NAVISTAR INTERNATIONAL TRANSPORTATION CORP, 10-K, 1997-01-22

NAVISTAR INTERNATIONAL TRANSPORTATION CORP
10-K, 1997-01-22
MOTOR VEHICLES & PASSENGER CAR BODIES

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K

( X ) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)

For the fiscal year ended October 31, 1996

( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)

For the transition period from to

Commission file number 1-5236

NAVISTAR INTERNATIONAL TRANSPORTATION CORP.
-------------------------------------------
(Exact name of registrant as specified in its charter)

Delaware 36-1264810
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

455 North Cityfront Plaza Drive, Chicago, Illinois 60611
-------------------------------------------------- -------------------
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code (312) 836-2000

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

Name of Each Exchange
Title of Each Class on Which Registered
- ----------------------------------------------- ---------------------
Sinking fund debentures: 6-1/4%, due 1998 New York Stock Exchange
Sinking fund debentures: 9%, due 2004 New York Stock Exchange

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

None
----

Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months and (2) has been
subject to such filing requirements for the past 90 days: Yes X No
--- ---

As of January 10, 1997, the number of shares outstanding of the
registrant's capital stock was 1,000.

Document Incorporated by Reference
----------------------------------
Navistar Financial Corporation 1996 Annual Report on Form 10-K (Part IV)

THE REGISTRANT IS A WHOLLY OWNED SUBSIDIARY OF NAVISTAR
INTERNATIONAL CORPORATION AND MEETS THE CONDITIONS SET FORTH IN
GENERAL INSTRUCTION J(1) (a) AND (b) OF FORM 10-K AND IS, THEREFORE,
FILING THIS FORM WITH THE REDUCED DISCLOSURE FORMAT.

NAVISTAR INTERNATIONAL TRANSPORTATION CORP.

FORM 10-K

Year Ended October 31, 1996

INDEX
-----

10-K Page
---------
PART I

Item 1. Business ............................................ 3
Item 2. Properties .......................................... 8
Item 3. Legal Proceedings ................................... 9
Item 4. Submission of Matters to a Vote of
Security Holders (A) .............................. 9

PART II

Item 5. Market for Registrant's Common Equity
and Related Stockholder Matters ................... 9
Item 6. Selected Financial Data (A) ......................... 9
Item 7. Management's Discussion and Analysis of
Results of Operations and Financial Condition ..... 10
Item 8. Financial Statements and Supplementary Data ......... 16
Item 9. Changes in and Disagreements
with Accountants on Accounting
and Financial Disclosure .......................... 43

PART III

Item 10. Directors and Executive Officers of the Registrant (A) 43
Item 11. Executive Compensation (A) ......................... 43
Item 12. Security Ownership of Certain Beneficial
Owners and Management (A) ........................ 43
Item 13. Certain Relationships and Related Transactions (A) . 43

PART IV

Item 14. Exhibits, Financial Statement Schedule
and Reports on Form 8-K .......................... 43

INDEPENDENT AUDITORS' REPORT ................................. 41

INDEPENDENT AUDITORS' CONSENT ................................ 42

SIGNATURES

Principal Accounting Officer ................................. 44
Directors .................................................... 45

POWER OF ATTORNEY ............................................ 45

SCHEDULE ..................................................... F-1
EXHIBITS ..................................................... E-1

(A) Omitted or amended as the registrant is a wholly-owned subsidiary
of Navistar International Corporation and meets the conditions
set forth in General Instructions J(1) (a) and (b) of Form 10-K
and is, therefore, filing this Form with the reduced disclosure
format.

PART I

ITEM 1. BUSINESS

Navistar International Transportation Corp., hereinafter referred to
as "the company" and "Transportation," is the wholly owned subsidiary of a
holding company, Navistar International Corporation, hereinafter referred
to as "Navistar" and the "Parent Company."

Transportation, operates in two principal industry segments:
manufacturing and financial services. Manufacturing operations are
responsible for the manufacture and marketing of medium and heavy trucks,
including school buses, mid-range diesel engines and service parts
primarily in the United States and Canada as well as in selected export
markets. Based on assets and revenues, manufacturing operations represent
the majority of Transportation's business activities. The financial
services operations consist of Navistar Financial Corporation (Navistar
Financial), its domestic insurance subsidiary and Transportation's foreign
finance and insurance companies. Navistar Financial's primary business is
the retail and wholesale financing of products sold by the manufacturing
operations and its dealers within the United States and the providing of
commercial physical damage and liability insurance to the manufacturing
operations' dealers and retail customers and to the general public through
an independent insurance agency system. Industry segment data for 1996,
1995, and 1994 is summarized in Note 15 to the Financial Statements, which
is incorporated herein by reference.

THE MEDIUM AND HEAVY TRUCK INDUSTRY

The market in which Transportation competes is subject to
considerable volatility as it moves in response to cycles in the overall
business environment and is particularly sensitive to the industrial
sector which generates a significant portion of the freight tonnage
hauled. Government regulation has impacted and will continue to impact
trucking operations and efficiency and the specifications of equipment.

The following table shows industry retail deliveries in the combined
United States and Canadian markets for the five years ended October 31, in
thousands of units:

YEARS ENDED OCTOBER 31,
------------------------------------

1996 1995 1994 1993 1992
---- ---- ---- ---- ----

Class 5, 6 and 7 medium
trucks and school buses . 145.8 151.8 134.2 122.5 118.3
Class 8 heavy trucks ...... 195.4 228.8 205.4 166.4 125.2
----- ----- ----- ----- -----
Total ................... 341.2 380.6 339.6 288.9 243.5
===== ===== ===== ===== =====

Source: Monthly data provided by the American Automobile
Manufacturers Associations (AAMA) in the United States and Canada, and
other sources.

The Class 5 through 8 diesel truck market in the United States and
Canada is highly competitive. Major domestic competitors include PACCAR,
Ford and General Motors, as well as foreign-controlled manufacturers, such
as Freightliner, Mack and Volvo GM. In addition, manufacturers from Japan
(Hino, Isuzu, Nissan and Mitsubishi) are competing in the United States
and Canadian markets. The intensity of this competition results in price
discounting and margin pressures throughout the industry. In addition to
the influence of price, market position is driven by product quality,
engineering, styling, utility and distribution.

TRANSPORTATION MARKET SHARE

Transportation delivered 94,000 Class 5 through 8 trucks, including
school buses, in the United States and Canada in fiscal 1996, an 8%
decrease from the 101,700 units delivered in 1995. Navistar's combined
share of the Class 5 through 8 truck market was 27.5% in 1996 and 26.7% in
1995. Transportation has been the leader in combined market share for
Class 5 through 8 trucks, including school buses, in the United States and
Canada in each of its last 16 fiscal years based on data obtained from the
American Automobile Manufacturer's Association, the United States Motor
Vehicle Manufacturer's Association and R.L. Polk & Company.

PRODUCTS

The following table illustrates the percentage of Transportation's
manufacturing sales by class of product based on dollar amount:

YEARS ENDED OCTOBER 31,
-----------------------

PRODUCT CLASS 1996 1995 1994
- ------------- ---- ---- ----
Class 5, 6 and 7 medium
trucks and school buses . 35% 32% 32%
Class 8 heavy trucks ...... 35 42 42
Service parts ............. 14 12 14
Engines ................... 16 14 12
-- -- --

Total ................... 100% 100% 100%
=== === ===

Transportation manufactures a full line of products in the common
carrier, private carrier, government/service, leasing, construction,
energy/petroleum and student transportation markets. Transportation offers
diesel-powered trucks and buses because of their improved fuel economy,
ease of serviceability and greater durability over gasoline-powered
vehicles. Transportation's Class 8 heavy trucks generally use diesel
engines purchased from outside suppliers while Class 5, 6 and 7 medium
trucks are powered by a proprietary line of mid-range diesel engines
manufactured by Transportation. Based upon information published by R.L.
Polk & Company, diesel-powered Class 5, 6 and 7 medium truck shipments
represented 87% of all medium truck shipments for fiscal year 1996 in the
United States and Canada.

Transportation's truck and bus manufacturing operations in the United
States and Canada consist principally of the assembly of components
manufactured by its suppliers, although Transportation produces its own
mid-range diesel truck engines, sheet metal components (including cabs)
and miscellaneous other parts.

ENGINE AND FOUNDRY

Transportation builds diesel engines for use in its Class 5, 6 and 7
medium trucks, school buses, selected Class 8 heavy truck models and for
sale to original equipment manufacturers in the United States and Canada.
Transportation also sells engines for industrial, agricultural and marine
applications. Transportation is the leading supplier of mid-range diesel
engines in the 160-300 horsepower range according to data supplied by
Power Systems Research of Minneapolis, Minnesota.

Transportation has an agreement to supply its T444E electronically
controlled diesel engine to a domestic automotive company through the year
2000 for use in all of its diesel-powered light trucks and vans. Sales of
this engine to the automotive company currently account for approximately
87% of Transportation's T444E sales. Shipments of V8 and I6 engines to
all original equipment manufacturers totaled a record 163,200 units in
1996, an increase of 6% from the 154,200 units shipped in 1995.

SERVICE PARTS

In the United States and Canada, Transportation operates 7 regional
parts distribution centers, which allows it to offer 24-hour availability
and same day shipment of the parts most frequently requested by customers.

MARKETING AND DISTRIBUTION

Transportation's truck products are distributed in virtually all key
markets in the United States and Canada. Transportation's truck
distribution and service network in these countries was composed of 957,
958 and 949 dealers and retail outlets at October 31, 1996, 1995 and 1994,
respectively. Included in these totals were 504, 490 and 473 secondary
and associate locations at October 31, 1996, 1995 and 1994, respectively.

Retail dealer activity is supported by 5 regional operations in the
United States and a general office in Canada. Transportation has a
national account sales group, responsible for its 110 major national
account customers. Transportation's network of 13 Used Truck Centers in
the United States provides trade-in support to the company's dealers and
national account group, and markets all makes and models of re-conditioned
used trucks to owner-operators and fleet buyers. Both wholesale and
retail trucks, components and service parts are exported to more than 70
countries around the world.

FINANCIAL SERVICES

Navistar Financial is engaged in the wholesale, retail and lease
financing of new and used trucks sold by Transportation and its dealers in
the United States. Navistar Financial also finances wholesale accounts
and selected retail accounts receivable of Transportation. Sales of new
products (including trailers) of other manufacturers are also financed
regardless of whether designed or customarily sold for use with
Transportation's truck products. During 1996 and 1995, Navistar Financial
provided wholesale financing for 94%, and 93%, respectively, of the new
truck units sold by Transportation to its dealers and distributors in the
United States.

Navistar Financial's wholly owned domestic insurance subsidiary,
Harco National Insurance Company, provides commercial physical damage and
liability insurance coverage to Transportation's dealers and retail
customers, and to the general public through an independent insurance
agency system.

Harbour Assurance Company of Bermuda Limited offers a variety of
programs to the company, including general liability insurance, ocean
cargo coverage for shipments to and from foreign distributors, and
reinsurance coverage for various Transportation policies.

IMPORTANT SUPPORTING OPERATIONS

Third Party Sales Financing Agreements. In the United States,
Transportation has an agreement with Associates Commercial Corporation to
provide wholesale financing to certain of its truck dealers and retail
financing to their customers. Navistar International Corporation Canada
also has an agreement with a subsidiary of General Electric Canadian
Holdings Limited to provide financing for Canadian dealers and customers.

RESEARCH AND DEVELOPMENT

Research and development activities, which are directed toward the
introduction of new products and improvements of existing products and
processes used in their manufacture, totaled $101 million, $91 million,
and $88 million for 1996, 1995 and 1994, respectively.

BACKLOG

The backlog of unfilled truck orders (subject to cancellation or
return in certain events) at October 31, 1996, 1995 and 1994 was $1,254
million, $2,581 million and $3,358 million, respectively.

Although the backlog of unfilled orders is one of many indicators of
market demand, other factors such as changes in production rates,
available capacity, new product introductions and competitive pricing
actions may affect point-in-time comparisons.

EMPLOYEES

Transportation employed 14,186, 16,078 and 14,909 individuals at
October 31, 1996, 1995 and 1994, respectively.

LABOR RELATIONS

At October 31, 1996, the United Automobile, Aerospace and
Agricultural Implement Workers of America (UAW) represented 6,902 of
Transportation's active employees in the United States, and the Canadian
Auto Workers (CAW) represented 1,476 of Transportation's active employees
in Canada. Other unions represented 1,022 of Transportation's active
employees in the United States and Canada. Transportation entered into a
collective bargaining agreement with the UAW in 1995, which expires on
October 1, 1998. In addition, Transportation entered into a collective
bargaining agreement with the CAW in 1996, which expires on October 24,
1999.

PATENTS AND TRADEMARKS

Transportation continuously obtains patents on its inventions and,
thus, owns a significant patent portfolio. Additionally, many of the
components which Transportation purchases for its products are protected
by patents that are owned or controlled by the component manufacturer.
Transportation has licenses under third-party patents relating to its
products and their manufacture, and Transportation grants licenses under
its patents. The royalties paid or received under these licenses are not
significant. No particular patent or group of patents is considered by
Transportation to be essential to its business as a whole.

Like all businesses which offer well-known products or services,
Transportation's primary trademarks are an important part of its worldwide
sales and marketing efforts, and provide instant identification of its
products and services in the marketplace. To support these efforts,
Transportation maintains, or has pending, registrations of its primary
trademarks in those countries in which it does business or expects to do
business.

RAW MATERIALS AND ENERGY SUPPLIES

Transportation purchases raw materials, parts and components from
numerous outside suppliers but relies upon some suppliers for a
substantial number of components for its truck products. A portion of
Transportation's requirements for raw materials and supplies is filled by
single-source suppliers.

The impact of an interruption in supply will vary by commodity. Some
parts are generic to the industry while others are of a proprietary design
requiring unique tooling which would require time to recreate. However,
Transportation's exposure to a disruption in production as a result of an
interruption of raw materials and supplies is no greater than the industry
as a whole. In order to remedy any losses resulting from an interruption
in supply, Transportation maintains contingent business interruption
insurance for storms, fire and water damage.

While Transportation believes that it has adequate assurances of
continued supply, the inability of a supplier to deliver could have an
adverse effect on production at certain of the company's manufacturing
locations.

IMPACT OF GOVERNMENT REGULATION

Truck and engine manufacturers continue to face increasing
governmental regulation of their products, especially in the areas of
environment and safety. Transportation believes its products comply with
all applicable environmental and safety regulations.

As a diesel engine manufacturer, Transportation has incurred
research and tooling costs to redesign its engine product lines to meet
United States Environmental Protection Agency (U.S. EPA) and California
Air Resources Board (CARB) emission standards effective for the 1994 model
year. Transportation faces additional outlays through 1998 to meet
further tightening of these standards. In addition to the 1998 standard,
Transportation, along with other engine manufacturers, has signed a
voluntary agreement (Statement of Principles) with U.S. EPA and CARB to
achieve new reductions in ozone-causing exhaust emissions by 2004. As a
result of the Statement of Principles, U.S. EPA issued a Notice of
Proposed Rulemaking defining exhaust emission standards for the 2004 model
year. A final rule is expected in the early part of 1997. Transportation
must also satisfy California's emission standards in 2002 for engines used
in medium-size vehicles (which includes vehicles up to 14,000 lbs. Gross
Vehicle Weight Rating). Transportation expects that its diesel engines
will be able to meet all of these standards within the required time-
frame.

Emissions regulations in Canada and Mexico are similar, but not
identical, to the U.S. federal regulations. Although Canada's regulations
impose standards equivalent only to the U.S. standards for the 1990 model
year, diesel engine manufacturers, including Transportation, have
voluntarily signed several memorandums of understanding with the Canadian
federal government, agreeing to sell only engines meeting the 1994 U.S.
emission standards in model years 1995 to 1997. Canada has announced its
intention to conform its heavy-duty engine emission standards to the U.S.
EPA standards in 1998 and to require low-sulfur diesel fuel, as in the
U.S., beginning October 1, 1997. Mexico has adopted the U.S. heavy diesel
engine emission standards as of the 1994 model year but has conditioned
compliance on the availability of low-sulfur diesel fuel.

Truck manufacturers are also subject to various noise standards
imposed by federal, state and local regulations. The engine is one of a
truck's primary noise sources, and Transportation, therefore, works
closely with original equipment manufacturers to develop strategies to
reduce engine noise. Transportation is also subject to the National
Traffic and Motor Vehicle Safety Act (Safety Act) and Federal Motor
Vehicle Safety Standards (Safety Standards) promulgated by the National
Highway Traffic Safety Administration. Transportation believes it is in
compliance with the Safety Act and the Safety Standards.

Expenditures to comply with various environmental regulations
relating to the control of air, water and land pollution at production
facilities and to control noise levels and emissions from Transportation's
products have not been material except for two sites formerly owned by
Transportation, Wisconsin Steel in Chicago, Illinois, and Solar Turbine in
San Diego, California. In 1994, Transportation recorded a $20 million
after-tax charge as a loss of discontinued operations for environmental
liabilities and cleanup cost at these two sites. It is not expected that
the costs of compliance with foreseeable environmental requirements will
have a material effect on Transportation's financial position or
operating results.

ITEM 2. PROPERTIES

In the United States and Canada, Transportation owns and operates 9
manufacturing and assembly operations, which contain approximately 9
million square feet of floor space. Four facilities manufacture and
assemble trucks, 2 plants manufacture diesel engines, 2 locations produce
iron castings and 1 facility produces molded fiberglass components. In
addition, Transportation owns or leases other significant properties in
the United States and Canada including vehicle and parts distribution
centers, sales offices, an engineering center and its headquarters in
Chicago.

Transportation's principal research and engineering facilities are
located in Fort Wayne, Indiana, and Melrose Park, Illinois. In addition,
certain research is conducted at its manufacturing plants.

All of Transportation's plants are being utilized and have been
maintained adequately, are in good operating condition and are suitable
for its current needs through productive utilization of the facilities.
These facilities, together with planned capital expenditures, are expected
to meet Transportation's manufacturing needs in the foreseeable future.

A majority of the activity of the financial services operations is
conducted from its leased headquarters in Rolling Meadows, Illinois. The
financial services operations also lease 6 other office locations in the
United States and share office space with other locations.

