[Notes to Financial Statements]

16 EARNINGS PER SHARE

Earnings per share was computed as follows:

Unexercised employee stock options to purchase .2 million, .5 million and 1.5 million shares of Navistar common stock during the years ended October 31, 1999, 1998 and 1997, respectively, were not included in the computation of diluted shares outstanding because the exercise prices were greater than the average market prices of Navistar common stock. Additionally, the diluted calculations for 1998 and 1997 exclude the effects of the conversion of the Series G preferred stock as such conversion would have been anti-dilutive.

17 STOCK COMPENSATION PLANS

The company has stock-based compensation plans, approved by the Committee on Compensation and Governance of the board of directors, which provide for granting of stock options to employees for purchase of common stock at the fair market value of the stock on the date of grant. The grants generally have a 10-year life.

The company has elected to continue to account for stock option grants to employees and directors in accordance with Accounting Principles Board Opinion No. 25 and related interpretations. Accordingly, no compensation cost has been recognized for fixed stock options because the exercise prices of the stock options equal the market value of the company's common stock at the date of grant. Had compensation cost for the plans been determined based upon the fair value at the grant date consistent with Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," pro forma net income would have been $542 million in 1999, $297 million in 1998 and $147 million in 1997; pro forma diluted earnings per share would have been $8.16 in 1999, $4.09 in 1998 and $1.61 in 1997; and pro forma basic earnings per share would have been $8.30 in 1999, $4.14 in 1998 and $1.62 in 1997. The pro forma effect on net income for 1999 and 1998 may not be representative of the pro forma effect on net income of future years as in 1999 and 1998, one-third of the options granted became exercisable on each of the first, second and third anniversaries of grant. Prior to 1998, grants were generally exercisable after one year.

The weighted-average fair values at date of grant for options granted during 1999, 1998 and 1997 were $8.15, $7.53 and $5.71, respectively, and were estimated using the Black-Scholes option-pricing model with the following assumptions:

The following summarizes stock option activity for the years ended October 31:

The following table summarizes information about stock options outstanding and exercisable at October 31, 1999.

18 SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

  Annual Report 1999