Edgar Filing: CUMMINS INC

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 3, 2003

REGISTRATION NO. (333-108829)

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

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CUMMINS INC.
(Exact name of Registrant as specified in its charter)

INDIANA 3510 35-0257090
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)

500 JACKSON STREET
BOX 3005
COLUMBUS, INDIANA 47202-3005
(812) 377-3121
(Address, including zip code, and telephone number, including
area code, of Registrant's principal executive offices)

MARYA M. ROSE, ESQ.
VICE PRESIDENT-GENERAL COUNSEL
AND CORPORATE SECRETARY
500 JACKSON STREET
BOX 3005
COLUMBUS, INDIANA 47202-3005
(Name, address, including zip code, and telephone number, including
area code, of agent for service for Registrant)

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COPY TO:

WILLIAM J. WHELAN, III, ESQ.
Cravath, Swaine & Moore LLP
Worldwide Plaza, 825 Eighth Avenue
New York, New York 10019
(212) 474-1000

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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC: As soon as practicable after the effective time of this Registration
Statement.

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If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. / /

If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /

If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /

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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.

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PROSPECTUS

[GRAPHIC]

$250,000,000

CUMMINS INC.

EXCHANGE OFFER FOR
UP TO $250,000,000 PRINCIPAL AMOUNT OUTSTANDING
OF 9 1/2% SENIOR NOTES DUE 2010
FOR A LIKE PRINCIPAL AMOUNT
OF NEW 9 1/2% SENIOR NOTES DUE 2010
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We are offering to exchange new 9 1/2% senior notes due 2010 (the "new
notes") for all of our outstanding unregistered 9 1/2% senior notes due 2010
(the "original notes"). The new 9 1/2% senior notes due 2010 will be free of the
transfer restrictions that apply to our outstanding unregistered 9 1/2% senior
notes due 2010 that you currently hold, but will otherwise have substantially
the same terms as the outstanding original notes. This offer will expire at
5:00 p.m., New York City time, on , 2003, unless we extend it. The new
notes will not trade on any established exchange.

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Each broker-dealer that receives new notes for its own account pursuant to
this exchange offer must acknowledge that it will deliver a prospectus in
connection with any resale of such new notes. The letter of transmittal
accompanying this prospectus states that by so acknowledging and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act. This prospectus, as it
may be amended or supplemented from time to time, may be used by a broker-
dealer in connection with resales of new notes received in exchange for
outstanding original notes where such outstanding original notes were acquired
by such broker-dealer as a result of market-making activities or other trading
activities. We have agreed that, for a period of 180 days after the expiration
of this exchange offer, we will make this prospectus available to any
broker-dealer for use in connection with any such resale. See "Plan of
Distribution".

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SEE "RISK FACTORS" BEGINNING ON PAGE 11 TO READ ABOUT IMPORTANT FACTORS YOU
SHOULD CONSIDER IN CONNECTION WITH THIS EXCHANGE OFFER.

THE SECURITIES OFFERED HEREBY HAVE NOT BEEN RECOMMENDED BY ANY UNITED STATES
FEDERAL OR STATE SECURITIES COMMISSION OR REGULATORY AUTHORITY. FURTHERMORE, THE
FOREGOING AUTHORITIES HAVE NOT CONFIRMED THE ACCURACY OR DETERMINED THE ADEQUACY
OF THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

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Prospectus dated , 2003.

YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS OR TO
WHICH WE HAVE REFERRED YOU. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH
DIFFERENT INFORMATION. WE ARE NOT MAKING AN OFFER OF THESE SECURITIES IN ANY
STATE WHERE THE OFFER IS NOT PERMITTED. YOU SHOULD NOT ASSUME THAT THE
INFORMATION CONTAINED IN THIS PROSPECTUS IS ACCURATE AS OF ANY DATE OTHER THAN
THE DATE ON THE FRONT OF THIS PROSPECTUS.

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TABLE OF CONTENTS

PAGE
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Where You Can Find More Information......................... i
Disclosure Regarding Forward-Looking Statements............. ii
Summary..................................................... 1
Risk Factors................................................ 11
Use of Proceeds............................................. 20
The Exchange Offer.......................................... 21
Selected Historical Financial Data.......................... 29
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 31
Business.................................................... 70
Management.................................................. 84
Description of Other Indebtedness........................... 102
Description of the Notes.................................... 107
U.S. Federal Income Tax Consequences........................ 153
Plan of Distribution........................................ 154
Legal Matters............................................... 154
Experts..................................................... 154
Index to Financial Statements............................... F-1

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PRESENTATION OF FINANCIAL INFORMATION

Our fiscal year is comprised of a 52 or 53 week fiscal year which ends on
December 31. Fiscal 2002 refers to the 52 weeks ended December 31, 2002, fiscal
2001 refers to the 52 weeks ended December 31, 2001, fiscal 2000 refers to the
52 weeks ended December 31, 2000, fiscal 1999 refers to the 53 weeks ended
December 31, 1999 and fiscal 1998 refers to the 52 weeks ended December 31,
1998. In this prospectus, the six months ended June 29, 2003 refers to the 26
weeks ended June 29, 2003 and the six months ended June 30, 2002 refers to the
26 weeks ended June 30, 2002.

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WHERE YOU CAN FIND MORE INFORMATION

We are subject to the information reporting requirements of the Securities
Exchange Act of 1934, as amended, or the Exchange Act, and, accordingly, file
annual, quarterly and special reports, proxy statements and other information
with the SEC. Members of the public may read and copy any materials we file with
the SEC at the Public Reference Room maintained by the SEC at 450 Fifth Street,
N.W., Room 1024, Washington, D.C. 20549.

Information on the operation of the Public Reference Room maintained by the
SEC may be obtained by calling the SEC at 1-800-SEC-0330. The SEC maintains an
Internet site at http://www.sec.gov that contains materials we file
electronically with the SEC.

We have filed with the SEC a registration statement on Form S-4 under the
Securities Act with respect to this exchange offer. This prospectus does not
contain all of the information contained in the registration statement and the
exhibits to the registration statement. For further information with respect to
us, we refer you to the registration statement and the exhibits filed as part of
the registration statement.

DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements that are based on
current expectations, estimates and projections about the industries in which we
operate and management's beliefs and assumptions. Words such as "expect",
"anticipate", "intend", "plan", "believe", "seek" and "estimate", and variations
of such words and similar expressions, are intended to identify such
forward-looking statements. These statements are not guarantees of future
performance and involve certain risks, uncertainties and assumptions, which we
refer to as "future factors", which are difficult to predict. Therefore, actual
outcomes and results may differ materially from what is expressed or forecasted
in such forward-looking statements. We undertake no obligation to update
publicly any forward-looking statements, whether as a result of new information,
future events or otherwise.

Future factors include: increasing price and product competition by foreign
and domestic competitors, including new entrants; rapid technological
developments and changes; our ability to continue to introduce competitive new
products on a timely, cost-effective basis; our mix of products; our achievement
of lower costs and expenses; domestic and foreign governmental and public policy
changes, including environmental regulations; protection and validity of patent
and other intellectual property rights; reliance on large customers;
technological, implementation and cost/financial risks in increasing use of
large, multi-year contracts; the cyclical nature of our business; the outcome of
pending and future litigation and governmental proceedings; and the continued
availability of financing, financial instruments and financial resources in the
amounts, at the times and on the terms required to support our future business.

These are representative of the future factors that could affect the outcome
of the forward-looking statements. In addition, such statements could be
affected by general industry and market conditions and growth rates, general
domestic and international economic conditions, including interest rate and
currency exchange rate fluctuations, and other future factors.

SUMMARY

THIS SUMMARY HIGHLIGHTS INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS.
AS A RESULT, IT DOES NOT CONTAIN ALL OF THE INFORMATION THAT YOU SHOULD CONSIDER
BEFORE PARTICIPATING IN THIS EXCHANGE OFFER. YOU SHOULD READ THIS ENTIRE
PROSPECTUS, ESPECIALLY THE SECTION ENTITLED "RISK FACTORS". IN THIS PROSPECTUS,
UNLESS THE CONTEXT OTHERWISE REQUIRES, THE TERM "NOTES" REFERS TO BOTH THE
ORIGINAL NOTES THAT ARE THE SUBJECT OF THIS EXCHANGE OFFER AND THE NEW NOTES
THAT WILL BE ISSUED IN EXCHANGE FOR ORIGINAL NOTES IN THE EXCHANGE OFFER.

CUMMINS INC.

We are a global power leader that designs, manufactures, distributes and
services diesel and natural gas engines, electric power generation systems and
engine-related products, including filtration and emissions solutions, fuel
systems, controls and air handling systems. We were founded in 1919 as one of
the first manufacturers of diesel engines and are headquartered in Columbus,
Indiana. We sell our products to Original Equipment Manufacturers (OEMs),
distributors and other customers worldwide. We have long-standing relationships
with many of the leading manufacturers in the markets we serve, including
DaimlerChrysler, Volvo AB, PACCAR Inc., Navistar International Corporation, CNH
Global N.V., Scania AB and General Electric Company.

Our financial performance depends, in large part, on varying conditions in
the markets we serve, particularly the automotive, construction and general
industrial markets. Demand in these markets tends to fluctuate in response to
overall economic conditions and is particularly sensitive to changes in interest
rate levels and fuel costs. OEM inventory levels, production schedules and work
stoppages also impact our sales. Economic downturns in the markets we serve
generally result in a sales reduction, which affect our profits and cash flow.

BUSINESS SEGMENTS

ENGINE BUSINESS. Our Engine Business manufactures and markets a broad array
of diesel and natural gas powered engines under the Cummins brand name for the
heavy- and medium-duty truck, bus, recreational vehicle (RV), light-duty
automotive, agricultural, construction, mining, marine, oil and gas, rail and
governmental equipment markets. We offer a wide variety of engine products
ranging in size from 3.3 liters to 91 liters, providing from 60 horsepower to
3,500 horsepower. In addition, we provide a full range of new parts and service,
as well as remanufactured engines, through our extensive distribution network.
Our Engine Business accounted for approximately 56% of our total sales in 2002.

POWER GENERATION BUSINESS. Our Power Generation Business is a global
provider of power generation systems and services for customers needing
self-generated or standby power. Our power generation products are marketed
under the Cummins, Onan and Newage brands, and include diesel and alternative
fuel electrical generator sets for commercial and residential applications, such
as office buildings, hospitals, municipalities and homes. We also offer engines,
alternators, control systems and switchgear for sale to other generator set
assemblers, and are the worldwide leader in auxiliary generator sets for RVs and
diesel-powered recreational marine applications. In addition, we provide
maintenance contracts, rental options and other power solutions for our
customers. Our Power Generation Business accounted for approximately 20% of our
total sales in 2002.

FILTRATION AND OTHER BUSINESS. Our Filtration and Other Business produces
filters, silencers and intake and exhaust systems under the Fleetguard and
Nelson brand names and is the largest worldwide supplier of turbochargers for
commercial applications through our Holset brand. We manufacture filtration and
exhaust systems for on- and off-highway heavy-duty equipment and are a supplier
of filtration products for industrial and passenger car applications, exhaust
systems for small engine

equipment and silencing systems for gas turbines. In addition, we operate an
emission solutions business through which we develop systems to help our
customers meet increasingly stringent emissions standards. Our Filtration and
Other Business accounted for approximately 15% of our total sales in 2002.

INTERNATIONAL DISTRIBUTOR BUSINESS. Our International Distributor Business
distributes the full range of our products and services to end users at 111
locations in 50 countries and territories. Our trained personnel provide parts
and service to our customers, as well as full service solutions, including
maintenance contracts, engineering services and integrated products where we
customize our products to cater to specific end users. Our company-owned
distributors are located in key markets, including India, China, Japan,
Australia, the United Kingdom (UK) and South Africa. Our International
Distributor Business accounted for approximately 9% of our total sales in 2002.

COMPETITIVE STRENGTHS

We believe the following competitive strengths are instrumental to our
success:

- LEADING BRANDS. Our product portfolio includes products marketed under
the following brands, each of which holds a leading position in its
respective market:

- Cummins engines, electric power generation systems, components and
parts;

- Onan generator sets;

- Newage alternators;

- Fleetguard filtration systems and components;

- Nelson intake and exhaust systems and components;

- Kuss automotive in-tank fuel filtration;

- Universal Silencer large filtration systems and silencers; and

- Holset turbochargers.

- CUSTOMERS AND PARTNERS. To maintain technology leadership and a global
presence in a cost-effective manner, we have established strategic
alliances with a number of our leading customers. For example, we have
both customer and supplier arrangements with Komatsu, Ltd., including
multiple manufacturing joint ventures and a product development joint
venture through which we have partnered in the development of several
engines. We are also the exclusive supplier of engines for Komatsu mining
equipment. In addition, we have been the exclusive diesel engine supplier
to DaimlerChrysler for its Dodge Ram truck since 1988, and our exclusivity
agreement extends through model year 2007. We have long-term agreements
with Volvo, PACCAR and Navistar for the supply of heavy-duty truck
engines. These agreements afford us long-term price stability and
eliminate certain dealer and end-user discounts. We also have multiple
international joint ventures to manufacture midrange engines, including
partnerships with Tata Engineering and Locomotive Company, the leading
truck manufacturer in India, and Dongfeng Automotive Corporation, the
second largest truck manufacturer in China.

- GLOBAL PRESENCE. We have a strong global presence including a world class
distribution system, manufacturing and engineering facilities around the
world and a network of global supply sources. Our distribution and service
network currently includes more than 500 company-owned and independent
distributor locations and 4,700 independent dealers located throughout 131
countries and territories. We also have manufacturing operations and
product engineering centers around the world. Our worldwide presence has
enabled us to take advantage of growth opportunities in international
markets, with our sales outside the United States growing from 39 percent
of total sales in 1999 to 45 percent of total sales in 2002.

- LEADING TECHNOLOGY. We have an established reputation for delivering
high-quality, technologically advanced products. We continuously work with
our customers to develop new

products that improve the performance of their vehicles, equipment or
systems at competitive cost levels. We are a leader in developing
technologies to reduce diesel engine emissions, a key concern of our
customers and regulators around the world. We were the first company to
develop engines that were certified to meet new emissions standards
governing heavy-duty diesel engines. These standards went into effect in
the United States on October 1, 2002.

BUSINESS STRATEGY

The three key elements of our business strategy are as follows:

- AGGRESSIVELY PURSUE COST LEADERSHIP. In many of our markets, product or
system cost is a critical performance parameter for our customers. To
achieve cost leadership, we will continue to leverage our innovative
technology, economies of scale, global presence and customer partnerships.
Beginning in 2000, we launched several focused initiatives to dramatically
reduce costs and lower our breakeven point:

- SIX SIGMA. Six Sigma is a project oriented, statistically based,
problem solving methodology focused on elimination of waste and other
forms of unnecessary expenses. This is the cornerstone of our cost
reduction efforts. Since the program's inception in 2000, we have
trained 1,300 "belts" (a person trained in the tools of Six Sigma who
manages the project and implements the improvements) who have delivered
more than $400 million of savings and have substantially improved
product and service quality.

- DIRECT/INDIRECT PURCHASING. Our cost reduction efforts in supply chain
management have saved more than $315 million in the cost of purchased
materials during the last four years.

- OVERHEAD REDUCTION. We reduced selling, administrative and research
expenses by $78 million in 2001 compared to 2000, and an additional
$4 million in 2002 compared to 2001.

- RESTRUCTURING. Since January 1, 2000, we have closed six plants,
consolidated multiple operations and reduced our global headcount by
over 17 percent. These efforts resulted in savings of more than
$80 million in 2002.

We will continue to pursue cost reduction opportunities through our Six
Sigma initiatives, global sourcing, consolidation of operations and product
design and quality improvement.

- MAXIMIZE RETURN ON CAPITAL. Return on capital, specifically return on
average net assets (ROANA), is our primary measure of financial
performance. Each of our business segments has ROANA targets, and we
allocate capital based on segment performance against those targets.

As a result of our focus on ROANA, we have been able to reduce
capital spending while still funding key development programs, including
the completion of a full range of emission-compliant engines. We have
reduced our 2002 capital expenditure requirements by over $100 million
compared to capital expenditures in the previous three years.

One of our goals is to regain an investment grade credit rating. To
achieve this goal, we have put significant management focus on
increasing earnings, improving cash flow and reducing financial
leverage. To this end, we generated $193 million in cash flow from
operations in 2002.

RISK FACTORS

You should carefully consider all of the information set forth and
incorporated by reference in this prospectus and, in particular, you should
evaluate the specific factors set forth in the section entitled "Risk Factors",
which begins on page 11, for a discussion of certain risks that should be
considered by investors in evaluating whether to participate in the exchange
offer. These factors include risks that may have an adverse affect on our
competitive strengths, such as the cyclical nature of the markets that we serve,
the impact of government regulation on our business and our reliance on key
customers and third-party suppliers. In considering whether to participate in
this exchange offer, you should carefully consider the risk factors discussed in
detail beginning on page 11 together with all of the information in this
prospectus.

RECENT DEVELOPMENTS

On April 14, 2003, we announced that we had determined that our previously
issued financial statements for the years ended December 31, 2000 and 2001 would
require restatement and reaudit. The restatement was necessary to correct prior
period accounting errors related primarily to unreconciled accounts payable
accounts at two of our manufacturing locations, the majority of which were
associated with the integration of a new enterprise resource planning system
into our accounting processes. We were required to have these restated financial
statements audited by our current auditors, since Arthur Andersen LLP, our
predecessor auditor for the years subject to restatement, had ceased operations.
The restatement and reaudit of our financial statements included a comprehensive
review of the accounting records underlying our financial statements for the
related periods.

On August 25, 2003, we announced that two of our engines had received
certification from the U.S. Environmental Protection Agency (EPA) for compliance
with new stringent standards for urban transit applications. These engines are
the only current heavy-duty diesel engines certified as compliant with the 2004
EPA Urban Bus emissions standards using standard fuel without special soot
filter exhaust aftertreatment.

SUMMARY OF TERMS OF THE EXCHANGE OFFER

Background................................ On November 20, 2002, we completed a private placement
of $250,000,000 aggregate principal amount of original
9 1/2% senior notes due 2010. In connection with that
private placement, we entered into a registration rights
agreement in which we agreed to complete an exchange
offer.
The Exchange Offer........................ We are offering to exchange our new 9 1/2% senior notes
due 2010 for a like principal amount of our outstanding
original notes. Original notes may only be tendered in
integral multiples of $1,000 principal amount. See "The
Exchange Offer--Terms of the Exchange".
Resale of New Notes....................... Based upon the position of the staff of the SEC as
described in previous no-action letters, we believe that
new notes issued pursuant to the exchange offer in
exchange for original notes may be offered for resale,
resold and otherwise transferred by you without
compliance with the registration and prospectus delivery
provisions of the Securities Act, provided that:
- you are acquiring the new notes in the ordinary course
of your business;
- you have not engaged in, do not intend to engage in,
and have no arrangement or understanding with any person
to participate in the distribution of the new notes;
and
- you are not our affiliate as defined under Rule 405 of
the Securities Act.
We do not intend to apply for listing of the new notes
on any securities exchange or to seek approval for
quotation through an automated quotation system.
Accordingly, there can be no assurance that an active
market will develop upon completion of the exchange
offer or, if developed, that such market will be
sustained or as to the liquidity of any market.
Each participating broker-dealer that receives new notes
for its own account pursuant to the exchange offer in
exchange for original notes that were acquired as a
result of market-making or other trading activity must
acknowledge that it will deliver a prospectus in
connection with any resale of new notes. See "Plan of
Distribution".
Consequences If You Do Not Exchange Your
Original Notes.......................... Original notes that are not tendered in the exchange
offer or are not accepted for exchange will continue to
bear legends restricting their transfer. You will not be
able to offer or sell the original notes unless:
- pursuant to an exemption from the requirements of the
Securities Act; or
- the original notes are registered under the Securities
Act.
After the exchange offer is closed, we will no longer
have an obligation to register the original notes,
except for some limited exceptions. See "Risk
Factors--If you fail to exchange your original notes,
they will continue to be restricted securities and may
become less liquid".

Expiration Date........................... The exchange offer will expire at 5:00 p.m., New York
City time, on , 2003, unless we extend the
exchange offer. See "The Exchange Offer--Expiration
Date; Extensions; Amendments".
Exchange Date; Issuance of New Notes...... The date of acceptance for exchange of original notes is
the exchange date, which will be the first business day
following the expiration date. We will issue new notes
in exchange for original notes tendered and accepted in
the exchange offer promptly following the exchange date.
See "The Exchange Offer--Terms of the Exchange".
Certain Conditions to the Exchange
Offer................................... The exchange offer is subject to certain customary
conditions, which we may waive. See "The Exchange
Offer--Conditions to the Exchange Offer".
Special Procedures for Beneficial
Holders................................. If you beneficially own original notes which are
registered in the name of a broker, dealer, commercial
bank, trust company or other nominee and you wish to
tender in the exchange offer, you should contact such
registered holder promptly and instruct such person to
tender on your behalf. If you wish to tender in the
exchange offer on your own behalf, you must, prior to
completing and executing the letter of transmittal and
delivering your original notes, either arrange to have
the original notes registered in your name or obtain a
properly completed bond power from the registered
holder. The transfer of registered ownership may take a
considerable time. See "Exchange Offer--Procedures for
Tendering".
Withdrawal Rights......................... You may withdraw your tender of original notes at any
time before the exchange offer expires. See "Exchange
Offer--Withdrawal of Tenders".
Accounting Treatment...................... We will not recognize any gain or loss for accounting
purposes upon the completion of the exchange offer. The
expenses of the exchange offer that we pay will increase
our deferred financing costs in accordance with
generally accepted accounting principles. See "The
Exchange Offer--Accounting Treatment".
Certain Tax Consequences.................. The exchange pursuant to the exchange offer generally
should not be a taxable event for U.S. federal income
tax purposes. See "U.S. Federal Income Tax
Consequences".
Use of Proceeds........................... We will not receive any proceeds from the exchange or
the issuance of new notes in connection with the
exchange offer. See "Use of Proceeds".
Exchange Agent............................ BNY Midwest Trust Company is serving as exchange agent
in connection with the exchange offer. See "Exchange
Offer--Exchange Agent".

SUMMARY OF THE TERMS OF THE NOTES

OTHER THAN THE OBLIGATIONS TO CONDUCT AN EXCHANGE OFFER, THE NEW NOTES WILL
HAVE THE SAME FINANCIAL TERMS AND COVENANTS AS THE ORIGINAL NOTES, WHICH ARE AS
FOLLOWS:

Issuer.................................... Cummins Inc.

Securities................................ $250 million aggregate principal amount of 9 1/2% senior
notes due 2010.

Maturity.................................. December 1, 2010.

Interest Payment Dates.................... June 1 and December 1 of each year.

Optional Redemption....................... The notes are redeemable, at our option, in whole or from
time to time in part at any time after December 1, 2006, at
a redemption price equal to 100% of the principal amount
plus a premium declining ratably to par, plus accrued and
unpaid interest, if any. See "Description of the
Notes--Optional Redemption".

Ranking................................... The notes are general, unsecured obligations of Cummins
Inc. and rank equally in right of payment with all of
Cummins Inc.'s existing and future unsubordinated debt and
senior in right of payment to all of Cummins Inc.'s
existing and future subordinated debt. The notes are
effectively subordinated to all of Cummins Inc.'s secured
debt to the extent of the value of the assets securing such
debt and structurally subordinated to all of the existing
and future liabilities, including guarantees, of Cummins
Inc.'s subsidiaries that do not guarantee the notes. As of
June 29, 2003, Cummins Inc. and its subsidiaries had
$826 million of total indebtedness outstanding, excluding
the original notes, approximately (a) $51 million of which
is secured debt and effectively senior to the securities
being registered and (b) $775 million of which ranks
equally with the securities being registered. A number of
Cummins Inc.'s current and future domestic subsidiaries are
guaranteeing borrowings under our $385 million revolving
credit facility and have secured those guarantees with
certain of their assets. See "Description of Other
Indebtedness--New Revolving Credit Facility".

Guarantees................................ The notes are not currently guaranteed by any of our
subsidiaries. In the future, the notes may be
unconditionally guaranteed, on a joint and several basis,
by certain of our subsidiaries that guarantee our or any
subsidiary guarantor's other indebtedness. The guarantees
by these subsidiary guarantors will be general unsecured
obligations and rank equally with any of their existing and
future obligations that are not expressly subordinated to
the subsidiary guarantees. However, during such time as the
notes receive and maintain an investment grade rating from
both Standard & Poor's and Moody's, our subsidiaries that
guarantee our other indebtedness will not be required to
guranteee the notes. See "Description of the
Notes--Guarantees" and "--Certain Covenants--Suspension of
Covenants and Covenant Substitution".

Change of Control......................... Upon the occurrence of a "Change of Control", we will be
required, unless at the time of the Change of Control (and
during

the 30-day period following the Change of Control) the
notes have an investment grade rating from both Standard &
Poor's and Moody's, to make an offer to repurchase each
holder's notes at a price equal to 101% of the principal
amount thereof, plus accrued and unpaid interest, if any,
to the date of repurchase. See "Description of the Notes--
Certain Covenants--Change of Control".

Restrictive Covenants..................... The indenture governing the notes contains certain
covenants that, among other things, limit our ability and
the ability of our restricted subsidiaries to:

- incur additional indebtedness and issue preferred stock;

- pay dividends or make certain other restricted payments;

- create liens on our assets;

- make investments;

- create restrictions on the payment of dividends or other
amounts from our restricted subsidiaries;

- enter into sale and leaseback transactions;

- engage in transactions with affiliates;

- merge or consolidate with any other person; and

- sell our assets.

These covenants are subject to important exceptions and
qualifications, which are described in "Description of the
Notes--Certain Covenants".

During such time as the notes receive and maintain an
investment grade rating from both Standard & Poor's and
Moody's, these covenants will be suspended, and substituted
forms of indebtedness and preferred stock, negative pledge,
sale and leaseback and merger and consolidation covenants
will apply to us and our restricted subsidiaries. In such
an event, the covenants under the indenture for the notes
will be substantially similar to the covenants under the
1986 Indenture (which governs a number of our other notes
and debentures). See "Description of the Notes--Certain
Covenants--Suspension of Covenants and Covenant
Substitution".

RISK FACTORS

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Cummins Inc. is an Indiana corporation. Our executive offices are located at
500 Jackson Street, Columbus, Indiana 47202, and our telephone number is
(812) 377-5000.

SUMMARY FINANCIAL DATA

The following table presents our summary financial data. The historical
financial data for each of the years in the three year period ended
December 31, 2002 and as of December 31, 2001 and 2002 has been derived from our
audited consolidated financial statements included elsewhere in this prospectus.
The financial information as of December 31, 2000 has been derived from our
previously issued financial statements for that year adjusted for the impact of
the restatement adjustments discussed in Note 2 of the Consolidated Financial
Statements included elsewhere in this prospectus. The historical financial data
for the six month periods ended June 30, 2002 and June 29, 2003 and as of
June 30, 2002 and June 29, 2003 has been derived from our unaudited consolidated
financial statements included elsewhere in this prospectus. We have prepared our
unaudited consolidated financial statements on the same basis as our audited
consolidated financial statements and have included all adjustments, including
all normal recurring adjustments, that we consider necessary for a fair
presentation of our financial position and operating results for the unaudited
periods. The results for the six months ended June 29, 2003 are not necessarily
indicative of the results that may be expected for the year ending December 31,
2003.

You should read the following summary financial data in conjunction with
"Selected Historical Financial Data", "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and our consolidated financial
statements included elsewhere in this prospectus.

SIX MONTHS ENDED
YEAR ENDED DECEMBER 31 -------------------
------------------------------ JUNE 29, JUNE 30,
2002 2001 2000 2003 2002
-------- -------- -------- -------- --------
(IN MILLIONS, EXCEPT PER SHARE DATA)

STATEMENT OF EARNINGS DATA:
Net sales................................................... $5,853 $5,681 $6,597 $2,926 $2,791
Gross margin................................................ 1,045 1,013 1,267 494 510
Restructuring, asset impairment and other charges (credits)
(2)(3).................................................... (8) 126 154 -- 2
Loss on early extinguishment of debt (4).................... 8 -- -- -- --
Interest expense............................................ 61 77 87 40 29
Dividends on preferred securities........................... 21 11 -- 11 11
Cumulative effect of change in accounting principle, net of
tax (5)................................................... 3 -- -- -- 3
Net earnings (loss)......................................... 82 (103) 14 (17) (8)
Net earnings (loss) per share:
Basic....................................................... 2.13 (2.70) 0.35 (0.45) (0.21)
Diluted..................................................... 2.13 (2.70) 0.35 (0.45) (0.21)
Dividends declared per share................................ 1.20 1.20 1.20 0.60 0.60

SIX MONTHS ENDED
YEAR ENDED DECEMBER 31 ---------------------------------
------------------------------------- JUNE 29, JUNE 30,
2002 2001 2000 2003 2002
--------------- -------- -------- --------------- ---------------
(IN MILLIONS, EXCEPT PER SHARE)

OTHER DATA:
Property, plant and equipment additions............... $ 90 $ 206 $ 228 $ 43 $ 34
Consolidated ratio of earnings to fixed charges (1)... 1.5 -- 1.0 -- --

BALANCE SHEET DATA (AS OF PERIOD END):
Working capital....................................... $ 653 $ 557 $ 589 $ 718 $ 505
Property, plant and equipment, net.................... 1,305 1,405 1,596 1,256 1,346
Total assets.......................................... 4,837 4,311 4,448 4,885 4,510
Long-term debt........................................ 999 915 1,032 1,035 789
Mandatorily redeemable preferred securities........... 291 291 -- 291 291
Shareholders' investment.............................. 841 983 1,280 846 990

------------------

(1) For purposes of calculating the consolidated ratios of earnings to fixed
charges, "earnings" includes income before income taxes, extraordinary
items, the cumulative effects of changes in accounting principles and
earnings or losses of equity investees and fixed charges. "Fixed charges"
consists of interest on all indebtedness, including interest incurred by
consolidated companies, the amount of pre-tax earnings required to pay
dividends on outstanding preferred stock and that portion of rental expense
that management believes to be representative of interest. Our earnings were
insufficient to cover fixed charges for the year ended December 31, 2001 by
approximately $135 million as well as for the six months ended June 29, 2003
and June 30, 2002 by approximately $30 million and $8 million, repectively.

(2) The years ended December 31, 2002, 2001 and 2000, includes restructuring,
asset impairment and other charges of $(8) million, $126 million and
$154 million respectively. These charges are more fully discussed in Note 7
of our annual Consolidated Financial Statements included elsewhere in this
registration statement.

(3) The six months ended June 30, 2002 includes restructuring, asset impairment
and other charges of $2 million. This charge is more fully discussed in
Note 3 of our interim unaudited Consolidated Financial Statements.

(4) The year ended December 31, 2002 includes a charge of $8 million related to
a loss on the early extinguishment of debt. This charge is more fully
discussed in Note 8 of our annual Consolidated Financial Statements.

(5) The year ended December 31, 2002 and the six months ended June 30, 2002
includes income of $3 million related to a cumulative effect of a change in
accounting principles. This matter is more fully discussed in Note 1 of our
annual Consolidated Financial Statements.

RISK FACTORS

IN CONSIDERING WHETHER TO PARTICIPATE IN THIS EXCHANGE OFFER, YOU SHOULD
CAREFULLY CONSIDER ALL OF THE INFORMATION WE HAVE INCLUDED IN THIS PROSPECTUS.
IN PARTICULAR, YOU SHOULD CAREFULLY CONSIDER THE RISK FACTORS DESCRIBED BELOW
BEFORE MAKING A DECISION TO PARTICIPATE IN THIS EXCHANGE OFFER.

RISK FACTORS RELATING TO OUR BUSINESS

OUR BUSINESS IS AFFECTED BY THE CYCLICAL NATURE OF THE MARKETS THAT WE SERVE.

Our financial performance depends, in large part, on varying conditions in
the markets that we serve, particularly the automotive, construction and general
industrial markets. Demand in these markets fluctuates in response to overall
economic conditions and is particularly sensitive to changes in interest rate
levels and fuel costs. Our sales are also impacted by OEM inventory levels and
production schedules and stoppages. Economic downturns in the markets we serve
generally result in reductions in sales and pricing of our products, which could
reduce our profits and cash flow.

Since 2000, the markets we serve in North America have been experiencing a
downturn, most notably in the markets for heavy-duty trucks, medium-duty trucks,
construction equipment and a number of consumer-driven markets, such as those
for light-duty trucks and recreational vehicles. These conditions had a negative
impact on the performance of our Engine Business. Depending upon markets served,
engine production volumes decreased by as much as 78% on a global basis from
peak volumes during the 5 years preceding 2003. This resulted in a reduction of
Engine Business gross margin percentage of as much as 35% during this period,
primarily related to our decreased ability to recover fixed costs of
manufacturing at decreased volumes during global economic downturns. The Engine
Business constituted then and continues to constitute between 54% and 60% of our
total consolidated revenues. Fluctuations in the gross margins of this business,
therefore, have a significant impact on our overall financial performance. In
addition, weak conditions in the markets served by our Power Generation Business
have resulted in decreased demand and high inventory levels, which have
negatively affected our performance in this segment. Any continued weakness in
the markets we serve or in overall global economic conditions could result in
continued reduction in demand for our products and could have a material adverse
affect on our business, results of operations, financial condition and cash
flows.

OUR PRODUCTS ARE SUBJECT TO SUBSTANTIAL GOVERNMENT REGULATION.

Our engines are subject to extensive statutory and regulatory requirements
governing emissions and noise, including standards imposed by the EPA, state
regulatory agencies, such as the California Air Resource Board (CARB), and other
regulatory agencies around the world. In some cases, we may be required to
develop new products to comply with new regulations, particularly those relating
to air emissions. For example, under the terms of a consent decree that we and a
number of other engine manufacturers entered into with the DOJ, the CARB and the
EPA, we were required to develop new engines to comply with stringent emissions
standards by October 1, 2002. While we were able to meet this deadline, our
ability to comply with other existing and future regulatory standards will be
essential for us to maintain our position in the engine markets we serve.
Currently, we believe we are on schedule to meet all deadlines for known future
regulatory standards.

We have made, and will be required to continue to make, significant capital
and research expenditures to comply with these standards but we cannot assure
you that we will be able to achieve the technological advances that may be
necessary for us to continue to comply with evolving regulatory standards.
Further, the successful development and introduction of new and enhanced
products are subject to risks, such as delays in product development, cost
over-runs and unanticipated technical and manufacturing difficulties. Any
failure to comply with regulatory standards affecting our products could subject
us to fines or penalties, and could require us to cease production of any
non-compliant engine or to recall any engines produced and sold in violation of
the applicable standards. See "Business--

Environmental Compliance--Product Environmental Compliance" for a complete
discussion of the environmental laws and regulations that affect our products.

WE CANNOT ASSURE YOU THAT OUR TRUCK MANUFACTURER AND OEM CUSTOMERS WILL CONTINUE
TO OUTSOURCE THEIR ENGINE SUPPLY NEEDS.

Some of our engine customers, including Volvo and DaimlerChrysler, are truck
manufacturers or OEMs that manufacture engines for their own products. Despite
their engine manufacturing abilities, these customers have chosen to outsource
certain types of engine production to us due to the quality of our engine
products and in order to reduce costs, eliminate production risks and maintain
company focus. However, we cannot assure you that these customers will continue
to outsource engine production in the future. Increased levels of production
insourcing could result from a number of factors, such as shifts in our
customers' business strategies, which could result from the acquisition of
another engine manufacturer, the inability of third party suppliers to meet
product specifications and the emergence of low-cost production opportunities in
foreign countries. Any significant reduction in the level of engine production
outsourcing from our truck manufacturer or OEM customers could significantly
impact our revenues and, accordingly, have a material adverse affect on our
business, results of operations and financial condition.

OUR LARGEST CUSTOMER ACCOUNTS FOR A SIGNIFICANT SHARE OF OUR BUSINESS.

Sales to DaimlerChrysler accounted for approximately 14 percent of our net
sales for 2002, primarily relating to sales of our ISB engine for use in the
Dodge Ram truck and sales of our heavy-and medium-duty engines to its
Freightliner division. While a significant number of our sales to
DaimlerChrysler are under long-term supply agreements, these agreements provide
for the supply of DaimlerChrysler's engine requirements for particular models
and not a specific number of engines. Accordingly, the loss of DaimlerChrysler
as a customer or a significant decline in the production levels for the vehicles
in which DaimlerChrysler uses our products would have an adverse effect on our
business, results of operations and financial condition.

OUR MANUFACTURING OPERATIONS ARE DEPENDENT UPON THIRD-PARTY SUPPLIERS, MAKING US
VULNERABLE TO SUPPLY SHORTAGES.

We obtain materials and manufactured components from third-party suppliers.
A significant number of our suppliers (representing 75 to 85 percent of our
total raw material and component purchasers in 2002) are the sole source for a
particular supply item, although the majority of these materials and components
can be obtained from other suppliers. Any delay in our suppliers' abilities to
provide us with necessary materials and components may affect our capabilities
at a number of our manufacturing locations, or may require us to seek
alternative supply sources. Delays in obtaining supplies may result from a
number of factors affecting our suppliers, such as capacity constraints, labor
disputes, the impaired financial condition of a particular supplier, suppliers'
allocations to other purchasers, weather emergencies or acts of war or
terrorism. Any delay in receiving supplies could impair our ability to deliver
products to our customers and, accordingly, could have a material adverse effect
on our business, results of operations and financial condition.

WE MAY BE ADVERSELY IMPACTED BY WORK STOPPAGES AND OTHER LABOR MATTERS.

As of December 31, 2002, we employed approximately 23,700 persons worldwide.
Approximately 9,700 of our employees are represented by various unions under
collective bargaining agreements that expire between 2003 and 2005. Although we
believe our relations with our unions are good, we cannot assure you that future
issues with labor unions will be resolved favorably or that we will not in the
future encounter strikes, further unionization efforts or other types of
conflicts with labor unions or our employees. Any of these factors may have an
adverse effect on us or may limit our flexibility in dealing with our workforce.
In addition, many of our customers have unionized work forces. Work
stoppages or

slow-downs experienced by our customers could result in slow-downs or closures
at vehicle assembly plants where our engines are installed. If one or more of
our customers experience a material work stoppage, it could have a material
adverse effect on our business, results of operations and financial condition.

OUR PRODUCTS INVOLVE RISKS OF EXPOSURE TO PRODUCT LIABILITY CLAIMS.

We face an inherent business risk of exposure to product liability claims in
the event that our products' failure to perform to specifications results, or is
alleged to result, in property damage, bodily injury and/or death. We may
experience material product liability losses in the future. While we maintain
insurance coverage with respect to certain product liability claims, we may not
be able to obtain such insurance on acceptable terms in the future, if at all,
and any such insurance may not provide adequate coverage against product
liability claims. In addition, product liability claims can be expensive to
defend and can divert the attention of management and other personnel for
significant periods of time, regardless of the ultimate outcome. An unsuccessful
defense of a product liability claim could have a material adverse affect on our
business, results of operations and financial condition and cash flows. In
addition, even if we are successful in defending against a claim relating to our
products, claims of this nature could cause our customers to lose confidence in
our products and our company.

AN INCREASE IN OUR PENSION COSTS COULD ADVERSELY AFFECT US.

We have several contributory and noncontributory pension plans covering
substantially all of our employees. Our pension plan assets are principally
invested in equity securities and fixed income securities. We may be required to
contribute to a particular pension plan where the present value of the
accumulated benefit obligation under the plan exceeds the fair value of the plan
assets.

We have assumed an expected rate of return on plan assets of 10.0 percent in
the United States and 8.5 percent in the United Kingdom during the past two
years. Due to lower market returns in the past two years, we now intend to lower
our asset return assumptions to 8.5 percent in the United States and 8.2 percent
in the United Kingdom. We expect to use these return on plan asset assumptions
for 2003 and will continue to review and update these assumptions on an annual
basis. In 2003, we expect our pension expense to increase approximately $30
million due primarily to reducing our expected rate of return on plan assets.

Recent declines in equity markets and interest rates have had a negative
impact on our pension plan liability and the fair value of plan assets. As a
result, the fair value of plan assets was lower than our accumulated pension
benefit obligation at our measurement date. Based on the fair value of plan
assets and interest rates, each as of November 30, 2002, we recorded a charge of
$257 million to shareholders' equity during the fourth quarter.

OUR OPERATIONS ARE SUBJECT TO EXTENSIVE ENVIRONMENTAL LAWS AND REGULATIONS.

Our plants and operations are subject to increasingly stringent
environmental laws and regulations in all of the countries in which we operate,
including laws and regulations governing emissions to air, discharges to water
and the generation, handling, storage, transportation, treatment and disposal of
waste materials. While we believe that we are in compliance in all material
respects with these environmental laws and regulations, we cannot assure you
that we will not be adversely impacted by costs, liabilities or claims with
respect to existing or subsequently acquired operations, under either present
laws and regulations or those that may be adopted or imposed in the future. We
are also subject to laws requiring the cleanup of contaminated property. If a
release of hazardous substances occurs at or from any of our current of former
properties or at a landfill or another location where we have disposed of
hazardous materials, we may be held liable for the contamination, and the amount
of such liability could be material.

WE ARE EXPOSED TO POLITICAL, ECONOMIC AND OTHER RISKS THAT ARISE FROM OPERATING
A MULTINATIONAL BUSINESS.

Approximately 45 percent of our net sales for 2002 were derived from sources
outside the United States. Accordingly, our business is subject to the
political, economic and other risks that are inherent in operating in numerous
countries. These risks include:

- the difficulty of enforcing agreements and collecting receivables through
foreign legal systems;

- trade protection measures and import or export licensing requirements;

- tax rates in certain foreign countries that exceed those in the United
States and the imposition of withholding requirements on foreign earnings;

- the imposition of tariffs, exchange controls or other restrictions;

- difficulty in staffing and managing widespread operations and the
application of foreign labor regulations;

- required compliance with a variety of foreign laws and regulations; and

- changes in general economic and political conditions in countries where we
operate, particularly in emerging markets.

As we continue to expand our business globally, our success will depend, in
part, on our ability to anticipate and effectively manage these and other risks.
We cannot assure you that these and other factors will not have a material
adverse affect on our international operations or on our business as a whole.

WE ARE SUBJECT TO CURRENCY EXCHANGE RATE AND OTHER RELATED RISKS.

We conduct operations in many areas of the world involving transactions
denominated in a variety of currencies. We are subject to currency exchange rate
risk to the extent that our costs are denominated in currencies other than those
in which we earn revenues. In addition, since our financial statements are
denominated in U.S. dollars, changes in currency exchange rates between the U.S.
dollar and other currencies have had, and will continue to have, an impact on
our earnings. While we customarily enter into financial transactions to address
these risks, we cannot assure you that currency exchange rate fluctuations will
not adversely affect our results of operations and financial condition. In
addition, while the use of currency hedging instruments may provide us with
protection from adverse fluctuations in currency exchange rates, by utilizing
these instruments we potentially forego the benefits that might result from
favorable fluctuations in currency exchange rates.

We also face risks arising from the imposition of exchange controls and
currency devaluations. Exchange controls may limit our ability to convert
foreign currencies into U.S. dollars or to remit dividends and other payments by
our foreign subsidiaries or businesses located in or conducted within a country
imposing controls. Currency devaluations result in a diminished value of funds
denominated in the currency of the country instituting the devaluation. Actions
of this nature, if they occur or continue for significant periods of time, could
have an adverse effect on our results of operations and financial condition in
any given period.

REVISION OR WITHDRAWAL OF OUR CREDIT RATINGS MAY NEGATIVELY IMPACT OUR ABILITY
TO ISSUE DEBT AND THE COST OF OUR FINANCING ARRANGEMENTS.

A number of our financing agreements and arrangements, such as our accounts
receivable securitization program, our financing arrangements for independent
distributors, our new revolving credit facility and our equipment sale-leaseback
agreement, have restrictive covenants and/or pricing modifications that may be
triggered in the event of ratings revisions. Our corporate credit rating is
currently "BB+" from Standard & Poor's, with a stable outlook, and "Ba1" from
Moody's, with a negative outlook. Our long-term senior unsecured debt rating is
currently "BB+" from Standard &

Poor's, with a negative outlook, and "Ba2" from Moody's, with a negative
outlook. A rating of Baa or higher by Moody's or a rating of BBB or higher by
Standard & Poor's is considered investment grade. Accordingly, our long-term
senior unsecured debt rating is below investment grade. Our long-term senior
unsecured debt rating was downgraded by Moody's from "Ba1" to "Ba2" on
November 7, 2002 as a result of us securing our borrowings under the new
revolving credit facility. Any rating can be revised upward or downward or
withdrawn at any time by a rating agency if it decides the circumstances warrant
that change, and there can be no assurance that our debt ratings will not be
lowered further or withdrawn by a rating agency. Any future lowering of our
credit ratings could further increase the cost of our financing agreements and
arrangements, and also have a negative impact on our ability to access the
capital markets or borrow funds at current rates.

WE FACE SIGNIFICANT COMPETITION IN THE MARKETS WE SERVE.

The markets in which we operate are highly competitive. We compete worldwide
with a number of other manufacturers and distributors that produce and sell
similar products. Our products primarily compete on the basis of price,
performance, fuel economy, speed of delivery, quality and customer support. Some
of our competitors are companies, or divisions or operating units of companies,
that have greater financial and other resources than we do. There can be no
assurance that our products will be able to compete successfully with the
products of these other companies. Any failure by us to compete effectively in
the markets we serve could have a material adverse effect on our business,
results of operations and financial condition. For a more complete discussion of
the competitive environment in which each of our business segments operates, see
"Business--Our Business Segments".

RISK FACTORS RELATING TO THE NOTES

THE AMOUNT OF OUR INDEBTEDNESS COULD ADVERSELY AFFECT OUR FINANCIAL CONDITION.

As of June 29, 2003, our total indebtedness was $1,076 million, excluding
unused commitments under the new revolving credit facility, which represented
approximately 56 percent of our total capitalization. In addition, we and our
subsidiaries will be able to incur additional indebtedness in the future,
subject to the terms of our existing and future debt instruments.

Our level of indebtedness could have important consequences to you. For
example, it could:

- limit our ability to fund future working capital, capital expenditures and
other general corporate activities;

- require us to dedicate a substantial portion of our operating cash flow to
payments on our indebtedness, thereby reducing the availability of our
cash flow to fund other areas of our business;

- limit our flexibility in planning for, or reacting to, changes in our
business and the industry in which we operate;

- make us more vulnerable in the event of a downturn in general economic
conditions or in our business;

- make it more difficult to satisfy our obligations under the notes,
including our repurchase obligation upon the occurrence of specified
change of control events; and

- increase our exposure to interest rate increases because a portion of our
borrowings is at variable rates.

SERVICING OUR DEBT OBLIGATIONS REQUIRES A SIGNIFICANT AMOUNT OF CASH, AND OUR
ABILITY TO GENERATE CASH DEPENDS ON MANY FACTORS BEYOND OUR CONTROL.

Our ability to satisfy our debt service obligations will depend on, among
other things, our future operating performance. Our future financial performance
will be affected by a range of economic, competitive, regulatory and business
factors, many of which are beyond our control, and we cannot

assure you that our business will generate sufficient cash flow from operations
to enable us to service our indebtedness or fund our other liquidity needs. If
we do not generate sufficient cash flow from operations to satisfy our debt
obligations, including payments on the notes, we may have to undertake
alternative financing plans, such as refinancing or restructuring our debt,
selling assets, reducing or delaying capital investments or seeking to raise
additional capital. We cannot assure you that any refinancing would be possible,
that any assets could be sold, or, if sold, of the timing of the sales or the
amount of proceeds realized from those sales, or that additional financing could
be obtained on acceptable terms, if at all.

OUR DEBT AGREEMENTS CONTAIN COVENANTS THAT RESTRICT OUR OPERATIONS.

Among other things, the operating and financial restrictions and covenants
contained in our debt agreements, including the indenture governing the notes,
restrict, condition or prohibit us from:

- incurring additional indebtedness and issuing preferred stock;

- paying dividends and making certain other restricted payments;

- creating liens;

- making investments;

- creating restrictions on the payment of dividends or other amounts to us;

- entering into sale and leaseback transactions;

- engaging in transactions with affiliates;

- merging or consolidating with any other person; or

- selling, assigning, leasing, conveying or otherwise transferring our
assets.

In addition, the new revolving credit facility contains financial and
operating covenants and prohibitions, including requirements that we maintain
certain financial ratios.

The operating and financial restrictions and covenants in our existing debt
agreements and any future financing agreements may adversely affect our ability
to finance future operations or capital needs or to engage in other business
activities. Although we are currently in compliance with these operating and
financial restrictions and covenants, a breach of any of these restrictions or
covenants may result in an event of default under a particular debt instrument,
which could permit acceleration of the debt under that instrument and, in some
cases, the acceleration of debt under any other debt instrument that contains
cross-acceleration provisions. In an event of default, or in the event of a
cross-acceleration, we may not have sufficient funds available to make the
required payments under our indebtedness.

IF THE NOTES ARE RATED INVESTMENT GRADE AT ANY TIME BY BOTH STANDARD & POOR'S
AND MOODY'S, CERTAIN COVENANTS CONTAINED IN THE INDENTURE WILL BE SUSPENDED, AND
THE HOLDERS OF THE NOTES WILL LOSE THE PROTECTION OF THESE COVENANTS.

The indenture contains certain covenants that will be suspended and cease to
have any effect from and after the first date when the notes are rated
investment grade by both Standard & Poor's and Moody's. See "Description of the
Notes--Certain Covenants--Suspension of Covenants and Covenant Substitution".
These covenants restrict, among other things, our ability to pay dividends,
incur certain liens, incur additional debt and to enter into certain types of
transactions. Because we will not be subject to these restrictions when the
notes are rated investment grade, we will be able to incur additional debt and
grant additional liens on our property. If after these covenants are suspended,
Standard & Poor's or Moody's were to downgrade their rating of the notes to a
non-investment grade level, the covenants would be reinstated and the holders of
the notes would again have the protection of these covenants. However, the notes
would be effectively subordinated to any liens incurred during such time as the
notes were rated investment grade.

THE NOTES ARE GENERAL UNSECURED OBLIGATIONS.

The notes are our general unsecured obligations and are effectively
subordinated in right of payment to all of our secured indebtedness to the
extent of the value of the assets securing such indebtedness. In the event of a
bankruptcy or similar proceeding involving us, our assets which serve as
collateral under our secured indebtedness would be made available to satisfy the
obligations under any secured debt before any payments are made on the notes.
Our obligations under the new revolving credit facility are secured by security
interests in substantially all of our assets and certain assets of our domestic
subsidiaries that guarantee obligations under the facility. See "Description of
Other Indebtedness--New Revolving Credit Facility".

THE NOTES ARE OUR OBLIGATIONS AND NOT OBLIGATIONS OF OUR SUBSIDIARIES AND WILL
BE EFFECTIVELY SUBORDINATED TO THE CLAIMS OF OUR SUBSIDIARIES' CREDITORS.

The notes are our direct obligations and are not currently guaranteed by any
of our subsidiaries. As of June 29, 2003, our subsidiaries had approximately
$1,078 million of outstanding third-party liabilities and approximately
$2,638 million of our consolidated assets. In addition, a number of our existing
domestic subsidiaries are, to a certain extent, guaranteeing our obligations
under the new revolving credit facility but are not guaranteeing our obligations
with respect to the notes. The terms of the indenture governing the notes and
the terms of the 1986 Indenture (which governs a number of our other notes and
debentures) limit certain of these subsidiaries' indebtedness and guarantees to
15 percent of our consolidated net tangible assets.

The indenture governing the notes requires that in the future certain of our
domestic subsidiaries that guarantee our or any subsidiary guarantors' other
indebtedness also guarantee the notes. However, this requirement to also
guarantee the notes only applies to subsidiaries that are designated as
"unrestricted subsidiaries" under the terms of the 1986 Indenture. Accordingly,
in the future, certain of our domestic subsidiaries will be required to
guarantee the new revolving credit facility without also guaranteeing the notes.
Further, the guarantee of the notes by a subsidiary that is also guaranteeing
the new revolving credit facility would rank equally with, and not prior to, the
applicable subsidiary's guarantee under the new revolving credit facility.

In addition, our right to receive any assets of any of our non-guarantor
subsidiaries upon their liquidation or reorganization, and therefore the right
of the holders of the notes to participate in those assets, will be effectively
subordinated to the claims of those subsidiaries' creditors, including
debtholders and trade creditors. This means that the holders of that debt would
have a claim prior to that of the holders of the notes with respect to the
assets of those subsidiaries. In addition, even if we were a creditor of any of
our non-guarantor subsidiaries, our rights as a creditor would be subordinate to
any security interest in the assets of those subsidiaries and any indebtedness
of those subsidiaries that is senior to the indebtedness we hold. While the
terms of our existing indebtedness, including the indenture governing the notes,
currently contain restrictions in the ability of our non-guarantor subsidiaries
to incur indebtedness, these restrictions are subject to a number of
qualifications and exceptions.

Our cash flow and our ability to service our debt, including the notes,
depend partly upon the earnings of our subsidiaries. However, our subsidiaries
are separate and distinct legal entities and have no obligation to pay any
amounts due on the notes or to provide us with funds for our payment
obligations, whether by dividends, distributions, loans or other payments.
Payments to us by our subsidiaries will also be contingent upon our
subsidiaries' earnings and other business considerations. In addition, any
payment of dividends, distributions, loans or advances by our subsidiaries to us
could be subject to statutory or contractual restrictions.

FRAUDULENT TRANSFER LAWS MAY PERMIT A COURT TO TAKE ACTION DETRIMENTAL TO YOU.

Certain of our future domestic subsidiaries may guarantee the notes. If,
however, any subsidiary becomes a debtor in a case under the United States
Bankruptcy Code or encounters other financial difficulty, under Federal or state
fraudulent transfer law a court might:

- avoid all or a portion of such subsidiary guarantor's obligations to you;

- subordinate such subsidiary guarantor's obligations to you to other
existing and future indebtedness, entitling other creditors to be paid in
full before any payment is made on the related guarantee; and

- take other action detrimental to you, including, in certain circumstances,
invalidating the related guarantee.

The court might do so if it found that, when the subsidiary entered into its
guarantee (or, in some states, when payments became due thereunder), the
subsidiary guarantor:

- received less than reasonably equivalent value or fair consideration for
the guarantee; and

- either (1) was or was rendered insolvent, (2) was left with inadequate
capital to conduct its business or (3) believed or should have believed
that it would incur debts beyond its ability to pay.

The court might also avoid a subsidiary's guarantee, without regard to those
factors, if it found that the subsidiary entered into its guarantee with actual
intent to hinder, delay or defraud its creditors.

A court would likely find that a subsidiary did not receive reasonably
equivalent value or fair consideration for its guarantee unless it benefited
directly or indirectly from the notes' issuance. If a court avoided a guarantee,
you would no longer have a claim against the guarantor. In addition, the court
might direct you to repay any amounts already received from the guarantor. If
the court were to avoid any subsidiary's guarantee, we cannot assure you that
funds would be available to pay the notes from another subsidiary guarantor or
from any other source.

The test for determining solvency for these purposes will depend on the law
of the jurisdiction being applied. In general, a court would consider an entity
insolvent either if the sum of its existing debts exceeds the fair value of all
of its property or if the present fair saleable value of its assets is less than
the amount required to pay the probable liability on its existing debts as they
become due. For the analysis, "debts" includes contingent and unliquidated
debts.

The indenture states that the liability of each subsidiary on its guarantee
is limited to the maximum amount that the subsidiary can incur without risk that
the guarantee will be subject to avoidance as a fraudulent transfer. We cannot
assure you that this limitation will protect any guarantees from fraudulent
transfer attack or, if it does, that any guarantees will be in amounts
sufficient, if necessary, to pay the notes when due.

WE MAY NOT HAVE THE ABILITY TO RAISE THE FUNDS NECESSARY TO FINANCE THE CHANGE
OF CONTROL OFFER REQUIRED BY THE NOTES INDENTURE.

Upon the occurrence of certain kinds of change of control events, we will be
required to offer to repurchase all our outstanding notes at 101% of the
principal amount thereof plus accrued and unpaid interest, if any, to the date
of repurchase. Any change of control would constitute a default under the new
revolving credit facility. If a change of control were to occur, we cannot
assure you that we would have sufficient funds to pay the purchase price of the
outstanding notes, and we expect that we would require third party financing to
do so. Any requirements to offer to purchase any outstanding notes may require
us to refinance our existing indebtedness. In such an event, we cannot assure
you that we would be able to obtain additional financing or refinance our
existing indebtedness on favorable terms, if at all. See "Description of the
Notes--Certain Covenants--Change of Control".

YOUR RIGHT TO REQUIRE US TO REDEEM THE NOTES IS LIMITED.

The holders of notes have limited rights to require us to purchase or redeem
the notes in the event of a takeover, recapitalization or similar restructuring,
including an issuer recapitalization or similar transaction with management.
Consequently, the change of control provisions of the indenture governing the
notes will not afford any protection in a highly leveraged transaction,
including a transaction initiated by us, if such transaction does not result in
a change of control or otherwise result in an event of default under the
indenture. Accordingly, the change of control provision is likely to be of
limited effect in such situations.

IF YOU FAIL TO EXCHANGE YOUR ORIGINAL NOTES, THEY WILL CONTINUE TO BE RESTRICTED
SECURITIES AND MAY BECOME LESS LIQUID.

Original notes which you do not tender or we do not accept will, following
the exchange offer, continue to be restricted securities, and you may not offer
to sell them except pursuant to an exemption from, or in a transaction not
subject to, the Securities Act and applicable state securities laws. We will
issue new notes in exchange for the original notes pursuant to the exchange
offer only following the satisfaction of the procedures and conditions set forth
in "The Exchange Offer--Procedures for Tendering". Such procedures and
conditions include timely receipt by the exchange agent of such original notes
and of a properly completed and duly executed letter of transmittal.

Because we anticipate that most holders of original notes will elect to
exchange such original notes, we expect that the liquidity of the market for any
original notes remaining after the completion of the exchange offer will be
substantially limited. Any original notes tendered and exchanged in the exchange
offer will reduce the aggregate principal amount at maturity of the original
notes outstanding. Following the exchange offer, if you did not tender your
original notes you generally will not have any further registration rights, and
such original notes will continue to be subject to certain transfer
restrictions. Accordingly, the liquidity of the market for such original notes
could be adversely affected.

WE MAY REDEEM THE NOTES AT OUR OPTION PRIOR TO MATURITY.

The notes are redeemable, at our option and without your consent, in whole
or in part, at any time after December 1, 2006. If we exercise this option you
will receive the redemption price described under "Description of the
Notes--Optional Redemption". Our decision to exercise this option will be
influenced by a range of factors including the availability of cash required to
redeem the notes, whether market conditions at the time are conducive to such a
refinancing and other considerations relevant to our future capital management.
If the notes are redeemed as a result of the optional redemption, you may not
obtain the return you expect to receive on the notes if you owned them until
maturity.

USE OF PROCEEDS

This exchange offer is intended to satisfy our obligations under the
registration rights agreement entered into in connection with the issuance of
the original notes. We will not receive any cash proceeds from the issuance of
the new notes in the exchange offer. In consideration for issuing the new notes
as contemplated by this prospectus, we will receive the original notes in like
principal amount. The original notes surrendered and exchanged for the new notes
will be retired and canceled and cannot be reissued. Accordingly, the issuance
of the new notes will not result in any increase in our indebtedness or capital
stock.

THE EXCHANGE OFFER

PURPOSE OF THE EXCHANGE OFFER

In connection with the sale of the original notes, we entered into a
registration rights agreement with the initial purchasers, under which we agreed
to use our reasonable best efforts to file and have declared effective an
exchange offer registration statement under the Securities Act and to consummate
the exchange offer.

We are making the exchange offer in reliance on the position of the SEC as
set forth in certain no-action letters. However, we have not sought our own
no-action letter. Based upon these interpretations by the SEC, we believe that a
holder of new notes, but not a holder who is our "affiliate" within the meaning
of Rule 405 of the Securities Act, who exchanges original notes for new notes in
the exchange offer, generally may offer the new notes for resale, sell the new
notes and otherwise transfer the new notes without further registration under
the Securities Act and without delivery of a prospectus that satisfies the
requirements of Section 10 of the Securities Act. This does not apply, however,
to a holder who is our "affiliate" within the meaning of Rule 405 of the
Securities Act. We also believe that a holder may offer, sell or transfer the
new notes only if the holder acquires the new notes in the ordinary course of
its business and is not participating, does not intend to participate and has no
arrangement or understanding with any person to participate in a distribution of
the new notes.

Any holder of the original notes using the exchange offer to participate in
a distribution of new notes cannot rely on the no-action letters referred to
above. A broker-dealer that acquired original notes directly from us, but not as
a result of market-making activities or other trading activities, must comply
with the registration and prospectus delivery requirements of the Securities Act
in the absence of an exemption from such requirements.

Each broker-dealer that receives new notes for its own account in exchange
for original notes, as a result of market-making activities or other trading
activities, must acknowledge that it will deliver a prospectus in connection
with any resale of such new notes. This prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with resales of new notes received in exchange for original notes where such
original notes were acquired by such broker-dealer as a result of market-making
activities or other trading activities. The letter of transmittal states that by
acknowledging and delivering a prospectus, a broker-dealer will not be
considered to admit that it is an "underwriter" within the meaning of the
Securities Act. We have agreed that for a period of 180 days after the
expiration date for the exchange offer, we will make this prospectus available
to broker-dealers for use in connection with any such resale. See "Plan of
Distribution".

Except as described above, this prospectus may not be used for an offer to
resell, resale or other transfer of new notes.

The exchange offer is not being made to, nor will we accept tenders for
exchange from, holders of original notes in any jurisdiction in which the
exchange offer or the acceptance of it would not be in compliance with the
securities or blue sky laws of such jurisdiction.

TERMS OF THE EXCHANGE

Upon the terms and subject to the conditions of the exchange offer, we will
accept any and all original notes validly tendered prior to 5:00 p.m., New York
City time, on the expiration date for the exchange offer. The date of acceptance
for exchange of the original notes, and completion of the exchange offer, is the
exchange date, which will be the first business day following the expiration
date (unless extended as described in this document). We will issue, on or
promptly after the exchange date, an aggregate principal amount of up to $250
million of new notes for a like principal amount of outstanding original notes
tendered and accepted in connection with the exchange offer. The new notes

issued in connection with the exchange offer will be delivered on the earliest
practicable date following the exchange date. Holders may tender some or all of
their original notes in connection with the exchange offer, but only in $1,000
increments of principal amount at maturity.

The terms of the new notes will be identical in all material respects to the
terms of the original notes, except that the new notes will have been registered
under the Securities Act and are issued free from any covenant regarding
registration, including the payment of additional interest upon a failure to
file or have declared effective an exchange offer registration statement or to
complete the exchange offer by certain dates. The new notes will evidence the
same debt as the original notes and will be issued under the same indenture and
entitled to the same benefits under that indenture as the original notes being
exchanged. As of the date of this prospectus, $250 million in aggregate
principal amount of the original notes are outstanding.

In connection with the issuance of the original notes, we have arranged for
the original notes originally purchased by qualified institutional buyers and
those sold in reliance on Regulation S under the Securities Act to be issued and
transferable in book-entry form through the facilities of The Depository Trust
Company, acting as depositary. The new notes will be issued in the form of a
global note registered in the name of DTC or its nominee and each beneficial
owner's interest in it will be transferable in book-entry form through DTC.

Holders of original notes do not have any appraisal or dissenters' rights in
connection with the exchange offer. Original notes which are not tendered for
exchange or are tendered but not accepted in connection with the exchange offer
will remain outstanding and be entitled to the benefits of the indenture under
which they were issued, but, subject to certain limited exceptions, will not be
entitled to any registration rights under the registration rights agreement.

We shall be considered to have accepted validly tendered original notes if
and when we have given oral or written notice to the exchange agent. The
exchange agent will act as agent for the tendering holders for the purposes of
receiving the new notes from us.

If any tendered original notes are not accepted for exchange because of an
invalid tender, the occurrence of certain other events described in this
prospectus or otherwise, we will return the original notes, without expense, to
the tendering holder as quickly as possible after the expiration date.

Holders who tender original notes will not be required to pay brokerage
commissions or fees or, subject to the instructions in the letter of
transmittal, transfer taxes on exchange of original notes in connection with the
exchange offer. We will pay all charges and expenses, other than certain
applicable taxes described below, in connection with the exchange offer. See
"--Fees and Expenses".

EXPIRATION DATE; EXTENSIONS; AMENDMENTS

The expiration date for the exchange offer is 5:00 p.m., New York City time,
on , 2003, unless extended by us in our sole discretion (but in no
event to a date later than , 2003), in which case the term
"expiration date" shall mean the latest date and time to which the exchange
offer is extended.

We reserve the right, in our sole discretion:

- to delay accepting any original notes, to extend the offer or to terminate
the exchange offer if, in our reasonable judgment, any of the conditions
described below shall not have been satisfied, by giving oral or written
notice of the delay, extension or termination to the exchange agent; or

- to amend the terms of the exchange offer in any manner.

If we amend the exchange offer in a manner that we consider material, we
will disclose such amendment by means of a prospectus supplement, and we will
extend the exchange offer for a period of five to ten business days.

If we determine to make a public announcement of any delay, extension,
amendment or termination of the exchange offer, we will do so by making a timely
release through an appropriate news agency.