ITEM 3. LEGAL PROCEEDINGS

Transportation and its subsidiaries are subject to various other
claims arising in the ordinary course of business, and are parties to
various legal proceedings which constitute ordinary routine litigation
incidental to the business of the company and its subsidiaries. In the
opinion of Transportation's management, none of these proceedings or
claims are material to the business or the financial condition of the
company.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Intentionally omitted. See the index page of this Report for
explanation.

PART II

Page
----

ITEM 5. MARKET FOR THE REGISTRANT'S
COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS ................ 39

ITEM 6. SELECTED FINANCIAL DATA

Intentionally omitted. See the index page to this Report for
explanation.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION

Certain statements under this caption constitute "forward-looking
statements" under the Reform Act, which involve risks and uncertainties.
Navistar International Transportation Corp.'s actual results may differ
significantly from the results discussed in such forward-looking
statements. Factors that might cause such a difference include, but are
not limited to, those discussed under the caption "Business Environment."

Transportation's manufacturing operations are engaged in the
manufacture and marketing of Class 5 through 8 trucks, including school
buses, mid-range diesel engines and service parts in the United States and
Canada. These products are also sold to distributors in selected export
markets. Transportation's financial services operations provide
wholesale, retail and lease financing, and commercial physical damage and
liability insurance coverage to Transportation's dealers and retail
customers and to the general public through an independent insurance
agency system.

The discussion and analysis reviews the operating and financial
results, and liquidity and capital resources of the manufacturing and
financial services operations. Manufacturing operations include the
financial results of the financial services operations included on a one-
line basis under the equity method of accounting. Financial services
operations include Navistar Financial Corporation (Navistar Financial),
its domestic insurance subsidiary, as well as Transportation's foreign
finance and insurance companies. See Note 1 to the financial statements.

RESULTS OF OPERATIONS

Transportation reported a net loss of $41 million for 1996 reflecting
lower sales and revenues and a one-time $35 million charge for termination
of its next generation truck program in the fourth quarter of 1996. Net
income was $102 million in 1995 and $7 million in 1994. Net income in
1994 included a $33 million charge to discontinued operations related to
environmental liabilities.

Transportation's manufacturing operations reported a loss before
income taxes of $87 million in 1996 compared with pretax income of $96
million in 1995 and $2 million in 1994. The 1996 operating results
reflect a decline in demand for trucks as well as the charge for
termination of Transportation's next generation truck program. The
increase between 1995 and 1994 reflects higher sales of trucks and diesel
engines as well as the effects of improved pricing and various cost
improvement initiatives.

Transportation's financial services operations, which include
Navistar Financial, its domestic insurance subsidiary and Transportation's
foreign finance and insurance subsidiaries, had income before income taxes
of $83 million, $62 million and $60 million in 1996, 1995 and 1994,
respectively.

Navistar Financial's pretax income in 1996 was $81 million, a 37%
increase from $59 million in 1995. The change is a result of higher
income on sales of retail notes and increased volume of wholesale
financing during the first half of 1996. The improved gains on sales
resulted from higher margins on retail notes reflecting declining market
interest rates prior to the date of sale. Navistar Financial's pretax
income increased $4 million in 1995 from the $55 million reported in 1994.
The change reflects higher income from an increased volume of wholesale
financing to support the demand for trucks and improvement in Navistar
Financial's interest cost over market interest rates offset by a reduction
in margins on retail financing.

Earnings from the foreign finance and insurance subsidiaries were $2
million, $3 million and $5 million in 1996, 1995 and 1994, respectively.

Sales and Revenues. Industry retail sales of Class 5 through 8 trucks
totaled 341,200 units in 1996, a 10% decline from the 380,600 units sold
in 1995 but comparable to the 339,600 units sold in 1994. Class 8 heavy
truck sales totaled 195,400 units, a decline of 15% from the 228,800 units
sold in 1995 and 5% from the 205,400 units sold in 1994. Industry sales
of Class 5, 6 and 7 medium trucks, including school buses, totaled 145,800
units in 1996, a 4% decrease from 1995 when 151,800 units were sold, but
9% higher than the 134,200 units sold in 1994. Industry sales of school
buses, which accounted for 22% of the medium truck market, increased 7%
over 1995 to 32,500 units.

Sales and revenues of $5,731 million in 1996 were 9% lower than the
$6,326 million reported in 1995 but 8% higher than the $5,330 million
reported in 1994. Sales of trucks, mid-range diesel engines and service
parts, for 1996 totaled $5,508 million, 10% below the $6,125 million
reported for 1995 and 7% over the $5,153 million reported in 1994.

Transportation maintained its position as sales leader in the
combined United States and Canadian Class 5 through 8 truck market in 1996
with a 27.5% market share, an increase from both the 26.7% share in 1995
and the 27.0% share in 1994. (Sources: American Automobile Manufacturer's
Association, the United States Motor Vehicle Manufacturer's Association
and R. L. Polk & Company.) In 1996, Transportation's share of the Class
8 heavy truck market declined to 17.1% from 18.4% in 1995 and 19.6% in
1994, reflecting intense competition in this market.

Shipments of mid-range diesel engines by Transportation to other
original equipment manufacturers during 1996 were a record 163,200 units,
a 6% increase from 1995 and a 25% improvement over 1994. Higher shipments
to a domestic automotive manufacturer to meet consumer demand for the
light trucks and vans which use this engine was the primary reason for the
increase.

Service parts sales of $760 million in 1996 increased from the $730
million reported in 1995 and were 6% higher than the $714 million reported
in 1994 as a result of dealer and national account volume growth.

Finance and insurance revenue for 1996 was $197 million, 18% higher
than the $167 million reported in 1995 primarily as a result of higher
income on sales of retail notes. Revenues from financial services
operations increased 10% between 1995 and 1994 primarily as a result of
higher wholesale and retail financing volume.

Other income declined to $26 million in 1996 from $34 million in
1995, reflecting a decrease in interest income from lower cash, cash
equivalent and marketable securities balances. Other income increased 36%
between 1995 and 1994 as a result of increased interest income from
higher cash, cash equivalents and marketable securities balances.

Costs and Expenses. Manufacturing gross margin was 12.5% of sales in
1996, compared with 13.8% in 1995 and 12.8% in 1994. The decrease in
gross margin is the result of lower sales volumes, more competitive
pricing and the costs of terminating the next generation truck program.
Factors which contributed to the change in gross margin between 1995 and
1994 included higher sales volumes and improved pricing offset by overtime
costs and a provision for employee profit sharing.

Engineering and research expense increased to $129 million in 1996
from $113 million in 1995 and $97 million in 1994 reflecting investment in
new truck and engine products as well as improvements to existing
products.

Marketing and administrative expense was $319 million in 1996
compared with $307 million in 1995 and $264 million in 1994. The $12
million increase in the expense between 1995 and 1996 reflects investment
in the implementation of Transportation's strategy to reduce costs and
complexity in its manufacturing processes. The change between 1994 and
1995 is the result of higher sales and distribution costs and an increase
in the provision for payment to employees as provided by Transportation's
performance incentive programs.

Interest expense decreased to $168 million in 1996 from $173 million
in 1995 but was slightly higher than the $165 million reported in 1994.
The increase in this expense in 1996 and 1995 over 1994 was the result of
higher debt balances required by the financial services operations to
finance the increased wholesale note and account balances as well as
higher interest rates in 1995.

Finance service charges on sold receivables were $24 million in 1996,
20% lower than in 1995 but 50% higher than 1994 reflecting the pattern of
truck unit sales over this period.

LIQUIDITY AND CAPITAL RESOURCES

Cash flow is generated from the manufacture and sale of trucks, mid-
range diesel engines and service parts as well as product financing and
insurance coverage provided to Transportation's dealers and retail
customers by the financial services operations.

Historically, funds to finance Transportation's products are obtained
from a combination of commercial paper, short- and long-term bank
borrowings, medium- and long-term debt issues, sales of finance
receivables and equity capital. Navistar Financial's current debt ratings
have made bank borrowings and sales of finance receivables the most
economic sources of cash. Insurance operations are funded through
internal operations.

Total cash, cash equivalents and marketable securities of
Transportation amounted to $348 million at October 31, 1996, $668 million
at October 31, 1995 and $624 million at October 31, 1994.

Cash used in operations during 1996 totaled $35 million, primarily
from a net change in operating assets and liabilities of $84 million. The
net change in operating assets and liabilities includes a $173 million
decrease in receivables offset by a reduction in accounts payable of $109
million, higher inventories and a $100 million decrease in other
liabilities. The change in receivables and inventories reflects lower
demand for Transportation's products while the decline in accounts payable
is a result of lower production. The change in other liabilities is the
result of the payment to employees as required by Transportation's profit
sharing agreements.

Investment programs used cash for a $73 million increase in property
and equipment leased to others and $117 million to fund capital
expenditures for truck product improvements, to increase mid-range diesel
engine capacity and for programs to improve cost performance. These
programs were partially funded by a net decrease in marketable securities
of $83 million. During 1996, the purchase of $1,108 million of retail
notes and lease receivables was funded with $982 million in proceeds from
the sale of receivables and principal collections of $125 million.

Financing activities used cash of $136 million for principal payments
on long-term debt partially offset by an $81 million increase in notes and
debt outstanding under the bank revolving credit facility and asset-backed
and other commercial paper programs.

During 1996, Navistar Financial supplied 94% of the wholesale
financing of new trucks sold to Transportation's dealers compared with 93%
in 1995 and 1994. Navistar Financial's share of the retail financing of
new trucks sold in the United States increased to 16% in 1996 compared
with 14% in 1995 and 15% in 1994.

The sale of finance receivables is a significant source of funding
for the financial services operations. During 1996 and 1995, Navistar
Financial sold $985 million and $740 million, respectively, of retail
notes through Navistar Finance Retail Receivables Corporation (NFRRC), a
wholly owned subsidiary. In both years, the net proceeds were used for
general working capital purposes.

NFRRC has filed registration statements with the Securities and
Exchange Commission which provide for the issuance of up to $5,000 million
of asset-backed securities. At October 31, 1996, the remaining shelf
registration available to NFRRC for issuance of asset-backed securities
was $2,445 million. See Note 9 to the Financial Statements.

Navistar Financial has a $925 million bank revolving credit facility,
and a $400 million asset-backed commercial paper program supported by a
bank liquidity facility which mature in March 2001. Navistar Financial
also utilizes a $500 million revolving wholesale note sales trust that
provides for the continuous sale of eligible wholesale notes on a daily
basis. The sales trust is comprised of three $100 million tranches of
investor certificates maturing serially from 1997 to 1999 and a $200
million tranche maturing in 2004.

Transportation finances capital expenditures principally through
internally generated cash. Capital leasing is used to fund selected
projects based on economic and operating factors. Transportation had
outstanding capital commitments of $38 million at October 31, 1996 which
consist of truck and engine development and ongoing facility maintenance.
In November 1996, Transportation announced plans to spend $167 million,
over the next two years to construct a new truck assembly facility in
Mexico.

At October 31, 1996, the Canadian operating subsidiary was subject to
maximum recourse of $164 million on retail contracts and $9 million on
retail leases financed by a third party. In addition, the company is
contingently liable for $45 million for various guarantees and buyback
programs. Based on historic trends, however, Transportation's exposure is
not considered material.

The Canadian operating subsidiary and certain financial services
subsidiaries had $260 million of assets which were restricted as to
distribution to Transportation in the form of dividends, or loans and
advances at October 31, 1996. The Parent Company and Transportation are
obligated under certain agreements to maintain Navistar Financial's income
before interest expense and income taxes at not less than 125% of its
total interest expense. No income maintenance payments were required for
the three years ended October 31, 1996.

It is the opinion of management that, in the absence of significant
unanticipated cash demands, current and forecasted cash flow will provide
a basis of financing operating requirements and capital expenditures.
Management also believes that collections on the outstanding receivables
portfolios as well as funds available from various funding sources will
permit the financial services operations to meet the financing
requirements of Transportation's dealers and customers.

ENVIRONMENTAL MATTERS

As disclosed in Notes 4 and 14 to the Financial Statements,
Transportation recorded a $33 million charge in 1994 as a loss of
discontinued operations for environmental liabilities at production
facilities of two formerly owned businesses, Wisconsin Steel and Solar
Turbine, Inc. (Solar). The charge consisted of an $11 million payment to
be made to the Economic Development Administration and a $22 million
charge for potential cleanup costs for these sites.

In addition, Transportation has been named a potentially responsible
party (PRP), in conjunction with other parties, in a number of cases
arising under an environmental protection law commonly known as the
Superfund law. These cases involve sites which allegedly have received
wastes from current or former company locations. Based on information
available to Transportation, which in most cases consists of data related
to quantities and characteristics of material generated at or shipped to
each site as well as cost estimates from PRPs and/or federal or state
regulatory agencies for the cleanup of these sites, a reasonable estimate
is calculated of Transportation's share, if any, of the probable costs and
is provided for in the financial statements. These obligations generally
are recognized no later than completion of the remedial feasibility study
and are not discounted to their present value. Transportation believes
that, based on these calculations, its share of the potential costs for
the cleanup of each site, other than the Wisconsin Steel and Solar sites,
will not have a material effect on Transportation's financial results.
Transportation reviews its accruals on a regular basis.

DERIVATIVE FINANCIAL INSTRUMENTS

As disclosed in Notes 1 and 11 to the Financial Statements,
Transportation uses derivative financial instruments to transfer or reduce
the risks of foreign exchange and interest rate volatility, and
potentially increase the return on invested funds. Transportation's
policy does not allow the use of derivatives for speculative purposes.

Transportation's manufacturing operations, as conditions warrant,
hedge foreign exchange exposure on the purchase of parts and materials
from foreign countries and its exposure from sales of manufactured
products in other countries. Contracted purchases of commodities for
manufacturing may be hedged up to one year. The manufacturing operations
had no foreign exchange exposure at October 31, 1996.

Navistar Financial uses interest rate caps, interest rate swaps and
forward interest rate contracts when needed to convert floating rate funds
to fixed and vice versa to match its asset portfolio. Navistar Financial
also uses forward interest rate contracts to manage its exposure to
fluctuations in funding costs from the anticipated securitization and sale
of retail notes. Between August and October 1996, Navistar Financial
entered into $400 million of forward interest rate lock agreements which
were closed in conjunction with the pricing of the sale of $487 million of
retail receivables in November 1996. The unrecognized loss on the
agreements at October 31, 1996, which was not material, was included in
the gain recognized on the sale of receivables.

Both manufacturing operations and Navistar Financial purchase
collateralized mortgage obligations that have relatively stable cash flow
patterns in relation to interest rate changes.

PENDING ACCOUNTING STANDARDS

In June 1996, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 125, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities," which Transportation must adopt for all applicable
transactions occurring after December 31, 1996. This standard is not
expected to have a material effect on Transportation's net income or
financial position.

BUSINESS ENVIRONMENT

Sales of Class 5 through 8 trucks are 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. Although the general economy remained stable in
1996, demand for new trucks declined. This change reflected over capacity
in the trucking industry as well as uncertainty over the future growth of
the economy, causing freight carriers to scale back plans for modernizing
and expanding their truck fleets. As a result, the Class 5 through 8
truck market experienced a significant decline in the rate of new truck
orders. The decline in the number of new orders has reduced
Transportation's order backlog to 20,900 units at October 31, 1996 from
47,100 units at October 31, 1995. Accordingly, retail deliveries in 1997
will be highly dependent on the rate at which new truck orders are
received. Transportation will evaluate order receipts and backlog
throughout the year and will balance production with demand as
appropriate.

Transportation currently projects 1997 United States and Canadian
Class 8 heavy truck demand to be 170,000 units, a 13% decrease from 1996.
Class 5, 6 and 7 medium truck demand, excluding school buses, is forecast
at 112,000 units, unchanged from 1996. Demand for school buses is
expected to decline slightly in 1997 to 31,500 units. Mid-range diesel
engine shipments by the company to original equipment manufacturers in
1997 are expected to be 176,500 units, 8% higher than in 1996.
Transportation's service parts sales are projected to grow 6% to $809
million.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Index To Financial Statements

Page
----

Navistar International Transportation Corp.:

Statement of Income ................................ 17
Statement of Financial Condition ................... 18
Statement of Cash Flow ............................. 19
Notes to Financial Statements ...................... 20
Independent Auditors' Report ....................... 41

Finance and Insurance Subsidiaries:

The financial statements of Navistar Financial Corporation for the
years ended October 31, 1996, 1995 and 1994 appearing on pages 9 through
40 in the Annual Report on Form 10-K for Navistar Financial Corporation
for the fiscal year ended October 31, 1996, Commission File No. 1-4146-1,
are incorporated herein by reference and filed as Exhibit 28.1 to this
Form 10-K.

