year, we believe that
the company is well-positioned to achieve our stated long-term financial goals
to grow internally, on an average annual basis, sales by 8 percent and earnings
per share by 15 percent, as well as to improve our long-term debt to
capitalization ratio to 45 percent, excluding acquisition activities.


----------
(1)      See Note 1 of Notes to Consolidated Financial Statements for the
         definitions of capitalized terms used and not otherwise defined in this
         section.


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         These long-term goals have been established with the recognition that
the industry in which the company operates has been characterized historically
by periodic fluctuations in overall demand for commercial, specialty and light
vehicles for which the company supplies products, resulting in corresponding
fluctuations in demand for products of the company. Accordingly, the company
will measure its performance against these long-term financial goals over a
multi-year period. Our markets are currently strong, and looking to the first
half of fiscal 1999 the outlook remains the same. However, beyond this horizon
the outlook is less clear and economic uncertainties around the world may make
1999 a challenging year in many of our global markets. As a result of the
diversity and balance of our product portfolio and served markets, we expect to
perform well in this environment.

         Meritor began operations separate from Rockwell on September 30, 1997.
The financial information included in this annual report for periods prior to
September 30, 1997 may not necessarily be indicative of the results of
operations, financial position and cash flows of the company had it been a
separate, independent company during such periods.

FINANCIAL CONDITION

         Cash flow from operations for fiscal 1998 was $278 million, an increase
of 34 percent over the prior year, reflecting the company's strong emphasis on
cash generation. Cash flow from operations was $208 million in fiscal 1997 and
$197 million in fiscal 1996. Sales growth related to both Heavy Vehicle Systems
and Light Vehicle Systems products resulted in an increase in accounts
receivables, inventories and accounts payables at the end of each fiscal year.

         The strong cash flows have allowed the company to fund capital
expenditures of $139 million in fiscal 1998, $126 million in fiscal 1997 and
$144 million in fiscal 1996, as the company continued to invest in the property,
plant and equipment needed for future business requirements. Capital
expenditures in fiscal 1998 included equipment to support new product
introductions, capacity expansion and new production processes. The company
expects to spend approximately $150 million for capital expenditures in fiscal
1999.


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         Increased cash flow has enabled the company to reduce debt and improve
its long-term debt to capitalization ratio by 20 percentage points, to 51
percent at September 30, 1998, from 71 percent a year ago. Pre-tax interest
coverage was 7.4x for the year ended September 30, 1998, excluding the interest
rate settlement cost of $31 million (see discussion in Results of Operations -
1998 Compared to 1997).

         Standard & Poors and Moody's have assigned "BBB/Baa2" credit ratings,
respectively, to the company's debt as of September 30, 1998. On April 9, 1998
the company filed a shelf Registration Statement with the Securities and
Exchange Commission covering up to $500 million aggregate principal amount of
debt securities that may be offered in one or more series on terms to be
determined at the time of sale. The Registration Statement became effective on
June 4, 1998. Except as may otherwise be determined at the time of any sales,
the net proceeds of any offering would be added to the company's general funds
which would be available for general corporate purposes, including the repayment
of existing indebtedness, working capital needs, capital expenditures and
acquisitions. No debt securities have been issued under the shelf registration
at September 30, 1998.

         In fiscal 1998, net cash used for investing activities consisted of the
capital expenditures described above, $8 million used to acquire sunroof patents
and technologies and to further invest in the company's Chinese heavy axle joint
venture with Xuzhou Construction Machinery Axle and Case Co., offset by $17
million of proceeds received from the sale of a long-term note receivable and
other property. In fiscal 1997, the $16 million in acquisition of businesses and
investments consisted primarily of investments in the company's Chinese heavy
axle joint venture. In fiscal 1996, the $101 million of net cash used for
investing activities included, in addition to capital expenditures, proceeds of
$58 million from the disposition of property and businesses primarily related to
the sale of Brazilian assets, and $15 million used for investments in joint
ventures.

         Net cash used for financing activities was $216 million in 1998. This
amount reflects payments of $222 million to reduce debt under the company's
revolving Credit Facility, partially offset by a $93 million increase in other
borrowings. In addition, the 


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company made net payments of $58 million related to certain Canadian tax
obligations incurred in connection with the transfer of assets prior to the
Distribution and payments of $29 million of cash dividends, or $.42 per share.
In November 1998, the Board of Directors declared a $.105 per share quarterly
dividend payable in December 1998. Net cash used for financing activities for
fiscal 1997 was comprised primarily of $445 million of proceeds from borrowings
under the Credit Facility used to fund the Pre-Distribution Payment to Rockwell.
In addition, $58 million in cash was provided by Rockwell to fund the Canadian
tax obligations described above and the company paid $84 million in cash
distributions to Rockwell. Net cash used for financing activities was $84
million in 1996, primarily related to cash distributions to Rockwell.

         The company has retirement medical and pension plans which cover most
of its United States and certain non-United States employees (see Notes 12 and
13 of Notes to Consolidated Financial Statements). Retirement medical plan
payments aggregated $36 million in fiscal 1998, $36 million in fiscal 1997 and
$35 million in fiscal 1996 and are expected to approximate $36 million in fiscal
1999. The company made pension plan contributions of $28 million in fiscal 1998,
$5 million in fiscal 1997 and $2 million in fiscal 1996. Management expects to
fund at least the minimum pension plan contributions required by government
regulations for the various plans in fiscal 1999 and anticipates that pension
plan funding will be approximately $25 million.

         The company regularly considers various strategic and business
opportunities, including acquisitions. Although no assurance can be given as to
whether or when any acquisitions will be consummated, if agreement were to be
reached, the company could finance such acquisitions by issuance of additional
debt or equity securities. The additional debt from any acquisitions, if
consummated, would increase the company's debt to capitalization ratio. See
Overview and Outlook for information on certain acquisition activities.

         RESULTS OF OPERATIONS

         The following sets forth the sales, operating earnings and net income
of the company for the years ended September 30, 1998, 1997 and 1996, as well as
pro forma 


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amounts for the year ended September 30, 1997 (dollars in millions, except per
share amounts):


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<TABLE>
<CAPTION>
                                                         Pro Forma(1)                   Year Ended
                                          Year Ended      Year Ended                   September 30,
                                         September 30,   September 30,         --------------------------
                                             1998            1997                1997               1996
                                             ----            ----                ----               ----
<S>                                      <C>             <C>                   <C>                <C>    
Sales

    Heavy Vehicle Systems                   $ 2,361         $ 1,957            $ 1,957            $ 1,827
    Light Vehicle Systems                     1,475           1,352              1,352              1,317
                                            -------         -------            -------            -------
Total sales                                 $ 3,836         $ 3,309            $ 3,309            $ 3,144
                                            =======         =======            =======            =======

Gross margin                                $   547         $   438            $   438            $   397
                                            =======         =======            =======            =======

Operating earnings                          $   299         $   192(2)             181(2)         $   146(2)
Other income-net                                 20              15                 15                 46
Interest rate settlement cost                   (31)           --                 --                 --
Interest expense                                (43)            (38)               (10)               (10)
Provision for income taxes                      (98)            (70)               (77)               (68)
                                            -------         -------            -------            -------
Net income                                  $   147         $    99            $   109            $   114
                                            =======         =======            =======            =======

Basic and Diluted Earnings Per Share        $  2.13         $  1.44(2)
                                            =======         =======

Basic and Diluted Earning Per Share         $  2.40         $  1.74
Before Special Items(3)                     =======         =======


Shares Outstanding (in millions)               69.0            68.9
                                            =======         =======
</TABLE>


(1)      Pro forma information reflects (a) the 68.9 million shares of common
         stock issued at the date of the spin-off from Rockwell, (b)
         management's estimate that corporate costs would have been $11 million
         lower on a stand-alone basis for the year ended September 30, 1997 than
         those allocated by Rockwell to its automotive businesses, and (c) $28
         million of interest expense at 6 percent for the year ended September
         30, 1997 related to the debt incurred by the company in connection with
         the $445 million Pre-Distribution Payment to Rockwell.

(2)      Operating earnings for pro forma and actual fiscal 1997 include
         restructuring and spin-off costs of $29 million ($21 million after-tax
         or $.30 per share on a pro forma basis) and for fiscal 1996 include
         restructuring costs of $36 million ($24 million after-tax).

(3)      Special items include the interest rate settlement cost of $31 million
         ($19 million after-tax or $.27 per share) recorded in the fourth
         quarter of fiscal 1998 and restructuring and spin-off costs of $29
         million ($21 million after-tax or $.30 per share on a pro forma basis)
         recorded in the fourth quarter of fiscal 1997.


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<PAGE>   8
         The following charts demonstrate the strength, diversity and balance of
our product mix, geographic presence and served markets for the fiscal year
ended September 30, 1998.

                        [1998 Sales by Product Pi Chart]

                  [1998 Sales by Geographic Region Pi Chart]

                        [1998 Sales by Market Pi Chart]


1998 COMPARED TO 1997

         Sales for fiscal 1998 were $3.8 billion, up $527 million, or 16
percent, above fiscal 1997.

         Heavy Vehicle Systems sales grew to a record $2.4 billion in fiscal
1998, an increase of $404 million, or 21 percent over 1997. Sales increased
across all of the company's heavy truck and trailer products, including axles,
transmissions, clutches, drivelines and brake systems, primarily as a result of
the strong North American heavy truck market, greater market penetration and
improved volumes in the aftermarket. Sales also increased in Heavy Vehicle
Systems off-highway, government and specialty product lines.

         Light Vehicle Systems also reported record sales for the year of $1.5
billion, an increase of $123 million, or 9 percent over 1997. The sales growth
was driven by penetration gains in the door, suspension, access control and seat
adjusting systems and wheel product lines and somewhat by higher industry
volumes in Europe. This growth was negatively affected by lower European sunroof
demand and the adverse impact of currency translation on European sales.