INTEREST ON THE NEW NOTES

Interest on the new notes will accrue at the rate of 9 1/2% per annum from
the most recent date to which interest on the new notes has been paid or, if no
interest has been paid, from the date of the indenture governing the notes.
Interest will be paid semiannually in arrears on June 1 and December 1 of each
year.

CONDITIONS TO THE EXCHANGE OFFER

Despite any other term of the exchange offer, we will not be required to
accept for exchange, or exchange new notes for, any original notes and may
terminate the exchange offer as provided in this prospectus before the
acceptance of the original notes, if prior to the expiration date:

- any action or proceeding is instituted or threatened in any court or by or
before any governmental agency relating to the exchange offer which, in
our reasonable judgment, might materially impair our ability to proceed
with the exchange offer or materially impair the contemplated benefits of
the exchange offer to us, or any material adverse development has occurred
in any existing action or proceeding relating to us or any of our
subsidiaries;

- any change, or any development involving a prospective change, in our
business or financial affairs or any of our subsidiaries has occurred
which, in our reasonable judgment, might materially impair our ability to
proceed with the exchange offer or materially impair the contemplated
benefits of the exchange offer to us;

- any law, statue, rule or regulation is proposed, adopted or enacted, which
in our reasonable judgment, might materially impair our ability to proceed
with the exchange offer or materially impair the contemplated benefits of
the exchange offer to us; or

- any governmental approval has not been obtained, which approval we, in our
reasonable discretion, consider necessary for the completion of the
exchange offer as contemplated by this prospectus.

The conditions listed above are for our sole benefit and may be asserted by
us regardless of the circumstances giving rise to any of these conditions. We
may waive these conditions in our reasonable discretion in whole or in part at
any time and from time to time prior to the expiration date. The failure by us
at any time to exercise any of the above rights shall not be considered a waiver
of such right, and such right shall be considered an ongoing right which may be
asserted at any time and from time to time.

If we determine in our reasonable discretion that any of the conditions are
not satisfied, we may:

- refuse to accept any original notes and return all tendered original notes
to the tendering holders;

- extend the exchange offer and retain all original notes tendered before
the expiration of the exchange offer, subject, however, to the rights of
holders to withdraw these original notes
(see " -- Withdrawal of Tenders" below); or

- waive unsatisfied conditions relating to the exchange offer and accept all
properly tendered original notes which have not been withdrawn.

PROCEDURES FOR TENDERING

Unless the tender is being made in book-entry form, to tender in the
exchange offer, a holder must

- complete, sign and date the letter of transmittal, or a facsimile of it;

- have the signatures guaranteed if required by the letter of transmittal;
and

- mail or otherwise deliver the letter of transmittal or the facsimile, the
original notes and any other required documents to the exchange agent
prior to 5:00 p.m., New York City time, on the expiration date.

Any financial institution that is a participant in DTC's Book-Entry Transfer
Facility system may make book-entry delivery of the original notes by causing
DTC to transfer the original notes into the exchange agent's account. Although
delivery of original notes may be effected through book-entry transfer into the
exchange agent's account at DTC, the letter of transmittal (or facsimile), with
any required signature guarantees and any other required documents, must, in any
case, be transmitted to and received or confirmed by the exchange agent at its
addresses set forth under the caption "Exchange Agent" below, prior to
5:00 p.m., New York City time, on the expiration date. Delivery of documents to
DTC in accordance with its procedures does not constitute delivery to the
exchange agent.

The tender by a holder of original notes will constitute an agreement
between us and the holder in accordance with the terms and subject to the
conditions set forth in this prospectus and in the letter of transmittal.

The method of delivery of original notes and the letter of transmittal and
all other required documents to the exchange agent is at the election and risk
of the holders. Instead of delivery by mail, we recommend that holders use an
overnight or hand delivery service. In all cases, holders should allow
sufficient time to assure delivery to the exchange agent before the expiration
date. No letter of transmittal of original notes should be sent to us. Holders
may request their respective brokers, dealers, commercial banks, trust companies
or nominees to effect the tenders for such holders.

Any beneficial owner whose original notes are registered in the name of a
broker, dealer, commercial bank, trust company or other nominee and who wishes
to tender should contact the registered holder promptly and instruct such
registered holder to tender on behalf of the beneficial owner. If the beneficial
owner wishes to tender on that owner's own behalf, the owner must, prior to
completing and executing the letter of transmittal and delivery of such owner's
original notes, either make appropriate arrangements to register ownership of
the original notes in the owner's name or obtain a properly completed bond power
from the registered holder. The transfer of registered ownership may take
considerable time.

Signature on a letter of transmittal or a notice of withdrawal must be
guaranteed by an eligible guarantor institution within the meaning of
Rule 17Ad-15 under the Exchange Act, unless the original notes tendered pursuant
thereto are tendered:

- by a registered holder who has not completed the box entitled "Special
Issuance Instructions" or "Special Delivery Instructions" on the letter of
transmittal; or

- for the account of an eligible guarantor institution.

In the event that signatures on a letter or transmittal or a notice of
withdrawal are required to be guaranteed, such guarantee must be by:

- a member firm of a registered national securities exchange or of the
National Association of Securities Dealers, Inc.;

- a commercial bank or trust company having an office or correspondent in
the United States; or

- an "eligible guarantor institution".

If the letter of transmittal is signed by a person other than the registered
holder of any original notes, the original notes must be endorsed by the
registered holder or accompanied by a properly completed bond power, in each
case signed or endorsed in blank by the registered holder.

If the letter of transmittal or any original notes or bond powers are signed
or endorsed by trustees, executors, administrators, guardians, attorney-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity, such persons should so indicate when signing and, unless waived by us,
submit evidence satisfactory to us of their authority to act in that capacity
with the letter of transmittal.

We will determine all questions as to the validity, form, eligibility
(including time of receipt) and acceptance and withdrawal of tendered original
notes in our sole discretion. We reserve the absolute right to reject any and
all original notes not properly tendered or any original notes whose acceptance
by us would, in the opinion of our counsel, be unlawful. We also reserve the
right to waive any defects, irregularities or conditions of tender as to any
particular original notes either before or after the expiration date. Our
interpretation of the terms and conditions of the exchange offer (including the
instructions in the letter of transmittal) will be final and binding on all
parties. Unless waived, any defects or irregularities in connection with tenders
of original notes must be cured within a time period we will determine. Although
we intend to request the exchange agent to notify holders of defects or
irregularities relating to tenders of original notes, neither we, the exchange
agent nor any other person will have any duty or incur any liability for failure
to give such notification. Tenders of original notes will not be considered to
have been made until such defects or irregularities have been cured or waived.
Any original notes received by the exchange agent that are not properly tendered
and as to which the defects or irregularities have not been cured or waived will
be returned by the exchange agent to the tendering holders, unless otherwise
provided in the letter of transmittal, as soon as practicable following the
expiration date.

In addition, we reserve the right, as set forth above under the caption
"--Conditions to the Exchange Offer", to terminate the exchange offer.

By tendering, each holder represents to us, among other things, that:

- the new notes acquired in connection with the exchange offer are being
obtained in the ordinary course of business of the person receiving the
new notes, whether or not such person is the holder;

- neither the holder nor any such other person has an arrangement or
understanding with any person to participate in the distribution of such
new notes; and

- neither the holder nor any such other person is our "affiliate" (as
defined in Rule 405 under the Securities Act).

If the holder is a broker-dealer which will receive new notes for its own
account in exchange for original notes, it will acknowledge that it acquired
such original notes as the result of market-making activities or other trading
activities and it will deliver a prospectus in connection with any resale of
such new notes. See "Plan of Distribution".

GUARANTEED DELIVERY PROCEDURES

A holder who wishes to tender its original notes and:

- whose original notes are not immediately available;

- who cannot deliver the holder's original notes, the letter of transmittal
or any other required documents to the exchange agent prior to the
expiration date; or

- who cannot complete the procedures for book-entry transfer before the
expiration date;

may effect a tender if

- the tender is made through an eligible guarantor institution;

- before the expiration date, the exchange agent receives from the eligible
guarantor institution:

- a properly completed and duly executed notice of guaranteed delivery by
facsimile transmission, mail or hand delivery,

- the name and address of the holder, and

- the certificate number(s) of the original notes and the principal
amount at maturity of original notes tendered, stating that the tender
is being made and guaranteeing that, within three New York Stock
Exchange trading days after the expiration date, the letter of
transmittal and the certificate(s) representing the original notes (or
a confirmation of book-entry transfer), and any other documents
required by the letter of transmittal will be deposited by the eligible
guarantor institution with the exchange agent; and

- the exchange agent receives, within three New York Stock Exchange trading
days after the expiration date, a properly completed and executed letter
of transmittal or facsimile, as well as the certificate(s) representing
all tendered original notes in proper form for transfer or a confirmation
of book-entry transfer, and all other documents required by the letter of
transmittal.

WITHDRAWAL OF TENDERS

Except as otherwise provided herein, tenders of original notes may be
withdrawn at any time prior to 5:00 p.m., New York City time, on the expiration
date.

To withdraw a tender of original notes in connection with the exchange
offer, a written facsimile transmission notice of withdrawal must be received by
the exchange agent at its address set forth herein prior to 5:00 p.m., New York
City time, on the expiration date. Any such notice of withdrawal must:

- specify the name of the person who deposited the original notes to be
withdrawn;

- identify the original notes to be withdrawn (including the certificate
number or numbers and principal amount at maturity of such original
notes);

- be signed by the depositor in the same manner as the original signature on
the letter of transmittal by which such original notes were tendered
(including any required signature guarantees) or be accompanied by
documents or transfer sufficient to have the trustee register the transfer
of such original notes into the name of the person withdrawing the tender;
and

- specify the name in which any such original notes are to be registered, if
different from that of the depositor.

We will determine all questions as to the validity, form and eligibility
(including time of receipt) of such withdrawal notices. Any original notes so
withdrawn will be considered not to have been validly tendered for purposes of
the exchange offer, and no new notes will be issued unless the original notes

withdrawn are validly re-tendered. Any original notes which have been tendered
but which are not accepted for exchange or which are withdrawn will be returned
to the holder without cost to such holder as soon as practicable after
withdrawal, rejection of tender or termination of the exchange offer. Properly
withdrawn original notes may be re-tendered by following one of the procedures
described above under the caption "--Procedures for Tendering" at any time prior
to the expiration date.

EXCHANGE AGENT

BNY Midwest Trust Company has been appointed as exchange agent in connection
with the exchange offer. Questions and requests for assistance, requests for
additional copies of this prospectus or of the letter of transmittal should be
directed to the exchange agent at its offices at 101 Barclay Street, 7 East New
York, NY 10286, attention Corporate Trust Operations Reorganization Unit. The
exchange agent's telephone number is (212) 815-6331 and facsimile number is
(212) 298-1915.

FEES AND EXPENSES

We will not make any payment to brokers, dealers or others soliciting
acceptances of the exchange offer. We will pay certain other expenses to be
incurred in connection with the exchange offer, including the fees and expenses
of the exchange agent and certain accounting and legal fees.

Holders who tender their original notes for exchange will not be obligated
to pay transfer taxes. If, however:

- new notes are to be delivered to, or issued in the name of, any person
other than the registered holder of the original notes tendered; or

- if tendered original notes are registered in the name of any person other
than the person signing the letter of transmittal; or

- if a transfer tax is imposed for any reason other than the exchange of
original notes in connection with the exchange offer;

then the amount of any such transfer taxes (whether imposed on the registered
holder or any other persons) will be payable by the tendering holder. If
satisfactory evidence of payment of such taxes or exemption from them is not
submitted with the letter of transmittal, the amount of such transfer taxes will
be billed directly to the tendering holder.

ACCOUNTING TREATMENT

The new notes will be recorded at the same carrying value as the original
notes as reflected in our accounting records on the date of the exchange.
Accordingly, we will not recognize any gain or loss for accounting purposes upon
the completion of the exchange offer. The expenses of the exchange offer that we
pay will increase our deferred financing costs in accordance with generally
accepted accounting principles.

CONSEQUENCES OF FAILURES TO PROPERLY TENDER ORIGINAL NOTES IN THE EXCHANGE OFFER

Issuance of the new notes in exchange for the original notes in the exchange
offer will be made only after timely receipt by the exchange agent of such
original notes, a properly completed and duly executed letter of transmittal and
all other required documents. Therefore, holders of the original notes desiring
to tender such original notes in exchange for new notes should allow sufficient
time to ensure timely delivery. We are under no duty to give notification of
defects or irregularities of tenders of original notes for exchange. Original
notes that are not tendered or that are tendered but not accepted by us will,
following completion of the exchange offer, continue to be subject to the
existing restrictions

upon transfer thereof under the Securities Act, and, upon completion of the
exchange offer, certain registered rights under the registration rights
agreement will terminate.

In the event the exchange offer is completed, we will not be required to
register the remaining original notes. Remaining original notes will continue to
be subject to the following restrictions on transfer:

- the remaining original notes may be resold only if registered pursuant to
the Securities Act, if any exemption from registration is available, or if
neither such registration nor such exemption is required by law; and

- the remaining original notes will bear a legend restricting transfer in
the absence of registration or an exemption.

We do not currently anticipate that we will register the remaining original
notes under the Securities Act. To the extent that original notes are tendered
and accepted in connection with the exchange offer, any trading market for
remaining original notes could be adversely affected. See "Risk Factors--Risks
Relating to the Notes--If you fail to exchange your original notes, they will
continue to be restricted securities and may become less liquid".

SELECTED HISTORICAL FINANCIAL DATA

The following table presents our selected historical financial data. The
selected financial data for the three years ended December 31, 2002 and as of
December 31, 2001 and 2002 have been derived from our audited Consolidated
Financial Statements included elsewhere in this prospectus. The financial
information for the years ended December 31, 1998 and 1999 and as of
December 31, 1998, 1999 and 2000 has been derived from our previously issued
financial statements for those years adjusted for the impact of the restatement
adjustments discussed in Note 2 of our audited Consolidated Financial Statements
included elsewhere in this prospectus. The selected financial data for the six-
month periods ended June 30, 2002 and June 29, 2003 and as of June 30, 2002 and
June 29, 2003 have been derived from our unaudited consolidated financial
statements included elsewhere in this prospectus. We have prepared our unaudited
consolidated financial statements on the same basis as our audited consolidated
financial statements and have included all adjustments, including all normal
recurring adjustments, that we consider necessary for a fair presentation of our
financial position and operating results for the unaudited periods. The results
for the six months ended June 29, 2003 are not necessarily indicative of the
results that may be expected for the year ending December 31, 2003. This table
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Consolidated Financial
Statements and the notes thereto included elsewhere in this prospectus.

SIX MONTHS ENDED
YEAR ENDED DECEMBER 31 -------------------
---------------------------------------------------- JUNE 29, JUNE 30,
2002 2001 2000 1999 1998 2003 2002
-------- -------- -------- -------- -------- -------- --------
(IN MILLIONS, EXCEPT PER SHARE DATA)

STATEMENT OF EARNINGS DATA:
Net sales......................................... $5,853 $5,681 $6,597 $6,639 $6,266 $2,926 $2,791
Special charges (1)............................... -- 92
Gross margin...................................... 1,045 1,013 1,267 1,392 1,243 494 510
Restructuring, asset impairment and other charges
(credits) (2)(3)(4)(5).......................... (8) 126 154 56 118 -- 2
Loss on early extinguishment of debt (6).......... 8 -- -- -- -- -- --
Interest expense.................................. 61 77 87 75 72 40 29
Dividends on preferred securities................. 21 11 -- -- -- 11 11
Cumulative effect of change in accounting
principle, net of tax (7)....................... 3 -- -- -- -- -- 3
Net earnings (loss)............................... 82 (103) 14 132 (23) (17) (8)
Net earnings (loss) per share:
Basic............................................. 2.13 (2.70) 0.35 3.43 (0.59) (0.45) (0.21)
Diluted........................................... 2.13 (2.70) 0.35 3.41 (0.59) (0.45) (0.21)
Dividends declared per share...................... 1.20 1.20 1.20 1.13 (1.10) 0.60 0.60

SIX MONTHS ENDED
YEAR ENDED DECEMBER 31 ---------------------------------
----------------------------------------------------------- JUNE 29, JUNE 30,
2002 2001 2000 1999 1998 2003 2002
-------- -------- --------------- -------- -------- --------------- ---------------
(IN MILLIONS, EXCEPT PER SHARE)

OTHER DATA:
Property, plant and equipment
additions..................... $ 90 $ 206 $ 228 $ 215 $ 271 $ 43 $ 34
Consolidated ratio of earnings
to fixed charges (8).......... 1.5 -- 1.0 2.6 -- -- --

BALANCE SHEET DATA (AS OF PERIOD
END):
Working capital................. $ 653 $ 557 $ 589 $ 822 $ 792 $ 718 $ 505
Property, plant and equipment,
net........................... 1,305 1,405 1,596 1,624 1,666 1,256 1,346
Total assets.................... 4,837 4,311 4,448 4,629 4,535 4,885 4,510
Long-term debt.................. 999 915 1,032 1,092 1,137 1,035 789
Mandatorily redeemable preferred
securities.................... 291 291 -- -- -- 291 291
Shareholders' investment........ 841 983 1,280 1,365 1,265 846 990

------------------

(1) In 1998, we recorded special charges of $92 million for product coverage
cost and inventory write-downs.

(2) The years ended December 31, 2002, 2001 and 2000, includes restructuring,
asset impairment and other charges of $(8) million, $126 million and
$154 million, respectively. These charges are more fully discussed in
Note 7 of our annual Consolidated Financial Statements included elsewhere in
this registration statement.

(4) The year ended December 31, 1999 includes restructuring, asset impairment
and other charges of $56 million primarily related to the dissolution of the
Cummins Wartsila joint venture.

(5) The year ended December 31, 1998 includes restructuring, asset impairment
and other charges of $118 million primarily related to a worldwide workforce
reduction and a $25 million penalty paid to the U.S. Environmental
Protection Agency regarding diesel engine emissions.

(6) The year ended December 31, 2002 includes a charge of $8 million related to
a loss on the early extinguishment of debt. This charge is more fully
discussed in Note 8 of our annual Consolidated Financial Statements.

(7) The year ended December 31, 2002 and the six months ended June 30, 2002
includes income of $3 million related to a cumulative effect of a change in
accounting principles. This matter is more fully discussed in Note 1 of our
annual Consolidated Financial Statements.

(8) For purposes of calculating the consolidated ratios of earnings to fixed
charges "earnings" include income before income taxes, extraordinary items,
the cumulative effects of changes in accounting principles and earnings or
losses of equity investees and fixed charges. "Fixed charges" consist of
interest on all indebtedness, including interest incurred by consolidated
companies, the amount of pre-tax earnings required to pay dividends on
outstanding preferred stock and that portion of rental expense that
management believes to be representative of interest. Our earnings were
insufficient to cover fixed charges for the years ended December 31, 2001
and 1998 by approximately $135 million and $17 million, respectively as well
as for the six months ended June 29, 2003 and June 30, 2002 by approximately
$30 million and $8 million, respectively.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

RESTATEMENT OF AUDITED FINANCIALS

The restatement and reaudit of our financial statements included a
comprehensive review of the accounting records underlying our financial
statements for the related periods. The accompanying financial statements
reflect adjustments made to our previously reported information as a result of
this comprehensive review and the work performed during the restatement and
reaudit process in order to correct accounting errors primarily associated with
the period of accounting recognition.

The discussion that follows reflects the effects of these restatement
adjustments. For details regarding the restatement refer to Note 2 of our
audited Consolidated Financial Statements and Note 2 of our unaudited
consolidated financial statements each included elsewhere in this prospectus.

In addition, in connection with the preparation of our 2003 Consolidated
Financial Statements, we became aware of certain isolated matters that were
treated incorrectly in the restatement of our pre-2002 Consolidated Financial
Statements. The cumulative effect of these matters resulted in a $2.7 million
understatement of retained earnings as of December 31, 2002. The amount of the
understatement was not material to our historical financial statements nor to
our expected full year 2003 financial statements. As a result, our Consolidated
Statement of Earnings for the first quarter of 2003 includes $3.6 million
pre-tax income, ($2.7 million after tax and $0.07 per share) to correct this
matter. The corrections are classified in the Consolidated Statement of Earnings
based upon the classification of the original transactions. Approximately
$2.0 million of the correction is recorded in cost of goods sold, $0.2 million
in selling and administrative expenses and $1.4 million in other (income)
expense, net. Our Consolidated Statements of Earnings for the first quarter of
2003 differ by these amounts from the Consolidated Statements of Earnings
included in our Form 8-K furnished April 17, 2003.

As a result of the restatement and reaudit, we delayed the filing of our
Annual Report on Form 10-K for the year ended December 31, 2002, and our
Quarterly Report on Form 10-Q for the quarter ended March 30, 2003, with the
SEC. As previously disclosed, the delay in filing resulted in a breach of a
requirement for timely satisfaction of SEC filing obligations under several of
our credit agreements, the most significant of which are discussed below. A
majority of our long-term debt is governed by three Indenture agreements
summarized as follows:

- A November 20, 2002 Indenture between the Company and BNY Midwest Trust
Company as trustee for $250 million in 9.5% senior notes;

- A June 18, 2001 Indenture between the Company and BNY Midwest Trust
Company as trustee for $300 million in 7% convertible preferred
securities; and

- A March 1, 1986 Indenture between the Company and JPMorgan Chase Bank
(formerly The Chase Manhattan Bank) for four series of securities with an
aggregate value of $765 million.

give us notice and we do not cure the breach within 60 days. However, neither
the Trustees nor the respective debt holders have given us such notice. As a
result, we continue to classify our debt as long-term in our Consolidated
Statements of Financial Position.

In connection with the 2002 Indenture, we agreed to file this exchange offer
registration statement with the SEC and complete the offer no later than
May 19, 2003. As a result of the delay in filing our Annual Report on Form 10-K
with the SEC, we were unable to complete the exchange offer and became
contractually obligated to pay an additional 0.25% per annum interest on the
notes issued under the Indenture. We also were not able to complete the exchange
offer within 90 days of May 19, 2003 which resulted in another 0.25% per annum
increase on our interest obligation of the notes. For each 90-day delay in the
completion of the exchange offer, the interest rate on the notes will increase
by an additional 0.25% per annum up to a 1% maximum increase until such time as
the exchange offer is completed.

In connection with the 2001 Indenture governing the issue of our 7%
convertible preferred securities, we exercised our right to suspend the use of
the resale prospectus, which is part of a shelf registration statement that we
had filed and had declared effective to permit the resale of these securities,
pending the filing of our Annual Report on Form 10-K with the SEC. Effective
March 31, 2003, this suspension resulted in an increase of 0.5% per annum in the
dividend rate borne by these securities. As of June 2003, we are no longer
obligated to pay the 0.5% per annum increase because our obligations under the
registration rights agreement we entered into in connection with the issuance of
the 7% convertible preferred securities have expired.

In November 2002, we entered into a new credit facility agreement that
provides for aggregate borrowings of up to $385 million and is available on a
revolving basis for a period of three years. The agreement requires that we
annually deliver audited financial statements to the lenders within a specified
period of time. As a result of the restatement and reaudit process, we received
a waiver from our lenders through November 30, 2003 of any breach due to a delay
in the delivery of our audited financial statements. There were no amounts
outstanding under this facility at December 31, 2002.

By filing our Annual Report on Form 10-K and our Quarterly Report on
Form 10-Q for the first quarter ended March 30, 2003 with the SEC and by
delivering a copy of these filings to the Trustees of the Indentures and to our
lenders under our credit facility, we have cured the noncompliance under the
abovementioned Indentures and comply with the terms of the credit facility. We
expect to satisfy our registration obligations relating to the 2002 Indenture in
the near term, following which the incremental interest and dividend payments
will be discontinued.

OVERVIEW

Our net earnings for the second quarter 2003 were $14 million, or $0.34 per
share, a decrease of $2 million over last year's second quarter earnings of
$16 million, or $0.40 per share. Three of our four business segments delivered
improved earnings in the quarter compared to the first quarter of 2003 despite
soft demand in the majority of our markets. Our Power Generation business moved
closer to breakeven results while absorbing $5 million of severance costs and
related benefit costs during the quarter. On a year-to-date basis, we have
incurred a net loss of $17 million compared to a net loss of $8 million for the
first half of 2002. The decrease in earnings for the second quarter and first
half of 2003 compared to 2002 is primarily attributable to higher interest
expense resulting from an increase in our borrowing rates. Interest expense is
up $5 million in the second quarter 2003 compared to 2002 and is up $11 million
for the first half of 2003.

Our second quarter 2003 worldwide net sales were $1.539 billion, an increase
of $81 million, or 6 percent, compared to net sales of $1.458 billion in the
second quarter of 2002. Sales in each of our businesses increased during the
second quarter 2003 compared to 2002. Total Engine Business sales increased
$39 million, or 5 percent, Power Generation sales increased $3 million, or
1 percent, Filtration and Other sales were up $22 million, or 9 percent, and
International Distributor sales

increased $24 million, or 17 percent. Net sales for the first half of 2003 were
$2.926 billion, up $135 million, or 5 percent, compared to the first half of
2002 with increased sales in all of our businesses except Power Generation.

Our net earnings for 2002 were $82 million, or $2.13 per share, on sales of
$5.85 billion, compared to a net loss of $103 million or ($2.70) per share on
sales of $5.68 billion for the prior year. Results for 2002, however, included a
pre-tax credit of $8 million for costs associated with restructuring actions, an
$8 million pre-tax charge related to early extinguishment of debt and a
$3 million after-tax credit for the cumulative effect of a change in accounting
principle. Net earnings for 2002 also reflect a one-time $57 million favorable
tax adjustment related to the settlement of income tax audits for the years 1994
through 1999. In comparison, our 2001 loss of $103 million included a net after
tax charge of $84 million related to restructuring actions. In 2000, our net
earnings were $14 million, or $0.35 per share, on sales of $6.60 billion and
also included a net after tax charge of $100 million for restructuring actions.

NET SALES

NET SALES SUMMARY

Net sales for each of our key business segments during the comparative
interim periods follow:

SECOND QUARTER FIRST HALF
------------------- -------------------
JUNE 29 JUNE 30 JUNE 29 JUNE 30
2003 2002 2003 2002
------- -------- -------- --------
(IN MILLIONS)

Engine...................................................... $ 889 $ 850 $1,705 $1,626
Power Generation............................................ 307 304 574 587
Filtration and Other........................................ 265 243 519 471
International Distributor................................... 169 145 305 269
Elimination of intersegment revenue......................... (91) (84) (177) (162)
------ ------ ------ ------
$1,539 $1,458 $2,926 $2,791
====== ====== ====== ======

Net sales for the Engine Business were $889 million in the second quarter
2003, an increase of $39 million, or 5 percent, compared to net sales in the
second quarter of 2002. Most of the sales increase is automotive related as
discussed below. Sales in the Power Generation Business were $307 million, up
slightly from sales of $304 million a year before. Sales of the Filtration and
Other Business were $265 million, an increase of $22 million, or 9 percent,
compared to 2002, reflecting improvement in original equipment manufacturers
(OEMs) and aftermarket demand. Sales for the International Distributor Business
were $169 million, up $24 million, or 17 percent, compared to second quarter
2002 sales, reflecting strong improvement in parts and service sales.

On a year-to-date basis, Engine Business sales were up $79 million, or
5 percent, primarily automotive related, as industrial engine sales are down
4 percent. Power Generation sales were down $13 million on a year-to-date basis
due to continued weak demand. Sales of the Filtration and Other business are up
$48 million, or 10 percent, in the first half of 2003 compared to a year earlier
reflecting some improvement in demand and increased market share. International
Distributor sales were up $36 million, or 13 percent, year-over-year with modest
improvement across most geographic regions.

The table below sets forth net sales for each of our key business segments
during the last three years:

2002 2001 2000
-------- -------- --------
(IN MILLIONS)

Engine...................................................... $3,435 $3,121 $4,050
Power Generation............................................ 1,226 1,422 1,395
Filtration and Other........................................ 951 889 902
International Distributor................................... 574 562 555
Elimination of intersegment sales........................... (333) (313) (305)
------ ------ ------
$5,853 $5,681 $6,597
====== ====== ======

Sales increased in all of our business segments during 2002 compared to 2001
with the exception of our Power Generation Business. Sales of our Engine
Business increased $314 million, or 10 percent, primarily reflecting strong
demand in the heavy-duty truck sector in advance of the October 1, 2002 EPA
emissions deadline and higher sales for the Dodge Ram truck. Power Generation
sales were $1,226 million, down $196 million, or 14 percent compared to the
prior year, as a result of lower demand from slow economic activity. Sales in
the Filtration and Other Business were $951 million, up $62 million or
7 percent year-over-year, reflecting demand improvement and increased market
penetration. In our International Distributor Business, sales increased
$12 million, or 2 percent, compared to 2001, primarily due to increased business
at our distributors in Australia and Asia.

Net sales for 2001 were $5.68 billion, $916 million lower than 2000. The
decrease was primarily due to lower engine sales, down $929 million, or
23 percent as a result of reduced shipments to North American OEMs which were
affected by the sharp downturn in the North American automotive industry and
construction markets.

GROSS MARGIN

Our gross margin was $276 million, or 17.9 percent of net sales, in the
second quarter of 2003, compared to $277 million, or 19.0 percent of net sales,
in the second quarter of 2002. Gross margin in the second quarter 2003 improved
from price realization of new engine models and slightly higher volumes but was
more than offset by changes in sales mix and increases in material costs related
to new engines. The decrease in gross margin percentage was primarily
attributable to a higher sales mix of new emissions compliant engines with lower
margins at product introduction. Product coverage costs were $51 million, or
3.3 percent of net sales, in the second quarter 2003, compared to $51 million,
or 3.5 percent of net sales, a year before. Excluding product coverage costs,
gross margin for the quarter was $327 million, or 21.2 percent of net sales,
compared to $328 million, or 22.5 percent of net sales, in the second quarter
last year.

Gross margin for the first half of 2003 was $494 million, or 16.9 percent of
net sales, compared to $510 million, or 18.3 percent of net sales, in the first
half of 2002. The decline in gross margin percent year-over-year is attributable
to the higher sales mix of new emissions compliant engines that experience lower
margins during product introduction.

Our gross margin was $1.05 billion in 2002, $1.01 billion in 2001 and
$1.27 billion in 2000 with related gross margin percent of net sales of
17.9 percent, 17.8 percent, and 19.2 percent, respectively. Compared to the
prior year, gross margin in 2002 was relatively flat on a net sales increase of
$172 million, reflecting changes in sales mix as we transitioned from mature
engines to new engines where margins are typically lower at introduction. In
addition, our margins were also affected by lower fixed cost absorption in our
Power Generation business due to a significant sales decline as a result of weak
power generation demand. Product coverage costs were flat year over year at
3.4 percent in 2002 and 2001. The most significant factors affecting the decline
in gross margin and gross margin percentage from 2000 to 2001 was lower
absorption of fixed manufacturing costs in our Engine

Business as a result of declining sales volume. In addition, gross margin was
also impacted by changes in sales mix partially offset by our cost reduction
efforts and lower product coverage costs, 3.4 percent in 2001 compared to
4.1 percent in 2000.

SELLING AND ADMINISTRATIVE EXPENSES

Total selling and administrative expenses were $200 million, or 13 percent
of net sales, in the second quarter 2003 compared to $186 million, or
13 percent of sales, in the second quarter 2002. The $14 million increase is
primarily attributable to audit fees related to the restatement and reaudit of
our 2001 and 2000 financial statements, funding of growth initiatives in our
filtration business, severance settlements and other cost reduction actions in
our Power Generation business, higher cost of product liability settlements and
the impact of exchange rates, partially offset by reductions in variable
compensation expense.

Selling and administrative expenses during the first half of 2003 were
$395 million, or 13 percent of sales, compared to $375 million, or 13 percent of
sales, in the first half of 2002. The increase of $20 million is primarily
attributable to increased audit fees, funding of growth initiatives in our
filtration business, cost reduction actions and the impact of changes in
exchange rates.

Selling and administrative expenses were $736 million in 2002, an increase
of $15 million, or 2 percent, compared to spending levels a year ago. The
increase in selling and administrative expenses year-over-year is primarily a
result of volume variable expenditures, funding of focused growth initiatives
and higher variable compensation expense due to improved earnings, partially
offset by cost reduction actions.

Selling and administrative expenses in 2001 were $721 million, down
$52 million or 7 percent compared to 2000 expenses. A majority of the decrease
resulted from our cost reduction efforts, including benefits of restructuring
actions and lower spending across all of our business segments.

RESEARCH AND ENGINEERING EXPENSES

Total research and engineering expenses were $50 million, or 3 percent of
net sales, in the second quarter 2003 compared to $55 million, or 4 percent of
net sales, last year. Most of the $5 million decrease is a result of completing
a majority of the development work on our new emission compliant heavy-duty
engines in 2002.

Research and engineering expenses during the first half of 2003 were
$97 million, or 3 percent of sales, compared to $111 million, or 4 percent of
sales, in the first half of 2002. A majority of the decrease is attributable to
completion of our development work on our 2002 emissions compliant products and
reduced spending associated with funding pre-production research on engines
produced by our European Engine Alliance (EEA) joint venture.

Research and engineering expenses in 2002 were $201 million, a decrease of
$19 million or 9 percent, compared to 2001 expenses. Overall, research and
engineering expenses were lower due to cancellation of a major engine
development program in the second quarter of 2001 and other cost reduction
actions, partially offset by higher engineering costs related to the development
of our 2002 emissions products.

Research and engineering expenses in 2001 were $220 million, down
$26 million, or 11 percent, compared to 2000. The decline is primarily a result
of on-going cost reduction efforts and the discontinuance of a new engine
development program.

INCOME FROM JOINT VENTURES AND ALLIANCES

Our earnings from joint ventures and alliances were $17 million in the
second quarter 2003, compared to earnings of $7 million a year ago. On a
year-to-date basis, earnings from joint ventures and alliances were $24 million
in the first half of 2003, compared to $7 million in earnings in the first

half of 2002, or a $17 million increase. The increase in quarter-over-quarter
and year-over-year results from earnings improvement from most of our joint
ventures, primarily marine and domestic distributorships with a significant
increase from our recently expanded joint venture in China, Dongfeng Cummins
Engine Co. Ltd., a supplier to China's second largest truck manufacturer. In
addition, the second quarter of 2003 also included $2 million of annual payments
received for royalty and technical fees.

Our income from joint ventures and alliances was $22 million in 2002,
compared to $10 million of income in 2001. The increase is primarily
attributable to improved earnings across most of our joint ventures,
particularly our joint ventures with China National Heavy-duty Truck Corporation
in Chongqing, which manufactures heavy-duty and high-horsepower diesel engines
and Dongfeng Motors, which manufactures our B and C Series midrange engines.
Earnings at our partially owned distributor locations in North America and our
new marine joint venture, Cummins Mercruiser, also contributed to the increase
in 2002.

Earnings from joint ventures and alliances were $10 million in 2001 compared
to $7 million in 2000. The increase in income is attributable to improved
earnings from our joint ventures in China offset by lower earnings from our
joint venture with Komatsu.

RESTRUCTURING ACTIONS

We have continued a restructuring program initiated in 1998 to improve our
cost structure. During 2002, we recorded a net $8 million credit related to
restructuring actions comprised of a net $2 million charge in the second quarter
and a reversal of $10 million of excess restructuring accruals in the fourth
quarter. The second quarter charge of $2 million was comprised of a $16 million
charge for restructuring actions taken that quarter reduced by $14 million of
reversals. The second and fourth quarter reversals included 2001 and 2000
restructuring actions that were realigned or cancelled and the fourth quarter
reversal included $3 million from a charge originally recorded in 2000 and a
$1 million reversal of the 2002 accrual.

During 2001 and 2000, we recorded restructuring charges of $126 million and
$154 million, respectively, that were directly related to the downturn in the
North American heavy-duty truck market and several other end-markets. These
actions were necessary to achieve lower production costs, improve operating
efficiencies, and enhance management effectiveness under difficult economic
conditions. The charges included staffing reorganizations and reductions in
various business segments, asset impairment write-downs for manufacturing
equipment, facility closure and consolidation costs, cancellation of a new
engine development program and other exit costs related to small business
operations.

Note 7 of the audited consolidated financial statements for the years ended
2002, 2001 and 2000 included elsewhere in this prospectus (the "Consolidated
Financial Statements") includes schedules that present by major cost component
and by year of expense, activities related to restructuring actions for the
years 2000 through 2002, including adjustments to the original charges. As of
December 31, 2002, all activities associated with our 2001 and 2000
restructuring actions are completed. A discussion of our restructuring actions
during this period follows:

2002 RESTRUCTURING ACTIONS

In the second quarter 2002, we announced further restructuring actions
precipitated by weak market conditions, related primarily to our Engine and
Power Generation Businesses and recorded additional restructuring charges of
$16 million. The charges included $11 million attributable to workforce
reduction actions, $3 million for asset impairments and $2 million related to
facility closures and consolidations. Of this charge, $5 million was associated
with our Engine Business, $4 million with Power Generation, $3 million with
Filtration and Other and $4 million with the International Distributor Business.

The charges included severance costs and related benefits of terminating
approximately 220 salaried and 350 hourly employees and were based on amounts
pursuant to established benefit programs or statutory requirements of the
affected operations. These actions reflect overall reductions in staffing levels
due to closing operations and moving production to available capacity. As of
December 31, 2002 approximately 200 salaried and 350 hourly employees had been
separated or terminated under this plan. The asset impairment charge relates to
equipment available for disposal. The carrying value of the equipment and the
effect of suspending depreciation on the equipment were not significant. In the
fourth quarter 2002, the number and mix of employees that were terminated under
this plan differed from our original estimate. As a result, we reversed
approximately $1 million of severance costs and related benefits to income.

During 2002, we paid approximately $10 million in liabilities related to
this action. As of December 31, 2002, $2 million remained in accrued liabilities
for this plan. The majority of this restructuring action was completed by the
end of the first quarter 2003 and we expect to complete the remainder by the end
of 2003.

This action is expected to generate approximately $13 million in annual
savings. For the year ended December 31, 2002, approximately $6 million in
savings was recognized in cost of goods sold.

2001 RESTRUCTURING ACTIONS

In the first half of 2001, primarily as a result of the continuing downturn
in the North American heavy-duty truck market and several other end-markets, we
announced further restructuring actions and recorded restructuring charges of
$128 million, most of which was recorded in the second quarter. The charges
included $18 million attributable to workforce reduction actions, $68 million
for asset impairment and $42 million related to cancellation of capital and
tooling equipment purchase commitments. In addition we recorded other charges of
$1 million attributed to the divestiture of a small business operation. These
charges were reduced by a $3 million reversal of excess 2000 restructuring
accruals. Of the net $126 million charge, $113 million was associated with the
Engine Business, $8 million with the Power Generation Business, $4 million with
the Filtration and Other Business and $1 million with the International
Distributor Business.

The workforce reduction actions included overall reductions in staffing
levels and the impact of divesting a small business operation. The charges
included severance costs and related benefits of terminating approximately 500
salaried and 350 hourly employees and were based on amounts pursuant to
established benefit programs or statutory requirements of the affected
operations. All employees affected by this workforce reduction plan and the
subsequent fourth quarter 2001 realignment plan were terminated by the end of
the fourth quarter of 2002.

The asset impairment charge and the charges for cancelled purchased
commitments were for equipment, tooling and related investment supporting a new
engine development program that was cancelled in the second quarter of 2001. For
assets that will continue to be used, the amount of the impairment was
determined based on the difference between the carrying value of the assets and
their fair value based on discounted future cash flows. For assets to be sold or
disposed, the amount of impairment represents the difference between the
carrying value and the expected salvage value of the equipment less costs to
dispose (this was the primary method used on the assets associated with the
cancelled engine program). The charges included the investment in manufacturing
equipment previously capitalized and cancellation charges for capital and
tooling purchase commitments. The charge was reduced by the estimated salvage
value related to the planned equipment disposals. During 2002, we recovered
$9 million of salvage proceeds on planned equipment disposals, of which
$6 million was in excess of previously estimated recoveries and was reversed
against the original restructuring charge. In the fourth quarter 2002, we
transferred $3 million of previously impaired manufacturing equipment to a U.S.
plant as a result of consolidating our ISX assembly and realigned our workforce

reduction plan. These actions resulted in the reversal of an additional
$12 million in excess charges related to this plan.

During 2002, we paid approximately $9 million related to liabilities under
this plan. As of December 31, 2002 approximately 511 salaried and 540 hourly
employees have been separated or terminated under the workforce reduction
actions of this plan. We have completed this restructuring action as of
December 31, 2002.

For the year ending December 31, 2002, we recognized approximately
$24 million in savings under this plan comprised of $14 million in cost of goods
sold, $7 million in selling and administrative expenses and $3 million in
research and engineering expenses.

2000 RESTRUCTURING ACTIONS

During the fourth quarter of 2000, we announced restructuring plans
primarily in response to the downturn in the North American heavy-duty truck
market and several other end-markets where our shipments had declined
35 percent from 1999 and recorded a $138 million restructuring charge. The
charges included workforce reduction costs of $39 million, $88 million for asset
impairments (including $30 million for internally developed software) and
$11 million associated with exit costs to close or consolidate a number of small
business operations. In addition, we recorded $13 million of other charges
related to asset impairments not associated with the restructuring actions
($10 million for investments and $3 million for intangibles). In addition to the
2000 restructuring charge, we recorded a net $3 million charge related to prior
years restructuring actions. Of these amounts, $125 million was associated with
our Engine Business, $18 million with our Power Generation Business and
$11 million with our Filtration and Other Business.

The workforce reduction actions included overall reductions in staffing
levels and the impact of divesting a small business operation. The charges
included severance and benefit costs of terminating approximately 500 salaried
and 630 hourly employees and were based on amounts pursuant to established
benefit programs or statutory requirements of the affected operations. In the
fourth quarter 2001, we realigned our workforce reduction plan and reallocated
$2 million of excess liabilities for termination benefits to workforce reduction
actions committed to during that quarter. All employees affected by this
workforce reduction plan were separated or terminated by June 30, 2002 and all
remaining severance costs and related benefits under this action were paid by
December 31, 2002. Approximately 560 salaried and 380 hourly employees were
affected by the workforce reduction actions of this plan.

The asset impairment charge of $88 million was calculated in accordance with
the provisions of Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of". For assets that will continue to be used, the amount of the
impairment was determined based on the difference between the carrying value of
the assets and their fair value based on discounted future cash flows. For
assets to be sold or disposed, the amount of impairment represents the
difference between the carrying value and the expected salvage value of the
equipment less costs to dispose. Approximately $30 million of the charge
consisted of capitalized software-in-process related to manufacturing, financial
and administrative information technology programs that were cancelled during
program development and prior to implementation. The remaining $58 million
included $38 million for engine assembly and fuel system manufacturing equipment
to be disposed of upon closure or consolidation of production operations. The
equipment was expected to continue in use and be depreciated for approximately
two years from the date of the charge until closure or consolidation. The
expected recovery value of the equipment was based on estimated salvage value
and was excluded from the impairment charge. The charge also included
$11 million for equipment available for disposal, $6 million for properties
available for disposal, and $3 million for intangibles. The carrying value of
assets held for disposal and the effect of suspending depreciation on these
assets was not significant.

In the second quarter 2002, we cancelled plans to close a filtration
manufacturing plant ($1 million), transferred $2 million of previously impaired
power generation equipment slated for disposal to a foreign operation, realigned
our workforce reduction plan ($1 million) and settled legal claims from a
previous disposal action for less than originally estimated ($2 million). These
actions resulted in a reversal of $6 million in excess charges related to this
plan. In the fourth quarter of 2002, we moved our ISX assembly to another U.S.
plant which reduced the need for a previous accrual. As a result of this action,
asset removal costs previously provided for at the two production facilities
were no longer needed and $2 million in excess charges related to this plan were
reversed.

During 2002, we paid approximately $12 million related to liabilities under
this plan. As of December 31, 2002, all activities associated with this
restructuring plan are completed.

For the year ending December 31, 2002, we recognized approximately
$60 million in savings under this plan comprised of $46 million in cost of goods
sold, $12 million in selling, general and administrative expenses and
$2 million in research and engineering expenses.

INTEREST EXPENSE

Interest expense was $20 million in the second quarter of 2003 compared to
$15 million in the second quarter last year. Interest expense for the first half
of 2003 was $40 million compared to $29 million in the first half of 2002. The
increase in second quarter and year-to-date interest costs compared to the prior
year reflects higher costs of borrowed funds, specifically the issuance of our
9 1/2% senior notes in November 2002.

Effective July 1, 2003, dividends on our preferred securities will be
prospectively classified as interest expense in accordance with a new accounting
standard issued by the Financial Accounting Standards Board (see "--Recently
Issued Accounting Pronouncements").

Cash payments of interest during the second quarter of 2003 and 2002 are
disclosed in the consolidated statements of cash flows (for the quarter ended
June 29, 2003 and June 30, 2002).

Interest expense was $61 million in 2002 compared to $77 million in 2001, a
decrease of $16 million. Lower borrowings as a result of our preferred
securities issuance in 2001 and lower interest rates accounted for a majority of
the decrease. Interest expense in 2001 was $10 million lower than 2000,
primarily from the issuance of the preferred securities in July 2001 and reduced
debt levels. Cash payments of interest for 2002, 2001 and 2000 were
$52 million, $80 million and $88 million, respectively and are disclosed
separately in the consolidated statements of cash flows for the fiscal years
ended 2002, 2001 and 2000, (the "Consolidated Statements of Cash Flows").

LOSS ON EARLY RETIREMENT OF DEBT

In November 2002 we elected to repay all of the outstanding 5.61% notes due
2010 issued by our Employee Stock Ownership Plan (ESOP) trust. The election to
redeem the notes early was a result of a covenant conflict with our new
revolving credit facility that we entered into in November. The aggregate
redemption price for the notes was approximately $51 million, plus redemption
premiums of $8 million and accrued interest of approximately $1 million. The
$8 million redemption premium is classified in our consolidated statements of
earnings for the years ended 2002, 2001 and 2000 (the "Consolidated Statements
of Earnings") as "Loss on early retirement of debt."

OTHER INCOME AND EXPENSE

Other income was $3 million in the second quarter 2003 compared to
$7 million of income in the second quarter of 2002, or a $4 million decrease. On
a year-to-date basis, other income was $10 million compared to $7 million in the
second half a year ago. The major components of other income and expense,
classified as either operating or non-operating, are disclosed in Note 5 of the
consolidated financial statements (for the quarters ended June 29, 2003 and
June 30, 2002) included elsewhere in this prospectus .

Other income and expense was a net $9 million of income in 2002 compared to
net expense of $0 million in 2001. A majority of the increase is a result of the
discontinuance of goodwill amortization in accordance with a newly adopted
accounting standard (see Note 6 to Notes to Consolidated Financial Statements).
Other income and expense in 2000 was a net $6 million expense compared to net
expense of $0 million in 2001. Other income and expense includes several
transactions comprising foreign currency exchange, interest income, royalty
income and other miscellaneous items. The major components of other income and
expense are segregated between operating items and non-operating items and are
disclosed in note 15 of our Consolidated Financial Statements.

PROVISION FOR INCOME TAXES

We recorded an income tax provision of $5 million in the second quarter of
2003 compared to a $7 million tax provision recorded in the second quarter of
2002. Our income tax benefit for the first half of 2003 was $4 million compared
to $1 million in the first half of 2002. The second quarter and first half of
2003 and 2002 income tax provision and benefit reflect an estimated annual
effective tax rate of 25 percent of earnings or losses before income taxes after
deducting dividends on the our preferred securities.

Our income tax provision in 2002 was a benefit of $38 million, including a
one-time favorable tax adjustment credit of $57 million related to the
settlement during 2002 of the U.S. Internal Revenue Service income tax audits
for the tax years 1994 through 1999. In addition, our effective income tax rate
on operations in all years 2002 through 2000 was less than the 35 percent U.S.
corporate income tax rate because of reduced taxes on export sales, research tax
credits and (in 2002 and 2001) dividends on preferred securities, which are
deductible as interest expense for federal tax purposes. The 2002 effective tax
rates were 34 percent for restructuring credits and 35 percent for early
retirement of debt charges. The effective tax rate on restructuring charges in
2001 was 33 percent and in 2000 was 35 percent. Note 12 of the Consolidated
Financial Statements includes a more complete disclosure of our income taxes.
The amount of income taxes paid in 2002 and 2001 was $30 million and
$20 million, respectively, and is disclosed in our Consolidated Statements of
Cash Flows.

MINORITY INTEREST

Minority interest in consolidated operations was $2 million in the second
quarter of 2003, compared to $5 million in the second quarter of 2002, a
decrease of $3 million. For the first half, minority interests were $6 million
compared to $8 million in the first half of 2002. The decrease in minority
interest is primarily from lower earnings at Wuxi Holset, a 55 percent
owned-subsidiary and Cummins India Limited, a 51 percent owned-subsidiary.

Minority interest in income of our consolidated operations was $16 million
in 2002 compared to $15 million in 2001 and $14 million in 2000. The increase
over 2001 and 2000 is primarily from higher earnings due minority partners as a
result of improved earnings in the operating results of Cummins India Limited
and Wuxi Holset Ltd.

DIVIDENDS ON PREFERRED SECURITIES

Dividends on our preferred securities were $21 million in 2002 compared to
$11 million in 2001. Our preferred securities were issued in June 2001 and
results for that year include dividend payments for the last two quarters while
2002 results include a full year of dividend payments.

Dividends on our preferred securities were $5 million in the second quarter
of 2003 and 2002 and $11 million for the first half of 2003 and 2002.

A description of the securities is provided in Note 9 of our audited
consolidated financial statements included elsewhere in this prospectus.
Effective July 1, 2003, dividends on these securities will be prospectively
classified as interest expense in accordance with a new accounting standard
issued by the Financial Accounting Standards Board ("--Recently Issued
Accounting Pronouncements").

CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE

During the fourth quarter of 2002, we changed the measurement date for
measuring our return on pension plan investments and our minimum liability for
pension obligations from September 30 to November 30. This change in measurement
date aligns more closely with the date of our financial statements and we
believe provides a more current measurement of plan assets and obligations than
previously presented. The impact of this change is reported in our Consolidated
Statements of Earnings as a change in accounting principle. The cumulative
after-tax effect of the change was a $3 million credit, or $0.07 per share,
recorded as of January 1, 2002. The effect of this accounting change on 2002 net
earnings was not significant.

NET EARNINGS

Net earnings for the year ending 2002 were $82 million, or $2.13 per share,
compared to a net loss of $103 million or ($2.70) per share in 2001 and net
earnings of $14 million, or $0.35 per share in 2000. Net earnings for 2002
included a pre-tax credit of $8 million for excess restructuring accruals, an
$8 million pre-tax loss on early retirement of debt, and a $3 million net-of-tax
credit for the cumulative effect of a change in accounting for pensions. Also
reflected in 2002 net earnings is a one-time $57 million favorable tax
adjustment related to settlement of U.S. Internal Revenue Service income tax
audits for the years 1994 through 1999. In comparison, our 2001 loss of
$103 million included a net after tax charge of $84 million related to
restructuring actions and our 2000 net earnings of $14 million included a net
after tax charge of $100 million for restructuring actions.

BUSINESS SEGMENT RESULTS

ENGINE BUSINESS

The revenues and operating income for the Engine Business segment for the
second quarter and first half interim periods were as follows:

SECOND QUARTER FIRST HALF
------------------- -------------------
JUNE 29 JUNE 30 JUNE 29 JUNE 30
2003 2002 2003 2002
-------- -------- -------- --------
(IN MILLIONS)

Net sales................................................... $889 $850 $1,705 $1,626
Earnings (loss) before interest, taxes, restructuring, asset
impairment and other...................................... 24 16 2 (2)
Restructuring, asset impairment and other (credits)......... -- (1) -- (1)
---- ---- ------ ------
Earnings (loss) before interest and taxes................... $ 24 $ 17 $ 2 $ (1)
==== ==== ====== ======

The Engine Business shipped 78,700 engines in the second quarter 2003, an
increase of 500 units, or less than 1 percent, compared to second quarter 2002.
While heavy-duty engine shipments declined 15 percent and high-horsepower engine
shipments were flat compared to second quarter 2002, shipments of midrange
engines were up 2,600 units, or 4 percent, primarily due to increased demand
from DaimlerChrysler AG for Dodge Ram truck engines, up 8,800 units, or
39 percent, compared to a year earlier. Total shipments to automotive related
markets increased 3 percent compared to the prior year's quarter while shipments
to industrial related markets declined 7 percent.

The revenues and operating income for the Engine Business segment for the
three years ended December 31, 2002, were as follows:

2002 2001 2000
-------- -------- --------
(IN MILLIONS)

Net sales................................................... $3,435 $3,121 $4,050
Earnings (loss) before interest, income taxes and
restructuring and other charges (credits)................. 37 (95) 34
Restructuring and other charges (credits)................... (12) 113 125
------ ------ ------
Earnings (loss) before interest and income taxes............ $ 49 $ (208) $ (91)
====== ====== ======

Total net sales for our Engine Business were $3.44 billion in 2002 compared
to $3.12 billion in 2001, an increase of $314 million, or 10 percent, primarily
due to strong sales of our Dodge Ram truck engine and an upturn in heavy-duty
OEM engine shipments prior to the October 1 new emissions standards. Net sales
in 2001 were down $929 million, or 23 percent, when compared to net sales in
2000, due primarily to the downturn experienced in the North American trucking
industry characterized by high inventory levels of new and used trucks.

Compared to the first half of 2002, shipments for the Engine Business were
up 5,900 units, or 4 percent, with shipments to automotive related markets up
9,500 units, or 9 percent, and shipments to industrial markets down 3,600 units,
or 9 percent.

A summary of unit shipments for the Engine Business by engine classification
is shown in the table below:

SECOND QUARTER FIRST HALF
------------------- -------------------
JUNE 29 JUNE 30 JUNE 29 JUNE 30
UNIT SHIPMENTS 2003 2002 2003 2002
-------------- -------- -------- -------- --------

Mid-range................................................. 66,200 63,600 129,500 121,100
Heavy-duty................................................ 11,600 13,700 21,300 23,800
High-horsepower........................................... 900 900 1,700 1,700
------ ------ ------- -------
78,700 78,200 152,500 146,600
====== ====== ======= =======

The Engine Business shipped 308,200 units in 2002, an increase of 24,000
units, or 8 percent, compared to 284,200 units shipped in 2001. Engine unit
shipments were down 108,500 units in 2001, or 28 percent lower than unit
shipments in 2000. A summary unit shipments for the Engine Business by engine
category follows:

UNIT SHIPMENTS 2002 2001 2000
-------------- -------- -------- --------

Mid-Range................................................... 251,100 231,900 302,400
Heavy-Duty.................................................. 53,600 48,200 86,300
High-Horsepower............................................. 3,500 4,100 4,000
------- ------- -------
308,200 284,200 392,700
======= ======= =======

A summary and discussion of net sales for the Engine Business by market
application follows:

SECOND QUARTER FIRST HALF
------------------- -------------------
JUNE 29 JUNE 30 JUNE 29 JUNE 30
2003 2002 2003 2002
-------- -------- -------- --------
(IN MILLIONS)

Heavy-duty Truck............................................ $266 $265 $ 502 $ 484
Medium-duty Truck and Bus................................... 141 157 263 295
Light-duty Automotive....................................... 228 179 450 336
Industrial.................................................. 192 191 368 388
High-horsepower Industrial.................................. 62 58 122 123
---- ---- ------ ------
$889 $850 $1,705 $1,626
==== ==== ====== ======

2002 2001 2000
-------- -------- --------
(IN MILLIONS)

Heavy-Duty Truck............................................ $1,069 $ 940 $1,444
Medium-Duty Truck and Bus................................... 599 577 662
Light-Duty Automotive....................................... 781 576 830
Industrial.................................................. 743 748 873
High-Horsepower Industrial.................................. 243 280 241
------ ------ ------
$3,435 $3,121 $4,050
====== ====== ======

HEAVY-DUTY TRUCK

Sales to the heavy-duty truck market were $266 million in the second quarter
of 2003, essentially flat compared to sales of $265 million in the second
quarter of 2002. Unit shipments were 9,000 in the second quarter 2003 compared
to 11,200 units a year ago, a decline of 2,200 units, or 20 percent. Sales to
the heavy-duty truck market during the first half of 2003 were up slightly
compared to 2002, increasing 4 percent, while unit shipments declined
14 percent compared to the prior year. The increase in sales and lower unit
shipments reflect higher unit price realization on new emissions compliant
engines that began shipping in October 2002. Unit shipments to the North
American heavy-duty truck market continue to be adversely impacted by the
October 2002 emissions standards change, while unit shipments of heavy-duty
truck engines to international markets remain unchanged compared to a year
before.

Sales to the heavy-duty truck market were $1.07 billion in 2002, up
$129 million, or 14 percent, compared to sales in 2001. The increase primarily
reflects an upturn in North American OEM engine shipments in response to
accelerated purchases prior to the October 1, 2002 effective date of the new EPA
emissions standards. Unit shipments of our heavy-duty truck engines in 2002 were
43,400 units compared to 37,900 units in 2001, an increase of 15 percent
year-over-year. Sales to the heavy-duty international truck market were
relatively flat compared to 2001. Shipments of our heavy-duty ISX truck engine
more than doubled compared to the prior year. Sales of heavy-duty truck engines
in 2001 were 35 percent lower than 2000 reflecting the downturn in the North
American trucking industry.

MEDIUM-DUTY TRUCK AND BUS

Medium-duty truck and bus revenues in the second quarter 2003 were down
$16 million, or 10 percent below sales levels a year before. Revenues for the
medium-duty truck market increased 2 percent compared to the prior year's
quarter while unit shipments declined 10 percent. Unit shipments to the North
American medium-duty truck market were down 46 percent compared to a year
before, while shipments of medium-duty engines to international markets
increased 7 percent, primarily to OEMs in Latin America. Revenues from sales of
bus engines declined 40 percent compared to second quarter 2002 with most of the
decline a result of lower demand from North American OEMs due to the emissions
change. Shipments to international bus markets were down 15 percent compared to
second quarter 2002, with lower shipments to China and Mexico.

Medium-duty truck and bus revenues during the first half of 2003 were down
$32 million, or 11 percent, with shipments to the North American market down
55 percent while shipments to international markets increased 1 percent. On a
year-to-date basis, sales of medium-duty bus engines were down 36 percent,
mostly to North American OEMs as a result of the emissions change.

Medium-duty truck and bus revenues increased $22 million in 2002, or
4 percent, above sales levels a year ago reflecting a slight increase in demand
as a result of the October 1, 2002 emissions standards. Unit shipments to the
North American medium-duty truck market were down 24 percent compared to a year
ago. Medium-duty shipments to international markets increased 10 percent,
primarily in Asia. Bus engine sales declined 8 percent globally while total unit
shipments were down 11 percent, primarily to international customers as
shipments to North American OEMs declined 3 percent compared to 2001.

Sales to the medium-duty truck and bus market in 2001 were $85 million
lower, or 13 percent below 2000 sales, primarily reflecting lower demand due to
deteriorating market conditions in the North American truck industry.

LIGHT-DUTY AUTOMOTIVE

Revenues from the light-duty automotive market increased $49 million, or
27 percent, compared to second quarter 2002 revenues. Total unit shipments were
up 26 percent compared to the prior year's quarter with most of the increase
attributable to increased demand from DaimlerChrysler AG partially offset by a
reduction in unit shipments to the recreational vehicle market. Total shipments
to DaimlerChrysler for the Dodge Ram truck were 31,200 in the second quarter
2003, an increase of 8,800 units, or 39 percent higher than a year ago primarily
from the launch of the new Dodge Ram pickup model. For the first half of 2003,
engine shipments to Daimler Chrysler were 63,000 compared to 42,300 a year ago.
Engine sales to the recreational vehicle market were down 22 percent in the
second quarter 2003 compared to the prior year and engine shipments were
29 percent lower than the prior year. Year-to-date sales to the recreational
vehicle market are off 28 percent compared to the first half of 2002. While some
recovery is evident in the recreational vehicle industry and our market share
has increased primarily from favorable product acceptance, the change to the new
emissions standards has adversely affected sales in this market.

Revenues from our light-duty automotive market increased $205 million in
2002, or 36 percent, compared to 2001 revenues. Total unit shipments were up
27 percent compared to the prior year, with the increase evenly distributed
between shipments to DaimlerChrysler and shipments to OEMs in the North American
RV market. Shipments of our ISB engine to DaimlerChrysler for the Dodge Ram
truck were 99,900 units in 2002, an increase of 23,700 units, or 31 percent
higher than a year ago, primarily driven by the introduction of the new Dodge
Ram truck model. Unit shipments to the recreational vehicle market were up
38 percent year-over-year from previously weak demand levels, reflecting some
recovery in consumer markets and growth in the diesel-powered segment of this
market.

Sales to the light-duty automotive market in 2001 decreased $254 million, or
31 percent, compared to 2000 sales. Shipments to DaimlerChrysler were off
36 percent and were impacted by production constraints preceding the 2002 model
year changeover. Engine sales to the recreational vehicle market were down
7 percent compared to 2000 reflecting lower demand.

INDUSTRIAL

Sales to the construction, marine and agriculture markets in the second
quarter 2003 were flat compared to the second quarter 2002 and were down
$20 million, or 5 percent, on a year-to-date basis. Worldwide shipments in the
construction equipment market decreased 5 percent compared to the second quarter
of 2002 with unit shipments to North America down 19 percent, and shipments to

international markets up 6 percent, primarily in Asia. For the first half of
2003, shipments of engines for the construction market are down 7 percent, with
shipments to North American equipment OEMs down 21 percent. Reduced capital
spending driven by weak economic demand has lowered spending levels in the
construction equipment markets.

Shipments to the marine markets decreased 8 percent compared to second
quarter 2002, and are down 22 percent year-to-date. The decline in marine
business is primarily attributable to the formation of the Cummins Mercruiser
joint venture in March 2002, where sales of recreational marine engines are now
recorded. Shipments to the agricultural equipment market decreased 3 percent
from second quarter of 2002, and are down 4 percent for the first half of the
year. Unit shipments to the North American market decreased 35 percent during
the quarter while shipments to international markets increased 56 percent, with
a small decline in Europe offset by increases in Latin America, primarily
Brazil.

Total industrial sales to the construction, marine and agricultural markets
were down $5 million in 2002, or relatively flat compared to 2001. Sales to the
construction segment of this market were down slightly year-over-year with unit
shipments to North America and international OEM's down 8 percent and
7 percent, respectively. Engine sales to the agricultural equipment market were
up 16 percent compared to 2001, primarily due to international OEM's in Latin
America. Sales to the North American market increased 7 percent. In the marine
market, sales were down 6 percent compared to the prior year, partially as a
result of our new joint venture with Brunswick Corporation, Cummins Mercruiser.
Sales of engines for recreational marine applications are now recorded by the
joint venture.

Industrial engine sales in 2001 were down 14 percent compared to 2000, with
a majority of the decline in the construction market where sales were down
18 percent as OEM's adjusted to lower market conditions.

HIGH-HORSEPOWER INDUSTRIAL

Total high-horsepower industrial sales were $62 million in the second
quarter 2003 compared to $58 million a year ago, an increase of $4 million, or
7 percent. For the first half of 2003, revenues from sales of high-horsepower
industrial engines are flat compared to last year. Sales to the high-horsepower
mining market were up 21 percent in second quarter 2003 and 11 percent for the
first half of 2003, despite a continued soft market due to lower commodity
prices. Second quarter sales to the rail sector, which is primarily an
international market, were down 64 percent for the quarter and year-to-date
while high-horsepower sales to government markets, primarily military
applications, were up 100 percent compared to second quarter 2002, and up
80 percent for the first half of 2003, with increased sales to both North
American and international markets.

Sales of our V, K and Q series high-horsepower industrial engines in 2002
were down $37 million or 13 percent compared to the prior year. Unit shipments
to the North American mining market declined 46 percent while shipments to
international OEMs in the mining markets declined 11 percent compared to 2001.
Shipments of high-horsepower engines to the rail sector, which is primarily
international business, were down 22 percent from the prior year. Shipments of
our high-horsepower engines to government markets, primarily V series military
applications, were up 28 percent with the majority of the increase in North
America.

High-horsepower industrial engine sales in 2001 were up 16 percent compared
to 2000, primarily driven by market share gains in the mining segment and
increased sales to the rail car market as a result of large orders in Europe and
Asia.

EARNINGS FROM OPERATIONS

Operating earnings before interest and taxes for the Engine Business were
$24 million and $2 million in the second quarter, and first half of 2003,
respectively, compared to operating earnings of $17 million in the second
quarter of 2002 and a $1 million operating loss for the first half of 2002. The
increase in operating earnings for the second quarter and first half result from
improved earnings at our joint ventures and lower managed expenses, primarily
research and development and administrative expenses, which offset a decline in
gross margin from the launch of new emissions compliant products and several
one-time costs incurred during the first quarter 2003, including costs related
to moving our ISX assembly operations. Benefits from our cost reduction programs
helped to offset lower margins resulting from the sales shift of mature engines
to new engines where our margins are typically lower at product introduction. We
expect Engine Business margins to improve throughout the remainder of the year
as volumes begin to ramp up and manufacturing efficiencies are realized.

Earnings before interest, taxes and restructuring actions increased from a
loss of $95 million in 2001 to earnings of $37 million in 2002, an improvement
of $132 million. The improvement is primarily a result of higher engine volumes
and the accompanying benefit of fixed cost absorption at our manufacturing
plants and our continued focus on cost reduction. The $95 million loss before
interest, taxes and restructuring actions in 2001 was $129 million worse on a
comparable basis than 2000 results, primarily from lower volumes due to the
downturn in the North American truck industry. Over the last two years, the
Engine Business has lowered its break-even results through restructuring actions
and cost-reduction efforts to better align its production costs with expected
industry demand levels.