<TABLE>
<CAPTION>
STATEMENT OF INCOME
- ----------------------------------------------------------------------------------
For the Years Ended October 31 (Millions of dollars)
- ----------------------------------------------------------------------------------

Navistar International Transportation Corp.
and Consolidated Subsidiaries
------------------------------------------
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Sales and revenues
Sales of manufactured products ... $5,508 $6,125 $5,153
Finance and insurance revenue .... 197 167 152
Other income ..................... 26 34 25
------ ------ ------
Total sales and revenues ....... 5,731 6,326 5,330
------ ------ ------
Costs and expenses
Cost of products and services sold 4,828 5,289 4,496
Postretirement benefits .......... 220 206 176
Engineering and research expense.. 129 113 97
Marketing and
administrative expense ......... 319 307 264
Interest expense ................. 168 173 165
Financing charges
on sold receivables ............ 24 30 16
Insurance claims
and underwriting expense ....... 47 50 54
------ ------ ------
Total costs and expenses ....... 5,735 6,168 5,268
------ ------ ------
Income (loss) before
income taxes ................. (4) 158 62
Income tax expense ............. (37) (56) (22)
------ ------ ------
Income (loss) of continuing
operations ..................... (41) 102 40
Loss of discontinued operations .. - - (33)
------ ------ ------
Net income (loss) ................ $ (41) $ 102 $ 7
====== ====== ======
<FN>
See Notes to Financial Statements.
</TABLE>
<PAGE>
<PAGE 18>
<TABLE>
<CAPTION>
STATEMENT OF FINANCIAL CONDITION
- --------------------------------------------------------------------------------
As of October 31 (Millions of dollars)
- --------------------------------------------------------------------------------

Navistar International
Transportation Corp. and
Consolidated Subsidiaries
-------------------------
1996 1995
------ ------
<S> <C> <C>
ASSETS
- -----------------------------------

Cash and cash equivalents .................... $ 204 $ 442
Marketable securities ........................ 144 226
------ ------
348 668
Receivables, net ............................. 1,646 1,831
Inventories .................................. 463 416
Property and equipment, net .................. 770 683
Investments and other assets ................. 211 199
Intangible pension assets .................... 314 284
------ ------
Total assets ................................. $3,752 $4,081
====== ======

LIABILITIES AND SHAREOWNER'S EQUITY
- -----------------------------------

Liabilities
Accounts payable, principally trade .......... $ 820 $ 933
Debt due Parent Company ...................... 884 923
Debt:
Manufacturing operations ................... 115 127
Financial services operations .............. 1,305 1,330
Postretirement benefits liability ............ 1,351 1,341
Other liabilities ............................ 806 949
------ ------
Total liabilities ........................ 5,281 5,603
------ ------

Commitments and contingencies

Shareowner's equity
Capital stock (1,000 shares issued) .......... 786 786
Retained earnings (deficit) .................. (2,315) (2,308)
------ ------
Total shareowner's equity .................... (1,529) (1,522)
------ ------

Total liabilities and shareowner's equity .... $3,752 $4,081
====== ======
<FN>
See Notes to Financial Statements.
</TABLE>
<PAGE>
<PAGE 19>
<TABLE>
<CAPTION>
STATEMENT OF CASH FLOW
- --------------------------------------------------------------------------------------
For the years Ended October 31 (millions of dollars)
- --------------------------------------------------------------------------------------

Navistar International
Transportation Corp. and
Consolidated Subsidiaries
----------------------------------

1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Cash flow from operations
Net income (loss) ............................... $ (41) $ 102 $ 7
Adjustments to reconcile net income (loss) to cash
provided by (used in) operations:
Depreciation and amortization ................. 101 81 72
Additional pension funding .................... - (72) -
Provision for loss of discontinued operations . - - 33
Other, net .................................... (11) (6) (24)
Change in operating assets and liabilities:
Receivables ................................. 173 (65) (176)
Inventories ................................. (48) 35 (19)
Accounts payable ............................ (109) 63 83
Other liabilities ........................... (100) 152 48
-------- -------- --------
Cash provided by (used in) operations ......... (35) 290 24
-------- -------- --------

Cash flow from investment programs
Purchase of retail notes and lease receivables .. (1,108) (1,099) (916)
Collections/sales of retail notes
and lease receivables ......................... 1,107 850 1,176
Purchase of marketable securities ............... (243) (272) (468)
Sales or maturities of marketable securities .... 326 226 483
Proceeds from property sold under sale/leaseback. 7 - 87
Capital expenditures ............................ (117) (139) (87)
Property and equipment leased to others ......... (73) (19) (5)
Other investment programs, net .................. (8) 5 36
-------- -------- --------
Cash provided by (used in) investment programs. (109) (448) 306
-------- -------- --------
Cash flow from financing activities
Principal payments on debt ...................... (136) (121) (222)
Issuance of debt ................................ - - 100
Net increase (decrease)in notes and debt
outstanding under bank revolving credit
facility and asset-backed and other
commercial paper programs ..................... 81 312 (28)
Net decrease in loan from
Navistar International Corporation............. (39) (45) (32)
-------- -------- --------
Cash provided by (used in) financing activities (94) 146 (182)
-------- -------- --------
Cash and cash equivalents
Increase (decrease) during the year ........... (238) (12) 148
At beginning of the year ...................... 442 454 306
-------- -------- --------
Cash and cash equivalents at end of the year .... $ 204 $ 442 $ 454
======== ======== ========

- --------------------------------------------------------------------------------------
<FN>
See Notes to Financial Statements.
</TABLE>

NAVISTAR INTERNATIONAL TRANSPORTATION CORP.
AND CONSOLIDATED SUBSIDIARIES
==========

NOTES TO FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED OCTOBER 31, 1996

1. SUMMARY OF ACCOUNTING POLICIES

Basis of Consolidation

Navistar International Transportation Corp., hereafter referred to as
"the company" and "Transportation" is the wholly owned subsidiary of
Navistar International Corporation hereafter referred to as "Parent
Company." The consolidated financial statements include the results of
Transportation's manufacturing operations and its wholly owned financial
services subsidiaries. The effects of transactions between the
manufacturing and financial services operations have been eliminated to
arrive at the consolidated totals.

Transportation operates in two principal industry segments:
manufacturing and financial services. Manufacturing operations are
responsible for the manufacture and marketing of medium and heavy trucks,
including school buses, mid-range diesel engines and service parts
primarily in the United States and Canada as well as in selected export
markets. Based on assets and revenues, manufacturing operations represent
the majority of Transportation's business activities. The financial
services operations consist of Navistar Financial Corporation (Navistar
Financial), its domestic insurance subsidiary and Transportation's foreign
finance and insurance companies. Navistar Financial's primary business is
the retail and wholesale financing of products sold by the manufacturing
operations and its dealers within the United States and the providing of
commercial physical damage and liability insurance to the manufacturing
operations' dealers and retail customers and to the general public through
an independent insurance agency system.

The distinction between current and long-term assets and liabilities
in the Statement of Financial Condition is not meaningful when finance,
insurance and manufacturing subsidiaries are combined; therefore,
Transportation has adopted an unclassified presentation. Certain 1995 and
1994 amounts have been reclassified to conform with the presentation used
in the 1996 financial statements.

Estimates

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.

Revenue Recognition

Manufacturing operations recognize shipments of new trucks and
service parts to independent dealers and retail customers as sales. Price
allowances, expected in the normal course of business, and the cost of
special incentive programs are recorded at the time of sale. Engine sales
are recognized at the time of shipment to original equipment
manufacturers. An allowance for losses on receivables is maintained at an
amount that management considers appropriate in relation to the
outstanding receivables portfolio and it is charged when receivables are
determined to be uncollectible.

==========
NOTES TO FINANCIAL STATEMENTS--(Continued)

1. SUMMARY OF ACCOUNTING POLICIES (continued)

Revenue Recognition (continued)

Financial services operations recognize finance charges on retail
notes and finance leases as income over the term of the receivables on the
accrual basis utilizing the interest method. Interest due from interest
bearing notes and accounts is recognized on the accrual basis. Operating
lease revenues are recognized on a straight-line basis over the life of
the lease. Selected receivables are sold and securitized to public and
private investors with limited recourse. Gains or losses on sales of
receivables are credited or charged to revenue in the period in which the
sale occurs. Financial services operations continue to service the sold
receivables and receive a fee for such services from the investor. An
allowance for losses is maintained at a level deemed appropriate based on
loss experience and other factors and it is charged when receivables are
determined to be uncollectible.

Insurance premiums are earned on a prorata basis over the terms of
the policies. Underwriting losses and outstanding loss reserve balances
are based on individual case estimates of the ultimate cost of settlement,
including actual losses, and determinations of amounts required for losses
incurred but not reported.

Cash and Cash Equivalents

All highly liquid financial instruments with maturities of three
months or less from date of purchase, consisting primarily of bankers'
acceptances, commercial paper, United States government securities and
floating rate notes, are classified as cash equivalents in the Statement
of Financial Condition and Statement of Cash Flow.

Marketable Securities

Marketable securities are classified as available-for-sale securities
and are reported at fair value.

Inventories

Inventories are valued at the lower of average cost or market.

Property and Other Long-Lived Assets

Significant expenditures for replacement of equipment, tooling and
pattern equipment, and major rebuilding of machine tools are capitalized.
Depreciation and amortization are generally provided on the straight-line
basis over the estimated useful lives of the assets, which average 35
years for buildings and improvements and 8 years for machinery and
equipment. Gains and losses on property disposals are included in other
income and expense. The carrying amount of all long-lived assets is
evaluated periodically to determine if adjustment to the depreciation and
amortization period or to the unamortized balance is warranted. Such
evaluation is based principally on the expected utilization of the long-
lived assets and the projected, undiscounted cash flows of the operations
in which the long-lived assets are deployed.

==========
NOTES TO FINANCIAL STATEMENTS--(Continued)

1. SUMMARY OF ACCOUNTING POLICIES (continued)

Engineering and Research Expense

Engineering and research expense, which includes research and
development expenses and routine ongoing costs associated with improving
existing products and manufacturing processes, totaled $129 million, $113
million and $97 million in 1996, 1995 and 1994, respectively. Research
and development expenses, which include activities for the introduction of
new truck and diesel engine products and major improvements to existing
products and processes totaled $101 million, $91 million and $88 million
in 1996, 1995, and 1994, respectively.

Product Related Costs

Transportation accrues warranty expense at the time of end product
sale. Product liability expense is accrued based on the estimate of total
future payments to settle product liability claims.

Income Taxes

The Parent Company files a consolidated U.S. federal income tax
return which includes Transportation and its U.S. subsidiaries.
Transportation has a tax allocation agreement with the Parent Company (Tax
Agreement) which requires Transportation to compute its separate federal
income tax expense based on its adjusted book income. Any resulting tax
liability is paid to the Parent Company. In addition, under the Tax
Agreement, Transportation is required to pay to the Parent Company any tax
payments received from its subsidiaries. The effect of the Tax Agreement
is to allow the Parent Company rather than Transportation to utilize U.S.
operating losses and net operating loss carryforwards generated in earlier
years.

Derivative Financial Instruments

Transportation uses derivatives to transfer or reduce risks of
foreign exchange and interest rate volatility and to potentially increase
the return on invested funds. Navistar Financial, uses a variety of
contracts to manage its exposure to fluctuations in funding costs from the
anticipated securitization and sale of retail notes. All derivatives are
held for purposes other than trading, and Transportation's policy does not
allow the use of derivatives for speculative purposes. Gains and losses
on hedges of existing assets or liabilities, firm commitments or
anticipated transactions are included in the carrying amounts of the
related asset or liability and recognized in income when the hedged event
occurs. Gains or losses related to qualifying hedges of anticipated sales
of receivables are deferred and are recognized in income when the
receivables are sold.

Pending Accounting Standard

In June 1996, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 125, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities," which Transportation must adopt for all applicable
transactions occurring after December 31, 1996. The standard is not
expected to have a material effect on Transportation's net income or
financial position.

==========
NOTES TO FINANCIAL STATEMENTS--(Continued)

2. POSTRETIREMENT BENEFITS

Transportation provides postretirement benefits to substantially all
of its employees. Costs associated with postretirement benefits include
pension expense for employees, retirees and surviving spouses, and
postretirement health care and life insurance expense for employees,
retirees, surviving spouses and dependents. In addition, as part of the
1993 restructured retiree health care and life insurance plans, profit
sharing payments to an independent retiree trust are required. The cost
of postretirement benefits is segregated as a separate component in the
Statement of Income and is as follows:

Millions of dollars 1996 1995 1994
- -----------------------------------------------------------------------
Pension expense .................... $ 160 $ 110 $ 108
Health/life insurance .............. 60 70 64
Profit sharing provision to Trust .. - 26 4
------- ------- -------

Total postretirement
benefits expense ................. $ 220 $ 206 $ 176
======= ======= =======

In the Statement of Financial Condition, the postretirement benefits
liability of $1,351 million in 1996 and $1,341 million in 1995 includes
$607 million and $587 million, respectively, for pension and $744 million
and $754 million, respectively, for postretirement health care and life
insurance benefits.

Pension Benefits

Generally, the pension plans are noncontributory with benefits
related to an employee's length of service and compensation rate.
Transportation's policy is to fund its pension plans in accordance with
applicable United States and Canadian government regulations and to make
additional payments as funds are available to achieve full funding of the
vested accumulated benefit obligation. The pension plans vary in the
extent to which they are funded, but for plan years which ended during the
current year, all legal funding requirements have been met. Plan assets
are invested primarily in dedicated portfolios of long-term fixed income
securities with more recent contributions invested in equity securities.

Pension Expense

Net pension expense included in the Statement of Income is composed
of the following:

Millions of dollars 1996 1995 1994
- -----------------------------------------------------------------------
Service cost for benefits
earned during the period ......... $ 34 $ 24 $ 34
Interest on projected
benefit obligation ............... 231 232 211
Net amortization costs and other ... 104 57 50
Less expected return on assets ..... (209) (203) (187)
------- ------- -------
Net pension expense ................ $ 160 $ 110 $ 108
======= ======= =======

Actual return on assets ............ $ 188 $ 398 $ (127)
======= ======= =======
<PAGE>
<PAGE 24>

==========
NOTES TO FINANCIAL STATEMENTS--(Continued)

2. POSTRETIREMENT BENEFITS (continued)

Pension Expense (continued)

"Amortization costs" shown in the above table include amortization of
cumulative gains and losses over the expected remaining service life of
employees, amortization of the initial transition liability over 15 years
and amortization of plan amendments, recognized over the remaining service
life of employees, except for those plan amendments arising from
negotiated labor contracts, which are amortized over the length of the
contract.

Pension Assets and Liabilities

Included in the Statement of Financial Condition is the minimum
pension liability for certain unfunded pension plans. The adjustment for
the minimum pension liability in the amounts of $623 million and $628
million are offset by intangible pension assets of $314 million and $284
million and accumulated reductions in shareowner's equity of $309 million
and $344 million at October 31, 1996 and October 31, 1995, respectively.
The minimum pension liability will change from year to year as a result of
revisions to actuarial assumptions, experience gains or losses and
settlement rate changes.

The funded status of Transportation's plans as of October 31, 1996
and 1995 and a reconciliation with amounts recognized in the Statement of
Financial Condition are provided below.

Plans in Which Plans in Which
Assets Exceed Accumulated Benefits
Accumulated Benefits Exceed Assets
--------------------- --------------------
Millions of dollars 1996 1995 1996 1995
- -----------------------------------------------------------------------
Actuarial present value of:
Vested benefits .......... $ (59) $ (51) $ (2,672) $ (2,612)
Nonvested benefits ....... (7) (5) (270) (270)
-------- -------- -------- --------
Accumulated benefit
obligation ........... (66) (56) (2,942) (2,882)
Effect of projected future
compensation levels ...... (3) (4) (23) (27)
-------- -------- -------- --------
Projected benefit
obligation ............... (69) (60) (2,965) (2,909)
Plan assets at fair value .. 91 87 2,336 2,295
-------- -------- -------- --------
Funded status at October 31. 22 27 (629) (614)
Unamortized pension costs:
Net losses ............. 11 9 332 372
Prior service costs .... 6 1 113 50
(Asset) liability at
date of transition ... (1) (1) 200 233
Adjustment for the minimum
liability ................ - - (623) (628)
-------- -------- -------- --------
Net asset (liability) ...... $ 38 $ 36 $ (607) $ (587)
======== ======== ======== ========

==========
NOTES TO FINANCIAL STATEMENTS--(Continued)

2. POSTRETIREMENT BENEFITS (continued)

Pension Assets and Liabilities (continued)

The weighted average rate assumptions used in determining pension
costs and the projected benefit obligation were:

1996 1995 1994
- -----------------------------------------------------------------------
Discount rate used to determine
present value of projected
benefit obligation at end of year. 8.1% 7.8% 9.3%
Expected long-term rate of
return on plan assets for the year 9.0% 9.9% 8.1%
Expected rate of increase
in future compensation levels .... 3.5% 3.5% 3.5%

Other Postretirement Benefits

In addition to providing pension benefits, Transportation provides
health care and life insurance for a majority of its retired employees,
spouses and certain dependents in the United States and Canada.

In 1993, a trust was established to provide a vehicle for funding the
health care liability through Transportation's contributions and retiree
premiums. The funds in this trust are invested primarily in equity
securities. Transportation is required to make a prefunding contribution
of $200 million to the trust on or prior to June 30, 1998.

The components of expense for other postretirement benefits included
in the Statement of Income are as follows:

Millions of dollars 1996 1995 1994
- -----------------------------------------------------------------------
Service cost for benefits
earned during the year ........... $ 14 $ 10 $ 10
Interest cost on the accumulated
benefit obligation ............... 84 90 81
Less expected return on assets ..... (38) (30) (27)
------- ------- -------
Net other postretirement
benefits expense ................. $ 60 $ 70 $ 64
======= ======= =======

Actual return on assets ............ $ 46 $ 65 $ 12
======= ======= =======

The funded status of other postretirement benefits as of October 31
is as follows:

Millions of dollars 1996 1995
- -----------------------------------------------------------------------
Accumulated other postretirement
benefit obligation (APBO):
Retirees and their dependents ...... $ (773) $ (729)
Active employees eligible to retire (244) (201)
Other active participants .......... (208) (227)
------- -------
Total APBO ......................... (1,225) (1,157)
Plan assets at fair value .......... 401 364
------- -------
APBO in excess of plan assets ...... (824) (793)
Unamortized prior service cost ..... (6) -
Unrecognized net loss ............. 86 39
------- -------
Net liability ...................... $ (744) $ (754)
======= =======
<PAGE>
<PAGE 26>

==========
NOTES TO FINANCIAL STATEMENTS--(Continued)

2. POSTRETIREMENT BENEFITS (continued)

Other Postretirement Benefits (continued)

The weighted average expected return on plan assets was 10.5% for
1996, 10% for 1995 and 9% for 1994. The weighted average of discount
rates used to determine the accumulated other postretirement benefit
obligation was 8.2% and 7.8% at October 31, 1996 and 1995, respectively.
For 1997, the weighted average rate of increase in the per capita cost of
covered health care benefits is projected to be 8.2%. The rate is
projected to decrease to 5.0% by the year 2004 and remain at that level
each year thereafter. If the cost trend rate assumptions were increased
by one percentage point for each year, the accumulated postretirement
benefit obligation would increase by approximately $117 million and the
associated expense recognized for the year ended October 31, 1996 would
increase by an estimated $8 million.