         Gross margin for fiscal 1998 improved $109 million, or 25 percent, over
fiscal 1997. Fiscal 1998 operating earnings of $299 million were up 56 percent
over pro forma fiscal 1997. Excluding the restructuring and spin-off costs of
$29 million recorded in 1997, operating earnings were up 35 percent over the
prior year's pro forma operating earnings of $221 million. Operating margins for
fiscal 1998 improved to 7.8 percent from last year's pro forma 6.7 percent
excluding restructuring and spin-off costs (5.8 percent in fiscal 1997 including
restructuring and spin-off costs). This growth reflects the ongoing successful
implementation of the company's productivity and cost improvement programs, the
strength of the company's global markets and the penetration gains across nearly
all of the company's product range.


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         The company's productivity and cost improvement programs relate to (i)
purchasing, which includes outsourcing non-core manufacturing and using lower
cost global sourcing of materials and supply base management; and (ii)
manufacturing, which includes shifting production to lower cost facilities,
consolidating common processes, improving material flow and investing in capital
and systems.

          Selling, general and administrative expenses as a percentage of sales
improved slightly from 6.6 percent pro forma in 1997 to 6.5 percent in 1998,
despite planned increased investments in information technology. Other income
for 1998 was up $5 million over last year primarily due to higher equity income
from joint ventures pertaining to the heavy truck and trailer markets.

          In the fourth quarter of fiscal 1998, the company recorded a one-time
 charge of $31 million ($19 million after-tax) or $.27 per share in connection
 with the settlement of interest rate agreements. These agreements were entered
 into in April 1998 to secure interest rates in anticipation of offering debt
 securities. The planned issuance of these debt securities did not occur,
 initially due to the consideration of a major acquisition and, subsequently,
 the instability in the U.S. corporate bond market. These agreements were
 settled and paid in October 1998 resulting in the charge discussed above.

1997 COMPARED TO 1996

         Sales for fiscal 1997 of $3.3 billion were up by $165 million, or 5
percent, above fiscal 1996.

         Heavy Vehicle Systems product sales grew to nearly $2 billion in fiscal
1997, an increase of $130 million, or 7 percent, over fiscal 1996. This sales
growth was driven largely by increased sales in North America which benefited
from higher sales in the aftermarket as well as greater market penetration by
our truck drivetrain products and trailer axle and brake products. Sales also
increased in emerging markets including Brazil and China, while sales declined
in Europe, where industry volumes were lower.

         Light Vehicle Systems product sales in fiscal 1997 of $1.4 billion
increased $35 million, or 3 percent, over fiscal 1996. The sales performance was
linked to ongoing growth in North America, offset somewhat by a decline in
European sales, due principally to the currency translation impact of a strong
U. S. dollar in fiscal 1997 and decreased 


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sunroof demand. North American sales growth of 13 percent in generally flat
light vehicle markets was chiefly the result of stronger market penetration in
door, suspension, seat adjusting systems and wheel products.

         Gross margin for fiscal 1997 improved $41 million, or 10 percent, over
fiscal 1996. Operating earnings for fiscal 1997 increased $35 million, or 24
percent, over fiscal 1996. Excluding restructuring and spin-off costs of $29
million recorded in fiscal 1997 and restructuring costs of $36 million recorded
in fiscal 1996, operating earnings for fiscal 1997 increased $28 million, or 15
percent, over fiscal 1996. This growth in gross margin and operating earnings
was due principally to the fiscal 1996 restructuring program as well as other
productivity and cost improvement programs (previously described).

         In fiscal 1997, the company recorded a $21 million ($16 million
after-tax) restructuring charge related to workforce reductions and other
manufacturing cost reduction programs, mostly outside the United States. The
provision included severance and other employee costs of $16 million and other
facility-related costs of $5 million. The company also recorded an $8 million
($5 million after-tax) charge in fiscal 1997 related to costs associated with
its spin-off from Rockwell including costs for communications, brand
advertising, recruitment and other professional services. Operating margins
before the restructuring and spin-off costs were 6.3 percent in fiscal 1997, as
compared to 5.8 percent in fiscal 1996, principally due to increased sales of
higher margin aftermarket products, continued improvement in production
processes and cost improvements from the 1996 restructuring, which offset
investments in new product development, continuing launch costs related to seat
adjusting systems products and higher engineering costs. Selling, general and
administrative expenses in fiscal 1997 increased $13 million, or 6 percent over
fiscal 1996, due to increased sales volume and increased spending on information
technology projects.

         Other income in fiscal 1997 decreased $31 million from fiscal 1996,
primarily due to one-time gains in fiscal 1996 which included a $14 million ($10
million after-tax) gain on the sale of Brazilian assets and $15 million ($9
million after-tax) from the settlement of certain environmental insurance
claims.


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INCOME TAXES

         The company's effective income tax rate in fiscal 1998 was 40.0 percent
compared to 41.3 percent in fiscal 1997 and 37.6 percent in fiscal 1996. The tax
rate decline in fiscal 1998 was primarily due to changes in the mix of foreign
income. The higher tax rate in fiscal 1997 was due primarily to a lower level of
foreign net operating loss utilization in fiscal 1997 and a refund of certain
foreign income taxes in fiscal 1996.

ENVIRONMENTAL MATTERS

         Federal, state and local requirements relating to the discharge of
substances into the environment, the disposal of hazardous wastes and other
activities affecting the environment have had and will continue to have an
impact on the manufacturing operations of the company. Thus far, compliance with
environmental requirements and resolution of environmental claims have been
accomplished without material effect on the company's liquidity and capital
resources, competitive position, or financial statements. In connection with the
Distribution, the company assumed all liabilities in respect of environmental
matters related to current and former operations of Rockwell's automotive
businesses.

         The company has been designated as a potentially responsible party at
three Superfund sites, excluding sites as to which the company's records
disclose no involvement or as to which the company's potential liability has
been fully determined. Management estimates the total reasonably possible costs
the company could incur for the remediation of Superfund sites at September 30,
1998 to be approximately $16 million, of which $10 million has been accrued.

         Various other lawsuits, claims and proceedings have been asserted
against the company alleging violation of federal, state and local environmental
protection requirements, or seeking remediation of alleged environmental
impairments, principally at previously disposed of properties. For these
matters, management has estimated the total reasonably possible costs the
company could incur at September 30, 1998 to be approximately $39 million. The
company has recorded environmental accruals for these matters of $14 million.


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         At September 30, 1998, there were no receivables recorded from third
parties related to environmental matters.

         Based on its assessment and after consulting with the general counsel
of the company, management believes that the company's expenditures for
environmental capital investment and remediation necessary to comply with
present regulations governing environmental protection and other expenditures
for the resolution of environmental claims will not have a material adverse
effect on the company's liquidity and capital resources, competitive position or
financial statements. Management cannot assess the possible effect of compliance
with future requirements.

INTERNATIONAL OPERATIONS

         Nearly one-half of the company's total assets and 38 percent of sales
for the year ended September 30, 1998 were outside North America, primarily in
France, the United Kingdom, Germany, Brazil and Italy. Borrowings under the
company's revolving Credit Facility have been principally in the United States,
Canada, Italy and the United Kingdom. Management believes that international
operations have significantly benefited the financial performance of the
company. However, the company's international operations are subject to a number
of risks inherent in operating abroad. There can be no assurance that these
risks will not have a material adverse impact on the company's ability to
increase or maintain its foreign sales or on its financial condition or results
of operations.

         On January 1, 1999, the Euro will become the common currency of eleven
countries of the European Union. During a three-year transition period, the
present national currencies of these eleven countries will become sub-units of
the Euro at fixed exchange rates. The European Union's current plans call for
the transition period to be completed by July 1, 2002, at which time the Euro
will become the sole legal tender in those participating countries.

         The company is engaged in business in some of the countries that will
participate in the European Monetary Union, and sales for fiscal 1998 in these
countries were approximately 21 percent of the company's total sales. In
addition, the company enters into foreign currency forward exchange contracts
with respect to several of the existing 


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currencies that will be subsumed into the Euro and has borrowings in
participating currencies primarily under its revolving Credit Facility. The
company has analyzed the potential effects of the Euro conversion on competitive
conditions, information technology and other systems, currency risks, financial
instruments and contracts, and has examined the tax and accounting consequences
of Euro conversion, and believes that the conversion will not have a material
adverse effect on its business, operations and financial condition.

         The company has begun making the necessary adjustments to accommodate
the conversion, including modifications to its information technology systems
and programs, pricing schedules and financial instruments. The company expects
that all necessary actions will be completed within budget and in a timely
manner, and that the costs associated with the conversion to the Euro will not
be material.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

         The company is exposed to foreign currency exchange rate risk inherent
in its sales and assets and liabilities denominated in currencies other than the
U.S. dollar and interest rate risk associated with the company's debt. The
company does enter into foreign currency forward exchange contracts to minimize
risk of loss from currency rate fluctuations on firm and identifiable foreign
currency commitments entered into in the ordinary course of business. Also, the
company may, from time to time, use interest rate agreements in the management
of interest rate exposure on selected debt issuances. It is the policy of the
company not to enter into derivative financial instruments for speculative
purposes.

         The company has performed a sensitivity analysis assuming a
hypothetical 10 percent adverse movement in foreign currency exchange rates and
interest rates applied to the underlying exposures described above. As of
September 30, 1998, the analysis indicated that such market movements would not
have a material effect on the company's consolidated financial position, results
of operations or cash flows. Actual gains or losses in the future may differ
significantly from that analysis, however, based on changes in the timing and
amount of interest rate and foreign currency exchange rate movements and the
company's actual exposures. 


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<PAGE>   14
YEAR 2000 READINESS DISCLOSURE

BACKGROUND

         The company initiated a company-wide year 2000 project to determine
whether the company's Information Technology ("IT") and non-IT systems are year
2000 compliant and to identify and implement the remedial actions necessary to
effect compliance. None of the company's other IT projects have been
significantly delayed due to the year 2000 project. The year 2000 project also
includes an assessment of compliance at the supplier and service provider level
in order to minimize supply disruptions. In addition, certain of the company's
locations are implementing Enterprise Resource Planning systems. It is
anticipated that these systems will be in place in early 1999 and will be year
2000 compliant. Because the company's customer base is diverse, fewer resources
of the project have been directed to the area of customer compliance.

