[Management's Discussion and Analysis]

BUSINESS ENVIRONMENT Sales of Class 5 through 8 trucks have historically been cyclical, with demand affected by such economic factors as industrial production, construction, demand for consumer durable goods, interest rates and the earnings and cash flow of dealers and customers. Reflecting the stability of the general economy, demand for new trucks remained strong during 1999. The decrease in the number of new truck orders has decreased the company's order backlog to a more normal level of 57,300 units at October 31, 1999, from 72,100 units at October 31, 1998. The company continually evaluates order receipts and backlog throughout the year and will balance production with demand as appropriate.

The company currently projects 2000 U.S. and Canadian Class 8 heavy truck demand to be 245,000 units, a 14% decrease from 1999. Although lower, this level of demand is still considered strong allowing Navistar to produce at record capacity levels. Process improvements and capacity expansions have been implemented to enhance the company's ability to meet customer demand for its products. Class 5, 6 and 7 medium truck demand, excluding school buses is forecast at 128,000 units, 12% lower than in 1999. Demand for school buses is expected to decrease only 5% in 2000 to 32,000 units. Mid-range diesel engine shipments by the company to OEMs in 2000 are expected to be 324,000 units, 13% higher than in 1999.

In 1999, the company announced that it had finalized a joint venture with a Brazilian diesel engine producer to manufacture diesel engines in South America.

In June 1999, the employees represented by Local 127 of the Canadian Auto Workers voted to ratify a new three-year labor agreement. The new contract extends through June 1, 2002. Increased labor and pension costs associated with the new contract are expected to be offset by work rule changes that provide increased manufacturing flexibility.