3. INCOME TAXES

The Parent Company files a consolidated U.S. federal income tax
return which includes Transportation and its U.S. subsidiaries. Under the
tax allocation agreement with the Parent Company (Tax Agreement), if
Transportation records income, it is required to compute its federal
income tax expense based on such income and report it in the Statement of
Income; if a loss is recorded, the federal income tax benefit from such
loss is recorded by the Parent Company. Any resulting tax liability is
paid to the Parent Company. In addition, under the Tax Agreement,
Transportation is required to pay to the Parent Company any tax payments
received from its subsidiaries. The effect of the Tax Agreement is to
allow the Parent Company, rather than Transportation, to utilize U.S.
operating losses and net operating loss (NOL) carryforwards generated in
earlier years. As of October 31, 1996, Transportation's subsidiaries had
$35 million of domestic NOL carryforwards available to offset their future
taxable income.

The domestic and foreign components of income (loss) of continuing
operations before income taxes consist of the following:

Millions of dollars 1996 1995 1994
- -----------------------------------------------------------------------
Domestic ........................... $ (1) $ 147 $ 49
Foreign ............................ (3) 11 13
------- ------- -------
Total income (loss)
before income taxes .............. $ (4) $ 158 $ 62
======= ======= =======

Taxes on income (loss) of continuing operations are analyzed by
categories as follows:

Millions of dollars 1996 1995 1994
- -----------------------------------------------------------------------
Current:
Federal .......................... $ 30 $ 46 $ 15
State and local .................. 7 9 4
------- ------- -------
Total current expense .......... 37 55 19
Deferred expense ................... - 1 3
------- ------- -------
Total income tax expense
of continuing operations ......... $ 37 $ 56 $ 22
======= ======= =======

==========
NOTES TO FINANCIAL STATEMENTS--(Continued)

3. INCOME TAXES (continued)

The difference between the provision for income taxes and income
taxes computed using the U.S. federal statutory rate is as follows:

Millions of dollars 1996 1995 1994
- -----------------------------------------------------------------------
Amount computed using
the U.S. federal statutory rate .. $ (1) $ 55 $ 22
Increase (decrease)
in taxes resulting from:
State income taxes, net ........ 7 9 4
Difference between U.S.
and foreign tax rates ........ 1 (4) (5)
Current year loss
for which no benefit
is available ................ 29 - -
Other .............................. 1 (4) 1
------- ------- -------
Provision for income taxes
of continuing operations ......... $ 37 $ 56 $ 22
======= ======= =======

Pursuant to the Tax Agreement, all U.S. income taxes are paid by the
Parent Company to the federal tax authorities. Transportation's
consolidated tax payments to certain state and local governments were $2
million each year during 1996, 1995 and 1994, respectively.

Taxpaying entities of Transportation offset all deferred tax assets
and liabilities within each tax jurisdiction and present them in a single
amount in the Statement of Financial Condition. The components of the
deferred tax asset (liability) at October 31 are as follows:

Millions of dollars 1996 1995
- -----------------------------------------------------------------------
United States
- -------------
Deferred tax asset--net operating
loss carryforwards ............... $ 13 $ 18
Less valuation allowance ........... (13) (18)
------- -------
Net deferred tax asse ............. $ - $ -
======= =======
Foreign
- -------
Deferred tax assets:
Net operating loss carryforwards ... $ 2 $ -
Postretirement benefits ............ 19 19
------- -------
Total deferred tax assets .......... 21 19
Less valuation allowance ........... (21) (19)
------- -------
Net deferred tax assets ............ - -
Deferred tax liabilities--prepaid
pension assets ................... (16) (16)
------- -------
Net deferred tax liabilities ....... $ (16) $ (16)
======= =======

A valuation allowance has been provided for those NOL carryforwards
and temporary differences which are estimated to expire before they are
utilized. The total valuation allowance decreased $3 million during 1996
resulting from utilization of domestic NOL carryforwards by
Transportation's subsidiaries for which a full allowance had previously
been provided, net of tax benefits associated with foreign NOLs.

==========
NOTES TO FINANCIAL STATEMENTS--(Continued)

4. DISCONTINUED OPERATIONS

In the fourth quarter of 1994, Transportation recorded a $33 million
charge as a loss of discontinued operations for environmental liabilities
at production facilities of two formerly owned businesses, Wisconsin Steel
and Solar Turbine, Inc. This charge, which included an $11 million
settlement for various environmental related commercial issues and a $22
million charge for cleanup costs for these sites, was included in Other
Liabilities. See also Note 14.

5. MARKETABLE SECURITIES

The fair value of marketable securities is estimated based on quoted
market prices, when available. If a quoted price is not available, fair
value is estimated using quoted market prices for similar financial
instruments.

Information related to Transportation's marketable securities at
October 31 is as follows:
1996 1995
------------------- --------------------
Amortized Fair Amortized Fair
Millions of dollars Cost Value Cost Value
- ---------------------------------------------------------------------
Corporate securities $ 32 $ 32 $ 33 $ 33
U.S. government
securities .......... 49 48 139 140
Mortgage and asset-
backed securities ... 42 42 32 33
Foreign government
securities .......... 5 5 9 9
------ ------ ------ ------
Total debt
securities ....... 128 127 213 215
Equity securities ..... 14 17 10 11
------ ------ ------ ------

Total marketable
securities .......... $ 142 $ 144 $ 223 $ 226
====== ====== ====== ======

Gross unrealized gains and losses on marketable securities at October
31, 1996 and 1995 are not material.

Contractual maturities of marketable debt securities at October 31
are as follows:
1996 1995
------------------- --------------------
Amortized Fair Amortized Fair
Millions of dollars Cost Value Cost Value
- ---------------------------------------------------------------------
Due in one year or less $ 22 $ 21 $ 105 $ 105
Due after one year
through five years .. 35 35 38 39
Due after five years
through ten years ... 23 23 27 27
Due after ten years ... 6 6 11 11
------ ------ ------ ------
86 85 181 182
Mortgage and asset-
backed securities ... 42 42 32 33
------ ------ ------ ------

Total debt securities . $ 128 $ 127 $ 213 $ 215
====== ====== ====== ======

==========
NOTES TO FINANCIAL STATEMENTS--(Continued)

5. MARKETABLE SECURITIES (continued)

Proceeds from sales or maturities of investments in securities were
$326 million during 1996 and $226 million during 1995. Gross gains and
losses realized on such sales or maturities were not material for each of
the two years. Shareowner's equity includes unrealized holding gains of
$2 million at October 31, 1996 and $3 million at October 31, 1995. At
October 31, 1996 and 1995, a domestic insurance subsidiary had $17 million
and $23 million, respectively, of marketable securities on deposit with
various state departments of insurance or otherwise not available. These
securities are included in total marketable securities balances at October
31, 1996 and 1995.

6. RECEIVABLES

Receivables at October 31 are summarized by major classification as
follows:

Millions of dollars 1996 1995
- -----------------------------------------------------------------------
Accounts receivable ............... $ 551 $ 565
Retail notes and lease financing .. 733 747
Wholesale notes ................... 101 268
Amounts due from sales
of receivables .................. 264 248
Reinsurance balance receivables ... 28 31
Allowance for losses .............. (31) (28)
------- -------
Total receivables, net ........ $ 1,646 $ 1,831
======= =======

Navistar Financial purchases the majority of the wholesale notes
receivable and some retail notes and accounts receivable arising from
Transportation's operations in the United States.

A portion of Navistar Financial's funding for retail and wholesale
notes comes from sales of receivables by Navistar Financial to third
parties with limited recourse. Proceeds from sales of retail notes
receivable, net of underwriting costs, were $982 million in 1996, $727
million in 1995 and $995 million in 1994. Uncollected sold retail and
wholesale receivable balances totaled $1,866 million and $1,673 million as
of October 31, 1996 and 1995, respectively.

Contractual maturities of accounts receivable, retail notes and lease
financing and wholesale notes, including unearned finance income, at
October 31, 1996 were: 1997 - $851 million, 1998 - $243 million, 1999 -
$186 million, 2000 - $142 million, 2001 - $76 million, and 2002 and
thereafter - $14 million. Unearned finance income totaled $127 million at
October 31, 1996.

==========
NOTES TO FINANCIAL STATEMENTS--(Continued)

7. INVENTORIES

Inventories at October 31 are as follows:

Millions of dollars 1996 1995
- -----------------------------------------------------------------------
Finished products ................. $ 242 $ 167
Work in process ................... 97 91
Raw materials and supplies ........ 124 158
------- -------

Total inventories ................. $ 463 $ 416
======= =======

8. PROPERTY AND EQUIPMENT

At October 31, property and equipment includes the following:

Millions of dollars 1996 1995
- -----------------------------------------------------------------------
Land .............................. $ 12 $ 11
------- -------
Buildings, machinery
and equipment at cost:
Plants ........................ 1,299 1,223
Distribution .................. 79 75
Other ......................... 222 138
------- -------

Subtotal .................. 1,600 1,436
------- -------

Total property ................ 1,612 1,447
Less accumulated depreciation
and amortization ............ (842) (764)
------- -------
Total property
and equipment, net ...... $ 770 $ 683
======= =======

Total property includes property under capitalized lease obligations
of $25 million at October 31, 1996 and $24 million at October 31, 1995.
In addition total property includes vehicles under operating lease to
third parties of $116 million at October 31, 1996 and $49 million at
October 31, 1995.

=========
NOTES TO FINANCIAL STATEMENTS--(Continued)

9. DEBT

Debt Due Parent Company

Millions of dollars 1996 1995
- ---------------------------------------------------------------------
Manufacturing operations
Current maturities of debt
due Parent Company ............ $ 42 $ 38
------- -------
Subordinated Parent Company Note
9.05% Stock Purchase Agreement
(Class B Common), due 2003 .. 349 392
9.0% Loan Agreement, due 2013 . 493 493
------- -------
Long-term debt due Parent Company 842 885
------- -------

Total debt due Parent Company ..... $ 884 $ 923
======= =======
Debt

Millions of dollars 1996 1995
- ---------------------------------------------------------------------
Manufacturing operations
Notes payable and current
maturities of long-term debt .. $ 14 $ 10
------- -------
6 1/4% Sinking Fund Debentures,
due 1998 ...................... 3 6
9% Sinking Fund Debentures,
due 2004 ...................... 53 60
8% Secured Note,
due 2002 secured by plant assets 26 31
Capitalized leases and other .... 19 20
------- -------
Total long-term debt ........ 101 117
------- -------
Manufacturing operations debt ..... 115 127
------- -------
Financial services operations
Commercial paper ................ 99 50
Current maturities
of long-term debt ............. - 118
------- -------
Total short-term debt ....... 99 168
------- -------
Asset-backed commercial paper
program, variable rate,
due March 2001 ................ 402 302
Bank revolver, variable rate,
due March 2001 ................ 704 760
------- -------
Total senior debt ........... 1,106 1,062
------- -------
Subordinated Term Debt
- Senior notes, 8 7/8%,
due November 1998 ........... 100 100
------- -------
Total long-term debt ........ 1,206 1,162
------- -------
Financial services operations debt. 1,305 1,330
------- -------

Total debt ........................ $ 1,420 $ 1,457
======= =======

=========
NOTES TO FINANCIAL STATEMENTS--(Continued)

9. DEBT (continued)

Consolidated interest payments were $168 million, $169 million and
$181 million in 1996, 1995 and 1994, respectively.

Navistar Financial issues commercial paper with varying terms and has
short-term borrowings with various banks on a noncommitted basis.
Compensating cash balances and commitment fees are not required under
these borrowings.

The aggregate annual maturities and sinking fund requirements for
debt for the years ended October 31 are as follows:

Financial
Manufacturing Services
Millions of dollars Operations Operations Total
- -------------------------------------------------------------------------
1997 ............................... $ 56 $ 99 $ 155
1998 ............................... 68 - 68
1999 ............................... 66 100 166
2000 ............................... 70 - 70
2001 ............................... 76 1,106 1,182
Thereafter ......................... 663 - 663

Weighted average interest rate
on total debt, including short-term
debt, and the effect of discounts
and related amortization
for the years ended:
October 31, 1996 ............... 9.0% 6.5% 7.7%
October 31, 1995 ............... 9.1% 7.4% 8.3%

Effective March 29, 1996, Navistar Financial amended and restated its
bank revolving credit facility and its asset-backed commercial paper
(ABCP) program, extending the maturity date of each facility to March
2001. In addition, the commitment of the bank revolving credit facility
was expanded to $925 million, the ABCP facility was increased to $400
million, and a new pricing and fee schedule was established. The
available funding under the ABCP program is $414 million, comprised of the
$400 million liquidity facility and $14 million of trust certificates
issued in connection with the ABCP Trust.

Under the terms of the ABCP program, a special purpose wholly owned
subsidiary of Navistar Financial will purchase retail notes and lease
receivables. All assets of the subsidiary will be pledged or sold to a
trust that will fund the receivables with investment grade commercial
paper. The assets may also be sold to the trust.

Available funding under the amended and restated credit agreement and
ABCP program was $233 million, of which $99 million was used to back
short-term debt at October 31, 1996. The remaining $134 million when
combined with unrestricted cash and cash equivalents made $141 million
available to fund the general business purposes of Navistar Financial at
October 31, 1996.

=========
NOTES TO FINANCIAL STATEMENTS--(Continued)

9. DEBT (continued)

Navistar Financial's wholly owned subsidiaries, Navistar Financial
Retail Receivables Corporation (NFRRC) and Navistar Financial Securities
Corporation (NFSC), have a limited purpose of purchasing retail and
wholesale receivables, respectively, and transferring an undivided
ownership interest in such notes to investors in exchange for pass-through
notes and certificates. The subsidiaries have limited recourse on the
sold receivables and their assets are available to satisfy the claims of
their creditors prior to such assets becoming available to Navistar
Financial or affiliated companies.

NFSC has in place $500 million of revolving wholesale note sales
trusts that provide for the continuous sale of eligible wholesale notes on
a daily basis. The sales trusts are comprised of three $100 million
tranches of investor certificates maturing serially from 1997 to 1999 and
a $200 million tranche maturing in 2004.

During 1996, Navistar Financial sold $985 million of retail notes,
net of unearned finance income, through NFRRC in two separate sales to two
individual owner trusts which in turn sold $946 million of notes and $39
million of certificates to investors. The net proceeds, after
underwriting costs and credit enhancements, of $935 million were used by
Navistar Financial for general working capital purposes. At October 31,
1996, the remaining shelf registration available to NFRRC for issuance of
asset-backed securities was $2,445 million.

In November 1996, Navistar Financial sold $487 million of retail
notes through NFRRC. The net proceeds of $473 million were used for
general working capital purposes.

10. OTHER LIABILITIES

Major classifications of other liabilities at October 31 are as
follows:

Millions of dollars 1996 1995
- ---------------------------------------------------------------------
Product liability and warranty .... $ 293 $ 294
Loss reserves and unearned premiums 113 118
Employee incentive programs ....... 10 104
Payroll, commissions
and employee related benefits ... 73 80
Long-term disability
and workers' compensation ....... 55 66
Taxes ............................. 46 42
Environmental ..................... 23 25
Interest .......................... 9 12
Other ............................. 184 208
------- -------
Total other liabilities ....... $ 806 $ 949
======= =======

During the fourth quarter of 1996, Transportation recorded a one-time
$35 million charge for termination of its next generation truck program.

==========
NOTES TO FINANCIAL STATEMENTS--(Continued)

11. FINANCIAL INSTRUMENTS

Fair Value of Financial Instruments

The carrying amounts of financial instruments, as reported in the
Statement of Financial Condition and described in various Notes to the
Financial Statements, and their fair values at October 31 are as follows:

1996 1995
------------------- -------------------
Carrying Fair Carrying Fair
Millions of dollars Amount Value Amount Value
- --------------------------------------------------------------------
Receivables, net ...... $1,646 $1,649 $1,831 $1,844
Investments
and other assets .... 211 219 199 199
Debt .................. 2,304 2,358 2,380 2,532

Cash and cash equivalents approximate fair value. The cost and fair
value of marketable securities are disclosed in Note 5.

Customer receivables, wholesale notes and retail and wholesale
accounts and other variable-rate retail notes approximate fair value as a
result of the short-term maturities of the financial instruments. The
fair value of truck retail notes is estimated based on quoted market
prices of similar sold receivables. The fair value of amounts due from
sales of receivables is estimated by discounting expected cash flows at
estimated current market rates.

The fair value of investments and other assets is estimated based on
quoted market prices or by discounting future cash flows.

The short-term debt and variable-rate borrowings under Navistar
Financial's bank revolving credit agreement, which is repriced frequently,
approximate fair value. The fair value of long-term debt is estimated
based on quoted market prices, when available. If a quoted market price
is not available, fair value is estimated using quoted market prices for
similar financial instruments or discounting future cash flows.

=========
NOTES TO FINANCIAL STATEMENTS--(Continued)

11. FINANCIAL INSTRUMENTS (continued)

Derivatives Held or Issued for Purposes Other Than Trading

Transportation uses derivatives to transfer or reduce risks of
foreign exchange and interest rate volatility and to potentially increase
the return on invested funds.

Transportation purchases collateralized mortgage obligations (CMOs)
that have predetermined fixed-principal payment patterns which are
relatively certain. These instruments totaled $42 million at October 31,
1996. At October 31, 1996, the unrecognized gain on the CMOs was not
material.

Navistar Financial manages its exposure to fluctuations in interest
rates by limiting the amount of fixed rate assets funded with variable
rate debt, by selling fixed rate retail receivables on a fixed rate basis
and, to a lesser extent, by utilizing financial derivative instruments.
These instruments may include interest rate swaps, interest rate caps and
forward interest rate contracts. Navistar Financial enters into forward
interest rate contracts to manage its exposure to fluctuations in funding
costs from the anticipated securitization and sale of retail notes.

Between August and October 1996, Navistar Financial entered into $400
million of forward interest rate lock agreements on a Treasury note
maturing in 1998 related to the anticipated November 1996 sale of retail
receivables. These hedge agreements were closed in conjunction with the
pricing of the sale, and the loss at October 31, 1996, which was not
material, was deferred and included in the gain recognized on the sale of
receivables in November 1996.

=========
NOTES TO FINANCIAL STATEMENTS--(Continued)

12. COMMITMENTS, CONTINGENCIES, RESTRICTED ASSETS, CONCENTRATIONS
AND LEASES

Commitments, contingencies and restricted assets

At October 31, 1996, commitments for capital expenditures in progress
were approximately $38 million.