COMPANY'S STATE OF READINESS

         The project is divided into four major sections - business and
engineering, factory floor, IT infrastructure (hardware and software) and supply
chain. Each section involves three phases: phase one - identification of risks;
phase two - defining the scope of necessary corrections, preparation of related
plans and cost estimates and development of contingency plans; and phase three -
implementation of decisions to repair, replace or retire the systems in
question.

         The consulting firm of Keane, Inc. was engaged to coordinate the year
2000 project for all four major sections and to provide more direct assistance
with respect to the business and engineering section and the IT infrastructure
section. In addition, the company engaged outside consultants to assist in risk
identification, analysis and remediation planning for factory floor operations
and to assist in implementing repair and remediation projects at local sites.

         The business and engineering section includes manufacturing, financial
applications and remediation projects, critical core business system validation
testing, aftermarket systems and supplemental systems. The factory floor section
includes shop floor controls and facility systems. The IT infrastructure section
includes PC/LAN hardware, software and peripherals; mainframe, midrange and UNIX
systems; 


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engineering workstations; and telecom/global carriers. The supply chain section
includes formal communication with the company's significant customers,
suppliers and critical service providers. The company estimates that all four
areas will be year 2000 compliant by June 30, 1999, with follow-up reviews
scheduled through the remainder of 1999.

         The following chart summarizes the status of completion by section for
each phase of the project at September 30, 1998:

<TABLE>
<CAPTION>
                                          Approximate Percentage Completed
                                        ------------------------------------
                                        Phase 1       Phase 2        Phase 3
                                        -------       -------        -------
<S>                                     <C>           <C>            <C>   
Business and Engineering                100           55-100*        15-90*

Factory floor                           100           40-80*         15

IT Infrastructure                       100           40-100*        25

Supply Chain                            45-100*       20-60*         0-8*
</TABLE>

      * Percentage of completion varies by location and by separate project
                               within each section

CONTINGENCY PLANS

         The company is in the initial stage of developing contingency plans
designed to minimize any adverse effects that would result if timely compliance
were not achieved, either internally or at the third party level. The planning
process will include identification of the areas of the company's business and
suppliers with the greatest potential of non-compliance and arrangements for
alternate suppliers, backup systems or stockpiling of components in the affected
areas. The company expects to complete its analysis and have contingency
arrangements in place by September 30, 1999.

COSTS

         The company currently estimates that the aggregate cost of the year
2000 project will be approximately $26 million. These amounts exclude employee
expense and computer equipment and upgrades that would have been purchased
regardless of the year 2000 project. During fiscal 1998 and fiscal 1997, the
company spent $10.2 million and $.7 million, respectively on the project. In
fiscal 1998, approximately $6.6 million of expenditures related to business and
engineering systems and IT infrastructure and approximately $3.6 million related
to the factory floor. These costs are being expensed as incurred and are being
funded through operating cash flows and do not include costs that 


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<PAGE>   16
may be incurred as a result of the failure of third parties, including
suppliers, to become year 2000 compliant or costs to implement contingency
plans.

         The company currently estimates that the costs incurred in connection
with the Enterprise Resource Planning systems will be approximately $35 million,
including costs of internal employees dedicated to the project. The company
anticipates that approximately $30 million of the total costs will be
capitalized and amortized over five years.

RISKS

         Incomplete or untimely resolution of the year 2000 issue by the
company, key suppliers, customers and other parties could have a material
adverse effect on the company's results of operations, financial condition and
cash flows. The year 2000 project is expected to reduce significantly the
company's level of uncertainty about year 2000 issues. The company believes that
completed and planned modifications and conversions of its internal IT and
non-IT systems will allow it to be year 2000 compliant in a timely manner.
However, due to the general uncertainty inherent with year 2000 compliance, the
company is unable to determine at this time whether the consequences of year
2000 failures by third parties will have a material impact on the company.

         Forward-looking statements contained in this section should be read in
conjunction with the company's disclosures under the heading: Cautionary
Statement following this disclosure.

CAUTIONARY STATEMENT

         This Management's Discussion and Analysis as well as other sections of
this Annual Report contain statements relating to future results of the company
(including certain projections and business trends) that are "forward-looking
statements" as defined in the Private Securities Litigation Reform Act of 1995.
Actual results may differ materially from those projected as a result of certain
risks and uncertainties, including but not limited to global economic and market
conditions; the demand for commercial, specialty and light vehicles for which
the company supplies products; risks inherent in operating abroad; OEM program
delays; demand for and market acceptance of new and existing products;
successful development of new products; reliance on major OEM 


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<PAGE>   17
customers; labor relations of the company, its customers and suppliers; and
competitive product and pricing pressures, as well as other risks and
uncertainties, such as those described under Overview and Outlook, Environmental
Matters, International Operations, Quantitative and Qualitative Disclosures
About Market Risk and Year 2000 Readiness Disclosure and those detailed herein
and from time to time in the filings of the company with the Securities and
Exchange Commission.


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<PAGE>   18

Independent Auditors Report


To the Board of Directors and Shareowners of Meritor Automotive, Inc.:

We have audited the accompanying consolidated balance sheets of Meritor
Automotive, Inc. and subsidiaries (formerly the automotive businesses of
Rockwell International Corporation -- see Note 1) as of September 30, 1998 and
1997, and the related consolidated and combined statements of income,
shareowners' equity and cash flows for each of the three years in the period
ended September 30, 1998. 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 and combined financial statements present
fairly, in all material respects, the financial position of Meritor Automotive,
Inc. and subsidiaries at September 30, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
September 30, 1998 in conformity with generally accepted accounting principles.

DELOITTE & TOUCHE LLP
Detroit, Michigan
November 11, 1998
<PAGE>   19
MERITOR AUTOMOTIVE, INC.

STATEMENT OF CONSOLIDATED INCOME
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                                YEAR ENDED SEPTEMBER 30,
                                          -----------------------------------
                                            1998          1997          1996
                                          -------       -------       -------
<S>                                       <C>           <C>           <C>    
Sales                                     $ 3,836       $ 3,309       $ 3,144

Cost of sales                               3,289         2,871         2,747
                                          -------       -------       -------

GROSS MARGIN                                  547           438           397

Selling, general and administrative           248           228           215

Restructuring and spin-off costs             --              29            36
                                          -------       -------       -------

OPERATING EARNINGS                            299           181           146

Other income-net                               20            15            46

Interest rate settlement cost                 (31)         --            --

Interest expense                              (43)          (10)          (10)
                                          -------       -------       -------

INCOME BEFORE INCOME TAXES                    245           186           182

Provision for income taxes                     98            77            68
                                          -------       -------       -------

NET INCOME                                $   147       $   109       $   114
                                          =======       =======       =======

Basic and diluted earnings per share      $  2.13
                                          =======

Average common shares outstanding --
  basic and diluted                          69.0
                                          =======
</TABLE>


See notes to consolidated financial statements.


                                       1
<PAGE>   20
MERITOR AUTOMOTIVE, INC.

CONSOLIDATED BALANCE SHEET
(IN MILLIONS)

<TABLE>
<CAPTION>
                                                              SEPTEMBER 30,
                                                         ----------------------
ASSETS                                                     1998           1997
------                                                     ----           ----
<S>                                                      <C>            <C>    
CURRENT ASSETS

Cash                                                     $    65        $   133
Receivables (less allowance for doubtful
  accounts: 1998, $11; 1997, $9)                             638            563
Inventories                                                  360            327
Other current assets                                         153            128
                                                         -------        -------

Total current assets                                       1,216          1,151
                                                         -------        -------

NET PROPERTY                                                 666            635

OTHER ASSETS                                                 204            216
                                                         -------        -------

TOTAL ASSETS                                             $ 2,086        $ 2,002
                                                         =======        =======

LIABILITIES AND SHAREOWNERS' EQUITY
CURRENT LIABILITIES

Short-term debt                                          $    34        $    21
Accounts payable                                             636            501
Accrued compensation and benefits                            142            129
Accrued income taxes                                          13             88
Other current liabilities                                    229            177
                                                         -------        -------

Total current liabilities                                  1,054            916
                                                         -------        -------

LONG-TERM DEBT                                               313            465
ACCRUED RETIREMENT BENEFITS                                  378            387
OTHER LIABILITIES                                             44             46
MINORITY INTERESTS                                            31             37

SHAREOWNERS' EQUITY

Common Stock (shares issued and outstanding:
  1998, 69.0; 1997, 68.9)                                     69             69
Additional paid-in capital                                   156            154
Retained earnings                                            118           --
Cumulative currency translation adjustments                  (77)           (72)
                                                         -------        -------

Total shareowners' equity                                    266            151
                                                         -------        -------

TOTAL LIABILITIES AND SHAREOWNERS' EQUITY                $ 2,086        $ 2,002
                                                         =======        =======
</TABLE>


See notes to consolidated financial statements.


                                       2
<PAGE>   21
MERITOR AUTOMOTIVE, INC.

