[Management's Discussion and Analysis]

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

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

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

The internal systems portion of the project addresses personal computing; facilities, including the physical "machines" inside a plant or office complex; and computer business systems that are commonly run on larger mainframes and mid-range computers as well as the supporting infrastructure for the company's computer business systems. The company presently believes that it has identified all significant applications that require remediation, which in some cases will involve the replacement of the systems, to achieve Year 2000 readiness. Both internal and external resources are being used to make the required modifications and test for Year 2000 compliance. At November 30, 1999, the company estimates that it was 99.8% complete with the conversion or compliance checking of its internal systems including significant applications. The company is targeting the completion of the modifications and testing processes to all significant applications by mid-December 1999, which is prior to any anticipated impact on its operating systems. Remaining significant applications have contingency plans available.

The company has completed assessing the Year 2000 readiness of its production and service parts suppliers through a supplier survey process designed and coordinated by the Automotive Industry Action Group (AIAG). Responses to these questionnaires have been received and based on these responses, individual supplier contacts and 160 on-site assessments, the company believes that the majority of these suppliers have successfully completed their Year 2000 readiness programs. In addition, contingency plans have been established for all suppliers to assure an uninterrupted flow of materials in the unlikely event there are some that have unexpected problems.

NFC has received written assurances from its major suppliers of cash management services that their main treasury management products and required backroom processing have been tested and deemed ready for the Year 2000.

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

The company's total cost of the Year 2000 project, which will be funded through operating cash flows, is estimated to be $32 million, including $26 million of estimated expense and $6 million of capital expenditures. Approximately $23 million has been expensed and approximately $6 million has been capitalized through October 31, 1999. The remaining costs are estimated to be incurred in fiscal year 2000. The company's estimated annual expense for the Year 2000 project is not material to the company's fiscal 2000 information technology budget. Other non-Year 2000 information technology efforts have not been materially delayed or impacted by the Year 2000 project.

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

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

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

As part of its continuous assessment process, each of the business locations have prepared contingency plans for critical business processes that will be placed into effect in the event of a Year 2000 problem. These plans identify when contingent actions should be taken and identify the resources necessary for a proper response. Review and testing of the contingency plans will continue through the remainder of 1999, along with the necessary training of people that will manage through the crossover into the Year 2000.

Checklists have been established for each of the contingency plans, against which status will be measured as the crossover occurs. The first priority will be to determine that computing platforms, data base management systems and communication networks for both voice and data are functioning properly. Immediately following, a series of production applications have been scheduled to run, with the objective being to quickly identify any remaining Year 2000 problems, and to initiate corrective actions promptly.

A Year 2000 command center structure has been established to facilitate the management of activities and communications, consisting of a central center and 10 subsidiary centers defined for the business locations. Staffing has been identified for each of the centers, along with the procedures to manage the implementation of the defined pre- and post-Year 2000 activities.

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

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