Navistar Financial's maximum exposure under all receivable sale
recourse provisions at October 31, 1996 was $215 million; however,
Navistar Financial's exposure is not considered material.

At October 31, 1996, the Canadian operating subsidiary was
contingently liable for retail customers' contracts and leases financed by
a third party. Transportation is subject to maximum recourse of $164
million on retail contracts and $9 million on retail leases. In addition,
as of October 31, 1996, Transportation is contingently liable for
approximately $45 million for various guarantees and buyback programs;
however, based on historical loss trends, Transportation's exposure is not
considered material.

The Canadian operating subsidiary and certain subsidiaries included
in financial services operations are parties to agreements which restrict
the amounts which can be distributed to Transportation in the form of
dividends or loans and advances which can be made. As of October 31,
1996, these subsidiaries had $385 million of net assets of which $260
million was restricted as to distribution.

The Parent Company and Transportation are obligated under certain
agreements with public and private lenders of Navistar Financial to
maintain the subsidiary's income before interest expense and income taxes
at not less than 125% of its total interest expense. No income
maintenance payments were required for the 3 years ended October 31, 1996.

Concentrations

At October 31, 1996, Transportation employed 9,043 hourly workers and
5,143 salaried workers in the United States and Canada. Approximately 91%
of the hourly employees and 23% of the salaried employees are represented
by unions. Of these represented employees, 89% of the hourly workers and
93% of the salaried workers are represented by the United Automobile,
Aerospace, and Agricultural Implement Workers of America (UAW) or the
National Automobile, Aerospace, and Agricultural Implement Workers of
Canada (CAW). The collective bargaining agreements with the UAW and the
CAW expire on October 1, 1998 and October 24, 1999, respectively.

Reflecting higher consumer demand for light trucks and vans, sales of
mid-range diesel engines to a domestic automobile manufacturer have
increased from 10% of consolidated sales and revenues in 1994 to 12% in
1995 and 14% in 1996.

==========
NOTES TO FINANCIAL STATEMENTS--(Continued)

12. COMMITMENTS, CONTINGENCIES, RESTRICTED ASSETS, CONCENTRATIONS
AND LEASES (continued)

Leases

Transportation has long-term noncancellable leases for use of various
equipment and facilities. Lease terms are generally for 5 to 25 years
and, in many cases, provide for renewal options. Transportation is
generally obligated for the cost of property taxes, insurance and
maintenance. Transportation leases office buildings, distribution
centers, furniture and equipment, machinery and equipment, and computer
equipment.

The majority of Transportation's lease payments are for operating
leases. At October 31, 1996, future minimum lease payments under
operating leases having lease terms in excess of one year are: 1997 - $30
million, 1998 - $27 million, 1999 - $26 million, 2000 - $25 million, 2001
- - $17 million and thereafter - $21 million. Total operating lease expense
was $32 million in 1996, $37 million in 1995 and $34 million in 1994.
Income received from sublease rentals was $6 million in 1996, 1995 and
1994, respectively.

13. LEGAL PROCEEDINGS

Transportation and its subsidiaries are subject to various claims
arising in the ordinary course of business, and are parties to various
legal proceedings which constitute ordinary routine litigation incidental
to the business of the company and its subsidiaries. In the opinion of
Transportation's management, none of these proceedings or claims is
material to the business or the financial condition of Transportation.

14. ENVIRONMENTAL MATTERS

In the fourth quarter of 1994, Transportation recorded a $33 million
charge, as a loss of discontinued operations related to environmental
liabilities at production facilities of two formerly owned businesses,
Wisconsin Steel and Solar Turbine, Inc. (Solar). Transportation reached
an agreement with the Economic Development Administration, a division of
the U.S. Department of Commerce, in 1994 in settlement of commercial and
environmental disputes related to the Wisconsin Steel property. At
October 31, 1996, the final consent decree remained subject to approval by
the U.S. Department of Justice and by Transportation.

Transportation has been named a potentially responsible party (PRP),
in conjunction with other parties, in a number of cases arising under an
environmental protection law known as the Superfund law. These cases
involve sites which allegedly have received wastes from current or former
company locations. Based on information available to Transportation,
which in most cases consists of data related to quantities and
characteristics of material generated at or shipped to each site as well
as cost estimates from PRPs and/or federal or state regulatory agencies
for the cleanup of these sites, a reasonable estimate is calculated of
Transportation's share, if any, of the probable costs and is provided for
in the financial statements. These obligations generally are recognized
no later than completion of the remedial feasibility study and are not
discounted to their present value. Transportation believes that, based on
these calculations, its share of the potential additional costs for the
cleanup of each site, other than the Wisconsin Steel and Solar sites, will
not have a material effect on Transportation's financial results.
Transportation reviews its accruals on a regular basis.

==========
NOTES TO FINANCIAL STATEMENTS--(Continued)

15. INDUSTRY SEGMENT DATA

Information concerning operations by industry segment is as follows:

Financial
Manufacturing Services
Millions of dollars Operations Operations Consolidated
- --------------------------------------------------------------------------
October 31, 1996
- ----------------
Total sales and revenues .... $5,527 $ 258 $5,731
Operating profit ............ 689 109 749
Depreciation and amortization 90 11 101
Capital expenditures ........ 117 - 117
Identifiable assets ......... 2,241 1,843 3,752

October 31, 1995
- ----------------
Total sales
and revenues .............. $6,152 $ 235 $6,326
Operating profit ............ 844 80 869
Depreciation and amortization 75 6 81
Capital expenditures ........ 139 - 139
Identifiable assets ......... 2,533 1,922 4,081

October 31, 1994
- ----------------
Total sales and revenues .... $5,171 $ 214 $5,330
Operating profit ............ 659 76 685
Depreciation and amortization 68 4 72
Capital expenditures ........ 87 - 87
Identifiable assets ......... 2,355 1,582 3,678

Intersegment sales and revenues were not material in 1996, 1995 or
1994. Transactions between manufacturing operations and financial
services operations have been eliminated from the consolidated column.

==========
NOTES TO FINANCIAL STATEMENTS--(Continued)

16. SHAREOWNER'S EQUITY

The number of authorized shares of Transportation's capital stock at
October 31, 1996 was 100,000 with a par value of $1.00 per share and the
number of issued and outstanding shares was 1,000. All the issued and
outstanding stock is owned by Navistar International Corporation and no
shares are reserved for officers and employees or for options, warrants,
conversions and other rights.

Shareowner's equity for the years ended October 31 is as follows:

Millions of dollars 1996 1995 1994
- -----------------------------------------------------------------------
Common Stock ....................... $ 786 $ 786 $ 786
------- ------- -------

Retained earnings (deficit)
Balance at beginning of the year ... (2,307) (2,283) (2,304)
Net income (loss) .................. (41) 102 7
Minimum pension liability
adjustment/other ................ 33 (127) 14
------- ------- -------
Balance at end of the year ........ (2,315) (2,308) (2,283)
------- ------- -------

Total shareowner's equity ......... $(1,529) $(1,522) $(1,497)
======= ======= =======

17. SELECTED QUARTERLY FINANCIAL DATA (Unaudited)
<TABLE>
<CAPTION>
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
-------------- ---------------- --------------- ----------------

(Millions of dollars) 1996 1995 1996 1995 1996 1995 1996 1995
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sales and revenues ... $1,427 $1,413 $1,474 $1,635 $1,383 $1,510 $1,447 $1,768
====== ====== ====== ====== ====== ====== ====== ======

Manufacturing gross
margin ............. 12.2% 12.4% 13.7% 14.0% 12.6% 14.0% 11.6% 14.4%
====== ====== ====== ====== ====== ====== ====== ======

Net income (loss) .... $ 6 $ 7 $ (2) $ 37 $ (9) $ 18 $ (36) $ 40
</TABLE>
<PAGE>
<PAGE 40>

=========
NOTES TO FINANCIAL STATEMENTS--(Continued)

18. SUPPLEMENTAL FINANCIAL INFORMATION,
AS OF OCTOBER 31 AND FOR THE YEARS THEN ENDED (Unaudited)

Navistar International Transportation Corp. (with financial services
operations on an equity basis).
(Millions of dollars)

Condensed Statement of Income 1996 1995 1994
- -------------------------------------------- ------ ------ ------
<S> <C> <C> <C>
Sales of manufactured products ............. $5,508 $6,125 $5,153
Other income ............................... 19 27 18
------ ------ ------
Total sales and revenues .............. 5,527 6,152 5,171
------ ------ ------

Cost of products and services sold ......... 4,819 5,281 4,494
Postretirement benefits .................... 219 205 175
Engineering and research expense ........... 129 113 97
Marketing and administrative expense ....... 282 277 237
Other expenses ............................. 165 180 166
------ ------ ------
Total costs and expenses ................... 5,614 6,056 5,169
------ ------ ------
Income (loss) before income taxes
Manufacturing operations ................. (87) 96 2
Financial services operations ............ 83 62 60
------ ------ ------
Income (loss) before income taxes ...... (4) 158 62
Income tax expense ......................... (37) (56) (22)
------ ------ ------
Income (loss) of continuing operations ..... (41) 102 40
Loss of discontinued operations ............ - - (33)
------ ------ ------
Net income (loss) .......................... $ (41) $ 102 $ 7
====== ====== ======

Condensed Statement of Financial Condition 1996 1995
- --------------------------------------------- ------ ------
Cash, cash equivalents
and marketable securities ................. $ 174 $ 504
Inventories ................................. 463 416
Property and equipment net .................. 666 642
Equity in Financial Services subsidiaries ... 306 282
Other assets ................................ 632 689
------ ------
Total assets ........................... $2,241 $2,533
====== ======

Accounts payable .......................... $ 772 $ 876
Postretirement benefits liabilities ....... 1,344 1,334
Other liabilities ......................... 1,654 1,845
Shareowner's equity ....................... (1,529) (1,522)
------ ------
Total liabilities
and shareowner's equity .............. $2,241 $2,533
====== ======

Condensed Statement of Cash Flow 1996 1995 1994
- --------------------------------------------- ------ ------ ------
Cash flow from operations
Net income (loss) ........................... $ (41) $ 102 $ 7
Adjustments to reconcile net income (loss)
to cash provided by (used in) operations:
Depreciation and amortization .......... 90 75 68
Equity in earnings of nonconsolidated
companies, net of dividends received . (24) (28) (10)
Other, net ............................. 3 (68) 23
Change in operating assets and liabilities .. (180) 192 62
------ ------ ------
Cash provided by (used in) operations ....... (152) 273 150
------ ------ ------

Cash flow from investment programs
Purchase of marketable securities ........... (158) (196) (409)
Sales or maturities of marketable securities. 239 145 431
Capital expenditures ........................ (117) (139) (87)
Other investment programs, net .............. (3) 5 123
------ ------ ------
Cash provided by (used in) investment programs (39) (185) 58
------ ------ ------

Cash flow from financing activities ......... (57) (66) (74)
------ ------ ------
Cash and cash equivalents
Increase (decrease) during the year ......... (248) 22 134
At beginning of the year .................... 418 396 262
------ ------ ------
Cash and cash equivalents at end of the year $ 170 $ 418 $ 396
====== ====== ======
</TABLE>

NAVISTAR INTERNATIONAL TRANSPORTATION CORP.
AND CONSOLIDATED SUBSIDIARIES
-------------------------------------------

INDEPENDENT AUDITORS' REPORT
----------------------------

Navistar International Transportation Corp.:

We have audited the financial statements and financial statement
schedule of Navistar International Transportation Corp. and Consolidated
Subsidiaries listed in Item 8 and Item 14 These consolidated financial
statements and financial statement schedule are the responsibility of
Transportation's management. Our responsibility is to express an opinion
on these consolidated financial statements and financial statement
schedule 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 consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated 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, the accompanying consolidated financial statements
present fairly, in all material respects, the financial position of
Navistar International Transportation Corp. and Consolidated Subsidiaries
at October 31, 1996 and 1995, and the results of their operations and
their cash flow for each of the three years in the period ended October
31, 1996, in conformity with generally accepted accounting principles.
Also, in our opinion, the financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly in all material respects the information set forth
therein.

Deloitte & Touche LLP
December 16, 1996
Chicago, Illinois

NAVISTAR INTERNATIONAL TRANSPORTATION CORP.
AND CONSOLIDATED SUBSIDIARIES
-------------------------------------------

INDEPENDENT AUDITORS' CONSENT
-----------------------------

Navistar International Transportation Corp.:

We consent to the incorporation by reference in Post-Effective
Amendment No. 1 to Registration No. 2-70979 of Navistar International
Transportation Corp. on Form S-8 of our reports on Navistar International
Transportation Corp. and Navistar Financial Corporation dated December 16,
1996, appearing and incorporated by reference in this Annual Report on
Form 10-K of Navistar International Transportation Corp. for the year
ended October 31, 1996.

Deloitte & Touche LLP
January 22, 1997
Chicago, Illinois

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE

None
PART III

ITEMS 10, 11, 12 AND 13

Intentionally omitted. See the index page to this Report for
explanation.

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K

Financial Statements
- --------------------

See Index to Financial Statements in Item 8.

Schedule Page
- -------- ----

II - Valuation and Qualifying Accounts
and Reserves .......................... F-1

All other schedules are omitted because of the absence of the
conditions under which they are required or because information called for
is shown in the financial statements and notes thereto.

Exhibits, Including those Incorporated by Reference Page
- --------------------------------------------------- ----

(3) Articles of Incorporation and By-Laws ...... E-1
(4) Instruments Defining the Rights
of Security Holders, including Indentures. E-2
(10) Material Contracts ........................ E-3
(23) Independent Auditors' Consent
(24) Power of Attorney
(27) Financial Data Schedule ................... N/A
(28.1) Navistar Financial Corporation Annual Report
on Form 10-K for the fiscal year ended
October 31, 1996 .......................... N/A

All exhibits other than those indicated above are omitted because of
the absence of the condition under which they are required or because
information called for is shown in the financial statements and notes
thereto.

Reports on Form 8-K
- -------------------

No reports on Form 8-K were filed for the three months ended October
31, 1996.

<PAGE>
<PAGE 44>
SIGNATURE

NAVISTAR INTERNATIONAL TRANSPORTATION CORP.
AND CONSOLIDATED SUBSIDIARIES
-------------------------------------------

SIGNATURE

Pursuant to the requirements of Section 13 and 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.

NAVISTAR INTERNATIONAL TRANSPORTATION CORP.
- -------------------------------------------
(Registrant)

/s/ J. Steven Keate
- -----------------------------------
J. Steven Keate January 22, 1997
Vice President and Controller
(Principal Accounting Officer)

<PAGE>
<PAGE 45>
SIGNATURE

NAVISTAR INTERNATIONAL TRANSPORTATION CORP.
AND CONSOLIDATED SUBSIDIARIES
-------------------------------------------
POWER OF ATTORNEY

Each person whose signature appears below does hereby make,
constitute and appoint John R. Horne, J. Steven Keate and Robert A.
Boardman and each of them acting individually, true and lawful attorneys-
in-fact and agents with power to act without the other and with full power
of substitution, to execute, deliver and file, for and on such person's
behalf, and in such person's name and capacity or capacities as stated
below, any amendment, exhibit or supplement to the Form 10-K Report making
such changes in the report as such attorney-in-fact deems appropriate.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated:

Signature Title Date
- ---------------------- --------------------------- -----------------

/s/ John R. Horne
- ----------------------
John R. Horne Chairman, President January 22, 1997
and Chief Executive
Officer and Director
(Principal Executive
Officer)

/s/ Robert C. Lannert
- ----------------------
Robert C. Lannert Executive Vice President January 22, 1997
and Chief Financial
Officer and Director
(Principal Financial
Officer)

<PAGE>
<PAGE 46>
<TABLE>
<CAPTION>
SCHEDULE II

NAVISTAR INTERNATIONAL TRANSPORTATION CORP.
AND CONSOLIDATED SUBSIDIARIES
============
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR THE YEARS ENDED OCTOBER 31, 1996, 1995 AND 1994
(MILLIONS OF DOLLARS)

COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
-------- -------- -------- -------- --------

BALANCE DEDUCTIONS FROM
DESCRIPTION AT RESERVES BALANCE
DESCRIPTION BEGINNING ADDITIONS CHARGED AT END
OF RESERVES DEDUCTED FROM OF YEAR TO INCOME DESCRIPTION AMOUNT OF YEAR
----------- ------------- --------- ----------------- ----------- ------ -------
<S> <S> <C> <C> <S> <C> <C>
Reserves deducted from
assets to which they
apply:

1996
----
Uncollectible notes
and accounts
Allowance for written off and
losses on Notes and accounts reserve adjustments,
receivables .... receivable .... $ 28 $ 21 less recoveries ... $ 18 $ 31
===== ===== ===== =====

1995
----
Uncollectible notes
and accounts
Allowance for written off and
losses on Notes and accounts reserve adjustments,
receivables .... receivable .... $ 25 $ 4 less recoveries ... $ 1 $ 28
===== ===== ===== =====

1994
----
Uncollectible notes
and accounts
Allowance for written off and
losses on Notes and accounts reserve adjustments,
receivables .... receivable .... $ 36 $ 2 less recoveries ... $ 13 $ 25
===== ===== ===== =====
</TABLE>

F-1

EXHIBIT 3

NAVISTAR INTERNATIONAL TRANSPORTATION CORP.
AND CONSOLIDATED SUBSIDIARIES
-------------------------------------------

ARTICLES OF INCORPORATION AND BY-LAWS

The following documents of Navistar International Transportation
Corp. are incorporated herein in those executed and conformed copies of
this report provided to the Securities and Exchange Commission, the New
York Stock Exchange, the Chicago Stock Exchange and the Pacific Stock
Exchange.

3.1 Restated Certificate of Incorporation of Navistar
International Transportation Corp. effective October 27, 1995,
filed as Exhibit 3.1 on Annual Report on Form 10-K dated
October 31, 1996, which was filed on January 26, 1996,
Commission File No. 1-5236.

3.2 The By-Laws of Navistar International Transportation Corp.
effective February 14, 1995, filed as Exhibit 3.2 on Annual
Report on Form 10-K dated October 31, 1996 which was filed
on January 26, 1996, on Commission File No. 1-5236.