STATEMENT OF CONSOLIDATED CASH FLOWS
(DOLLARS IN MILLIONS)

<TABLE>
<CAPTION>
                                                                            YEAR ENDED SEPTEMBER 30,
                                                                         -----------------------------
                                                                          1998        1997        1996
                                                                         -----       -----       -----
<S>                                                                      <C>         <C>         <C>  
OPERATING ACTIVITIES

Net income                                                               $ 147       $ 109       $ 114

Adjustments to net income to arrive at cash

   provided by operating activities:

     Depreciation and amortization                                         102         100         102

     Gain on sale of property and businesses                              --            (3)        (19)

     Restructuring, net of expenditures                                   --            20          26

     Deferred income taxes                                                 (10)         (4)        (18)

     Pension expense                                                        21          24          25

     Pension contributions                                                 (28)         (5)         (2)

     Changes in assets and liabilities, excluding effects of
       acquisitions, divestitures and foreign currency adjustments:

         Receivables                                                       (88)       (103)        (32)

         Inventories                                                       (34)        (40)         19

         Accounts payable                                                  129          80          24

         Other assets and liabilities                                       39          30         (42)
                                                                         -----       -----       -----

              CASH PROVIDED BY OPERATING ACTIVITIES                        278         208         197
                                                                         -----       -----       -----

INVESTING ACTIVITIES

Capital expenditures                                                      (139)       (126)       (144)

Acquisitions of businesses and investments, net of cash acquired            (8)        (16)        (15)

Sale of long-term note receivable                                           12        --          --

Proceeds from disposition of property and businesses                         5           8          58
                                                                         -----       -----       -----

              CASH USED FOR INVESTING ACTIVITIES                          (130)       (134)       (101)
                                                                         -----       -----       -----

FINANCING ACTIVITIES

Net increase (decrease) in short-term borrowings                            17          17          (3)

Net (decrease) increase in revolving debt                                 (222)        445        --

Net increase (decrease) in other long-term debt                             76          (6)         (7)
                                                                         -----       -----       -----

         Net (decrease)increase in debt                                   (129)        456         (10)

Cash dividends                                                             (29)       --          --

Pre-Distribution Payment to Rockwell                                      --          (445)       --

Transfer from Rockwell - Distribution tax obligation                      --            58        --

Payment of Distribution tax obligation                                     (72)       --          --

Net transfers from (to) Rockwell                                            14         (84)        (74)
                                                                         -----       -----       -----

              CASH USED FOR FINANCING ACTIVITIES                          (216)        (15)        (84)
                                                                         -----       -----       -----

(DECREASE) INCREASE IN CASH                                                (68)         59          12

CASH AT BEGINNING OF YEAR                                                  133          74          62
                                                                         -----       -----       -----

CASH AT END OF YEAR                                                      $  65       $ 133       $  74
                                                                         =====       =====       =====
</TABLE>


See notes to consolidated financial statements.


                                       3
<PAGE>   22
MERITOR AUTOMOTIVE, INC.

STATEMENT OF CONSOLIDATED SHAREOWNERS' EQUITY
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                                     YEAR ENDED SEPTEMBER 30,
                                                  -----------------------------
                                                   1998        1997        1996
                                                  -----       -----       -----
<S>                                               <C>         <C>         <C>
COMMON STOCK
Beginning balance                                 $  69       $--         $--
Distribution of Meritor shares                     --            69        --
                                                  -----       -----       -----
Ending balance                                       69          69        --
                                                  -----       -----       -----

ADDITIONAL PAID-IN CAPITAL
Beginning balance                                   154        --          --
Distribution of Meritor shares                     --           154        --
Other                                                 2        --          --
                                                  -----       -----       -----
Ending balance                                      156         154        --
                                                  -----       -----       -----

RETAINED EARNINGS
Beginning balance                                  --           643         603
Net income                                          147         109         114
Cash dividends (per share: 1998, $.42)              (29)       --          --
Net transfers to Rockwell                          --           (84)        (74)
Pre-Distribution Payment to Rockwell               --          (445)       --
Distribution of Meritor shares                     --          (223)       --
                                                  -----       -----       -----
Ending balance                                      118        --           643
                                                  -----       -----       -----

CUMULATIVE CURRENCY TRANSLATION ADJUSTMENTS
Beginning balance                                   (72)        (44)        (42)
Net translation adjustments                          (5)        (28)         (2)
                                                  -----       -----       -----
Ending balance                                      (77)        (72)        (44)
                                                  -----       -----       -----

TOTAL SHAREOWNERS' EQUITY                         $ 266       $ 151       $ 599
                                                  =====       =====       =====
</TABLE>


See notes to consolidated financial statements.


                                       4
<PAGE>   23
MERITOR AUTOMOTIVE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.       BASIS OF PRESENTATION

         Meritor Automotive, Inc. (the company or Meritor) is a leading global
         supplier of a broad range of components and systems for use in
         commercial, specialty and light vehicles. The company became an
         independent, publicly-held company on September 30, 1997 (the
         Distribution Date), when Rockwell International Corporation (Rockwell)
         spun off its automotive businesses as an independent publicly-traded
         company by distributing all of the issued and outstanding shares of the
         company to Rockwell's shareowners (the Distribution). Prior to the
         Distribution Date, the company made a payment of approximately $445
         million in cash to Rockwell through a combination of dividends and
         other payments, including repayments of intercompany indebtedness
         (collectively, the Pre-Distribution Payment). The Pre-Distribution
         Payment was funded through borrowings under the revolving Credit
         Facility (see Note 8).

         The consolidated financial statements as of and for periods after
         September 30, 1997 are those of the company and its consolidated
         subsidiaries. The financial statements for periods prior to September
         30, 1997 present the combined historical financial position, results of
         operations and cash flows of the ongoing automotive businesses of
         Rockwell that were spun off. The company's financial statements prior
         to September 30, 1997 include charges from Rockwell for certain
         centralized services and general corporate expenses. Charges from
         Rockwell for centralized services, including payroll and employee
         benefits administration, data processing and telecommunication services
         were billed to the company based on actual usage and aggregated $21
         million and $25 million in fiscal years 1997 and 1996, respectively.
         Charges from Rockwell for general corporate expenses which were not
         directly related to the automotive businesses were allocated to the
         company based on Meritor's sales in proportion to total Rockwell sales.
         These costs included costs for corporate oversight, financial, legal,
         tax, corporate communications and human resources and aggregated $28
         million and $27 million in fiscal years 1997 and 1996, respectively.
         Management believes these amounts were allocated or billed to the
         company on a reasonable basis. The financial information included
         herein for periods prior to September 30, 1997 may not necessarily be
         indicative of the results of operations or cash flows of the company if
         it had been a separate, independent company during such periods.

         Certain prior year amounts have been reclassified to conform with
         current year presentation.

2.       ACCOUNTING POLICIES

         USE OF ESTIMATES

         The financial statements of Meritor have been prepared in accordance
         with generally accepted accounting principles which require management
         to make estimates and assumptions that affect the amounts reported in
         the financial statements. Actual results could differ from those
         estimates.


                                       5
<PAGE>   24
         CONSOLIDATIONS AND JOINT VENTURES

         The consolidated financial statements include the accounts of the
         company and those majority-owned subsidiaries in which the company has
         control. All significant intercompany accounts and transactions are
         eliminated in consolidation.

         Investments in affiliates which are not majority-owned are reported
         using the equity method. The accounts and results of operations of
         majority-owned subsidiaries where ownership is greater than 50 percent
         but less than 100 percent are included in the consolidated results and
         are offset by a related minority interest expense and liability
         recorded for the minority interest ownership.

         FOREIGN CURRENCY

         Local currencies are considered the functional currencies outside the
         United States except for subsidiaries located in countries with highly
         inflationary economies. For operations reporting in local currencies,
         assets and liabilities are translated at year-end exchange rates with
         cumulative currency translation adjustments included as a component of
         shareowners' equity. Income and expense items are translated at average
         rates of exchange during the year. For operations in countries with
         highly inflationary economies in which the U.S. dollar is considered
         the functional currency, certain financial statement amounts are
         translated at historic exchange rates with all other assets and
         liabilities translated at year-end exchange rates. These translation
         adjustments are reflected in the accompanying Statement of Consolidated
         Income.

         INVENTORIES

         Inventories are stated at the lower of cost (using LIFO, FIFO or
         average methods) or market (determined on the basis of estimated
         realizable values).

         TOOLING

         Costs incurred by the company for certain engineering and tooling
         projects, principally for light vehicle products, for which customer
         reimbursement is anticipated are classified as Other Current Assets in
         the accompanying Consolidated Balance Sheet. Provisions for losses are
         provided at the time management anticipates costs to exceed anticipated
         customer reimbursement. Company-owned tooling is classified as property
         and depreciated over its expected life or the life of the related
         vehicle platform, whichever is shorter.

         PROPERTY

         Property is stated at cost. Depreciation of property is based on
         estimated useful lives generally using the straight-line method.
         Significant renewals and betterments are capitalized and replaced units
         are written off. Maintenance and repairs, as well as renewals of minor
         amounts, are charged to expense.

         INTANGIBLE ASSETS

         Goodwill represents the excess of the cost of purchased businesses over
         the fair value of their net assets at the date of acquisition and is
         amortized using the straight-line method over periods ranging from 5 to
         40 years.

         CAPITALIZED SOFTWARE

         Costs relating to internally developed or purchased software are
         capitalized and amortized utilizing the straight-line basis over a
         period of generally 5 years. These amounts are included in Other Assets
         in the accompanying Consolidated Balance Sheet.


                                       6
<PAGE>   25
         IMPAIRMENT OF LONG-LIVED ASSETS

         Management periodically reviews the realizability of long-lived assets
         based on an evaluation of remaining useful lives, cash flows and
         profitability projections and has determined that there is no
         impairment at September 30, 1998.

         REVENUE RECOGNITION

         Revenues are generally recognized upon shipment of products to
         customers.

         EARNINGS PER SHARE

         The company has adopted Statement of Financial Accounting Standards No.
         128 (SFAS 128), "Earnings Per Share". Basic earnings per share are
         based upon the weighted average number of shares outstanding during
         each year. Diluted earnings per share assumes the exercise of common
         stock options when dilutive.

         ENVIRONMENTAL MATTERS

         The company records accruals for environmental issues in the accounting
         period in which its responsibility is established and the cost can be
         reasonably estimated. At environmental sites in which more than one
         potentially responsible party has been identified, the company records
         a liability for its allocable share of costs related to its involvement
         with the site as well as an allocable share of costs related to
         insolvent parties or unidentified shares. At environmental sites in
         which Meritor is the only responsible party, the company records a
         liability for the total estimated costs of remediation before
         consideration of recovery from insurers or other third parties. If
         recovery from a third party is determined to be probable, the company
         records a receivable for the estimated recovery.

         STOCK BASED COMPENSATION

         The company accounts for its stock based compensation using the
         intrinsic value approach under Accounting Principles Board Opinion
         (APB) No. 25, "Accounting for Stock Issued to Employees" and adopted
         the disclosure-only provisions of Statement of Financial Accounting
         Standards No. 123 (SFAS 123), "Accounting for Stock-Based Compensation"
         (see Note 11).