CONSOLIDATION OF HEAVY-DUTY ASSEMBLY

As part of our continuing effort to reduce our production costs, we
announced plans in the fourth quarter of 2002 to consolidate our heavy-duty
engine assembly and test operations at our Jamestown, New York plant.
Approximately 200 employees in the heavy-duty engine business were eliminated as
a result of consolidating assembly and test operations at our Columbus, Indiana
engine plant into existing assembly operations at our Jamestown plant. The
consolidation was completed during the first quarter of 2003. None of the costs
associated with the consolidation were recorded as restructuring charges.

POWER GENERATION BUSINESS

The revenues and operating income for the Power Generation Business segment
for the second quarter and first half interim periods were as follows:

SECOND QUARTER FIRST HALF
------------------- -------------------
JUNE 29 JUNE 30 JUNE 29 JUNE 30
2003 2002 2003 2002
-------- -------- -------- --------
(IN MILLIONS)

Net sales................................................... $307 $304 $574 $587
Earnings (loss) before interest, taxes, restructuring, asset
impairment and other...................................... (15) (1) (29) (16)
Restructuring, asset impairment and other (credits)......... -- 1 -- 1
---- ---- ---- ----
Earnings (loss) before interest and taxes................... $(15) $ (2) $(29) $(17)
==== ==== ==== ====

Sales in our Power Generation Business were $307 million in the second
quarter 2003, essentially flat compared to second quarter sales of $304 million
a year ago. For the first half of 2003, Power Generation sales are down
$13 million, or 2 percent, as a result of continued weakness in the commercial
generator set business.

A summary of unit shipments for the Power Generation business by engine
classification follows:

SECOND QUARTER FIRST HALF
------------------- -------------------
UNIT SHIPMENTS JUNE 29 JUNE 30 JUNE 29 JUNE 30
-------------- -------- -------- -------- --------
2003 2002 2003 2002
-------- -------- -------- --------

Mid-range................................................... 3,600 3,400 6,600 6,400
Heavy-duty.................................................. 1,200 1,100 2,200 2,100
High-horsepower............................................. 1,100 1,200 2,200 2,500
----- ----- ------ ------
5,900 5,700 11,000 11,000
===== ===== ====== ======

Total engine shipments for generator drive assemblies were 64 percent of
total power generation engine shipments in the second quarter 2003, compared to
61 percent a year ago. Total shipments of generator drive units increased
9 percent compared to second quarter 2002 and are up 4 percent for the first
half of 2003. Most of the increase was in international markets as shipments of
generator drive units in North America were flat compared to the second quarter
and first half of 2001. Shipments of heavy-duty power generator drive units were
up 16 percent compared to second quarter a year ago, but down 6 percent on a
year-to-date basis. Shipments of high-horsepower generator drive units were down
2 percent compared to a year before. Shipments of midrange powered generator
drive units increased 11 percent over the prior year's quarter and are up
8 percent on a year-to-date basis. Year-to-date revenues for generator drive
units increased 12 percent as a result of increased volumes.

Total shipments of generator sets declined 2 percent below the prior year's
quarter as midrange units declined 4 percent, heavy-duty units were up
3 percent and high-horsepower units decreased 2 percent. For the first half of
2003, shipments of generator sets were down 6 percent with high-horsepower units
down 25 percent. Total revenues from generator sets were down 6 percent compared
to second quarter 2002 and were down 13 percent year-to-date, primarily from the
decline in high-horsepower unit sales. Shipments in North America were up
5 percent during the quarter and 4 percent for the first half of 2003, while
shipments to Latin America and East Asia were down 19 percent and 17 percent,
respectively, for the first half. Alternator sales increased 26 percent compared
to second quarter 2002 and were up 13 percent for the first half of 2003.
Generator set sales to the mobile/RV market were up slightly, increasing
2 percent during the quarter and 3 percent in the first half of 2003.

The revenue and operating income for the Power Generation Business segment
for the three years ended December 31, 2002 were as follows:

2002 2001 2000
-------- -------- --------
(IN MILLIONS)

Net sales................................................... $1,226 $1,422 $1,395
Earnings (loss) before interest, income taxes and
restructuring and other charges (credits)................. (25) 82 95
Restructuring and other charges............................. -- 8 18
------ ------ ------
Earnings (loss) before interest and income taxes............ $ (25) $ 74 $ 77
====== ====== ======

Sales in our Power Generation Business were $1.23 billion in 2002, down
$196 million or 14 percent, compared to 2001. A majority of the sales decline is
a result of lower generator set sales, down 26 percent and lower generator drive
sales, down 24 percent, offset by increased sales to the mobile and recreational
vehicle markets, up 22 percent compared to 2001. Total engine shipments for the
power generation market were 23,700 units, down 4,000 units, or 14 percent lower
than a year before, reflecting weak demand and slow economic growth in this
market.

Power Generation revenues in 2001 were 2 percent higher than 2000, primarily
driven by higher sales to Latin America and Brazil and offset by lower sales in
North America. Sales of small generator sets to the recreational vehicle
industry were down 7 percent in 2001 compared to 2000.

A summary of engine unit shipments for the Power Generation Business by
engine category follows:

UNIT SHIPMENTS 2002 2001 2000
-------------- -------- -------- --------

Mid-range................................................... 14,000 13,800 15,800
Heavy-duty.................................................. 4,300 6,900 5,700
High-horsepower............................................. 5,400 7,000 7,800
------ ------ ------
23,700 27,700 29,300
====== ====== ======

Total unit sales of midrange engines to the power generation market were up
200 units, or 1 percent in 2002 compared to 2001. Generator drive units powered
by midrange engines increased 18 percent over the same period while unit sales
to the midrange generator set market were off 15 percent. Total unit sales of
heavy-duty engines to the power generation market decreased 2,600 units, or
38 percent, in 2002 compared to 2001. Heavy-duty generator drive units were off
45 percent from a year before while generator sets powered by heavy-duty engines
were down 21 percent year over year. High-horsepower unit sales in the power
generation business decreased 1,600 units, or 23 percent compared to 2001.
High-horsepower generator drive units declined 11 percent year-over-year while
high-horsepower generator set units decreased 34 percent from the prior period.
The decline in unit shipments is attributable to weakening demand in the
heavy-duty and high-horsepower power generation equipment markets.

Most of the decline in generator drive units for stationary power occurred
in North America, Latin America and Europe and was offset by slight increases in
shipments to India and Southeast Asia markets. A majority of the decline in
generator set units is attributable to weak demand in North America, Latin
America and Europe.

Sales of alternators increased 6 percent in 2002 compared to 2001 while
sales of small generator sets for recreational vehicles and other consumer
applications increased 22 percent in 2002 reflecting strong demand in this
segment.

EARNINGS FROM OPERATIONS

In the second quarter of 2003, Power Generation incurred an operating loss
before interest and taxes of $15 million, compared to an operating loss before
interest and taxes of $2 million last year. For the first half of 2003, Power
Generation operating results were a $29 million loss before interest and taxes
compared to a $17 million loss in 2002. While we continue with our cost
reduction actions, those benefits were more than offset by further weakness in
the North American commercial generator set business, particularly in
high-horsepower applications where our fixed manufacturing costs are
underabsorbed, and we are experiencing continued market pricing pressure and
lower utilization of our Power Generation rental fleet. Second quarter 2003
operating results also included $5 million related to severance and benefit
costs from staffing reductions during the quarter which are expected to provide
$2 million of quarterly savings in future periods.

In 2002, Power Generation incurred an operating loss before interest and
taxes of $25 million, compared to earnings before interest and taxes of
$74 million in 2001. The overall decline in margin and earnings before interest
and taxes in the Power Generation Business is attributable to several factors.
First is the decrease in volume due to weak demand. Second is a shift in sales
mix, with a decline in unit shipments of higher margin heavy-duty and
high-horsepower products. Third, the overall decline in sales volume resulted in
underabsorption of fixed overhead costs at our manufacturing

facilities. Fourth, excess inventory in the marketplace continues to create
pricing pressures resulting in heavier discounting to retain market share.
Finally, utilization of Power Generation's rental fleet is lower in 2002
compared to last year due to overall weak demand, resulting in reduced
profitability of our rental fleet business.

FILTRATION AND OTHER BUSINESS

The revenues and operating income for the Filtration and Other Business
segment for the second quarter and first half interim periods were as follows:

SECOND QUARTER FIRST HALF
------------------- -------------------
JUNE 29 JUNE 30 JUNE 29 JUNE 30
2003 2002 2003 2002
-------- -------- -------- --------
(IN MILLIONS)

Net sales................................................... $265 $243 $519 $471
Earnings before interest, taxes, restructuring, asset
impairment and other...................................... 25 25 45 45
Restructuring, asset impairment and other (credits)......... -- (2) -- (2)
---- ---- ---- ----
Earnings before interest and taxes.......................... $ 25 $ 27 $ 45 $ 47
==== ==== ==== ====

Revenues in the Filtration and Other Business were $265 million, up
$22 million, or 9 percent, compared to second quarter 2002. For the first half
of 2003, revenues were up $48 million, or 10 percent. Second quarter 2003 marked
a record sales quarter for this segment reflecting demand improvement from
OEMs and increased market share despite continued weakness across most of the
markets it serves. Geographically, sales of filtration products increased in
most regions with North American sales up 6 percent in the second quarter and
6 percent year-to-date and international sales up 23 percent for the quarter and
20 percent year-to-date. Revenues from the Holset turbocharger business were
down 3 percent over second quarter 2002 primarily as a result of reduced
shipments to China. Year-to-date sales for Holset were up 2 percent compared to
2002.

The revenues and operating income for the Filtration and Other Business
segment for the three years ended December 31, 2002, were as follows:

2002 2001 2000
-------- -------- --------
(IN MILLIONS)

Net sales................................................... $951 $889 $902
Earnings before interest, taxes and restructuring and other
charges................................................... 94 68 91
Restructuring and other charges............................. -- 4 11
---- ---- ----
Earnings before interest and taxes.......................... $ 94 $ 64 $ 80
==== ==== ====

Filtration and Other Business revenues were $951 million in 2002, up
$62 million, or 7 percent, compared to 2001 sales. Revenues from filtration
products in the U.S. were up $30 million, or 6 percent, over 2001, reflecting
demand improvement and increased market penetration at North American
OEMs. Sales to OEMs in Europe, Australia, Mexico and other international
locations also increased compared to 2001. Revenues from the sale of Holset
turbochargers were up 15 percent compared to 2001, primarily from continuing
strong business in China. Approximately 27 percent of the increase in 2002
revenues for this business segment is attributable to Holset products.

EARNINGS FROM OPERATIONS

Earnings before interest and taxes for the Filtration and Other Business in
the second quarter 2003 were $25 million compared to $27 million a year earlier.
For the first half of 2003, earnings before interest and taxes were $45 million
compared to $47 million in 2002. Incremental volumes in the

second quarter and first half of 2003 and the related absorption benefit in
gross margin offset additional expenses from the new Emission Solutions business
and higher administrative expenses from funding growth initiatives.

Earnings before interest, taxes and restructuring actions for the Filtration
and Other Business in 2002 were $94 million, up $26 million, or 38 percent,
compared to $68 million in earnings a year earlier. The improvement in
profitability is primarily a result of volume increases and the discontinuance
of approximately $9 million in goodwill amortization. In addition, incremental
expenses from this segment's new Emission Solutions business were offset by
benefits from restructuring actions and our Six Sigma cost reduction efforts.

INTERNATIONAL DISTRIBUTOR BUSINESS

The revenues and operating income for the International Distributor Business
segment for the second quarter and first half were as follows:

SECOND QUARTER FIRST HALF
------------------- -------------------
JUNE 29 JUNE 30 JUNE 29 JUNE 30
2003 2002 2003 2002
-------- -------- -------- --------
(IN MILLIONS)

Net sales................................................... $169 $145 $305 $269
Earnings before interest, taxes, restructuring, asset
impairment and other...................................... 12 10 18 11
Restructuring, asset impairment and other (credits)......... -- 4 -- 4
---- ---- ---- ----
Earnings before interest and taxes.......................... $ 12 $ 6 $ 18 $ 7
==== ==== ==== ====

Revenues from the International Distributor Business were $169 million in
the second quarter 2003, up $24 million, or 17 percent, compared to year earlier
levels with modest improvement noted across most regions. For the first half of
2003, revenues were up $36 million, or 13 percent, compared to the first half of
2002. Sales of engines, parts and service in the South Pacific, Europe and South
Africa regions were strong during the second quarter and first half with sales
declines reported by our distributorships in Asia related to the economic impact
of the SARS virus.

The revenues and operating income for the International Distributor Business
segment for the three years ended December 31, 2002 were as follows:

2002 2001 2000
-------- -------- --------
(IN MILLIONS)

Net Sales................................................... $574 $562 $555
Earnings before interest, taxes and restructuring and other
charges................................................... 33 27 29
Restructuring and other charges............................. 4 1 --
---- ---- ----
Earnings before interest and taxes.......................... $ 29 $ 26 $ 29
==== ==== ====

Revenues from the International Distributor Business were $574 million, up
$12 million, or 2 percent, compared to 2001. Sales of parts and engines
increased at distributor locations in Australia, East and Southeast Asia,
partially offset by sales declines in Latin America, primarily Argentina, and
Central Europe, primarily Germany. Sales for the year ending 2001 and 2000
include $42 million and $46 million, respectively, of certain OEM sales that are
now classified and reported as sales in the Engine Business segment. This
reporting change had no affect on earnings results in either business segment.

EARNINGS FROM OPERATIONS

Earnings before interest and taxes for the International Distributor
Business were $12 million in the second quarter 2003, up $6 million, or double
the earnings when compared to second quarter 2002. Year-to-date 2003 earnings
are up $11 million, or more than double the previous period, as a result of
increased engine and parts sales and lower exchange losses.

Earnings before interest and taxes for the International Distributor
Business were $29 million in 2002 compared to $26 million in 2001 and
$29 million in 2000. The increase in earnings in 2002 is primarily a result of
increased engine and parts sales at our distributors in East Asia, Southeast
Asia and South Pacific and offset by lower sales from distributors in Central
Europe, primarily Germany. Earnings from operations in 2001 were lower primarily
from the effect of foreign currency exchange losses at our Latin America
distributor in Argentina.

GEOGRAPHIC MARKETS

Our net sales by geographic region during comparative interim periods were:

SECOND QUARTER FIRST HALF
------------------- -------------------
JUNE 29 JUNE 30 JUNE 29 JUNE 30
2003 2002 2003 2002
-------- -------- -------- --------
(IN MILLIONS)

United States............................................... $ 816 $ 777 $1,556 $1,496
Asia/Australia.............................................. 274 264 513 479
Europe/CIS.................................................. 214 193 414 392
Mexico/Latin America........................................ 103 117 198 221
Canada...................................................... 78 68 153 135
Africa/Middle East.......................................... 54 39 92 68
------ ------ ------ ------
Total International......................................... 723 681 1,370 1,295
------ ------ ------ ------
$1,539 $1,458 $2,926 $2,791
====== ====== ====== ======

Sales to international markets represented 47 percent of the Company's
revenues in the second quarter of 2003 and 2002. Total international sales in
the second quarter 2003 increased $42 million, or 6 percent, over the second
quarter of 2002, while year-to-date international sales are up $75 million, or
6 percent. Heavy-duty truck engine shipments to international markets decreased
10 percent compared to second quarter 2002 and are flat on a year-to-date basis.
Midrange engine shipments to international markets increased 7 percent during
the quarter and are up 11 percent for the first half of 2003, primarily from
increased demand in Mexico and Latin America. Total engine shipments to the
international bus market were down 15 percent quarter-over-quarter and
7 percent year-over-year with demand fall off in Mexico and Asia.

Sales to the Asia/Australia region increased $10 million, or 4 percent,
compared to second quarter 2002, primarily from increased demand for
construction applications in Asia partially offset by lower engine sales to the
bus market. Sales to this geographic region were up 7 percent for the first half
of 2003 compared to the prior year. Sales to Europe/CIS, representing
30 percent of international sales and 14 percent of worldwide sales in the
second quarter 2003, were up 11 percent compared to the prior year's quarter and
6 percent year-to-date with increased sales in the Filtration and Other Business
and International Distributors offset by declines in engine sales to OEMs.
Business in Latin America was 14 percent of total international sales in the
second quarter 2003, compared with 17 percent a year ago with revenues down
$14 million or 12 percent, primarily due to lower bus and power generation sales
in Mexico partially offset by increased engines sales to the agriculture,
construction and medium-duty truck markets in Latin America. Sales to Canada,
representing 5 percent of worldwide sales in the second quarter 2003, were up
$10 million, or 15 percent, compared to second quarter 2002,

and 13 percent on a year-to-date basis, primarily due to increased sales of
engines and filtration products.

Sales to international markets in 2002 were $2.65 billion, or 45 percent of
total net sales, compared to $2.64 billion, or 46 percent of total net sales in
2001 and $2.82 billion, or 43 percent of total net sales in 2000. A summary of
our net sales by geographic territory for the last three years follows:

2002 2001 2000
-------- -------- --------
(IN MILLIONS)

Unites States............................................... $3,202 $3,045 $3,775
Asia/Australia.............................................. 1,023 901 905
Europe/CIS.................................................. 763 832 860
Mexico/Latin America........................................ 423 471 451
Canada...................................................... 283 303 418
Africa/Middle East.......................................... 159 129 188
------ ------ ------
$5,853 $5,681 $6,597
====== ====== ======

Shipments of heavy-duty truck engines to international markets in 2002
decreased 3 percent compared to a year ago, primarily to Latin America and
Central Europe, partially offset by increased shipments to Mexican
OEMs. Shipments of midrange automotive engines to international markets
increased 10 percent in 2002, primarily to Latin America OEMs. Engine shipments
to the international bus market decreased 20 percent compared to a year ago,
primarily to China, India and Mexico, where shipments declined over 2000 units
compared to 2001. Shipments of light-duty automotive engines to international
markets declined 4 percent in 2002 compared to 2001. Engine shipments to
international agricultural and construction equipment markets were down
3 percent in 2002 compared to 2001 due to weak market conditions. Engine
shipments to international mining and rail markets were down 17 percent from the
prior year.

Sales to the Asia/Australia region increased $122 million, or 14 percent
compared to 2001, primarily from increased demand for engines, generator drives
and sales at our Australian distributorship. Sales to Europe/CIS, representing
13 percent of total sales and 29 percent of international sales in 2002, were
down 8 percent compared to the prior year, mostly in the heavy-duty truck
markets in the UK. Business in Mexico, Brazil and Latin America decreased
10 percent in 2002 compared to 2001, primarily from lower power generation
revenues and a decline in bus sales, and offset by increased engine sales to the
agricultural market. Sales to Canada, representing 5 percent of net sales in
2002, were down 7 percent compared to 2001 due to lower heavy-duty truck
production and lower sales of filtration products. Sales to Africa/Middle East
increased 23 percent in 2002 compared to 2001, primarily from engines and parts
sales at our distributors in Dubai, Zimbabwe and South Africa.

Net sales to international markets in 2001 compared to 2000 were down
$186 million, or 7 percent, primarily due to weak demand in Europe/CIS, lower
sales in Canada due to the downturn in the North American heavy-duty truck
market, and lower sales to Africa/Middle East, primarily Turkey.

LIQUIDITY AND CAPITAL RESOURCES

CASH FLOWS

Key elements of our cash flows during the six-month periods follow:

JUNE 29 JUNE 30
2003 2002
-------- --------
(IN MILLIONS)

Net cash (used in) provided by operating activities......... $ (37) $35
Net cash used in investing activities....................... (26) (58)
Net cash (used in) provided by financing activities......... (105) 20
Effect of exchange rate changes on cash..................... 3 1
----- ---
Net change in cash and cash equivalents..................... $(165) $(2)
===== ===

The following table sets forth key elements of our cash flows for the last
three years:

2002 2001 2000
-------- -------- --------
(IN MILLIONS)

Net cash provided by operating activities................... $193 $152 $472
Net cash used in investing activities....................... (152) (140) (410)
Net cash provided by (used in) financing activities......... 131 (2) (81)
Effect of exchange rate changes on cash..................... 2 (1) (2)
---- ---- ----
Net change in cash and cash equivalents..................... $174 $ 9 $(21)
==== ==== ====

CASH FROM OPERATIONS

During the first half of 2003, our operating activities used $37 million in
cash compared to $35 million in cash provided by operations in the first half of
2002, or a net use of cash of $72 million year-over-year. The increase in cash
used in operations in 2003 was partially due to the decline in net earnings,
from a first half net loss of $8 million in 2002 to a first half net loss of
$17 million in 2003, or a $9 million decrease, offset by $16 million of non-cash
charges in the second quarter of 2002 for restructuring actions. In addition,
non-cash adjustments for earnings in our joint ventures and alliances decreased
$23 million year over year and non-cash adjustments from minority interests
declined $2 million during the same period. Net changes in working capital
consumed $54 million more cash during the first half of 2003 compared to the
prior year as a reduction in accounts receivable and provided $100 million of
cash, primarily due to lower amounts outstanding under our securitization
program. This amount was offset during the same period by net cash used to
finance an increase in inventories of $36 million driven by higher production
volumes and a reduction in the amount of working capital provided by accounts
payable and accrued expenses and other items ($103 and $15 million,
respectively), primarily from increased funding of retirement programs.

Our operating activities provided positive cash flow of $193 million in 2002
compared to $152 million in 2001 and $472 million in 2000. The increase in cash
from operations in 2002 was largely due to improved net earnings, from a net
loss of $103 million in 2001 to net earnings of $82 million in 2002, or an
increase of $185 million, partially offset by decreases in non-cash adjustments
for restructuring and asset impairment charges, down $87 million, and non-cash
adjustments for earnings of our joint ventures and alliances, down $17 million.
Depreciation and amortization declined $10 million from the prior year,
primarily due to the discontinuance of $11 million of goodwill amortization
which does not affect cash flows. Cash flows from operating activities was
reduced by a net $33 million from changes in accounts receivable, inventories,
accounts payable and other operating assets and liabilities. Accounts receivable
increased $184 million, primarily due to repayment of our securitization
program, while inventory increased $25 million for a net year-over-year change
in working capital used of

$209 million. This amount was partially offset by an increase in accounts
payable and accrued expenses ($174 million). The increase in accounts payable
($37 million) was primarily from higher material purchases and the increase in
accrued expenses ($127 million) was primarily due to higher accruals for
retirement liabilities ($70 million), interest ($12 million), and income taxes
and variable compensation.

INVESTING ACTIVITIES

Net cash used in investing activities was $26 million in 2003 compared to
$58 million a year ago, a decrease or improvement in cash outflows of
$32 million. Capital expenditures during the first half of 2003 were up
$9 million and software additions increased $5 million compared to 2002.
Investments and advances to joint ventures and alliances provided $15 million of
cash inflows during the first half of 2003 compared to a use of $41 million in
cash a year ago, an improvement of $56 million in cash provided by investing
activities that was partially offset by $38 million in cash from the disposition
of certain businesses during the first half of 2002. Purchase of marketable
securities during the first half of 2003 used $55 million of cash compared to
$43 million a year ago, or an increase in cash outflows of $12 million from
investing activities. However, this increase in cash outflows was more than
offset by proceeds of $65 million from the sale of marketable securities during
the first half of 2003 compared to proceeds of $33 million a year ago, or an
increase in cash inflows of $32 million year-over-year.

Net cash used in investing activities was $152 million in 2002 compared to
$140 million a year ago, an increase of $12 million but down considerably from
the $410 million cash used in investing activities in 2000. Cash flows from
investing activities in 2001 benefited from $143 million in proceeds from
sale-leaseback transactions. Excluding the cash flows from these transactions,
net cash used in investing activities was $283 million in 2001 compared to
$152 million in 2002, or a decrease of $131 million year-over-year. Most of the
decline was a result of lower capital spending in 2002, down $116 million
compared to 2001. Reduced capital spending remains a priority in 2003 as we
estimate our capital expenditures will be $110 million, up $20 million compared
to 2002, but down considerably from the $200 million spending levels of 2001 and
2000. Capital expenditures during the first half of 2001 included significant
disbursements for a subsequently cancelled engine program. Investments in and
advances to our joint ventures and alliances represented a cash outflow of
$60 million in 2002 compared to $48 million a year ago. The advances include
both long-term investment and short-term funding for working capital needs of
our joint ventures. Cash inflows from investing activities in 2002 also included
$23 million in proceeds from the sale of a previously consolidated
distributorship, $6 million in proceeds from the sale of a distributorship
acquired during the second quarter ($5 million outflow for business acquisition)
and $9 million of proceeds from assets sold to the newly formed marine business
joint venture, Cummins Mercruiser. Sales of marketable securities provided
$86 million of cash in 2002 but cash was reduced by the purchase $116 million in
securities during the same period. During 2001, sales of marketable securities
provided $53 million of cash and $74 million of cash was used for the purchase
of marketable securities.

FINANCING ACTIVITIES

During the first half of 2003, financing activities used $105 million of
cash compared to $20 million of cash provided by financing activities in the
first half of 2002, or a net cash outflow of $125 million year-over-year.
Proceeds from borrowings provided $7 million more cash during the first half of
2003 compared to 2002 but were offset by $7 million of lower borrowings under
our credit agreements during the same period. A majority of the cash used in
financing activities during the first half of 2003 was for the payment of our
$125 million 6.25% Notes that matured in March 2003. Additional cash outflows
used in financing activities during the first half of 2003 and 2002 were
$25 million of common stock dividend payments.

Cash and cash equivalents at June 29, 2003, were $59 million, an increase of
$11 million compared to $48 million of cash and cash equivalents at June 30,
2002. For the first half of 2003, cash and cash equivalents decreased
$165 million from December 31, 2002.

Net cash provided by financing activities was $131 million in 2002 compared
to a net use of cash for financing activities of $2 million in 2001. A
significant financing activity providing cash in 2002 was the issuance of our
9 1/2% Senior Notes during the fourth quarter (See Note 8 to the Consolidated
Financial Statements). Net proceeds of $244 million from this issuance were used
to repay borrowings under our accounts receivable securitization program and
were also used to retire our 6.25% Notes that matured in March 2003. Significant
financing activities in 2001 included $291 million in proceeds from the issuance
of our preferred securities in the second quarter of 2001 of which $247 million
was used to repay borrowings under our short-term credit agreements during that
quarter. Payments on long-term borrowings were $87 million in 2002 and included
early retirement of our ESOP Trust Notes (See Note 8 to the Consolidated
Financial Statements). Net borrowings under short-term credit agreements were
$4 million during 2002 compared to $248 million in 2001. Dividend payments on
our common stock were $50 million in 2002, 2001 and 2000.

Cash and cash equivalents at December 31, 2002 were $224 million, an
increase of $174 million compared to $50 million of cash and cash equivalents at
the beginning of the year. A majority of the increase in cash and cash
equivalents occurred in the fourth quarter when we received proceeds of
$244 million from the issuance of our 9 1/2% Senior Notes.

MANAGEMENT ASSESSMENT OF LIQUIDITY

Since fiscal 2000, we have made a strategic effort to improve our cost
structure and improve efficiencies from continuing operations through
monetization of assets and restructuring actions. As a result, we have
undertaken various initiatives to improve cash flow, reduce debt obligations and
improve our financial flexibility. Our operations have historically generated
sufficient cash to fund our businesses, capital expenditures, research and
development and dividend payments. Cash provided by continuing operations is a
major source of our working capital funding. At certain times, cash provided by
operations is subject to seasonal fluctuations, and as a result, periodic
borrowings are used to fund working capital requirements. We have available
various short and long-term credit arrangements which are discussed below and
disclosed in Note 8 "Borrowing Arrangements" of our Consolidated Financial
Statements. These credit arrangements and our accounts receivable securitization
program provide the financial flexibility required to satisfy future short-term
funding requirements for our debt service obligations, projected working capital
requirements and capital spending. With the exception of payments required under
our operating lease agreements, there are no major fixed cash payment
obligations occurring until March 2005 when our 6.45% Notes with principal
amount of $225 million mature. Based on projected cash flows from operations and
existing credit facilities, management believes the Company has sufficient
liquidity available to meet anticipated capital, debt and dividend requirements
in the foreseeable future.

During the fourth quarter of 2000, we entered into a receivable
securitization program, which provides a cost-effective method to fund our trade
accounts receivable. This program diversifies our funding base by providing a
flexible source of funding that is not reported on our balance sheet. As of
December 31, 2002, there were no amounts outstanding under this program. A more
complete description of the securitization program, which discloses certain cash
flows related to the program, is found in the following section "--Off Balance
Sheet Financing--Accounts Receivable Securitization Program".

In the second quarter of 2001, we issued 6 million shares of cumulative
convertible preferred securities subject to mandatory redemption through Cummins
Capital Trust I, a wholly-owned subsidiary. The net proceeds of $291 million
from this issuance were used to repay outstanding

indebtedness under our revolving credit agreement. Dividends on the preferred
securities are payable at an annual rate of 7% of the $50 liquidation preference
on March 15, June 15, September 15 and December 15 of each year or approximately
$5.3 million in each quarter. A complete description of the preferred securities
is disclosed in Note 9 of the Consolidated Financial Statements. See also
Recently Issued Accounting Pronouncements below regarding a new accounting
standard applicable to these securities.

During the second and third quarters of 2001, we entered into two
sale-leaseback transactions whereby we sold certain manufacturing equipment and
aircraft and received $143 million in proceeds from the transactions. The leases
were accounted for as operating leases. We used the proceeds from these
transactions to reduce our indebtedness and to fund our working capital
requirements. Note 18 to the Consolidated Financial Statements contains a
description of the sale-leaseback transactions.

During 2002, 2001 and 2000, we recorded significant charges to restructure
its operations, largely focused in the Engine Business. These actions and the
resulting charges were primarily taken in response to the downturn in the North
American trucking industry and related conditions and included workforce
reductions, asset impairment losses, termination of a new engine development
program and other charges. Total cash outflows associated with these actions
approximated $59 million, the majority of which has already been disbursed,
including $23 million in 2002. The associated annual savings of these
restructuring actions are estimated at $97 million upon completion. Note 7 to
the Consolidated Financial Statements describes in detail the restructuring
actions we have taken during the last three years.

In November 2002, we entered into a new revolving credit facility that
replaced our prior revolving credit facility. The new credit facility provides
for aggregate borrowings of up to $385 million and is available on a revolving
basis for a period of three years. Borrowings are primarily available in U.S.
dollars, although up to $60 million of the new credit facility is available for
multicurrency borrowing and letters of credit, up to $150 million is available
for letters of credit and up to $50 million is available for swing line loans.
We and a number of our subsidiaries are permitted to borrow and obtain letters
of credit under the new revolving credit facility, although the aggregate amount
of borrowings by, and letters of credit issued for the benefit of, our
subsidiaries under the new facility may not exceed $60 million. As of December
31, 2002, there were no borrowings outstanding under this credit facility and
$94 million was utilized for letters of credit. Note 8 to the Consolidated
Financial Statements contains a more complete description of our new revolving
credit facility.

In November 2002, we issued $250 million of unsecured 9 1/2% Senior Notes
that mature in 2010. Proceeds from the issue were approximately $244 million,
net of debt issue costs. Proceeds from the notes were used to repay amounts
outstanding under our receivable securitization program and $125 million of the
proceeds were used to retire our 6.25% Notes that matured in March 2003.
Interest on the Notes is payable on June 1 and December 1 each year. We can
redeem the Notes in whole or in part at any time after December 1, 2006, at a
premium equal to 104.75% of par, declining to par in 2008, plus accrued
interest. A more complete description of our Senior Notes is disclosed in Note 8
to the Consolidated Financial Statements.

AVAILABLE CREDIT CAPACITY

The following table provides the components of our available credit capacity
as of June 29, 2003:

(IN MILLIONS)
-------------

Revolving credit facility................................... $251
International credit facilities............................. 24
Accounts receivable securitization.......................... 125
----
$400
====

Total debt was $1.076 billion at June 29, 2003 compared with $1.137 billion
at December 31, 2002. Total debt as a percentage of our total capital was
56.0 percent at June 29, 2003 versus 57.5 percent at December 31, 2002.

CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS

A summary of payments due by period of our contractual obligations and
commercial commitments as of December 31, 2002, are shown in the tables below. A
more complete description of these obligations and commitments is included in
the Notes to Consolidated Financial Statements as referenced below.

2004- 2006- AFTER
CONTRACTUAL CASH OBLIGATIONS 2003 2005 2007 2007 TOTAL
---------------------------- -------- -------- -------- -------- --------
(IN MILLIONS)

Revolving credit facility................................ $ -- $ -- $-- $ -- $ --
Loans payable............................................ 19 -- -- -- 19
Long-term debt 119 245 4 750 1,118
Capital leases........................................... 1 1 1 1 4
Operating leases......................................... 70 104 81 193 448
Preferred securities of subsidiary trust................. -- -- -- 291 291
---- ---- --- ------ ------
$209 $350 $86 $1,235 $1,880
==== ==== === ====== ======

2004- 2006- AFTER
OTHER COMMERCIAL COMMITMENTS 2003 2005 2007 2007 TOTAL
---------------------------- -------- -------- -------- -------- --------
(IN MILLIONS)

Standby letters of credit................................ $104 -- -- -- $ 104
Guarantees............................................... 68 -- -- -- 68
---- ---- --- ------ ------
$172 $ -- $-- $ -- $ 172
==== ==== === ====== ======

FINANCIAL COVENANTS AND CREDIT RATING

A number of our contractual obligations and financing agreements, such as
our accounts receivable securitization program, our financing arrangements for
independent distributors, our new revolving credit facility and our equipment
sale-leaseback agreement, have restrictive covenants and/or pricing
modifications that may be triggered in the event of downward revisions to our
corporate credit rating. Our corporate credit rating is determined by
independent credit rating agencies and comprises an assessment of the
creditworthiness of our debt securities and other obligations. It measures the
probability of the timely repayment of principal and interest of our notes and
short term debt. Generally, a higher credit rating leads to a more favorable
effect on the marketability of our debt instruments in the capital markets. A
credit rating of Baa or higher by Moody's or a rating of BBB or

higher by Standard & Poor's is considered investment grade. Currently, the
corporate credit rating of our debt securities is below investment grade.

In April 2002, Moody's Investors Services, one of two major credit rating
agencies, lowered our long-term and short-term debt ratings primarily as a
result of the continued weakness in the North American heavy-duty truck market.
Moody's lowered our senior unsecured long-term debt rating to Ba1 from Baa3 with
a Stable outlook. The short-term rating, which applies to our short-term
borrowings, was lowered to Not-Prime from Prime-3. Standard & Poors, the other
major credit rating agency, reaffirmed its rating of Cummins debt at BBB- and
expected the our liquidity and credit protection measures to remain satisfactory
for the current rating.

In October 2002, Moody's confirmed the long-term rating of our senior debt
at Ba1 but changed the outlook to Negative from Stable. Also in October,
Standard & Poors lowered our corporate credit rating to BB+ from BBB- with a
Negative outlook, primarily as a result of declining power generation sales and
weak heavy and medium-duty truck demand. In November, Moody's lowered our
long-term senior unsecured debt rating from Ba1 to Ba2 as a result of our
securing borrowings under the revolving credit facility.

Any rating can be revised upward or downward or withdrawn at any time by a
rating agency if it decides the circumstances warrant that change, and there can
be no assurance that our debt ratings will not be lowered further or withdrawn
by a rating agency. Any future lowering of our debt ratings could further
increase the cost of our financing agreements and arrangements, and also have a
negative impact on our ability to access the capital markets or borrow funds at
current rates. However, we do not believe further downgrade of our credit rating
will have a material impact on our financial results or our financial condition.
The following is a discussion regarding the impact of the credit ratings on our
financing arrangements.

OFF BALANCE SHEET FINANCING--ACCOUNTS RECEIVABLE SECURITIZATION PROGRAM

We entered into our accounts receivable securitization program in
December 2000. As of December 31, 2002, there were no proceeds outstanding under
the securitization program and as of December 31, 2001, $55 million was
outstanding under the program. As of June 29, 2003, $5 million was outstanding
under the program. The original agreement for this program required us to
maintain a minimum investment grade credit rating in our long-term senior
unsecured debt. As a result of the Moody's downgrade in April 2002, we
renegotiated the terms of the securitization agreement and renewed the
requirement to maintain a minimum investment grade credit rating. The terms of
the new agreement provide for an increase in the interest rate and fees under
this program of approximately $0.5 million annually at current funding levels.
As a result of amending the requirement, neither the October 2002 Standard &
Poor's downgrade, or the November 2002 Moody's downgrade affected our funding
under this program. Further downgrade of our debt rating from Moody's will
require us to renegotiate the terms of our securitization agreement in order to
continue funding under this program. Note 4 to the Consolidated Financial
Statements provides a more complete discussion of our accounts receivable
securitization program.

FINANCING ARRANGEMENTS FOR RELATED PARTIES

In accordance with the provisions of various joint venture agreements, we
may purchase products and components from the joint ventures, sell products and
components to the joint ventures and the joint ventures may sell products and
components to unrelated parties. Joint venture transfer prices to us may differ
from normal selling prices. Certain joint ventures agreements transfer product
to us at cost, some transfer product to us on a cost-plus basis, and others
transfer product to us at market value.

We purchase significant quantities of mid-range diesel and natural gas
engines, components and service parts from Consolidated Diesel Company (CDC), an
unconsolidated general partnership. The partnership was formed in 1980 with J.
I. Case (Case) to jointly fund engine development and manufacturing capacity.
Cummins and Case (now CNH Global N.V.) are general partners and each partner
shares 50 percent ownership in CDC. Under the terms of the agreement, CDC is
obligated to make its entire production of diesel engines and related products
available solely to the partners. Each partner is entitled to purchase up to
one-half of CDC's actual production; a partner may purchase in excess of
one-half of actual production to the extent productive capacity is available
beyond the other partner's purchase requirement. The partners are each
obligated, unconditionally and severally, to purchase annually at least one
engine or engine kit produced by CDC, provided a minimum of one engine or kit is
produced. The transfer price of CDC's engines to the partners must be sufficient
to cover its manufacturing cost in such annual accounting period, including
interest and financing expenses, depreciation expense and payment of principal
on any of CDC's indebtedness. In addition, each partner is obligated to
contribute one-half of the capital investment required to maintain plant
capacity and each partner has the right to invest unilaterally in plant
capacity, which additional capacity can be utilized by the other partner for a
fee. To date, neither partner has made a unilateral investment in plant capacity
at CDC.

We are not a guarantor of any of CDC's obligations or commitments; however,
we are required to provide up to 50 percent of CDC's base working capital as
defined by the agreement. The amount of base working capital is calculated each
quarter and if supplemental funding greater than the base working capital amount
is required, the amount is funded through third party financing arranged by CDC,
or we may elect to fund the requirement although we are under no obligation to
do so. To date, when supplemental funding is required above the base working
capital amount, we have elected to provide that funding to CDC. If the amount of
supplemental funding required is less than the base working capital amount, it
is funded equally by the partners. Excess cash generated by CDC is remitted to
Cummins until CDC's working capital amount is reduced to the base working
capital amount. Any further cash remittances from CDC to the partners are shared
equally by the partners.

FINANCING ARRANGEMENTS AND GUARANTEES FOR DISTRIBUTORS

U.S. DISTRIBUTORS

We guarantee the revolving loans, term loans and leases in excess of a
specified borrowing base for certain independently owned and operated North
American distributors as well as distributors in which we own an equity
interest. The agreement requires us to maintain a minimum investment grade
credit rating for our long-term senior unsecured debt. As a result of the
Moody's downgrade in April 2002, our guarantee under the operating agreement for
our guarantee program increased to the full amount of distributor borrowings
outstanding under the program. In the interim, the program lender agreed to
waive the additional guarantees of distributor indebtedness that were required
upon our ratings downgrade and continued to fund the distributors under this
program. We then amended the operating agreement with the lender under the
program to lower the ratings trigger one level. Subsequently, as a result of the
Moody's downgrade in November 2002, our guarantee under the operating agreement
for the guarantee program again increased to the full amount of distributor
borrowings under this program. We again amended the operating agreement with the
lender under the program, lowering the rating trigger for a period of
approximately two years, at which time the rating trigger will resume to its
prior level. Under the amended agreement, if our long-term senior unsecured debt
rating falls below "BB" with Standard & Poor's or below "Ba2" with Moody's, the
lender under the program could elect to curtail distributor borrowings and the
amount of our guarantee would increase to the total distributor borrowings
outstanding under the program. This rating level trigger remains in effect until
August 31, 2004, at which time the ratings trigger reverts to a rating of below
"BBB-" for Standard & Poor's or below "Baa3" for Moody's.

In addition, in the event the rating on our long-term senior unsecured debt
falls below the thresholds described above, we will also be required to pay the
lender a monthly fee equal to 0.50 percent on the daily average outstanding
balance of each financing arrangement under the operating agreement. Further, in
the event that any distributor defaults under a particular financing
arrangement, we will be required to purchase the assets of that distributor that
secure its borrowings under the financing arrangement

The operating agreement will continue in effect until February 7, 2007, and
may be renewed by the parties for additional one year terms. As of December 31,
2002, we had guaranteed $43 million of financing arrangements under the
operating agreement relating to U.S. distributor borrowings of $292 million.

CANADIAN DISTRIBUTORS

We have entered into a number of guarantee agreements with a Canadian lender
pursuant to which we have agreed to guarantee borrowings of certain independent
distributors of our products in Canada. Under the terms of these agreements, our
guarantee with respect to any one financing arrangement between a distributor
and lender is limited to 50 percent of the aggregate principal amount of the
financing. As of December 31, 2002, we had $15 million of guarantees outstanding
under these guarantee agreements relating to distributor borrowings of
$30 million.

NEW REVOLVING CREDIT FACILITY

In November 2002, we entered into a new revolving credit facility that
replaced our prior revolving credit facility. The new revolving credit facility
provides for aggregate borrowings of up to $385 million and is available on a
revolving basis for a period of three years. Borrowings are primarily available
in U.S. dollars, although up to $60 million of the new credit facility is
available for multicurrency borrowing and letters of credit, up to $150 million
is available for letters of credit and up to $50 million is available for swing
line loans. We and a number of our subsidiaries are permitted to borrow and
obtain letters of credit under the new revolving credit facility, although the
aggregate amount of borrowings by, and letters of credit issued for the benefit
of, our subsidiaries under the new facility may not exceed $60 million.

We guarantee all borrowings of our subsidiaries under the new revolving
credit facility. In addition, our principal domestic subsidiaries guarantee all
borrowings under the new revolving credit facility, although certain of those
guarantees are limited by the terms of our existing public indenture (which
governs a number of our existing notes and debentures) that restrict the ability
of our subsidiaries to incur or guarantee indebtedness, and are limited by
similar terms in the indenture governing our $250 million senior notes.

Borrowings under the new revolving credit facility (other than swing line
loans) bear interest at a rate equal to, at our option:

- the London inter-bank offered rate (LIBOR) plus a spread ranging from
0.875 percent to 2.5 percent based on our credit rating and utilization of
the credit facility; or

- the Alternate Base Rate rate or ABR (which is the greater of the
administrative agent's prime rate and the federal funds effective rate
plus 0.5 percent) plus a spread ranging from 0 percent to 1.5 percent
based on our credit rating and utilization of the credit facility.

Following the November 2002 downgrade from Moody's, the effective rate of
interest on our borrowings under the new revolving credit facility increased
from LIBOR plus 175 basis points (1.75 percent) to LIBOR plus 200 basis points
(2.0 percent).

Swing line loans bear interest at the ABR rate plus a spread based on our
credit rating and utilization of the new revolving credit facility, or such
other rate as is agreed to by us and the swing line lender. We are required to
pay quarterly facility fees on unused commitments under the new revolving credit
facility, which fees are based upon our credit rating. We also are required to
pay an annual administration fee to the administrative agent for the facility.

Our obligations and the obligations of our subsidiaries under the new
revolving credit facility are collateralized by security interests in
substantially all of our assets and the assets of our domestic subsidiaries that
guarantee obligations under the facility (other than shares of stock or
indebtedness of our subsidiaries that are "restricted subsidiaries" under the
terms of our existing public indenture and other than assets that are considered
"principal properties" of ours or of our "restricted subsidiaries" under the
terms of our existing public indenture).

The terms of the new revolving credit facility contain covenants that
restrict our ability, and the ability of our subsidiaries, to among other
things, incur liens, enter into sale and leaseback transactions, enter into
merger, consolidation or asset sale transactions, dispose of capital stock of
subsidiaries, incur subsidiary indebtedness and enter into swap transactions.
The new revolving credit facility also restricts our ability to, under the terms
of our existing public indenture, redesignate "unrestricted subsidiaries" as
"restricted subsidiaries" or designate future subsidiaries as "restricted
subsidiaries". The new revolving credit facility also contains the following
financial covenants:

- we may not permit our net worth to fall below an amount equal to the sum
of (1) $1.15 billion and (2) 25 percent of the sum of our consolidated net
earnings for each of the fiscal quarters commencing after September 29,
2002 to and including the most recent fiscal quarter prior to the date on
which the net worth calculation is made and (3) 75 percent of the amount
by which our net worth has increased as a result of our issuance of
capital stock after September 29, 2002;

- we may not permit the ratio of (1) the sum of our consolidated
indebtedness and our securitization financings to (2) the sum of our
consolidated indebtedness, securitization financings and net worth to be
equal to or greater than 0.55 to 1.0; and

- we may not permit the ratio of (1) our consolidated EBITDA minus capital
expenditures to (2) our consolidated interest expense for any period of
four consecutive quarters, to be less than 1.50 to 1.0.

For purposes of the financial covenants described above, "net worth,"
"consolidated net income," "consolidated indebtedness," "consolidated EBITDA,"
"consolidated interest expense" and other financial measurements are calculated
in the manner provided by the terms of the new revolving credit facility
agreement.

As of December 31, 2002, we did not have any outstanding borrowings under
this revolving credit facility and we were in compliance with all of the
covenants of this agreement. As of June 29, 2003 we had $37 million outstanding
under this facility and were in compliance with all covenants, except as
previously discussed in this "Management's Discussion and Analysis of Financial
Condition and Results of Operations" section.

EQUIPMENT SALE-LEASEBACK AGREEMENT

In 2001, we entered into a sale-leaseback agreement whereby we sold certain
manufacturing equipment and leased it back under an operating lease. As a result
of the Moody's downgrade in April 2002, and the Standard & Poor's downgrade in
October 2002, we were required under the lease agreement to obtain irrevocable,
unconditional standby letters of credit in an amount of $64 million. The letters
of credit were posted to the benefit of the equipment lessor and lenders and
will remain in effect until we achieve and maintain a minimum investment grade
credit rating for twelve consecutive months. If we had been unable to obtain
these letters of credit, we would have satisfied our obligation

under the lease agreement by borrowing under our prior revolving credit facility
and posting the proceeds as collateral. The November 2002 Moody's downgrade had
no effect on this agreement. The equipment sale-leaseback transaction is
disclosed in Note 18 of the Consolidated Financial Statements.

CRITICAL ACCOUNTING POLICIES

A summary of our significant accounting policies is included in Note 1 of
our Consolidated Financial Statements. We believe the application of our
accounting policies on a consistent basis enables us to provide financial
statement users with useful, reliable and timely information about our earnings
results, financial condition and cash flows.

Our financial statements are prepared in accordance with generally accepted
accounting principles that oftentimes require management to make judgments,
estimates and assumptions regarding uncertainties that affect the reported
amounts presented and disclosed in our financial statements. Our management
reviews these estimates and assumptions based on historical experience, changes
in business conditions and other relevant factors that they believe to be
reasonable under the circumstances. In any given reporting period, our actual
results may differ from the estimates and assumptions used in preparing our
financial statements.

Critical accounting policies are those that may have a material impact on
our financial statements and also require management to exercise significant
judgment due to a high degree of uncertainty at the time estimates are made. Our
senior management has discussed the development and selection of our accounting
policies, related accounting estimates and the disclosures set forth below with
the Audit Committee of our Board of Directors. We believe our critical
accounting policies include those addressing the recoverability and useful lives
of assets (including goodwill), estimation of liabilities for product coverage
programs and accounting for income taxes, pensions and postretirement benefits.

RECOVERABILITY OF LONG-LIVED ASSETS

Our investment in engine manufacturing equipment is depreciated using a
modified units-of-production method. The cost of all other equipment is
depreciated using the straight-line method. Under the modified
units-of-production method, the service life of our assets is measured in terms
of units of product produced rather than the passage of time. Depreciation
expense under this method is likewise measured in terms of units of product
produced subject to a minimum level or floor. The assumptions and estimates
regarding asset service life, residual value and units of production are based
on a number of factors, including but not limited to, wear and tear,
deterioration, and obsolescence. Actual results could differ from our estimates
due to changes in retirement or maintenance practices, the introduction of new
technology and new products or other changes that may affect the expected
service lives of the assets. We evaluate the carrying value of our long-lived
assets by performing impairment tests whenever events or changes in
circumstances indicate possible impairment. In addition, we perform an annual
impairment test for the goodwill that is recorded in our Statement of Financial
Position.

PRODUCT COVERAGE COSTS

We estimate and record a liability for product coverage programs, other than
product recalls, at the time our products are sold. Our estimates are based on
historical experience and reflect management's best estimates of expected costs
at the time products are sold and subsequent adjustment to those expected costs
when actual costs differ. As a result of uncertainty surrounding the nature and
frequency of product recall programs, the liability for such programs is
recorded when the recall action is announced. Our warranty liability is affected
by component failure rates, repair costs, and the time of failure, partially
offset by recovery from certain of our vendors. Future events and circumstances
related to these factors could materially change our estimates and require
adjustments to our liability. Note 1

of the Consolidated Financial Statements contains a summary of the activity in
our product coverage liability account, including adjustments to pre-existing
warranties during the period.

REALIZATION OF DEFERRED TAX ASSETS

We determine our provision for income taxes using the asset and liability
method. Under this method, deferred tax assets and liabilities are recognized
for the future tax effects of temporary differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Future tax benefits of tax loss and credit carryforwards
are also recognized as deferred tax assets. We evaluate the realizability of our
deferred tax assets each quarter by assessing the likelihood of future
profitability and available tax planning strategies that could be implemented to
realize our net deferred tax assets. As of December 31, 2002, we had recorded
net deferred tax assets of $768 million. These assets include $334 million for
the value of tax loss and credit carryforwards that generally have a limited
life and begin expiring in 2008. The ultimate realization of our net deferred
tax assets will require a higher level of profitability than we have achieved in
recent years. Having assessed the future profit plans and tax planning
strategies together with the years of expiration of carryforward benefits, a
valuation allowance of $41 million has been recorded to reduce the tax assets to
the net value management believes is more likely than not to be realized. Should
our operating performance not improve, future assessments could conclude a
larger valuation allowance will be needed to further reduce the deferred tax
assets. Factors that may affect our ability to achieve a higher level of
profitability include, but are not limited to, a decline in sales or gross
margin, loss of market share, increased competition, and existing and future
regulatory standards. In addition, we operate within multiple taxing
jurisdictions and are subject to tax audits in these jurisdictions. These audits
can involve complex issues, which may require an extended period of time to
resolve. However, we believe we have made adequate provision for income taxes
for all years that are subject to audit. A more complete description of our
income taxes and the future benefits of our tax loss and credit carryforwards
are disclosed in Note 12 to the Consolidated Financial Statements.

PENSION AND OTHER POSTRETIREMENT BENEFITS

We sponsor a number of pension and other retirement plans in various
countries. In the U.S. and the U.K. we have several major defined benefit plans
that are separately funded. We account for our pension and other postretirement
benefit programs in accordance with SFAS No. 87 "Employers' Accounting for
Pensions" and SFAS No. 106 "Employers' Accounting for Postretirement Benefits
Other than Pensions". These standards require that amounts recognized in
financial statements be determined using an actuarial basis. As a result, our
pension and other postretirement benefit programs are based on a number of
statistical and judgmental assumptions that attempt to anticipate future events
and are used in calculating the expense and liability related to our plans.
These assumptions include a discount rate, an expected return on plan assets
rate, a future compensation increase rate, and a health care cost trend rate. In
addition, there are also subjective actuarial assumptions relating to retirement
age, mortality rates and participant withdrawals. The actuarial assumptions we
use may differ significantly from actual results due to changing economic
conditions, participant life span, withdrawal rates and changes in actual costs
of health care. These differences may result in a material impact to the amount
of pension and other post-retirement benefit expenses that are recorded.

The most significant assumptions used in determining our pension income
(expense) in accordance with SFAS No. 87 are the expected return on plan assets
and the discount rate for pension expense calculation purposes. In 2001 and
2002, we assumed the expected long-term return on our plan assets would be
10 percent for U.S. plans and 8.5 percent for U.K. plans. Over the past two
years, global capital market developments have resulted in negative returns on
our plan assets and a decline in the discount rate used to estimate the related
pension liability. As a result, at November 30, 2002, the present value of our
pension obligation (the accumulated benefit obligation or "ABO") exceeded the

fair value of its assets, which required us to record a fourth quarter "minimum
pension liability" adjustment of $415 million in accordance with SFAS No. 87.
The effect of this non-cash adjustment was to increase pension liabilities by
$415 million, increase intangible assets by $13 million and increase other
comprehensive loss, a contra shareholders' account, by $402 million
($257 million after-tax). If the fair value of the pension plan assets exceeds
the ABO in future years, the charge to shareholders' equity would be reversed.
Alternatively, if the fair market value of the pension plan assets experiences
further declines or the discount rate is reduced, additional charges to
accumulated other comprehensive income (loss) may be required in future periods.
The financial ratios and net worth covenants contained in our credit
arrangements and debt securities agreements were not affected by the 2002
minimum pension liability adjustment.

As a result of lower investment returns experienced in the past two years,
we have changed our pension plan asset return assumptions which will impact
pension expense in future periods. Our expected long-term rate of return on
assets has been lowered to 8.5 percent in the U.S. and 8.2 percent in the U.K.
with consultation from and the concurrence of our actuaries. The effect of
lowering our long-term rate of return assumption will increase our 2003 pension
expense, as measured in accordance with SFAS No. 87, by approximately
$30 million compared to the amount recorded in 2002. In addition, the discount
rate for our U.S. plans has declined from 7.25 percent at September 30, 2001, to
7.0 percent at November 30, 2002, and from 6.25 percent at September 30, 2001,
to 5.8 percent at November 30, 2002, for our U.K. plans.

During the fourth quarter of 2002, we changed the date for measuring our
return on pension plan assets and our minimum liability for pension obligations
from September 30 to November 30. We believe this change in measurement dates
aligns more closely with the date of our financial statements and provides a
more current measurement of plan assets and obligations than previously
presented. The impact of this change is reported in our Consolidated Statements
of Earnings as a change in accounting principle, and had a favorable cumulative
after tax effect of $3 million, or $0.07 per share, recorded as of January 1,
2002. The effect on 2002 net earnings of this accounting change was not
material.

During 2002 and 2001, we made cash contributions to our pension plans of
$81 million and $84 million, respectively, and we expect to make cash
contributions of approximately $105 million during 2003. Note 11 of the Notes to
the Consolidated Financial Statements provides a summary of our pension benefit
plan activity, the funded status of our plans and the amounts recognized in our
Consolidated Financial Statements.

RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS

In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard No. 141 (SFAS 141), "Business
Combinations" concurrent with Statement of Financial Accounting Standards
No. 142 (SFAS 142) "Goodwill and Other Intangible Assets". We adopted the new
accounting standards on January 1, 2002.

SFAS 141 requires that the purchase method of accounting be used for all
business combinations initiated after June 30, 2001. SFAS 141 also provides new
criteria in the determination of intangible assets, including goodwill acquired
in a business combination, and expands financial disclosures concerning business
combinations. The adoption of SFAS 141 did not affect previously reported
amounts of goodwill and other intangible assets included in our STATEMENTS OF
FINANCIAL POSITION.

SFAS 142 requires that goodwill and certain other intangible assets with
indefinite useful lives no longer be amortized but instead are allocated to
applicable reporting units for purposes of performing annual impairment tests
using a two-step process. To the extent that impairment exists, we are required
to perform a second test to measure the amount of the impairment. During the
first quarter 2002, we completed the first step of the transitional goodwill
impairment test which required us to compare the

fair value of our reporting units to the carrying value of the net assets of our
reporting units as of January 1, 2002. For each of our reporting units, the
estimated fair value was determined utilizing the expected present value of the
future cash flows of the units. Based on this analysis, we concluded that the
fair value of each of our reporting units exceeded their carrying, or book
value, including goodwill, and therefore we did not recognize any impairment of
goodwill.

We elected to perform the annual impairment test of our recorded goodwill as
required by SFAS 142 as of September 29, 2002, the end of our fiscal third
quarter. The results of this annual impairment test indicated that the fair
value of each of our reporting units as of September 29, 2002, exceeded their
carrying, or book value, including goodwill, and therefore our recorded goodwill
was not subject to impairment. As required by SFAS 142, our Consolidated
Statements of Earnings for periods prior to its adoption have not been restated.
However, the effect on our net earnings and earnings per share of excluding
goodwill amortization is shown in Note 6 of the Notes to the Consolidated
Financial Statements.

In June 2001, the FASB issued Statement of Financial Accounting Standard
143, "Accounting for Asset Retirement Obligations." This Statement establishes
standards of accounting for obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement costs. It
requires obligations associated with the retirement of long-lived assets to be
capitalized as part of the carrying value of the related asset. We adopted the
provisions of this standard on January 1, 2003. The adoption of SFAS 143 did not
have a material impact on our Consolidated Financial Statements.

In August 2001, the FASB issued Statement of Financial Accounting Standard
No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets"
(SFAS 144), which supersedes SFAS 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of". This Statement
establishes a single accounting model for the impairment or disposal of
long-lived assets. We adopted the provisions of SFAS 144 on January 1, 2002, as
required. The adoption did not have a material impact on our results of
operations or financial position in fiscal 2002.

In June 2002, the FASB issued Statement of Financial Accounting Standard
146, "Accounting for Costs Associated with Exit or Disposal Activities"
(SFAS 146). This standard nullifies Emerging Issues Task Force (EITF) Issue
No. 88-10 "Costs Associated with Lease Modification or Termination" and EITF
Issue No. 94-3 "Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)". SFAS 146 requires that a liability for a cost associated with
an exit or disposal activity be recognized and measured at its fair value when
the liability is incurred. We adopted the provisions of SFAS 146 for exit or
disposal activities, such as restructuring, involuntarily terminating employees,
and costs associated with consolidating facilities, on January 1, 2003. The
adoption of SFAS 146 is not expected to have a material impact on our
Consolidated Financial Statements in fiscal 2003.

In November 2002, the FASB issued FASB Interpretation No. 45 (FIN 45),
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others," an interpretation of SFAS Nos.
5, 57, and 107 and rescission of FASB Interpretation No. 34. FIN 45 elaborates
on the disclosures to be made by a guarantor about its obligations under certain
guarantees that it has issued. In addition, the interpretation requires an
entity to recognize, at the inception of a guarantee, an initial liability for
the fair value of an obligation assumed by issuing a guarantee. The disclosure
provisions of FIN 45 are effective for financial statements issued after
December 15, 2002. The recognition and measurement provisions of FIN 45 are
applicable only on a prospective basis for guarantees issued or modified after
December 31, 2002. See Note 19 to the Consolidated Financial Statements for a
discussion of our guarantees existing at December 31, 2002, and Note 1 for an
analysis of our product coverage liabilities. We adopted the provisions FIN 45
on January 1, 2003. The adoption of FIN 45 is not expected to have a material
impact on our Consolidated Financial Statements in fiscal 2003.

In December 2002, the FASB issued Statement of Financial Accounting Standard
No. 148, "Accounting for Stock-Based Compensation--Transition and Disclosure, An
Amendment of SFAS No. 123" (SFAS 148). This Statement amends SFAS 123,
"Accounting for Stock-Based Compensation", to provide alternative methods of
transition for companies that voluntarily change to the fair value based method
of accounting for stock-based employee compensation. It also amends the
disclosure provisions of that standard to require prominent disclosure about the
effects on reported net income of an entity's accounting policy decisions with
respect to stock-based employee compensation. SFAS 148 also amends Accounting
Principles Board Opinion No. 28, "Interim Financial Reporting", to require
disclosure about those effects in interim financial information. We adopted the
provisions of SFAS 123 on January 1, 2003 for options granted on or after
January 1, 2003.

EARLY ADOPTION OF ACCOUNTING PRONOUNCEMENT

In April 2002, the FASB issued Statement of Financial Accounting Standards
No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections." (SFAS 145). This Statement, among
other amendments, requires that certain gains and losses on the extinguishment
of debt previously recorded as extraordinary items be classified as income or
loss from continuing operations. In the fourth quarter 2002, we retired our ESOP
Trust notes and elected to early adopt the provisions of this statement for
fiscal year 2002. We paid $8 million in net premiums for the early retirement of
our ESOP Trust Notes and the amount is classified as a separate caption from
continuing operations in our CONSOLIDATED STATEMENTS OF EARNINGS. See Note 8 of
the Consolidated Financial Statements.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS NOT YET EFFECTIVE

In November 2002, the Emerging Issues Task Force released Issue No. 00-21,
"Revenue Arrangements with Multiple Deliverables." This Issue provides guidance
in determining when an arrangement involving multiple deliverables contains more
than one unit of accounting and when more than one unit of accounting exists how
the arrangement consideration should be allocated to the multiple units. The
application of this issue could affect the timing of revenue recognition for
multiple deliverable arrangements. The guidance in this Issue is prospective for
revenue arrangements entered into after June 30, 2003. We are in the process of
analyzing the impact this EITF will have, if any, on our revenue recognition in
future accounting periods.

In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation
of Variable Interest Entities", an Interpretation of Accounting Research
Bulletin No. 51 "Consolidated Financial Statements" (FIN 46). FIN 46 provides
guidance related to identifying variable interest entities (VIEs), including
entities more commonly referred to as special purpose entities or SPEs, and in
determining whether such entities should be consolidated by the entities'
primary beneficiary, defined in FIN 46 as the entity that holds the majority of
the variable interests in the VIE. In addition, FIN 46 requires disclosure for
both consolidated and non-consolidated VIEs. Certain disclosure provisions of
FIN 46 are effective for financial statements issued after January 31, 2003, and
the consolidation requirements applicable to Cummins are effective for all
periods ending after December 15, 2003. Currently we participate in four known
VIEs, two of which are already consolidated. We are assessing the impact of this
interpretation on our known VIEs, one that is a party to our sale-leaseback
transaction entered into in 2001, two that are involved in our receivable
securitization program and a trust that holds our preferred securities. We are
also assessing the impact of this interpretation on our relationship with other
entities, such as investments currently accounted for under the equity method.
Our maximum potential loss related to the sale-leaseback SPE is limited to the
amount of our residual value guarantee ($9 million at June 29, 2003). At
June 29, 2003, $5 million of receivable sales were outstanding under the
receivable securitization facility.

In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities" (SFAS 149). SFAS 149 amends and
clarifies accounting and reporting for derivative instruments and hedging
activities under SFAS 133, "Accounting for Derivative Instruments and Hedging
Activities." The Statement is effective for derivative instruments and hedging
activities entered into or modified after June 30, 2003, except for certain
forward purchase and sale securities. For forward purchase and sale securities,
SFAS 149 is effective for both new and existing securities after June 30, 2003.
We do not believe the adoption of this statement will have a material effect on
our Consolidated Financial Statements.

In May 2003, the FASB issued Statement of Financial Accounting Standards
No. 150 "Accounting for Certain Financial Instruments with Characteristics of
both Liabilities and Equity" (SFAS 150). SFAS 150 establishes standards for how
companies classify and measure certain financial instruments with
characteristics of both liabilities and equity. SFAS 150 requires financial
instruments meeting certain criteria to be reported as liabilities that were
previously reflected as equity or in between liabilities and equity. We are
required to adopt SFAS 150 for our existing financial instruments on July 1,
2003. The adoption of this statement will result in the classification of our
obligations associated with the Convertible Preferred Securities of Subsidiary
Trust as a liability and will result in the classification of future payments
related to these obligations as interest expense in our Consolidated Statements
of Earnings. The adoption of this statement will have no impact on net earnings.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

We are exposed to financial risk resulting from changes in foreign exchange
rates, interest rates and commodity prices. This risk is closely monitored and
managed through the use of financial (derivative) instruments including price
swaps, forward contracts and interest rate swaps. As clearly stated in our
policies and procedures, financial instruments are used expressly for hedging
purposes, and under no circumstances are they used for speculative purposes. Our
hedging transactions are entered into with banking institutions that have strong
credit ratings, and thus the credit risk associated with these transactions is
not considered significant. The results and status of our hedging transactions
are reported to senior management on a monthly and quarterly basis. Note 13 of
the Notes to Consolidated Financial Statements contains further information
regarding financial instruments and risk management.

The following describes our risk exposures and provides results of
sensitivity analyses performed on December 31, 2002. The sensitivity test
assumes instantaneous, parallel shifts in foreign currency exchange rates, and
commodity prices.

FOREIGN EXCHANGE RATES

We are exposed to foreign currency exchange risk as a result of our
international business presence. We transact extensively in foreign currencies
and have significant assets and liabilities denominated in foreign currencies.
As a result, our earnings experience some volatility related to movements in
foreign currency exchange rates. In order to benefit from global diversification
and naturally offsetting currency positions, we enter into forward contracts to
hedge our existing exposures (recognized asset and liability) and forecasted
transactions. The contracts are designated as hedges under Statement of
Financial Accounting Standards No. 133. The objective of our hedging program is
to reduce the impact of changes in foreign exchange rates on earnings by
essentially creating offsetting currency exposures.