E-1

EXHIBIT 4

NAVISTAR INTERNATIONAL TRANSPORTATION CORP.
AND CONSOLIDATED SUBSIDIARIES
-------------------------------------------

INSTRUMENTS DEFINING RIGHTS OF SECURITY HOLDERS
INCLUDING INDENTURES

The following instruments of Navistar International Transportation
Corp. and its principal subsidiary Navistar Financial Corporation defining
the rights of security holders are incorporated herein by reference.

4.1 Indenture, dated as of March 1, 1968, between Navistar
International Transportation Corp. and Manufacturers Hanover
Trust Company, as Trustee, and succeeded by FIDATA Trust Company
of New York, as successor Trustee, for 6 1/4% Sinking Fund
Debentures due 1998 for $50,000,000. Filed on
Registration No. 2-28150.

4.2 Indenture, dated as of June 15, 1974, between Navistar
International Transportation Corp. and Harris Trust and Savings
Bank, as Trustee, and succeeded by Commerce Union Bank,
now known as Sovran Bank/Central South, as successor Trustee,
for 9% Sinking Fund Debentures due 2004 for $150,000,000.
Filed on Registration No. 2-51111.

4.3 Indenture, dated as of September 22, 1989, between Navistar
Financial Corporation, the First National Bank of Chicago,
as Trustee, succeeded by Bank One, Columbus, N.A., as successor
Trustee, for $400,000,000 of debt securities on terms to be
determined at time of sale. Filed on Registration No. 33-31003.

4.4 Indenture, dated as of November 15, 1993, between Navistar
Financial Corporation and Bank of America, Illinois formerly
known as Continental Bank, National Association, as Trustee,
for 8 7/8% Senior Subordinated Notes due 1998 for $100,000,000.
Filed on Registration No. 33-50541.

======

Instruments defining the rights of holders of other unregistered
long-term debt of Navistar and its subsidiaries have been omitted from
this exhibit index because the amount of debt authorized under any such
instrument does not exceed 10% of the total assets of the Registrant and
its consolidated subsidiaries. The Registrant agrees to furnish a copy of
any such instrument to the Commission upon request.

E-2

EXHIBIT 10

NAVISTAR INTERNATIONAL TRANSPORTATION CORP.
AND CONSOLIDATED SUBSIDIARIES
-------------------------------------------

MATERIAL CONTRACTS

The following documents of Navistar International Transportation
Corp. and its principal subsidiary Navistar Financial Corporation are
incorporated herein by reference.

10.1 Pooling and Servicing Agreement dated as of December 1, 1990,
between Navistar Financial Corporation as Servicer, Navistar
Financial Securities Corporation as Purchaser, with respect
to Dealer Note Trust 1990. Filed on Registration No. 33-36767.

10.2 Form of Executive Severance Agreement which is executed
with all executive officers dated September 14, 1992.
Commission File No. 1-5236.

10.3 Security, Pledge and Trust Agreement between Navistar
Financial Corporation and Bankers Trust Company, Trustee,
dated as of April 26, 1993. Filed on Form 8-K dated
April 30, 1993. Commission File No. 1-4146-1.

10.4 Amended and Restated Purchase Agreement among Truck Retail
Instalment Paper Corp., as Seller, Navistar Financial
Corporation, certain purchasers, Chemical Bank and Bank of
America, Illinois formerly known as Continental Bank N.A.
as Co-Agents, and J. P. Morgan Delaware as Administrative
Agent, dated as of April 26, 1993. Filed on Form 8-K dated
April 30, 1993. Commission File No. 1-4146-1.

10.5 Indenture dated as of November 10, 1993 between Navistar
Financial 1993-A Owner Trust and The Bank of New York,
as Indenture Trustee, with respect to Navistar Financial
1993-A Owner Trust. Filed on Registration No. 33-50291.

10.6 Navistar 1994 Performance Incentive Plan. Filed as Appendix
to Proxy Statement dated January 27, 1994. Commission File
No. 1-9618.

10.7 Indenture dated as of May 3, 1994 between Navistar
Financial 1994-A Owner Trust and The Bank of New York,
as Indenture Trustee, with respect to Navistar Financial
1994-A Owner Trust. Filed on Registration No. 33-50291.

10.8 Indenture dated as of August 3, 1994 between Navistar
Financial 1994-B Owner Trust and The Bank of New York,
as Indenture Trustee, with respect to Navistar Financial
1994-B Owner Trust. Filed on Registration No. 33-50291.

10.9 Amended and Restated Credit Agreement dated as of
November 4, 1994 among Navistar Financial Corporation,
certain banks, certain Co-Arranger banks, and Morgan Guaranty
Trust Company of New York, as Administrative Agent. Filed on
Form 8-K dated November 4, 1994. Commission File No. 1-4146-1.

E-3
<PAGE>
<PAGE 2>

EXHIBIT 10 (CONTINUED)

NAVISTAR INTERNATIONAL TRANSPORTATION CORP.
AND CONSOLIDATED SUBSIDIARIES
-------------------------------------------

MATERIAL CONTRACTS

10.10 Liquidity Agreement dated as of November 7, 1994 among NFC
Asset Trust, as Borrower, Chemical Bank, Bank of America
Illinois, The Bank of Nova Scotia, and Morgan Guaranty Trust
Company of New York, as Co-Arrangers, and Chemical Bank,
as Administrative Agent. Filed on Form 8-K dated November 4,
1994. Commission File No. 1-4146-1.

10.11 Indenture dated as of December 15, 1994 between Navistar
Financial 1994-C Owner Trust and the Bank of New York,
as Indenture Trustee, with respect to Navistar Financial
1994-C Owner Trust. Filed on Registration No. 33-55865.

10.12 Indenture dated as of May 25, 1995, between Navistar
Financial 1995-A Owner Trust and The Bank of New York,
as Indenture Trustee, with respect to Navistar Financial
1995-A Owner Trust. Filed on Registration 33-55865.

10.13 Indenture dated as of November 1, 1995, between Navistar
Financial 1995-B Owner Trust and The Bank of New York,
as Indenture Trustee, with respect to Navistar Financial
1995-B Owner Trust. Filed on Registration 33-55825.

10.14 Amendment No. 2 dated as of March 29, 1996, to the Amended
and Restated Credit Agreement dated as of November 4, 1994,
as amended by Amendment No. 1 dated as of December 15, 1995,
among Navistar Financial, certain banks, certain Co-Arranger
banks, and Morgan Guaranty Trust Company of New York,
as Administrative Agent filed on Form 8-K dated June 5, 1996.
Commission File No. 1-4146-1.

10.15 Indenture dated as of November 6, 1996, between Navistar
Financial 1995-B Owner Trust and The Bank of New York,
as Indenture Trustee, with respect to Navistar Financial
1996-A Owner Trust. Filed on Registration No. 33-55865.

10.16 Indenture dated as of November 6, 1996, between Navistar
Financial 1995-B Owner Trust and The Bank of New York,
as Indenture Trustee, with respect to Navistar Financial
1996-B Owner Trust. Filed on Registration No. 33-55865.

E-4

<ARTICLE> 5
<MULTIPLIER> 1,000,000

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1996
<PERIOD-END> OCT-31-1996
<CASH> 204
<SECURITIES> 144
<RECEIVABLES> 1677
<ALLOWANCES> (31)
<INVENTORY> 463
<CURRENT-ASSETS> 0<F1>
<PP&E> 1612
<DEPRECIATION> (842)
<TOTAL-ASSETS> 3752
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 2304
0
0
<COMMON> 786
<OTHER-SE> (2315)
<TOTAL-LIABILITY-AND-EQUITY> 3752
<SALES> 5508
<TOTAL-REVENUES> 5731
<CGS> 4828
<TOTAL-COSTS> 5735
<OTHER-EXPENSES> 220
<LOSS-PROVISION> 21
<INTEREST-EXPENSE> 168
<INCOME-PRETAX> (4)
<INCOME-TAX> (37)
<INCOME-CONTINUING> (41)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (41)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<FN>
<F1>The company has adopted an unclassified presentation in the Statement of
Financial Condition.
</FN>

</TABLE>

EXHIBIT 28.1

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

FORM 10-K

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended October 31, 1996

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________ to__________
-----------------
Commission File Number 1-4146-1
-----------------

NAVISTAR FINANCIAL CORPORATION
(Exact name of Registrant as specified in its charter)

Delaware 36-2472404
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)

2850 West Golf Road
Rolling Meadows, Illinois 60008
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code 847-734-4275

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
and (2) has been subject to such filing requirements for the past
90 days. Yes X No__

As of December 31, 1996, the number of shares outstanding of the
registrant's common stock was 1,600,000.

THE REGISTRANT IS A WHOLLY-OWNED SUBSIDIARY OF NAVISTAR
INTERNATIONAL TRANSPORTATION CORP. AND MEETS THE CONDITIONS SET
FORTH IN GENERAL INSTRUCTION J(1) (a) AND (b) OF FORM 10-K AND IS
THEREFORE FILING THIS FORM WITH THE REDUCED DISCLOSURE FORMAT.
<PAGE>

NAVISTAR FINANCIAL CORPORATION
AND SUBSIDIARIES

FORM 10-K

Year Ended October 31, 1996
<TABLE>
<CAPTION>

INDEX
10-K Page
PART I
<S> <C> <C>
Item 1. Business (A) 1
Item 2. Properties (A) 1
Item 3. Legal Proceedings 1
Item 4. Submission of Matters to a Vote of
Security Holders (A) 2

PART II

Item 5. Market for the Registrant's Common Equity and
Related Stockholder Matters 2
Item 6. Selected Financial Data (A) 2
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations (A) 3
Item 8. Financial Statements and Supplementary Data 9
Independent Auditors' Report 39
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 40

PART III

Item 10. Directors and Executive Officers of the
Registrant (A) 40
Item 11. Executive Compensation (A) 40
Item 12. Security Ownership of Certain Beneficial Owners
and Management (A) 40
Item 13. Certain Relationships and Related
Transactions (A) 40

PART IV

Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K 40

SIGNATURES - Principal Accounting Officer 41
- Directors 42

POWER OF ATTORNEY 42

EXHIBITS E-1

(A) - Omitted or amended as the registrant is a wholly-owned
subsidiary of Navistar International Transportation Corp. and
meets the conditions set forth in General Instructions J(1) (a)
and (b) of Form 10-K and is, therefore, filing this Form with
reduced disclosure format.
</TABLE>
<PAGE>
PART I

Item 1. Business

The registrant, Navistar Financial Corporation ("NFC"), was
incorporated in Delaware in 1949 and is a wholly-owned subsidiary
of Navistar International Transportation Corp. ("Transportation"),
which is wholly-owned by Navistar International Corporation ("Navistar").
As used herein, the "Corporation" refers to Navistar Financial Corporation
and its wholly-owned subsidiaries unless the context otherwise requires.

The Corporation provides wholesale, retail, and to a lesser
extent, lease financing in the United States for sales of new and
used trucks sold by Transportation and Transportation's dealers.
The Corporation also finances wholesale accounts and selected
retail accounts receivable of Transportation. Sales of new
products (including trailers) of other manufacturers are also
financed regardless of whether designed or customarily sold for
use with Transportation's truck products. Harco National
Insurance Company, NFC's wholly-owned insurance subsidiary,
provides commercial physical damage and liability insurance
coverage to Transportation's dealers and retail customers, and to
the general public through the independent insurance agency system.

Item 2. Properties

The Corporation's properties principally consist of office
equipment and leased office space in Rolling Meadows, Illinois;
Columbus, Ohio; Atlanta, Georgia; Plano, Texas; Mt. Laurel, New
Jersey; and San Ramon, California. The office equipment owned
and in use by the Corporation is not significant in relation to
the total assets of the Corporation.

Item 3. Legal Proceedings

During 1992, auditors of the Illinois Department of Revenue
("Department") began an income tax audit of NFC for the fiscal
years ended October 31, 1989, 1990 and 1991. On February 1,
1994, the Department issued a Notice of Deficiency to NFC for
approximately $11.9 million. The Department has taken the
position that nearly 100% of NFC's income during these years
should be attributed to and taxed by Illinois. NFC maintains
that the Department's interpretation and application of the law
is incorrect and improper, and that the Department's intended
result is constitutionally prohibited. Based on discussions with
outside counsel, NFC's management is of the opinion that it is
more likely than not that NFC's position will prevail such that
the Department's action will not have a material impact on NFC's
earnings and financial position.

<PAGE>
PART I (Continued)

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

Intentionally omitted. See the index page of this Report for
explanation.

PART II

Page
<S> <C> <C>
Item 5. Market for the Registrant's Common Equity and
Related Stockholder Matters 29

Item 6. Selected Financial Data

Intentionally omitted. See the index page to this Report for
explanation.

</TABLE>
<PAGE>

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

Financing Volume

The Corporation's serviced receivables portfolio, which
includes sold receivables, totaled $3.3 billion at October 31,
1996, up from $3.2 billion and $2.5 billion at October 31, 1995
and 1994, respectively.

In fiscal 1996 customer demand for Class 5 through 8 trucks
declined approximately 9% compared with 1995 and was slightly
higher than 1994 demand. In spite of lower customer demand and
the continued highly competitive commercial financing market,
fiscal 1996 acquisitions of retail notes and leases of $1.1
billion, net of unearned finance income, were equal to 1995. The
Corporation's finance market share of new trucks manufactured by
Transportation and sold in the United States increased to 16.3%
in 1996 from 14.4% in 1995. Acquisitions in 1995 were $.2
billion higher than 1994 due to increased demand offset in part
by lower finance market share of 14.4% in 1995 compared with
15.3% in 1994. Serviced retail notes and lease financing
balances were $2.2 billion at October 31, 1996, compared with
$1.9 billion and $1.6 billion at October 31, 1995 and 1994,
respectively.

During fiscal 1996, the Corporation supplied 94% of the
wholesale financing of new trucks sold to Transportation's
dealers, slightly higher than the 93% in 1995 and 1994. During
1996, Transportation dealers generally reduced inventory levels
in response to lower customer demand. As a result, acquisitions
of wholesale notes decreased $.3 billion, 9%, to $2.7 billion in
1996 after a 29% increase to $3.0 billion in 1995 from 1994.
Serviced wholesale note balances were $685 million at October 31,
1996, compared to $854 million and $577 million at October 31,
1995 and 1994, respectively.

Owned finance receivables balances, including subordinated
interests in retail and wholesale receivables, decreased to $1.4
billion at October 31, 1996, from $1.5 billion at October 31,
1995 due primarily to lower wholesale financing. Balances in 1995
were $.2 billion higher than 1994 as a result of the higher level
of wholesale and retail financing. Receivable sales were a
significant source of funding during fiscal 1996 and 1995 and, as
a result, sold retail receivable balances increased to $1.4
billion at October 31, 1996 from $1.2 billion and $1.0 billion at
October 31, 1995 and 1994, respectively. Sold wholesale note
balances were $500 million at October 31, 1996 and 1995 and $300
million at October 31, 1994.

Results of Operations

The Corporation's after tax return on equity was a record
18.1% in 1996 compared with 15.0% and 15.1% in 1995 and 1994,
respectively. Income before taxes in 1996 was $81 million, a 37%
increase from $59 million in 1995, primarily as a result of
higher gains on sales of retail notes, higher levels

<PAGE>

Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)

Results of Operations (Continued)

of wholesale note balances during the first nine months of 1996
and higher retail and lease balances offset in part by a higher
loss provision. Gains on sales of retail note receivables during
1996 were $20 million on sales of $985 million compared with
gains of $5 million on sales of $740 million in 1995. The higher
gains on sales resulted from higher margins on retail notes due
to declining market interest rates prior to the sale in November
1995. During a declining interest rate environment, the
Corporation's acquisition spreads improve as NFC's cost of
borrowing differs from the time when interest rates are quoted to
borrowers and the time when notes are acquired. In addition, the
effective interest rate for each sale is based on a market
interest rate at the time of the sale, which may be up to six
months after the Corporation acquired the retail note. During
fiscal 1995, the opposite impact was experienced by NFC on a sale
in November 1994 as market interest rates were rising and a loss
was recorded on that sale.

Income before taxes of $59 million in 1995 increased 6% from
$55 million in 1994 as a result of higher finance receivables to
support the demand for Transportation truck products and
improvement in the Corporation's borrowing spread over market
interest rates. This increase was partially offset by lower
gains on sales of retail notes. Gains on the $740 million retail
notes sold in 1995 were $5 million compared with $12 million on
sales of $1,033 million in 1994.

The more significant elements of revenue and expense
impacting net income for these years are discussed in the
following paragraphs:

Retail note and lease financing revenue for 1996 was $98
million compared with $73 million and $71 million in 1995 and
1994, respectively. The 1996 improvement over 1995 is primarily
due to higher gains on sold notes and higher average balances.
The increase in 1995 revenues compared with 1994 is due to higher
financing volume offset in part by lower gains on sold notes.

Wholesale note revenue increased 5% in 1996 to $57 million
as a result of higher average outstanding note balances in the
first nine months of the fiscal year offset in part by lower
average yields relating to a lower prime interest rate. In 1995
revenue increased 38% compared with 1994 as the level of
wholesale financing was higher to support increased demand for
Transportation truck products and higher average yields due to
higher prime interest rates.

Revenue from accounts decreased in 1996 to $27 million from
$29 million in 1995 as the decline in customer demand caused a
lower level of financing activity. Revenue in 1995 was 32%
higher than 1994 due to higher outstanding balances in support of
the increased demand for Transportation truck products and higher
average yields due to higher prime interest rates.

<PAGE>

Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)

Results of Operations (Continued)

Servicing fee income increased to $20 million in 1996 from
$18 million in 1995 and $17 million in 1994 as a result of higher
levels of sold note receivable balances which the Corporation
continues to service.

Insurance premiums earned by Harco decreased 6% to $42
million in 1996 from $45 million in 1995 and 12% in 1995 from
1994. The decreases in 1996 and 1995 reflect reductions in
written premiums of truck liability lines in response to adverse
loss experience in those lines and to increased competition.