         NEW ACCOUNTING STANDARDS

         In June 1997, the Financial Accounting Standards Board issued Statement
         of Financial Accounting Standards No. 130 (SFAS 130), "Reporting
         Comprehensive Income," effective for fiscal year 1999. SFAS 130
         establishes standards for the reporting and display in the financial
         statements of total net income and the components of all other nonowner
         changes in equity, referred to as comprehensive income. The adoption of
         this standard will not have a material effect on the company's
         financial statements.

         In June 1997, the Financial Accounting Standards Board issued Statement
         of Financial Accounting Standards No. 131 (SFAS 131), "Disclosures
         about Segments of an Enterprise and Related Information," effective for
         fiscal years beginning after December 15, 1997. SFAS 131 requires
         disclosure of business and geographic segments in the consolidated
         financial statements of the company. The company is currently analyzing
         the impact this standard will have on the disclosures in its financial
         statements.


                                       7
<PAGE>   26
         In February 1998, the Financial Accounting Standards Board issued
         Statement of Financial Accounting Standards No. 132 (SFAS 132),
         "Employers' Disclosure about Pensions and Other Postretirement
         Benefits," effective for fiscal years beginning after December 15,
         1997. SFAS 132 standardizes the disclosure requirements for pensions
         and other postretirement benefits, requires additional information on
         changes in the benefit obligations and fair values of plan assets that
         will facilitate financial analysis and eliminates certain disclosures.
         The company will adopt the disclosure provisions of SFAS 132 in fiscal
         year 1999.

         In June 1998, the Financial Accounting Standards Board issued Statement
         of Financial Accounting Standards No. 133 (SFAS 133), "Accounting for
         Derivative Instruments and Hedging Activities," effective for all
         fiscal quarters of fiscal years beginning after June 15, 1999. SFAS 133
         requires that all derivatives be recognized as either assets or
         liabilities in the statement of financial position and be measured at
         fair value. The company is currently analyzing the impact this standard
         will have on its financial statements.

3.       INVENTORIES

         Inventories are summarized as follows (in millions):

<TABLE>
<CAPTION>
                                                                  SEPTEMBER 30,
                                                                 ---------------
                                                                 1998       1997
                                                                 ----       ----
<S>                                                              <C>        <C> 
Finished goods                                                   $143       $117
Work in process                                                   120        146
Raw materials, parts and supplies                                 150        116
                                                                 ----       ----

Total                                                             413        379
Less allowance to adjust the carrying value of certain
  inventories (1998, $144; 1997, $150) to a LIFO basis             53         52
                                                                 ----       ----

Inventories                                                      $360       $327
                                                                 ====       ====
</TABLE>


4.       OTHER CURRENT ASSETS

         Other Current Assets are summarized as follows (in millions):

<TABLE>
<CAPTION>
                                                                 SEPTEMBER 30,
                                                               -----------------
                                                               1998         1997
                                                               ----         ----
<S>                                                            <C>          <C> 
Current deferred income taxes (see Note 16)                    $112         $ 85
Customer tooling                                                 20           20
Prepaid expenses                                                 20           21
Other                                                             1            2
                                                               ----         ----

Other Current Assets                                           $153         $128
                                                               ====         ====
</TABLE>


                                       8
<PAGE>   27
5. NET PROPERTY

     Net Property is summarized as follows (in millions):

<TABLE>
<CAPTION>
                                                             SEPTEMBER 30,
                                                      --------------------------
                                                        1998                1997
                                                      ------              ------
<S>                                                   <C>                 <C>
   Property at cost:
     Land and land improvements                       $   32              $   31
     Buildings                                           293                 278
     Machinery and equipment                           1,037                 985
     Company-owned tooling                               204                 195
     Construction in progress                             95                  93
                                                      ------              ------
   Total                                               1,661               1,582
   Less accumulated depreciation                         995                 947
                                                      ------              ------
   Net Property                                       $  666              $  635
                                                      ======              ======
</TABLE>

6. OTHER ASSETS



     Other Assets are summarized as follows (in millions):

<TABLE>
<CAPTION>
                                                             SEPTEMBER 30,
                                                      --------------------------
                                                       1998                1997
                                                      ------              ------
<S>                                                   <C>                 <C>
Net deferred income taxes (see Note 16)                $ 53               $ 71
Goodwill (net of accumulated amortization of:
   1998, $25; 1997, $22)                                 39                 42
Investments in affiliates                                46                 43
Prepaid pension costs (see Note 13)                      30                 29
Net capitalized computer software                        16                  7
Other                                                    20                 24
                                                       ----               ----
Other Assets                                           $204               $216
                                                       ====               ====
</TABLE>

7. OTHER CURRENT LIABILITIES

     Other Current Liabilities are summarized as follows (in millions):

<TABLE>
<CAPTION>
                                                                 SEPTEMBER 30,
                                                             ----------------------
                                                              1998            1997 
                                                             ------          ------
<S>                                                           <C>             <C>
Accrued product warranties                                    $112            $ 95
Accrued taxes other than income taxes                           36              28
Accrued restructuring                                           10              26
Accrued interest rate settlement cost (see Note 9)              31             --
Other                                                           40              28
                                                              ----            ----

Other Current Liabilities                                     $229            $177
                                                              ====            ====
</TABLE>

8. LONG-TERM DEBT

     Long-term Debt is summarized as follows (in millions):

<TABLE>
<CAPTION>
                                                              SEPTEMBER 30,
                                                       --------------------------
                                                        1998                1997 
                                                       ------              ------
<S>                                                     <C>                 <C>
Bank revolving Credit Facility                          $219                $447
Lines of credit                                           79                 --
Other                                                     15                  18
                                                        ----                ----
Long-term Debt                                          $313                $465
                                                        ====                ====
</TABLE>




                                       9
<PAGE>   28
      The company has a $1 billion unsecured revolving Credit Facility with 19
      banks which expires in August 2002. Borrowings are subject to interest
      based on quoted market rates, principally LIBOR and eurocurrency rates, at
      the date of borrowing plus an applicable margin which is based on the
      company's credit rating. In addition, a facility fee, which also varies
      based upon the company's credit rating, is required on the $1 billion
      committed amount. At September 30, 1998, the margin over the LIBOR-based
      and eurocurrency rates was 20 basis points, and the facility fee on the
      committed amount was 10 basis points. At September 30, 1998, the company
      was in compliance with all covenants included in the Credit Facility and
      there have been no events of default. Up to $500 million of the Credit
      Facility is available for eurocurrency loans and up to $100 million is
      available for the issuance of standby letters of credit.



      The company has $130 million of unsecured lines of credit. Interest rates
      under these lines of credit are determined at the time of borrowing based
      on the underlying bank rates and averaged approximately 6.5 percent at
      September 30, 1998. Borrowings under the lines generally extend through
      September 1999 and are classified as long-term debt as the company has the
      ability and intent to refinance these borrowings under its revolving
      Credit Facility.



      On April 9, 1998, the company filed a shelf Registration Statement with
      the Securities and Exchange Commission covering up to $500 million
      aggregate principal amount of debt securities that may be offered in one
      or more series on terms to be determined at the time of sale. The
      Registration Statement became effective on June 4, 1998. Except as may
      otherwise be determined at the time of any sales, the net proceeds of any
      offering would be added to the company's general funds which would be
      available for general corporate purposes, including the repayment of
      existing indebtedness, working capital needs, capital expenditures and
      acquisitions. No debt securities have been issued under the shelf
      registration at September 30, 1998.


9. FINANCIAL INSTRUMENTS

      Meritor's financial instruments include cash, short- and long-term debt
      and foreign currency forward exchange contracts. As of September 30, 1998
      and 1997, the carrying values of the company's financial instruments
      approximated their fair values based on prevailing market prices and
      rates. It is the policy of the company not to enter into derivative
      financial instruments for speculative purposes. Meritor does enter into
      foreign currency forward exchange contracts to minimize risk of loss from
      currency rate fluctuations on foreign currency commitments entered into in
      the ordinary course of business. These foreign currency forward exchange
      contracts relate to purchase and sales transactions and are generally for
      terms of less than one year. The foreign currency forward exchange
      contracts are executed with creditworthy banks and are denominated in
      currencies of major industrial countries. The notional amount of
      outstanding foreign currency forward exchange contracts aggregated $212
      million and $194 million at September 30, 1998 and 1997, respectively.
      Meritor does not anticipate any material adverse effect on its results of
      operations or financial position relating to these foreign currency
      forward exchange contracts.


                                       10
<PAGE>   29
      In anticipation of offering debt securities under the shelf Registration
      Statement described in Note 8, the company entered into interest rate
      agreements on April 9, 1998 with creditworthy financial institutions.
      These agreements effectively fixed the base rate of interest at the rate
      prevailing on April 9, 1998 on an aggregate notional principal amount of
      $200 million of debt that the company planned to issue. This planned
      issuance of these debt securities did not occur, initially due to the
      consideration of a major acquisition and, subsequently, the instability in
      the U.S. corporate bond market. The company settled the interest rate
      agreements in October 1998 resulting in a payment of $31 million, which
      was accrued and included in Other Current Liabilities at September 30,
      1998. The accounting treatment of the settlement payment is a one-time
      charge of $31 million ($19 million after-tax), or $.27 per share, which is
      included in the accompanying Statement of Consolidated Income. Had the
      debt been issued, the accounting treatment would have been to defer and
      amortize the cost of the settlement over the life of the debt securities.


10. CAPITAL STOCK

      The company is authorized to issue 350 million shares of Common Stock,
      with a par value of $1 per share, and 25 million shares of Preferred
      Stock, without par value, of which 1 million shares are designated as
      Series A Junior Participating Preferred Stock (Junior Preferred Stock).
      Under the Company Rights Plan, a Preferred Share Purchase Right (Right) is
      attached to each share of Common Stock pursuant to which the holder may,
      in certain takeover-related circumstances, become entitled to purchase
      from the company 1/100th of a share of Junior Preferred Stock at a price
      of $112.50, subject to adjustment. Also, in certain takeover-related
      circumstances, each Right (other than those held by an acquiring
      person)will be exercisable for shares of Common Stock or stock of the
      acquiring person having a market value of twice the exercise price. In
      certain events, each Right may be exchanged by the company for one share
      of Common Stock or 1/100th of a share of Junior Preferred Stock. The
      Rights will expire on September 30, 2007, unless earlier exchanged or
      redeemed at a redemption price of $.01 per Right. Until a Right is
      exercised, the holder, as such, will have no voting, dividend or other
      rights as a shareowner of the company.