As of December 31, 2002, the potential gain or loss in the fair value of our
outstanding foreign currency contracts, assuming a hypothetical 10 percent
fluctuation in the currencies of such contracts, would be approximately
$.2 million. The sensitivity analysis of the effects of changes in foreign
currency exchange rates assumes the notional value to remain constant for the
next 12 months. The analysis

ignores the impact of foreign exchange movements on our competitive position and
potential changes in sales levels. It should be noted that any change in the
value of the contracts, real or hypothetical, would be significantly offset by
an inverse change in the value of the underlying hedged items. (See Note 13 of
the Consolidated Financial Statements.)

INTEREST RATES

We are also exposed to interest rate risk as result of our indebtedness. Our
objective in managing our exposure to changes in interests rates is to limit the
effect of interest rate changes on earnings and cash flows and to lower our
overall cost of borrowing. To achieve this objective, we primarily use interest
rate swap agreements to manage exposure to interest rate changes related to our
borrowing arrangements.

In November 2002, we terminated an interest rate swap relating to our 6.45%
Notes that mature in 2005. The swap converted $225 million notional amount from
fixed rate debt into floating rate debt and would have matured in 2005. The
termination of this swap resulted in a $12 million gain. The gain is being
amortized to earnings as a reduction of interest expense over the remaining life
of the debt. The amount of gain recognized in 2002 was $0.9 million. The
remaining balance of the deferred gain is classified as "Long-term debt" in our
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION.

In March 2001, we terminated three fixed-to-floating interest rate swap
agreements related to our 6.25% Notes with principal amount of $125 million due
in 2003 and 6.45% Notes with principal amount of $225 million due in 2005. The
termination of these swaps resulted in a $9 million gain. The gain is being
amortized to earnings as a reduction of interest expense over the remaining life
of the debt. The amount of gain recognized in 2002 and 2001 was $2.9 million and
$2.5 million, respectively.

As of December 31, 2002, we do not own any interest rate swap agreements.
(See Note 13 of the Consolidated Financial Statements.)

COMMODITY PRICES

We are also exposed to fluctuations in commodity prices through the purchase
of raw materials as well as contractual agreements with component suppliers. To
reduce the effect of raw material price changes for select commodities, we enter
into commodity swap contracts to hedge a portion of our anticipated raw material
purchases.

As of December 31, 2002, the potential gain or loss related to the
outstanding commodity swap contracts, assuming a hypothetical 10 percent
fluctuation in the price of such commodities, would be approximately
$.3 million. The sensitivity analysis of the effects of changes in commodity
prices assumes the notional value to remain constant for the next 12 months. The
analysis ignores the impact of commodity price movements on our competitive
position and potential changes in sales levels. It should be noted that any
change in the value of the swaps, real or hypothetical, would be significantly
offset by an inverse change in the value of the underlying hedged items. (See
Note 13 of the Consolidated Financial Statements.)

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

On April 1, 2002, our Board of Directors adopted the recommendation of its
Audit Committee to replace Arthur Andersen LLP as our independent public
accountants and engaged PricewaterhouseCoopers LLP to serve as independent
public accountants for the fiscal year 2002. On June 15, 2002, a jury in
Houston, Texas found Arthur Andersen LLP guilty of a Federal obstruction of
justice charge arising from the Federal government's investigation of Enron
Corporation. On August 31, 2002, Arthur Andersen LLP ceased practicing before
the Securities and Exchange Commission.

Arthur Andersen LLP provided us with auditing services for prior fiscal
periods through December 31, 2001, including issuing an audit report with
respect to our audited Consolidated Financial Statements for each of the fiscal
years ended December 31, 2001 and 2000. Andersen's report did not contain an
adverse opinion or disclaimer of opinion, nor was it qualified or modified as to
uncertainty, audit scope or accounting principles. During the fiscal years ended
December 31, 2001 and 2000 and the interim period between December 31, 2001 and
April 1, 2002, there were no disagreements with Andersen on any matter of
accounting principles or practices, financial statement disclosure or auditing
scope or procedure. During this period there were also no disagreements, which,
if not resolved to the satisfaction of Andersen, would have caused it to make
reference to the subject matter in its report on the Consolidated Financial
Statements for such years.

During the years ended December 31, 2001 and 2000 and through April 1, 2002,
there were no reportable events as defined in Item 304 (a) (1) (v) of
Regulation S-K as promulgated by the SEC. We have provided a copy of the
foregoing disclosures to Andersen. A letter from Andersen stating its agreement
with such disclosures was attached as an Exhibit in our Form 8-K report filed
with the SEC on April 3, 2002.

During the interim period between December 31, 2001, and April 1, 2002, we
did not consult with PwC regarding the application of accounting principles to a
specific transaction, or the type of audit opinion that might be rendered on our
Consolidated Financial Statements for the years ended December 31, 2001, and
2000, or any other matter that was either the subject of a disagreement (as
described above) or as a reportable event.

BUSINESS

Since 2000, the markets we serve in North America have experienced a
downturn, primarily markets for heavy-duty trucks, medium-duty trucks,
construction equipment and a number of consumer-driven markets, such as those
for light-duty trucks. These conditions had a negative impact on the performance
of our Engine Business. In addition, weak conditions in the markets served by
our Power Generation Business have resulted in reduced demand and high inventory
levels, which have negatively affected our performance in this segment. During
the fourth quarter of 2000, the first quarter of 2001 and the second quarters of
2001 and 2002 we recorded restructuring charges as a result of the downturn in
the North American heavy-duty truck market and several other end-markets. These
actions were necessary in order to achieve lower production costs and improve
operating efficiencies under difficult economic conditions. The charges related
to the programs, included staffing reorganizations and reductions in our
business segments, asset impairment write-downs for manufacturing equipment and
facility closure and consolidation costs. As of December 31, 2002, all
activities associated with the 2000 and 2001 restructuring actions were
completed.

In the fourth quarter 2002, we announced plans to consolidate our heavy-duty
engine assembly and test operations at our Jamestown, New York engine plant.
Approximately 200 positions in the heavy-duty business were eliminated as a
result of the consolidation, which was completed by the end of the first quarter
2003.

In reviewing this discussion of our business you should consider those
factors that may have an adverse affect on our results of operations. The
section entitled "Risks Factors" beginning on page 11 provides an important
discussion of these factors.

COMPETITIVE STRENGTHS

We believe the following competitive strengths are instrumental to our
success:

- LEADING BRANDS. Our product portfolio includes products marketed under
the following brands, each of which holds a leading position in its
respective market:

- Cummins engines, electric power generation systems, components and
parts;

- Onan generator sets;

- Newage alternators;

- Fleetguard filtration systems and components;

- Nelson intake and exhaust systems and components;

- Kuss automotive in-tank fuel filtration;

- Universal Silencer large filtration systems and silencers; and

- Holset turbochargers.

While our portfolio of brands contains a number of market leaders, we
operate in a highly competitive sector and our brands compete with the
brands of other manufacturers and distributors that produce and sell
similar products.

- CUSTOMERS AND PARTNERS. To maintain technology leadership and a global
presence in a cost-effective manner, we have established strategic
alliances with a number of our leading customers. These partnerships
provide us with a knowledge and understanding of our customers' technology
and business needs, and enable us to develop products and services, which
better meet their requirements at lower costs. For example, we have both
customer and supplier arrangements with Komatsu, Ltd., including multiple
manufacturing joint ventures and a product development joint venture
through which we have partnered in the development of several engines. We
are also the exclusive supplier of engines for Komatsu mining equipment.
In addition, we have been the exclusive diesel engine supplier to
DaimlerChrysler for its Dodge Ram truck since 1988, and our exclusivity
agreement extends through model year 2007. We have long-term agreements
with Volvo, PACCAR and Navistar for the supply of heavy-duty truck
engines. These agreements afford us long-term price stability and
eliminate certain dealer and end-user discounts. We also have multiple
international joint ventures to manufacture midrange engines, including
partnerships with Tata Engineering and Locomotive Company, the leading
truck manufacturer in India, and Dongfeng Automotive Corporation, the
second largest truck manufacturer in China.

- GLOBAL PRESENCE. We have a strong global presence including a world class
distribution system, manufacturing and engineering facilities around the
world and a network of global supply sources. Our worldwide presence has
enabled us to take advantage of growth opportunities in international
markets, with our sales outside the United States growing from 39 percent
of total sales in 1999 to 45 percent of total sales in 2002. In the last
45 years, we have developed a distribution and service network that
includes more than 500 company-owned and independent distributor locations
and 4,700 independent dealers located throughout 131 countries and
territories. We also have manufacturing operations and product engineering
centers around the world, with facilities in the United Kingdom, Brazil,
Mexico, Canada, France, Australia, China, India, South Africa and
Singapore. In addition, we have developed a global network of
high-quality, low-cost supply sources to support our manufacturing base.

- LEADING TECHNOLOGY. We have an established reputation for delivering
high-quality, technologically advanced products. We continuously work with
our customers to develop new products that improve the performance of
their vehicles, equipment or systems at competitive cost levels. We are a
leader in developing technologies to reduce diesel engine emissions, a key
concern of our customers and regulators around the world. We were the
first company to develop engines that were certified to meet new emissions
standards governing heavy-duty diesel engines. These standards went into
effect in the United States on October 1, 2002. We also developed
low-emission, high-performance natural gas engines as an alternative fuel
option for the on-highway, industrial and power generation markets. Our
technology leadership enables us to develop integrated product solutions
for the power generation and filtration markets, allowing our customers to
use a single high-performance, low-cost system as opposed to multiple
components from different suppliers. The competitive nature of the markets
in which we operate require us to dedicate significant resources and to
continuously work to sustain our reputation for delivering high-quality,
technologically advanced products.

BUSINESS STRATEGY

The three key elements of our business strategy are as follows:

- DIRECT/INDIRECT PURCHASING. Our cost reduction efforts in supply chain
management have saved more than $315 million in the cost of purchased
materials during the last four years.

- OVERHEAD REDUCTION. We reduced selling, administrative and research
expenses by $78 million in 2001 compared to 2000, and an additional
$4 million in 2002 compared to 2001.

We will continue to pursue cost reduction opportunities through our Six
Sigma initiatives, global sourcing, consolidation of operations and product
design and quality improvement.

- EXPAND INTO RELATED MARKETS. We will grow in related businesses where we
can use our existing investments in products or technology, leading brand
names or market presence to establish a competitive advantage. We will
target related markets that will offer us higher rates of growth,
attractive returns and more stable cash flows through product and end
market diversity. For example, we are growing our International
Distributor Business through expansion of our aftermarket parts and
service business by capitalizing on our global customer base. Through our
Emission Solutions business, we will leverage our filtration, exhaust and
engine technologies to provide integrated solutions for our customers and
meet increasingly stringent emissions requirements. Our Power Generation
Business is focused on increasing sales of power electronics and controls,
such as transfer switches and switchgear.

As a result of our focus on ROANA, we have been able to reduce capital
spending while still funding key development programs, including the
completion of a full range of emission-compliant engines. We have reduced
our 2002 capital expenditure requirements by over $100 million compared to
capital expenditures in the previous three years. In addition, despite
unprecedented weakness in most of our markets, we generated an operating
profit in 2002.

One of our goals is to regain an investment grade credit rating. To
achieve this goal, we have put significant management focus on increasing
earnings, improving cash flow and reducing financial leverage. To this
end, we generated $193 million in cash flow from operations in 2002.

OUR BUSINESS SEGMENTS

We operate four complementary business segments that share technology,
customers, strategic partners, brands and our distribution network to gain a
competitive advantage in their respective markets. With our size and global
presence, we provide world-class products, service and support to our customers
in a cost- effective manner. In each of our business segments, we compete
worldwide with a number of other manufacturers and distributors that produce and
sell similar products. Our products primarily compete on the basis of price,
performance, fuel economy, speed of delivery, quality and customer support.

ENGINE BUSINESS

Our Engine Business manufactures and markets a broad array of diesel and
natural gas-powered engines under the Cummins brand name for the heavy and
medium-duty truck, bus, recreational vehicle (RV), light-duty automotive,
agricultural, construction, mining, marine, oil and gas, rail and governmental
equipment markets. We offer a wide variety of engine products with displacement
from 3.3 liters to 91 liters and horsepower ranging from 60 to 3,500. In
addition, we provide a full range of new parts and service, as well as
remanufactured parts and engines, through our extensive distribution network.
Our Engine Business is our largest business segment, accounting for
approximately 56 percent of total sales in 2002.

The principal customers of our heavy and medium-duty truck engines include
truck manufacturers, such as International Truck and Engine, Volvo Trucks North
America, PACCAR and Freightliner, manufacturers of school, transit and shuttle
buses and manufacturers of construction, agriculture and marine equipment. The
principal customers of our light-duty automotive engines are DaimlerChrysler and
manufacturers of RVs.

In the markets served by our Engine Business, we compete with independent
engine manufacturers as well as OEMs who manufacture engines for their own
products. Our primary competitors in North America are Caterpillar, Inc.,
Detroit Diesel Corporation, Mack Trucks, Inc. and Navistar. Our primary
competitors in international markets vary from country to country, with local
manufacturers generally predominant in each geographic market. Other engine
manufacturers in international markets include Mercedes Benz, Volvo, Renault
Vehicules Industriels, Scania and Nissan Diesel Motor Co., Ltd.

Our Engine Business organizes its engine, parts and service businesses
around the following end-user focused groups:

HEAVY-DUTY TRUCK

We manufacture a complete line of diesel engines that range from 310
horsepower to 565 horsepower serving the worldwide heavy-duty truck market. We
offer the ISL, ISM, ISX and in Australia, the Signature 620 series engines,
which we believe comprise the most modern product engine line in our industry.
Most major heavy-duty truck manufacturers in North America offer our diesel
engines as standard or optional power. In 2002, we held a 24 percent share of
the engine market for North American heavy-duty trucks. We also have significant
market share overseas, including Europe and Latin America, and are the market
leader in Mexico, South Africa and Australia. Our principal competitors in the
North American heavy-duty truck market are Caterpillar, Inc., Detroit Diesel
Corporation, Mack Trucks, Inc. and Volvo. Our overseas competitors in this
market are Mercedes Benz, Volvo, Renault and Scania. Our largest customer for
heavy-duty truck engines in 2002 was International Truck and Engine Corporation
with sales to this customer representing 5 percent of our net sales in 2002.

In order to reduce our cost structure, improve customer service and increase
market share, we recently entered into long-term supply agreements with three
key customers. In October 2000, we entered into a long-term agreement with Volvo
Trucks North America, Inc. under which we act as its

sole external engine supplier. In 2001, we entered into long-term supply
agreements with PACCAR and International Truck and Engine covering our
heavy-duty engine product line. These supply agreements provide long-term,
stable pricing for engines and eliminate certain dealer and end-user discounts,
in order to provide our customers with full responsibility for total vehicle
cost and pricing. In addition, these agreements provide for joint work on
engine/vehicle integration with a focus on reducing product proliferation. These
efforts are expected to reduce product cost while creating enhanced value for
end-users through better product quality and performance. The joint sales and
service efforts also will provide better customer support at a significantly
reduced cost to the partners.

MEDIUM-DUTY TRUCK AND BUS

We manufacture a product line of diesel engines ranging from 185 horsepower
to 315 horsepower serving medium-duty and inter-city delivery truck customers
worldwide. We believe that our ISB and ISC series diesel engines comprise the
most advanced product line in the industry. We entered the North American
medium-duty truck market in 1990 and had a 13 percent share of the market for
diesel powered medium-duty trucks in 2002. Other participants in this market
include International Truck and Engine Corporation, Caterpillar and Detroit
Diesel Corporation. We also sell our ISB and ISC series engines and engine
components outside North America to medium-duty truck manufacturers in Asia,
Europe and South America. Freightliner LLC, a division of DaimlerChrysler, was
our largest customer in the medium-duty truck market in 2002, representing
4 percent of our net sales.

We also offer both diesel and alternative fuel engines for school buses,
transit buses and shuttle buses. We offer the ISB, ISC, ISL and ISM diesel
engines for the bus markets. We also offer our B and C series engines for
natural gas applications, which are focused primarily on transit and school bus
markets. The demand for alternative fuel products continues to grow both
domestically and internationally. Cummins Westport Inc., a joint venture formed
in 2001 with Westport Innovations, Inc., offers low emission, propane and
natural gas engines that are currently used in municipal transportation markets
in Los Angeles, Boston, Salt Lake City and Vancouver, British Columbia.

LIGHT-DUTY AUTOMOTIVE

We are the exclusive provider of diesel engines used by DaimlerChrysler in
its Dodge Ram trucks. Our relationship with DaimlerChrysler extends over
13 years, and in 2002 we shipped approximately 99,900 engines for use in Dodge
Ram trucks. DaimlerChrysler was our largest customer for midrange engines in
this market. In 2002, we were selected as the exclusive diesel power provider
for Dodge Ram truck models through the 2007 model year.

We are the leading manufacturer of diesel engines for use in the Class A
recreational vehicle market. We hold a 30 percent share of the overall class A
motorhome market, representing a 70 percent share of the market for
diesel-powered recreational vehicles. Other manufacturers in this market include
Caterpillar and Detroit Diesel Corporation. Sales of diesel engines to the
recreational vehicle market have increased significantly during the last five
years. This indicates strong growth in the use of diesel power for these
applications, as opposed to gasoline.

In 2002, our contract with the U.S. Department of Energy to develop a
light-duty automotive engine suitable for use in light pickup truck and sport
utility vehicles was renewed. Prototype engines are currently undergoing test
and development. We believe that we are well positioned to take advantage of the
growing interest in diesel engines for use in these vehicles.

MEDIUM AND HEAVY-DUTY INDUSTRIAL

Our medium and heavy-duty engines power a wide variety of equipment in the
construction, agricultural and marine markets throughout the world. Our major
construction OEM customers are in North America, Europe, South Korea and Japan.
These OEMs manufacture approximately one million pieces of equipment per year
for a diverse set of applications and utilize engines from our complete

product range. Agricultural OEM customers are primarily in North America, South
America and Europe, serving end use markets that span the globe. In the marine
markets, our joint venture, Cummins Mercruiser Diesel Marine is the market share
leader in the North American recreational boat segment. Our engines are sold to
both recreational and commercial boat builders, primarily in North America,
Europe and Asia.

HIGH-HORSEPOWER INDUSTRIAL

We design, manufacture and market high-horsepower engines for mining, rail,
government, oil and gas, power generation and marine applications. Our engine
size ranges from 19 liters to 91 liters, representing 550 horsepower to 3,500
horsepower, and is the most modern high-horsepower product line in the industry.

We offer a full product line for mining applications that compete in all
segments from small underground mining equipment to 400-ton haul trucks. The
launch of the QSK78 at MINExpo 2000 extends our mining products up to 3,500
horsepower, the largest in the mining industry. We occupy the number two
position in this market (the number one position in this market is occupied by
Caterpillar). Our sales to the rail market are primarily in Europe and Asia, and
we are a leader in the worldwide railcar market. With our new QSK60 and QSK78
engines, we will be able to move into a larger proportion of the locomotive and
railcar markets outside North America and commercial marine markets worldwide.
Government sales represent a small portion of the high-horsepower market and are
primarily to defense contractors in North America and Europe. Our new
high-horsepower engines allow us to offer our customers in the oil and gas
business a full line of high-horsepower products.

POWER GENERATION BUSINESS

The Power Generation Business is our second largest business segment,
representing 20 percent of our total sales in 2002. This business is one of the
most integrated providers of power solutions in the world, designing and
manufacturing most of the components that make up power generation systems,
including loose engines, controls, alternators, transfer switches and
switchgear. This business is a global provider of power generation systems and
services for a diversified customer base needing self-generated or standby
power. Standby power solutions are provided to customers that rely on
uninterrupted sources of power and sophisticated backup power systems. Prime
power customers include those in developing countries with less comprehensive
electrical power infrastructures. We are also a key player in the distributed
power generation market, in which generating capacity is moved closer to
end-users rather than kept solely in large, centralized utility plants.

Our power generation products are marketed under the Cummins, Onan and
Newage brands, and include diesel and alternative fuel electrical generator sets
for commercial and residential applications, such as office buildings,
hospitals, municipalities and homes. We offer reciprocating engine based power
generation systems worldwide with a power range of 2 kilowatts to 2 megawatts
for either standby or prime power applications. Engines are offered with a
choice of fuels, including diesel, natural gas or gasoline. Our Newage division
is a leader in the alternator industry, supplying alternators up to 4 megawatts.
Newage supplies its products internally as well as to other generator set
assemblers.

We also sell engines, alternators, control systems and switchgear to other
generator set assemblers, and are the worldwide leader in auxiliary generator
sets for RVs and diesel powered recreational marine applications. Our Power Rent
business offers the rental of power equipment for both standby and prime power
purposes. Our Power Generation Business also markets service contracts, whereby
it sells power by the hour rather than the actual power generating equipment and
provides a range of services, such as long-term maintenance contracts and
turn-key power solutions.

This business segment continuously explores emerging technologies, such as
microturbines and fuel cells, and is leveraging our experience in building
business partnerships to develop cost-effective and environmentally-sound power
solutions.

Our customer base for our power generation products is highly diversified,
with customer groups varying based upon their power needs. General Electric is
one of our largest customers of power generation products.

This business competes on a global scale with a variety of engine
manufacturers and generator set assemblers. Caterpillar remains our primary
competitor as a result of its acquisition of MAK Americas Inc., Perkins
Engines Inc. and FG Wilson Inc. DaimlerChrysler, through its acquisition of
Detroit Diesel Corporation, and Volvo are other major engine manufacturers with
a presence in the high-speed generation segment of the market. Newage competes
globally with Emerson Electric Co., Marathon Electric and Meccalte, among
others.

FILTRATION AND OTHER BUSINESS

Our Filtration and Other Business produces filters, silencers and intake and
exhaust systems under the Fleetguard, Nelson, Kuss and Universal Silencer brand
names and is the largest worldwide supplier of turbochargers for commercial
applications through our Holset brand. This segment manufactures filtration and
exhaust systems for on-and-off highway heavy-duty equipment and is a supplier of
filtration products for industrial and passenger car applications, exhaust
systems for small engine equipment and silencing systems for gas turbines. In
addition, we operate an emission solutions business through which we develop
systems to help our customers meet increasingly stringent emissions standards.
In 2002, our Filtration and Other Business segment accounted for approximately
15 percent of our net sales.

Fleetguard is a leading designer and manufacturer of filters and filtration
systems for heavy-duty equipment. Its products are produced and sold in global
markets, including Europe, North America, South America, India, China, Australia
and the Far East. In a recent 2002 North America on-highway truck market survey
published by a leading independent market research company, Fleetguard ranked as
the top brand preference for diesel engine air, oil, fuel and coolant filtration
products. Nelson Industries, Inc., designs and manufactures air filtration and
exhaust systems for on-and-off highway applications ranging from heavy duty
equipment to small engine driven consumer applications. Together, Fleetguard and
Nelson provide advanced, integrated filtration systems, including air intake and
exhaust filtration, emission and noise reduction, engine filtration and mobile
hydraulic filtration systems. Our Filtration and Other Business also makes
products for the automotive specialty filtration market and the industrial
filtration market through our Kuss subsidiary, located in Findlay, Ohio, and
Universal Silencer, located in Stoughton, Wisconsin. Our Filtration and Other
Business' revenue is split between first fit OEM customers (approximately
40 percent) and replacement part business (approximately 60 percent).

Holset designs, manufactures and markets turbochargers worldwide. Holset
manufacturers turbochargers in five countries and has worldwide sales and
distribution. Holset provides critical technology for engines to meet worldwide
emissions standards, including variable geometry turbochargers, and is the
market leader in turbochargers for heavy-duty equipment. Holset's joint venture
with Tata Engineering and Locomotive Company assembled and shipped its first
turbochargers in 1996. A joint venture with Wuxi Littleswan Co., Ltd. in China
also began production in 1996. In 1999, Holset began full production in the
United Kingdom of a variable geometry turbocharger designed for truck
powertrains. In 2001, Holset completed consolidation of its U.S. manufacturing
facilities into one site located in Charleston, South Carolina.

Customers of our Filtration and Other Business segment generally include
truck manufacturers and other OEMs that are also customers of our Engine
Business, such as Deere, and other manufacturers that use our filtration
products in their product platforms, such as Harley Davidson. Our customer base
for replacement filtration parts is highly fragmented, and primarily consists of
various end-users of filtration systems.

Our Filtration and Other Business competes with other manufacturers of
filtration systems and components and turbochargers. Our primary competitors in
these markets include Donaldson Company, Inc., Clarcor Inc., Mann+Hummel Group,
Tokyo Roki Co., Ltd. and Honeywell International.

INTERNATIONAL DISTRIBUTOR BUSINESS

In the fourth quarter of 2001, we realigned our reporting structure and
created the International Distributor Business as a result of the growing size
and importance of the retail distribution business. In 2002, International
Distributor Business sales were 9 percent of our total net sales. Our
International Distributor Business consists of 17 company-owned distributors and
two joint ventures that distribute the full range of our products and services
to end-users at 111 locations in 50 countries and territories. Through this
network, our trained personnel provide parts and service to our customers, as
well as full service solutions, including maintenance contracts, engineering
services and integrated products where we customize our products to cater to
specific end-users. Our company-owned distributors are located in key markets,
including India, China, Japan, Australia, the United Kingdom and South Africa.
Our distributors also serve the dealers and end-users in their territories by
providing product maintenance, repair and overhaul services.

Our International Distributor Business serves a highly diverse customer base
consisting of various end-users in the specific geographic markets in which our
distributors are located.

In our International Distributor Business, each distributor that we own or
operate in a particular geographic region competes with other distributors and
dealers that offer similar products within that region. In many cases, competing
distributors and dealers are owned by, or affiliated with, OEMs of those
competing products.

SEGMENT FINANCIAL INFORMATION

Financial information about our business segments is provided in Note 17 of
the Notes to Consolidated Financial Statements included elsewhere in this
prospectus.

SUPPLY

We have developed and maintain a world class supply base in terms of
technology, quality and cost. We source our materials and manufactured
components from leading suppliers both domestically and internationally, and we
have adequate sources of supply of raw materials and components. We machine and
assemble many of the components used in our engines, including blocks, heads,
rods, turbochargers, crankshafts and fuel systems. We also have arrangements
with certain suppliers who are the sole source for specific products or supply
items. Between 75 and 85 percent of our total raw material and component
purchases in 2002 were purchased from suppliers who are the sole source of
supply for a particular supply item. Although we elect to source a relatively
high proportion of our total raw materials and component requirements from sole
suppliers, the majority of these supply items can be purchased from alternate
suppliers if required. Our supply agreements vary according to the particular
supply item, however, these agreements typically include standard terms relating
to cost (including cost reduction targets), quality, delivery and customary
intellectual property provisions. The duration of our more important supply
agreements varies but typically ranges between 3 and 5 years and some extend
through 2010. Many of our supply agreements include early termination provisions
related to failure to meet quality and delivery requirements. Our business is
not substantially dependent on any one of our supply agreements, however, the
raw materials and components from these suppliers are single sourced and are
important to our business because delays involved in re-sourcing these raw
materials and components could be costly.

PATENTS AND TRADEMARKS

We own or control a significant number of patents and trademarks relating to
the products we manufacture. These have been granted and registered over a
period of years. Although these patents and trademarks are generally considered
beneficial to our operations, we do not believe any patent, group of patents, or
trademark (other than our leading brand house trademarks) is considered
significant in relation to our business.

SEASONALITY

While individual product lines may experience modest seasonal declines in
production, there is no material effect on the demand for the majority of our
products on a quarterly basis. However, our Power Generation Business normally
experiences seasonal declines in the first quarter of the fiscal year due to
general declines in construction spending and our International Distributor
Business normally experiences seasonal declines in first quarter sales due to
holiday periods in Asia and Australia.

LARGEST CUSTOMER

We have thousands of customers around the world and have developed
long-standing business relationships with many of them. DaimlerChrysler is our
largest customer, accounting for approximately 14 percent of our net sales in
2002, primarily relating to sales of our ISB engine for use in Dodge Ram trucks
and sales of our heavy and medium-duty engines to the Freightliner division of
DaimlerChrysler. While a significant number of our sales to DaimlerChrysler are
under long-term supply agreements, these agreements provide for the supply of
DaimlerChrysler's engine requirements for particular models and not a specific
number of engines. DaimlerChrysler is our only customer accounting for more than
10 percent of our net sales in 2002, and accordingly, the loss of this customer
or a significant decline in the production level of DaimlerChrysler vehicles
that use our engines would have an adverse effect on our business, results of
operations and financial condition. We have been supplying engines to
DaimlerChrysler for more than 13 years. A summary of our principal customers for
each of our business segments is included in the discussion of each of our
segments.

In addition to our agreements with DaimlerChrysler, we have long-term
heavy-duty engine supply agreements with International Truck and Engine
Corporation, PACCAR and Volvo Trucks North America. Collectively, our net sales
to these three customers was less than 15% of total net sales in 2002 and
individually, was less than 5% of total net sales for each of these customers.
As with DaimlerChrysler, these agreements contain standard purchase and sale
agreement terms covering engine and engine parts pricing, quality and delivery
commitments, as well as engineering product support obligations. The basic
nature of our agreements with OEM customers is that they are long-term
(generally 5 years or longer) price and operations agreements that assure the
availability of our products to each customer through the duration of the
respective agreements. There are no guarantees or commitments by these customers
of any kind regarding volumes or market shares, except in the case of
DaimlerChrysler which has committed that we will be its exclusive diesel engine
supplier for the Dodge Ram heavy-duty pickup truck.

BACKLOG

While we have supply agreements with some truck and off-highway equipment
OEMs, most of our business is transacted through open purchase orders. These
open orders are historically subject to month-to-month releases and may be
canceled on reasonable notice without cancellation charges and therefore are not
considered technically firm.

DISTRIBUTION

Over the last 45 years, we have developed a distribution and service network
that includes more than 500 distributor locations and 4,700 dealers in 131
countries and territories. This network is

comprised of independent distributors, as well as distributors that are
partially or wholly owned by us. Each distributor sells the full range of our
products, as well as complementary products and services. Our International
Distributor Business operates within this network, operating company-owned
distributors in 111 locations across 50 countries and territories.

Our agreements with independent and partially owned distributors generally
have a three-year term and are exclusive with respect to specified territories.
Our distributors develop and maintain the network of dealers with which we have
no direct relationship. The distributors are permitted to sell other, non-
competitive, products only with our consent. Products are sold to the
distributors at standard domestic or international distributor net prices, as
applicable. We can refuse to renew these agreements at will, and we may
terminate them upon 90-day notice for inadequate sales, change in principal
ownership and certain other reasons. Upon termination or failure to renew, we
are required to purchase the distributor's current inventory and may, but are
not required to purchase other assets of the distributor.

Our distribution capability is a key element of our business strategy and
competitive position, particularly in our efforts to increase customer access to
aftermarket replacement parts and repair service. There are approximately 8,900
locations in North America, primarily owned and operated by OEMs or their
dealers, at which Cummins trained service personnel and parts are available to
service, maintain and repair our engines. We also have parts distribution
centers located strategically throughout the world in order to serve our
customers.

We consolidate the financial results of all wholly-owned distributors and
account for partially-owned distributors using the equity method of accounting
(see Note 1 and Note 5 of the Notes to Consolidated Financial Statements
included elsewhere in this Prospectus).

RESEARCH AND DEVELOPMENT

We have an extensive research and engineering program to achieve product
improvements, innovations and cost reductions for our customers, as well as to
satisfy legislated emissions requirements. We are nearing completion of a
program to renew and extend our engine range. We have introduced a variety of
concepts in the diesel industry that combine electronic controls, computing
capability and information technology. We also offer alternative fuel engines
for certain markets. In 2002, our research and development expenditures were
$201 million. Of this amount, approximately 40 percent, or $80 million, was
directly related to the development of engines that are designed to comply with
the 1998 consent degree. We continue to invest in technologies to meet
increasingly more stringent emissions standards. For example, we have had three
heavy-duty diesel truck engines certified by the EPA as in compliance with new
emissions standards for heavy-duty diesel engines that went into effect in the
United States on October 1, 2002. We were the first company to have an engine
certified by the EPA as being in compliance with the new EPA standards.

JOINT VENTURES AND ALLIANCES

We have manufacturing facilities worldwide, including major operations in
Europe, India, Mexico and Brazil. We also have parts distribution centers
strategically located in Brazil, Mexico, Australia, Singapore, China, India and
Belgium to supply service parts to maintain and repair our engines. We have
entered into the following joint venture agreements and alliances with business
partners in various areas of the world to increase our market penetration,
expand our product lines, streamline our supply chain management and develop new
technologies:

- CUMMINS INDIA LTD. We are the majority owner of Cummins India Ltd., which
is publicly listed on the Bombay Stock Exchange. This business grew out of
a partnership established in 1962 with the Kirloskar family and eventually
expanded to include other local partners. Cummins India Ltd. produces
midrange, heavy-duty and high-horsepower engines for the Indian and export
markets.

- CONSOLIDATED DIESEL COMPANY. Consolidated Diesel Company, located in the
United States is a joint venture with CNH Global N.V. that began with Case
Corporation in 1980. This partnership produces Cummins B series, C series
and ISL Series engines and engine products for automotive and industrial
markets in North America and Europe.

- CUMMINS/DONGFENG JOINT VENTURE. We partnered with Dongfeng
International Ltd. in 1995 to form a joint venture in China, Dongfeng
Cummins Engine Co. Ltd., for the production of our C Series engines. This
joint venture produces engines for the second largest truck manufacturer
in China. We have also licensed Dongfeng Automotive Corporation to
manufacture Cummins B Series engines in China.

- CUMMINS/KOMATSU ARRANGEMENTS. We have formed a broad relationship with
Komatsu Ltd., including three joint ventures and numerous exclusive supply
arrangements. Two joint ventures were formed in 1992, one to manufacture
Cummins B Series engines in Japan, the other to build high-horsepower
Komatsu-designed engines in the United States. In 1997, we established a
third joint venture to design next generation industrial engines in Japan.

- TATA CUMMINS LIMITED. In 1992, we formed a joint venture with Tata
Engineering and Locomotive Company, the largest automotive company in
India and a member of the Tata group of companies. Tata Cummins Limited
manufactures the Cummins B Series engine in India for use in Tata trucks.

- CUMMINS/CHINA NATIONAL HEAVY-DUTY TRUCK JOINT VENTURE. In 1995, we formed
a joint venture with China National Heavy-duty Truck Corporation in
Chongqing, China to manufacture a broad line of our heavy-duty and
high-horsepower diesel engines in China.

- THE EUROPEAN ENGINE ALLIANCE (EEA). The EEA was established in 1996 as a
joint venture between our Company and two Fiat Group companies, Iveco N.V.
(trucks and buses) and CNH Global (agricultural equipment), to develop a
new generation of 4, 5 and 6-liter engines based on our 4B and 6B Series
engines.

- CUMMINS/SCANIA JOINT VENTURE. We formed a joint venture with Scania in
1999 to produce fuel systems for heavy-duty diesel engines.

- CUMMINS/WESTPORT JOINT VENTURE. In 2001, we formed a joint venture with
Westport Innovations Inc., located in British Columbia, Canada, to develop
and market low-emissions, high-performance natural gas engines for
on-highway, industrial and power generation markets.

- NEWAGE/AVK/SEG JOINT VENTURE. In 2001, Newage International Ltd., which
operates within our Power Generation Business, formed a joint venture with
AvK/SEG Holding GmbH & Co. KG, a German alternator and power electronics
company, to offer a broad range of industrial alternators.

- CUMMINS MERCRUISER DIESEL MARINE LLC. In 2002, we formed a joint venture
with Mercury Marine, a division of Brunswick Corporation, to develop,
manufacture and sell recreational marine diesel products, including
engines, sterndrive packages, inboard packages, instrument and controls,
service systems and replacement and service parts and assemblies, complete
integration systems and other related products.

In addition to these key joint ventures and agreements, we have entered into
numerous joint ventures around the world that provide engine components, such as
turbochargers, alternators and filtration products. We have also entered into
license agreements that provide for the manufacture and sale of our products in
Turkey, China, Pakistan, South Korea, Indonesia and other countries. We will
continue to evaluate joint venture and partnership opportunities in order to
penetrate new markets, develop new products and generate manufacturing and
operational efficiencies.

Financial information about our investments in joint ventures and alliances
is included in Note 5 of the Notes to Consolidated Financial Statements.
Financial information about geographic areas is included in Note 17 of the Notes
to Consolidated Financial Statements included elsewhere in this prospectus.

EMPLOYMENT

ENVIRONMENTAL COMPLIANCE

PRODUCT ENVIRONMENTAL COMPLIANCE

Our engines are subject to extensive statutory and regulatory requirements
that directly or indirectly impose standards governing emissions and noise. Our
products comply with emissions standards that the EPA, the California Air
Resources Board (CARB) and other state regulatory agencies, as well as other
regulatory agencies around the world, have established for heavy-duty on-highway
diesel and gas engines and off-highway engines produced through 2003. Our
ability to comply with these and future emissions standards is an essential
element in maintaining our leadership position in regulated markets. We have
made, and will continue to make, significant capital and research expenditures
to comply with these standards. Failure to comply with these standards could
result in adverse effects on our future financial results.

EPA ENGINE CERTIFICATIONS

In the fourth quarter 2002, we implemented new on-road emissions standards.
These were implemented in accordance with the terms of a consent decree that we
and a number of other engine manufacturers entered into with the EPA, the U.S.
Department of Justice and CARB. The consent decree was in response to concerns
raised by these agencies regarding the level of nitrogen oxide emissions (NOx)
from heavy-duty diesel engines.

EPA regulations governing our operations also establish several means for
the EPA to ensure and verify compliance with emissions standards, including
tests of new engines as they come off the assembly line (selective enforcement
audits (SEAs)) and tests of field engines (in-use compliance tests). The EPA has
used the SEA provisions for several years to verify the compliance of heavy-duty
engines. In the product development process, we anticipate SEA requirements when
we set emissions design targets. If we fail an SEA, we might be required to
cease production of any non-compliant engines and recall engines produced prior
to the audit. None of our engines was chosen for in-use compliance testing in
2003. The EPA will increase the in-use test rate in future years, and one or
more of our engines may be selected.

In 1988, the CARB promulgated a rule that requires the reporting of failures
of emissions related components when the failure rate reaches a specified level.
At higher failure rates, a recall may be required. In 2002, we did not submit
any emissions-related component failure reports. EPA also requires the
submission of defect reports. Pursuant to this requirement, we notified EPA that
811 ISB engines produced at our Darlington Engine Plant in England contained
pistons produced by a supplier that are not in compliance with specifications,
resulting in slightly higher particulate emissions. At the time of reporting
this noncompliance to the EPA we proposed a solution to the EPA which involved
deducting a specified amount from our 2002 particulate matter credit account.
This amount was equivalent to the amount by which the non-complying engines
exceeded the specified limit for particulate emissions. To date, we have not
received a response from the EPA. We have, however, deducted this amount of
credits from the appropriate particulate matter credit account and have
submitted our preliminary yearly annual banking and trading summary report to
the EPA based on this amount.

A second element of the consent decree requires us to pull forward by one
year to January 1, 2005, the implementation of Tier 3 emissions standards for
off-road engines in the horsepower range from 300 to 749 horsepower. When the
development of Tier 3 compliant engines is near completion we will commence a
certification process with the EPA. This process involves testing, compiling and
analyzing data and the provision of information to the EPA and the California
Air Resources Board. Once this testing and data preparation is finalized, we
will file a certification application with the EPA. Until the EPA has approved
our application, we cannot sell off-road engines in the horsepower range from
300 to 749 in the United States (less than 2% of our 2002 revenue was derived
from the sale of these types of off-road engines in the United States).
Development and testing is well advanced and we anticipate achieving the
January 1, 2005 milestone for engines in this horsepower range.

Not all of our competitors are signatories to the consent decree and
therefore were not required to undertake the capital and research expenditures
that we have undertaken at the time we have undertaken them. This has provided
some of our competitors with a competitive advantage. The majority of the impact
the consent decree has had on our business is reflected in the results we have
reported over the past four years. The pull ahead of emission standards has put
us at a disadvantage compared to manufacturers who did not sign the consent
decree. Relative to the fifteen-month pull ahead of the 2004 emission standards
for engines used in on-highway applications, the company's heavy heavy-duty
engine families (ISX and ISM) compete primarily against engines produced by
other consent decree signing manufacturers. However, DaimlerChrysler, one of our
competitors who did not sign the consent decree, introduced a new entry into
this segment of the market during this period and thereby enjoyed a competitive
advantage. Our medium heavy-duty engines were also at a disadvantage compared to
manufacturers who did not sign the consent decree. As this fifteen month pull
ahead time period is nearly over, the majority of the impact has already
occurred. Relative to the twelve month pull ahead (from January 1, 2006 to
January 1, 2005) of the non-road Tier 3 standards for engines used in
construction and agricultural applications, the situation is similar. Our QSM,
QSX and QSK19 engine families participate in this market segment. Most of the
competitive engines in this horsepower range are produced by other consent
decree signing manufacturers that are subject to the pull ahead. There are some
participants in this market that are not consent decree signers, that would,
during this one year period, have a competitive advantage.

Emissions standards in international markets, including Europe and Japan,
are becoming more stringent. We believe that our experience in meeting U.S.
emissions standards leaves us well positioned to take advantage of opportunities
in these markets as the need for emissions control capability grows.

OTHER ENVIRONMENTAL STATUTES AND REGULATIONS

We believe we are in compliance in all material respects with laws and
regulations applicable to our plants and operations. During the last five years,
expenditures for environmental control activities and environmental remediation
projects at our facilities in the U.S. have not been a substantial portion of
annual capital outlays and are not expected to be material in 2003. Pursuant to
notices received from federal and state agencies and/or defendant parties in
site environmental contribution actions, we have been identified as potentially
responsible parties (PRPs) under the Comprehensive Environmental Response,
Compensation, and Liability Act of 1980, as amended, or similar state laws, at
approximately 10 waste disposal sites. Under such laws, we typically are jointly
and severally liable for any investigation and remediation costs incurred with
respect to the sites. Therefore, our ultimate responsibility for such costs
could be greater than the percentage of waste we actually contributed to the
site.

We are unable to determine the aggregate cost of remediation at these sites.
However, for each site we have attempted to calculate our liability by analyzing
the amounts and constituents of waste we contributed to the sites, the estimated
costs for remediation at the sites, the number and identities of other PRPs and
the level of our insurance coverage. At some of these sites, we will be released
from liability at the site as a DE MINIMIS PRP for a nominal amount. With
respect to some sites at which we

have been named as a PRP, we cannot accurately estimate the future remediation
costs. At several sites, the remedial action has not been determined. In other
cases, we have only recently been named a PRP and we are collecting information
on the site. Finally, in some cases, we believe we have no liability at the site
and are actively contesting our designation as a PRP.

Based upon our experiences at similar sites, however, we believe that our
aggregate future remediation costs will not be significant. We believe that we
have good defenses to liability at several of the sites while our percentage
contribution at other sites is likely to be insignificant and that other PRPs
will bear most of the future remediation costs at the sites where we could have
liability. Because environmental laws impose joint and several liability, our
liability may be based upon many factors outside our control, however, and could
be material if we become obligated to pay a significant portion of expenses that
would otherwise be the responsibility of other PRPs. Based upon information
presently available, we believe that such an outcome is unlikely at any site for
which we have been named a PRP.

PROPERTIES

Our worldwide manufacturing facilities occupy approximately 15 million
square feet, including approximately 9 million square feet in the United States.
Principal manufacturing facilities in the U.S. include our plants in Southern
Indiana, Wisconsin, New York, Iowa, Tennessee and Minnesota, as well as an
engine manufacturing facility in North Carolina, which is operated in
partnership with CNH Global N.V.

Manufacturing facilities outside of the U.S. include facilities located in
the United Kingdom, Brazil, India, Mexico, Canada, France, China and Australia.
In addition, engines and engine components are manufactured by joint ventures or
independent licensees at plants in the United Kingdom, France, China, India,
Japan, Pakistan, South Korea, Turkey and Indonesia.

LEGAL PROCEEDINGS

We are at any one time party to a number of lawsuits or subject to claims
arising out of the ordinary course of our business, including actions related to
product liability, patent, trademark or other intellectual property
infringement, contractual liability, workplace safety and environmental claims
and cases, some of which involve claims for substantial damages. We and our
subsidiaries are currently defendants in a number of pending legal actions,
including actions related to use and performance of our products. While we carry
product liability insurance covering significant claims for damages involving
personal injury and property damage, we cannot assure you that such insurance
would be adequate to cover the costs associated with a judgment against us with
respect to these claims. We have also been identified as a PRP at several waste
disposal sites under federal and state environmental statutes, only one of which
we expect could result in monetary sanctions, exclusive of interest and costs,
of $100,000 or more (in the vicinity of $137,000) based upon our estimated
preportional volume of waste disposed at this site in Oaklahoma City, Oaklahoma.
More information with respect to our environmental exposure can be found under
"--Environmental Compliance Other Environmental Status and Regulations". We deny
liability with respect to many of these legal actions and environmental
proceedings and are vigorously defending such actions or proceedings. While we
have established accruals that we believe are adequate for our expected future
liability with respect to our pending legal actions and proceedings, we cannot
assure that our liability with respect to any such action or proceeding would
not exceed our established accruals. Further, we cannot assure that litigation
having a material adverse affect on our financial condition will not arise in
the future.

MANAGEMENT

The following table sets forth the name, age and position of our directors
and executive officers. Directors are elected at the annual meeting of
shareholders. Executive officers are appointed by, and hold office at the
discretion of, our board of directors.

NAME AGE POSITION
---- -------- --------

Theodore M. Solso............ 56 Chairman and Chief Executive Officer
F. Joseph Loughrey........... 53 Executive Vice President and President--Engine Business
Rick J. Mills................ 55 Vice President and President--Filtration and
Fleetguard, Inc.
Tom Linebarger............... 40 Vice President and President of Power Generation
Jean S. Blackwell............ 48 Vice President--Chief Financial Officer and Chief of Staff
Steven M. Chapman............ 49 Vice President--International and President of
International Distributor Business
John C. Wall................. 51 Vice President--Chief Technical Officer
Richard E. Harris............ 50 Vice President--Treasurer
Susan K. Carter.............. 44 Vice President--Financial and Chief Accounting Officer
Marya M. Rose................ 41 Vice President--General Counsel and Corporate Secretary
Robert J. Darnall............ 65 Director
John M. Deutch............... 65 Director
Walter Y. Elisha............. 70 Director
Alexis M. Herman............. 56 Director
William I. Miller............ 47 Director
William D. Ruckelshaus....... 71 Director
Franklin A. Thomas........... 69 Director
J. Lawrence Wilson........... 67 Director

THEODORE M. SOLSO. Mr. Solso has been the Chairman of our board of
directors and our Chief Executive Officer since January 2000. Previously,
Mr. Solso served as our President and Chief Operating Officer from 1995 to 2000.

F. JOSEPH LOUGHERY. Mr. Loughery has been our Executive Vice President
since 1996 and our President--Engine Business since October 1999. Mr. Loughery
served as our Group President--Industrial and our Chief Technical Officer from
1996 to 1999.

RICK J. MILLS. Mr. Mills has been our Vice President and
President--Filtration and Fleetguard, Inc. since February 2000. Mr. Mills served
as our Corporate Controller from 1996 to 2000.

TOM LINEBARGER. Mr. Linebarger has been our Vice President and
President--Cummins Power Generation since February 2003. From 2000 to 2003, Mr.
Linebarger was our Vice President and Chief Financial Officer. Mr. Linebarger
also served as our Vice President--Supply Chain Management from 1998 to 2000, as
Managing Director of Holset Engineering Company Ltd. from 1997 to 1998 and as
Senior Manager--Engineering Operations and Technical Centre Leader of Holset
from 1996 to 1997.

JEAN S. BLACKWELL. Ms. Blackwell has been our Vice President--Chief
Financial Officer and Chief of Staff from February 2003. Ms. Blackwell also
served as Vice-President--Cummins Business Services from 2001 to 2003, as our
Vice President--Human Resources from 1997 to 2001 and as our Vice
President--General Counsel in 1997.

STEVEN M. CHAPMAN. Mr. Chapman has been our Vice President--International
since 2000 and the President of our International Distributor Business since
February 2002. Previously, Mr. Chapman was Vice President--China and Southeast
from 1996 to 2000.

JOHN C. WALL. Mr. Wall has been our Vice President and Chief Technical
Officer since March 2000. Mr. Wall was our Vice President--Research and
Development from 1995 to 2000.

RICHARD E. HARRIS. Mr. Harris has been our Vice President and Treasurer
since April 2003. Mr. Harris was Assistant Treasurer of Compaq Computer
Corporation from 2000 to 2002. Prior to that he was Director, Treasury Planning
and Banking Analysis for Compaq from 1998 to 2000.

SUSAN K. CARTER. Ms. Carter has been our Vice President of Finance and
Chief Accounting Officer since February 2003. She also served as our Vice
President and Corporate Controller from 2002 to 2003. Previously, Ms. Carter was
Vice President and Chief Financial Officer of Transportation & Power Systems for
Honeywell, Inc. from 1999 to March 2002. Prior to that, Ms. Carter was Director
of Finance, Engine Systems and Accessories for Honeywell from 1998 to 1999 and
Director of Finance, Defense and Space Systems for Honeywell from 1996 to 1998.

MARYA M. ROSE. Ms. Rose has been our Vice President, General Counsel and
our Corporate Secretary since March 2001. Previously, Ms. Rose was our Assistant
General Counsel from 2000 to 2001, our Director--Public Relations and
Communications Strategy from 1999 to 2000, our Director--Public Relations from
1998 to 1999 and our Corporate Counsel from 1997 to 2000.

ROBERT J. DARNALL. Mr. Darnall has been a director of our company since
1989. In 1998, Mr. Darnall ended a 36-year career at Inland Steel Industries, a
steel manufacturer, processor and distributor, retiring as its Chairman and
Chief Executive Officer. In 1998, Mr. Darnall joined Ispat International N.V., a
steel manufacturer and distributor, as head of its North American operations, a
position he held until early 2000. He served as Chairman of Prime Advantage
Corporation for nearly two years until January 2002. Mr. Darnall serves on the
boards of directors of Household International, Inc., Pactiv Corp., Sunoco,
Inc., U.S. Steel Corp. and the Federal Reserve Bank of Chicago.

JOHN M. DEUTCH. Mr. Deutch has been a director of our company since 1997.
He has been an Institute Professor at the Massachusetts Institute of Technology
since 1990. Prior to that, Mr. Deutch served as Director of the U.S. Central
Intelligence Agency during 1995 and 1996. From 1994 through 1995, Mr. Deutch was
U.S. Deputy Secretary of Defense, and served in the U.S. Department of Defense
as Undersecretary of Defense for Acquisition and Technology between 1993 and
1994. Mr. Deutch also serves on the boards of directors of Ariad
Pharmaceuticals, Inc., Citigroup, Inc., CMS Energy Corp., Raytheon Company and
Schlumberger Ltd.

WALTER Y. ELISHA. Mr. Elisha has been a director of our company since 1991.
Mr. Elisha served as Chief Executive Officer of Springs Industries, Inc., a
manufacturer of home furnishings and industrial and specialty fabrics, from 1981
through 1997 and as the Chairman of its board of directors from 1983 until 1998.
Mr. Elisha also serves on the board of directors of AT&T Wireless. Mr. Elisha is
a trustee of Wabash College and a former member of the President's Advisory
Committee for Trade Policy and Negotiations under President Clinton.

ALEXIS M. HERMAN. Ms. Herman has been a director of our company since 2001.
Ms. Herman is Chairman and Chief Executive Officer of New Ventures, Inc., an
independent consulting firm. Ms. Herman is also the Chairwoman of The Coca-Cola
Company's Diversity Task Force, Chair of the Toyota Diversity Advisory Board, an
On-Line Columnist for Monster.com and a member of the boards of directors of
MGM/Mirage, Inc. and the Presidential Life Insurance Corporation. She is also a
member of the Advisory Committee for Public Issues for the Advertising Council.
From 1997 to 2001, Ms. Herman served as the U.S. Secretary of Labor.

WILLIAM I. MILLER. Mr. Miller has been a director of our company since
1989. Mr. Miller has been Chairman of Irwin Financial Corporation, a publicly
traded diversified financial services company, since 1990 and has served on its
board of directors since 1985. Mr. Miller continues to serve as Chairman of

the board of directors of Irwin Management Company and as Chairman of the board
of directors of Tipton Lakes Company, a real estate development firm.
Mr. Miller is also a member of the boards of directors of Tennant Company, the
New Perspective Fund, Inc. and the New World Fund, Inc., and is a Trustee of the
EuroPacific Growth Fund. Mr. Miller is also a Trustee of The Taft School,
Watertown, Connecticut, and The National Building Museum, Washington, D.C.

WILLIAM D. RUCKELSHAUS. Mr. Ruckelshaus has been a director of our company
since 1974. He is currently a Strategic Partner in the Madrona Venture Group,
L.L.C., a venture capital institution, and was the Chairman of the board of
directors of Browning-Ferris Industries from 1995 through 1999. Mr. Ruckelshaus
also serves on the boards of directors of Monsanto Company, Solutia, Inc.,
Coinstar, Inc. and Weyerhauser Corporation.

FRANKLIN A. THOMAS. Mr. Thomas has been a director of our company since
1973. He is an attorney and a consultant with the TFF Study Group, a non-profit
organization. Previously, he served as President and Chief Executive Officer of
The Ford Foundation from 1979 to 1996. Mr. Thomas also serves on the boards of
directors of ALCOA Inc., Avaya Inc., Citigroup, Inc., Conoco, Inc., Lucent
Technologies, Inc. and PepsiCo, Inc.

J. LAWRENCE WILSON. Mr. Wilson has been a director of our company since
1990. He was a member of the board of directors of Rohm and Haas Company, a
specialty chemical manufacturer, from 1977 to 1999 and served as its Chairman
and Chief Executive Officer from 1988 to 1999. Mr. Wilson is a member of the
boards of directors of Vanderbilt University, the Vanguard Group of Investment
Companies, MeadWestvaco Corporation and AmeriSourceBergen Corporation.

EXECUTIVE COMPENSATION
COMPENSATION COMMITTEE REPORT

Our Compensation Committee Report is organized as follows:

- Role of the Compensation Committee

- Objectives and Principles of Executive Compensation

- Compensation Program Elements

- New Stock Grant Plan

- Compensation of the Chief Executive Officer

ROLE OF THE COMPENSATION COMMITTEE

Our Compensation Committee is made up of five members of our Board of
Directors, who are not our current or former employees. The Committee has
oversight responsibility for our executive compensation programs and works with
management to establish our general compensation philosophy. It reviews the
elements of the compensation program, the specifics of each element, the goals
and measurements used in the program, and the results of the compensation
program compared to the philosophy to determine if the compensation program is
performing as expected.

In addition, the Committee reviews the individual compensation levels and
awards for each of the five most highly paid officers and takes appropriate
action. In its review, the Committee has direct access to advice from
professional executive compensation consultants. The Committee also reviews its
actions with the full Board of Directors.

OBJECTIVES AND PRINCIPLES OF EXECUTIVE COMPENSATION

Our executive compensation program is designed to attract, motivate, and
retain the personnel required to achieve our performance goals in the
competitive global business environment. The program is designed to reflect the
individual's contribution and our performance. The program attempts to strike an
appropriate balance between short-term and long-term performance.

We are committed to the concept of pay for sustained financial performance.
We evaluate performance over several periods of time. While the specific
elements of executive compensation vary from time to time, the Compensation
Committee focuses on this central principle of pay for performance in reviewing
the compensation program, any proposed changes, and the specific awards.

The Committee follows several principles, in addition to pay for
performance, in designing and implementing compensation programs for its
officers.

- Programs should provide competitive compensation opportunity; the concept
of opportunity is important in our program. We believe the executive
should have the opportunity to do well if the Company does well, but that
total compensation should vary in relation to our performance.

- An individual's compensation should be at the median of the range when
compared to the compensation of individuals in U.S. industrial companies
with sales volumes similar to us, when our financial performance is at the
median of those companies.

- There should be a balance between short-term and long-term elements of
compensation.

- The more senior a person's position, the more the compensation should be
"at risk", i.e., dependent on our performance.

- Stock should be an important part of the program in order to link the
management's compensation with shareholders' expectations; the greater the
level of responsibility of the person, the more the compensation should be
stock-based.

- The system should be as simple and as easily understood as possible.

In addition to these principles, we have the following observations:

- No single program accomplishes these aims consistently; a mix of programs
is best.

- There is no single best comparator of performance; a mix of comparators
should be used.

- In this complex area, relative simplicity seems the best that can be
achieved.

- There is no perfect program; change should be expected from time to time
as the outcome of the Committee's periodic reviews.

Section 162(m) of the Internal Revenue Code ("Section 162(m)") limits the
corporate tax deduction to one million dollars for compensation paid annually to
any one of the named executive officers in the proxy, unless the compensation
meets certain requirements. The Committee adopted changes to the compensation
program, approved by shareholders in 1995, that qualify payments under the
Senior Executive Bonus Plan and Senior Executive Three Year Performance Plan for
tax deductibility under Section 162(m). These changes were designed to maximize
tax deductibility, while retaining the ability to attract, retain and motivate
executives to achieve our business objectives. Payments under the Senior
Executive Bonus Plan for 2002 were certified by the Compensation Committee;
there were no payments under the Senior Executive Three Year Performance Plan in
2002.

As indicated below, the Base Salaries of the named executive officers are
set at the median of the range of the salaries of individuals with similar
positions in companies of similar size to Cummins. The Committee intends to
continue this policy notwithstanding the enactment of Section 162(m).

COMPENSATION PROGRAM ELEMENTS

Our executive compensation program consists of three elements: Base Salary,
Annual Bonus, and Long-Term compensation. Each was designed to accomplish a
somewhat different objective. In total, they were designed to fulfill our basic
goals of linking pay to financial performance and paying competitively. All
officers have participated in each element of the program.

We have used survey data provided by our compensation consultants to
determine competitive levels of pay. These surveys include over 300 U.S.
industrial corporations. Each element of pay described below was intended to
provide compensation for each position at the median of the amounts companies of
similar size in the survey would pay the same position.

1. BASE SALARY

Base Salary is reviewed annually. It is the only fixed portion of the
executive's compensation. Base Salary is normally set at the median of the range
of the salaries of individuals with similar positions in companies of similar
size to us.

2. ANNUAL BONUS

This element is designed to link executive pay to our short-term performance
defined as annual performance. The payout factor is calculated on a formula
established by the Committee and reviewed annually. We have assigned each person
a participation rate that is a percent of salary. The Annual Bonus is calculated
as follows.

(Annual Bonus) equals (Annual Base Salary) times (participation percentage
assigned to each job) times (Payout Factor)

Participation rates are based on the same survey data as base salaries and
are set at the median of the range for like positions in similarly-sized
companies.

The payout factor for the annual bonus was set to yield a 1.0 payout factor
for our financial performance that was equal to the performance provided by
achieving our annual operating plan. In 2002, free cash flow was the measure
used to determine annual bonus payments.

One-half of the bonus for senior managers of our business units has been
determined by the financial performance of the business units, and one-half has
been based on our performance. The Committee believes this formula provides
appropriate balance, compensating for performance measured at the business unit
level as well as for the total company. Basing a significant portion of the
bonus on our total results rewards business units for working in an integrated
way, maximizing our total financial performance. Adding the business unit
measure emphasizes business results each key manager affects most directly. In
2002, the performance measure for the business units' annual bonus plans was
free cash flow, consistent with the Annual Bonus Plan based on our performance.

In addition to the free cash flow performance measure, minimum levels of
performance called Performance Hurdles were required. Regardless of the free
cash clow performance, in order for any annual bonus to be paid, a performance
hurdle level of earnings per share had to be achieved. In addition, each
business unit defined a specific profit before interest and tax performance
hurdle that must be achieved before Annual Bonus based on that Business Unit's
performance could be paid.

In order to comply with the requirements of Section 162 (m), designated
officers (the Chief Executive Officer and the seven other officers who were
members of our Policy Committee in 2002) are compensated under a modified
version of the Annual Bonus Plan, called the Senior Executive Bonus Plan. The
Senior Executive Bonus Plan differs from the Annual Bonus Plan in which many
employees at all levels, including all officers, participate, only in that the
Compensation Committee has no discretion to increase the payouts once it
establishes the performance measures each year.

3. LONG-TERM COMPENSATION

Our Long-Term compensation program consists of performance cash awards and
stock-based grants.

PERFORMANCE CASH AWARDS

Performance cash awards are granted as Target Awards expressed as a dollar
amount for each participant. Multiples of the Target Award are paid in cash,
ranging from zero to two times the Target Award, based on how well we achieve
performance measures established by the Committee over a specified measurement
period. Following is a summary of the plan used to grant performance cash Target
Awards.

Performance cash target awards were granted under the Three Year Performance
Plan annually from 1995 through 2000. This plan measured our performance versus
peer group companies over a rolling three-year cycle. For each three-year award
cycle, a target award was granted to each participant, expressed as a dollar
amount. Payout opportunities were in cash, based on a scale of multiples of the
target award established by the Committee for each award cycle. For target
awards granted since 1997, payouts were linked to our common stock price. The
target award was made in stock units, calculated as the target award dollars
divided by the six-month average our stock price as of the grant date. The
payout is calculated as (number of stock units granted) X (payout
factor) X (six-month average Cummins Stock Price as of the payout date).

There were no payments in 2002 for the 1999-2001 award cycle of the Three
Year Performance Plan or the Senior Executive Three Year Performance Plan.

The Three Year Performance Plan and Senior Executive Three Year Performance
Plan were amended in 2001 to be the Medium Term Performance Plan and the Senior
Executive Medium Term Performance Plan, respectively. For the 2001 grant under
the amended plans, performance is measured by our Free Cash Flow, rather than
return on equity compared to a panel of companies. Also, the grants are based on
a two-year performance period rather than a three-year cycle.

For the 2001 - 2002 Award Cycle, Target Awards were granted to each
participant, expressed as a dollar amount. The grants cover two years of grant
value; no additional annual grants were made in 2002.

The Committee established performance guidelines to determine the portion of
the granted amount to be paid for the two-year award cycle. The Committee
established a scale of multiples of the target award to be paid for various
levels of our performance over the award cycle. The target award will be paid if
we achieve the level of free cash flow provided by achieving our annual
operating plans, measured cumulatively for the two-year period. The maximum that
can be paid is two times the target award for performance that is 161.3% of the
level of free cash flow in the annual operating plans.

As with the Annual Bonus Plan, to comply with the requirements of
Section 162(m), designated officers (the Chief Executive Officer and the seven
other officers who were members of our Policy Committee in 2002) are compensated
under a modified version of the Medium Term Performance Plan, called the Senior
Executive Medium Term Performance Plan. The plans are identical except that the
Committee's discretion to adjust payments upward is eliminated in the Senior
Executive Medium Term Performance Plan.

STOCK AWARDS

Annually from 1992 through 2000, restricted stock and stock options were
granted to officers under the 1992 Cummins Stock Incentive Plan. Restrictions on
the restricted stock will lapse on one-third of each grant annually, beginning
two years and one month from the date of each grant. The stock options expire
ten years from grant, but cannot be exercised for the first two years.

In 2001, the long term stock option grants were made to cover two years, as
was done for the performance cash grants described previously. Very few
additional grants were made in 2002; none were made to the CEO or to members of
the policy committee.

Grant amounts under the long term plan elements have been set to provide
total compensation opportunity at the median of that provided by similarly-sized
U.S. industrial companies in our survey base, when combined with base salary and
annual bonus. The Committee reviews the proportion of total compensation that is
dependent on Company performance in determining the allocation of the
compensation opportunity among each of the Long-Term plan elements for each
position. More senior positions have a larger proportion of total compensation
opportunity dependent on Company performance than do less senior positions.

The Committee believes that our officers should own significant amounts of
our common stock. To underscore this, we have adopted formal stock ownership
guidelines requiring officers to own our common stock with their shares' total
value equal to multiples of base salary as follows: CEO, five times base salary;
senior officers, three times base salary; all other officers, one times base
salary. At this time, virtually all officers meet the guidelines, and many own
shares in quantities significantly higher than the guidelines.

NEW STOCK GRANT PLAN: THE 2003 STOCK INCENTIVE PLAN

The 1992 Stock Incentive Plan expired at the end of 2002. In order to
continue making long-term grants linked to our common stock, a new
shareholder-approved plan is needed. Therefore, the committee has recommended a
new plan, authorizing a pool of 2,500,000 shares for future grants, beginning in
2003.

The Committee believes grants based on our stock are important tools to
achieve our executive compensation program objectives, as stated earlier in this
report.

The Committee has recommended that shareholders approve the proposed 2003
Stock Incentive Plan to meet the objectives of the executive compensation
program, to continue providing competitive levels of long-term grants to our key
decision-makers, and to maintain the strong linkage of management's interests
with the interests of our shareholders.

COMPENSATION OF THE CHIEF EXECUTIVE OFFICER

Approximately one-fifth of the CEO's annualized total compensation
opportunity is fixed base salary. Four-fifths of the total is based on our
performance, assuming target level of our financial performance. When our
performance is better than the target levels, the variable compensation elements
pay more and comprise a larger portion of the actual total. When our performance
is less than the target levels, the variable elements pay less and comprise a
smaller proportion of the actual total.

