[Notes to Financial Statements]

1 SUMMARY OF ACCOUNTING POLICIES

BASIS OF CONSOLIDATION Navistar International Corporation is a holding company, whose principal operating subsidiary is Navistar International Transportation Corp. (Transportation). As used hereafter, "company" or "Navistar" refers to Navistar International Corporation and its consolidated subsidiaries. Navistar operates in three principal industry segments: truck, engine (collectively called "manufacturing operations") and financial services.

The company's truck segment is engaged in the manufacture and marketing of Class 5 through 8 trucks, including school buses, and operates primarily in the United States (U.S.) and Canada as well as in Mexico, Brazil and other selected export markets. The company's engine segment is engaged in the design and manufacture of mid-range diesel engines and operates primarily in the U.S. and Brazil. The financial services operations of the company provide wholesale, retail and lease financing and domestic commercial physical damage and liability insurance coverage to the company's dealers and retail customers and to the general public through an independent insurance agency system.

The consolidated financial statements include the results of the company'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. Certain 1998 and 1997 amounts have been reclassified to conform with the presentation used in the 1999 financial statements. During 1999, the company adopted a classified balance sheet format; 1998 balances have been reclassified to conform with the presentation used in 1999.

USE OF 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 Truck operations recognize shipments of new trucks and service parts to 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 (OEMs). 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.

Financial services operations recognize finance charges on finance receivables as income over the term of the receivables utilizing the interest method. Operating lease revenues are recognized on a straight-line basis over the life of the lease. Selected receivables are securitized and sold 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. An allowance for losses is maintained at a level deemed appropriate based on such factors as overall portfolio quality, historical loss experience and current economic conditions.

Insurance premiums are earned on a prorata basis over the terms of the policies. The liability for unpaid insurance claims includes provisions for reported claims and an estimate of unreported claims based on past experience.

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, U.S. government securities and floating rate notes, are classified as cash equivalents in the Statements of Financial Condition and Cash Flow.

MARKETABLE SECURITIES Marketable securities are classified as available-for-sale securities and are reported at fair value. The difference between amortized cost and fair value is recorded as a component of accumulated other comprehensive loss in shareowners' equity, net of applicable deferred taxes. Securities with remaining maturities of less than twelve months and other investments needed for current cash requirements are classified as current within the Statement of Financial Condition. All equity securities are classified as current because they are highly liquid financial instruments which can be readily converted to cash. All other securities are classified as non-current.

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 eight 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.

ENGINEERING AND RESEARCH EXPENSE Engineering and research expense includes research and development expenses and routine ongoing costs associated with improving existing products and manufacturing processes. Research and development expenses, which include activities for the introduction of new truck and engine products and major improvements to existing products and processes, totaled $207 million, $138 million and $85 million in 1999, 1998 and 1997, respectively.

PRODUCT RELATED COSTS The company 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.

DERIVATIVE FINANCIAL INSTRUMENTS The company uses derivatives to transfer or reduce risks of foreign exchange and interest rate volatility and to potentially increase the return on invested funds. Financial services operations may use forward contracts to hedge the fair value of its fixed rate receivables against changes in market interest rates in anticipation of the sale of such receivables. Financial services operations also use interest rate swaps to reduce exposure to interest rate changes when they sell fixed rate receivables on a variable rate basis. For the protection of investors in Navistar Financial Corporation's (NFC) debt securities, NFC may write interest rate caps when fixed rate receivables are sold on a variable rate basis. The company also uses derivatives such as forward contracts to reduce its exposure to foreign exchange volatility.

Derivative financial instruments are generally held for purposes other than trading. Income recognition of changes in fair values of the derivatives is deferred until the derivative instruments are closed. Gains or losses related to hedges of anticipated transactions are deferred until they are recognized in income when the effects of the anticipated transactions are recognized in earnings. The principal balance of receivables expected to be sold by NFC equals or exceeds the notional amount of open forward contracts. Additionally, the value of committed purchases denominated in currencies other than the functional currency generally exceeds the notional amount of related open derivative contracts.

FOREIGN CURRENCY The financial statements of foreign subsidiaries are translated to U.S. dollars using the period-end exchange rate for assets and liabilities and a weighted-average exchange rate for each period for revenues and expenses. The local currency is the functional currency for the company's foreign subsidiaries and translation adjustments for these subsidiaries are recorded as a component of accumulated other comprehensive loss in shareowners' equity. Effective February 1, 1999, the functional currency of the company's Mexican subsidiaries changed from the U.S. dollar to the Mexican peso because Mexico's economy is no longer considered highly inflationary. The effect of this change was not material. Translation gains and losses arising from fluctuations in currency exchange rates on transactions denominated in currencies other than the functional currency are recognized in earnings as incurred, except for those transactions which hedge purchase commitments, and for those intercompany balances which are designated as long-term investments. Net income included a foreign currency transaction loss of $10 million in 1999 and foreign currency transaction gains of $4 million in 1998 and $2 million in 1997.

NEW ACCOUNTING PRONOUNCEMENTS Effective November 1, 1998, Navistar adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income," which establishes standards for reporting and display of comprehensive income and its components. Financial statements for prior periods have been reclassified as required by this statement. Effective November 1, 1998, Navistar adopted Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" (SFAS 131). See Note 13 to the Financial Statements.

In March 1998, the American Institute of Certified Public Accountants issued Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." This statement defines whether or not certain costs related to the development or acquisition of internal use software should be expensed or capitalized, and is effective for fiscal years beginning after December 15, 1998. The company adopted this statement effective November 1, 1999. At planned 2000 spending levels, adoption of this statement will result in the company capitalizing approximately $25 million of certain costs that would have otherwise been expensed.

In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133), to establish accounting and reporting requirements for derivative instruments. This standard requires recognition of all derivative instruments in the statement of financial condition as either assets or liabilities, measured at fair value. This statement additionally requires changes in the fair value of derivatives to be recorded each period in current earnings or comprehensive income depending on the intended use of the derivatives. In June 1999, the FASB issued Statement of Financial Accounting Standards No. 137, "Accounting for Derivative Instruments and Hedging ActivitiesÑDeferral of the Effective Date of FASB Statement No. 133," which amends SFAS 133 by deferring for one year the effective date of SFAS 133, to those fiscal years beginning after June 15, 2000. The company is currently assessing the impact of SFAS 133 on the company's results of operations, financial condition and cash flows.

  Annual Report 1999