      The company has reserved 7.7 million shares of Common Stock in connection
      with its 1997 Long-Term Incentives Plan (the 1997 LTIP), Directors Stock
      Plan and Incentive Compensation Plan for grants of non-qualified stock
      options, incentive stock options, stock appreciation rights, restricted
      stock and stock awards to key employees and the company's directors. At
      September 30, 1998, there were 4.5 million shares available for future
      grants under these plans.


                                       11
<PAGE>   30
11. STOCK OPTIONS


      Stock options granted under the plans described in Note 10 expire ten
      years from the date of grant and generally have a vesting period of three
      years. The stock options granted are exercisable at prices equal to the
      fair market value of Common Stock on the dates the options are granted;
      accordingly, no compensation expense has been recognized for the stock
      option plans.



      Information relative to stock options is as follows (shares in thousands):

<TABLE>
<CAPTION>
                                                                                     WEIGHTED
                                                                                     AVERAGE
                                                                                     EXERCISE
                                                                   SHARES             PRICE
<S>                                                                <C>               <C>
      Conversion of Rockwell options at September 30, 1997            368            $ 23.78
      Granted                                                       3,043              22.40
      Exercised                                                        (1)             23.65
      Canceled                                                       (292)             22.43
                                                                    -----              ------
      Options outstanding at September 30, 1998                     3,118            $ 22.56
                                                                    =====              ======

      Exercisable at September 30, 1997:                                -                  -
      Exercisable at September 30, 1998:                              114            $ 23.79
</TABLE>

      Options outstanding at September 30, 1998 are exercisable at prices
      ranging from $22.31 to $26.11 per share and have a weighted average
      remaining life of 9 years.



      If the company accounted for its stock-based compensation plans using the
      fair value method provided by SFAS 123, the company's 1998 net income and
      earnings per share would have been reduced to pro forma net income of $142
      million and pro forma earnings per share of $2.06. The weighted average
      fair value of options granted was $7.01 per share in 1998. The fair value
      of each option was estimated on the date of grant using the Black-Scholes
      pricing model utilizing expected volatility of 31 percent, risk free
      interest of 5.8 percent, expected life of 5 years and an expected dividend
      yield of 2 percent. Pro forma net income would have been $1.1 million and
      $0.3 million lower in 1997 and 1996, respectively, utilizing the same
      assumptions noted, except with an expected volatility of 26 percent.


12. RETIREMENT MEDICAL PLANS


      Meritor has retirement medical plans which cover most of its U.S. and
      certain non-U.S. employees and provide for medical payments to eligible
      employees and dependents upon retirement.



      The components of retirement medical expense are as follows (in millions):

<TABLE>
<CAPTION>
                                                        1998           1997         1996
                                                        ----           ----         ----
<S>                                                    <C>            <C>          <C>
      Service cost                                     $   2          $   2        $   2


      Interest cost                                       28             28           27

      Amortization of unrecognized amounts                (1)            (1)          (1)
                                                       -----          -----        -----

      Retirement medical expense                       $  29          $  29        $  28
                                                       =====          =====        =====
</TABLE>

                                       12
<PAGE>   31
      The retirement medical obligation at September 30, 1998 and 1997 is
      comprised of the following (in millions):

<TABLE>
<CAPTION>
                                                             1998           1997
                                                            -----          -----
<S>                                                         <C>            <C>
      Accumulated obligation:
        Retirees                                            $ 395          $ 346
        Employees eligible to retire                           22             21
        Employees not eligible to retire                       37             34
                                                            -----          -----
               Total                                          454            401

      Items not yet recognized in the balance sheet:
        Plan amendments                                        21             27
        Actuarial (losses) gains:
          Discount rate                                       (84)           (54)
          Health care cost trend                               18             11
          Demographic and other                              (107)           (86)
      Recorded liability                                    $ 302          $ 299
                                                            =====          =====

      Assumptions used (June 30 measurement date):
          Discount rate                                      6.75%           7.5%
          Health care cost trend rates                        8.0%           8.0%
           Ultimate trend rates                               5.0%           5.5%
           Year ultimate trend rates achieved                2016           2015
</TABLE>

      The actuarial losses relating to demographics are due principally to
      earlier than assumed retirements resulting from plant closures and
      restructuring actions. The net actuarial losses will be considered in the
      determination of retirement medical expense in the future.



      Changing the health care cost trend rates by one percentage point would
      change the accumulated obligation at September 30, 1998 by approximately
      $34 million and would change total expense by approximately $2 million.
      Retirement medical payments totaled $36 million, $36 million and $35
      million for fiscal 1998, 1997 and 1996, respectively.


13. RETIREMENT PENSION PLANS


      Prior to the Distribution, Meritor employees participated in a Rockwell
      pension plan which provides monthly pension payments to eligible U.S.
      employees upon retirement. At September 30, 1997, the company established
      a pension plan with substantially similar benefits which credits
      participants for service earned with Rockwell. Pension benefits for
      salaried employees are based on years of credited service and
      compensation. Pension benefits for certain hourly employees are based on
      years of service and specified benefit amounts.



      The obligation for vested benefits earned by Meritor participants prior to
      the Distribution and all related assets were retained by Rockwell. The
      benefits payable under the Meritor plan will be equal to the difference
      between the total benefit earned with both companies and the vested
      benefit obligation retained by Rockwell.


                                       13
<PAGE>   32
Net pension expense consisted of the following (in millions):

<TABLE>
<CAPTION>
                                                             1998            1997          1996
                                                             ----            ----          ----
<S>                                                         <C>              <C>            <C>
      Service cost                                           $ 15            $ 14          $ 16
      Interest cost                                            18              17            17
      Assumed return on plan assets                           (15)            (13)          (12)
      Amortization of unrecognized amounts                      3               6             4
                                                            -----            ----          ----
      Net pension expense                                   $  21            $ 24          $ 25
                                                            =====            ====          ====
</TABLE>

      The following table reconciles the funded status of the pension assets and
      liabilities to amounts included in the balance sheet (in millions):

<TABLE>
<CAPTION>
                                                                  1998                                    1997
                                                  -------------------------------------   --------------------------------------
                                                     PLANS WITH           PLANS WITH         PLANS WITH           PLANS WITH
                                                       ASSETS            ACCUMULATED           ASSETS             ACCUMULATED
                                                     EXCEEDING             BENEFITS           EXCEEDING            BENEFITS
                                                    ACCUMULATED           EXCEEDING          ACCUMULATED           EXCEEDING
                                                      BENEFITS              ASSETS            BENEFITS              ASSETS
                                                  -----------------     ---------------   ------------------    ----------------
<S>                                               <C>                   <C>               <C>                   <C>
       Accumulated benefit obligation,
           principally vested                          $ 114              $   135                   $ 103           $  105


       Effects of projected compensation
           increases                                       9                   60                       8               47
                                                       -----                -----                   -----            -----

       Projected benefit obligation                      123                  195                     111              152

       Fair value of plan assets                         183                   54                     153               31
                                                       -----                -----                   -----            -----

       Plan assets in excess of (less than)
           projected benefit obligation                   60                 (141)                     42             (121)


       Items not yet recognized in the
           balance sheet:

           Net actuarial (gains) losses                  (29)                  36                     (11)              12
           Prior service cost                             13                    3                      13                3
           Remaining initial net asset                   (14)                  (1)                    (15)              (3)
       Unfunded pension adjustment                         -                   (7)                      -               (1)
                                                       -----                -----                   -----            -----

       Prepaid (accrued) pension costs
           at September 30                             $  30                $(110)                  $  29            $(110)
                                                       =====                =====                   =====            =====
</TABLE>

      Assumptions used (June 30 measurement date):

<TABLE>
<CAPTION>
                                                                                           1998                  1997
                                                                                          ------                ------
<S>                                                                                       <C>                  <C>
      Discount rate                                                                       6.0-6.75%            7.0-7.75%
      Compensation increase rate                                                           2.5-4.5%             3.5-4.5%
      Long-term rate of return on plan assets                                                  9.0%                 9.0%
</TABLE>

      The company also sponsors certain defined contribution savings plans for
      eligible employees. Expense related to these plans was $6 million, $5
      million and $6 million for fiscal 1998, 1997 and 1996, respectively.


                                       14
<PAGE>   33
14.   RESTRUCTURING AND SPIN-OFF COSTS

      The company recorded restructuring charges of $21 million ($16 million
      after-tax) and $36 million ($24 million after-tax) in fiscal 1997 and
      1996, respectively, for manufacturing cost reduction programs mostly
      outside of the United States. The 1997 charge was comprised of severance
      and other employee costs of $16 million related to 640 employees and other
      facility related costs of $5 million. The 1996 charge was comprised of
      employee costs of $22 million related to 1,400 employees, asset impairment
      of $8 million and other costs of $6 million. At September 30, 1998,
      approximately $10 million of the reserve remains in Other Current
      Liabilities in the accompanying Consolidated Balance Sheet. The company
      anticipates the majority of the remaining expenditures will occur in
      fiscal 1999. In 1997, the company also recorded spin-off costs of $8
      million ($5 million after-tax) associated with start-up activities of the
      new company.