The base salary and annual bonus participation rate of the CEO are set at
the median of our survey companies specifically as described under the base
salary and annual bonus sections appearing earlier in this report.

In 2002 we were profitable and improved our Free Cash Flow performance.
Therefore, the CEO received an Annual Bonus payment, but at a level
significantly less than the target level. The CEO did not receive a Base Salary
increase in 2002.

In January 2001, the CEO received grants of stock options under the
Long-Term 1992 Stock Incentive Plan, as well as a Target Award (payable in 2003)
under the Senior Executive Medium Term Performance Plan. As stated previously,
these grants covered two years; no additional annual grants were made in 2002 to
the CEO.

In determining grant amounts for the CEO, as explained earlier, the
Committee set the total of the three elements of the executive compensation
program--base salary, annual bonus, and the long-term plan--to provide
annualized compensation opportunity to the CEO equal to the median of the range
of total compensation opportunity provided for CEOs by the survey companies
described earlier in this report.

The CEO, on a yearly basis, discusses in detail his priorities and
objectives with our Governance and Nominating Committee. The Governance and
Nominating Committee formally reviews the CEO's performance annually, based on
how well the CEO performed against his workplan, including the progress we made
in implementing its business strategy and achieving its business objectives,
both short-term and long-term. This review, which is reported in detail to the
Committee, considers both quantitative and qualitative performance matters, and
is a key factor in setting the CEO's compensation.

SHAREHOLDER RETURN PERFORMANCE PRESENTATION

The following graph compares the cumulative total shareholder return on our
common stock for the last five fiscal years with the cumulative total return on
the S&P 500 Index and an index of peer companies* we selected. The comparisons
in this table are required by the Securities and Exchange Commission and are not
intended to forecast or be indicative of possible future performance of our
common stock.

COMPARE 5-YEAR CUMULATIVE TOTAL RETURN
AMONG CUMMINS INC.,
S&P 500 INDEX AND PEER GROUP INDEX

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

CUMMINS INC. PEER GROUP INDEX S&P 500 INDEX

12/31/97 $100 $100 $100
12/31/98 $62 $86 $129
12/31/99 $86 $97 $156
12/31/00 $70 $93 $141
12/31/01 $73 $102 $125
12/31/02 $55 $100 $97

--------------

* Arvin/Meritor Inc., Caterpillar, Inc., Dana Corporation, Deere & Company,
Eaton Corporation, Ingersoll-Rand Company, Navistar International
Corporation and Paccar Inc.

COMPENSATION TABLES AND OTHER INFORMATION

The summary compensation table and accompanying notes and other information
on the following pages include individual compensation information for the last
three fiscal years on our Chairman and Chief Executive Officer and the four
other most highly compensated executive officers during 2002. The dollar value
of perquisites and other personal benefits for each of the named executive
officers was less than the established reporting threshold and is not included
in the table.

SUMMARY COMPENSATION TABLE

ANNUAL COMPENSATION LONG TERM COMPENSATION
------------------------------ -----------------------------------
AWARDS PAYOUTS
--------------------- -----------
(1) (2) (3)
STOCK MEDIUM-
RESTRICTED OPTIONS/ TERM
NAME STOCK SARS PERFORMANCE ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS AWARDS (#) PLANS COMPENSATION
------------------ -------- -------- -------- ---------- -------- ----------- ------------

T. M. Solso................... 2002 $940,500 $376,200 $ 0 0 $ 0 $ 93,731
Chairman of the Board and 2001 $904,575 $ 0 $ 0 124,250 $ 71,063 $100,564
Chief Executive Officer 2000 $900,000 $486,000 $1,085,013 69,800 $142,500 $ 93,394

F. J. Loughrey................ 2002 $585,000 $210,600 $ 0 0 $ 0 $ 68,809
Executive Vice President 2001 $562,750 $ 0 $ 0 40,000 $ 29,025 $ 90,003
President--Engine Business 2000 $542,500 $163,275 $1,141,919 22,300 $ 67,821 $ 65,045

J. K. Edwards................. 2002 $480,000 $ 72,000 $ 0 0 $ 0 $ 27,223
Executive Vice President 2001 $452,000 $ 0 $ 0 35,000 $ 23,216 $ 33,399
President--Power Generation 2000 $421,500 $306,325 $1,096,394 18,000 $ 67,821 $ 23,488

R. J. Mills................... 2002 $375,000 $135,000 $ 0 0 $ 0 $ 7,477
Vice President 2001 $341,122 $ 0 $ 578,100 30,000 $ 10,881 $ 12,491
President--Filtration and 2000 $300,000 $126,043 $ 193,481 11,800 $ 21,881 $ 10,918
Fleetguard, Inc.

T. Linebarger................. 2002 $385,417 $115,625 $ 0 0 $ 0 $ 5,292
Vice President and Chief 2001 $341,667 $ 0 $ 0 29,800 $ 7,254 $ 4,239
Financial Officer 2000 $243,750 $ 70,031 $ 117,606 7,200 $ 6,555 $ 0

--------------

(1) The CEO did not receive an increase in base salary in 2002. The base salary
paid to the CEO is greater in 2002 than in 2001 in this table because of two
factors: (1) Mr. Solso received a base salary increase effective July 1,
2001; therefore, the salary totals reflect this increase for half of the
year in 2001 and the full year in 2002; and (2) his base salary was reduced
by 10% during November and December of 2001.

(2) Payments were made in 2003 under our Senior Executive Medium Term
Performance Plan and Medium Term Performance Plan for the 2001-2002 Award
Cycle. These payments will be reported in our proxy statement next year.

The cash payments were based on our Free Cash Flow performance during
2001-2002, as previously established by the Committee for this award cycle.
However, the Compensation Committee, acting on management's recommendation,
reduced the amounts that were paid from the amounts that otherwise would
have been paid based on our free cash flow performance during 2001-2002
compared to the measures established by the Committee for this award cycle.

(3) Amounts reported as "All Other Compensation" for 2002 include, respectively,
matching contributions by us under the Retirement and Savings Plan and
"above market" earnings on previously deferred compensation as follows: T.
M. Solso $5,075 and $88,656; F. J. Loughrey $4,369 and $64,440; J. K.
Edwards $4,865 and $22,358; R. J. Mills $3,754 and $3,723; and T. Linebarger
$4,126 and $1,166.

OPTION/SAR GRANTS IN LAST FISCAL YEAR

POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE AT ASSUMED
----------------------------------------------------- ANNUAL RATES OF
% OF TOTAL STOCK PRICE
OPTIONS/SAR'S APPRECIATION FOR
(1) GRANTED TO EXERCISE OPTION TERMS
OPTIONS/SARS EMPLOYEES IN PRICE EXPIRATION -----------------------
NAME GRANTED (#) FISCAL YEAR ($/SHARE) DATE 5% ($) 10% ($)
---- ------------ ------------- --------- ---------- -------- --------

T. M. Solso.......................... 0 0% $0 -- $0 $0
F. J. Loughrey....................... 0 0% $0 -- $0 $0
J. K. Edwards........................ 0 0% $0 -- $0 $0
R. J. Mills.......................... 0 0% $0 -- $0 $0
T. Linebarger........................ 0 0% $0 -- $0 $0

Stock option and stock appreciation right exercise activity during 2002, on
an aggregated basis for each of the named executives, is contained in the
following table. Also disclosed are the number and value of options and
appreciation rights, on an aggregated basis, held by each named executive as of
December 31, 2002.

AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR, AND FY-END OPTION/SAR VALUE

VALUE OF
NUMBER OF UNEXERCISED
NUMBER OF UNEXERCISED IN-THE-MONEY
SECURITIES VALUE OPTIONS/SARS AT OPTIONS/SARS AT
UNDERLYING REALIZED FR-END(#) FY-END ($)
OPTIONS/SARS ($) ---------------------------- ---------------------------
NAME EXERCISED EXERCISEABLE EXERCISEABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ------------ ------------ ------------ ------------- ----------- -------------

T.M. Solso.................... 0 $0 332,200 0 $0 $0
F.J. Loughrey................. 0 $0 147,050 0 $0 $0
J. K. Edwards................. 0 $0 96,850 35,000 $0 $0
R.J. Mills.................... 0 $0 68,300 0 $0 $0
T. Linebarger................. 0 $0 54,800 0 $0 $0

Estimated benefits payable to each named executive pursuant to long-term
incentive plan rights awarded during 2002 are disclosed in the following table.

LONG-TERM INCENTIVE PLAN AWARDS IN LAST FISCAL YEAR/SAR VALUE

NUMBER OF ESTIMATED FUTURE PAYOUTS UNDER
SHARES, NON-STOCK PRICE-BASED PLANS
UNITS OR OTHER PERIOD UNTIL -------------------------------
NAME RIGHTS(1) PAYOUT THRESHOLD TARGET MAXIMUM
---- -------------- ------------ --------- -------- --------

T. M. Solso.............................. 0 -- -- -- --
F. J. Loughrey........................... 0 -- -- -- --
J. K. Edwards............................ 0 -- -- -- --
R. J. Mills.............................. 0 -- -- -- --
T. Linebarger............................ 0 -- -- -- --

--------------

(1) No shares, units or other rights were awarded in the last fiscal year. We
made targeted dollar awards under its Medium Term Performance Plan and
Senior Executive Medium Term Performance Plan in 2001 to cover two grant
years (2001 and 2002). Therefore, no additional grants were made to the
named executive officers in 2002.

The grants made in 2001 for the 2001-2002 Award Cycle under the Medium Term
Performance Plan and Senior Executive Medium Term Performance Plan were tied
to achieving certain levels of cumulative free cash flow.

PENSION PLAN TABLE

We maintain retirement pension programs for our employees, including the
executive officers named in the Summary Compensation Table. Elements of the
program for the executive officers include our Cash Balance Pension Plan, the
Excess Benefit Plan which provides pension benefits in excess of limitations
imposed by the Internal Revenue Code, and the Supplemental Life Insurance and
Deferred Income Program. Benefits are not offset or otherwise reduced by amounts
payable or received under Social Security. The following table sets forth the
estimated maximum annual pension benefits payable on a straight life annuity
basis under the program to the officers in various compensation and years of
service classifications upon retirement at age 65. An officer who is among our
two highest paid executive officers at the time of retirement will receive an
annual benefit greater than amounts reflected in the table by an amount equal to
10% of the officer's covered compensation.

ESTIMATED ANNUAL BENEFIT UPON RETIREMENT

AVERAGE TOTAL
CASH
COMPENSATION
(BASE SALARY
PLUS SHORT- 10 15 20 25 30+
TERM BONUS) YEARS YEARS YEARS YEARS YEARS
--------------------- -------- -------- -------- -------- --------

$ 200,000 $ 40,000 $ 60,000 $ 80,000 $ 90,000 $100,000

$ 275,000 $ 55,000 $ 82,500 $110,000 $123,750 $137,500

$ 350,000 $ 70,000 $105,000 $140,000 $157,500 $175,000

$ 425,000 $ 85,000 $127,500 $170,000 $191,250 $212,500

$ 500,000 $100,000 $150,000 $200,000 $225,000 $250,000

$ 575,000 $115,000 $172,500 $230,000 $258,750 $287,500

$ 650,000 $130,000 $195,000 $260,000 $292,500 $325,000

$ 725,000 $145,000 $217,500 $290,000 $326,250 $362,500

$ 800,000 $160,000 $240,000 $320,000 $360,000 $400,000

$ 875,000 $175,000 $262,500 $350,000 $393,750 $437,500

$ 950,000 $190,000 $285,000 $380,000 $427,500 $475,000

$1,025,000 $205,000 $307,500 $410,000 $461,250 $512,500

$1,100,000 $220,000 $330,000 $440,000 $495,000 $550,000

$1,175,000 $235,000 $352,500 $470,000 $528,750 $587,500

$1,250,000 $250,000 $375,000 $500,000 $562,500 $625,000

$1,325,000 $265,000 $397,500 $530,000 $596,250 $662,500

$1,400,000 $280,000 $420,000 $560,000 $630,000 $700,000

$1,475,000 $295,000 $442,500 $590,000 $663,750 $737,500

Compensation for purposes of the pension program is the highest average
total cash compensation, including base salary and short-term bonus payments,
for any consecutive five-year period prior to retirement. Covered compensation
is disclosed under the "salary" and "bonus" columns of the Summary Compensation
Table. Covered compensation and full years of service as of December 31, 2002
for our Chief Executive Officer and the other named executive officers are as
follows: T.M. Solso, $1,127,614, 31 years; F.J. Loughrey, $654,960, 29 years; J.
K. Edwards, $548,422, 30 years; R. J. Mills, $369,986, 31 years; T. Linebarger,
$323,433, 9 years.

CHANGE OF CONTROL ARRANGEMENTS

In the event of a change of control of Cummins, we will provide benefits to
certain executives including the Chief Executive Officer and other executive
officers named in the Summary Compensation Table on page 93. Certain named
executive officers, as designated by the Compensation Committee, would be
entitled to three year's salary plus three annual bonus payments, and three
annual payments equal to the grant value of the then most recent annual
long-term incentive compensation award(s), if any, to the executive. We will
also provide for the full vesting of certain insurance and retirement benefits
and the continuation in effect for a three-year severance period of certain
other employee benefits. In addition, our retirement plans will allocate any
actuarial surplus assets to fund increased pension benefits, stock options
previously granted will become fully exercisable, and certain long-term
incentive plan awards will be paid in cash. The value of supplemental and excess
retirement annuity benefits will also be paid in cash. All amounts of employee
compensation and director annual fees deferred (including the value of deferred
shares and stock units), respectively, under our Deferred Compensation Plan and
Deferred Compensation Plan for Non-Employee Directors will be paid in cash. At
an employee's option, amounts deferred under the Deferred Compensation Plan will
be contributed to a grantor trust of which we are the grantor. A change of
control for these purposes is defined in each of the various plans, programs and
arrangements providing these benefits.

OTHER TRANSACTIONS AND AGREEMENTS WITH DIRECTORS AND OFFICERS

Irwin Financial Corporation ("IFC") owns a partial interest in one of our
business aircrafts and has an arrangement with us to share the fixed and
operating expenses of such aircraft. During 2002, $260,338 was paid or payable
to us by IFC under this arrangement. Director nominee William I. Miller is
Chairman and an executive officer of IFC.

Pursuant to our Key Employee Stock Investment Plan, certain officers have
purchased shares of our common stock on an installment basis. The interest rate
on these loans is the minimum annual rate permitted under the Internal Revenue
Code without imputation of income. The following table shows, as to those of our
executive officers and directors who were indebted to us in excess of $60,000
since January 1, 2002, the largest aggregate amount owed for such purchases and
loans at any time since

January 1, 2002, and the amount owed as of July 31, 2003. All such loans were
made prior to the effective date of the Sarbanes-Oxley Act of 2002.

AMOUNT OF
LARGEST INDEBTEDNESS
AMOUNT OF AS OF
INDEBTEDNESS JULY 31, 2003
------------ -------------

J. S. Blackwell............................................. $314,260 $ 0
S. M. Chapman............................................... $299,988 $ 0
T. Linebarger............................................... $299,979 $ 0
F. J. Loughrey.............................................. $ 98,813 $ 98,813
M. M. Rose.................................................. $215,480 $100,328
T. M. Solso................................................. $940,495 $255,938
D. W. Trapp................................................. $ 71,786 $ 0
J.C. Wall................................................... $297,850 $297,850

We have a policy of purchasing from employees of our shares of common stock
that have been acquired under the Key Employee Stock Investment Plan, 1986 Stock
Option Plan and 1992 Stock Incentive Plan. The purchase price for such shares is
the closing price quoted on the New York Stock Exchange Composite Tape on the
date of purchase. During 2002, four current executive officers sold shares to us
pursuant to this policy. No such transactions have occurred during 2003.

2003 STOCK INCENTIVE PLAN

Our shareholders have approved a variety of stock option and other
equity-based incentive compensation plans for executives and other key employees
of the Company since 1977, the most recent of which was our 1992 Stock Incentive
Plan which expired, by its terms, on December 31, 2002. No new benefits under
that plan can be granted. Our Board continues to believe that such stock
incentive programs are important factors in retaining and rewarding executives
and other selected employees. To enable such awards to be tailored to changing
business conditions, our Board has recommended to shareholders approval of a new
2003 Stock Incentive Plan (the "Plan"). Subject to such approval, the plan was
adopted by the Board in February 2003.

In 1994, shareholders approved our Restricted Stock Plan for Non-Employee
Directors under which our directors who were not officer-employees of Cummins
have received one-half of their annual retainer fee in the form of restricted
common stock awards. That plan had no shares authorized for issuance separate
and apart from the 1992 Stock Incentive Plan and, therefore, also expired on
December 31, 2002. The Board believes that it is in our best interest for
outside directors to continue increasing their economic stake in our long-term
performance through this program, and has formally integrated it as a feature of
the new 2003 Stock Incentive Plan.

The new Plan will continue to provide for the granting of stock options. The
Plan will also permit the granting of awards, either singly or in combination,
payable in cash (in the case of stock appreciation rights), stock, performance
shares, or restricted stock, including the director fee awards. In addition, the
new Plan will provide flexibility to make awards related to various measures,
including business performance objectives and growth rates.

PRINCIPAL FEATURES OF THE PLAN

The following summary of the principal features of the Plan does not purport
to be complete and is subject to, and is qualified in its entirety by reference
to, the pertinent provisions thereof.

If approved by shareholders, 2.5 million shares of our common stock will be
available for issuance under the Plan. The 2003 Plan is intended to replace and
succeed our 1992 Stock Incentive Plan. Therefore, in addition to the
2.5 million shares, an additional number of shares of our common stock

will be available for grant under the Plan equal to the number of shares from
any award under the 1992 Plan that expire or are terminated, surrendered,
cancelled or forfeited.

Pursuant to the Plan, the Compensation Committee will determine the amount
and types of officer and other employee awards to be made under the Plan which
may include but are not limited to stock options, stock appreciation rights,
performance shares, restricted stock and other stock awards. No more than
one-half of the 2.5 million shares may be granted as stock awards (restricted
stock or performance share awards).

Pursuant to the outside director fee award feature of the Plan, a number of
shares of common stock will automatically be awarded to each such director each
year equal to one-half of their annual fee (currently $84,000) divided by the
average of the closing prices of common stock on the New York Stock Exchange
during the twenty (20) day period immediately preceding the date of our Annual
Meeting of Shareholders each year. A director may vote and receive dividends on
the shares, but may not transfer them for a period of six (6) months following
the award.

As in the case of the earlier stock option plans, stock options issued under
the Plan will be granted at not less than 100% of the average market price of
our common stock on the New York Stock Exchange on the date shareholders approve
the Plan, or the date of grant, whichever is later. The duration of the new Plan
will be ten years, subject to earlier termination by the Board.

As has been the case in the past, the new Plan will be administered by the
Compensation Committee, a committee of the Board composed entirely of directors
who are not eligible to participate in the Plan, other than through receipt of
automatic formula fee awards. The Committee may provide, as a feature of an
award or otherwise, that upon a change of control of Cummins (as defined in the
Plan), any time periods relating to the exercise or realization of an award will
be accelerated, an award will be purchased by Cummins, or other similar
provisions in order to maintain the value intended to be granted by the award.
Other than with respect to the automatic formula fee award feature, the
Committee has the authority, to be exercised in its discretion, to
(i) determine the number and type of stock incentive awards, performance
measures, and any other conditions under which such awards may be earned and
distributed; and (ii) prescribe, amend and rescind rules and regulations, and to
make all other determinations deemed necessary or advisable for the
administration of the Plan.

The Board may amend, modify, alter or terminate the Plan, except that the
Board may not, without shareholder approval, amend the Plan to (i) increase the
number of shares of stock that may be awarded under the Plan, (ii) decrease the
price at which an option may be exercised, (iii) materially modify the class of
employees or others to whom awards may be granted, (iv) withdraw administration
of the Plan from the Committee, or (v) extend the duration of the Plan.

Under the Internal Revenue Code, as presently in effect, the grant of a
stock option or a stock appreciation right ("SAR") or the award of restricted
stock under the Plan will not generate income for federal income tax purposes to
a recipient.

Upon exercise of a non-statutory (non-qualified) stock option or an SAR, the
recipient will normally be deemed to have received ordinary income in an amount
equal to the difference between the exercise price for the stock option or SAR
and the market price of common stock on the exercise date and we will be
entitled to a deduction for such amount. The disposition of shares acquired upon
exercise of a non-qualified stock option will generally result in a capital gain
or loss for the optionee, but will have no tax consequences.

In the case of incentive stock options ("ISOs"), there is no ordinary income
deemed generated on the date of exercise. If the recipient holds the stock
received upon exercising an ISO for one year from the date of exercise or two
years from the date of grant, the recipient will thereafter realize long-term
capital gain or loss upon a subsequent sale, based on the difference between the
option price and the sale price and we will not be entitled to a deduction. If
the stock is sold before the requisite holding

period, ordinary income tax treatment will be applicable, as described above
upon exercise of a non-statutory option, and we will be entitled to a
corresponding deduction.

The grant of restricted stock will not generate taxable income at the time
of the award unless the recipient elects otherwise. At the time any restrictions
applicable to the restricted stock award lapse, the recipient will recognize
ordinary income and we will be entitled to a corresponding deduction equal to
the excess of the fair market value of such stock at such time over the amount
paid therefor. Dividends paid to the recipient on the restricted stock during
the restricted period will be ordinary compensation income to the recipient and
deductible as such by us.

Special rules apply to directors and to officers subject to liability under
Section 16(b) of the Securities Exchange Act of 1934 that may prevent the
recognition of income by such individuals and the corresponding tax deduction by
us before the date six months following the grant of an option or SAR or the
receipt of restricted stock or other stock award (unless the employee receives
the shares before that date and elects to be taxed upon such receipt).

Under Section 162(m) of the Internal Revenue Code, we may not deduct
compensation of more than $1,000,000 that is paid to a participant who, on the
last day of the taxable year, was either our Chief Executive Officer or was
among the four other most highly-compensated officers for that taxable year. The
limitation on deductions does not apply to certain types of compensation,
including qualified performance-based compensation. With shareholder approval of
the Plan, we believe that benefits in the form of performance-based awards under
the Plan will be exempt from the $1,000,000 limitation on deductible
compensation, if applicable.

Unless the Committee determines or an award provides otherwise, if the
employment of a participant terminates other than as a result of retirement,
death or disability, all unexercised, deferred and unpaid awards will be
immediately cancelled. In the event of death, the participant's estate or
beneficiaries may receive or exercise any outstanding awards. In the event of
death or disability, the Committee may, in its sole discretion, terminate any
remaining restrictions on awards, accelerate any installments or rights, and pay
the value thereof in a single sum to the participant, the participant's estate,
beneficiaries or representatives.

INCENTIVE AWARDS

In February 2003, the Compensation Committee granted awards of performance
shares and stock options pursuant to the Plan, subject to approval of the Plan
by our shareholders. Awards made to our Chief Executive Officer, the other named
executive officers, all executive officers as a group, and all of our other
employees are reflected in the following table.

The performance shares shown were granted as target awards of shares of our
common stock. The shares would be earned based on Cummins' Return on Equity
(ROE) performance during the 2003-2004 period. The Compensation Committee has
established a Payout Factor Table ranging from zero to 1.0, based on the
Corporation's ROE performance during 2003-2004. In order to earn 100% of the
target award number of shares, the Corporation's profitability would need to
increase from 2002 levels by a compound annual growth rate greater than 40%.

Each target award of performance shares would be multiplied by the
appropriate payout factor to determine the number of shares earned. The shares
earned would then be restricted for an additional year (until February 2006). If
the participant left Cummins prior to February 2006, earned shares would be
forfeited. No dividends are paid on shares until they become earned based on our
performance.

The table shows the range of the number of shares that could be earned based
on our ROE performance during 2003-2004.

(3)
PERFORMANCE SHARES (4)
---------------------------- STOCK OPTIONS
DOLLAR VALUE SHARES SHARES
-------------- ----------- -------------

T. M. Solso.......................................... 0 - $1,366,995 0 - 55,400 30,800
Chairman of the Board and Chief Executive Officer
F. J. Loughrey....................................... 0 - $468,825 0 - 19,000 10,600
Executive Vice President
President--Engine Business
J. K. Edwards(1)..................................... $0 0 0
Executive Vice President
President--Power Generation
R. J. Mills.......................................... 0 - $293,633 0 - 11,900 6,600
Vice President
President--Filtration and Fleetguard, Inc.
T. Linebarger........................................ 0 - $352,853 0 - 14,300 7,900
Vice President, President--
Power Generation(2)
All Executive Officers as a group.................... 0 - $3,649,433 0 - 147,900 82,000
Directors who are not Executive Officers............. $0 0 0
All other Employees.................................. 0 - $3,563,070 0 - 144,400 503,250

--------------

(1) Mr. Edwards retired July 1, 2003.

(2) Prior to March 11, 2003, Mr. Linebarger was Vice President and Chief
Financial Officer.

(3) The dollar value of the Performance Shares is shown at $24.675 per share.
This represents the average of the High and Low trading prices of our Common
Stock on the New York Stock Exchange on February 10, 2003, the date the
Compensation Committee made the grants, subject to shareholder approval of
the 2003 Stock Incentive Plan.

(4) The Stock Options cannot be exercised for two years and would expire in ten
years, if not exercised. With respect to the named individuals, the Exercise
Price will be equal to the average of the High and Low trading prices of our
common stock on the New York Stock Exchange on the date the shareholders
approve the 2003 Stock Incentive Plan. With respect to all other employees,
the exercise price will be the average trading price on the date
shareholders approve the Plan or the grant date, whichever is later.

We intend to take such actions as may be required to keep the shares
authorized for issuance under the 2003 Stock Incentive Plan registered under the
Securities Act of 1933 and listed on the New York Stock Exchange.

EQUITY COMPENSATION PLAN INFORMATION

Information regarding the number and weighted-average exercise price of
outstanding options, warrants and rights to purchase common stock granted by us
to participants in equity compensation

100

plans, as well as the number of securities remaining available under the plans
as of December 31, 2002, is provided in the following table.

(A) (B) (C)
-------------------------- ----------------------------- ----------------------------
NUMBER OF SECURITIES
REMAINING AVAILABLE FOR
NUMBER OF SECURITIES FUTURE ISSUANCE UNDER EQUITY
TO BE ISSUED UPON EXERCISE WEIGHTED-AVERAGE COMPENSATION PLANS
PLAN OF OUTSTANDING OPTIONS, EXERCISE PRICE OF OUTSTANDING (EXCLUDING SECURITIES)
CATEGORY WARRANTS AND RIGHTS OPTIONS, WARRANTS AND RIGHTS REFLECTED IN COLUMN(A)
-------------------------- -------------------------- ----------------------------- ----------------------------

Equity compensation plans
approved by security
holders................. 2,908,993 $42.58 -0-
Equity compensation plans
not approved by security
holders................. 2,446,747(1) $40.77 -0-
TOTAL..................... 5,355,740 $41.75 -0-

--------------

(1) Grants or awards in connection with these securities were not made pursuant
to our now-expired 1992 Stock Incentive Plan or our other formal plan, but
were granted to certain non-officer key employees at the discretion of the
Board on substantially the same terms as those made under the 1992 Plan.
Discretionary non-qualified stock option awards were made, subject to the
terms of individual agreements between us and the recipient, granting the
employee the right to purchase common stock at its fair market value on the
date of grant, expiring on the tenth (10th) anniversary of the date of
grant.

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DESCRIPTION OF OTHER INDEBTEDNESS

NEW REVOLVING CREDIT FACILITY

On November 5, 2002, we entered into a new revolving credit facility that
replaced our prior revolving credit facility. The new revolving credit facility
provides for aggregate borrowings of up to $385 million and is available on a
revolving basis for a period of three years following the closing of the
facility. Borrowings are primarily available in U.S. dollars, although up to
$60 million of the new revolving credit facility is available for multicurrency
borrowing and letters of credit. Up to $150 million of the available commitments
under the new revolving credit facility is available for letters of credit. Up
to $50 million of the available commitments under the new revolving credit
facility is available for swing line loans. We and a number of our subsidiaries
are permitted to borrow and obtain letters of credit under the new revolving
credit facility, although the aggregate amount of borrowings by, and letters of
credit issued for the benefit of, our subsidiaries under the new revolving
credit facility may not exceed $60 million at any one time outstanding. We
guarantee all borrowings of our subsidiaries under the new revolving credit
facility. In addition, our principal domestic subsidiaries guarantee all
borrowings under the new revolving credit facility, although certain of those
guarantees are limited by the terms of the 1986 Indenture (which governs a
number of our other notes and debentures) that restrict the ability of our
subsidiaries to incur or guarantee indebtedness, and are limited by similar
terms in the indenture governing the new notes and the original notes.

Borrowings under the new revolving credit facility (other than swing line
loans) bear interest at a rate equal to, at our option:

- the London inter-bank offered rate plus a spread ranging from 0.875% to
2.500% based on our credit rating and utilization of the credit facility;
or

- the ABR rate (which is the greater of the administrative agent's prime
rate and the federal funds effective rate plus 0.5%) plus a spread ranging
from 0% to 1.500% based on our credit rating and utilization of the credit
facility.

Our obligations and the obligations of our subsidiaries under the new
revolving credit facility are secured by security interests in substantially all
of our assets and the assets of our domestic subsidiaries that guarantee
obligations under the facility (other than shares of stock or indebtedness of
our subsidiaries that are "restricted subsidiaries" under the terms of the 1986
Indenture and other than assets that are considered "principal properties" of
ours or of our "restricted subsidiaries" under the terms of the 1986 Indenture).

The terms of the new revolving credit facility contain covenants that
restrict our ability, and the ability of our subsidiaries to, among other
things, incur liens, enter into sale and leaseback transactions, enter into
merger, consolidation or asset sale transactions, dispose of capital stock of
subsidiaries, incur subsidiary indebtedness and enter into swap transactions.
The new revolving credit facility also restricts our ability to, under the terms
of the 1986 Indenture, redesignate "unrestricted subsidiaries" as "restricted
subsidiaries" or designate future subsidiaries as "restricted subsidiaries". The
new revolving credit facility also contains the following financial covenants:

- we may not permit our net worth to fall below an amount equal to the sum
of (1) $1.15 billion and (2) 25% of the sum of our consolidated net income
for each of the fiscal quarters commencing after September 29, 2002 to and
including the most recent fiscal quarter prior to

102

the date on which the net worth calculation is made and (3) 75% of the
amount by which our net worth has increased as a result of our issuance of
capital stock after September 29, 2002;

For purposes of the financial covenants described above, "net worth",
"consolidated net income", "consolidated indebtedness", "consolidated EBITDA",
"consolidated interest expense" and other financial measurements are calculated
in the manner provided by the terms of the credit agreement for the new
revolving credit facility.

The new revolving credit facility also contains customary events of default.

EXISTING NOTES AND DEBENTURES

In February 1997, we issued $120 million aggregate principal amount of 6.75%
debentures due 2027 in an underwritten public offering. The 6.75% debentures due
2027 were issued pursuant to the 1986 Indenture.

In February 1998, we issued $765 million aggregate principal amount of debt
securities in an underwritten public offering. These debt securities were also
issued under the 1986 Indenture and were issued in four tranches as follows:

- $125 million aggregate principal amount of 6.25% notes due 2003 (this
series was retired at maturity);

- $225 million aggregate principal amount of 6.45% notes due 2005;

- $250 million aggregate principal amount of 7.125% debentures due 2028; and

- $165 million aggregate principal amount of 5.65% debentures due 2098.

As of June 29, 2003, there was $120 million outstanding under the 6.75%
debentures due 2027, $225 million outstanding under the 6.45% notes due 2005,
$250 million outstanding under the 7.125% debentures due 2028 and $165 million
outstanding under the 5.65% debentures due 2098.

The 6.75% debentures due 2027, the 6.25% notes due 2003, the 6.45% notes due
2005, the 7.125% debentures due 2028 and the 5.65% debentures due 2098 are
referred to in this prospectus as the "Existing Notes and Debentures".

The Existing Notes and Debentures are unsecured and unsubordinated
obligations, and are ranked pari passu with one another and with all of our
other unsecured and unsubordinated obligations, including indebtedness
outstanding under the new revolving credit facility and the notes.

The 6.75% debentures due 2027 bear interest at an annual rate of 6.75%, with
interest payable on February 15 and August 15 of each year, and mature on
February 15, 2027. The 6.25% notes due 2003 were repaid on their date of
maturity, March 1, 2003. The 6.45% notes due 2005 bear interest at an annual
rate of 6.45%, with interest payable on March 1 and September 1 of each year,
and mature on March 1, 2005. The 7.125% debentures due 2028 bear interest at an
annual rate of 7.125%, with interest payable on March 1 and September 1 of each
year, and mature on March 1, 2028. The 5.65% debentures due 2098 bear interest
at an annual rate of 5.65%, with interest payable on March 1 and September 1 of
each year, and mature on March 1, 2098. As the 5.65% debentures due 2098 were
issued at a discount to par, the effective annual rate of interest to us on
these debentures is 7.48%.

103

The 6.75% debentures due 2027 are redeemable, in whole or in part, at our
option at any time after February 15, 2007 at the greater of par value or an
amount designed to ensure that the holders of the debentures are not penalized
by the early redemption, in each case plus accrued interest. In addition,
holders of the 6.75% debentures due 2027 may elect to be repaid on February 15,
2007, at par value plus accrued interest to February 17, 2007. Such election,
which is irrevocable, must be made between December 15, 2006 and January 15,
2007.

The 7.125% debentures due 2028 and the 5.65% debentures due 2098 are
redeemable, at our option, in whole or in part, at any time at the greater of
par value or an amount designed to ensure that the holders of the debentures are
not penalized by the early redemption, in each case plus accrued interest. In
addition, we have the right to redeem the 5.65% debentures due 2098 in whole
(but not in part) in the event that there is a change in law that creates a more
than insubstantial risk that interest paid by us on the 5.65% debentures due
2098 is not, or will not be, deductible, in whole or in part, by us for purposes
of U.S. Federal income tax. In such an event, which we refer to as a "Tax
Event", the discount rate utilized by us to calculate the make-whole premium
payable to holders of the debentures will be increased by 10 basis points over
the rate that is otherwise utilized in connection with an early redemption of
the debentures.

In the event of a Tax Event, we may, in lieu of redeeming the 5.65%
debentures due 2098, elect to shorten the maturity of the debentures to the
longest maturity date within the original maturity date that, in the opinion of
counsel, would permit us, after such shortening of the maturity, to continue to
deduct the interest paid on the 5.65% debentures due 2098 for U.S. Federal
income tax purposes. If we so elect to shorten the maturity of the 5.65%
debentures due 2098, no holder of debentures will be entitled to any
compensation from us in connection with our exercise of such right. In addition,
in the event that the maturity of the 5.65% debentures due 2098 is shortened as
described above, the principal amount of the 5.65% debentures due 2098 payable
upon the new maturity date will change to an amount equal to the accreted value
of the debentures as of the new maturity date.

The terms of the Existing Notes and Debentures contain covenants that
restrict our ability to, among other things, allow our restricted subsidiaries
to incur indebtedness, incur or allow our restricted subsidiaries to incur
secured indebtedness, enter into sale and leaseback transactions, enter into
certain merger or consolidation transactions or sell all or substantially all of
our assets to another person. The terms of the Existing Notes and Debentures
also contain customary events of default.

TRUST PREFERRED SECURITIES AND DEBENTURES

In June 2001, Cummins Capital Trust I, a Delaware business trust and our
subsidiary, issued 6 million shares of 7% convertible quarterly income preferred
securities, which we refer to in this prospectus as the "Trust Preferred
Securities", to qualified institutional buyers for net proceeds of $291 million.
The Trust Preferred Securities represent an undivided beneficial ownership
interest in the assets of Cummins Capital Trust I. The total proceeds from the
issuance of the Trust Preferred Securities by Cummins Capital Trust I were
invested in $300 million aggregate principal amount of 7% convertible
subordinated debentures due 2031 issued by us, which we refer to in this
prospectus as the "7% Debentures".

Holders of the Trust Preferred Securities are entitled to receive
preferential cumulative cash dividends at an annual rate of 7% of the $50 per
share liquidation value of the Trust Preferred Securities, which payments will
be made quarterly in arrears on March 15, June 15, September 15 and December 15
of each year. These distribution rates and payment dates for the Trust Preferred
Securities correspond to the interest rate and payment dates for the 7%
Debentures. Cummins Capital Trust I's only source of cash to make payments on
the Trust Preferred Securities is our payment of interest on the 7% Debentures
held by Cummins Capital Trust I. We may defer interest payments on the 7%
Debentures for a period not to exceed 20 consecutive quarters. If such a
deferral is made,

104

Cummins Capital Trust I will defer distributions on the Trust Preferred
Securities for a corresponding period but will continue to accrue for the
distribution.

We have guaranteed, on a subordinated basis, the payment in full of:

- any accrued and unpaid distributions and the amount payable upon
redemption of the Trust Preferred Securities to the extent we have made a
payment to the trustee for Cummins Capital Trust I of interest or
principal on the 7% Debentures; and

- generally, the liquidation amount of the Trust Preferred Securities to the
extent that Cummins Capital Trust I has assets available for distribution
to holders of Trust Preferred Securities. This guarantee is unsecured and
subordinated and junior in right of payment to all of our senior and
subordinated debt.

The 7% Debentures mature on June 15, 2031. We may redeem the 7% Debentures,
in whole or in part, for cash on or after June 15, 2006 at the redemption prices
set forth in the indenture governing the 7% Debentures. In addition, in the
event of a change in law such that there is more than insubstantial risk that
either Cummins Capital Trust I will be subject to U.S. Federal income tax with
respect to interest payments received on the 7% Debentures or that we will be
unable to deduct the interest payments made on the 7% Debentures, we may redeem
the 7% Debentures at a redemption price equal to par value plus accrued
interest. Further, in the event of a change in law such that there is more than
an insubstantial risk that Cummins Capital Trust I will be considered an
"investment company" under the Investment Company Act of 1940, we may redeem the
7% Debentures at a redemption price equal to par value plus accrued interest. In
the event of any redemption of the 7% Debentures, Cummins Capital Trust I will
redeem a like aggregate liquidation amount of Trust Preferred Securities. The
Trust Preferred Securities do not have a stated maturity date, but they are
subject to mandatory redemption upon maturity of the 7% Debentures on June 15,
2031, or upon earlier redemption or upon the occurrence of an event of default.

Each of Trust Preferred Securities and the related 7% Debenture are
convertible at any time prior to the close of business on June 13, 2031, at the
option of the holder, into shares of our common stock at the rate of 1.0519
shares per Trust Preferred Security, subject to customary antidilution
adjustments.

ACCOUNTS RECEIVABLE SECURITIZATION PROGRAM

On December 15, 2000, we entered into agreements with a wholly-owned,
bankruptcy-remote special purpose subsidiary, Cummins Receivable Corp., and a
number of financial institutions under which we sell interests in designated
pools of trade receivables to Cummins Receivable Corp. and it, in turn,
transfers interests in the receivables, without recourse, to limited purpose
receivable securitization entities, referred to as "conduits", that are
established and managed by an independent financial institution. Certain
conduits are required to purchase receivables from time to time during the term
of the agreements, and certain conduits may elect whether or not they will
purchase receivables. Conduits fund their purchases of receivables from Cummins
Receivable Corp. by issuing commercial paper. To maintain a balance in the
designated pools of receivables sold, we may sell new receivables as existing
receivables are collected. Our retained interests in the sold receivables are
subordinated to the interests of the conduits. The receivables agreements, which
we refer to in this prospectus as the "Receivables Program", provide for a
continuation of the program on a revolving basis for a three-year period and
provide for a minimum commitment of receivables purchases from the conduits of
$200 million. As of June 29, 2003, there was $5 million outstanding under the
Receivables Program.

Interest accrues on a monthly basis on amounts paid by the conduits in
respect of receivables sold under the Receivables Program. The effective rate of
interest will vary based upon, among other things, the nature of the financial
institution that has purchased the subject pool of receivables. For conduits
that are committed to purchase receivables, the interest rate in effect will be
based upon either the London inter-bank offered rate plus a spread or the
conduit's base rate. For conduits that are not

105

committed to purchase receivables, the interest rate in effect will equal the
weighted average rate of interest on the commercial paper issued by that conduit
to finance the purchase of the receivables. The weighted average interest rate
on securitized repayments under the Receivables Program during 2002 was 1.8%.

The terms of the Receivables Program contain covenants and events of default
that are customary for transactions of this nature. The terms of the Receivables
Program also provide for the termination of the program in the event that we
fail to maintain minimum ratings on our long-term senior unsecured debt of "BB"
from Standard & Poor's and "Ba2" from Moody's.

DISTRIBUTOR GUARANTEES

U.S. DISTRIBUTOR GUARANTEES

We have entered into an operating agreement with Citicorp Leasing, Inc.
pursuant to which we agreed to guarantee revolving loans, equipment term loans
and leases, real property loans and letters of credit made by Citicorp Leasing,
Inc. to certain independent Cummins and Onan distributors in the United States.
Under the terms of the operating agreement, our guarantee of any particular
financing will be limited to the amount of the financing in excess of a
particular distributor's "borrowing base". The "borrowing base" of any
particular distributor is equal to the amount that Citicorp Leasing, Inc. would
have allowed the distributor to borrow absent our guarantee.

In the event that any distributor is in default under any financing or:

- at any time on or before August 31, 2004, the rating on our long-term
senior unsecured debt from Standard & Poor's is less than "BB" or from
Moody's is less than "Ba2"; or

- at any time on or after September 1, 2004, the rating on our long-term
senior unsecured debt from Standard & Poor's is less than "BBB-" or from
Moody's is less than "Baa3";

then we will be required to guarantee the entire amount of each financing under
the terms of the operating agreement. In addition, in the event the rating on
our long-term senior unsecured debt falls below the thresholds described above,
we will also be required to pay to Citicorp Leasing, Inc. a monthly fee equal to
0.50% on the daily average outstanding balance of each financing arrangement
under the operating agreement. Further, in the event that any distributor
defaults under a particular financing arrangement, we will be required to
purchase the assets of that distributor that secure its borrowings under the
financing arrangement.

The operating agreement will continue in effect until February 7, 2007, and
may be renewed by the parties for additional one year terms. As of June 29,
2003, we had $27 million of guarantees outstanding under the operating agreement
relating to distributor borrowings of $253 million.

CANADIAN DISTRIBUTOR GUARANTEES

We have entered into a number of guarantee agreements with The Bank of Nova
Scotia pursuant to which we have agreed to guarantee borrowings of certain
independent distributors of our products. Under the terms of these agreements,
our guarantee with respect to any one financing arrangement between a
distributor and The Bank of Nova Scotia is limited to 50% of the aggregate
principal amount of the financing. As of June 29, 2003, we had $11 million of
guarantees outstanding under these guarantee agreements relating to distributor
borrowings of $21 million.

OPERATING LINES OF CREDIT

A number of our subsidiaries have obtained individual lines of credit from
financial institutions for the purpose of financing working capital. These lines
of credit contain customary covenants and events of default. As of June 29,
2003, we had approximately $36 million of borrowings outstanding under these
subsidiary lines of credit.

106

DESCRIPTION OF THE NOTES

GENERAL

The original notes were issued and the new notes will be issued under the
indenture dated as of November 20, 2002 (the "INDENTURE"), between Cummins and
BNY Midwest Trust Company, as trustee (the "TRUSTEE"), a copy of which has been
filed as an exhibit to the registration statement of which this prospectus forms
a part. The orignal notes, the new notes and any additional notes issued under
the indenture are referred to collectively in this "Description of the Notes" as
the "Notes". The Notes are subject to all the terms of the indenture, and
holders of the Notes are referred to the indenture and the Trust Indenture Act
for a statement thereof. The following summary of certain provisions of the
indenture does not purport to be complete and is qualified in its entirety by
reference to the indenture, including the definitions therein of certain
capitalized terms used below. The definitions of certain capitalized terms used
in the following summary are set forth below under "--Certain Definitions" or
are otherwise defined in the indenture. Unless otherwise specifically indicated,
all references in this section to "Cummins" are to Cummins Inc. and not to any
of its Subsidiaries.

The terms of the new notes are identical in all material respects to the
original notes, except the new notes will no longer contain transfer
restrictions and holders of new notes will no longer have any registration
rights. The Trustee will authenticate and deliver new notes for original issue
only in exchange for a like principal amount of original notes. Any original
notes that remain outstanding after the consummation of the exchange offer,
together with the new notes, will be treated as a single class of securities
under the indenture. Accordingly, all references in this section to specified
percentages in aggregate principal amount of the outstanding Notes shall be
deemed to mean, at any time after the exchange offer is consummated, such
percentage in aggregate principal amount of the original notes and new notes
then outstanding.

The Notes have an aggregate principal amount of $250 million and will be
issued in denominations of $1,000 and integral multiples of $1,000. The
indenture allows Cummins to issue additional Notes, subject to any such
additional issuance complying with the covenant described below under the
heading "--Certain Covenants--Limitation on Incurrence of Indebtedness and
Issuance of Preferred Stock". Any such additional Notes will be issued with the
same terms as the Notes so that such additional Notes will form a single series
with the Notes.

The Notes will mature on December 1, 2010 and will bear interest at the rate
of 9 1/2% per annum. Interest will be payable semiannually (to holders of record
of Notes at the close of business on the May 15 or November 15 immediately
preceding the interest payment date) on June 1 and December 1 of each year,
respectively, commencing June 1, 2003. Interest will be computed on the basis of
a 360-day year comprised of twelve 30-day months.

Principal of and premium, if any, and interest on the Notes will be payable,
and the Notes may be presented for registration of transfer and exchange, at the
offices of agencies of Cummins maintained for that purpose in the Borough of
Manhattan, the City of New York, provided that, at the option of Cummins,
payment of interest on the Notes may be made by check mailed to the address of
the Person entitled thereto as it appears in the note register; and provided
further that all payments of principal (and premium, if any) and interest on
Notes, the holders of which have given wire transfer instructions to Cummins or
its agent at least 10 business days prior to the applicable payment date will be
required to be made by wire transfer of immediately available funds to the
accounts specified by such holders in such instructions. Until otherwise
designated by Cummins, such office or agency in the Borough of Manhattan, the
City of New York will be the corporate trust office of the Trustee, as Paying
Agent and Registrar.

The Notes will be issued in fully registered form, without coupons. No
service charge will be made for any registration of transfer or exchange of
Notes, but Cummins may require payment of a sum sufficient to cover any tax or
other governmental charge payable in connection therewith.

107

The Notes will not have the benefit of any sinking fund.

RANKING

The Notes are general, unsecured obligations of Cummins and rank equally
("PARI PASSU") in right of payment with all existing and future unsubordinated
Indebtedness of Cummins and senior in right of payment to all existing and
future subordinated Indebtedness of Cummins or any Subsidiary Guarantor. The
Notes are effectively subordinated to all secured Indebtedness of Cummins or any
Subsidiary Guarantor to the extent of the value of the assets securing such
Indebtedness. In addition, the Notes are structurally subordinated to all of the
existing and future liabilities, including guarantees, of Cummins' subsidiaries
that are not Subsidiary Guarantors (as defined below).

Certain Restricted Subsidiaries have provided a guarantee of the Credit
Facility up to the maximum amount permissible under terms of this indenture and
the 1986 Indenture and have secured such guarantees with certain of their
assets.

Universal Silencer, Inc., a subsidiary of Cummins that makes products for
the industrial filtration market, is an Unrestricted Subsidiary under the
indenture. As an Unrestricted Subsidiary, Universal Silencer is not subject to
the restrictive covenants in the indenture and at any time has the ability to,
among other things, dispose of its assets or incur additional Indebtedness,
including secured and layered Indebtedness. In addition, Universal Silencer has
provided a full guarantee of the Credit Facility and has secured such guarantee
with substantially all of its assets.

THE GUARANTEES

The Notes will be guaranteed (the "SUBSIDIARY GUARANTEES") by each
Restricted Subsidiary of Cummins that is required to guarantee the Notes
pursuant to "--Certain Covenants--Future Guarantors" and executes and delivers a
supplemental indenture to this indenture providing for a Subsidiary Guarantee of
the payment of the Notes by such Restricted Subsidiary (the "SUBSIDIARY
GUARANTORS"). Initially, there are no Restricted Subsidiaries that are
Subsidiary Guarantors.

Each of the Subsidiary Guarantors (so long as it remains a Restricted
Subsidiary) will fully and unconditionally guarantee on a joint and several
basis all of Cummins' obligations under the Notes, including its obligations to
pay principal, interest and premium, if any, with respect to the Notes. The
Subsidiary Guarantees will be general unsecured obligations of the Subsidiary
Guarantors and will rank PARI PASSU with all existing and future Indebtedness of
the Subsidiary Guarantors that is not, by its terms, expressly subordinated in
right of payment to the Subsidiary Guarantees. The obligations of each
Subsidiary Guarantor will be limited to the maximum amount which, after giving
effect to all other contingent and fixed liabilities of such Subsidiary
Guarantor and after giving effect to any collections from or payments made by or
on behalf of any other Subsidiary Guarantor in respect of the obligations of
such other Subsidiary Guarantor under its Subsidiary Guarantee or pursuant to
its contribution obligations under the indenture, will result in the obligations
of such Subsidiary Guarantor under its Subsidiary Guarantee not constituting a
fraudulent conveyance or fraudulent transfer under federal or state law. See
"Risk Factors--Risk Factors Relating to the Notes--Fraudulent transfer laws may
permit a court to take action detrimental to you". Each Subsidiary Guarantor
that makes a payment or distribution under a Subsidiary Guarantee shall be
entitled to a contribution from each other Subsidiary Guarantor in an amount PRO
RATA, based on the net assets of each Subsidiary Guarantor, determined in
accordance with GAAP. Except as provided in "Certain Covenants--Limitation on
Certain Asset Dispositions" below, Cummins is not restricted from selling or
otherwise disposing of any Subsidiary Guarantor.

If a Subsidiary Guarantee were rendered voidable, it could be subordinated
by a court to all other indebtedness (including guarantees and other contingent
liabilities) of the applicable Subsidiary Guarantor, and, depending upon the
amount of such indebtedness, a Subsidiary Guarantor's liability on

108

its Subsidiary Guarantee could be reduced to zero. See "Risk Factors--Risk
Factors Relating to the Notes--Fraudulent transfer laws may permit a court to
take action detrimental to you".

A sale of assets or Capital Stock of a Subsidiary Guarantor or Restricted
Subsidiary may constitute an Asset Disposition subject to the provisions
contained under the caption "Certain Covenants--Limitation on Certain Asset
Dispositions", and a consolidation, merger or sale of all or substantially all
of the assets of a Subsidiary Guarantor must also comply with the provisions
described under "Certain Covenants--Merger, Consolidation, Etc".

The indenture provides that:

(i) in the event of a sale or other disposition, by way of merger,
consolidation or otherwise, of all the Capital Stock of any Subsidiary
Guarantor to any person that is not an Affiliate of Cummins, such Subsidiary
Guarantor will be released and relieved of any obligations under its
Subsidiary Guarantee; provided, that the Net Available Proceeds of such sale
or other disposition are applied in accordance with the applicable
provisions of the indenture. See "Certain Covenants--Limitation on Certain
Asset Disposition";

(ii) upon the release or discharge of the guarantee that resulted in the
creation of the Subsidiary Guarantee of such Subsidiary Guarantor, except a
discharge or release by or as a result of payment under such Subsidiary
Guarantee, such Subsidiary Guarantor will be released and relieved of any
obligations under its Subsidiary Guarantee;

(iii) upon the designation of any Subsidiary Guarantor as an
Unrestricted Subsidiary in accordance with the terms of the indenture, such
Subsidiary Guarantor will be released and relieved of any obligations under
its Subsidiary Guarantee; and

(iv) in connection with any sale or other disposition, by way of merger,
consolidation or otherwise, of Capital Stock of any Subsidiary Guarantor to
a Person in accordance with the indenture that results in the Subsidiary
Guarantor no longer being a Restricted Subsidiary; provided, that after
giving effect to such sale, such former Subsidiary Guarantor shall have no
guarantees outstanding of any Indebtedness of Cummins or any Restricted
Subsidiary and, provided further, that the Net Available Proceeds of such
sale or other disposition are applied in accordance with the applicable
provisions of the indenture. See "Certain Covenants--Limitation on Certain
Asset Dispositions".

OPTIONAL REDEMPTION

The Notes will be redeemable, at the option of Cummins, in whole or from
time to time in part, at any time after December 1, 2006, on at least 30 days'
but not more than 60 days' prior notice mailed to the registered address of each
holder of Notes to be so redeemed, at the following redemption prices (expressed
as percentages of the principal amount), plus accrued and unpaid interest, if
any, to but excluding the date of redemption, if redeemed during the 12-month
period commencing on or after December 1 of the years set forth below:

YEAR REDEMPTION PRICE
---- ----------------

2006...................... 104.750%
2007...................... 102.375%
2008 and thereafter....... 100.000%

If the redemption date is on or after an interest record date and on or
before the related interest payment date, the accrued and unpaid interest, if
any, will be paid to the Person in whose name the Note is registered at the
close of business on such record date, and no additional interest will be
payable to holders whose Notes will be subject to redemption by Cummins.

In the case of any redemption of less than all of the Notes, selection of
Notes for any redemption shall be made by the Trustee under the indenture in
accordance with the rules of any securities

109

exchange on which the Notes may be listed or if the Notes are not so listed, pro
rata or by lot or in such other manner as the Trustee shall deem appropriate and
fair. Notes in denominations larger than $1,000 may be redeemed in part but only
in integral multiples of $1,000. Notice of redemption will be mailed at least
30 days but not more than 60 days before the redemption date to each Holder of
Notes to be redeemed at his or her registered address. On and after the
redemption date, interest will cease to accrue on Notes or portions thereof
called for redemption.

Any decision to redeem the notes through optional redemption will be
influenced by a range of factors including the availability of cash required to
redeem the notes, whether market conditions are conducive to a refinancing and
other considerations relevant to our future capital management.

CERTAIN COVENANTS

SUSPENSION OF COVENANTS AND COVENANT SUBSTITUTION. After such time as:

(1) the Notes have been assigned an Investment Grade rating by both
Rating Agencies; and

(2) no Default under the indenture has occurred and is continuing,

(all such events collectively constituting an "Investment Grade Rating
Event"), the following agreements, covenants and definitions contained in the
indenture (the "Suspended Provisions") shall be suspended and shall not apply to
Cummins and its Restricted Subsidiaries:

- "Limitation on Certain Asset Dispositions";

- "Limitation on Restricted Payments";

- "Limitation on Transactions with Affiliates";

- "Limitation on Payment Restrictions Affecting Restricted Subsidiaries";

- "Change of Control";

- "Future Guarantors";

- section (a) of "Limitation on Incurrence of Indebtedness and Issuance of
Preferred Stock";

- section (a) of "Limitation on Liens";

- section (a) of "Limitation on Sale and Leaseback Transactions";

- clause (3) of the first paragraph of "Merger, Consolidation, Etc.";

- section (a) of the definition of "Restricted Subsidiary"; and

- section (a) of the definition of "Unrestricted Subsidiary"

and section (b) of "Limitation on Incurrence of Indebtedness and Issuance of
Preferred Stock", section (b) of "Limitation on Liens", section (b) of
"Limitation on Sale and Leaseback Transactions", section (b) of the definition
of "Restricted Subsidiary" and section (b) of the definition of "Unrestricted
Subsidiary" shall become effective and apply to Cummins and its Restricted
Subsidiaries. Notwithstanding any of the foregoing, if the Notes later cease to
have an Investment Grade rating by either or both Rating Agencies, all the
Suspended Provisions shall again become effective and apply to Cummins and its
Restricted Subsidiaries and section (b) of "Limitation on Incurrence of
Indebtedness and Issuance of Preferred Stock", section (b) of "Limitation on
Liens", section (b) of "Limitation on Sale and Leaseback Transactions",
section (b) of the definition of "Restricted Subsidiary" and section (b) of the
definition of "Unrestricted Subsidiary" shall no longer be effective.

A change in the rating on the Notes by either Rating Agency shall be deemed
to have occurred on the date that such Rating Agency shall have publicly
announced the change.

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LIMITATION ON INCURRENCE OF INDEBTEDNESS AND ISSUANCE OF PREFERRED
STOCK. (a) The indenture provides that Cummins will not, and will not cause or
permit any of its Restricted Subsidiaries to, incur, directly or indirectly, any
Indebtedness, and Cummins will not cause or permit any of its Restricted
Subsidiaries to issue any Preferred Stock, except:

(1) Indebtedness of Cummins or a Subsidiary Guarantor if, immediately
after giving effect to the incurrence of such Indebtedness and the receipt
and application of the net proceeds thereof, the Consolidated Coverage Ratio
of Cummins for the four full fiscal quarters for which quarterly or annual
financial statements are available next preceding the incurrence of such
Indebtedness would be greater than 2.25 to 1.00;

(2) Indebtedness outstanding on the Issue Date;

(3) Indebtedness under the Credit Facility of Cummins, each Subsidiary
Guarantor and the Restricted Subsidiaries of Cummins that are parties
thereto on the Issue Date in an amount not to exceed $385 million;

(4) Indebtedness owed by Cummins to any Restricted Subsidiary of Cummins
or Indebtedness owed by a Restricted Subsidiary of Cummins to Cummins or a
Restricted Subsidiary of Cummins, provided, that if Cummins or any
Subsidiary Guarantor is the obligor on such Indebtedness, then such
Indebtedness is expressly subordinated by its terms to the prior payment in
full in cash of the Notes or the Subsidiary Guarantees, as the case may be;
provided further, that, upon either

(a) the transfer or other disposition by such Restricted Subsidiary
or Cummins of any Indebtedness so permitted under this clause (4) to a
Person other than Cummins or another Restricted Subsidiary of Cummins; or

(b) the issuance (other than directors' qualifying shares), sale,
transfer or other disposition of shares of Capital Stock or other
ownership interests (including by consolidation or merger) of any
Restricted Subsidiary that is the holder of any Indebtedness so permitted
under this clause (4) to a Person other than Cummins or another
Restricted Subsidiary of Cummins as a result of which such Restricted
Subsidiary ceases to be a Restricted Subsidiary of Cummins,

the provisions of this clause (4) shall no longer be applicable to such
Indebtedness and such Indebtedness shall be deemed to have been incurred at
the time of any such issuance, sale, transfer or other disposition, as the
case may be;

(5) Indebtedness of Cummins or its Restricted Subsidiaries under any
Interest Rate Protection Agreement or Currency Agreement to the extent
entered into in the ordinary course of business and not for the purpose of
speculation;

(6) Acquired Indebtedness to the extent Cummins could have incurred such
Indebtedness in accordance with clause (1) above on the date such
Indebtedness became Acquired Indebtedness;

(7) Indebtedness incurred by Cummins or any of its Restricted
Subsidiaries constituting reimbursement obligations with respect to letters
of credit issued in the ordinary course of business, including, without
limitation, letters of credit in response to worker's compensation claims,
self-insurance or operating lease obligations;

(8) Indebtedness arising from agreements of Cummins or a Restricted
Subsidiary of Cummins providing for indemnification, adjustment of purchase
price, earn-out or other similar obligations, in each case, incurred or
assumed in connection with the disposition of any business, assets or
Capital Stock of a Subsidiary of Cummins;

(9) Obligations in respect of performance and surety bonds and
completion guarantees provided by Cummins or any Restricted Subsidiary of
Cummins in the ordinary course of business;

111

(10) Guarantees by Cummins or any of its Restricted Subsidiaries of
Indebtedness of Cummins or any Restricted Subsidiary to the extent Cummins
or such Restricted Subsidiary could have incurred such Indebtedness pursuant
to any other clause of this covenant; provided, that Restricted Subsidiaries
(as defined in paragraph (b) of the definition of "Restricted Subsidiaries")
shall be permitted to guarantee Indebtedness under the Credit Facility;

(11) Indebtedness of Cummins and any Subsidiary Guarantor evidenced by
the Notes and any Subsidiary Guarantee thereof;

(12) Indebtedness incurred to renew, extend or refinance (collectively
for purposes of this clause (12) to "REFINANCE") any Indebtedness incurred
pursuant to clauses (1), (2), (6) or (11) above; provided, that:

(a) such Indebtedness does not exceed the principal amount (or
accreted amount, if less) of Indebtedness so refinanced plus the amount
of any premium required to be paid in connection with such refinancing
pursuant to the terms of the Indebtedness refinanced or the amount of any
premium reasonably determined by Cummins as necessary to accomplish such
refinancing by means of a tender offer, exchange offer, or privately
negotiated repurchase, plus the expenses of Cummins or such Restricted
Subsidiary incurred in connection therewith and

(b) (I) in the case of any refinancing of Indebtedness that is PARI
PASSU with the Notes, such refinancing Indebtedness is made PARI PASSU
with or subordinate in right of payment to the Notes, and, in the case of
any refinancing of Indebtedness that is subordinate in right of payment
to the Notes, such refinancing Indebtedness is subordinate in right of
payment to the Notes on terms no less favorable to the Holders than those
contained in the Indebtedness being refinanced,

(II) in either case, the refinancing Indebtedness by its terms, or by
the terms of any agreement or instrument pursuant to which such
Indebtedness is issued does not have an Average Life that is less than
the remaining Average Life of the Indebtedness being refinanced and does
not permit redemption or other retirement (including pursuant to any
required offer to purchase to be made by Cummins or any of its Restricted
Subsidiaries) of such Indebtedness at the option of the holder thereof
prior to the final Stated Maturity of the Indebtedness being refinanced,
other than a redemption or other retirement at the option of the holder
of such Indebtedness (including pursuant to a required offer to purchase
made by Cummins or any of its Restricted Subsidiaries) which is
conditioned upon a change of control of Cummins pursuant to provisions
substantially similar to those contained in the indenture described under
"--Change of Control" below or upon an asset sale pursuant to provisions
substantially similar to those contained in the indenture described under
"--Limitation on Certain Asset Dispositions" below and

(III) Indebtedness of a Restricted Subsidiary (other than a
Subsidiary Guarantor) may not be incurred to refinance any Indebtedness
of Cummins;

(13) Indebtedness consisting of take-or-pay obligations contained in
supply agreements entered into by Cummins or its Restricted Subsidiaries in
the ordinary course of business;

(14) Preferred Stock of Restricted Subsidiaries issued to Cummins or any
of its Restricted Subsidiaries, provided, that, upon either

(a) the transfer or other disposition by such Restricted Subsidiary
or Cummins of any Preferred Stock so permitted under this clause (14) to
a Person other than Cummins or another Restricted Subsidiary of Cummins
or

(b) the issuance (other than directors' qualifying shares), sale,
transfer or other disposition of shares of Capital Stock or other
ownership interests (including by consolidation

112

or merger) of any Restricted Subsidiary that is the holder of any
Preferred Stock so permitted under this clause (14) to a Person other
than Cummins or another Restricted Subsidiary of Cummins as a result of
which such Restricted Subsidiary ceases to be a Subsidiary of Cummins,

the provisions of this clause (14) shall no longer be applicable to such
Preferred Stock and such Preferred Stock shall be deemed to have been issued
at the time of any such issuance, sale, transfer or other disposition, as
the case may be;

(15) Indebtedness relating to any Qualified Securitization Transaction
that is non recourse to Cummins or any of its Restricted Subsidiaries in an
amount which, together with any other Indebtedness incurred pursuant to this
clause (15) (including any Indebtedness incurred to refinance any such
Indebtedness) and outstanding on the date of such incurrence, has an
aggregate principal amount not in excess of $200.0 million;

(16) Indebtedness incurred by Foreign Subsidiaries in the ordinary
course of business for the purpose of financing working capital in an
aggregate amount not to exceed $100.0 million at any one time outstanding;

(17) Qualified Distributor Guarantees of Cummins or a Subsidiary
Guarantor in an aggregate principal amount not to exceed $110.0 million at
any one time outstanding; and

(18) Indebtedness of Cummins or a Subsidiary Guarantor, not otherwise
permitted to be incurred pursuant to clauses (1) through (17) above, which,
together with any other Indebtedness incurred pursuant to this clause (18)
and outstanding on the date of such incurrence, has an aggregate principal
amount not in excess of $100.0 million.

Notwithstanding the foregoing, Cummins will not permit any Restricted
Subsidiary to become liable for any Funded Debt, unless after giving effect
thereto the aggregate amount of Funded Debt of all Restricted Subsidiaries
outstanding (not including Funded Debt owned by Cummins or a Wholly Owned
Subsidiary) does not exceed 15% of Consolidated Net Tangible Assets. The
provisions of the preceding sentence shall not prevent (1) any Restricted
Subsidiary from becoming liable for any Funded Debt for the purpose of
extending, renewing or refunding any Funded Debt of a Restricted Subsidiary then
outstanding so long as the aggregate amount of the Funded Debt of all Restricted
Subsidiaries then outstanding (other than Funded Debt owned by Cummins or any
Wholly Owned Subsidiary) is not thereby increased or (2) any Restricted
Subsidiary from becoming liable for Funded Debt to Cummins or a Wholly Owned
Subsidiary. For purposes of the immediately two preceding sentences, Restricted
Subsidiaries shall mean the Restricted Subsidiaries under clause (b) of the
definition of "RESTRICTED SUBSIDIARIES".