Borrowing costs decreased slightly in 1996 to $82 million
from $84 million in 1995 after a significant increase in 1995
compared with $70 million in 1994. During 1996 the Corporation's
weighted average interest rate on all debt declined to 6.5% from
7.4% in 1995 primarily due to the maturity of high fixed rate
public debt during 1995 and 1996 and also due to lower market
interest rates. The favorable rate impact was offset in part by
higher debt balances to support receivable balances. The
increase in 1995 from 1994 was primarily the result of higher
debt balances to support increased wholesale note and account
balances and higher market interest rates, offset in part by an
improvement in the Corporation's borrowing spread over market
interest rates as a result of the 1995 amendment to the revolving
debt agreement and the asset-backed commercial paper ("ABCP")
program. The ratio of debt to equity was 4.7:1, 5.2:1 and 4.8:1
at October 31, 1996, 1995, and 1994, respectively.

Credit collection and administrative expenses were $28
million in 1996 and 1995 compared with $26 million in 1994. The
$2 million increase in 1995 compared with 1994 was due to retail
marketing efforts and incentive programs.

The provision for losses on receivables totaled $9 million
in 1996 compared with $3 million in 1995 and $2 million in 1994.
As the trucking industry softened during 1996, the high level of
new truck purchases in 1995 caused an over capacity in the
trucking sector. This over capacity coupled with competitive
freight rates and higher fuel costs impacted NFC's customers'
abilities to meet obligations and has resulted in higher
delinquencies, repossessions and credit losses. Notes and
account write-offs (recoveries), including sold notes totaled $5
million in 1996, $(1) million in 1995 and $1 million in 1994.
The Corporation's allowance for losses as a percentage of
serviced finance receivables was .74%, .62% and .65% at October
31, 1996, 1995 and 1994, respectively.

Insurance claims and underwriting expenses decreased to $44
million in 1996 from $47 million and $54 million in 1995 and
1994, respectively. The decline resulted from decreases in
losses incurred in Harco's truck liability insurance lines and
lower commission costs associated with lower volumes of premiums
written through general agents.

<PAGE>

Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)

Liquidity and Funds Management

The Corporation's operations are substantially dependent
upon the production and sale of Transportation's truck products.
Navistar Financial has traditionally obtained the funds to
provide financing to Transportation's dealers and retail
customers from sales of receivables, commercial paper, short- and
long-term bank borrowings, medium- and long-term debt issues and
equity capital. The current debt ratings of the Corporation,
detailed below, have made bank borrowings and sales of finance
receivables the most economical sources of cash. The
Corporation's insurance operation generates its funds through
internal operations and has no external borrowings.

Operations used $29 million in cash in 1996 as the cash
provided from net income of $49 million was offset by a decrease
in accounts payable reflecting the timing of payments to
Transportation. Investment activities provided $95 million in
cash primarily due to a $163 million decline in wholesale note
and account balances, offset in part by higher retail and
equipment leasing activity. During 1996, the purchase of $1,108
million retail notes and lease receivables was funded with $982
million proceeds from the sale of the receivables and principal
collections of $125 million. The cash provided from investing
activities was used to lower debt funding and to pay dividends of
$26 million. See also the "Statement of Consolidated Cash Flow"
on page 12.

Over the last three years, operations provided $103 million
in cash and proceeds from the sale of retail receivables totaled
$2,704 million. These amounts were used mainly to fund
receivable acquisitions of $2,747, net of principal collections
on the receivables, and dividend payments of $61 million.

Receivable sales were a significant source of funding in
1996 and 1995. Through the asset-backed public market, the
Corporation has been able to fund fixed rate retail note
receivables at rates offered to companies with investment grade
ratings. During fiscal 1996 and 1995, the Corporation sold $985
and $740 million, respectively, of retail notes, through Navistar
Financial Retail Receivables Corporation ("NFRRC"), a wholly-
owned subsidiary, to owner trusts which in turn sold notes and
certificates to investors. At October 31, 1996, the remaining
shelf registration available to NFRRC for issuance of asset-
backed securities was $2.4 billion. The Corporation has a $500
million revolving wholesale note trust that provides for the
continuous sale of eligible wholesale notes on a daily basis.
The trust is funded by securities sold to the public comprised of
three $100 million tranches of investor certificates maturing
serially from 1997 to 1999 and a $200 million tranche of investor
certificates maturing in 2004. See Note 5 to the Consolidated
Financial Statements for further discussion.

The Corporation has a $925 million bank revolving credit
facility and a $400 million asset-backed commercial paper
("ABCP") program supported by a bank liquidity facility, which
mature in March 2001. See Note 10 to the Consolidated Financial
Statements for further discussion.

<PAGE>

Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)

Liquidity and Funds Management (Continued)

In March 1995, ratings on the Corporation's debt were
upgraded by Moody's Investors Service, Inc. ("Moody's").
Moody's raised its ratings for the Corporation's debt from Ba3 to
Ba2 for senior debt and from B2 to B1 for subordinated debt. In
March 1995, Duff & Phelps confirmed its debt ratings of BB+ for
senior debt and BB for subordinated debt. In October 1993,
ratings on the Corporation's debt were reviewed by Standard and
Poor's Corporation ("Standard and Poor's"). Standard and Poor's
raised its ratings for the Corporation's debt from B- to BB for
senior debt and from CCC to B+ for subordinated debt. The
Corporation's commercial paper is rated "not prime" by Moody's.

In November 1996, the Corporation sold $487 million of
retail notes, net of unearned finance income, through NFRRC to an
owner trust which in turn sold notes and certificates to
investors. A gain of $6.9 million was recognized on the sale.

The Corporation manages sensitivity to interest rate changes
by funding floating rate assets with floating rate debt,
primarily borrowings under the bank revolving credit agreement,
and fixed rate assets with fixed rate debt, equity and floating
rate debt. Management has limited the amount of fixed rate
assets funded with floating rate debt by selling retail
receivables on a fixed rate basis and, to a lesser extent, by
utilizing derivative financial instruments. See notes 1 and 14
to the Consolidated Financial Statements. Corporate policy
prohibits the use of derivatives for speculative purposes.

On February 1, 1994, the Illinois Department of Revenue
("Department") issued a Notice of Deficiency to the Corporation
for approximately $12 million for the fiscal years 1989 throuth
1991. The Corporation maintains that the Department's
interpretation and application of the law is incorrect and
improper. Based on discussions with outside counsel, NFC's
management is of the opinion that NFC's position will prevail and
the Department's action will not have a material impact on NFC's
financial condition. See Note 8 to the Consolidated Financial
Statements for further discussion.

Pending Accounting Standards

In June 1996, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 125 ("SFAS
No. 125"), "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities" which the Corporation
must adopt for all applicable transactions occurring after
December 31, 1996. The Corporation will apply SFAS No. 125 to
securitization transactions occurring on or after January 1,
1997. The new standard is not expected to have a material effect
on the Corporation's net income or financial condition.

<PAGE>

Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)

Business Outlook

The demand for heavy trucks is forecast to continue to
soften during fiscal 1997 and correspondingly NFC's profitability
and wholesale and retail financing activity are anticipated to be
lower. Competition will continue to put pressure on the
Corporation's retail note acquisition activity and retail note
margins.

Management believes that collections on the outstanding
receivables portfolio plus cash available from the Corporation's
various funding sources will permit Navistar Financial to meet
the financing requirements of Transportation's dealers and retail
customers through 1997 and beyond.

Page
Item 8. Financial Statements and Supplementary Data

Navistar Financial Corporation and Subsidiaries:
<S> <C>
Statement of Consolidated Income and Retained Earnings
for the years ended October 31, 1996, 1995 and 1994 10
Statement of Consolidated Financial Condition as of
October 31, 1996 and 1995 11
Statement of Consolidated Cash Flow for the years ended
October 31, 1996, 1995 and 1994 12
Notes to Consolidated Financial Statements 13
Supplementary Financial Data 34
Independent Auditors' Report 39
</TABLE>
<PAGE>

Navistar Financial Corporoation and Subsidiaries

Statement of Consolidated Income and Retained Earnings
Millions of Dollars

<TABLE>
<CAPTION>
For the years ended October 31 1996 1995 1994
<S> <C> <C> <C>
Revenues
Retail notes and lease financing $ 97.7 $ 73.3 $ 71.4
Wholesale notes 56.6 54.1 39.2
Accounts 26.6 29.2 22.2
Servicing fee income 20.5 18.3 17.3
Insurance premiums earned 42.0 44.6 51.1
Marketable securities 9.4 8.7 9.6
Total 252.8 228.2 210.8

Expenses
Cost of borrowing:
Interest expense (Notes 9 and 10) 73.2 75.1 62.7
Other 8.4 9.1 7.1
Total 81.6 84.2 69.8
Credit, collection and administrative 28.2 27.9 25.9
Provision for losses on receivables (Note 7) 9.3 2.6 2.3
Insurance claims and underwriting 44.4 46.7 54.0
Other expense, net 8.8 8.1 3.6
Total 172.3 169.5 155.6

Income Before Taxes 80.5 58.7 55.2

Taxes on Income (Note 8) 31.1 22.5 21.2

Net Income 49.4 36.2 34.0

Retained Earnings
Beginning of year 84.0 56.8 48.4
Dividends paid
(26.0) (9.0) (25.6)
End of year (Note 13) $107.4 $ 84.0 $ 56.8

</TABLE>

See Notes to Consolidated Financial Statements.

<PAGE>

Navistar Financial Corporation and Subsidiaries

Statement of Consolidated Financial Condition
Millions of Dollars

<TABLE>
<CAPTION>
As of October 31 1996 1995
<S> <C> <C>
ASSETS

Cash and Cash Equivalents $ 6.7 $ 2.9
Marketable Securities (Note 4) 128.1 131.8
Receivables
Finance receivables (Note 5) 1,205.2 1,381.3
Allowance for losses (Note 7) (11.6) (10.4)
Receivables, net 1,193.6 1,370.9

Amounts Due from Sales of Receivables (Note 5) 264.3 247.8
Equipment on Operating Leases, Net (Note 6) 101.1 39.3
Repossessions 13.2 5.8
Reinsurance Receivables 21.2 24.8
Other Assets 65.6 51.4

Total Assets $1,793.8 $1,874.7

LIABILITIES AND SHAREOWNER'S EQUITY

Short-Term Debt (Note 9) $ 99.4 $ 50.5
Accounts Payable 66.7 138.8
Other Liabilities 19.7 24.1
Senior and Subordinated Debt (Note 10) 1,206.4 1,279.8
Dealers' Reserves 22.3 21.0
Unpaid Insurance Claims and Unearned Premiums 99.6 103.8

Commitments and Contingent Liabilities (Notes 8, 12 & 15) - -

Shareowner's Equity (Note 13)
Capital stock (Par value $1.00, 1,600,000 shares
issued and outstanding) and paid-in capital 171.0 171.0
Retained earnings 107.4 84.0
Unrealized gains on marketable
securities (Note 4) 1.3 1.7
Total 279.7 256.7

Total Liabilities and Shareowner's Equity $1,793.8 $1,874.7
</TABLE>

See Notes to Consolidated Financial Statements.

<PAGE>

Navistar Financial Corporation and Subsidiaries

Statement of Consolidated Cash Flow
Millions of Dollars
<TABLE>
<CAPTION>
For the years ended October 31 1996 1995 1994

Cash Flow From Operations
<S> <C> <C> <C>
Net income $ 49.4 $ 36.2 $ 34.0
Adjustments to reconcile net income to
cash provided from operations:
Gains on sales of receivables (Note 5) (20.2) (5.2) (11.8)
Depreciation and amortization 15.3 11.1 8.7
Provision for losses on receivables (Note 7) 9.3 2.6 2.3
Increase (decrease) in accounts payable
to affiliated companies (65.0) 73.2 (0.9)
Other (17.3) (6.7) (12.3)
Total (28.5) 111.2 20.0

Cash Flow From Investing Activities

Proceeds from sold retail notes 982.1 726.8 994.8
Purchase of retail notes and lease receivables (1,107.6) (1,099.5) (915.9)
Principal collections on retail notes and
lease receivables 125.4 123.4 180.9
Acquisitions (over)/under cash collections of
wholesale notes and accounts receivable 163.0 (77.1) (140.0)
Purchase of marketable securities (63.0) (61.9) (51.8)
Proceeds from sales and maturities of
marketable securities 67.7 67.3 45.1
Increase in property and equipment
leased to others (72.8) (18.7) (5.3)
Total 94.8 (339.7) 107.8

Cash Flow From Financing Activities

Net increase (decrease) in short-term debt 48.9 (368.7) 344.2
Net increase (decrease) in bank
revolving credit facility usage (56.0) 405.0 (372.0)
Net increase in asset-backed commercial paper
facility usage 88.1 275.8 -
Principal payments on long-term debt (117.5) (100.0) (180.0)
Proceeds from issuance of long-term debt - - 100.0
Dividends paid to Transportation (26.0) (9.0) (25.6)
Total (62.5) 203.1 (133.4)

Increase/(Decrease) in Cash and Cash Equivalents 3.8 (25.4) (5.6)

Cash and Cash Equivalents at Beginning of Year 2.9 28.3 33.9

Cash and Cash Equivalents at End of Year $ 6.7 $ 2.9 $ 28.3

Supplementary disclosure of cash flow information:
Interest paid $ 76.3 $ 74.3 $ 64.8
Income taxes paid $ 32.2 $ 14.6 $ 22.1

</TABLE>

See Notes to Consolidated Financial Statements.

<PAGE>

NAVISTAR FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE YEARS ENDED OCTOBER 31, 1996

MILLIONS OF DOLLARS

1. SUMMARY OF ACCOUNTING POLICIES

Principles of Consolidation

The consolidated financial statements include the accounts
of Navistar Financial Corporation ("NFC") and its wholly-owned
subsidiaries ("Corporation"). All significant intercompany
accounts and transactions have been eliminated. All of the
Corporation's capital stock is owned by Navistar International
Transportation Corp. ("Transportation"), which is wholly owned by
Navistar International Corporation ("Navistar").

Nature of Operations

The Corporation's primary business is the retail, wholesale,
and to a lesser extent, lease financing of products sold by
Transportation and its dealers within the United States. The
Corporation also provides commercial physical damage and
liability insurance coverage to Transportation's dealers and
retail customers and to the general public through the
independent insurance agency system.

Estimates

The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.

Revenue on Receivables

Finance charges on retail notes and finance leases are
recognized as income over the terms of the receivables using the
interest method. Interest from interest-bearing notes and
accounts is taken into income on the accrual basis. Revenue on
operating leases is recognized on a straight-line basis over the
life of the lease. Recognition of revenue on receivables and
leases is suspended when management determines the collection of
future income is not probable. Income recognition is resumed if
collection doubts are removed.

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MILLIONS OF DOLLARS

1. SUMMARY OF ACCOUNTING POLICIES (Continued)

Allowance for Losses on Receivables

The allowance for losses on receivables is established
through a charge to the provision for losses. The allowance is
an estimate of the amount adequate to absorb losses on existing
receivables that may become uncollectible. The allowance is
maintained at an amount management considers appropriate in
relation to the outstanding receivables portfolio based on such
factors as overall portfolio quality, historical loss experience
and current economic conditions.

Under various agreements, Transportation and its dealers may
be liable for a portion of customer losses or may be required to
repurchase the repossessed collateral at the receivable principal
value. The Corporation's losses are net of these benefits.
Receivables are charged off to the allowance for losses as soon
as the receivable is determined to be uncollectible.

Receivable Sales

The Corporation securitizes and sells receivables to public
and private investors with limited recourse. The Corporation
continues to service the receivables, for which a servicing fee
is received. Servicing fees are earned on a level yield basis
over the terms of the related sold receivables and are included
in servicing fee income. In a subordinated capacity, the
Corporation retains excess servicing cash flows, a limited
interest in the principal balances of the sold receivables and
certain cash deposits provided as credit enhancements for
investors. Gains or losses on sales of receivables are credited
or charged to financing revenue in the period in which the sales
occur.

Insurance Operations

Insurance premiums are earned on a pro rata basis over the
terms of the policies. Commission costs and premium taxes incurred
in acquiring business are deferred and amortized on the same basis
as such premiums are earned. The liability for unpaid insurance
claims includes provisions for reported claims and an estimate of
unreported claims based on past experience. Such provisions include
an estimate of loss adjustment expense. The estimated liability for
unpaid insurance claims is regularly reviewed and updated. Any
change in such estimate is reflected in current operations.

The Corporation's wholly-owned insurance subsidiary, Harco
National Insurance Company ("Harco"), limits its exposure on any single
loss occurrence by ceding reinsurance to other insurance enterprises.
Reinsurance receivables including amounts related to unpaid insurance
claims and prepaid reinsurance premiums are reported as assets in the
Statement of Consolidated Financial Condition.

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MILLIONS OF DOLLARS

1. SUMMARY OF ACCOUNTING POLICIES (Continued)

Income Taxes

Navistar and its subsidiaries file a consolidated Federal income
tax return which includes Transportation and the Corporation. Federal
income taxes for the Corporation are computed on a separate consolidated
return basis and are payable to Transportation.

Cash and Cash Equivalents

Cash and cash equivalents include money market funds and
marketable securities with original maturities of three months or
less, except for such securities held by the insurance operations
which are included in marketable securities.

Marketable Securities

Marketable securities are classified as available-for-sale
and are reported at fair value.

Derivative Financial Instruments

The Corporation uses derivatives to reduce its exposure to
interest rate volatility. All derivative financial instruments
are held for purposes other than trading, and the Corporation's
policy prohibits the use of derivatives for speculative purposes.
Gains or losses related to hedges of anticipated sales of
receivables are deferred and are recognized in income when the
receivables are sold.

Pending Accounting Standards

In June 1996, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 125,
("SFAS No. 125") "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities" which the
Corporation must adopt for all applicable transactions occurring
after December 31, 1996. The Corporation will apply SFAS No. 125
to securitization transactions occurring on or after January 1,
1997. The new standard is not expected to have a material effect
on the Corporation's net income or financial condition.

Reclassification

Certain amounts for prior years have been reclassified to conform
with the presentation used in the 1996 financial statements.

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MILLIONS OF DOLLARS

2. TRANSACTIONS WITH AFFILIATED COMPANIES

Wholesale Notes, Wholesale Accounts and Retail Accounts

In accordance with the agreements between the Corporation
and Transportation relating to financing of wholesale notes,
wholesale accounts and retail accounts, the Corporation receives
interest income from Transportation at agreed upon interest rates
applied to the average outstanding balances less interest amounts
paid by dealers on wholesale notes and wholesale accounts.