15. OTHER INCOME-NET

      Other Income-Net is comprised of the following (in millions):

<TABLE>
<CAPTION>
                                                       1998            1997           1996
                                                       ----            ----           ----
<S>                                                    <C>              <C>           <C>
      Equity in earnings of affiliates                 $  28            $ 15          $ 11

      Minority interests                                 (11)            (11)          (11)

      Gain on the sale of property

       and businesses                                       -              3            19

      Interest income                                      4               2             4

      Insurance settlement                                 -               5            15

      Other                                               (1)              1             8
                                                        -----           ----           ---



      Other Income-Net                                 $  20            $ 15          $ 46
                                                       =====            ====          ====
</TABLE>

16. INCOME TAXES



      The components of the Provision for Income Taxes are summarized as follows
(in millions):

<TABLE>
<CAPTION>
                                                      1998          1997          1996
                                                      -----         -----         -----
<S>                                                   <C>           <C>           <C>
            Current tax expense:
              United States                           $  37         $  23         $  30
              Foreign                                    62            53            48
              State and local                             9             5             8
                                                      -----         -----         -----
                    Total current tax expense           108            81            86
                                                      -----         -----         -----
            Deferred tax benefit:
              United States                              (4)           (3)          (13)
              Foreign                                    (3)         --              (2)
              State and local                            (3)           (1)           (3)
                                                      -----         -----         -----
                    Total deferred tax benefit          (10)           (4)          (18)
                                                      -----         -----         -----
            Provision for Income Taxes                $  98         $  77         $  68
                                                      =====         =====         =====
      </TABLE>

     The deferred tax benefit represents the tax impact related to certain
     accrued expenses that have been recorded for financial statement purposes
     but are not deductible for income tax purposes until paid.


                                       15
<PAGE>   34
     Net deferred income tax benefits included in Other Current Assets in the
     accompanying Consolidated Balance Sheet consist of the tax effects of
     temporary differences related to the following (in millions):

<TABLE>
<CAPTION>
                                                     SEPTEMBER 30,
                                                   ----------------
                                                   1998        1997
                                                   ----        ----
<S>                                                <C>         <C>
      Accrued product warranties                   $ 40        $ 35

      Accrued compensation and benefits              31          25

      Accrued restructuring                           3           7

      Accrued interest rate settlement cost          12         --

      Other-net                                      26          18
                                                   ----        ----

      Current deferred income taxes                $112        $ 85
                                                   ====        ====
</TABLE>

     Net deferred income tax benefits included in Other Assets in the
     accompanying Consolidated Balance Sheet consist of the tax effects of
     temporary differences related to the following (in millions):

<TABLE>
<CAPTION>
                                                 SEPTEMBER 30,
                                              -------------------
                                              1998           1997
                                              -----         -----
<S>                                           <C>           <C>
      Accrued retirement medical costs        $  99         $ 103

      Property                                  (64)          (61)

      Pensions                                   12            18

      Loss and credit carryforwards              23            21

      Other-net                                  (8)            5
                                              -----         -----

      Subtotal                                   62            86

      Valuation allowance                        (9)          (15)
                                              -----         -----

      Long-term deferred income taxes         $  53         $  71
                                              =====         =====
</TABLE>

     Management believes it is more likely than not that current and long-term
     deferred tax benefits will reduce future current income tax expense and
     payments. Significant factors considered by management in its determination
     of the probability of the realization of the deferred tax benefits
     included: (a) historical operating results, (b) expectations of future
     earnings and (c) the extended period of time over which the retirement
     medical liability will be paid. The valuation allowance represents the
     amount of tax benefits related to net operating loss and tax credit
     carryforwards which management believes is not likely to be realized. The
     carryforward periods for $9 million of net operating losses and tax credit
     carryforwards expire between 1999 and 2003. The carryforward period for the
     remaining net operating losses and tax credits is indefinite.


     A substantial portion of Meritor's results of operations for 1997 and prior
     years is included in the consolidated U.S. and combined non-U.S. income tax
     returns of Rockwell. The remaining results of operations for Meritor are
     included in separate Meritor income tax returns. Rockwell has agreed to
     indemnify Meritor for income tax liabilities and retained the rights to tax
     refunds relating to any operations included in such consolidated or
     combined tax returns. The income tax provisions included in the Statement
     of Consolidated Income for fiscal 1997 and 1996 have been determined as if
     the company were a separate taxpayer.



     At September 30, 1997, Accrued Income Taxes were primarily comprised of
     Canadian income taxes incurred in connection with the transfer of assets
     prior to the Distribution. The $72 million payment, during the quarter
     ended December 31, 1997, of the Rockwell Distribution tax obligation was
     indemnified by Rockwell.


                                       16
<PAGE>   35
     Prior to the Distribution, Rockwell received a ruling from the United
     States Internal Revenue Service that the spin-off of the automotive
     businesses would be tax-free to Rockwell shareowners. The company is
     responsible for any taxes imposed on Rockwell, the company or Rockwell
     shareowners if certain actions by or in respect of the company or its
     shareowners result in the disqualification of the Distribution as a
     tax-free transaction.

      The company's effective tax rate was different from the U.S. statutory
      rate for the reasons set forth below:

<TABLE>
<CAPTION>
                                                       1998          1997          1996
                                                       ----          ----          ----
<S>                                                    <C>           <C>           <C>
      Statutory tax rate                               35.0%         35.0%         35.0%
      State and local income taxes                      1.6           1.2           2.0
      Foreign income taxes                              2.7           3.7           2.3
      Recognition of foreign loss carryforwards        (2.0)         (1.9)         (2.1)
      Tax on undistributed foreign earnings             1.6           2.0           1.0
      Other                                             1.1           1.3          (0.6)
                                                       ----          ----          ----

      Effective tax rate                               40.0%         41.3%         37.6%
                                                       ====          ====          ====
</TABLE>

     The income tax provisions were calculated based upon the following
     components of income before income taxes (in millions):

<TABLE>
<CAPTION>
                                  1998        1997        1996
                                  ----        ----        ----
<S>                               <C>         <C>         <C>
      United States income        $ 86        $ 53        $ 43
      Foreign income               159         133         139
                                  ----        ----        ----
      Total                       $245        $186        $182
                                  ====        ====        ====
</TABLE>

     No provision has been made for U.S., state or additional foreign income
     taxes related to approximately $192 million of undistributed earnings of
     foreign subsidiaries which have been or are intended to be permanently
     reinvested.


17. SUPPLEMENTAL FINANCIAL INFORMATION

<TABLE>
<CAPTION>
                                           1998        1997        1996
                                           ----        ----        ----
<S>                                        <C>         <C>         <C>
      (IN MILLIONS)
      Statement of income data:
      Maintenance and repairs              $ 72        $ 70        $ 64
      Research and development               54          54          51
      Rental expense                         18          18          17
      Statement of cash flows data:
      Interest payments                    $ 43        $ 10        $ 10
      Income tax payments                   116          16           7
      Distribution tax payment               72         --          --
</TABLE>

18. CONTINGENT LIABILITIES


     Federal, state and local requirements relating to the discharge of
     substances into the environment, the disposal of hazardous wastes, and
     other activities affecting the environment have had and will continue to
     have an impact on the manufacturing operations of the company. Thus far,
     compliance with environmental requirements and resolution of environmental
     claims have been accomplished without material effect on the company's
     liquidity and capital resources, competitive position or financial
     statements.


                                       17
<PAGE>   36
     The company has been designated as a potentially responsible party at three
     Superfund sites, excluding sites as to which the company's records disclose
     no involvement or as to which the company's potential liability has been
     finally determined. Management estimates the total reasonably possible
     costs the company could incur for the remediation of Superfund sites at
     September 30, 1998 to be approximately $16 million, of which $10 million
     has been accrued.

     Various other lawsuits, claims, and proceedings have been asserted against
     Meritor alleging violations of federal, state and local environmental
     protection requirements, or seeking remediation of alleged environmental
     impairments, principally at previously disposed of properties. For these
     matters, management has estimated the total reasonably possible costs the
     company could incur at September 30, 1998 to be approximately $39 million.
     Environmental accruals for these matters of $14 million have been recorded.

     At September 30, 1998, there were no receivables recorded from third
     parties related to environmental matters.

     Based on its assessment, management believes that the company's
     expenditures for environmental capital investment and remediation necessary
     to comply with present regulations governing environmental protection and
     other expenditures for the resolution of environmental claims will not have
     a material adverse effect on the company's liquidity and capital resources,
     competitive position or financial statements. Management cannot assess the
     possible effect of compliance with future requirements.

     Various other lawsuits, claims and proceedings have been or may be
     instituted or asserted against the company relating to the conduct of its
     business, including those pertaining to product liability, intellectual
     property, safety and health and employment matters. Although the outcome of
     litigation cannot be predicted with certainty and some lawsuits, claims, or
     proceedings may be disposed of unfavorably to the company, management
     believes the disposition of matters which are pending or asserted will not
     have a material adverse effect on the company's financial statements.

     In connection with the Distribution, the company assumed all contingent
     liabilities (including those in respect of environmental matters) related
     to current and former operations of Rockwell's automotive businesses.


19. BUSINESS SEGMENT INFORMATION

     The company operates in one industry segment, the supply of automotive
     components and systems for use in commercial, specialty and light vehicles,
     including:

     HEAVY VEHICLE SYSTEMS--Drivetrain systems and components, including axles,
     brakes, transmissions, clutches and drivelines, for heavy-duty and
     medium-duty trucks, trailers, off-highway equipment, buses and coaches, as
     well as specialty and military vehicles.

     LIGHT VEHICLE SYSTEMS--Electromechanical and other components and systems,
     including roof, door, access control, suspension and seat adjusting 
     systems, as well as wheel products for passenger cars, light trucks
     and sport utility vehicles.


                                       18
<PAGE>   37
<TABLE>
<CAPTION>
  SALES BY GEOGRAPHIC AREA                 1998            1997          1996
(IN MILLIONS)                              ----            ----          ----

<S>                                     <C>             <C>           <C>
      United States                     $ 1,848         $ 1,522       $ 1,367
      Canada and Mexico                     538             426           391
                                        -------          ------       -------
          Total North America             2,386           1,948         1,758
      Europe                              1,093           1,022         1,094
      South America                         244             236           206
      Asia-Pacific                          113             103            86
                                        -------         -------       -------
      Total sales                       $ 3,836         $ 3,309       $ 3,144
                                        =======         =======       =======
</TABLE>

     Sales to one original equipment manufacturer represented 23 percent of the
     company's sales in fiscal 1998, 1997 and 1996. These sales include other
     customers acquired or merged with this customer. No other customer
     comprised 10 percent or more of the company's sales in the three years
     ended September 30, 1998.