Accrual of interest, accrual of dividends, the accretion of accreted value,
the payment of interest in the form of additional Indebtedness and the payment
of dividends in the form of additional shares of Preferred Stock will not be
deemed to be an incurrence of Indebtedness for purposes of this covenant. The
amount of any Indebtedness outstanding as of any date shall be (i) the accreted
value of the Indebtedness in the case of any Indebtedness issued with original
issue discount and (ii) the principal amount or liquidation preference thereof,
together with any interest thereon that is more than 30 days past due, in the
case of any other Indebtedness.

For purposes of determining compliance with any U.S. dollar-denominated
restriction on the incurrence of Indebtedness, the U.S. dollar-equivalent
principal amount of Indebtedness denominated in a foreign currency shall be
calculated based on the relevant currency exchange rate in effect on the date
such Indebtedness was incurred, in the case of term Indebtedness, or first
committed, in the case of revolving credit Indebtedness; provided, that if such
Indebtedness is incurred to refinance other Indebtedness denominated in a
foreign currency, and such refinancing would cause the applicable U.S.
dollar-denominated restriction to be exceeded if calculated at the relevant
currency exchange rate in

113

effect on the date of such refinancing, such U.S. dollar-denominated restriction
shall be deemed not to have been exceeded so long as the principal amount of
such refinancing Indebtedness does not exceed the principal amount of such
Indebtedness being refinanced. Notwithstanding any other provision of this
covenant, the maximum amount of Indebtedness that Cummins may incur pursuant to
this covenant shall not be deemed to be exceeded solely as a result of
fluctuations in the exchange rate of currencies. The principal amount of any
Indebtedness incurred to refinance other Indebtedness, if incurred in a
different currency from the Indebtedness being refinanced, shall be calculated
based on the currency exchange rate applicable to the currencies in which such
refinancing Indebtedness is denominated that is in effect on the date of such
refinancing.

For purposes of determining compliance with this covenant:

(A) in the event that an item of Indebtedness (or any portion thereof)
meets the criteria of more than one of the types of Indebtedness described
above, Cummins, in its sole discretion, will classify such item of
Indebtedness (or any portion thereof) at the time of incurrence and will
only be required to include the amount of type of such Indebtedness in one
of the above clauses;

(B) Cummins will be entitled to divide and classify an item of
Indebtedness in more than one of the types of Indebtedness described above;
and

(C) following the date of its incurrence, any Indebtedness originally
classified as incurred under any of the clauses above (other than clauses
(1), (2) and (3)) may later be classified by Cummins such that it will be
deemed as having been incurred pursuant to any other clauses, to the extent
that such reclassified Indebtedness could be incurred under such new clause
at the time of such reclassification.

Notwithstanding the foregoing, (A) Indebtedness incurred under clause (3) of
this covenant shall always be deemed to be incurred under that clause and
(B) Indebtedness of the nature described in clauses (16) and (17) outstanding on
the Issue Date shall be deemed to be incurred immediately after the Issue Date
under such clauses and not under clause (2) of this covenant.

(b) The indenture provides that, in the event that section (a) of this
covenant no longer applies to Cummins and its Restricted Subsidiaries in light
of the circumstances described above under "--Suspension of Covenants and
Covenant Substitution", Cummins will not permit any Restricted Subsidiary to
become liable for any Funded Debt unless immediately thereafter the aggregate
amount of the Funded Debt of all Restricted Subsidiaries (other than Funded Debt
owned by Cummins or a Wholly Owned Subsidiary) does not exceed 15% of
Consolidated Net Tangible Assets. The provisions of this section (b) shall not
prevent (1) any Restricted Subsidiary from becoming liable for any Funded Debt
for the purpose of extending, renewing or refunding any Funded Debt of a
Restricted Subsidiary then outstanding so long as the aggregate amount of the
Funded Debt of all Restricted Subsidiaries then outstanding (other than Funded
Debt owned by Cummins or any Wholly Owned Subsidiary) is not thereby increased
or (2) any Restricted Subsidiary from becoming liable for Funded Debt to Cummins
or a Wholly Owned Subsidiary.

LIMITATION ON RESTRICTED PAYMENTS. The indenture provides that Cummins will
not, and will not cause or permit any of its Restricted Subsidiaries to,
directly or indirectly:

(A) declare or pay any dividend, or make any distribution of any kind or
character (whether in cash, property or securities), in respect of any class
of its Capital Stock or to the holders thereof in their capacity as
stockholders, excluding any (a) dividend or distributions payable solely in
shares of its Qualified Capital Stock or in options, warrants or other
rights to acquire its Qualified Capital Stock, (b) in the case of any
Restricted Subsidiary of Cummins, dividends or distributions payable to
Cummins or a Restricted Subsidiary of Cummins and (c) pro rata dividends or
other distributions made by a Restricted Subsidiary that is not a Wholly
Owned Subsidiary to minority

114

stockholders (or owners of an equivalent interest in the case of the
Restricted Subsidiary that is an entity other than a corporation);

(B) purchase, redeem, or otherwise acquire or retire for value shares of
Capital Stock, or any securities convertible or exchangeable into shares of
Capital Stock, of Cummins that are held by any Person or of a Restricted
Subsidiary that are held by any Affiliate of Cummins, in each case other
than shares of Capital Stock or securities that are owned by Cummins or a
Restricted Subsidiary of Cummins;

(D) redeem, defease, repurchase, retire or otherwise acquire or retire
for value, prior to any scheduled maturity, repayment or sinking fund
payment, Indebtedness which is subordinate in right of payment to the Notes
(other than the redemption, defeasance, repurchase, retirement or
acquisition of Indebtedness in anticipation of satisfying a sinking fund
obligation, principal installment or final maturity, in each case due within
one year of the date of such redemption, defeasance, repurchase, retirement
or acquisition) (each of the transactions described in clauses (A) through
(D) (other than any exception to any such clause) being a "Restricted
Payment"),

if at the time thereof:

(1) an Event of Default, or an event that with the passing of time or
giving of notice, or both, would constitute an Event of Default, shall have
occurred and be continuing, or

(2) upon giving effect to such Restricted Payment, Cummins could not
incur at least $1.00 of additional Indebtedness pursuant to the terms of the
indenture described in clause (a)(1) of "--Limitation on Incurrence of
Indebtedness and Issuance of Preferred Stock" above, or

(3) upon giving effect to such Restricted Payment, the aggregate of all
Restricted Payments made on or after the Issue Date exceeds the sum (without
duplication) of:

(a) 50% of Consolidated Net Income of Cummins (or, in the case
cumulative Consolidated Net Income of Cummins shall be negative, less
100% of such deficit) for the period (treated as an accounting period)
from the Issue Date through the last day of Cummins' most recently ended
fiscal quarter for which financial statements are available; PLUS

(b) 100% of the aggregate net cash proceeds received after the Issue
Date, including the fair market value of readily marketable securities
from the issuance of Qualified Capital Stock of Cummins and warrants,
rights or options on Qualified Capital Stock of Cummins (other than in
respect of any such issuance to a Subsidiary of Cummins) and the
principal amount of Indebtedness of Cummins or a Subsidiary of Cummins
that has been converted into or exchanged for Qualified Capital Stock of
Cummins; PLUS

(c) in the case of the disposition or repayment of any Investment
constituting a Restricted Payment made after the Issue Date, an amount
equal to the lesser of the return of capital with respect to such
Investment and the cost of such Investment, in either case, less the cost
of the disposition of such Investment; PLUS

(d) an amount equal to the sum of (I) the net reduction in
Investments in Unrestricted Subsidiaries resulting from the receipt of
dividends, repayments of loans or advances or other transfers of assets
or proceeds from the disposition of Capital Stock or other distributions
or payments, in each case to Cummins or any Restricted Subsidiary from,
or with respect to, interests in Unrestricted Subsidiaries, and (II) the
portion (proportionate to Cummins' equity interest in such Subsidiary) of
the fair market value of the net assets of an Unrestricted Subsidiary at
the time such Unrestricted Subsidiary is designated a Restricted
Subsidiary; provided, that the foregoing sum shall not exceed, in the
case of any Unrestricted Subsidiary, the amount of Investments previously
made (and treated as a Restricted Payment) by

115

Cummins or any Restricted Subsidiary in such Unrestricted Subsidiary
subsequent to the Issue Date.

For purposes of determining the amount expended for Restricted Payments
under this clause (3), property other than cash shall be valued at its fair
market value.

Notwithstanding the foregoing, the provisions set forth in the immediately
preceding paragraph will not prohibit:

(1) any dividend on any class of Capital Stock of Cummins or any of its
Restricted Subsidiaries paid within 60 days after the declaration thereof
if, on the date when the dividend was declared, Cummins or any of its
Restricted Subsidiaries, as the case may be, could have paid such dividend
in accordance with the provisions of the indenture;

(2) the renewal, extension or refinancing of any Indebtedness otherwise
permitted pursuant to the terms of the indenture described in
clause (a)(12) of "--Limitation on Incurrence of Indebtedness and Issuance
of Preferred Stock" above;

(3) the exchange or conversion of any Indebtedness of Cummins or any of
its Restricted Subsidiaries for or into Qualified Capital Stock of Cummins;

(4) so long as no Event of Default has occurred and is continuing,
payments of ordinary dividends on Cummins' common stock in an aggregate
amount per quarter not to exceed the product of (x) $0.30 per share and
(y) the lesser of (a) the number of shares of Cummins' common stock
outstanding on a fully diluted basis on the Issue Date and (b) the number of
shares of Cummins' common stock outstanding on a fully diluted basis on the
date of payment of such dividend; provided, that after giving pro forma
effect to such payment of dividends, Cummins could incur at least $1.00 of
additional Indebtedness pursuant to the terms of the indenture described in
clause (a)(1) of "--Limitation on Incurrence of Indebtedness and Issuance of
Preferred Stock" above; provided further, that the number of shares and
amount of dividend per share referred to above shall be adjusted pro rata to
reflect any stock split (or reverse stock split) or stock dividend made
after the Issue Date and before such shares were issued so as to ensure that
the aggregate amount of dividends that may be paid by Cummins pursuant to
this clause (4) immediately following such stock split or dividend is equal
to the aggregate amount of dividends that may be paid by Cummins pursuant to
this clause (4) immediately before such stock split or dividend;

(5) any Restricted Payment out of the net cash proceeds of the
substantially concurrent sale of, or made in exchange for, Qualified Capital
Stock of Cummins (other than a sale to a Restricted Subsidiary of Cummins or
an exchange for Qualified Capital Stock held by a Restricted Subsidiary of
Cummins); provided, that the proceeds of such sale of Qualified Capital
Stock shall not be (and have not been) included in clause (3) of the
preceding paragraph;

(6) the redemption, repurchase, retirement or other acquisition of any
subordinated Indebtedness of Cummins in exchange for or out of the net cash
proceeds of the substantially concurrent sale (other than to a Subsidiary of
Cummins) of Indebtedness that is subordinated in right of payment to the
Notes; provided, that the proceeds of such sale of such Indebtedness shall
not be (and have not been) included in clause (3) of the preceding
paragraph;

(7) so long as no Event of Default has occurred and is continuing, any
purchase or redemption or other retirement for value of Qualified Capital
Stock of Cummins required pursuant to any employment, severance or
compensation agreement, shareholders agreement, management agreement or
employee stock option or restricted stock agreement in accordance with the
provisions of any such agreement in an amount not to exceed $15.0 million in
the aggregate; provided, that with respect to purchases and redemptions made
by Cummins to its employees pursuant to Cummins' Key Employee Stock
Investment Program only (or any similar program or

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arrangement duly adopted by Cummins to supplement or replace the Key
Employee Stock Investment Program), the amount of such purchase or
redemption shall be equal to the amount of net cash paid by Cummins in
respect of such shares of Qualified Capital Stock (excluding any payment
evidenced by the forgiveness or cancellation by Cummins of any Indebtedness
owned by Cummins, the proceeds of which originally were used to purchase
such shares of Qualified Capital Stock);

(8) repurchases of Capital Stock deemed to occur upon the exercise of
stock options if such Capital Stock represents a portion of the exercise
price thereof;

(9) so long as no Event of Default has occurred and is continuing,
Investments in Permitted Joint Ventures and the Permitted Unrestricted
Subsidiary; provided, that after giving pro forma effect to such Investment,
Cummins could incur at least $1.00 of additional Indebtedness pursuant to
the terms of the indenture described in clause (a)(1) of "--Limitation on
Incurrence of Indebtedness and Issuance of Preferred Stock" above; provided,
further, that the aggregate amount of such Investments made pursuant to this
clause (9) shall not exceed $60.0 million in any one fiscal year;

(10) Restricted Payments by Cummins or any of its Restricted
Subsidiaries not otherwise permitted to be made under clauses (1) through
(9) above and (11) and (12) below in an aggregate amount not to exceed
$15.0 million;

(11) payments of dividends on Disqualified Stock issued pursuant to the
terms of the indenture described in "--Limitation on Incurrence of
Indebtedness and Issuance of Preferred Stock" above; and

(12) payments of intercompany debt, the incurrence of which was
permitted pursuant to the terms of the indenture described in "--Limitation
on Incurrence of Indebtedness and Issuance of Preferred Stock" above;
provided, that no Default or Event of Default has occurred and is continuing
or would otherwise result therefrom.

Each Restricted Payment described in clauses (1) and (7) of the previous
sentence shall be taken into account (and the Restricted Payments described in
the remaining clauses shall not be taken into account) for purposes of computing
the aggregate amount of all Restricted Payments made pursuant to clause (3) of
the preceding paragraph.

LIMITATION ON LIENS. (a) The indenture provides that Cummins will not, and
will not cause or permit any of its Restricted Subsidiaries to, create, incur,
assume or suffer to exist any Liens upon any of their respective properties or
assets (including, without limitation, any asset in the form of the right to
receive payments, fees or other consideration or benefits) whether owned on the
Issue Date or acquired after the Issue Date, other than:

(1) Liens granted by Cummins on property or assets of Cummins securing
Indebtedness of Cummins that is permitted by the indenture and that is PARI
PASSU with the Notes; provided, that the Notes are secured on an equal and
ratable basis with such Liens for so long as such Indebtedness shall be so
secured;

(2) Liens granted by Cummins on property or assets of Cummins securing
Indebtedness of Cummins that is permitted by the indenture and that is
subordinated to the Notes; provided, that the Notes are secured by Liens
ranking prior to such Liens for so long as such Indebtedness shall be so
secured;

(3) Permitted Liens; and

(4) Liens in respect of Acquired Indebtedness permitted by the
indenture; provided, that the Liens in respect of such Acquired Indebtedness
secured such Acquired Indebtedness at the time of the incurrence of such
Acquired Indebtedness and such Liens and the Acquired Indebtedness were

117

not incurred by Cummins or by the Person being acquired or from whom the
assets were acquired in connection with, or in anticipation of, the
incurrence of such Acquired Indebtedness by Cummins, and provided further,
that such Liens in respect of such Acquired Indebtedness do not extend to or
cover any property or assets of Cummins or of any Restricted Subsidiary of
Cummins other than the property or assets that secured the Acquired
Indebtedness prior to the time such Indebtedness became Acquired
Indebtedness.

(b) The indenture provides that, in the event that section (a) of this
covenant no longer applies to Cummins and its Restricted Subsidiaries in light
of the circumstances described above under "--Suspension of Covenants and
Covenant Substitution", except with respect to Indebtedness between Cummins and
any Restricted Subsidiaries, Cummins will not, and will not permit Restricted
Subsidiaries to, become liable for any Secured Debt other than Permitted Secured
Debt without equally and ratably securing the Notes for so long as such Secured
Debt shall be so secured. Notwithstanding the foregoing, Cummins and its
Restricted Subsidiaries may, without equally and ratably securing the Notes,
become liable for Secured Debt, provided, that after giving effect thereto the
aggregate amount of such Secured Debt then outstanding (not including Permitted
Secured Debt) and the Attributable Indebtedness with respect to Sale and
Leaseback Transactions (other than Sale and Leaseback Transactions permitted
under clauses (b)(1) through (4) and (6) described under "--Limitation on Sale
and Leaseback Transactions") at such time does not exceed 10% of Consolidated
Net Tangible Assets.

LIMITATION ON CERTAIN ASSET DISPOSITIONS. The indenture provides that
Cummins will not, and will not cause or permit any of its Restricted
Subsidiaries to, directly or indirectly, make one or more Asset Dispositions
unless:

(1) Cummins or the Restricted Subsidiary, as the case may be, receives
consideration for such Asset Disposition at least equal to the fair market
value of the assets sold or disposed of (as determined in good faith by
Cummins);

(2) not less than 75% of the consideration for the disposition consists
of (i) cash or readily marketable Cash Equivalents, (ii) the assumption of
Indebtedness (other than non-recourse Indebtedness or any Indebtedness
subordinated to the Notes) of Cummins or such Restricted Subsidiary or other
obligations relating to such assets (and release of Cummins or such
Restricted Subsidiary from all liability on the Indebtedness or other
obligations assumed) or (iii) securities received by Cummins or any
Restricted Subsidiary from the transferee that are converted within 90 days
of receipt by Cummins or such Restricted Subsidiary into cash, to the extent
of the cash received in that conversion; and

(3) all Net Available Proceeds, less any amounts invested or committed
to be invested within 360 days of such Asset Disposition in Related Business
Assets (including capital expenditures or the Capital Stock of another
Person (other than Cummins); provided, that immediately after giving effect
to any such investment such Person shall be a Restricted Subsidiary of
Cummins), are applied, on or prior to the 360th day after such Asset
Disposition (unless and to the extent that Cummins shall determine to make
an Offer to Purchase), either to

(a) the permanent reduction and prepayment of any Indebtedness of
Cummins (other than Indebtedness which is expressly subordinate to the
Notes) then outstanding (including a permanent reduction of commitments
in respect thereof) or

(b) the permanent reduction and repayment of any Indebtedness of any
Restricted Subsidiary of Cummins then outstanding (including a permanent
reduction of commitments in respect thereof).

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The 361st day after such Asset Disposition shall be deemed to be the "ASSET
SALE OFFER TRIGGER DATE," and the amount of Net Available Proceeds from Asset
Dispositions otherwise subject to the preceding provisions not so applied or as
to which Cummins has determined not to so apply shall be referred to as the
"UNUTILIZED NET AVAILABLE PROCEEDS." Within fifteen days after the Asset Sale
Offer Trigger Date, Cummins shall make an Offer to Purchase the outstanding
Notes in the aggregate amount of the Unutilized Net Available Proceeds at a
purchase price in cash equal to 100% of their principal amount plus any accrued
and unpaid interest thereon to the Purchase Date. Notwithstanding the foregoing,
Cummins may defer making any Offer to Purchase outstanding Notes until there are
aggregate Unutilized Net Available Proceeds equal to or in excess of
$25.0 million (at which time, the entire Unutilized Net Available Proceeds, and
not just the amount in excess of $25.0 million, shall be applied as required
pursuant to this paragraph). Pending application of the Unutilized Net Available
Proceeds pursuant to this covenant, such Unutilized Net Available Proceeds shall
be invested in Permitted Investments of the types described in clauses (1),
(2) and (3) of the definition of "Permitted Investments."

If any Indebtedness of Cummins or any of its Restricted Subsidiaries ranking
PARI PASSU with the Notes requires that prepayment of, or an offer to prepay,
such Indebtedness be made with any Net Available Proceeds, Cummins may apply
such Net Available Proceeds pro rata (based on the aggregate principal amount of
the Notes then outstanding and the aggregate principal amount (or accreted
value, if less) of all such other Indebtedness then outstanding) to the making
of an Offer to Purchase the Notes in accordance with the foregoing provisions
and the prepayment or the offer to prepay such PARI PASSUIndebtedness. Any
remaining Net Available Proceeds following the completion of the required Offer
to Purchase may be used by Cummins for any other purpose (subject to the other
provisions of the indenture) and the amount of Net Available Proceeds then
required to be otherwise applied in accordance with this covenant shall be reset
to zero, subject to any subsequent Asset Disposition. These provisions will not
apply to a transaction consummated in compliance with the provisions of the
indenture described under "--Merger, Consolidation, Etc." below.

In the event that Cummins makes an Offer to Purchase the Notes, Cummins
shall comply with any applicable securities laws and regulations, including any
applicable requirements of Section 14(e) of, and Rule 14e-1 under, the Exchange
Act, and any violation of the provisions of the indenture relating to such Offer
to Purchase occurring as a result of such compliance shall not be deemed an
Event of Default or an event that with the passing of time or giving of notice,
or both, would constitute an Event of Default.

Cummins' ability to repurchase the Notes may be limited by other
then-existing borrowing agreements of Cummins and its Restricted Subsidiaries.
There can be no assurance that Cummins will be able to obtain a consent or a
waiver of such limitations. See "--Limitation on Restricted Payments".

LIMITATION ON SALE AND LEASEBACK TRANSACTIONS. (a) The indenture provides
that Cummins will not, and will not cause or permit any Restricted Subsidiary
to, enter into any Sale and Leaseback Transaction with respect to any property
unless:

(1) Cummins or such Restricted Subsidiary, as the case may be, receives
consideration at the time of such Sale/Leaseback Transaction at least equal
to the fair market value (as determined by the Board of Directors of Cummins
if the fair market value exceeds $20.0 million) of the property subject to
such transaction;

(2) Cummins or such Restricted Subsidiary could have incurred
Indebtedness in an amount equal to the Attributable Indebtedness in respect
of such Sale and Leaseback Transaction pursuant to the covenant described
under "--Limitation on Incurrence of Indebtedness and Issuance of Preferred
Stock"; and

119

(3) the Sale and Leaseback Transaction is treated as an Asset
Disposition and all of the conditions of the indenture described under
"--Limitation on Certain Asset Dispositions" (including the provisions
concerning the application of Net Available Proceeds after the Sale and
Leaseback Transaction) are satisfied at the time required to be satisfied
pursuant to that covenant with respect to such Sale and Leaseback
Transaction, treating all of the cash consideration (with the items
constituting cash consideration to be determined in accordance with
"--Limitation on Certain Asset Dispositions") received in such Sale and
Leaseback Transaction as Net Available Proceeds for purposes of such
covenant.

For the purposes of this section (a), the term "SALE AND LEASEBACK
TRANSACTION" means an arrangement relating to property now owned or hereafter
acquired whereby Cummins or a Restricted Subsidiary transfers such property to a
person and Cummins or a Restricted Subsidiary leases it from such Person.

(1) the transaction is entered into to finance the cost of acquiring
such property or within 180 days after such acquisition,

(2) the transaction is entered into to finance the cost of improvements
to such unimproved property,

(3) the transaction is one of certain types in which the lessor is a
governmental entity,

(4) the transaction involves the extension, renewal or replacement of
the transactions referred to in clauses (a) through (c) above,

(5) the property involved is property that could be mortgaged without
equally and ratably securing the Notes under the last sentence of
section (b) of the covenant described under "--Limitation on Liens" or

(6) an amount equal to the proceeds of sale or the fair value of the
property sold (whichever is higher) is applied to the retirement of funded
debt of the Cummins.

For the purposes of this section (b), the term "SALE AND LEASEBACK
TRANSACTION" means any arrangement with any bank, insurance company or other
lender or investor, or to which any such lender or investor is a party,
providing for the leasing to Cummins or a Restricted Subsidiary of any Principal
Property (except a lease for a temporary period not to exceed three years by the
end of which it is intended that the use of such Principal Property by the
lessee will be discontinued or a lease under which Cummins or a Wholly Owned
Subsidiary is the lessor) which has been or is to be sold or transferred by
Cummins or such Restricted Subsidiary to such lender or investor or to any
Person to whom funds have been or are to be advanced by such lender or investor
on the security of such Principal Property.

LIMITATION ON PAYMENT RESTRICTIONS AFFECTING RESTRICTED SUBSIDIARIES. The
indenture provides that Cummins will not, and will not cause or permit any of
its Restricted Subsidiaries to, directly or indirectly, create or suffer to
exist or allow to become effective any consensual encumbrance or restriction of
any kind on the ability of any such Restricted Subsidiary to:

(1) pay dividends, in cash or otherwise, or make other payments or
distributions on its Capital Stock or any other equity interest or
participation in, or measured by, its profits, owned by

120

Cummins or by any Restricted Subsidiary of Cummins, or make payments on any
Indebtedness owed to Cummins or to any Restricted Subsidiary of Cummins;

(2) make loans or advances to Cummins or any Subsidiary Guarantor; or

(3) transfer any of their respective property or assets to Cummins or
any Subsidiary Guarantor.

The preceding restrictions, however, do not apply to encumbrances or
restrictions existing under or by reason of:

(1) applicable law or regulations;

(2) any agreement in effect on the Issue Date as any such agreement is
in effect on such date;

(3) any agreement relating to any Restricted Subsidiary prior to the
date on which such Restricted Subsidiary became a Subsidiary of Cummins and
in effect on such date and not relating to Indebtedness incurred in
anticipation or contemplation of becoming a Restricted Subsidiary of
Cummins, provided, that such encumbrance or restriction shall not apply to
any assets of Cummins or its Restricted Subsidiaries other than such
Restricted Subsidiary;

(4) any agreement effecting an amendment, renewal, replacement or
extension of an agreement referred to in clause (2) or (3) of this paragraph
or this clause (4); provided, however, that the encumbrances and
restrictions contained in any such amendment, renewal, replacement or
extension are no less favorable in any material respect to the Holders of
the Notes than the encumbrances and restrictions contained in such
agreements referred to in clauses (2) and (3) of this paragraph;

(5) Indebtedness or any other contractual requirements (including
pursuant to any corporate governance documents in the nature of a charter or
by-laws) of a Securitization Subsidiary arising in connection with a
Qualified Securitization Transaction, provided, that any such encumbrances
and restrictions apply only to such Securitization Subsidiary;

(6) any encumbrance or restriction with respect to a Restricted
Subsidiary imposed pursuant to an agreement entered into for the sale or
disposition of all or a portion of the Capital Stock or assets of such
Restricted Subsidiary pending the closing of such sale or disposition;

(7) any encumbrance or restriction contained in security agreements or
mortgages securing Indebtedness of a Restricted Subsidiary to the extent
such encumbrance or restriction restricts the transfer of the property
subject to such security agreement or mortgage;

(8) any restrictions on cash or other deposits or net worth imposed by
suppliers or landlords under agreements entered into in the ordinary course
of business;

(9) with respect to clause (3) of the preceding paragraph, any
encumbrance or restriction consisting of customary nonassignment provisions
in leases governing leasehold interests to the extent such provisions
restrict the transfer of the lease or the property leased thereunder;

(10) provisions with respect to the disposition or distribution of
assets or property in joint venture agreements; or

(11) the indenture.

LIMITATION ON TRANSACTIONS WITH AFFILIATES. The indenture provides that
Cummins will not, and will not cause or permit any of its Restricted
Subsidiaries to:

(1) sell, lease, transfer or otherwise dispose of any of its property or
assets to any Affiliate of Cummins or of any Subsidiary,

121

(2) purchase any property or assets from any Affiliate of Cummins or of
any Subsidiary,

(3) make any Investment in any Affiliate of Cummins or of any
Subsidiary, or

(4) enter into or amend or extend any contract, agreement or
understanding with or for the benefit of, any Affiliate of Cummins or of any
Subsidiary (each of (1) through (4) being an "AFFILIATE TRANSACTION"),

other than Affiliate Transactions that are on terms that are no less favorable
to Cummins or such Restricted Subsidiary of Cummins than those that could be
obtained in a comparable arm's length transaction by Cummins or such Restricted
Subsidiary of Cummins from an unaffiliated party; provided, that if Cummins or
any Restricted Subsidiary of Cummins enters into an Affiliate Transaction or
series of Affiliate Transactions involving or having an aggregate value of
(a) more than $5.0 million, a majority of the disinterested members of the Board
of Directors of Cummins or a committee thereof shall, prior to the consummation
of such Affiliate Transaction, have determined (as evidenced by a resolution
thereof) that such Affiliate Transaction meets the foregoing standard and
(b) more than $25.0 million, Cummins obtains a written opinion from an
Independent Financial Advisor to the effect that the consideration to be paid or
received in connection with such Affiliate Transaction is fair, from a financial
point of view, to Cummins and the Restricted Subsidiaries.

The foregoing restrictions do not apply to:

(1) any transaction between Restricted Subsidiaries of Cummins, or
between Cummins and any Restricted Subsidiary of Cummins if such transaction
is not otherwise prohibited by the terms of the indenture;

(2) reasonable fees and compensation paid to and advances of expenses to
and indemnity provided on behalf of officers, directors, employees or
consultants of Cummins or any Subsidiary as determined in good faith by
Cummins' Board of Directors or senior management;

(3) any Qualified Securitization Transactions;

(4) any agreement as in effect as of the Issue Date or any amendment
thereto or any transaction contemplated thereby (including pursuant to any
amendment thereto) or in any replacement agreement thereto so long as any
such amendment or replacement agreement is not more disadvantageous to the
holders of the Notes in any material respect than the original agreement as
in effect on the Issue Date;

(5) Restricted Payments permitted by the indenture;

(6) joint venture partners, Permitted Joint Ventures or purchasers or
sellers of goods or services, in each case in the ordinary course of
business (including, without limitation, pursuant to joint venture
agreements) and otherwise in compliance with the terms of the indenture
which are fair to Cummins or its Restricted Subsidiaries, in the reasonable
determination of the senior management of Cummins, or are on terms at least
as favorable as might reasonably have been obtained at such time from an
unaffiliated party;

(7) any employment or compensation arrangement entered into by Cummins
or any of its Restricted Subsidiaries in the ordinary course of business
that is not otherwise prohibited by the indenture;

(8) loans or advances to employees or consultants in the ordinary course
of business in an aggregate amount not to exceed $5.0 million at any one
time outstanding; and

(9) the issuance and sale of any Qualified Capital Stock of Cummins.

CHANGE OF CONTROL. Upon the occurrence of a Change of Control (the date of
each such occurrence being the "CHANGE OF CONTROL DATE"), Cummins will notify
the Holders in writing of such

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occurrence and will commence an Offer to Purchase (the "CHANGE OF CONTROL
OFFER") all Notes then outstanding, in each case, at a purchase price equal to
101% of the principal amount thereof, plus accrued and unpaid interest, if any,
to the Purchase Date. Notice of a Change of Control will be mailed by Cummins to
the Holders not more than 30 days after any Change of Control Date.

None of the provisions relating to a purchase upon a Change of Control are
waivable by the Board of Directors of Cummins. Cummins could, in the future,
enter into certain transactions, including certain recapitalizations of Cummins,
that would not constitute a Change of Control with respect to the Change of
Control purchase feature of the Notes, but would increase the amount of
Indebtedness outstanding at such time. If a Change of Control were to occur,
there can be no assurance that Cummins would have sufficient funds to pay the
redemption price for all Notes that Cummins is required to redeem. In the event
that Cummins were required to purchase outstanding Notes pursuant to a Change of
Control Offer, Cummins expects that it would need to seek third-party financing
to the extent it does not have available funds to meet its purchase obligations.
However, there can be no assurance that Cummins would be able to obtain such
financing. See "Risk Factors--Risks Factors Relating to this Offering--We may
not have the ability to raise the funds necessary to finance the change of
control offer required by the notes indenture".

With respect to the disposition of property or assets, the phrase "all or
substantially all" as used in the indenture (including as set forth under
"--Merger, Consolidation, Etc." below) varies according to the facts and
circumstances of the subject transaction, has no clearly established meaning
under New York law (which governs the indenture and the Notes) and is subject to
judicial interpretation. Accordingly, in certain circumstances there may be a
degree of uncertainty in ascertaining whether a particular transaction would
involve a disposition of "all or substantially all" of the property or assets of
a Person and therefore it may be unclear as to whether a Change of Control has
occurred and whether the Holders are subject to a Change of Control Offer.

Cummins' ability to repurchase Notes may be limited by other then-existing
borrowing agreements of Cummins and its Subsidiaries. There can be no assurance
that Cummins will be able to obtain such a consent or a waiver of such
limitations. See "--Limitation on Restricted Payments."

In the event Cummins makes a Change of Control Offer, Cummins shall comply
with any applicable securities laws and regulations, including any applicable
requirements of Section 14(e) of, and Rule 14e-1 under, the Exchange Act and any
violation of the provisions of the indenture relating to such Change of Control
Offer occurring as a result of such compliance shall not be deemed an Event of
Default or an event that with the passing of time or giving of notice, or both,
would constitute an Event of Default.

The Change of Control redemption feature of the Notes may in certain
circumstances make more difficult or discourage a takeover of Cummins and, thus,
the removal of incumbent management.

FUTURE GUARANTORS. Cummins will cause each domestic Restricted Subsidiary
(other than the Restricted Subsidiaries as defined in paragraph (b) of the
definition of "Restricted Subsidiaries") that is not a Subsidiary Guarantor that
guarantees any other Indebtedness of Cummins or any Subsidiary Guarantor to, at
the same time, execute and deliver to the Trustee a supplemental indenture
pursuant to which such Restricted Subsidiary will fully and unconditionally
guarantee payment of the Notes on the same terms and conditions as those set
forth in the indenture.

REPORTS. So long as any Note is outstanding, Cummins will file with the SEC
and, within 15 days after it files them with the SEC, file with the Trustee and
mail or cause to be mailed, to the Holders at their addresses as set forth in
the register of the Notes, copies of the annual reports and of the information,
documents and other reports which Cummins is required to file with the SEC
pursuant to Section 13 or 15(d) of the Exchange Act or which Cummins would be
required to file with the SEC if Cummins then had a class of securities
registered under the Exchange Act. In addition, Cummins shall

123

cause its annual report to stockholders and any quarterly or other financial
reports furnished to its stockholders generally to be filed with the Trustee and
mailed, no later than the date such materials are mailed or made available to
Cummins' stockholders, to the Holders at their addresses as set forth in the
register of Notes.

MERGER, CONSOLIDATION, ETC. Cummins will not consolidate with or merge with
or into any other Person, or transfer (by lease, assignment, sale, or otherwise)
all or substantially all of its properties and assets to another Person unless
(1) either (A) Cummins shall be the continuing or surviving Person in such a
consolidation or merger or (B) the Person (if other than Cummins) formed by such
consolidation or into which Cummins is merged or to which all or substantially
all of the properties and assets of Cummins are transferred (Cummins or such
other Person being referred to as the "SURVIVING PERSON") shall be a corporation
organized and validly existing under the laws of the United States, any state
thereof, or the District of Columbia, and shall expressly assume, by a
supplemental indenture, all the obligations of Cummins under the Notes and the
indenture, (2) immediately after the transaction and the incurrence or
anticipated incurrence of any Indebtedness to be incurred in connection
therewith, no Event of Default will exist, (3) immediately after giving effect
to such transaction and the assumption contemplated by clause (1) above
(including giving effect to any Indebtedness and Acquired Indebtedness incurred
or anticipated to be incurred in connection with or in respect of such
transaction), the Surviving Person could incur at least $1.00 of additional
Indebtedness pursuant to clause (a)(1) of "--Limitation on Incurrence of
Indebtedness and Issuance of Preferred Stock" and (4) an officer's certificate
has been delivered to the Trustee to the effect that the conditions set forth in
the preceding clauses (1), (2) and, to the extent then applicable, (3), have
been satisfied and an opinion of counsel (from a counsel who shall not be an
employee of Cummins) has been delivered to the Trustee to the effect that the
conditions set forth in the preceding clause (1) and, to the extent then
applicable, clause (3), have been satisfied.

Notwithstanding the foregoing, the provisions of clause (3) of the preceding
paragraph is not applicable to (A) a Restricted Subsidiary consolidating with,
merging into or transferring all or part of its properties and assets to Cummins
or any of its Restricted Subsidiaries or (B) Cummins merging with a Wholly Owned
Subsidiary of Cummins solely for the purpose and with the sole effect of
reincorporating Cummins in another jurisdiction; provided, that such entity will
be organized under the laws of the United States, one of the States thereof or
the District of Columbia.

Upon any consolidation, merger or transfer in accordance with the foregoing,
the Surviving Person will succeed to and be substituted for Cummins with the
same effect as if it had been named herein as a party hereto, and thereafter the
predecessor corporation will be relieved of all obligations and covenants under
the Notes and the indenture.

No Subsidiary Guarantor will be permitted to:

- consolidate with or merge with or into any Person; or

- sell, convey, transfer or dispose of, all or substantially all its assets
as an entirety or substantially as an entirety, in one transaction or a
series of related transactions, to any Person; or

- permit any Person to merge with or into the Subsidiary Guarantor unless:

(A) the other Person is Cummins or any Restricted Subsidiary that is a
Subsidiary Guarantor or becomes a Subsidiary Guarantor concurrently with the
transaction; or

(B) (1) either (x) the Subsidiary Guarantor is the continuing Person or
(y) the resulting, surviving or transferee Person expressly assumes by
supplemental indenture all of the obligations of the Subsidiary Guarantor
under its Subsidiary Guarantee; and

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(2) immediately after giving effect to the transaction, no Event of
Default will exist; or

(C) the transaction constitutes a sale or other disposition (including
by way of consolidation or merger) of the Subsidiary Guarantor or the sale
or disposition of all or substantially all the assets of the Subsidiary
Guarantor (in each case other than to Cummins or a Restricted Subsidiary)
otherwise permitted by the indenture.

PAYMENTS FOR CONSENTS. Neither Cummins nor any of its Restricted
Subsidiaries will, directly or indirectly, pay or cause to be paid any
consideration, whether by way of interest, fees or otherwise, to any holder of
any Notes for or as an inducement to any consent, waiver or amendment of any of
the terms or provisions of the indenture or the Notes unless such consideration
is offered to be paid or is paid to all holders of the Notes that consent, waive
or agree to amend in the time frame set forth in the solicitation documents
relating to such consent, waiver or amendment.

EVENTS OF DEFAULT

The following are Events of Default under the indenture:

(1) default in the payment of principal of, or premium, if any, on any
Note when due at maturity, upon repurchase, upon acceleration or otherwise,
including, without limitation, failure of Cummins to repurchase any Note on
the date required following a Change of Control; or

(2) default in the payment of any installment of interest on any Note
(including any additional interest to be paid as required by the
registration rights agreement), when due and continuance of such Default for
30 days or more; or

(3) failure to observe, perform or comply with any of the applicable
provisions described under "Certain Covenants--Merger, Consolidation, Etc."
above; or

(4) default (other than a default set forth in clauses (1), (2) and
(3) above) in the performance of, or breach of, any other applicable
covenant or warranty of Cummins or of any Restricted Subsidiary in the
indenture and failure to remedy such default or breach within a period of
60 days after written notice from the Trustee or the Holders of at least 25%
in aggregate principal amount of the then outstanding Notes; or

(5) default under any mortgage, indenture or instrument under which
there may be issued or by which there may be secured or evidenced any
Indebtedness for money borrowed by Cummins or any Restricted Subsidiary of
Cummins (or the payment of which is guaranteed by Cummins or any Restricted
Subsidiary of Cummins), which default results in the acceleration of such
Indebtedness prior to its express maturity and the principal amount of any
such Indebtedness, together with the principal amount of any other such
Indebtedness the maturity of which has been so accelerated, aggregates
$10.0 million or more and such acceleration has not been rescinded or
annulled or such Indebtedness discharged in full within 30 days; or

(6) the entry by a court of competent jurisdiction of one or more
judgments, orders or decrees against Cummins or any Restricted Subsidiary of
Cummins or any of their respective property or assets in an aggregate amount
in excess of $10.0 million, which judgments, orders or decrees have not been
vacated, discharged, satisfied or stayed pending appeal within 30 days from
the entry thereof and with respect to which legal enforcement proceedings
have been commenced; or

(7) certain events of bankruptcy, insolvency or reorganization involving
Cummins or any Material Subsidiary of Cummins; or

(8) any Subsidiary Guarantee shall be held in any judicial proceeding to
be unenforceable or invalid or shall cease for any reason to be in full
force and effect or Cummins or any Subsidiary

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Guarantor, or any Person acting on behalf of any Subsidiary Guarantor, shall
deny or disaffirm its obligations under any Subsidiary Guarantee.

If an Event of Default (other than an Event of Default referred to in
clause (7) above involving Cummins or a Subsidiary Guarantor) occurs and is
continuing, then and in every such case the Trustee or the Holders of not less
than 25% in aggregate principal amount of the then outstanding Notes may, and
the Trustee shall upon the request of Holders of not less than 25% in aggregate
principal amount of the Notes then outstanding, declare the unpaid principal of,
premium, if any, and accrued and unpaid interest on all the Notes then
outstanding to be due and payable, by a notice in writing to Cummins (and to the
Trustee, if given by Holders) and upon such declaration such principal amount,
premium, if any, and accrued and unpaid interest will become immediately due and
payable, notwithstanding anything contained in the indenture or the Notes to the
contrary. If an Event of Default referred to in clause (7) above involving
Cummins or a Subsidiary Guarantor occurs, all unpaid principal of, and premium,
if any, and accrued and unpaid interest on the Notes then outstanding will IPSO
FACTO become due and payable without any declaration or other act on the part of
the Trustee or any Holder.

No Holder of any Note may enforce the indenture or the Notes except as
provided in the indenture. Subject to the provisions of the indenture relating
to the duties of the Trustee, the Trustee is under no obligation to exercise any
of its rights or powers under the indenture at the request, order or direction
of any of the Holders, unless such Holders have offered to the Trustee
reasonable indemnity. Subject to all provisions of the indenture and applicable
law, the Holders of a majority in aggregate principal amount of the then
outstanding Notes have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the Trustee or exercising
any trust or power conferred on the Trustee. The Trustee may withhold from the
Holders notice of any continuing Default or Event of Default (except a Default
or Event of Default in the payment of principal of or premium, if any, or
interest on the Notes or that resulted from the failure of Cummins to comply
with the provisions of "--Certain Covenants--Change of Control" or "--Merger,
Consolidation, Etc." above) if it determines that withholding notice is in their
interest.

The Holders of a majority in aggregate principal amount of the Notes then
outstanding by notice to the Trustee may rescind an acceleration of such Notes
and its consequences if all existing Events of Default (other than the
nonpayment of principal of and premium, if any, and interest on the Notes which
has become due solely by virtue of such acceleration) have been cured or waived
and if the rescission would not conflict with any judgment or decree. No such
rescission shall affect any subsequent Default or impair any right consequent
thereto.

The Holders of a majority in aggregate principal amount of the Notes then
outstanding may, on behalf of the Holders of all the Notes, waive any past
Default or Event of Default under the indenture as it relates to the Notes and
its consequences, except a Default in the payment of principal of or premium, if
any, or interest on the Notes or in respect of a covenant or provision of the
indenture which cannot be modified or amended without the consent of all
Holders.

Under the indenture, an officer of Cummins is required to provide a
certificate to the Trustee promptly upon any such officer obtaining knowledge of
any Default or Event of Default that has occurred and, if applicable, describe
such Default or Event of Default and the status thereof (provided that an
officer shall certify at least annually whether or not any Default or Event of
Default has occurred).

AMENDMENT, SUPPLEMENT AND WAIVER

From time to time, Cummins, the Subsidiary Guarantors and the Trustee may,
without the consent of the Holders, amend, waive or supplement the indenture and
the Notes issued thereunder for certain specified purposes, including, among
other things, curing ambiguities, defects or inconsistencies,

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qualifying, or maintaining the qualification of, the indenture under the Trust
Indenture Act, or making any change that does not adversely affect the rights of
any Holder. Other amendments and modifications of the indenture and the Notes
issued thereunder may be made by Cummins, the Subsidiary Guarantors and the
Trustee with the consent of the Holders of not less than a majority of the
aggregate principal amount of the Notes then outstanding affected thereby.

Notwithstanding the foregoing, no amendment or modification may, without the
consent of the Holder of each outstanding Note affected thereby:

(1) change the maturity of the principal of or any installment of
interest on any such Note or alter the optional redemption or repurchase
provisions of any such Note or the indenture in a manner adverse to the
Holders of such Notes;

(2) reduce the principal amount of (or the premium) of any such Note;

(3) reduce the rate of or extend the time for payment of interest on any
Note;

(4) change the place or currency of payment of principal of (or premium)
or interest on any such Note;

(5) modify any provisions of the indenture relating to the waiver of
past defaults (other than to add sections to the indenture or the Notes
subject thereto which do not adversely affect the Holders of Notes) or the
right of the Holders of Notes outstanding thereunder to institute suit for
the enforcement of any payment on or with respect to any Notes or the
modification and amendment of the indenture and any Notes (other than to add
sections to the indenture or the Notes which may not be amended,
supplemented or waived without the consent of each Holder herein affected);

(6) reduce the percentage of the principal amount of outstanding Notes
necessary for amendment to or waiver of compliance with any provision of the
applicable indenture or the Notes outstanding thereunder or for waiver of
any Default in respect thereof;

(7) waive a default in the payment of principal of, interest on, or
redemption payment with respect to, such Note (except a rescission of
acceleration of the Notes by the Holders thereof as provided in the
indenture and a waiver of the payment default that resulted from such
acceleration);

(8) modify the ranking or priority of the Notes;

(9) after the obligation has arisen to make an Offer to Purchase or a
Change of Control Offer, modify the provisions relating to any Offer to
Purchase or Change of Control Offer required under the covenants described
under "--Certain Covenants--Limitation on Certain Asset Dispositions" or
"--Certain Covenants--Change of Control" in a manner materially adverse to
the Holders of Notes affected thereby; or

(10) release any Subsidiary Guarantor from any of its obligations under
its Subsidiary Guarantee or the indenture other than in accordance with the
provisions of the indenture, or amend or modify any provision relating to
such release.

DEFEASANCE OR COVENANT DEFEASANCE OF INDENTURE

Cummins may, at its option and at any time, terminate the obligations of
Cummins with respect to the Notes ("DEFEASANCE"). Such defeasance means that
Cummins shall be deemed to have paid and discharged the entire Indebtedness
represented by the outstanding Notes so defeased, except for:

(1) the rights of holders of outstanding Notes to receive payment in
respect of the principal of, premium, if any, and interest on such Notes
when such payments are due;

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(2) Cummins' obligations to issue temporary Notes, register the transfer
or exchange of any Notes, replace mutilated, destroyed, lost or stolen Notes
and maintain an office or agency for payments in respect of the Notes;

(3) the rights, powers, trusts, duties and immunities of the Trustee;
and

(4) the defeasance provisions of the indenture.

In addition, Cummins may, at its option and at any time, elect to terminate
its obligations with respect to certain covenants that are set forth in the
indenture with respect to the Notes, some of which are described under
"--Certain Covenants" above, and any omission to comply with such obligations
shall not constitute a Default or an Event of Default with respect to the Notes
so defeased ("COVENANT DEFEASANCE").

In order to exercise either defeasance or covenant defeasance:

(1) Cummins must irrevocably deposit with the Trustee, in trust, for the
benefit of the holders of the Notes to be defeased cash in United States
dollars, U.S. Government Obligations, or a combination thereof, in such
amounts as will be sufficient, in the opinion of a nationally recognized
firm of independent public accountants, to pay the principal of, premium, if
any, and interest on the outstanding Notes to be defeased to redemption or
maturity;

(2) Cummins shall have delivered to the Trustee an opinion of counsel to
the effect that the holders of the outstanding Notes to be defeased will not
recognize income, gain or loss for Federal income tax purposes as a result
of such defeasance or covenant defeasance and will be subject to Federal
income tax on the same amounts, in the same manner and at the same times as
would have been the case if the act of such defeasance or covenant
defeasance had not occurred (in the case of defeasance, such opinion must
refer to and be based upon a ruling of the Internal Revenue Service or a
change in applicable Federal income tax laws);

(3) no Default or Event of Default under the indenture shall have
occurred and be continuing immediately after giving effect to such deposit;

(4) such defeasance or covenant defeasance shall not cause the Trustee
to have a conflicting interest with respect to any securities of Cummins;

(5) such defeasance or covenant defeasance shall not result in a breach
or violation of, or constitute a default under, any material agreement or
instrument to which Cummins is a party or by which it is bound;

(6) Cummins shall have delivered to the Trustee an opinion of counsel to
the effect that after the 91st day following the deposit, the trust funds
will not be subject to the effect of any applicable bankruptcy, insolvency,
reorganization or similar laws affecting creditors' rights generally; and

(7) Cummins shall have delivered to the Trustee an officer's certificate
and an opinion of counsel, each stating that all conditions precedent under
the indenture to either defeasance or covenant defeasance, as the case may
be, have been complied with.

Notwithstanding the foregoing, the opinion of counsel required by
clause (2) above need not be delivered if at such time all outstanding Notes
have been irrevocably called for redemption.

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SATISFACTION AND DISCHARGE

The indenture will be discharged and will cease to be of further effect
(except as to surviving rights or registration of transfer or exchange of the
Notes issued thereunder, as expressly provided for in such indenture) as to all
outstanding Notes issued thereunder when:

(1) either

(a) all the Notes issued thereunder theretofore authenticated and
delivered (except lost, stolen or destroyed Notes issued thereunder which
have been replaced or paid and Notes issued thereunder for whose payment
money has theretofore been deposited in trust or segregated and held in
trust by Cummins and thereafter repaid to Cummins or discharged from such
trust) have been delivered to the Trustee for cancellation or

(b) all Notes issued thereunder not theretofore delivered to the
Trustee for cancellation have become due and payable, including pursuant
to an irrevocable notice of redemption given in accordance with the terms
of the indenture, and Cummins has irrevocably deposited or caused to be
deposited with the Trustee funds in U.S. dollars in an amount sufficient
to pay and discharge the entire Indebtedness on such Notes issued
thereunder not theretofore delivered to the Trustee for cancellation, for
principal of, premium, if any, and interest on such Notes issued
thereunder to the date of deposit together with irrevocable instructions
from Cummins directing the Trustee to apply such funds to the payment
thereof at maturity or on such redemption date;

(2) Cummins has paid all other sums payable under such indenture by
Cummins; and

(3) Cummins has delivered to the Trustee an officer's certificate and an
opinion of counsel stating that all conditions precedent under the indenture
relating to the satisfaction and discharge of the indenture have been
complied with.

NOTICES

All notices shall be deemed to have been given by the mailing by first class
mail, postage prepaid, of such notices to Holders of the Notes at their
registered addresses as recorded in the note register.

NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS

No director, officer, employee, incorporator or stockholder of Cummins or
any of its Subsidiaries, as such, shall have any liability for any obligations
of Cummins under the Notes or the indenture or for any claim based on, in
respect of, or by reason of, such obligations or their creation. Each holder by
accepting a Note waives and releases all such liability. The waiver and release
are part of the consideration for issuance of the Notes. Such waiver may not be
effective to waive liabilities under the federal securities laws and it is the
view of the SEC that such a waiver is against public policy.

GOVERNING LAW

The indenture and the Notes are governed by, and construed in accordance
with, the laws of the State of New York.

THE TRUSTEE

The indenture provides that, except during the continuance of an Event of
Default, the Trustee will perform only such duties as are specifically set forth
in the indenture. During the existence of an Event of Default, the Trustee will
exercise such rights and powers vested in it by the indenture, and use the same
degree of care and skill in its exercise as a prudent person would exercise or
use under the circumstances in the conduct of such person's own affairs.

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The indenture and the provisions of the Trust Indenture Act contain certain
limitations on the rights of the Trustee, should it become a creditor of
Cummins, to obtain payments of claims in certain cases or to realize on certain
property received in respect of any such claim as security or otherwise. Subject
to the Trust Indenture Act, the Trustee will be permitted to engage in other
transactions, provided that if the Trustee acquires any conflicting interest as
described in the Trust Indenture Act, it must eliminate such conflict or resign.

CERTAIN DEFINITIONS

"1986 INDENTURE" means the indenture, dated as of March 1, 1986, between
Cummins Engine Company, Inc. and The Chase Manhattan Bank (National
Association), as trustee, as amended and supplemented from time to time.

"ACQUIRED INDEBTEDNESS" of any specified Person means Indebtedness of any
other Person and its Restricted Subsidiaries existing at the time such other
Person merged with or into or became a Restricted Subsidiary of such specified
Person or assumed by the specified Person in connection with the acquisition of
assets from such other Person and not incurred by the specified Person in
connection with or in anticipation of (a) such other Person and its Restricted
Subsidiaries being merged with or into or becoming a Restricted Subsidiary of
such specified Person or (b) such acquisition by the specified Person.

"AFFILIATE" means, when used with reference to any Person, any other Person
directly or indirectly controlling, controlled by, or under direct or indirect
common control with, the referent Person, as the case may be. For the purposes
of this definition, "control" when used with respect to any specified Person
means the power to direct or cause the direction of management or policies of
the referent Person, directly or indirectly, whether through the ownership of
voting securities, by contract or otherwise; and the terms "controlling" and
"controlled" have meanings correlative of the foregoing.

"ASSET DISPOSITION" means any sale, transfer or other disposition
(including, without limitation, by merger, consolidation or Sale and Leaseback
Transaction) of:

(1) shares of Capital Stock of a Restricted Subsidiary of Cummins (other
than directors' qualifying shares); or

(2) property or assets of Cummins or any of its Restricted Subsidiaries.

Notwithstanding the foregoing, an Asset Disposition shall not include:

(1) a disposition by a Restricted Subsidiary to Cummins or by Cummins or
a Restricted Subsidiary to a Restricted Subsidiary;

(2) the sale of Cash Equivalents in the ordinary course of business;

(3) a disposition of inventory in the ordinary course of business;

(4) a disposition of obsolete or worn out property or property that is
no longer useful in the conduct of the business of Cummins and its
Restricted Subsidiaries and that is disposed of in each case in the ordinary
course of business;

(5) transactions permitted under "Certain Covenants--Merger,
Consolidation, Etc.";

(6) an issuance of Capital Stock by a Restricted Subsidiary of Cummins
to Cummins or to a Restricted Subsidiary;

130

(7) for purposes of "Certain Covenants--Limitation on Certain Asset
Dispositions" only, the making of a Permitted Investment or a disposition
subject to "Certain Covenants--Limitation on Restricted Payments";

(8) any sale, transfer or other disposition of defaulted receivables for
collection;

(9) sales or grants of licenses to use patents, trade secrets, know-how
and other intellectual property of Cummins or any of its Restricted
Subsidiaries to the extent such sale or grant does not prohibit Cummins or
any Restricted Subsidiary from using the intellectual property licensed, or
require Cummins or any Restricted Subsidiary to pay any fees for any such
use;

(10) the granting of any Lien in compliance with the terms of the
indenture (or the foreclosure thereon);

(11) sales of Receivables, equipment and related assets (including
contract rights) of the type specified in the definition of "Qualified
Securitization Transaction" to a Securitization Subsidiary for the fair
market value thereof, including cash in an amount at least equal to 90% of
the fair market value thereof as determined in accordance with GAAP;

(12) transfers of Receivables, equipment and related assets (including
contract rights) of the type specified in the definition of "Qualified
Securitization Transaction" (or a fractional undivided interest therein) by
a Securitization Subsidiary in a Qualified Securitization Transaction; and

(13) any isolated sale, transfer or other disposition that does not
(together with all related sales, transfers or dispositions) involve
consideration in excess of $5.0 million.

"ASSET SALE OFFER TRIGGER DATE" has the meaning set forth in "--Certain
Covenants--Limitation on Certain Asset Dispositions."

"ATTRIBUTABLE INDEBTEDNESS" in respect of a Sale and Leaseback Transaction
means, as at the time of determination, the present value (discounted at the
lower of the interest rates borne by the Notes, compounded annually) of the
total obligations of the lessee for rental payments during the remaining term of
the lease included in such Sale and Leaseback Transaction (including any period
for which such lease has been extended).

"AVERAGE LIFE" means, as of the date of determination, with respect to any
Indebtedness or Preferred Stock, the quotient obtained by dividing (1) the sum
of the products of the numbers of years from the date of determination to the
dates of each successive scheduled principal payment of such Indebtedness or
redemption or similar payment with respect to such Preferred Stock multiplied by
the amount of such payment by (2) the sum of all such payments.

"BOARD OF DIRECTORS" means, as to any Person, the board of directors of such
Person or any duly authorized committee thereof.

"CAPITAL STOCK" of any Person means any and all shares, interests, rights to
purchase, warrants, options, participation or other equivalents of or interests
in (however designated) equity of such Person, including any Preferred Stock,
but excluding any debt securities convertible into such equity.

"CAPITALIZED LEASE OBLIGATIONS" means an obligation that is required to be
classified and accounted for as a capitalized lease for financial reporting
purposes in accordance with GAAP, and the amount of Indebtedness represented by
such obligation will be the capitalized amount of such obligation at the time
any determination thereof is to be made as determined in accordance with GAAP,
and the Stated Maturity thereof will be the date of the last payment of rent or
any other amount due under such lease before the first date such lease may be
terminated without penalty.

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"CASH EQUIVALENTS" means

(1) securities issued or directly and fully guaranteed or insured by the
United States Government or any agency or instrumentality of the United
States (provided that the full faith and credit of the United States is
pledged in support thereof), having maturities of not more than one year
from the date of acquisition;

(2) marketable general obligations issued by any state of the United
States of America or any political subdivision of any such state or any
public instrumentality thereof maturing within one year from the date of
acquisition thereof and, at the time of acquisition, having a credit rating
of "A" or better from either S&P or Moody's;

(3) certificates of deposit, time deposits, eurodollar time deposits,
overnight bank deposits or bankers' acceptances having maturities of not
more than one year from the date of acquisition thereof issued by any
commercial bank the long-term debt of which is rated at the time of
acquisition thereof at least "A" or the equivalent thereof by S&P or
Moody's, and having combined capital and surplus in excess of
$500.0 million;

(4) repurchase obligations with a term of not more than seven days for
underlying securities of the types described in clauses (1), (2) and
(3) entered into with any bank meeting the qualifications specified in
clause (3) above;

(5) commercial paper rated at the time of acquisition thereof at least
"A-2" or the equivalent thereof by S&P or "P-2" or the equivalent thereof by
Moody's, or carrying an equivalent rating by a nationally recognized rating
agency, if both of the two named rating agencies cease publishing ratings of
investments, and in any case maturing within one year after the date of
acquisition thereof; and

(6) interests in any investment company or money market fund which
invests solely in instruments of the type specified in clauses (1) through
(5) above.

"CHANGE OF CONTROL" means the occurrence of one or more of the following
events:

(1) any "person" or "group" (as such terms are used in Section 13(d) and
14(d) of the Exchange Act), other than employee or retiree benefit plans or
trusts sponsored or established by Cummins, is or becomes the "beneficial
owner" (as defined in Rule 13d-3 under the Exchange Act), directly or
indirectly, of securities of Cummins representing 35% or more of the
combined voting power of Cummins' then outstanding Voting Stock;

(2) the following individuals cease for any reason to constitute more
than two-thirds of the number of directors then serving on the Board of
Directors of Cummins: individuals who, on the Issue Date, constitute the
Board of Directors and any new director (other than a director whose initial
assumption of the office is in connection with an actual or threatened
election contest, including but not limited to a consent solicitation,
relating to the election of directors of Cummins) whose appointment or
election by the Board of Directors or nomination for election by Cummins'
stockholders was approved by the vote of at least a majority of the
directors then still in office or whose appointment, election or nomination
was previously so approved or recommended;

(3) the shareholders of Cummins shall approve any Plan of Liquidation
(whether or not otherwise in compliance with the provisions of the
indenture); or

(4) the merger or consolidation of Cummins with or into another Person
or the merger of another Person with or into Cummins, or the sale of all or
substantially all the assets of Cummins (determined on a consolidated basis)
to another Person, other than a transaction following which (A) in the case
of a merger or consolidation transaction, holders of securities that
represented

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100% of the Voting Stock of Cummins immediately prior to such transaction
(or other securities into which such securities are converted as part of
such merger or consolidation transaction) own directly or indirectly at
least a majority of the voting power of the Voting Stock of the surviving
Person in such merger or consolidation transaction immediately after such
transaction and in substantially the same proportion as before the
transaction and (B) in the case of a sale of all or substantially all of the
assets of Cummins, each transferee becomes an obligor in respect of the
Notes and a Subsidiary of Cummins.

For purposes of the foregoing, the transfer (by lease, assignment, sale or
otherwise, in a single transaction or series of transactions) of all or
substantially all of the properties or assets of one or more Restricted
Subsidiaries of Cummins, the Capital Stock of which constitutes all or
substantially all of the properties and assets of Cummins, shall be deemed to be
the transfer of all or substantially all of the properties and assets of
Cummins.

"CODE" means the Internal Revenue Code of 1986, as amended.

"COMMON STOCK" means with respect to any Person, any and all shares,
interest or other participations in, and other equivalents (however designated
and whether voting or nonvoting) of such Person's common stock whether or not
outstanding on the Issue Date, and includes, without limitation, all series and
classes of such common stock.

"CONSOLIDATED COVERAGE RATIO" means as of any date of determination, with
respect to any Person, the ratio of (x) the aggregate amount of Consolidated
EBITDA of such Person for the period of the most recent four consecutive fiscal
quarters ending prior to the date of such determination for which financial
statements are in existence to (y) Consolidated Interest Expense for such four
fiscal quarters, provided, however, that:

(1) if Cummins or any Restricted Subsidiary:

(a) has incurred any Indebtedness since the beginning of such four
fiscal quarters that remains outstanding on such date of determination or
if the transaction giving rise to the need to calculate the Consolidated
Coverage Ratio is an incurrence of Indebtedness, Consolidated EBITDA and
Consolidated Interest Expense for such period will be calculated after
giving effect on a pro forma basis to such Indebtedness as if such
Indebtedness had been Incurred on the first day of such period (except
that in making such computation, the amount of Indebtedness under any
revolving credit facility outstanding on the date of such calculation
will be computed based on (i) the average daily balance of such
Indebtedness during such four fiscal quarters or such shorter period for
which such facility was outstanding or (ii) if such facility was created
after the end of such four fiscal quarters, the average daily balance of
such Indebtedness during the period from the date of creation of such
facility to the date of such calculation); or

(b) has repaid, repurchased, defeased or otherwise discharged any
Indebtedness since the beginning of the period that is no longer
outstanding on such date of determination or if the transaction giving
rise to the need to calculate the Consolidated Coverage Ratio involves a
discharge of Indebtedness (in each case other than Indebtedness incurred
under any revolving credit facility unless such Indebtedness has been
permanently repaid and the related commitment terminated), Consolidated
EBITDA and Consolidated Interest Expense for such period will be
calculated after giving effect on a pro forma basis to such discharge of
such Indebtedness, including with the proceeds of such new Indebtedness,
as if such discharge had occurred on the first day of such period;

133

(2) if since the beginning of such period Cummins or any Restricted
Subsidiary will have made any Asset Disposition or if the transaction giving
rise to the need to calculate the Consolidated Coverage Ratio is an Asset
Disposition:

(a) the Consolidated EBITDA for such period will be reduced by an
amount equal to the Consolidated EBITDA (if positive) directly
attributable to the assets which are the subject of such Asset
Disposition for such period or increased by an amount equal to the
Consolidated EBITDA (if negative) directly attributable thereto for such
period; and

(b) Consolidated Interest Expense for such period will be reduced by
an amount equal to the Consolidated Interest Expense directly
attributable to any Indebtedness of Cummins or any Restricted Subsidiary
repaid, repurchased, defeased or otherwise discharged with respect to
Cummins and its continuing Restricted Subsidiaries in connection with
such Asset Disposition for such period (or, if the Capital Stock of any
Restricted Subsidiary is sold, the Consolidated Interest Expense for such
period directly attributable to the Indebtedness of such Restricted
Subsidiary to the extent Cummins and its continuing Restricted
Subsidiaries are no longer liable for such Indebtedness after such sale);

(3) if since the beginning of such period Cummins or any Restricted
Subsidiary (by merger or otherwise) will have made an Investment in any
Restricted Subsidiary (or any Person which becomes a Restricted Subsidiary
or is merged with or into Cummins) or an acquisition of assets, including
any acquisition of assets occurring in connection with a transaction causing
a calculation to be made hereunder, which constitutes all or substantially
all of an operating unit, division or line of business, Consolidated EBITDA
and Consolidated Interest Expense for such period will be calculated after
giving pro forma effect thereto (including the incurrence of any
Indebtedness) as if such Investment or acquisition occurred on the first day
of such period; and

(4) if since the beginning of such period any Person (that subsequently
became a Restricted Subsidiary or was merged with or into Cummins or any
Restricted Subsidiary since the beginning of such period) will have made any
Asset Disposition or any Investment or acquisition of assets that would have
required an adjustment pursuant to clause (2) or (3) above if made by
Cummins or a Restricted Subsidiary during such period, Consolidated EBITDA
and Consolidated Interest Expense for such period will be calculated after
giving pro forma effect thereto as if such Asset Disposition or Investment
or acquisition of assets occurred on the first day of such period.

For purposes of this definition, whenever pro forma effect is to be given to
any calculation under this definition, the pro forma calculations will be
determined in good faith by a responsible financial or accounting officer of
Cummins (including pro forma expense and cost reductions calculated on a basis
consistent with Regulation S-X under the Securities Act). If any Indebtedness
bears a floating rate of interest and is being given pro forma effect, the
interest expense on such Indebtedness will be calculated as if the rate in
effect on the date of determination had been the applicable rate for the entire
period (taking into account any Interest Rate Protection Agreement applicable to
such Indebtedness if such Interest Rate Protection Agreement has a remaining
term in excess of 12 months).

"CONSOLIDATED EBITDA" for any period means, without duplication,

(a) the Consolidated Net Income for such period, plus the following to
the extent deducted in calculating such Consolidated Net Income:

(1) Consolidated Interest Expense;

(2) Consolidated Income Taxes;

(3) consolidated depreciation expense;

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(4) consolidated amortization of intangibles; and

(5) other non-cash charges reducing Consolidated Net Income
(excluding any such non-cash charge to the extent it represents an
accrual of or reserve for cash charges in any future period or
amortization of a prepaid cash expense that was paid in a prior period
not included in the calculation), minus

(b) all non-cash items increasing Consolidated Net Income for such
period.