The Corporation purchases wholesale notes and accounts of
dealers from Transportation at the principal amount of the
receivables. An acquisition fee applicable to purchases of
wholesale notes secured by new equipment is charged to
Transportation. The retail accounts are accounts of
Transportation customers. Revenue collected from Transportation
was $49.8 in 1996, $55.7 in 1995 and $50.7 in 1994.

Retail Notes and Lease Financing

In accordance with agreements between the Corporation and
Transportation, Transportation may be liable for certain losses
on the finance receivables and may be required to repurchase the
repossessed collateral at the receivable principal value. Losses
recorded by Transportation were $9.5 in 1996 and $.6 in 1995 and
1994.

Support Agreements

Under provisions of certain public and private financing
arrangements, agreements with Transportation and Navistar provide
that the Corporation's consolidated income before interest
expense and income taxes will be maintained at not less than 125%
of its consolidated interest expense. Since 1984, no maintenance
payments have been required under these agreements.

Administrative Expenses

The Corporation pays a fee to Transportation for data
processing and other administrative services based on the actual
cost of services performed. The amount of the fee was $2.4 in
1996, $2.4 in 1995 and $2.5 in 1994.

Short-Term Debt

The Corporation had daily average short-term borrowings from
Transportation of $85 in 1996 and $93 in 1995 on which interest
accrued at the Corporation's incremental short-term borrowing
rate. These borrowings, including $5 and $6 of interest expense
in 1996 and 1995, respectively, were repaid during each of the
fiscal years.

Accounts Payable

Accounts payable include $24.5 and $89.5 payable to
Transportation at October 31, 1996 and 1995, respectively.

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MILLIONS OF DOLLARS

3. INDUSTRY SEGMENTS

Information by industry segment is summarized as follows:

<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Revenues:
Finance operations $ 201.6 $ 175.1 $ 150.6
Insurance operations 51.2 53.1 60.2
Total revenue $ 252.8 $ 228.2 $ 210.8

Income before taxes:
Finance operations $ 74.2 $ 53.1 $ 49.9
Insurance operations 6.3 5.6 5.3
Total income before taxes $ 80.5 $ 58.7 $ 55.2

Assets at end of year:
Finance operations $1,626.9 $1,701.9 $1,354.1
Insurance operations 166.9 172.8 180.7
Total assets at end of year $1,793.8 $1,874.7 $1,534.8
</TABLE>

4. MARKETABLE SECURITIES

The fair value of marketable securities is based on quoted
market prices, when available. If a quoted price is not
available, fair value is estimated using quoted market prices for
similar financial instruments. The difference between amortized
cost and fair value, net of deferred income taxes, is reflected
as a separate component of shareowner's equity. Shareowner's
equity was increased by net unrealized holding gains of $1.3 and
$1.7 as of October 31, 1996 and 1995, respectively. The
following table sets forth, by type of security issuer, the
amortized cost and estimated market values at October 31, 1996
and 1995:
<TABLE>
<CAPTION>
Amortized Gross Realized Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
U.S. government and
agency securities $ 41.7 $ .3 $ .5 $ 41.5
Corporate debt securities 29.1 .1 .4 28.8
Mortgage- and
asset-backed securities 42.4 .2 .4 42.2
Foreign governments 1.5 - - 1.5
Total debt securities $ 114.7 $ .6 $ 1.3 $ 114.0

Equity securities 11.3 3.5 .7 14.1
Total $ 126.0 $ 4.1 $ 2.0 $ 128.1
</TABLE>
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MILLIONS OF DOLLARS

4. MARKETABLE SECURITIES (Continued)

<TABLE>
<CAPTION>
Amortized Gross Unrealized Fair
October 31, 1995 Cost Gains Losses Value
<S> <C> <C> <C> <C>
U.S. government and
agency securities $ 52.8 $ 1.2 $ .1 $ 53.9
Corporate debt securities 32.0 .2 .2 32.0
Mortgage- and
asset-backed securities 32.7 .5 .1 33.1
Foreign governments 1.7 - - .7
Total debt securities $ 119.2 $ 1.9 $ .4 $ 120.7

Equity securities 10.0 1.7 .6 11.1
Total $ 129.2 $ 3.6 $ 1.0 $ 131.8
</TABLE>

Contractual maturities of marketable debt securities at
October 31, 1996, are as follows:

<TABLE>
<CAPTION>
Amortized Fair
Cost Value
<S> <C> <C>
Due in one year or less $ 16.1 $ 16.0
Due after one year through five years 31.2 31.5
Due after five years through ten years 18.9 18.5
Due after ten years 6.1 5.8
72.3 71.8
Mortgage- and asset-backed securities 42.4 42.2
Total (Excludes Stocks) $ 114.7 $ 114.0
</TABLE>

Actual maturities may differ from the contractual maturities
because of prepayments by the issuers.

Proceeds from sales or maturities of marketable securities
available for sale were $67.7 during 1996 and $67.3 during 1995.
Gross gains of $1.8 and $.8 and gross losses of $.5 and $.6 were
realized on those sales in 1996 and 1995, respectively.

All marketable securities at October 31, 1996 and 1995, were
held by Harco, of which $16.7 and $23.2, respectively, were on
deposit with various state departments of insurance or otherwise
restricted as to use.

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MILLIONS OF DOLLARS

5. FINANCE RECEIVABLES

Finance receivable balances, net of unearned finance income,
at October 31 are summarized as follows:

<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Retail notes and lease financing $ 733.3 $ 747.2

Wholesale notes 100.5 268.2

Accounts:
Retail 314.7 316.7
Wholesale 56.7 49.2
Total 371.4 365.9
Total finance receivables $1,205.2 $1,381.3
</TABLE>

Contractual maturities of finance receivables including
unearned finance income at October 31, 1996, are summarized as
follows:

<TABLE>
<CAPTION>
Retail Wholesale Accounts
<S> <C> <C> <C>
Due in:
1997 $230.7 $ 69.5 $371.4
1998 211.6 31.0 -
1999 186.4 - -
2000 142.3 - -
2001 75.5 - -
Due after 2001 13.8 - -
Gross finance receivables 860.3 100.5 371.4
Unearned finance income 127.0 - -
Total finance receivables $733.3 $100.5 $371.4
</TABLE>

The actual cash collections from finance receivables will
vary from the contractual cash flows because of sales,
prepayments, extensions and renewals. The contractual
maturities, therefore, should not be regarded as a forecast of
future collections.

The Corporation's primary business is to provide wholesale,
retail and lease financing for new and used trucks sold by
Transportation and Transportation's dealers, and as a result the
Corporation's receivables and leases have significant
concentration in the trucking industry. On a geographic basis,
there is not a disproportionate concentration of credit risk in
any area of the United States. The Corporation retains as
collateral a security interest in the equipment associated with
wholesale notes, retail notes and leases other than accounts.

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MILLIONS OF DOLLARS

5. FINANCE RECEIVABLES (Continued)

The Corporation sells finance receivables to public and
private investors with limited recourse provisions. Outstanding
sold receivable net balances at October 31 are as follows:

<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Retail notes $1,366.4 $1,173.2
Wholesale notes 500.0 500.0
Total $1,866.4 $1,673.2
</TABLE>

Gains or losses from the sales of receivables are recognized
in the period in which such sales occur. The allowance for
credit losses is adequately provided prior to the receivable
sales; therefore, gains from receivable sales are not reduced for
expected credit losses. Included in "Retail notes and lease
financing" revenue are gains totaling $20.2, $5.2 and $11.8 on
retail note receivable sales of $985, $740 and $1,033 for the
fiscal years ended October 31, 1996, 1995 and 1994, respectively.
Gains on sales of wholesale receivables are not material as a
result of their short maturities.

The Corporation has two wholly-owned subsidiaries, Navistar
Financial Retail Receivables Corporation ("NFRRC") and Navistar
Financial Securities Corporation ("NFSC"), which have a limited
purpose of purchasing retail and wholesale receivables,
respectively, and transferring an undivided ownership interest in
such notes to investors in exchange for pass-through notes and
certificates. These subsidiaries have limited recourse on the
sold receivables and their assets are available to satisfy the
claims of their creditors prior to such assets becoming available
to the Corporation or affiliated companies. During fiscal 1996,
in two separate sales, the Corporation sold a total of $985 of
retail notes, net of unearned finance income, through NFRRC to
two individual owner trusts. The owner trusts, in turn, sold
$946 of notes and $39 of certificates to investors. The proceeds
of $934, net of underwriting fees and credit enhancements, were
used by the Corporation for general working capital purposes. At
October 31, 1996, the remaining shelf registration available to
NFRRC for issuance of asset-backed securities was $2.4 billion.

NFSC has in place a $500 revolving wholesale note trust that
provides for the continuous sale of eligible wholesale notes on a
daily basis. The issuance of a $200 tranche of investor
certificates during fiscal 1995 increased NFSC's revolving
wholesale note trust to $500. The trust is comprised of three
$100 tranches of investor certificates maturing serially from
1997 to 1999 and a $200 tranche of investor certificates maturing
in 2004.

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MILLIONS OF DOLLARS

5. FINANCE RECEIVABLES (Continued)

The Corporation's retained interest in sold receivables and
other related amounts are generally restricted and subject to
limited recourse provisions. Holdback reserves were established
pursuant to the limited recourse provisions of the retail note
sales to private investors. The retail securitized sales
structure requires the Corporation to maintain cash reserves with
the trusts as credit enhancement for public sales. The cash
reserves are held by the trusts and restricted for use by the
securitized sales agreements.

The following is a summary of amounts included in "Amounts
Due from Sales of Receivables" as of October 31:

<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Cash held and invested by trusts $ 85.2 $ 66.8
Subordinated retained interests in wholesale 85.4 86.3
receivables
Subordinated retained interests in retail 12.5 12.2
receivables
Holdback reserves 31.7 43.7
Excess servicing fee and other 61.9 48.0
Allowance for credit losses
(12.4) (9.2)
Total $264.3 $247.8
</TABLE>

6. INVESTMENT IN OPERATING LEASES

Operating leases at year-end were as follows:

<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Investment in operating leases
Vehicles and other equipment, at cost $116.4 $ 49.0
Less: Accumulated depreciation
(15.3) (9.7)
Net investment in operating leases $101.1 $ 39.3
</TABLE>

Future minimum rentals on operating leases are as follows:
1997, $24.7; 1998, $22.2; 1999, $16.9; 2000, $11.1 and $5.3
thereafter. Each of these assets is depreciated on a straight-
line basis over the term of the lease in an amount necessary to
reduce the leased vehicle to its estimated residual value at the
end of the lease term.

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MILLIONS OF DOLLARS

7. ALLOWANCE FOR LOSSES

The allowance for losses on receivables is summarized as
follows:

<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Total allowance for losses at beginning of year $19.6 $16.2 $14.8
Provision for losses 9.3 2.6 2.3
Net (losses) recoveries (charged)
credited to allowance (4.9) .8 (.9)
Total allowance for losses at end of year $24.0 $19.6 $16.2

Allowance pertaining to:
Owned notes $11.6 $10.4 $ 8.2
Sold notes 12.4 9.2 8.0
Total $24.0 $19.6 $16.2
</TABLE>

8. TAXES ON INCOME

Taxes on income are summarized as follows:
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Current:
Federal $26.4 $18.9 $15.1
State and local 4.4 3.1 3.0
Total current 30.8 22.0 18.1

Deferred (primarily Federal) .3 .5 3.1
Total $31.1 $22.5 $21.2
</TABLE>

The effective tax rate of 38% differs from the statutory
United States Federal tax rate of 35% primarily because of state
and local income taxes. Deferred tax assets and liabilities at
October 31, comprised the following:

<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Deferred tax assets:
Other postretirement benefits $2.9 $2.8

Deferred tax liabilities:
Depreciation and other 6.9 6.4
Unrealized gains on marketable securities .8 1.0
Total deferred tax liabilities 7.7 7.4
Net deferred tax liabilities $4.8 $4.6
</TABLE>
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MILLIONS OF DOLLARS

8.TAXES ON INCOME (Continued)

9. SHORT-TERM DEBT

Commercial paper is issued by the Corporation with varying
terms. The Corporation also has short-term borrowings with
various banks on a non- committed basis. Compensating cash
balances and commitment fees are not required under these
agreements. Short-Term Debt outstanding at October 31 was
comprised only of commercial paper. There were no short-term
borrowings outstanding.

Information regarding short-term debt is as follows:

<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Aggregate obligations outstanding:
Daily average $ 68.2 $ 37.8 $ 11.7
Maximum month-end balance 117.8 81.1 419.2

Weighted average interest rate:
On average daily borrowing 6.0% 6.4% 5.4%
At October 31 5.9% 6.3% 5.6%
</TABLE>

Unused commitments under the Corporation's bank revolving
credit facility and bank liquidity facility supporting the asset-
backed commercial paper program are used as backup for
outstanding short-term borrowings. See also Note 10 to the
Consolidated Financial Statements.

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MILLIONS OF DOLLARS

10. SENIOR AND SUBORDINATED DEBT

Senior and Subordinated Debt outstanding at October 31 is
summarized as follows:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Bank revolving credit, at variable rates,
due March 2001 $ 704.0 $ 760.0

Funding under asset-backed commercial
paper program, at variable rates,
due March 2001 402.4 302.3

Senior term debt:
Notes, medium-term, 9.50%, due 1996 - 117.5

Subordinated term debt:
Senior Notes, 8 7/8%, due November 1998 100.0 100.0
Total senior and subordinated debt $1,206.4 $1,279.8
</TABLE>

The weighted average interest rate on total debt, including
short-term debt and the effect of discounts and related
amortization, was 6.5%, 7.4% and 7.1% in 1996, 1995 and 1994,
respectively. The aggregate annual maturities and required
payments of debt are as follows: 1999, $100.0; and 2001,
$1,106.4.

Effective March 29, 1996, the Corporation amended and
restated its $900 million bank revolving credit facility and its
$300 million asset-backed commercial paper ("ABCP") program
supported by a bank liquidity facility, extending the maturity
date of each facility to March 2001. In addition, the commitment
of the bank revolving credit facility was expanded to $925
million, the ABCP facility was increased to $400 million and a
new pricing and fee structure was established. The available
funding under the ABCP program is $414 million which is comprised
of the $400 million liquidity facility plus $14 million of trust
certificates issued in connection with the formation of the ABCP
Trust.

Under the terms of the ABCP program, a special purpose
wholly-owned subsidiary of NFC purchases eligible receivables
from NFC. All assets of the subsidiary are pledged to a Trust
that funds the receivables with A1/P1 rated commercial paper. In
addition, the assets may be sold to the Trust.

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MILLIONS OF DOLLARS

10. SENIOR AND SUBORDINATED DEBT (Continued)

Available funding under the amended and restated credit
facility and the ABCP program was $233, of which $99 provided
funding backup for the outstanding short-term debt at October 31,
1996. The remaining $134 when combined with unrestricted cash
and cash equivalents made $141 available to fund the general
business purposes of the Corporation at October 31, 1996. Under
the terms of the revolving credit facility, the Corporation is
required to maintain tangible net worth at a minimum of $175 and
a debt to tangible net worth ratio of no greater than 7 to 1.
Consistent with the previous revolving credit agreement, the
amended agreement grants security interests in substantially all
of the Corporation's assets to the Corporation's debtholders.
Compensating cash balances are not required under the restated
revolving credit facility. Facility fees are paid quarterly
regardless of usage.

11. RETIREMENT BENEFITS

The Corporation provides postretirement benefits to
substantially all of its employees. Expenses associated with
postretirement benefits include pension expense for employees,
retirees and surviving spouses, and postretirement health care
and life insurance expense for employees, retirees, surviving
spouses and dependents.

Pension Benefits

Generally pension benefits are non-contributory with
benefits related to an employee's length of service and
compensation rate. Plan assets are primarily invested in a
dedicated portfolio of long-term fixed income securities with the
remainder invested in high quality equity securities.

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MILLIONS OF DOLLARS

11. RETIREMENT BENEFITS (Continued)

Pension Expense

Net pension cost includes the following:
<TABLE>
<CAPTION>

1996 1995 1994
<S> <C> <C> <C>
Service cost for benefits earned during
the period $ .7 $ .5 $ 1.0
Interest cost on projected benefit
obligation 2.9 2.8 2.7
Return on assets - actual (gain) loss (3.2) (9.1) 3.3
- deferred gain (loss) (.4) 5.8 (6.8)
Net amortization costs and other costs. .1 - .1
Net pension cost $ .1 $ - $ .3
</TABLE>

Pension Assets and Liabilities

The plans' funded status and reconciliation to the Statement
of Consolidated Financial Condition as of October 31 were as
follows:

<TABLE>
<CAPTION>
Plan in Which Plan in Which
Assets Exceed Accumulated Benefits
Accumulated Benefits Exceed Assets
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Actuarial present value of:
Vested benefits $(31.5) $ (31.8) $ (2.0) $ (2.2)
Non-vested benefits (4.0) (4.0) (.1) (.1)
Accumulated benefit
obligation (35.5) (35.8) (2.1) (2.3)
Effect of projected future
compensation levels (.9) - - (1.0)
Total projected benefit
obligation (36.5) (36.7) (2.1) (2.3)
Plan assets at fair value 42.7 41.5 - -
Funded status at October 31 6.2 4.8 (2.1) (2.3)
Unrecognized net losses (gains) (5.5) (4.2) .4 .6

Unrecognized plan amendments .5 .5 - -
Unrecognized net obligation
as of transition date .1 .1 - -
Net asset (liability) $ 1.3 $ 1.2 $ (1.7) $ (1.7)
</TABLE>
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MILLIONS OF DOLLARS

11. RETIREMENT BENEFITS (Continued)

The weighted average rate assumptions used in determining the
projected benefit obligation and pension expense were:

<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Discount rate used to determine the present value 7.9% 7.5% 9.2%
of the projected benefit obligations
Expected long-term rate of return on plan assets 8.9% 9.9% 9.0%
Expected rate of increase in future
compensation levels 3.5% 3.5% 3.5%
</TABLE>