<TABLE>
<CAPTION>
      EARNINGS BY GEOGRAPHIC AREA              1998          1997          1996
      (IN MILLIONS)                           -----         -----         -----
<S>                                           <C>           <C>           <C>
      United States                           $ 122         $  93         $  64
      Canada and Mexico                          87            48            38
                                              -----         -----         -----
          Total North America                   209           141           102
      Europe                                     66            56            73
      South America                              17             7             1
      Asia-Pacific                                7             6             6
      Restructuring and spin-off costs         --             (29)          (36)
                                              -----         -----         -----
      Operating earnings                        299           181           146
      Other income-net                           20            15            46
      Interest rate settlement cost             (31)         --            --
      Interest expense                          (43)          (10)          (10)
      Provision for income taxes                (98)          (77)          (68)
                                              -----         -----         -----
      Net income                              $ 147         $ 109         $ 114
                                              =====         =====         =====
</TABLE>

<TABLE>
<CAPTION>
      IDENTIFIABLE ASSETS BY GEOGRAPHIC AREA         1998          1997          1996
      (IN MILLIONS)                                 ------        ------        ------
<S>                                                 <C>           <C>           <C>
      United States                                 $  937        $  830        $  764
      Canada and Mexico                                228           301           198
                                                    ------        ------        ------
          Total North America                        1,165         1,131           962
      Europe                                           639           566           590
      South America                                    163           192           188
      Asia-Pacific                                     119           113            90
                                                    ------        ------        ------
      Total                                         $2,086        $2,002        $1,830
                                                    ======        ======        ======
</TABLE>

20. QUARTERLY AND PRO FORMA FINANCIAL INFORMATION (UNAUDITED)

     The following is a condensed summary of the company's unaudited quarterly
     results of operations for fiscal 1998 and 1997, stock price data for fiscal
     1998 and unaudited pro forma quarterly results of operations for fiscal
     1997.


                                       19
<PAGE>   38
<TABLE>
<CAPTION>
      1998 FISCAL QUARTERS
                                   FIRST        SECOND         THIRD         FOURTH         1998
                                  ------        ------        -------        ------        ------
     (IN MILLIONS, EXCEPT SHARE-RELATED DATA)

<S>                               <C>           <C>           <C>            <C>           <C>
      Sales                       $  911        $  968        $ 1,003        $  954        $3,836

      Cost of sales                  791           823            852           823         3,289
      Net income                      32            45             47            23           147

      Net income per share
      (basic and diluted)         $  .47        $  .64        $ .68          $  .34        $ 2.13
                                  ======        ======        =======        ======        ======

      Stock Prices
          High                    25 1/4        27 3/16        28 3/8            24        28 3/8
          Low                     20 11/16      19 1/8         21 7/8            15            15
</TABLE>

     Fourth quarter 1998 net income was reduced by a one-time charge of $31
     million ($19 million after-tax) or $.27 per share, related to the
     settlement of the interest rate agreements (See Note 9).

<TABLE>
<CAPTION>
                                                       1997 FISCAL QUARTERS
                                   --------------------------------------------------------------
                                   FIRST         SECOND         THIRD        FOURTH         1997
                                   ------        ------        ------        ------        ------
      (IN MILLIONS)
<S>                                <C>           <C>           <C>           <C>           <C>
      Sales                        $  756        $  822        $  889        $  842        $3,309


      Cost of sales                   663           708           764           736         2,871

      Net income                       28            34            38             9           109
</TABLE>

     Fourth quarter 1997 net income was reduced by a $29 million ($21 million
     after-tax) charge related to restructuring and spin-off costs.

     The unaudited pro forma financial data for 1997 is presented as though the
     Distribution occurred as of October 1, 1996. Pro forma information reflects
     (a) the 68.9 million shares of common stock issued at the date of the
     spin-off,(b) management's estimate that corporate costs would have been $11
     million lower on a stand-alone basis than those allocated to the automotive
     businesses by Rockwell and (c) $28 million of interest expense at 6.0
     percent for the year ended September 30, 1997 related to the debt incurred
     by the company in connection with the Pre-Distribution Payment to Rockwell.
     The unaudited pro forma financial data is not necessarily indicative of the
     financial results of the company had the Distribution occurred on October
     1, 1996.


                                       20
<PAGE>   39
<TABLE>
<CAPTION>
                                                              1997 FISCAL QUARTERS
                                          --------------------------------------------------------------
                                          FIRST         SECOND        THIRD         FOURTH         1997
                                         ------         ------        ------        ------        ------

     (IN MILLIONS, EXCEPT PER SHARE AMOUNTS)

<S>                                       <C>           <C>           <C>           <C>              <C>
      Sales                               $  756        $  822        $  889        $  842           $3,309

      Pro Forma Operating Earnings            42            61            69            20(1)           192(1)
      Pro Forma Net Income                    25            33            35             6               99

      Pro Forma Earnings Per Share        $  .36        $  .48        $  .51        $  .09           $ 1.44
          (basic and diluted)             ======        ======        ======        ======           ======



      Pro Forma Earnings Per Share
         Before Restructuring
         and Spin-Off Costs               $  .36        $  .48        $  .51        $  .39           $ 1.74
          (basic and diluted)             ======        ======        ======        ======           ======
</TABLE>

      (1)   Includes restructuring and spin-off costs of $29 million ($21
            million after-tax).

21.SUBSEQUENT EVENTS (UNAUDITED)

     The company signed a definitive agreement to acquire the Heavy Vehicle
     Braking Systems (HVBS) business of LucasVarity plc for $390 million in cash
     on November 22, 1998. The LucasVarity HVBS components include air drum and
     disc brakes, hydraulic brakes, wheel end components and aftermarket
     products which complement the company's brake systems products. For the
     fiscal year ended January 31, 1998, the HVBS business of LucasVarity had
     net sales of approximately $290 million. The HVBS acquisition is expected
     to add annual sales of approximately $400 million. The transaction is
     subject to regulatory approvals in the U.S. and Europe and is expected to
     close in January 1999.

     On December 4, 1998, the company signed a definitive agreement with Volvo
     Truck Corporation to acquire Volvo's heavy axle manufacturing operations
     based in Lindesberg, Sweden. Under the terms of the agreement, the company
     will become the primary supplier of heavy duty axles for Volvo's heavy
     truck operations. The transaction is expected to add annual sales of
     approximately $200 million with a purchase price of approximately $135
     million in cash, $44 million of which is deferred. The transaction is
     expected to close in December 1998.

     The company also signed a definitive agreement to acquire Euclid Industries
     on December 7, 1998. Euclid is a leading North American supplier and
     manufacturer of aftermarket replacement parts for a wide range of medium-
     and heavy-duty vehicles, and has been a premier participant in the North
     American heavy-duty aftermarket. For the fiscal year ended August 31, 1998,
     Euclid generated sales of more than $100 million. The transaction is
     subject to regulatory approvals and is expected to close in December 1998.

     All of the above acquisitions will be accounted for by the purchase method
     of accounting. Accordingly, the results of operations of the acquired
     companies will be included with those of the company for periods subsequent
     to the date of acquisition.


                                       21
<PAGE>   40
MERITOR AUTOMOTIVE, INC.
SELECTED FINANCIAL DATA

(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                                               Fiscal Year Ended September 30,
                                               -------------------------------------------------------------
                                                 1998          1997          1996          1995        1994
                                               -------       -------       -------       -------     -------
<S>                                            <C>           <C>           <C>           <C>         <C>    
SUMMARY OF OPERATIONS

Sales

    Heavy Vehicle Systems                      $ 2,361       $ 1,957       $ 1,827       $ 1,937     $ 1,753
    Light Vehicle Systems                        1,475         1,352         1,317         1,188         900
                                               -------       -------       -------       -------     -------
        Total                                  $ 3,836       $ 3,309       $ 3,144       $ 3,125     $ 2,653
                                               =======       =======       =======       =======     =======

Operating earnings                                 299           181(1)        146(1)        178          91
  Operating earnings as a percent of sales         7.8%          5.5%          4.6%          5.7%        3.4%

Interest expense                                    43            10            10            11          12
Income before income taxes                         245(2)        186           182           185          88
Net income                                         147(2)        109           114           123          51
Basic and Diluted earnings per share(3)        $  2.13(2)        N/A           N/A           N/A         N/A
Cash dividends per share(3)                    $  0.42           N/A           N/A           N/A         N/A
                                               -------       -------       -------       -------     -------

FINANCIAL POSITION AT SEPTEMBER 30

Working capital(4)                             $   162       $   235       $   240       $   216     $   204
Property-net                                       666           635           643           647         617
Total assets                                     2,086         2,002         1,830         1,766       1,638
Short-term debt                                     34            21             8            14          17
Long-term debt                                     313           465            24            31          35
Equity and Minority interests(5)                   297           188           628           585         530
                                               -------       -------       -------       -------     -------

OTHER DATA

Depreciation and amortization                  $   102       $   100       $   102       $    97     $    93
Cash provided by operating activities              278           208           197           203         156
Capital expenditures                               139           126           144           119         102
Employees at year end                           16,900        16,900        15,300        16,700      17,200
Annual sales per employee (in thousands)(6)    $   228       $   203       $   198       $   182     $   159
                                               -------       -------       -------       -------     -------
</TABLE>


(1)      Operating earnings for fiscal year 1997 and fiscal year 1996 include
         restructuring and spin-off costs of $29 million and $36 million,
         respectively.

(2)      Income before income taxes, net income and basic and diluted earnings
         per share for fiscal year 1998 includes a one-time charge of $31
         million ($19 million after-tax), or $.27 per share relating to the
         settlement of interest rate agreements.

(3)      As the company began operations as a stand-alone entity on September
         30, 1997, per share data for years ending prior to September 30, 1998
         is not applicable.

(4)      Working capital consists of all current assets and liabilities,
         including cash and short-term debt.

(5)      Equity amounts for fiscal years ending September 30, 1996, 1995 and
         1994 represent the net investment of Rockwell prior to the spin-off of
         Meritor on September 30, 1997.

(6)      Annual sales per employee is based on the average of the monthly ending
         number of employees during the year.