"CONSOLIDATED INCOME TAXES" means, with respect to any Person for any
period, taxes imposed upon such Person or other payments required to be made by
such Person by any governmental authority, which taxes or other payments are
calculated by reference to the income or profits of such Person or such Person
and its Restricted Subsidiaries (to the extent such income or profits were
included in computing Consolidated Net Income for such period), regardless of
whether such taxes or payments are required to be remitted to any governmental
authority.

"CONSOLIDATED INTEREST EXPENSE" means, for any period, the total interest
expense of Cummins and its consolidated Restricted Subsidiaries, whether paid or
accrued, determined in accordance with GAAP, plus, to the extent not included in
such interest expense:

(1) interest expense attributable to Capitalized Lease Obligations;

(2) amortization of debt discount;

(3) commissions, discounts and other fees and charges owed with respect
to letters of credit and bankers' acceptance financing;

(4) the interest expense on Indebtedness of another Person that is
(a) Guaranteed by such Person or one of its Restricted Subsidiaries or
(b) secured by a Lien on assets of such Person or one of its Restricted
Subsidiaries, in each case excluding interest expense on Indebtedness
related to any Qualified Distributor Guarantee (other than to the extent
that the interest expense with respect to any such Indebtedness relating to
a Qualified Distributor Guarantee is reflected as interest expense on the
consolidated financial statements of Cummins in accordance with GAAP);

(5) net costs associated with Hedging Obligations (including
amortization of fees);

(6) the consolidated interest expense of such Person and its Restricted
Subsidiaries that was capitalized during such period; and

(7) the product of (a) all dividends paid or payable in cash, Cash
Equivalents or Indebtedness or accrued during such period on any series of
Disqualified Stock of such Person or on Preferred Stock of its Restricted
Subsidiaries payable to a party other than Cummins or a Restricted
Subsidiary, times (b) a fraction, the numerator of which is one and the
denominator of which is one minus the then current combined federal, state,
provincial and local statutory tax rate of such Person, expressed as a
decimal, in each case, on a consolidated basis;

provided, however, that "Consolidated Interest Expense" shall not include
interest expense attributable to the 6.25% notes due 2003 of Cummins that will
be repaid with a portion of the net proceeds from this offering.

For purposes of the foregoing, total interest expense will be determined
after giving effect to any net payments made or received by Cummins and its
Subsidiaries with respect to Interest Rate Protection Agreements.

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"CONSOLIDATED NET INCOME" means, for any period, the net income (loss) of
Cummins and its consolidated Restricted Subsidiaries determined in accordance
with GAAP; provided, however, that there will not be included in such
Consolidated Net Income:

(1) any net income (loss) of any Person if such Person is not a
Restricted Subsidiary, except that:

(a) subject to the limitations contained in clauses (3), (4) and
(5) below, Cummins' equity in the net income of any such Person for such
period will be included in such Consolidated Net Income up to the
aggregate amount of cash actually distributed by such Person during such
period to Cummins or a Restricted Subsidiary as a dividend or other
distribution (subject, in the case of a dividend or other distribution to
a Restricted Subsidiary, to the limitations contained in clause (3)
below); and

(b) Cummins' equity in a net loss of any such Person (other than an
Unrestricted Subsidiary) for such period will be included in determining
such Consolidated Net Income to the extent such loss has been funded with
cash from Cummins or a Restricted Subsidiary;

(2) any net income (but not loss) of any Restricted Subsidiary if such
Subsidiary is subject to restrictions, directly or indirectly, on the
payment of dividends or the making of distributions by such Restricted
Subsidiary, directly or indirectly, to Cummins, except that:

(a) subject to the limitations contained in clauses (3), (4) and
(5) below, Cummins' equity in the net income of any such Restricted
Subsidiary for such period will be included in such Consolidated Net
Income up to the aggregate amount of cash that could have been
distributed by such Restricted Subsidiary during such period to Cummins
or another Restricted Subsidiary as a dividend (subject, in the case of a
dividend to another Restricted Subsidiary, to the limitation contained in
this clause); and

(b) Cummins' equity in a net loss of any such Restricted Subsidiary
for such period will be included in determining such Consolidated Net
Income;

(3) any gain (loss) realized upon the sale or other disposition of any
property, plant or equipment of Cummins or its consolidated Restricted
Subsidiaries (including pursuant to any Sale and Leaseback Transaction)
which is not sold or otherwise disposed of in the ordinary course of
business (provided that sales of equipment and related assets (including
contract rights) or Receivables or interests therein pursuant to Qualified
Securitization Transactions shall be deemed to be in the ordinary course)
and any gain (loss) realized upon the sale or other disposition of any
Capital Stock of any Person;

(4) any extraordinary gain or loss; and

(5) the cumulative effect of a change in accounting principles.

"CONSOLIDATED NET TANGIBLE ASSETS" at any date means the total amount of
assets which under generally accepted accounting principles would be included on
a consolidated balance sheet of Cummins and its Restricted Subsidiaries as of
such date, less the sum of the following items which would then also be so
included in accordance with generally accepted accounting principles:
(a) related depreciation, amortization and other valuation reserves,
(b) Investments (less applicable reserves) in Subsidiaries that are not
Restricted Subsidiaries, (c) all treasury stock, goodwill, trade names,
trademarks, patents, unamortized debt discount and expense and other like
intangibles and (d) all liabilities and liability items of Cummins and its
Restricted Subsidiaries (including minority interests in Restricted Subsidiaries
held by Persons other than Cummins or Wholly Owned Subsidiaries) except (1) the
reserves deducted as contemplated by clauses (a) and (b), (2) Funded Debt,
(3) provisions for deferred income taxes and (4) capital stock, surplus and
surplus reserves. For purposes of this definition only, "RESTRICTED
SUBSIDIARIES" shall mean the Restricted Subsidiaries under clause (b) of the
definition of "RESTRICTED SUBSIDIARIES", as of the Issue Date.

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"CREDIT FACILITY" means the $385,000,000 Three Year Credit Agreement, dated
as of November 5, 2002, among Cummins Inc., Cummins Engine Co. Ltd., Cummins
Power Generation Ltd., New Age International Limited, the eligible subsidiaries
referred to therein, the lenders party thereto, JPMorgan Chase Bank, as
administrative agent and collateral agent, Citicorp USA, Inc., as syndication
agent, Bank of America, N.A. and The Bank of Nova Scotia, as co-documentation
agents, and J.P. Morgan Securities Inc. and Salomon Smith Barney Inc., as joint
bookrunners and co-lead arrangers, as such Three Year Credit Agreement may be
amended, extended, renewed, restated, replaced, supplemented or otherwise
modified (in whole or in part, and without limitation as to amount, terms,
conditions, covenants and other provisions) from time to time, and any agreement
or indenture (and related document or instrument) governing Indebtedness
incurred to refinance, in whole or in part, the borrowings and commitments then
outstanding or permitted to be outstanding under such Credit Facility or a
successor Credit Facility; provided, that no amendment, restatement, supplement
or other modification to such facility, or any refinancing of any borrowings or
commitments under such facility, shall provide for the granting of a Lien other
than as permitted by "Certain Covenants--Limitations on Liens".

"CURRENCY AGREEMENT" means any foreign exchange contract, currency swap
agreement or other similar agreement or arrangement designed to protect a Person
against fluctuations in currency values to or under which such Person is a party
or a beneficiary on the date of the indenture or becomes a party or a
beneficiary thereafter.

"DEFAULT" means any event that is, or after notice or passage of time or
both would be, an Event of Default (as defined in the indenture).

"DISQUALIFIED STOCK" means, with respect to any Person, any Capital Stock of
such Person which by its terms (or by the terms of any security into which it is
convertible or for which it is exchangeable) or upon the happening of any event:

(1) matures or is mandatorily redeemable (other than redeemable only for
Qualified Capital Stock of such Person) pursuant to a sinking fund
obligation or otherwise;

(2) is convertible or exchangeable for Indebtedness or Disqualified
Stock (excluding Capital Stock which is convertible or exchangeable solely
at the option of Cummins or a Restricted Subsidiary); or

(3) is redeemable at the option of the holder of the Capital Stock, in
whole or in part,

in each case on or prior to the date that is 91 days after the date (a) on
which the Notes mature or (b) on which there are no Notes outstanding, provided,
that only the portion of Capital Stock which so matures or is mandatorily
redeemable, is so convertible or exchangeable or is so redeemable at the option
of the holder thereof before such date will be deemed to be Disqualified Stock;
provided, further, that any Capital Stock that would constitute Disqualified
Stock solely because the holders thereof have the right to require Cummins to
repurchase such Capital Stock upon the occurrence of a change of control or
asset sale (each defined in a substantially identical manner to the
corresponding definitions in the indenture) shall not constitute Disqualified
Stock if (i) the terms of such Capital Stock (and all such securities into which
it is convertible or for which it is redeemable or exchangeable) provide that
Cummins may not repurchase or redeem any such Capital Stock (and all such
securities into which it is convertible or for which it is redeemable or
exchangeable) pursuant to such provision prior to compliance by Cummins with the
provisions of the indenture described under the captions "Change of Control" and
"Certain Covenants--Limitation on Certain Asset Dispositions" or (ii) such
repurchase or redemption complies with "Certain Covenants--Limitation on
Restricted Payments."

"DOMESTIC RESTRICTED SUBSIDIARY" means any Restricted Subsidiary of Cummins
that is organized under the laws of the United States of America or any State
thereof or the District of Columbia.

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"EVENT OF DEFAULT" has the meaning set forth under "--Events of Default"
herein.

"EXCHANGE ACT" means the U.S. Securities Exchange Act of 1934, as amended.

"FOREIGN SUBSIDIARY" means any Restricted Subsidiary of Cummins that is not
organized under the laws of the United States of America or any State thereof or
the District of Columbia.

"FUNDED DEBT" means, with respect to any person (a) every obligation of such
person for money borrowed and every obligation of such person secured by any
lien, mortgage, pledge or other security interest upon any property or asset of
such person (whether or not assumed by such person), which by its terms matures
at, or is extendible or renewable at the option of the obligor to, a date more
than 12 months after the time of the computation of the amount thereof, and
which would appear as a liability (other than a current liability or a deferred
item) on a statement of financial position of such person in accordance with
generally accepted accounting principles, (b) all obligations in respect of
lease rentals which, under accounting principles generally accepted at the date
of the 1986 Indenture, would be shown on a balance sheet of the obligor as a
liability (other than a current liability or a deferred item) in accordance with
generally accepted accounting principles, (c) all guarantees, direct or
indirect, of any such indebtedness or of any such obligations of others or of
dividends, other than any guarantee in connection with the sale or discount by
Cummins or any Restricted Subsidiary of accounts receivable, trade acceptances
and other paper arising in the ordinary course of business and (d) all
outstanding Preferred Stock of any Restricted Subsidiary, taken at the greater
of its voluntary or involuntary liquidation price at the time of any calculation
hereunder, but exclusive of accrued dividends, if any; PROVIDED, HOWEVER, that
the term "Funded Debt" shall not include (i) the guarantee by Cummins of any
indebtedness of any Restricted Subsidiary permitted by this indenture, (ii) the
guarantee of bonds or indebtedness of an industrial development or similar
authority, if Cummins or a Restricted Subsidiary is obligated, as part of the
same series of transactions, to such authority with respect to a Capital Lease
Obligation or installment purchase obligation which is Funded Debt, in the same
principal amount, and with substantially the same payment terms, as such bonds
or indebtedness, (iii) the guarantee by Cummins of indebtedness of Persons other
than Restricted Subsidiaries in an aggregate principal amount at any one time
outstanding not in excess of 5% of Consolidated Net Tangible Assets,
(iv) indebtedness of Cummins to any Unrestricted Subsidiary to the extent an
equal amount of indebtedness of such Unrestricted Subsidiary is guaranteed by
Cummins and such guarantee is included as Funded Debt or (v) obligations and
indebtedness incurred and assumed by Cummins in connection with the purchase or
other acquisition of assets of independent distributors of products of Cummins.
Cummins or any Restricted Subsidiary shall be deemed to have assumed Funded Debt
(whether or not it has actually done so) secured by any mortgage, pledge, lien,
security interest or other encumbrance upon any of its property or assets. For
purposes of this definition only, "Restricted Subsidiaries" and "Unrestricted
Subsidiaries" shall have the meanings ascribed thereto in clause (b) of each of
the respective definitions thereof.

"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as may be approved by a significant segment of the accounting
profession of the United States, which are in effect as of the Issue Date.

"GUARANTEE" means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Indebtedness of any other Person and,
without limiting the generality of the foregoing, any obligation, direct or
indirect, contingent or otherwise, of such Person:

(1) to purchase or pay (or advance or supply funds for the purchase or
payment of) such Indebtedness of such other Person (whether arising by
virtue of partnership arrangements, or by agreement to keepwell, to purchase
assets, goods, securities or services, to take-or-pay, or to maintain
financial statement conditions or otherwise); or

138

(2) entered into for purposes of assuring in any other manner the
obligee of such Indebtedness of the payment thereof or to protect such
obligee against loss in respect thereof (in whole or in part), provided that
the term "guarantee" shall not include endorsements for collection or
deposit in the ordinary course of business. The term "guarantee" used as a
verb has a corresponding meaning.

"HEDGING OBLIGATIONS" of any Person means the obligations of such Person
pursuant to any Interest Rate Protection Agreement or Currency Agreement.

"INCUR" means, with respect to any Indebtedness or other obligation of any
Person, to create, issue, incur (by conversion, exchange or otherwise), assume,
guarantee or otherwise become liable in respect of such Indebtedness or other
obligation or the recording, as required pursuant to GAAP or otherwise, of any
such Indebtedness or other obligation on the balance sheet of such Person (and
"incurrence," "incurred," "incurable" and "incurring" shall have meanings
correlative to the foregoing), provided, that (1) the accrual or payment of
interest or dividends (whether such interest or dividends are payable in cash or
in kind), (2) the amortization of debt discount or the accretion of original
issue discount and (3) the obligation to pay a premium in respect of
Indebtedness arising in connection with the issuance of a notice of redemption
or making of a mandatory offer to purchase such Indebtedness, in each case shall
not be deemed an incurrence of Indebtedness and, provided, further, that:

(1) any Indebtedness or Capital Stock of a Person existing at the time
such Person becomes (after the Issue Date) a Restricted Subsidiary (whether
by merger, consolidation, acquisition or otherwise) of Cummins shall be
deemed to be incurred or issued, as the case may be, by such Restricted
Subsidiary at the time it becomes a Restricted Subsidiary of Cummins; and

(2) any amendment, modification or waiver of any document pursuant to
which Indebtedness was previously incurred shall not be deemed to be an
incurrence of Indebtedness unless and then only to the extent such
amendment, modification or waiver increases the principal or premium thereof
or interest rate thereon (including by way of original issue discount).

"INDEBTEDNESS" means, with respect to any Person, at any date, any of the
following, without duplication:

(1) any liability, contingent or otherwise, of such Person (a) for
borrowed money (whether or not the recourse of the lender is to the whole of
the assets of such Person or only to a portion thereof), (b) evidenced by a
note, bond, debenture or similar instrument (including a purchase money
obligation) or (c) for the payment of money relating to a Capitalized Lease
Obligation or other obligation (whether issued or assumed) relating to the
deferred purchase price of property, but excluding in each case trade
accounts payable of such Person arising in the ordinary course of business;

(2) all conditional sale obligations and all obligations under any title
retention agreement (even if the rights and remedies of the seller under
such agreement in the event of default are limited to repossession or sale
of such property), but excluding trade accounts payable of such Person
arising in the ordinary course of business;

(3) all obligations for the reimbursement of any obligor on any letter
of credit, banker's acceptance or similar credit transaction (other than
obligations with respect to letters of credit securing obligations (other
than obligations described in clauses (1) and (2) above) entered into in the
ordinary course of business of such Person to the extent such letters of
credit are not drawn upon or, if and to the extent drawn upon, such drawing
is reimbursed no later than the third business day following receipt by such
Person of a demand for reimbursement following payment on the letter of
credit);

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(4) all Indebtedness of others secured by (or for which the holder of
such Indebtedness has an existing right, contingent or otherwise, to be
secured by) any Lien on any asset or property (including, without
limitation, leasehold interests and any other tangible or intangible
property) of such Person, whether or not such Indebtedness is assumed by
such Person or is not otherwise such Person's legal liability; provided,
that if the obligations so secured have not been assumed by such Person or
are otherwise not such Person's legal liability, the amount of such
Indebtedness for the purposes of this definition shall be limited to the
lesser of the amount of such Indebtedness secured by such Lien or the fair
market value of the assets or property securing such Lien;

(5) all Indebtedness of others (including all dividends of other Persons
the payment of which is) guaranteed, directly or indirectly, by such Person
or that is otherwise its legal liability or which such Person has agreed to
purchase or repurchase or in respect of which such Person has agreed
contingently to supply or advance funds;

(6) all Disqualified Stock issued by such Person with the amount of
Indebtedness represented by such Disqualified Stock being equal to the
greater of its voluntary or involuntary liquidation preference and its
maximum fixed repurchase price, but excluding accrued dividends if any;

(7) all obligations under Currency Agreements and Interest Rate
Protection Agreements; and

(8) all Attributable Indebtedness in respect of Sale and Leaseback
Transactions entered into by such person.

For purposes hereof, the "maximum fixed repurchase price" of any
Disqualified Stock which does not have a fixed repurchase price shall be
calculated in accordance with the terms of such Disqualified Stock as if such
Disqualified Stock were purchased on any date on which Indebtedness shall be
required to be determined pursuant to the indenture, and if such price is based
upon, or measured by, the fair market value of such Disqualified Stock, such
fair market value shall he determined reasonably and in good faith by the Board
of Directors of the issuer of such Disqualified Stock.

The amount of Indebtedness of any Person at any date shall be the
outstanding balance without duplication at such date of all unconditional
obligations as described above and the maximum liability, upon the occurrence of
the contingency giving rise to the obligation, of any contingent obligations at
such date, provided that the amount outstanding at any time of any Indebtedness
issued with original issue discount is the full amount of such Indebtedness less
the remaining unamortized portion of the original issue discount of such
Indebtedness at such time as determined in accordance with GAAP.

"INDEPENDENT FINANCIAL ADVISOR" means an investment banking firm of national
standing or any third party appraiser of national standing, provided that such
firm or appraiser is not an Affiliate of Cummins.

"INTEREST RATE PROTECTION AGREEMENT" means any interest rate protection
agreement, interest rate future agreement, interest rate option agreement,
interest rate swap agreement, interest rate cap agreement, interest rate collar
agreement, interest rate hedge agreement or other similar agreement or
arrangement designed to protect a Person against fluctuations in interest rates
to or under which such Person of such Person is a party or a beneficiary on the
Issue Date or becomes a party or a beneficiary thereafter.

"INVESTMENT" means, with respect to any Person, all investments by such
Person in other Persons (including Affiliates) in the form of any direct or
indirect advance, loan (other than advances to customers in the ordinary course
of business) or other extension of credit (including by way of guarantee or
similar arrangement, but excluding any debt or extension of credit represented
by a bank deposit other than a time deposit) or capital contribution to (by
means of any transfer of cash or other property to others or any payment for
property or services for the account or use of others), or any purchase or
acquisition of Capital Stock, Indebtedness or other similar instruments issued
by, such

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Person and all other items that are or would be classified as investments on a
balance sheet prepared in accordance with GAAP; provided, that none of the
following will be deemed to be an Investment:

(1) Hedging Obligations entered into in the ordinary course of business
and in compliance with the indenture;

(2) endorsements of negotiable instruments and documents in the ordinary
course of business; and

(3) an acquisition of assets, Capital Stock or other securities by
Cummins or a Subsidiary for consideration to the extent such consideration
consists of Qualified Capital Stock of Cummins.

For purposes of "Certain Covenants--Limitation on Restricted Payments",

(1) "Investment" will include the portion (proportionate to Cummins'
equity interest in a Restricted Subsidiary to be designated as an
Unrestricted Subsidiary) of the fair market value of the net assets of such
Restricted Subsidiary of Cummins at the time that such Restricted Subsidiary
is designated an Unrestricted Subsidiary; provided, however, that upon a
redesignation of such Subsidiary as a Restricted Subsidiary, Cummins will be
deemed to continue to have a permanent "Investment" in an Unrestricted
Subsidiary in an amount (if positive) equal to (a) Cummins' "Investment" in
such Subsidiary at the time of such redesignation less (b) the portion
(proportionate to Cummins' equity interest in such Subsidiary) of the fair
market value of the net assets (as conclusively determined by the Board of
Directors of Cummins in good faith) of such Subsidiary at the time that such
Subsidiary is so re-designated a Restricted Subsidiary; and

(2) any property transferred to or from an Unrestricted Subsidiary will
be valued at its fair market value at the time of such transfer, in each
case as determined in good faith by the Board of Directors of Cummins. If
Cummins or any Restricted Subsidiary of Cummins sells or otherwise disposes
of any Voting Stock of any Restricted Subsidiary of Cummins such that, after
giving effect to any such sale or disposition, such entity is no longer a
Subsidiary of Cummins, Cummins shall be deemed to have made an Investment on
the date of any such sale or disposition equal to the fair market value (as
conclusively determined by the Board of Directors of Cummins in good faith)
of the Capital Stock of such Subsidiary not sold or disposed of.

"INVESTMENT GRADE" means:

(1) with respect to S&P, any of the rating categories from and including
"AAA" to and including "BBB-"; and

(2) with respect to Moody's, any of the rating categories from and
including "Aaa" to and including "Baa3".

"ISSUE DATE" means November 20, 2002.

"LIEN" means, with respect to any Person, any mortgage, pledge, lien,
encumbrance, easement, restriction, covenant, right-of-way, charge or adverse
claim affecting title or resulting in an encumbrance against real or personal
property of such Person, or a security interest of any kind, including any
conditional sale or other title retention agreement, any lease in the nature
thereof, any option, right of first refusal or other similar agreement to sell,
in each case securing obligations of such Person and any filing of or agreement
to give any financing statement under the Uniform Commercial Code (or equivalent
statute or statutes) of any jurisdiction but excluding any such filing or
agreement which reflects ownership by a third party of

(1) property leased to the referent Person or any of its Restricted
Subsidiaries under a lease that is not in the nature of a conditional sale
or title retention agreement or

(2) accounts, general intangibles or chattel paper sold to the referent
Person.

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"MATERIAL SUBSIDIARY" means, at any date of determination, any Subsidiary of
Cummins that, together with its Subsidiaries,

(1) for the most recent fiscal year of Cummins accounted for more than
5% of the consolidated revenues of Cummins or

(2) as of the end of such fiscal year, was the owner of more than 5% of
the consolidated assets of Cummins, all as set forth on the most recently
available consolidated financial statements of Cummins and its consolidated
Subsidiaries for such fiscal year prepared in conformity with GAAP.

"MATURITY DATE" means December 1, 2010.

"MOODY'S" means Moody's Investors Service, Inc. and its successors.

"NET AVAILABLE PROCEEDS" from any Asset Disposition by any Person means cash
or readily marketable Cash Equivalents received (including by way of sale or
discounting of a note, installment receivable or other receivable, but excluding
any other consideration received in the form of assumption by the acquirer of
Indebtedness or other obligations relating to such properties or assets or
received in any other non-cash form) therefrom by such Person, including any
cash received by way of deferred payment or upon the monetization or other
disposition of any non-cash consideration (including notes or other securities)
received in connection with such Asset Disposition, net of:

(1) all legal, title and recording tax expenses, commissions and other
fees and expenses incurred (including, without limitation, fees and expenses
of accountants, brokers, printers and other similar entities and
underwriters' discounts) and all federal, state, foreign and local taxes
required to be accrued as a liability as a consequence of such Asset
Disposition;

(2) all payments made by such Person or its Restricted Subsidiaries on
any Indebtedness which is secured by such assets in accordance with the
terms of any Lien upon or with respect to such assets or which must by the
terms of such Lien, or in order to obtain a necessary consent to such Asset
Disposition or by applicable law, be repaid out of the proceeds from such
Asset Disposition;

(3) all payments made with respect to liabilities associated with the
assets which are the subject of the Asset Disposition, including, without
limitation, trade payables and other accrued liabilities;

(4) appropriate amounts to be provided by such Person or any Restricted
Subsidiary thereof, as the case may be, as a reserve in accordance with GAAP
against any liabilities associated with such assets and retained by such
Person or any Restricted Subsidiary thereof, as the case may be, after such
Asset Disposition, including, without limitation, liabilities under any
indemnification obligations and severance and other employee termination
costs associated with such Asset Disposition, until such time as such
amounts are no longer reserved or such reserve is no longer necessary (at
which time any remaining amounts will become Net Available Proceeds to be
allocated in accordance with the provisions of clause (3) of the covenant of
the indenture described under "--Certain Covenants--Limitation on Certain
Asset Dispositions"); and

(5) all distributions and other payments, made to minority interest
holders, if any, in Restricted Subsidiaries of such Person or joint ventures
as a result of such Asset Disposition.

"OFFER TO PURCHASE" means a written offer (the "OFFER") sent by Cummins by
first class mail, postage prepaid, to each Holder at its address appearing in
the register for the Notes on the date of the Offer, offering to purchase up to
the principal amount of the Notes in such Offer at the purchase price specified
in such Offer (as determined pursuant to the indenture). Unless otherwise
required by applicable law, the Offer shall specify an expiration date (the
"EXPIRATION DATE") of the Offer to

142

Purchase which shall be not less than 30 days nor more than 60 days after the
date of such Offer and a settlement date (the "PURCHASE DATE") for purchase of
such Notes within five business days after the Expiration Date. Cummins shall
notify the Trustee at least 15 business days (or such shorter period as is
acceptable to such Trustee) prior to the mailing of the Offer of Cummins'
obligation to make an Offer to Purchase, and the Offer shall be mailed by
Cummins or, at Cummins' request, by such Trustee in the name and at the expense
of Cummins. The Offer shall contain all the information required by applicable
law to be included therein. The Offer shall contain all instructions and
materials necessary to enable such Holders to tender such Notes pursuant to the
Offer to Purchase. The Offer shall also state:

(1) the Section of the indenture pursuant to which the Offer to Purchase
is being made;

(2) the Expiration Date and the Purchase Date;

(3) the aggregate principal amount of the outstanding Notes offered to
be purchased by Cummins pursuant to the Offer to Purchase (including, if
less than 100%, the manner by which such amount has been determined pursuant
to the section of the indenture requiring the Offer to Purchase) (the
"PURCHASE AMOUNT");

(4) the purchase price to be paid by Cummins for each $1,000 aggregate
principal amount of Notes accepted for payment (as specified pursuant to the
indenture) (the "PURCHASE PRICE");

(5) that the Holder may tender all or any portion of the Notes
registered in the name of such Holder and that any portion of a Note
tendered must be tendered in an integral multiple of $1,000 principal amount
of Notes;

(6) the place or places where Notes are to be surrendered for tender
pursuant to the Offer to Purchase;

(7) that interest on any Note not tendered or tendered but not purchased
by Cummins pursuant to the Offer to Purchase will continue to accrue;

(8) that on the Purchase Date the Purchase Price will become due and
payable upon each Note being accepted for payment pursuant to the Offer to
Purchase and that interest thereon shall cease to accrue on and after the
Purchase Date;

(9) that each Holder electing to tender all or any portion of a Note
pursuant to the Offer to Purchase will be required to surrender such Note at
the place or places specified in the Offer prior to the close of business on
the Expiration Date (such Note being, if Cummins or the Trustee so requires,
duly endorsed by, or accompanied by a written instrument of transfer in form
satisfactory to Cummins and the Trustee duly executed by the Holder thereof
or his attorney duly authorized in writing);

(10) that Holders will be entitled to withdraw all or any portion of
Notes tendered if Cummins (or its Paying Agent) receives, not later than the
close of business on the fifth Business Day next preceding the Expiration
Date, a telegram, telex, facsimile transmission or letter setting forth the
name of the Holder, the principal amount of the Note the Holder tendered,
the certificate number of the Note the Holder tendered and a statement that
such Holder is withdrawing all or a portion of his tender;

(11) that (I) if Notes in an aggregate principal amount less than or
equal to the Purchase Amount are duly tendered and not withdrawn pursuant to
the Offer to Purchase, Cummins shall purchase all such Notes and (II) if
Notes in an aggregate principal amount in excess of the Purchase Amount are
tendered and not withdrawn pursuant to the Offer to Purchase, Cummins shall
purchase Notes having an aggregate principal amount equal to the Purchase
Amount on a

143

pro rata basis (with such adjustments as may be deemed appropriate so that
only Notes in denominations of $1,000 or integral multiples thereof shall be
purchased); and

(12) that in the case of any Holder whose Note is purchased only in
part, Cummins shall execute, and the Trustee shall authenticate and deliver
to the Holder of such Note without service charge, a new Note or Notes, of
any authorized denomination as requested by such Holder, in all aggregate
principal amount equal to and in exchange for the unpurchased portion of the
Note or Notes so tendered.

An Offer to Purchase shall be governed by and effected in accordance with
the provisions above pertaining to any Offer.

"PERMITTED INVESTMENTS" means:

(1) Investments in marketable, direct obligations issued or guaranteed
by the United States of America, or any governmental entity or agency or
political subdivision thereof (provided, that the good faith and credit of
the United States of America is pledged in support thereof), maturing within
one year of the date of purchase;

(2) Investments in commercial paper issued by corporations or financial
institutions maturing within 180 days from the date of the original issue
thereof, and rated "P-1" or better by Moody's or "A-1" or better by S&P or
an equivalent rating or better by any other nationally recognized securities
rating agency;

(3) Investments in certificates of deposit issued or acceptances
accepted by or guaranteed by any bank or trust company organized under the
laws of the United States of America or any state thereof or the District of
Columbia, in each case having capital, surplus and undivided profits
totaling more than $500.0 million, maturing within one year of the date of
purchase;

(4) deposits, including interest-bearing deposits, maintained in the
ordinary course of business in banks;

(5) an Investment in (a) Cummins, (b) a Restricted Subsidiary or (c) a
Person that will, upon the making of such Investment, either become a
Restricted Subsidiary or be merged or consolidated with or into, or transfer
or convey all or substantially all its assets to, Cummins or a Restricted
Subsidiary;

(6) trade receivables and prepaid expenses, in each case arising in the
ordinary course of business; provided, that such receivables and prepaid
expenses would be recorded as assets of such Person in accordance with GAAP;

(7) endorsements for collection or deposit in the ordinary course of
business by such Person of bank drafts and similar negotiable instruments of
such other Person received as payment for ordinary course of business trade
receivables;

(8) any interest swap or hedging obligation with an unaffiliated Person
otherwise permitted by the indenture (including, without limitation, any
Currency Agreement and any Interest Rate Protection Agreement otherwise
permitted by the indenture);

(9) Investments received as consideration for an Asset Disposition in
compliance with the provisions of the indenture described under "--Certain
Covenants--Limitation on Certain Asset Dispositions" above;

(10) Investments for which the sole consideration provided is Qualified
Capital Stock of Cummins; provided, that the issuance of such Qualified
Capital Stock is not included in the calculation set forth in clause (3) of
the first paragraph of "--Certain Covenants--Limitation on Restricted
Payments";

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(11) loans and advances to employees made (a) in the ordinary course of
business or (b) pursuant to Cummins' Key Employee Stock Investment Program
(or any similar program or arrangement duly adopted by Cummins to supplement
or replace the Key Employee Stock Investment Program), in a manner
consistent with past practice to the extent that the proceeds of such loan
or advance under this clause (b) are used to purchase Qualified Capital
Stock from Cummins;

(12) Investments outstanding on the Issue Date;

(13) Investments in securities of trade creditors, suppliers or
customers received pursuant to any plan of reorganization or similar
arrangement upon bankruptcy or insolvency of such trade creditor, supplier
or customer;

(14) Investments in stock, obligations or securities received in
settlement of debts created in the ordinary course of business and owing to
Cummins or any Restricted Subsidiary or in satisfaction of judgments;

(15) Investments in any Person to the extent that such Investments
consist of lease, utility and workers' compensation, performance and other
similar deposits made in the ordinary course of business by Cummins or any
Restricted Subsidiary;

(16) Investments to fund the working capital requirements of Permitted
Joint Ventures and the Permitted Unrestricted Subsidiary in an aggregate
amount not in excess of $100.0 million at any one time outstanding; and

(17) Investments in any Person after the Issue Date in an aggregate
amount not in excess of $20.0 million at any one time outstanding.

"PERMITTED JOINT VENTURE" means any Person which is not a Restricted
Subsidiary and which is, directly or indirectly, through its subsidiaries or
otherwise, engaged principally in a Related Business, and the Capital Stock of
which is owned by Cummins or its Restricted Subsidiaries, on the one hand, and
one or more Persons other than Cummins or any Affiliate of Cummins, on the other
hand.

"PERMITTED LIENS" means:

(1) Liens for taxes, assessments and governmental charges (other than
any Lien imposed by the Employee Retirement Income Security Act of 1974, as
amended) that are not yet delinquent or are being contested in good faith by
appropriate proceedings promptly instituted and diligently conducted and for
which adequate reserves have been established or other provisions have been
made in accordance with generally accepted accounting principles;

(2) statutory mechanics', workmen's, materialmen's, operators' or
similar Liens imposed by law and arising in the ordinary course of business
for sums which are not yet due or are being contested in good faith by
appropriate proceedings promptly instituted and diligently conducted and for
which adequate reserves have been established or other provisions have been
made in accordance with generally accepted accounting principles;

(3) minor imperfections of, or encumbrances on, title that do not impair
the value of property for its intended use;

(4) Liens (other than any Lien under the Employee Retirement Income
Security Act of 1974, as amended) incurred or deposits made in the ordinary
course of business in connection with workers' compensation, unemployment
insurance and other types of social security;

(5) Liens incurred or deposits made to secure the performance of
tenders, bids, leases, statutory or regulatory obligations, bankers'
acceptances, surety and appeal bonds, government contracts, performance and
return of money bonds and other obligations of a similar nature

145

incurred in the ordinary course of business (exclusive of obligations for
the payment of borrowed money);

(6) easements, rights-of-way, municipal and zoning ordinances and
similar charges, encumbrances, title defects or other irregularities that do
not materially interfere with the ordinary course of business of Cummins or
of any of its Restricted Subsidiaries;

(7) Liens (including extensions and renewals thereof) upon real or
tangible personal property acquired after the Issue Date; provided, that

(a) such Lien is created solely for the purpose of securing
Indebtedness that is incurred in accordance with the indenture to finance
the cost (including the cost of improvement or construction) of the item
of property or assets subject thereto and such Lien is created prior to,
at the time of or within 180 days after the later of the acquisition, the
completion of construction or the commencement of full operation of such
property,

(b) the principal amount of the Indebtedness secured by such Lien
does not exceed 100% of such cost,

(c) any such Lien shall not extend to or cover any property or assets
of Cummins or of any Restricted Subsidiary of Cummins other than such
item of property or assets and any improvements on such item and

(d) the aggregate amount of Liens created pursuant to clause (7) of
this definition and outstanding at any one time does not exceed 5% of
Tangible Assets;

(8) leases or subleases granted to others that do not materially
interfere with the ordinary course of business of Cummins or of any
Restricted Subsidiary of Cummins;

(9) Liens arising from filing Uniform Commercial Code financing
statements regarding leases;

(10) Liens arising from the rendering of a final judgment or order
against Cummins or any Restricted Subsidiary of Cummins that does not give
rise to an Event of Default;

(11) Liens securing reimbursement obligations with respect to letters of
credit incurred in accordance with the indenture that encumber documents and
other property relating to such letters of credit and the products and
proceeds thereof;

(12) Liens in favor of the Trustee arising under the indenture;

(13) Liens on property of any Subsidiary of Cummins to secure
Indebtedness for borrowed money owed to Cummins;

(14) Liens in favor of Cummins or a Subsidiary Guarantor;

(15) Liens existing on the Issue Date;

(16) Liens in favor of custom and revenue authorities arising as a
matter of law to secure payment of nondelinquent customs duties in
connection with the importation of goods;

(17) Liens encumbering customary initial deposits and margin deposits,
and other Liens incurred in the ordinary course of business that are within
the general parameters customary in the industry, in each case securing
Indebtedness under an Interest Rate Protection Agreement;

(18) Liens encumbering deposits made in the ordinary course of business
to secure nondelinquent obligations arising from statutory, regulatory,
contractual or warranty requirements of Cummins or its Restricted
Subsidiaries for which a reserve or other appropriate provision, if any, as
shall be required by GAAP shall have been made;

146

(19) Liens arising out of consignment or similar arrangements for the
sale of goods entered into by Cummins or any Restricted Subsidiary in the
ordinary course of business in accordance with industry practice;

(20) Liens securing Indebtedness which is incurred to refinance
Indebtedness which had been secured by a Lien or Liens permitted under
"Limitation on Liens" and which is incurred in accordance with the
provisions of "Limitations on Incurrence of Indebtedness and Issuance of
Preferred Stock"; provided that such Liens do not extend to or cover any
property or assets of Cummins or any of its Restricted Subsidiaries not
securing the Indebtedness so refinanced;

(21) Liens granted in connection with any Qualified Securitization
Transaction;

(22) Liens to secure obligations incurred under the Credit Facility;
provided, that the aggregate amount of Indebtedness so secured pursuant to
this clause (22) (including any guarantee with respect thereto) shall not
exceed $435.0 million at any one time outstanding;

(23) Liens to secure Hedging Obligations made in the ordinary course of
business and not for the purpose of speculation to the extent permitted by
the Credit Facility;

(24) Liens on current assets of Foreign Subsidiaries securing
Indebtedness of Foreign Subsidiaries incurred in the ordinary course of
business for the purpose of financing working capital of Foreign
Subsidiaries in an aggregate amount not to exceed $100.0 million at any one
time outstanding;

(25) Liens secured by property, plant and equipment granted in
connection with any Qualified Distributor Guarantee in an aggregate amount
not to exceed $90.0 million at any one time outstanding; and

(26) other Liens on assets of Cummins or any Restricted Subsidiary of
Cummins securing Indebtedness or other obligations to be outstanding having
an aggregate principal amount at any one time outstanding not to exceed
$15.0 million.

"PERMITTED SECURED DEBT" means Secured Debt secured by

(1) mortgages on property, capital stock or indebtedness of any
corporation existing at the time such corporation becomes a Subsidiary;

(2) mortgages on property existing at the time of acquisition thereof to
secure the payment of all or any part of the purchase price thereof or to
secure any Indebtedness incurred prior to, at the time of or within
180 days after the acquisition of such property for the purpose of financing
all or any part of the purchase price thereof;

(3) mortgages on particular property, which is, in the opinion of the
Board of Directors, substantially unimproved, to secure all or any part of
the cost of improvements to such property or to secure any Indebtedness
incurred to provide funds for such purpose;

(4) mortgages which secure Indebtedness owing to Cummins or to a Wholly
Owned Subsidiary by a Subsidiary;

(5) mortgages in favor of the United States of America or any State
thereof, or any department, agency, or instrumentality or political
subdivision thereof, partial, progress, advance or other payments pursuant
to any contract or statute or to secure an Indebtedness or obligation
incurred for the purpose of financing all or any part of the cost of
acquiring, constructing or improving the property subject to such mortgages
(including mortgages incurred in connection with pollution control,
industrial revenue or similar financings); and

(6) any extension, renewal or replacement (or successive extensions,
renewal or replacements), in whole or in part, of any mortgage referred to
in the foregoing clauses (1) to (5),

147

inclusive, or of any Indebtedness secured thereby; provided, that such
extension, renewal or replacement mortgage shall be limited to all or any
part of the same property that secured the mortgage extended, renewed or
replaced (plus improvements on such property).

The terms "mortgage" or "mortgages" as used herein shall include pledges,
liens, encumbrances and security interests.

"PERMITTED UNRESTRICTED SUBSIDIARY" means Universal Silencer, Inc., a
Delaware corporation, and its successors.

"PERSON" means any individual, corporation, partnership, joint venture,
trust, estate, unincorporated organization or government or any agency or
political subdivision thereof.

"PLAN OF LIQUIDATION" means, with respect to any Person, a plan (including
by operation of law) that provides for, contemplates or the effectuation of
which is preceded or accompanied by (whether or not substantially
contemporaneously):

(1) the sale, lease, conveyance or other disposition of all or
substantially all of the assets of the referent Person; and

(2) the distribution of all or substantially all of the proceeds of such
sale, lease, conveyance or other disposition and all or substantially all of
the remaining assets of the referent Person to holders of Capital Stock of
the referent Person.

"PREFERRED STOCK" means, as applied to the Capital Stock of any Person, the
Capital Stock of such Person (other than the Common Stock of such Person) of any
class or classes (however designated) that ranks prior, as to the payment of
dividends or as to the distribution of assets upon any voluntary or involuntary
liquidation, dissolution or winding-up of such Person, to shares of Capital
Stock of any other class of such Person.

"PRINCIPAL PROPERTY" means any manufacturing or research property, plant or
facility of Cummins or any Restricted Subsidiary except any property that the
Board of Directors by resolutions declares is not of material importance to the
total business conducted by Cummins and its Restricted Subsidiaries as an
entirety.

"QUALIFIED CAPITAL STOCK" means, with respect to any Person, any Capital
Stock of such Person that is not Disqualified Stock or convertible into or
exchangeable or exercisable for Disqualified Stock.

"QUALIFIED DISTRIBUTOR GUARANTEE" means any guarantee by Cummins or any of
its Subsidiaries with respect to, or the grant of any security interest in any
asset or property of Cummins or any of its Subsidiaries in order to secure, any
Indebtedness of a distributor of products of Cummins or any of its Subsidiaries
(other than distributors that are Affiliates of Cummins), in each case to the
extent the grant of any such guarantee or security interest is in the ordinary
course of business of Cummins or the applicable Subsidiary.

"QUALIFIED SECURITIZATION TRANSACTION" means any transaction or series of
transactions that have been or may be entered into by Cummins or any of its
Restricted Subsidiaries in connection with or reasonably related to a
transaction or series of transactions in which Cummins or any of its Restricted
Subsidiaries may sell, convey or otherwise transfer to (1) a Securitization
Subsidiary or (2) any other Person, or may grant a security interest in, any
equipment and related assets (including contract rights) or Receivables or
interests therein secured by goods or services financed thereby (whether such
Receivables are then existing or arising in the future) of any of the Restricted
Subsidiaries of Cummins, and any assets related thereto including, without
limitation, all security or ownership interests in goods or services financed
thereby, the proceeds of such Receivables, and other assets which are
customarily sold or in respect of which security interests are customarily
granted in connection with securitization transactions involving such assets.

148

"RATING AGENCY" means each of (1) S&P and (2) Moody's.

"RECEIVABLES" means any right of payment from or on behalf of any obligor,
whether constituting an account, chattel paper, instrument, general intangible
or otherwise, arising from the financing by any Restricted Subsidiary of Cummins
of goods or services, and monies due thereunder, security or ownership interests
in the goods and services financed thereby, records related thereto, and the
right to payment of any interest or finance charges and other obligations with
respect thereto, proceeds from claims on insurance policies related thereto, any
other proceeds related thereto, and any other related rights.

"RELATED BUSINESS" means any business which is the same as or related,
ancillary or complementary to any of the businesses of Cummins and its
Subsidiaries on the date of the indenture.

"RELATED BUSINESS ASSETS" means assets used or useful in a Related Business.

"RESTRICTED SUBSIDIARY" means (a) any Subsidiary of Cummins that is not an
Unrestricted Subsidiary or (b) during such time as the Notes are rated
Investment Grade by S&P and Moody's, the Restricted Subsidiaries under the 1986
Indenture.

For purposes of clause (b) of this definition, Cummins may by board
resolution designate any Restricted Subsidiary to be an Unrestricted Subsidiary,
provided that it does not own a Principal Property and, after giving effect
thereto, a Restricted Subsidiary would be permitted by the covenant described in
section (b) of "--Limitation on Incurrence of Indebtedness and Issuance of
Preferred Stock" to incur additional Funded Debt, and may designate any
Unrestricted Subsidiary to be a Restricted Subsidiary. Cummins may by board
resolution designate a newly acquired or formed Subsidiary to be an Unrestricted
Subsidiary, provided such designation takes place not later than 90 days after
such acquisition or formation.

"SECURED DEBT" means Indebtedness for money borrowed if such Indebtedness is
secured by a mortgage, pledge, lien, security interest or encumbrance on any
Principal Property or on any shares of stock or indebtedness of any Restricted
Subsidiary.

"SECURITIZATION SUBSIDIARY" means a Subsidiary of Cummins which engages in
no activities other than those reasonably related to or in connection with the
entering into of securitization transactions and which is designated by the
Board of Directors of Cummins (as provided below) as a Securitization
Subsidiary: (l) no portion of the Indebtedness or any other obligations
(contingent or otherwise) of which (a) is guaranteed by Cummins or any
Restricted Subsidiary of Cummins, (b) is recourse to or obligates Cummins or any
Restricted Subsidiary of Cummins in any way other than pursuant to
representations, warranties and covenants (including those related to servicing)
entered into in the ordinary course of business in connection with a Qualified
Securitization Transaction or (c) subjects any property or asset of Cummins or
any Restricted Subsidiary of Cummins (other than those of a Securitization
Subsidiary), directly or indirectly, continently or otherwise, to any Lien or to
the satisfaction thereof, other than pursuant to representations, warranties and
covenants (including those related to servicing) entered into in the ordinary
course of business in connection with a Qualified Securitization Transaction;
(2) with which neither Cummins nor any Restricted Subsidiary of Cummins
(a) provides any credit support or (b) has any contract, agreement, arrangement
or understanding other than on terms that are fair and reasonable and that are
no less favorable to Cummins or such Restricted Subsidiary than could be
obtained from an unrelated Person (other than, in the case of subclauses
(a) and (b) of this clause (2), representations, warranties and covenants
(including those relating to servicing) entered into in the ordinary course of
business in connection with a Qualified Securitization Transaction and
intercompany notes relating to the sale of Receivables to such Securitization
Subsidiary); and (3) with which neither Cummins nor any Restricted Subsidiary of
Cummins has any obligation to maintain or preserve such Subsidiary's financial
condition or to cause such Subsidiary to achieve certain levels of operating
results. Any such designation by the Board of

149

Directors of Cummins shall be evidenced to the Trustee by filing with the
Trustee a certified copy of the resolutions of the Board of Directors of Cummins
giving effect to such designation.

"S&P" means Standard & Poor's Ratings Services, a division of The
McGraw-Hill Companies, Inc., and its successors.

"STATED MATURITY" means, with respect to any security or Indebtedness of a
Person, the date specified therein as the fixed date on which any principal of
such security or Indebtedness is due and payable, including pursuant to any
mandatory redemption provision (but excluding any provision providing for the
repurchase thereof at the option of the holder thereof).

"SUBSIDIARY" of any Person means

(1) a corporation a majority of whose Voting Stock is at the time,
directly or indirectly, owned by such Person, by one or more Restricted
Subsidiaries of such Person or by such Person and one or more Restricted
Subsidiaries of such Person or

(2) any other Person in which such Person, a Restricted Subsidiary of
such Person or such Person and one or more Restricted Subsidiaries of such
Person, directly or indirectly, at the date of determination thereof, have
at least a majority ownership interest.

"SUBSIDIARY GUARANTOR" means each Restricted Subsidiary of Cummins that
becomes a guarantor of the Notes pursuant to "--Certain Covenants--Limitation on
Guarantees by Restricted Subsidiaries" above.

"TANGIBLE ASSETS" means total assets of Cummins and its Restricted
Subsidiaries, as reflected in accordance with GAAP on the face of the
consolidated balance sheet of Cummins and its Restricted Subsidiaries for the
most recent fiscal quarter prior to such date for which financial statements are
in existence, less goodwill, trade names, patents, organizational expenses and
other like intangibles of Cummins and its Restricted Subsidiaries.

"TRUST INDENTURE ACT" means the U.S. Trust Indenture Act of 1939, as
amended.

"UNRESTRICTED SUBSIDIARY" means:

(a)(1) Universal Silencer, Inc.;

(2) any Subsidiary of Cummins that at the time of determination shall be
designated an Unrestricted Subsidiary by the Board of Directors in the
manner provided below; and

(3) any Subsidiary of an Unrestricted Subsidiary.

The Board of Directors may designate any Subsidiary of Cummins (including
any newly acquired or newly formed Subsidiary) to be an Unrestricted Subsidiary
unless such Subsidiary or any of its Subsidiaries owns any Capital Stock of, or
holds any Lien on any property of, Cummins or any other Restricted Subsidiary of
Cummins; provided, that either

(1) the Subsidiary to be so designated has total assets of $1,000 or
less or

(2) if such Subsidiary has assets greater than $1,000, such designation
would be permitted under the covenant described under "--Certain
Covenants--Limitation on Restricted Payments" to the extent then applicable.

The Board of Directors may designate any Unrestricted Subsidiary to be a
Restricted Subsidiary; provided, that immediately after giving effect to
such designation (a) if such Unrestricted Subsidiary at such time has
Indebtedness, Cummins could incur $1.00 of additional Indebtedness under
clause (a)(1) of the covenant described under "--Certain Covenants--
Limitation on Incurrence of Indebtedness and Issuance of Preferred Stock" to
the extent then applicable, and (b) no Default shall have occurred and be
continuing. Any such designation by the Board of Directors shall be
evidenced by Cummins to the Trustee by promptly filing with the Trustee a
copy of the board resolution giving effect to such designation and an
officer's certificate certifying that such designation complied with the
foregoing provisions; or

150

(b) during such time as the Notes are rated Investment Grade by S&P and
Moody's, any Subsidiary which is not a Restricted Subsidiary.

"VOTING STOCK" means, with respect to any Person, securities of any class or
classes of Capital Stock in such Person entitling the holders thereof (whether
at all times or only so long as no senior class of stock has voting power by
reason of any contingency) to vote in the election of members of the Board of
Directors or other governing body of such Person.

"WHOLLY OWNED SUBSIDIARY" means a Restricted Subsidiary all of the Capital
Stock of which (other than directors' qualifying shares) is owned by Cummins or
one or more Wholly Owned Subsidiaries.

BOOK-ENTRY SYSTEM

The Notes will be initially issued in the form of Global Notes registered in
the name of The Depository Trust Company ("DTC") or its nominee.

Upon the issuance of a Global Note, DTC or its nominee will credit the
accounts of Persons holding through it with the respective principal amounts of
the Notes represented by such Global Note purchased by such Persons in the
offering. Such accounts shall be designated by the initial purchasers. Ownership
of beneficial interests in a Global Note will be limited to Persons that have
accounts with DTC ("PARTICIPANTS") or Persons that may hold interests through
participants. Ownership of beneficial interests in a Global Note will be shown
on, and the transfer of that ownership interest will be effected only through,
records maintained by DTC (with respect to participants' interests) and such
participants (with respect to the owners of beneficial interests in such Global
Note other than participants). The laws of some jurisdictions require that
certain purchasers of securities take physical delivery of such securities in
definitive form. Such limits and such laws may impair the ability to transfer
beneficial interests in a Global Note.

All payments on Notes represented by a Global Note will be made in
immediately available funds to DTC or its nominee, as the case may be, as the
sole registered owner and the sole holder of the Notes represented thereby for
all purposes under the indenture. We have been advised by DTC that upon receipt
of any payment on any Global Note, DTC will immediately credit, on its
book-entry registration and transfer system, the accounts of participants with
payments in amounts proportionate to their respective beneficial interests in
the principal or face amount of such Global Note as shown on the records of DTC.
Payments by participants to owners of beneficial interests in a Global Note held
through such participants will be governed by standing instructions and
customary practices as is now the case with securities held for customer
accounts registered in "street name" and will be the sole responsibility of such
participants.

A Global Note may not be transferred except as a whole by DTC or a nominee
of DTC to another nominee of DTC or to DTC or to a successor depositary to DTC
or its nominee. A Global Note will be exchanged for certificated notes only if:

(a) DTC notifies us that it is unwilling or unable to continue as a
depositary for such Global Note or if at any time DTC ceases to be a
clearing agency registered under the Exchange Act, and in either case we
fail to appoint a successor depositary within 90 days, or

(b) we in our discretion at any time determine not to have all the notes
represented by such Global Note, or

(c) an Event of Default with respect to the notes represented by such
Global Note has occurred and is continuing and the trustee has received a
request from DTC to issue certificated notes in lieu of such Global Note.

Any Global Note that is exchangeable for certificated Notes pursuant to the
preceding sentence will be exchanged for certificated Notes in authorized
denominations and registered in such names as DTC or any successor depositary
holding such Global Note may direct. Subject to the preceding, a Global Note is
not exchangeable, except for a Global Note of like denomination to be registered
in the

151

name of DTC or any successor depositary or its nominee. In the event that a
Global Note becomes exchangeable for certificated Notes,

(a) certificated Notes will be issued only in fully registered form in
denominations of $1,000 or integral multiples thereof,

(b) payment of principal of, and premium, if any, and interest on, the
certificated Notes will be payable, and the transfer of the certificated
notes will be registerable, at the office or agency we maintain for such
purposes, and

(c) no service charge will be made for any registration of transfer or
exchange of the certificated Notes, although we may require payment of a sum
sufficient to cover any tax or governmental charge imposed in connection
therewith.

So long as DTC or any successor depositary for a Global Note, or any
nominee, is the registered owner of such Global Note, DTC or such successor
depositary or nominee, as the case may be, will be considered the sole owner or
holder of the Notes represented by such Global Note for all purposes under the
indenture and the Notes. Except as set forth above, owners of beneficial
interests in a Global Note will not be entitled to have the Notes represented by
such Global Note registered in their names, will not receive or be entitled to
receive physical delivery of certificated Notes in definitive form and will not
be considered to be the owners or holders of any Notes under such Global Note.
Accordingly, each Person owning a beneficial interest on a Global Note must rely
on the procedures of DTC or any successor depositary, and, if such Person is not
a participant, on the procedures of the participant through which such Person
owns its interest, to exercise any rights of a holder under the indenture. We
understand that under existing industry practices, in the event that we request
any action of holders or that an owner of a beneficial interest in a Global Note
desires to give or take any action which a holder is entitled to give or take
under the indenture, DTC or any successor depositary would authorize the
participants holding the relevant beneficial interest to give or take such
action and such participants would authorize beneficial owners owning through
such participants to give or take such action or would otherwise act upon the
instructions of beneficial owners owning through them.

DTC has advised us that DTC is a limited-purpose trust company organized
under the Banking Law of the State of New York, a member of the Federal Reserve
System, a "CLEARING CORPORATION" within the meaning of the New York Uniform
Commercial Code and a "CLEARING AGENCY" registered under the Exchange Act. DTC
was created to hold the securities of its participants and to facilitate the
clearance and settlement of securities transactions among its participants in
such securities through electronic book-entry changes in accounts of the
participants, thereby eliminating the need for physical movement of securities
certificates. DTC's participants include securities brokers and dealers (which
may include the initial purchasers), banks, trust companies, clearing
corporations and certain other organizations some of whom (or their
representatives) own DTC. Access to DTC's book-entry system is also available to
others, such as banks, brokers, dealers and trust companies, that clear through
or maintain a custodial relationship with a participant, either directly or
indirectly.

Although DTC has agreed to the preceding procedures in order to facilitate
transfers of interests in Global Notes among participants of DTC, it is under no
obligation to perform or continue to perform such procedures, and such
procedures may be discontinued at any time. Neither we nor the trustee will have
any responsibility for the performance by DTC or its participants or indirect
participants of their respective obligations under the rules and procedures
governing their operations.

152

U.S. FEDERAL INCOME TAX CONSEQUENCES

GENERAL

This section summarizes the material U.S. Federal income tax consequences to
holders associated with an exchange of original notes for new notes. However,
the discussion is limited in the following ways:

- This discussion only covers you if you purchased original notes in the
initial offering and you exchange such original notes for new notes
pursuant to the exchange offer.

- This discussion only covers you if you have always held your original
notes, and will only hold new notes received pursuant to the exchange
offer, as a capital asset (that is, for investment purposes), and if you
do not have a special tax status.

- The discussion does not cover tax consequences that depend upon your
particular tax situation in addition to your ownership of original notes
or new notes. We suggest that you consult your tax advisor about the
consequences of holding original notes or new notes in your particular
situation.

- The discussion is based on current U.S. Federal tax law. Changes in the
law may change the tax treatment of the original notes or new notes.

- The discussion does not cover state, local or foreign law.

- The discussion does not apply to you if you are a "Non-U.S. Holder", as
defined below, of notes and you (a) own 10% or more of our voting stock,
(b) are a "controlled foreign corporation" with respect to us, or (c) are
a bank making a loan in the ordinary course of its business.

- We have not requested a ruling from the Internal Revenue Service (IRS) on
the tax consequences of the exchange offer or owning the new notes. As a
result, the IRS could disagree with any portion of this discussion.

IF YOU ARE CONSIDERING EXCHANGING ORIGINAL NOTES FOR NEW NOTES PURSUANT TO THE
EXCHANGE OFFER, WE SUGGEST THAT YOU CONSULT YOUR TAX ADVISOR ABOUT THE TAX
CONSEQUENCES OF SUCH AN EXCHANGE AND HOLDING THE NEW NOTES IN YOUR PARTICULAR
SITUATION.

For purposes of this summary, a "U.S. Holder" is:

- an individual U.S. citizen or resident alien;

- a corporation or other entity taxable as a corporation for U.S. Federal
income tax purposes that was created under U.S. law (Federal or state); or

- an estate or trust whose world-wide income is subject to U.S. Federal
income tax.

If a partnership holds original notes or new notes, the tax treatment of a
partner will generally depend upon the status of the partner and upon the
activities of the partnership. If you are a partner of a partnership holding
original notes or new notes, we suggest that you consult your tax advisor.

For purposes of this summary, a "Non-U.S. Holder" is:

- an individual that is a nonresident alien;

- a corporation or other entity taxable as a corporation for U.S. Federal
income tax purposes that was created under non-U.S. law (Federal or
state); or

- an estate or trust that is not taxable in the U.S. on its worldwide
income.

EXCHANGE OFFER

The consummation of the exchange offer will not be a taxable event for U.S.
Federal income tax purposes. Accordingly, holders will not recognize any income,
gain or loss in connection with an exchange of old notes for new notes pursuant
to the exchange offer, and any such holder will have the same adjusted tax basis
and holding period in the new notes as it had in the old notes, as measured
immediately before the exchange.

153

PLAN OF DISTRIBUTION

Each broker-dealer that receives new notes for its own account pursuant to
the exchange offer must acknowledge that it will deliver a prospectus in
connection with any resale of such new notes. This prospectus, as it may be
amended or supplemented from time to time, may be used by a broker-dealer in
connection with resales of new notes received in exchange for original notes
where such original notes were acquired as a result of market-making activities
or other trading activities. We have agreed that, starting on the expiration
date and 180 days after the expiration date, we will make this prospectus, as
amended or supplemented, available to any broker-dealer for use in connection
with any such resale. In addition, until , 2003 all dealers effecting
transactions in the new notes may be required to deliver a prospectus.

We will not receive any proceeds from any sale of new notes by
broker-dealers. New notes received by broker-dealers for their own account
pursuant to the exchange offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions, through
the writing of options on the new notes or a combination of such methods of
resale, at market prices prevailing at the time of resale, at prices related to
such prevailing market prices or negotiated prices. Any such resale may be made
directly to purchasers or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any such
broker-dealer or the purchasers of any such new notes. Any broker-dealer that
resells new notes that were received by it for its own account pursuant to the
exchange offer and any broker or dealer that participates in a distribution of
such new notes may be deemed to be an "underwriter" within the meaning of the
Securities Act and any profit on any such resale of new notes and any commission
or concessions received by any such persons may be deemed to be underwriting
compensation under the Securities Act. The letter of transmittal states that, by
acknowledging that it will deliver and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act.

For a period of 180 days after the expiration date we will promptly send
additional copies of this prospectus and any amendment or supplement to this
prospectus to any broker-dealer that requests such documents in the letter of
transmittal. We have agreed to pay all expenses incident to the exchange offer
(including reasonable fees and disbursements of counsel for the initial
purchasers of the original notes) other than commissions of concessions of any
brokers or dealers and to indemnify the holders of the original notes (including
any broker-dealers) against certain liabilities, including liabilities under the
Securities Act.

LEGAL MATTERS

Certain legal matters with respect to the notes will be passed upon by Marya
M. Rose, Esq., Vice President--General Counsel and Secretary of Cummins Inc.,
and Cravath, Swaine & Moore LLP, New York, New York.

EXPERTS

The consolidated financial statements of Cummins Inc. and its subsidiaries
as of December 31, 2002 and 2001 and for each of the three years in the period
ended December 31, 2002, included in this prospectus, have been so included in
reliance on the report of PricewaterhouseCoopers LLP, independent accountants,
given on the authority of said firm as experts in auditing and accounting.

154

INDEX TO FINANCIAL STATEMENTS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

PAGE
--------

AUDITED ANNUAL FINANCIAL STATEMENTS
Report of Independent Auditors.............................. F-2
Consolidated Statements of Earnings for the years ended
December 31, 2002, 2001 and 2000.......................... F-3
Consolidated Statements of Financial Position as of December
31, 2002 and 2001......................................... F-4
Consolidated Statements of Cash Flows for the years ended
December 31, 2002, 2001 and 2000.......................... F-5
Consolidated Statements of Shareholders' Investment for the
years ended December 31, 2002, 2001 and 2000.............. F-6
Notes to the Consolidated Financial Statements.............. F-8

UNAUDITED INTERIM FINANCIAL STATEMENTS
Consolidated Statements of Earnings for the three months and
six months ended June 29, 2003 and June 30, 2002.......... F-56
Consolidated Statements of Financial Position as of June 29,
2003 and December 31, 2002................................ F-57
Consolidated Statements of Cash Flows for the six months
ended June 29, 2003 and June 30, 2002..................... F-58
Notes to Consolidated Financial Statements.................. F-59

F-1

REPORT OF INDEPENDENT AUDITORS

To the Board of Directors
and Stockholders of Cummins Inc.

In our opinion, the accompanying consolidated statements of financial
position, and the related consolidated statements of earnings, of shareholders'
investment and of cash flows present fairly, in all material respects, the
financial position of Cummins Inc. and its subsidiaries as of December 31, 2002
and 2001, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 2002, in conformity with
accounting principles generally accepted in the United States of America. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

As described in Note 2, Restatement of Previously Issued Financial
Statements and Status of Debt Compliance, the Company has restated its financial
statements as of December 31, 2001 and for each of the two years then ended,
previously audited by other independent accountants who have ceased operations.

As described in Note 1, Summary of Significant Accounting Policies, the
Company made a change to its method of accounting for pension and postretirement
employee benefit plans during the year ended December 31, 2002. In addition, as
discussed in Note 1, effective January 1, 2002 the Company changed the manner in
which it accounts for goodwill and other intangible assets upon the adoption of
Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets."

/s/PRICEWATERHOUSECOOPERS LLP
Indianapolis, Indiana
July 31, 2003

F-2

CUMMINS INC.

CONSOLIDATED STATEMENTS OF EARNINGS

RESTATED RESTATED
2002 2001 2000
-------- -------- --------
$ MILLIONS, EXCEPT PER SHARE
AMOUNTS

NET SALES (includes sales to related parties of $1,320,
$1,388 and $1,484, respectively).......................... $5,853 $5,681 $6,597
Cost of goods sold (includes purchases from related parties
of $550, $547 and $621, respectively)..................... 4,808 4,668 5,330
------ ------ ------
Gross margin................................................ 1,045 1,013 1,267
Selling and administrative expenses......................... 736 721 773
Research and engineering expenses........................... 201 220 246
Joint ventures and alliances income......................... (22) (10) (7)
Restructuring, asset impairment and other charges
(credits)................................................. (8) 126 154
Interest expense............................................ 61 77 87
Loss on early retirement of debt............................ 8 -- --
Other (income)expense, net.................................. (9) -- 6
EARNINGS (LOSS) BEFORE INCOME TAXES, MINORITY INTEREST,
DIVIDENDS ON PREFERRED SECURITIES OF SUBSIDIARY TRUST AND
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE....... 78 (121) 8
Benefit for income taxes.................................... (38) (44) (20)
Minority interests.......................................... 16 15 14
Dividends on preferred securities of subsidiary trust....... 21 11 --
------ ------ ------
EARNINGS (LOSS) BEFORE CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE...................................... 79 (103) 14
Cumulative effect of change in accounting principle, net of
tax of $1................................................. 3 -- --
------ ------ ------
NET EARNINGS (LOSS)......................................... $ 82 $ (103) $ 14
====== ====== ======
Earnings (loss) per share
Basic
Earnings (loss) before cumulative effect of change in
accounting principle.................................. $ 2.06 $(2.70) $ .35
Cumulative effect of change in accounting principle, net
of tax................................................ .07 -- --
------ ------ ------
Net earnings (loss)..................................... $ 2.13 $(2.70) $ .35
====== ====== ======
Diluted
Earnings (loss) before cumulative effect of change in
accounting principle.................................. $ 2.06 $(2.70) $ .35
Cumulative effect of change in accounting principle, net
of tax................................................ .07 -- --
------ ------ ------
Net earnings (loss)..................................... $ 2.13 $(2.70) $ .35
====== ====== ======

The accompanying notes are an integral part of the consolidated financial
statements.

F-3

CUMMINS INC.

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

RESTATED
DEC. 31 DEC. 31
2002 2001
-------- --------
$ MILLIONS

ASSETS
CURRENT ASSETS
Cash and cash equivalents................................. $ 224 $ 50
Marketable securities..................................... 74 44
Receivables, net.......................................... 676 517
Receivables from related parties.......................... 129 119
Inventories............................................... 641 682
Other current assets...................................... 238 209
------ ------
1,982 1,621
------ ------
PROPERTY, PLANT AND EQUIPMENT
Land and buildings........................................ 580 594
Machinery, equipment and fixtures......................... 2,303 2,255
Construction in process................................... 69 164
------ ------
2,952 3,013
Less accumulated depreciation............................. 1,647 1,608
------ ------
1,305 1,405
INVESTMENTS IN AND ADVANCES TO JOINT VENTURES AND
ALLIANCES................................................. 264 211
GOODWILL.................................................... 343 342
OTHER INTANGIBLE ASSETS..................................... 96 109
DEFERRED INCOME TAXES....................................... 640 429
OTHER NONCURRENT ASSETS..................................... 207 194
------ ------
TOTAL ASSETS................................................ $4,837 $4,311
====== ======
LIABILITIES AND SHAREHOLDERS' INVESTMENT
CURRENT LIABILITIES
Loans payable............................................. $ 19 $ 21
Current maturities of long-term debt...................... 119 9
Accounts payable.......................................... 427 390
Accrued product coverage and marketing expenses........... 233 240
Other accrued expenses.................................... 531 404
------ ------
1,329 1,064
LONG-TERM DEBT.............................................. 999 915
OTHER LONG-TERM LIABILITIES................................. 1,285 974
MINORITY INTEREST........................................... 92 84
CUMMINS OBLIGATED MANDATORILY REDEEMABLE CONVERTIBLE
PREFERRED SECURITIES OF SUBSIDIARY TRUST HOLDING SOLELY
CONVERTIBLE SUBORDINATED DEBENTURES OF CUMMINS............ 291 291
SHAREHOLDERS' INVESTMENT
Common stock, $2.50 par value, 150 million shares
authorized, 48.6 and 48.6 million shares issued......... 121 121
Additional contributed capital............................ 1,115 1,119
Retained earnings......................................... 569 536
Accumulated other comprehensive income.................... (527) (325)
Common stock in treasury, at cost, 7.0 and 7.2 million
shares.................................................. (280) (289)
Common stock held in trust for employee benefit plans, 2.6
and 2.9 million shares.................................. (128) (140)
Unearned compensation..................................... (29) (39)
------ ------
841 983
------ ------
TOTAL LIABILITIES AND SHAREHOLDERS' INVESTMENT.............. $4,837 $4,311
====== ======

The accompanying notes are an integral part of the consolidated financial
statements.

F-4

CUMMINS INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

RESTATED RESTATED
2002 2001 2000
-------- -------- --------
$ MILLIONS

CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings (loss)....................................... $ 82 $(103) $ 14
Adjustments to reconcile net earnings (loss) to net cash
flows from operating activities:
Cumulative effect of change in accounting principle..... (3) -- --
Loss on early extinguishment of debt.................... 8 -- --
Depreciation and amortization........................... 219 229 240
Restructuring and other................................. (21) 66 104
Equity in (earnings) losses of joint ventures and
alliances............................................. (9) 8 11
Minority interest....................................... 16 15 14
Translation and hedging activities...................... 2 5 (5)
Changes in assets and liabilities:
Receivables............................................. (87) 206 69
Proceeds (repayments) from sale of receivables.......... (55) (164) 219
Inventories............................................. 46 71 12
Accounts payable and accrued expenses................... (25) (199) (236)
Other................................................... 20 18 30
----- ----- -----
NET CASH PROVIDED BY OPERATING ACTIVITIES................... 193 152 472
----- ----- -----
CASH FLOWS FROM INVESTING ACTIVITIES
Property, plant and equipment:
Capital expenditures.................................. (90) (206) (228)
Investments in internal use software.................. (20) (28) (56)
Proceeds from disposals............................... 16 18 6
Proceeds from sale-leasebacks......................... -- 143 --
Investments in and advances to joint ventures and
alliances............................................. (60) (48) (86)
Acquisitions and dispositions of business activities,
net................................................... 32 1 (35)
Purchases of marketable securities...................... (116) (74) (18)
Sales of marketable securities.......................... 86 53 8
Other................................................... -- 1 (1)
----- ----- -----
NET CASH USED IN INVESTING ACTIVITIES....................... (152) (140) (410)
----- ----- -----
NET CASH PROVIDED BY OPERATING AND INVESTING ACTIVITIES..... 41 12 62
----- ----- -----
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings.................................. 258 -- 1
Payments on borrowings.................................... (87) (9) (10)
Net (payments) borrowings under short-term credit
agreements.............................................. (4) (248) (6)
Repurchases of common stock............................... -- -- (16)
Dividend payments on common stock......................... (50) (50) (50)
Proceeds from issue of preferred securities of subsidiary
trust................................................... -- 291 --
Other..................................................... 14 14 --
----- ----- -----
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES......... 131 (2) (81)
----- ----- -----
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH
EQUIVALENTS............................................... 2 (1) (2)
----- ----- -----
NET CHANGE IN CASH AND CASH EQUIVALENTS..................... 174 9 (21)
Cash and cash equivalents at beginning of year.............. 50 41 62
CASH AND CASH EQUIVALENTS AT END OF YEAR.................... $ 224 $ 50 $ 41
===== ===== =====
CASH PAYMENTS DURING THE YEAR FOR:
Interest.................................................. $ 52 $ 80 $ 88
Income taxes.............................................. 30 20 73

The accompanying notes are an integral part of the consolidated financial
statements.

F-5

CUMMINS INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' INVESTMENT

RESTATED RESTATED
2002 2001 2000
------------------- ------------------- -------------------
$ MILLIONS

COMMON STOCK
Balance at beginning of year.............................. $ 121 $ 122 $ 121
Issued under incentive plans.............................. 1 -- --
Retirement of stock issued under incentive plans.......... (1) -- --
Other..................................................... -- (1) 1
------ ------ ------
Balance at end of year.................................... 121 121 122
====== ====== ======
ADDITIONAL CONTRIBUTED CAPITAL
Balance at beginning of year.............................. 1,119 1,124 1,120
Issued to trust for employee benefit plans................ 1 (2) (3)
Issued under incentive plans.............................. 6 4 6
Retirements under incentive plans......................... (7) (6) (1)
Change in receivables from employees for stock
purchases............................................... (1) 1 (4)
Other..................................................... (3) (2) 6
------ ------ ------
Balance at end of year.................................... 1,115 1,119 1,124
====== ====== ======
RETAINED EARNINGS
Balance at beginning of year.............................. 536 689 725
Net earnings (loss)....................................... 82 $ 82 (103) $(103) 14 $ 14
Cash dividends on common stock............................ (50) (50) (50)
Other..................................................... 1 -- --
------ ------ ------
Balance at end of year.................................... 569 536 689
====== ====== ======
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Balance at beginning of year.............................. (325) (159) (99)
Foreign currency translation, net of tax of $4, $5, and
$7...................................................... 50 (25) (59)
Minimum pension liability, net of tax of $145, $78, and
$1...................................................... (257) (140) (2)
Unrealized gain (loss) on securities...................... 3 -- 1
Unrealized (loss) on derivatives.......................... 2 (1) --
------ ----- ------ ----- ------ ----
Other comprehensive income (loss)......................... (202) (202) (166) (166) (60) (60)
------ ----- ------ ----- ------ ----
Comprehensive income (loss)............................... $(120) $(269) $(46)
===== ===== ====
Balance at end of year.................................... (527) (325) (159)
====== ====== ======
COMMON STOCK IN TREASURY
Balance at beginning of year.............................. (289) (290) (274)
Repurchased............................................... -- -- (16)
Issued.................................................... 9 1 --
------ ------ ------
Balance at end of year.................................... (280) (289) (290)
====== ====== ======
COMMON STOCK HELD IN TRUST FOR EMPLOYEE BENEFIT PLANS
Balance at beginning of year.............................. (140) (151) (164)
Allocated to benefit plans................................ 12 11 13
------ ------ ------
Balance at end of year.................................... (128) (140) (151)
====== ====== ======
UNEARNED COMPENSATION
Balance at beginning of year.............................. (39) (55) (64)
Change in restricted stock unearned compensation, net..... 7 13 7
Shares allocated to ESOP participants..................... 3 3 2
------ ------ ------
Balance at end of year.................................... (29) (39) (55)
====== ====== ======
Shareholders' investment.................................. $ 841 $ 983 $1,280
====== ====== ======

F-6

CUMMINS INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' INVESTMENT (CONTINUED)

RESTATED RESTATED
SHARES OF STOCK (MILLIONS) 2002 2001 2000
-------------------------- -------- -------- --------

COMMON STOCK, $2.50 PAR VALUE, 150 MILLION SHARES AUTHORIZED
Balance at beginning of year.............................. 48.6 48.6 48.3
Shares issued............................................. -- -- .2
Shares issued under incentive plans....................... .2 .2 .2
Retirements under incentive plans......................... (.2) (.2) (.1)
---- ---- ----
Balance at end of year.................................... 48.6 48.6 48.6
==== ==== ====
COMMON STOCK IN TREASURY
Balance at beginning of year.............................. 7.2 7.2 6.8
Shares repurchased........................................ -- -- .4
Shares issued............................................. (.2) -- --
---- ---- ----
Balance at end of year.................................... 7.0 7.2 7.2
==== ==== ====
COMMON STOCK HELD IN TRUST FOR EMPLOYEE BENEFIT PLANS
Balance at beginning of year.............................. 2.9 3.1 3.4
Shares allocated to benefit plans......................... (.3) (.2) (.3)
---- ---- ----
Balance at end of year.................................... 2.6 2.9 3.1
==== ==== ====

The accompanying notes are an integral part of the consolidated financial
statements.

F-7

CUMMINS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

Our CONSOLIDATED FINANCIAL STATEMENTS include the accounts of all
majority-owned subsidiaries where our ownership is more than 50% of common
stock. All significant intercompany balances and transactions with
majority-owned subsidiaries are eliminated in our CONSOLIDATED FINANCIAL
STATEMENTS. Where our ownership interest is less than 100 percent, the minority
ownership interest is reported in our CONSOLIDATED STATEMENTS OF FINANCIAL
POSITION as a liability. The minority ownership interest of our earnings or
loss, net of tax, is classified as "Minority interest" in our CONSOLIDATED
STATEMENTS OF EARNINGS.

INVESTMENTS IN UNCONSOLIDATED ENTITIES

We use the equity method to account for our investments in joint ventures,
affiliated companies and alliances in which we have the ability to exercise
significant influence, generally represented by common stock ownership or
partnership equity of at least 20 percent but not more than 50 percent.
Generally, under the equity method, original investments in these entities are
recorded at cost and subsequently adjusted by our share of equity in earnings or
losses after the date of acquisition. Investment amounts in excess of our share
of a joint venture's assets are amortized over the life of the related asset
creating the excess. If the excess is goodwill, then it is not amortized. Equity
in earnings or losses of each joint venture, affiliate and alliance is recorded
according to our level of ownership; if losses accumulate, we record our share
of losses until our investment has been fully depleted. If our investment has
been fully depleted, we recognize additional losses only when we are the primary
funding source. Significant transactions with unconsolidated entities are
eliminated in our CONSOLIDATED FINANCIAL STATEMENTS. Our investments are
classified as "Investments in and advances to joint ventures and alliances" in
our CONSOLIDATED STATEMENTS OF FINANCIAL POSITION. Our share of the results from
joint ventures, affiliated companies and alliances is reported in our
CONSOLIDATED STATEMENTS OF EARNINGS as "Joint ventures and alliances income."

USE OF ESTIMATES

The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect reported amounts presented and disclosed in the
financial statements. Significant estimates require the exercise of judgment and
are used for, but not limited to allowance for doubtful accounts, depreciation
and amortization, product coverage programs, retirement plans, restructuring and
asset impairment costs, income taxes and contingencies. Actual results could
differ from these estimates.

REVENUE RECOGNITION

We recognize revenues on the sale of our products, net of estimated costs of
returns, allowances and sales incentives, when our products are shipped to
customers and title and risk of ownership transfers. Products are generally sold
on open account under credit terms customary to the geographic region of
distribution. We perform ongoing credit evaluations of our customers and
generally do not require collateral to secure our accounts receivable. Engines,
service parts, service tools and other items sold to independent distributors
and to partially owned distributors accounted for under the equity method are
recorded when title and risk of ownership transfers. This transfer is based on
the agreement in effect with the respective distributor, and in the United
States and most international locations occurs generally when the products are
shipped. To the extent of our ownership percentage,

F-8

CUMMINS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

margins on sales to distributors accounted for under the equity method are
deferred until the distributor sells the product to unrelated parties. We record
a provision for estimated sales returns from distributors at the time of sale
based on historical experience of product returns and established maximum
allowances for returned product.

FOREIGN CURRENCY

We translate assets and liabilities of foreign entities to US dollars, where
the local currency is the functional currency, at year-end exchange rates. We
translate income and expenses to US dollars using weighted average exchange
rates for the year. We record adjustments resulting from translation in a
separate component of shareholders' investment and include the adjustments in
net earnings only upon sale or liquidation of the underlying foreign investment.

Foreign currency transaction gains and losses are included currently in net
earnings for the period. For foreign entities where the US dollar is the
functional currency, including those operating in highly inflationary economies,
we translate inventory, property, plant and equipment balances and the related
earnings statement using historical exchange rates. We include the resulting
gains and losses in the CONSOLIDATED STATEMENTS OF EARNINGS, which combined with
transaction gains and losses amounted to net losses of $14 million in 2002,
$11 million in 2001 and $13 million in 2000.

DERIVATIVE INSTRUMENTS

We make use of derivative instruments in foreign exchange, commodity price
and interest rate-hedging programs. Derivatives currently in use are foreign
currency forward contracts and commodity swap contracts. These contracts are
used strictly for hedging and not for speculative purposes.

We enter into commodity swaps to offset our exposure to price volatility for
certain raw materials used in the manufacturing process and have the discretion
to settle these transactions either in cash or by taking physical delivery. As a
result, we do not consider these contracts to be financial instruments for
accounting purposes but account for them as hedges.

We record all derivatives at fair value in our financial statements.
Note 13 provides further information on our hedging strategy and accounting for
derivative financial instruments.

INCOME TAX ACCOUNTING

We determine our income tax provision using the asset and liability method.
Under this method, deferred tax assets and liabilities are recognized for the
future tax effects of temporary differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. We also recognize future tax benefits associated with tax loss and credit
carryforwards as deferred tax assets. Our deferred tax assets are reduced by a
valuation allowance to the extent there is uncertainty as to their ultimate
realization. We measure deferred tax assets and liabilities using enacted tax
rates in effect for the year in which we expect to recover or settle the
temporary differences. The

F-9

CUMMINS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

effect of a change in tax rates on deferred taxes is recognized in the period
that the change is enacted. During interim reporting periods our income tax
provision is based upon the estimated annual effective tax rate of those taxable
jurisdictions where we conduct business.

CASH EQUIVALENTS

Cash equivalents include all highly liquid investments with an original
maturity of three months or less at the time of purchase.

MARKETABLE SECURITIES

We classify our investments in marketable securities as "available-for-sale"
or "held-to-maturity" in accordance with the provisions of Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities" (SFAS 115). We do not have any investments
classified as "trading." Investments that we intend to hold for more than one
year are classified as long-term investments. See Note 3 for a detailed
description of our investments.

Available-for-sale securities are carried at fair value with the unrealized
gain or loss, net of tax, reported in other comprehensive income.
Held-to-maturity securities are recorded at amortized cost. Unrealized losses
considered to be "other-than-temporary" are recognized currently in earnings.
The cost of securities sold is based on the specific identification method. The
fair value of most investment securities is determined by currently available
market prices. Where quoted market prices are not available, we use the market
price of similar types of securities that are traded in the market to estimate
fair value.

EARNINGS PER SHARE:

We calculate basic earnings per share (EPS) of common stock by dividing net
earnings (loss) available to common shareholders by the weighted-average number
of common shares outstanding for the period. Diluted EPS reflects the potential
dilution that occurs if options or securities are exercised or converted into
common stock and the effect of the exercise or conversion reduces EPS. We
exclude shares of common stock held by the Company's Retirement Savings Plan in
the Employee Benefits Trust (see Note 14) from weighted average shares
outstanding for the EPS calculation until those shares are distributed from the
trust. Following is a reconciliation of net earnings (loss) and weighted

F-10

CUMMINS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

average common shares outstanding for purposes of calculating basic and diluted
net earnings (loss) per share:

2002 2001 2000
-------- -------- --------
$ MILLIONS, EXCEPT PER
SHARE AMOUNTS

Earnings (loss) before cumulative effect of change in
accounting principle...................................... $ 79 $ (103) $ 14

Weighted average common shares outstanding:
Basic..................................................... 38.6 38.3 38.2
Dilutive effect of stock options.......................... .2 -- --
----- ------ ----
Diluted................................................... 38.8 38.3 38.2
===== ====== ====

Earnings (loss) per share before cumulative effect of change
in accounting principle:
Basic..................................................... $2.06 $(2.70) $.35
Diluted................................................... 2.06 (2.70) .35

The weighted average diluted common shares outstanding for 2002 and 2001
excludes the effect of 6.3 and 2.9 million shares, respectively, attributable to
the conversion of our Preferred Securities of Subsidiary Trust because the
effect was antidilutive. The calculation also excludes .1 million shares in 2001
attributable to the exercise of outstanding options because their effect was
antidilutive.

The weighted average diluted common shares outstanding for 2002, 2001 and
2000 excludes the effect of approximately 4.4 million, 3.8 million and
3.6 million common stock options, respectively, since such options have an
exercise price in excess of the average market value of our common stock during
those years.

INVENTORIES

Our inventories are stated at the lower of cost or net realizable value. At
December 31, 2002 and 2001, approximately 26 percent and 22 percent,
respectively, of our domestic inventories (primarily heavy-duty and
high-horsepower engines and parts) were valued using the last-in, first-out
(LIFO) cost method. The cost of other inventories is generally valued using the
first-in, first-out (FIFO) cost method. Our inventories at interim reporting
dates include estimates for adjustments related to annual physical inventory
results and for inventory cost changes under the LIFO cost method. Inventories
at December 31 were as follows:

2002 2001
-------- --------
$ MILLIONS

Finished products........................................... $381 $385
Work-in-process and raw materials........................... 316 354
---- ----
Inventories at FIFO cost.................................... 697 739
Excess of FIFO over LIFO.................................... (56) (57)
---- ----
$641 $682
==== ====

F-11

CUMMINS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

PROPERTY, PLANT AND EQUIPMENT

We record property, plant and equipment at cost. We depreciate the cost of
substantially all engine production equipment using a modified
units-of-production method, which is based upon units produced subject to a
minimum level. We depreciate the cost of all other equipment using the
straight-line method with depreciable lives ranging from 20 to 40 years for
buildings and 3 to 20 years for machinery, equipment and fixtures. We expense
normal maintenance and repair costs as incurred. Depreciation expense totaled
$183 million, $184 million and $200 million for the year ended December 31,
2002, 2001 and 2000, respectively.

LONG LIVED ASSETS

We evaluate the carrying value of our long-lived assets by performing
impairment tests whenever adverse events or changes in circumstances indicate a
possible impairment loss. Such impairment tests are based on a comparison of the
estimated undiscounted future cash flows to the carrying value of the asset. If
impairment is indicated, the asset carrying value is reduced to its fair market
value or if fair market value is not readily available, the value is determined
using an appropriate discount rate for expected cash flows.

GOODWILL

Goodwill represents the excess of purchase price paid over the fair value of
net assets acquired in a business combination accounted for as a purchase.

In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets" (SFAS 142). We adopted SFAS 142 effective January 1, 2002. As
required by SFAS 142, we no longer amortize goodwill, but rather we allocate
goodwill to reporting units for purposes of performing annual impairment tests
using a fair-value-based analysis. See Note 6 for a further discussion about
goodwill and the effects of discontinuing the amortization of goodwill.

SOFTWARE

We capitalize internal and external software costs (excluding research,
reengineering and training) and amortize them generally over 3-5 years.

PRODUCT COVERAGE

We charge the estimated costs of product coverage programs, other than
product recalls, to earnings at the time products are shipped to customers. We
use historical experience of product coverage programs to estimate the remaining
liability for our various product coverage programs. As a result of the
uncertainty surrounding the nature and frequency of product recall programs, the
liability for such programs is recorded when the recall action is announced. We
review and assess the liability for these programs on a quarterly basis.

F-12

CUMMINS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Below is summary of the activity in our product coverage liability account
for the year ended December 31, 2002, including adjustments to pre-existing
warranties during the period:

2002
----------
$ MILLIONS

Balance December 31, 2001................................... $322
Provision for warranties issued............................. 144
Payments.................................................... (204)
Changes in estimates for pre-existing warranties............ 56
----
Balance December 31, 2002................................... $318
====

PRODUCT LIABILITY

From time to time, we issue indemnifications to our customers and joint
venture partners which indicate that we will indemnify them against any loss
suffered as a result of a defective product we have sold them. In addition,
periodically, we enter into license agreements or joint venture agreements where
we license a patent, trademark or other similar intangible asset and agree to
indemnify the licensee against any losses suffered should the patent, trademark
or intangible asset infringe upon a third party asset. We provide reserves for
these exposures when it is probable that we have suffered a loss, the loss is
reasonably estimable and the loss exceeds any insurance coverage we may have.
The activity in our product liability accrual for the year ended December 31,
2002 was as follows:

2002
----------
$ MILLIONS

Balance December 31, 2001................................... $ 8
Provision................................................... 4
Payments.................................................... (1)
---
Balance December 31, 2002................................... $11
===

TREASURY STOCK AND EMPLOYEE STOCK PLANS

We use the weighted average cost method to account for treasury stock
transactions.

We account for stock option transactions and other stock based employee
awards in accordance with Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25), as allowed under Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-based
Compensation" (SFAS 123). Under APB 25, we do not record compensation expense
upon the issuance of stock options because the exercise price of stock options
granted equals the market price on the grant date. However, consistent with the
provisions of SFAS No. 123, as amended by SFAS

F-13

CUMMINS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

No. 148, the following table summarizes the pro forma net earnings and per share
amounts as if we had accounted for stock options using the fair market value
approach:

2002 2001 2000
-------- -------- --------
$ MILLIONS, EXCEPT PER
SHARE AMOUNTS

Net earnings (loss)
As reported............................................... $ 82 $ (103) $ 14
Add: Stock based employee compensation included in net
earnings (loss), net of tax............................. 4 7 9
Less: Stock based employee compensation determined under
fair value method, net of tax........................... (17) (24) (20)
----- ------ ----
Pro forma net earnings (loss)............................... $ 69 $ (120) $ 3
===== ====== ====
Basic earnings (loss) per share
As reported............................................... $2.13 $(2.70) $.35
Pro forma................................................. 1.79 (3.14) .06
Diluted earnings (loss) per share
As reported............................................... $2.13 $(2.70) $.35
Pro forma................................................. 1.79 (3.14) .06

Under SFAS No. 123, the fair value of stock-based awards to employees is
calculated through the use of option pricing models. The assumptions used in
calculating this fair value is more fully described in Note 14.

We compute compensation expense related to restricted stock awards based on
the fair value of the stock at the grant date and amortize that expense ratably
over the vesting period of the award, as more fully described in Note 14.

Beginning January 1, 2003, we are changing our method of accounting for
stock-based employee awards to the fair value method preferred by SFAS No. 123.
The change will be implemented on a prospective basis only for new option grants
made on or after January 1, 2003.

Additional contributed capital in our Statements of Financial Position is
presented net of employee loans for stock purchases. As of December 31, 2002,
2001 and 2000 the loan amount was $13 million, $12 million and $13 million,
respectively.

SHIPPING AND HANDLING COSTS

Our shipping and handling costs are expensed as incurred. The majority of
these costs is associated with operations of our inventory distribution centers
and warehouse facilities and are classified as selling and administrative
expenses in our CONSOLIDATED STATEMENTS OF EARNINGS. For the years ended
December 31, 2002, 2001 and 2000, these costs were approximately $88 million,
$93 million and $93 million, respectively.

RESEARCH AND DEVELOPMENT

We expense research and development expenditures, net of contract
reimbursements, when incurred. Research and development expenses were
$195 million in 2002, $203 million in 2001 and $225 million in 2000.

F-14

CUMMINS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

ALLOWANCE FOR DOUBTFUL ACCOUNTS

We provide an allowance for doubtful accounts based on our collection
experience and an analysis of our accounts receivable in light of the current
economic environment. In addition, when necessary, we provide for the full
amount of specific accounts deemed to be uncollectable. The activity in our
allowance for doubtful accounts for the years ended December 31, 2002, 2001 and
2000 was as follows:

2002 2001 2000
-------- -------- --------
$ MILLIONS

Beginning balance.......................................... $ 9 $10 $10
Provision.................................................. 8 3 3
Write-offs................................................. (3) (4) (3)
--- --- ---
Ending balance............................................. $14 $ 9 $10
=== === ===

OFF-BALANCE SHEET ARRANGEMENTS AND SPECIAL PURPOSE ENTITIES

We use a special purpose entity (SPE), Cummins Receivable Corporation, in
connection with the sale of our trade accounts receivable. Cummins Receivable
Corporation is a wholly-owned, bankruptcy-remote special purpose subsidiary that
transfers an interest in our receivables, without recourse, to limited purpose
receivable securitization entities (conduits) that are established and managed
by an independent financial institution. Following the transfer of the sold
receivables to the conduits, those receivables are no longer assets of Cummins
and the sold receivables no longer appear on our balance sheet. The use of this
financing arrangement enables us to access highly liquid and efficient markets
to finance our working capital needs when receivables are sold and packaged in
this type of structure. As of December 31, 2002, there were no proceeds
outstanding under the securitization program.

In June 2001, we issued 6 million shares of convertible quarterly income
preferred securities through Cummins Capital Trust I, a Delaware special purpose
trust and wholly-owned subsidiary of Cummins. The proceeds from the issuance of
the preferred securities of $291 million were invested by the Trust in
convertible subordinated debentures issued by Cummins. The sole assets of the
Trust are the debentures.

None of our officers, directors or employees of Cummins or its affiliates
hold any direct or indirect equity interests in either Cummins Receivable
Corporation or Cummins Capital Trust I other than through holdings of Cummins
common stock.

In 2001, we entered into a lease agreement in which we sold and leased back
certain heavy-duty engine manufacturing equipment with a nationally prominent,
creditworthy lessor who had an established SPE to facilitate the financing of
the equipment for Cummins. The use of the SPE allows the parties providing the
lease financing to isolate particular assets in a single entity and thereby
syndicate the financing to multiple third parties. This is a conventional
financing technique used to lower the cost of borrowing and thus, the lease cost
to Cummins. There is a well-established market in which financial institutions
participate in the financing of such property through their purchase of
interests in such SPE's. The SPE established to facilitate the equipment lease
to Cummins is owned by an institution, which is independent and not affiliated
with Cummins. The financial institution maintains a substantial equity
investment in the SPE.

F-15

CUMMINS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

RECLASSIFIATIONS

Certain reclassifications have been made to the 2001 and 2000 financial
information to conform to the current year presentation.

CHANGE IN ACCOUNTING PRINCIPLE

Effective January 1, 2002, we changed the annual measurement date of our
pension plan assets used in determining their market-related value and of our
plan liabilities for our pension plans and postretirement benefit plans from
September 30 to November 30. We made this change to more closely align the
measurement date with our fiscal year end. These plans are more fully discussed
in Note 11.

As a result of this change, we recorded, retroactive to our first fiscal
quarter, a favorable cumulative effect of a change in accounting principle of
approximately $4 million, or $3 million on an after-tax basis. This amount is
disclosed as a separate line item in the accompanying CONSOLIDATED STATEMENTS OF
EARNINGS. The change did not have a material impact on the amount of pension or
postretirement expense recorded in 2002. Had we used a November 30 measurement
date in prior periods, the amount of pension and postretirement expense recorded
in 2001 and 2000 would have been reduced by approximately $1.1 and $.7 million,
respectively.

EARLY ADOPTION OF ACCOUNTING PRONOUNCEMENT

We have elected to early adopt the provisions of Statement of Financial
Accounting Standard No. 145, "Rescission of FASB Statements No. 4, 44, and 64,
Amendment of FASB Statement No. 13, and Technical Corrections." Since FASB
Statement No. 4 has been rescinded, retirements of debt are no longer
automatically classified as an extraordinary item. Rather, retirements of debt
are only classified as extraordinary to the extent the specified criteria in
Accounting Principles Board Opinion No. 30 "Reporting the Results of
Operations--Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions"
(APB No. 30) are met. As such, the loss from the early retirement of our ESOP
Notes was not classified as extraordinary as we believe it did not meet the
criteria of APB No. 30. See Note 8 for further discussion of this transaction.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS NOT YET EFFECTIVE

In June 2001, the FASB issued Statement of Financial Accounting Standard
No. 143, "Accounting for Asset Retirement Obligations" (SFAS No. 143). SFAS
No. 143 requires obligations associated with retirement of long-lived assets to
be capitalized as part of the carrying value of the related asset. We adopted
this statement on January 1, 2003. The adoption of this statement did not have a
material effect on our financial statements.

In June 2002, the FASB issued Statement of Financial Accounting Standard
No. 146, "Accounting for Costs Associated with Exit or Disposal Activities"
(SFAS 146). This standard nullifies Emerging Issues Task Force (EITF) Issue
No. 88-10 "Costs Associated with Lease Modification or Termination" and EITF
Issue No. 94-3 "Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity (Including Certain Costs Incurred in a
Restructuring)." SFAS 146 requires that a liability for a cost associated with
an exit or disposal activity be recognized and measured at its fair value when
the liability is incurred. We adopted the provisions of SFAS 146 for exit or
disposal activities, such as restructuring, involuntarily terminating employees,
and costs associated with consolidating facilities, for actions begun after
December 31, 2002. The adoption of this statement did not have a material effect
on our financial statements.

F-16

CUMMINS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" (FIN 45). FIN 45 elaborates on the
disclosures to be made by a guarantor about its obligations under certain
guarantees that it has issued. In addition, this interpretation will require a
guarantor to recognize, at the inception of a guarantee, a liability for the
fair value of the obligation undertaken in issuing the guarantee. The disclosure
provisions of FIN 45 are effective for annual or interim financial statements of
periods ending after December 15, 2002. See Note 19 for a discussion of our
guarantees existing at December 31, 2002. We adopted the recognition provisions
of FIN 45 for new or modified guarantees issued on or after January 1, 2003. The
adoption of this statement did not have a material effect on our financial
statements.

In November 2002, the Emerging Issues Task Force (EITF) issued EITF Issue
00-21, "Revenue Arrangements with Multiple Deliverables." This issue provides
guidance as to how to determine when an arrangement involving multiple
deliverables contains more than one unit of accounting and when more than one
unit of accounting exists, how the arrangement consideration should be allocated
to the multiple units. The application of this issue could affect the timing of
the recognition of revenue for multiple deliverable arrangements. The guidance
in this issue is prospective for revenue arrangements entered into after
June 30, 2003. We are in the process of analyzing the impact this EITF will
have, if any, on our revenue recognition in the future.

In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation
of Variable Interest Entities", an Interpretation of Accounting Research
Bulletin No. 51 "Consolidated Financial Statements" (FIN 46). FIN 46 provides
guidance related to identifying variable interest entities (VIEs), including
entities more commonly referred to as special purpose entities or SPEs, and in
determining whether such entities should be consolidated by the entities'
primary beneficiary, defined in FIN 46 as the entity that holds the majority of
the variable interests in the VIE. In addition, FIN 46 requires disclosure for
both consolidated and non-consolidated VIEs. Certain disclosure provisions of
FIN 46 are effective for financial statements issued after January 31, 2003, and
the consolidation requirements applicable to Cummins are effective for all
periods ending after December 15, 2003. Currently we participate in four known
VIEs, two of which are currently consolidated (See Notes 4 and 9). We are
assessing the impact of this interpretation on our known VIEs, one that is a
party to our sale-leaseback transaction entered into in 2001, two that are
involved in our receivable securitization program and a trust that holds our
preferred securities. We are assessing the impact of this interpretation on our
relationships with other entities, such as investments currently accounted for
under the equity method. Our maximum potential loss related to the
sale-leaseback SPE is limited to the amount of our residual value guarantee as
discussed in Note 18. At December 31, 2002, there is no potential loss related
to the receivable securitization conduit, as the conduit does not hold any
Cummins receivables at that date.

In May 2003, the FASB issued Statement of Financial Accounting Standard
No. 150 "Accounting for Certain Financial Instruments with Characteristics of
both Liabilities and Equity" (SFAS 150). SFAS 150 establishes standards for how
companies classify and measure certain financial instruments with
characteristics of both liabilities and equity. SFAS 150 requires financial
instruments meeting certain criteria to be reported as liabilities that were
previously reflected as equity or in between liabilities and equity. We are
required to adopt SFAS 150 for our existing financial instruments on July 1,
2003. The adoption of this statement will result in the classification of our
obligations associated with the Convertible Preferred Securities of Subsidiary
Trust as a liability and will result in the classification of the dividend
payments on these securities as interest expense in our Consolidated Statements
of Earnings. The adoption of this statement will have no impact on net earnings.

F-17

CUMMINS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 2. RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS AND STATUS OF DEBT
COMPLIANCE

1. Adjustments stemming from the unreconciled accounts at our manufacturing
locations referred to above. These errors resulted from deficiencies in
our control processes to identify and resolve the reconciliation issues
in a timely manner.

2. Adjustments related to the correction of accounting errors previously
recorded in the period management identified the error. Generally
Accepted Accounting Principles (GAAP) and SAB 99 permit these types of
adjustments to be recorded in the period errors are identified to the
extent they are not deemed material for purposes of restating prior
period financial statements. The most significant items in this category
are related to the reconciliation of certain intercompany accounts and
other clearing or suspense accounts associated with receivables, accounts
payable and accrued payroll. As a result of the restatement, management
has now reflected these items in the periods to which they relate.

3. Other adjustments to correct errors were identified during the
restatement process and have been categorized and summarized as follows:

a. Revisions to various accounts (primarily reserve and accrual
accounts) that relate to significant estimates, uncertainties and
judgments where the original amount was either calculated incorrectly
or documentation directly supporting the original amount could not be
located. The most significant items in this category include
adjustments to obligations associated with marketing programs,
inventory overhead cost capitalization and product liability
reserves.

b. Adjustments to certain accounts to achieve proper and consistent
application of GAAP throughout our organization. For example, this
category includes adjustments for liabilities or reserves not
recorded by certain of our locations that are required by US GAAP.
The most significant item in this category relates to the omission of
an accrual for long-term variable incentive compensation in 2001.
This category also includes adjustments related to the calculation of
expense for certain non-US subsidiary defined benefit pension plans
in accordance with US GAAP.

F-18

CUMMINS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Approximately half of the adjustments to our charges related to
timing of recognition of certain employee related costs in one
restructuring action. US GAAP requires that these costs be accrued
only after a specific announcement to employees. At one plant
location, we accrued certain costs after management made the decision
to terminate employees but prior to an announcement meeting the
specificity required by US GAAP. With regard to the excess reserve
adjustments, we previously reversed excess restructuring reserves at
the time the associated restructuring plan was substantially
complete. The adjustment was made to reverse the reserve in the
period in which it was determined to be in excess, as required under
US GAAP.

d. Other revisions to the financial statements, each of which impacted
net income by less than $.8 million, net of tax, less than
$1 million pre-tax.

F-19

CUMMINS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The following tables show the effect of the restatement adjustments on our
previously issued financial statements:

RESTATED RESTATED
-------- --------
INCREASE (DECREASE) IN NET EARNINGS ($ MILLIONS): 2002(A) 2001 2000 PRE-2000 TOTAL
------------------------------------------------- -------- -------- -------- -------- --------

Net earnings (loss)--as previously reported................ $ 72 $ (102) $ 8
Net adjustments (pre tax):
1. Manufacturing location adjustments (b)................ (8) (1) (4) $(13) $(26)
2. Items now recorded in period of occurrence............ 20 5 23 (51) (3)
3. Other adjustments:
a. Accrual and reserve measurements.................... (8) (1) (5) 15 1
b. GAAP application adjustments........................ 17 (4) (5) (8) --
c. Restructuring adjustments........................... (7) (1) (3) 11 --
d. Other, net.......................................... -- (1) (1) (2) (4)
----- ------ ---- ---- ----
Total net adjustments (pre tax)............................ 14 (3) 5 (48) (32)
Tax effect................................................. (4) 2 1 11 10
----- ------ ---- ---- ----
Total adjustments, net of tax.............................. 10 (1) 6 $(37) $(22)
----- ------ ---- ==== ====
Net earnings (loss)--as restated........................... $ 82 $ (103) $ 14
===== ====== ====
Basic and diluted earnings per share--as previously
reported................................................. $1.87 $(2.66) $.20
Effect of restatement adjustments.......................... .26 (.04) .15
----- ------ ----
Basic and diluted earnings per share--as restated.......... $2.13 $(2.70) $.35
===== ====== ====
Summary of net expense adjustments by Statements of
Earnings caption--increase (decrease) to net earnings
(loss):
Cost of goods sold....................................... $ 12 $ (8) $ 8
Selling and administrative expenses...................... 1 7 3
Research and engineering expenses........................ 2 -- (2)
Joint ventures and alliances income...................... -- -- (2)
Restructuring, asset impairment and other charges........ (6) (1) 6
Interest expense......................................... 2 (1) (1)
Other income (expense), net.............................. 2 -- (7)
Minority interests....................................... 1 -- --
----- ------ ----
Total net adjustments (pre tax)............................ $ 14 $ (3) $ 5
===== ====== ====

--------------

(a) This column shows the impact of the adjustments in 2002. Previously reported
net income for 2002 represents the unaudited results that were included in
the Form 8-K furnished on May 12, 2003. The changes in Statements of
Earnings captions are computed as changes from the related unaudited
Statements of Earnings amounts included in that Form 8-K.

F-20

CUMMINS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(b) Amount includes $4 million of reconciling items written off in the fourth
quarter of 2002 that could not be associated with a specific period.

Change in shareholders' investment ($ millions):
Shareholders' investment at December 31, 2001--as previously
reported.................................................. $1,025
Cumulative net decrease in net earnings--pre 2000........... (37)
Net increase in net earnings--2000.......................... 6
Net decrease in net earnings--2001.......................... (1)
Reclassification of employee receivables related to stock
purchases (a)............................................. (12)
Cumulative net change in comprehensive income............... 1
Other....................................................... 1
------
Shareholders' investment as of December 31, 2001--as
restated.................................................. $ 983
======

(a) This item was previously reflected in our STATEMENTS OF FINANCIAL POSITION
as a non current receivable.

CHANGE IN 2001 STATEMENTS OF FINANCIAL POSITION ($ IN MILLIONS) AS REPORTED AS RESTATED
--------------------------------------------------------------- ----------- -----------

Current assets............................................ $1,635 $1,621
Non current assets........................................ 2,700 2,690
Current liabilities....................................... 970 1,064
Non current liabilities................................... 2,049 1,973
Shareholders investment................................... 1,025 983

As a result of the restatement and reaudit, we delayed the filing of this
Annual Report on Form 10-K for the year ended December 31, 2002, and our
Quarterly Report on Form 10-Q for the quarter ended March 30, 2003, with the
Securities and Exchange Commission (SEC). As previously disclosed, the delay in
filing resulted in a breach of a requirement for timely satisfaction of SEC
filing obligations under several of our credit agreements, the most significant
of which are discussed below. A majority of our long-term debt is governed by
three Indenture agreements summarized as follows:

- A November 20, 2002, Indenture between the Company and BNY Midwest Trust
Company as trustee for $250 million in 9.5% senior notes;

- A June 18, 2001, Indenture between the Company and BNY Midwest Trust
Company as trustee for $300 million in 7% convertible preferred
securities; and,

- A March 1, 1986, Indenture between the Company and JPMorgan Chase Bank
(formerly The Chase Manhattan Bank) for four series of securities with an
aggregate value of $765 million.

Under each of the Indentures, we are required to deliver to the respective
Trustees a copy of our Annual Report on Form 10-K within specified periods of
time after such filings are due (March 31, 2003). The breach caused by the delay
in filing our Annual Report on Form 10-K gave certain rights to the Trustees and
debt holders under the Indentures to accelerate maturity of our indebtedness if
they give us notice and we do not cure the breach within 60 days. However,
neither the Trustees nor the respective debt holders have given us such notice.
As a result, we continue to classify our debt as long-term in the Consolidated
Statements of Financial Position.

F-21

CUMMINS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

became contractually obligated to pay an additional 0.25% per annum interest on
the notes issued under that Indenture. For each 90-day delay in the completion
of the exchange offer, the interest rate on the notes will increase by an
additional 0.25% per annum up to a 1% maximum increase until such time as the
exchange offer is completed.

In connection with the 2001 Indenture governing the issue of our 7%
convertible preferred securities, we exercised our right to suspend the use of
the resale prospectus, which is part of a shelf registration statement that we
had filed and had declared effective to permit the resale of these securities,
pending the filing of our Annual Report on Form 10-K with the SEC. Effective
March 31, 2003, this suspension resulted in an increase of 0.5% per annum in the
dividend rate borne by these securities, which we will continue to pay until we
permit the resale prospectus to be used after the filing of our Annual Report on
Form 10-K.

In November 2002, we entered into a new credit facility agreement that
provides for aggregate borrowings of up to $385 million and is available on a
revolving basis for a period of three years. The agreement requires that we
annually deliver audited financial statements to the lenders within a specified
period of time. As a result of the restatement and reaudit process, we received
a waiver from our lenders through November 30, 2003, of any breach due to a
delay in the delivery of our audited financial statements. There were no amounts
outstanding under this facility at December 31, 2002.

By filing this Annual Report on Form 10-K and our Quarterly Report on
Form 10-Q for the first quarter ended March 30, 2003, with the SEC and by
delivering a copy of these filings to the Trustees of the Indentures and to our
lender under the credit facility agreement, we will cure the noncompliance under
the abovementioned Indentures and comply with the terms of the credit facility
agreement. We expect to satisfy our registration obligations relating to the
2002 and 2001 Indentures in the near term, following which the incremental
interest and dividend payments will be discontinued.

NOTE 3. MARKETABLE SECURITIES

The following is a summary of marketable securities at December 31:

2002 2001
--------------------------------- ----------------------------------------------
GROSS GROSS GROSS
UNREALIZED EST. FAIR UNREALIZED UNREALIZED EST. FAIR
COST GAINS VALUE COST GAINS LOSSES VALUE
-------- ---------- --------- -------- ---------- ---------- ---------
$ MILLIONS

Available-for-sale:
Debt mutual funds......................... $44 $2 $46 $16 $ -- $ -- $16
Government debt securities--non-US........ 8 1 9 9 -- -- 9
Corporate debt securities................. 14 -- 14 6 1 -- 7
Equity securities......................... 5 -- 5 9 -- (4) 5
Held-to-maturity:
Commercial paper and other................ 5 -- 5 12 -- -- 12
--- -- --- --- --------- --------- ---
Total marketable securities................. $76 $3 $79 $52 $ 1 $ (4) $49
--- -- --- --- --------- --------- ---
Current................................... $71 $3 $74 $43 $ 1 $ -- $44
Non-current............................... 5 -- 5 9 -- (4) 5

Proceeds from sales of available-for-sale securities were $59 million,
$19 million and $3 million in 2002, 2001 and 2000, respectively. Purchases of
available-for-sale securities were $95 million, $39 million and $6 million in
2002, 2001 and 2000, respectively. Gross realized gains from the sale of

F-22

CUMMINS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

available-for-sale securities were $1 million in 2002 and $2 million in 2001.
Gross realized gains and losses in 2000 were not material. During the fourth
quarter of 2002, we recorded a $4 million charge related to an
"other-than-temporary" impairment of an investment in common stock.

The commercial paper and other investments mature during 2003. The fair
value of available-for-sale investments in debt securities by contractual
maturity at December 31, 2002, is as follows:

MATURITY DATE FAIR VALUE
------------- ------------
($ MILLIONS)

1 year or less.............................................. $8
1-5 years................................................... 8
5-10 years.................................................. 4
After 10 years.............................................. 3

NOTE 4. SALES OF RECEIVABLES

In December 2000, we entered into an agreement to sell an interest in
designated pools of trade receivables to Cummins Receivable Corporation (CRC), a
special purpose subsidiary. The subsidiary transfers an interest in its
receivables, without recourse, to limited purpose receivable securitization
companies (conduits) that are established and managed by an independent
financial institution. The conduits fund their purchases of receivables from the
subsidiary by issuing commercial paper. To maintain a balance in the designated
pools of receivables sold, we sell new receivables as existing receivables are
collected. Receivables transferred to CRC that are not sold to the conduit are
classified in accounts receivable and are subordinate to the conduit's interest
in the pool of receivables. The agreement for the sale of receivables provides
for continuation of the program on a revolving basis for a three-year period. We
amended the agreement in April 2002 to change the requirement for maintaining an
investment grade credit rating, which resulted in an increase in the interest
rate. The terms of the agreement contain certain covenants, which among other
restrictions require us to maintain minimum credit ratings, as amended, on our
long-term senior unsecured debt of "BB" from Standard & Poor's and "Ba2" from
Moody's.

No accounts receivable sold to the subsidiary were written off during 2002,
2001 or 2000. The weighted average interest rate on securitized repayments
during 2002, 2001 and 2000 was 1.8 percent, 4.4 percent and 6.5 percent,
respectively. The sold receivables servicing portfolio, which is included in
receivables at December 31, and the proceeds from the sale of receivables and
other cash flows received from and paid to CRC follows:

2002 2001 2000
-------- -------- --------
$ MILLIONS

Sold receivables servicing portfolio................. $ 242 $ 231 $355
Proceeds outstanding from receivable sales........... -- 55 219
Receivables sold to CRC.............................. 3,420 2,986 741
Collections reinvested in CRC........................ 3,409 3,110 385
Servicing fees and interest.......................... 2 8 --

F-23

CUMMINS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 5. JOINT VENTURES AND ALLIANCES AND RELATED PARTY TRANSACTIONS

Investments in and advances to joint ventures and alliances and our
ownership percentage at December 31 were as follows:

OWNERSHIP % 2002 2001
-------------- -------- --------
$ MILLIONS

Consolidated Diesel................................ 50% $ 60 $ 47
European Engine Alliance........................... 33% 56 44
AvK/SEG Newage..................................... 50% 36 15
Dongfeng Cummins................................... 50% 29 25
Komatsu alliances.................................. 20%--50% 25 19
Chongqing Cummins.................................. 50% 22 19
Tata Cummins....................................... 50% 18 17
Other.............................................. Various 18 25
---- ----
Total.............................................. $264 $211
==== ====

We have approximately $17 million in our investment account at December 31,
2002, that represents cumulative undistributed earnings in our joint ventures.
Summary financial information for our joint ventures and alliances was as
follows:

2002 2001 2000
-------- -------- --------
$ MILLIONS

Net sales........................................... $1,682 $1,573 $1,626
Gross margin........................................ 282 222 189
Net earnings........................................ 41 21 16
Cummins share of net earnings....................... 20 7 3

Current assets...................................... $ 617 $ 426 $ 448
Noncurrent assets................................... 684 620 596
Current liabilities................................. (424) (366) (405)
Noncurrent liabilities.............................. (511) (375) (291)
------ ------ ------
Net assets.......................................... $ 366 $ 305 $ 348
------ ------ ------
Cummins share of net assets......................... $ 173 $ 144 $ 159
====== ====== ======

RELATED PARTY TRANSACTIONS

We purchase significant quantities of midrange diesel and natural gas
engines, components and service parts from Consolidated Diesel Company (CDC), an
unconsolidated general partnership. The partnership was formed in 1980 with J.
I. Case (Case) to jointly fund engine development and manufacturing capacity.
Cummins and Case (now CNH Global N.V.) are general partners and each partner
shares 50 percent ownership in CDC. Under the terms of the agreement, CDC is
obligated to

F-24

CUMMINS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

make its entire production of diesel engines and related products available
solely to the partners. Each partner is entitled to purchase up to one-half of
CDC's actual production; a partner may purchase in excess of one-half of actual
production to the extent productive capacity is available beyond the other
partner's purchase requirement. The partners are each obligated, unconditionally
and severally, to purchase annually at least one engine or engine kit produced
by CDC, provided a minimum of one engine or kit is produced. The transfer price
of CDC's engines to the partners must be sufficient to cover its manufacturing
cost in such annual accounting period, including interest and financing
expenses, depreciation expense and payment of principal on any of CDC's
indebtedness. In addition, each partner is obligated to contribute one-half of
the capital investment required to maintain plant capacity and each partner has
the right to invest unilaterally in plant capacity, which additional capacity
can be utilized by the other partner for a fee. To date, neither partner has
made a unilateral investment in plant capacity at CDC.

All marketing, selling, warranty and research and development expenses
related to CDC products are the responsibility of the partners and CDC does not
incur any of these expenses. Cummins also provides purchasing and administrative
procurement services to CDC for an annual fee shared by the partners.

All of our engine purchases from CDC are shipped directly from CDC to our
customers and recorded as Cost of goods sold in our CONSOLIDATED STATEMENTS OF
EARNINGS. Our engine purchases from CDC are recorded at CDC's transfer price
which is based upon total production costs of products shipped and an allocation
of all other costs incurred during the reporting period, resulting in break-even
operating results for CDC. We account for our investment in CDC under the equity
method of accounting (see Note 1). Our investment in CDC is classified as
"Investments in and advances to joint ventures and alliances" in our
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION.

The following table summarizes our related party purchases included in Cost
of goods sold in our CONSOLIDATED STATEMENTS OF EARNINGS:

2002 2001 2000
-------- -------- --------
$ MILLIONS

Engines, parts and components--CDC...................... $457 $452 $541
Engines, parts and components--other JVs................ 93 95 80

The CONSOLIDATED STATEMENTS OF CASH FLOWS include the earnings of joint
ventures and alliances as reported above as well as other non-cash adjustments.
The most significant adjustment included in the statement of cash flows is
depreciation recorded by Consolidated Diesel, which is allocated to the joint
venture partners based on the amount of their purchases. We classify
depreciation and other noncash expenses related to Consolidated Diesel as "Cost
of goods sold" and "Other (income) expense",

F-25

CUMMINS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

respectively, in the CONSOLIDATED STATEMENTS OF EARNINGS. The adjustments
relating to Consolidated Diesel were $12 million in 2002, $16 million in 2001
and $14 million in 2000.

DISTRIBUTORS

We have an extensive worldwide distributor and dealer network through which
we sell and distribute our products and services. Generally, our distributors
are divided by geographic region. Some of our distributors are wholly-owned by
Cummins, some partially-owned and the majority are independently owned. We
consolidate all wholly-owned distributors and account for partially-owned
distributors using the equity method of accounting (see Note 1).

We are contractually obligated to repurchase new engines, parts and
components and signage from our North American distributors following an
ownership transfer or termination of the distributor. Outside of North America,
repurchase obligations and practices vary by region. In addition, we provide
guarantees related to certain obligations of some distributors as more fully
discussed in Note 19. We continually monitor the financial condition of these
independent distributors. We recognize revenue on sales to these distributors
when we have concluded that our performance under these guarantees is unlikely.
All distributors that are partially-owned and those who participate in the
guaranteed loan program are considered to be related parties in our CONSOLIDATED
FINANCIAL STATEMENTS.

NOTE 6. GOODWILL AND OTHER INTANGIBLE ASSETS

In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 142 "Goodwill and Other Intangible Assets"
(SFAS 142), which addresses financial accounting and reporting for goodwill and
intangible assets. Under SFAS 142, goodwill and certain other intangible assets
having indefinite useful lives are no longer amortized but are allocated to
applicable reporting units for purposes of performing annual impairment tests
using a fair-value-based analysis.

As required by SFAS 142, we applied this new accounting standard on
January 1, 2002, to our previously recognized goodwill and intangible assets. At
December 31, 2001, our net goodwill related to consolidated entities was
approximately $343 million. For purposes of impairment testing, we assigned
$332 million of goodwill to a component within the Filtration and Other
reporting segment, $6 million to a component within the Engine Business
reporting segment and $5 million to the International Distributor reporting
segment. During the first quarter 2002, we completed the first step of the
transitional goodwill impairment test, which required us to compare the fair
value of our reporting units to the carrying value of the net assets of our
reporting units as of January 1, 2002. For each of our reporting units, the
estimated fair value was determined utilizing the expected present value of the
future cash flows of the units. Based on this analysis, we concluded that the
fair value of each of our reporting units exceeded their carrying, or book
value, including goodwill, and therefore we did not recognize any impairment of
goodwill. As a result there was no change to our goodwill amounts during the
year.

We have elected to perform the annual impairment test of our recorded
goodwill as required by SFAS 142 as of the end of our fiscal third quarter. The
results of this annual impairment test indicated that the fair value of each of
our reporting units as of September 29, 2002, exceeded their carrying, or book
value, including goodwill, and therefore our recorded goodwill was not subject
to impairment.

F-26

CUMMINS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

As required by SFAS 142, our CONSOLIDATED STATEMENTS OF EARNINGS for periods
prior to its adoption have not been restated. However, the effect on our net
earnings and earnings per share of excluding goodwill amortization is shown in
the table below:

2002 2001 2000
-------- -------- --------
$ MILLIONS

Net earnings (loss)
As reported.......................................... $ 82 $ (103) $ 14
Goodwill amortization................................ -- 11 11
----- ------ ----
Net earnings (loss) as adjusted........................ $ 82 $ (92) $ 25
----- ------ ----
Basic earnings (loss) per share
As reported.......................................... $2.13 $(2.70) $.35
Goodwill amortization................................ -- .28 .31
----- ------ ----
As adjusted............................................ $2.13 $(2.42) $.66
----- ------ ----
Diluted earnings (loss) per share
As reported.......................................... $2.13 $(2.70) $.35
Goodwill amortization................................ -- .28 .31
----- ------ ----
As adjusted............................................ $2.13 $(2.42) $.66
----- ------ ----

The following table summarizes our other intangible assets with finite
useful lives that are subject to amortization as of December 31:

2002 2001
-------- --------
$ MILLIONS

Software.................................................... $ 208 $186
Accumulated amortization.................................... (113) (81)
----- ----
Net software.............................................. 95 105
----- ----
Trademarks and patents...................................... 4 8
Accumulated amortization.................................... (3) (4)
----- ----
Net trademarks and patents................................ 1 4
----- ----
Total..................................................... $ 96 $109
===== ====

Amortization expense for software and other intangibles totaled
$35 million, $34 million and $29 million for the years ended December 31, 2002,
2001 and 2000, respectively. Internal and external software costs (excluding
those related to research, reengineering and training) and trademarks and
patents are amortized generally over a five-year period. The projected
amortization expense of our intangible assets, assuming no further acquisitions
or dispositions, is approximately $38 million in 2003, $26 million in 2004,
$18 million in 2005, $10 million in 2006 and $4 million in 2007.

NOTE 7. RESTRUCTURING, ASSET IMPAIRMENT AND OTHER CHARGES

We have continued a restructuring program initiated in 1998 to improve the
Company's cost structure. The charges related to this program include staffing
reorganizations and reductions in various business segments, asset impairment
write-downs for manufacturing equipment, facility closure and consolidation
costs, dissolution costs and restructuring actions related to joint venture
operations, cancellation of a new engine development program and exit costs
related to several small business

F-27

CUMMINS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

operations. As of December 31, 2001 all activities associated with the 1998 and
1999 restructuring actions were complete. The 2000 and 2001 actions were a
result of the downturn in the North American heavy-duty truck market and several
other end-markets and were taken in order to achieve lower production costs and
improve operating efficiencies under difficult economic conditions. As of
December 31, 2002 all activities associated with the 2000 and 2001 restructuring
actions were complete.

A detailed discussion of the restructuring charges incurred during 2002,
2001 and 2000 accompanied by schedules that present, by major cost component and
by year of provision, activity related to the restructuring charges, including
adjustments to the original charges, follow:

RESTRUCTURING PLAN--2002

FACILITY
WORKFORCE ASSET CONSOLIDATION
REDUCTION IMPAIRMENT AND EXIT COSTS TOTAL
--------- ---------- -------------- --------
$ MILLIONS

Total restructuring charged to expense............... $11 $ 3 $ 2 $ 16
--- --------- --- ----
Cash payments...................................... (9) -- (1) (10)
Non-cash charges................................... -- (3) -- (3)
Reversal of restructuring accruals................. (1) -- -- (1)
--- --------- --- ----
Balance at December 31, 2002......................... $ 1 $ -- $ 1 $ 2
=== ========= === ====

In the second quarter 2002, we took further restructuring actions
precipitated by continued weak market conditions across most of our businesses
and recorded a restructuring charge of $16 million. For the year, the charge was
more than offset by a $8 million reversal of excess 2000 restructuring reserves,
a $12 million reversal of excess 2001 restructuring reserves and a recovery of
$3 million from a non-recurring charge originally taken in 2000. The charge
included $11 million attributable to workforce reduction actions, $3 million for
asset impairment and $2 million related to facility closures and consolidations.
Of this charge, $5 million was associated with the Engine Business, $4 million
with Power Generation, $3 million with Filtration and Other and $4 million with
the International Distributor Business.

The charges included severance cost and benefit costs of terminating
approximately 220 salaried and 350 hourly employees and were based on amounts
pursuant to established benefit programs or statutory requirements of the
affected operations. These actions reflect overall reductions in staffing levels
due to closing operations and moving production to locations with available
capacity. As of December 31, 2002 approximately 200 salaried and 350 hourly
employees had been separated or terminated under this plan. The asset impairment
charge related to equipment that was made available for disposal. The carrying
value of the equipment and the effect of suspending depreciation on the
equipment were not significant. The demographics of the workforce that was
terminated differed from original expectations. As such costs were $1 million
lower than the original estimates and the amount was reversed to income in the
fourth quarter of 2002. As of December 31, 2002, $2 million of restructuring
charges remained in accrued liabilities. The majority of this action was
completed by June 29, 2003 and we expect to complete the remaining items by the
end of 2003.

F-28

CUMMINS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

RESTRUCTURING AND OTHER CHARGES--2001

WORKFORCE ASSET OTHER EXIT
REDUCTION IMPAIRMENT COSTS OTHER TOTAL
--------- ---------- ---------- -------- --------
$ MILLIONS

Total restructuring charged to expense........... $18 $ 68 $ 42 $ 1 $129
--- ---- ---- ---- ----
Cash payments.................................. (9) (42) -- (51)
Non-cash charges............................... -- (68) -- (14) (82)
Cash receipts.................................. -- -- -- 13 13
Reallocation of excess accruals................ 3 -- -- -- 3
--- ---- ---- ---- ----
Balance at December 31, 2001..................... 12 -- -- -- 12
--- ---- ---- ---- ----
Cash payments.................................. (9) -- -- -- (9)
Cash receipts.................................. -- 6 -- -- 6
Adjustment to asset carrying value............. -- 3 -- -- 3
Reversal of restructuring accruals............. (3) (9) -- -- (12)
--- ---- ---- ---- ----
Balance at December 31, 2002..................... $-- $ -- $ -- $ -- $ --
=== ==== ==== ==== ====

In the first half of 2001, as a result of the continuing downturn in the
North American heavy-duty truck market and several other end-markets, we
announced further restructuring actions and recorded restructuring charges of
$128 million, most of which occurred in the second quarter. The restructuring
charges included $18 million attributable to workforce reduction actions,
$68 million for asset impairment, and $42 million for cancellation charges on
capital and tooling equipment commitments. In addition we also recorded a
non-recurring charge of $1 million attributed to the divestiture of a small
business operation. These charges were offset in the 2001 Statement of Earnings
by a $3 million recovery of excess 2000 restructuring accruals. Of the net $126
million charge, $113 million was associated with the Engine Business,
$8 million with the Power Generation Business and $4 million with the Filtration
and Other Business and $1 million with the International Distributor Business.

The asset impairment charge was for equipment, tooling and related
investment supporting a new engine development program that was cancelled during
the second quarter of 2001. The charges included the investment in manufacturing
equipment previously capitalized and cancellation charges for capital and
tooling purchase commitments. The charge was reduced by the estimated salvage
value related to the planned equipment disposals. During 2002, we recovered
$9 million of salvage proceeds on planned equipment disposals, of which
$6 million was in excess of previously estimated recoveries and was reversed
against the original restructuring charge. In the fourth quarter 2002, we
transferred $3 million of previously impaired engine equipment to a US plant as
a result of moving our ISX assembly operations and realigned our workforce
reduction plan. These actions resulted in a reversal of $12 million in excess
charges related to this plan.

As of December 31, 2002, 511 salaried and 540 hourly employees have been
separated or terminated under the workforce reduction actions of this plan. As
of December 31, 2002, the Company has concluded these actions.

F-29

CUMMINS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

RESTRUCTURING AND OTHER CHARGES--2000

FACILITY
CONSOLIDATION
WORKFORCE ASSET AND EXIT
REDUCTION IMPAIRMENT COSTS OTHER TOTAL
--------- ---------- ------------- -------- --------
$ MILLIONS

Total restructuring charged to expense........ $ 39 $ 88 $11 $ 13 $ 151
---- ---- --- ---- -----
Cash payments............................... (3) (2) -- -- (5)
Non-cash charges............................ -- (86) (3) (13) (102)
---- ---- --- ---- -----
Balance at December 31, 2000.................. 36 -- 8 -- 44
---- ---- --- ---- -----
Cash payments............................... (18) -- (3) -- (21)
Non-cash charges............................ -- -- -- -- --
Reversal of restructuring accruals.......... (3) -- -- -- (3)
Reallocation of excess accruals............. (3) -- -- -- (3)
---- ---- --- ---- -----
Balance at December 31, 2001.................. 12 -- 5 -- 17
---- ---- --- ---- -----
Cash payments............................... (11) -- (1) -- (12)
Adjustment to asset carrying value.......... -- 3 -- -- 3
Reversal of restructuring accruals.......... (1) (3) (4) -- (8)
---- ---- --- ---- -----
Balance at December 31, 2002.................. $ -- $ -- $-- $ -- $ --
==== ==== === ==== =====

During the fourth quarter of 2000, we announced restructuring plans in
response to the downturn in the North American heavy-duty truck market where our
shipments had declined 35 percent from 1999 and recorded a restructuring charge
of $138 million. The restructuring charges included workforce reduction costs of
$39 million, $88 million for asset impairments (including $30 million for
software developed for internal use), and $11 million associated with exit costs
to close or consolidate a number of small business operations. In addition, we
recorded $13 million of other non-recurring charges related to asset impairments
not associated with the restructuring ($10 million for investments and
$3 million for intangibles). In addition to the 2000 restructuring charge, we
recorded a net $3 million charge related to prior years restructuring actions.
Of these amounts, $125 million was associated with our Engine Business,
$18 million with our Power Generation Business and $11 million with our
Filtration and Other Business.

The workforce reduction actions included overall reductions in staffing
levels and the impact of divesting a small business operation. The charges
included severance and benefit costs of terminating approximately 500 salaried
and 630 hourly employees and were based on amounts pursuant to established
benefit programs or statutory requirements of the affected operations. In the
fourth quarter 2001, we realigned our workforce reduction plans and reallocated
$3 million of excess liabilities for termination benefits to workforce reduction
actions committed to during that quarter. All employees affected by this
workforce reduction plan were separated or terminated by June 30, 2002 and all
related costs have been paid. Approximately 560 salaried and 380 hourly
employees were affected by the workforce reduction actions associated with this
plan.

The asset impairment charge of $88 million was calculated in accordance with
the provisions of SFAS 121. Approximately $30 million of the charge consisted of
capitalized software-in-process related to manufacturing, financial and
administrative information technology programs that were cancelled during
program development and prior to implementation. The remaining $58 million
included

F-30

CUMMINS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

$38 million for engine assembly and fuel system manufacturing equipment to be
disposed of upon closure or consolidation of production operations. The
equipment was expected to continue in use and be depreciated for approximately
two years from the date of the change until closure or consolidation. The
expected recovery value of the equipment was based on estimated salvage value
and was excluded from the impairment charge. The charge also included
$11 million for equipment available for disposal, $6 million for properties
available for disposal and $3 million for intangibles. The carrying value of
assets held for disposal and the effect of suspending depreciation on such
assets is not significant.

In the second quarter 2002, we cancelled plans to close a filtration
manufacturing plant ($1 million), transferred $2 million of previously impaired
power generation equipment that was previously slated for disposal to a foreign
operation, realigned our workforce reduction plan ($1 million) and settled legal
claims from a previous disposal action for less than originally estimated
($2 million). These actions resulted in a reversal of $6 million in excess
charges related to this plan. In the fourth quarter 2002, we moved our ISX
assembly to a US plant which reduced the need for a previous accrual. This
action resulted in a reversal of $2 million in excess charges related to this
plan. The Company has concluded this restructuring action.

NOTE 8. BORROWING ARRANGEMENTS

2002 2001
-------- --------
$ MILLIONS

Short-term borrowings:
Loans payable............................................... $ 19 $ 5
Bank overdrafts............................................. -- 16
Current maturities of long-term debt........................ 119 9
---- ---
Total....................................................... $138 $30
==== ===

Loans payable consisted of notes payable to financial institutions of
$19 million in 2002 and $5 million in 2001. The weighted average interest rate
for notes payable, bank overdrafts and current maturities of long-term debt at
December 31, 2002 and 2001 was 6.69 percent and 5.52 percent, respectively.

As of December 31, 2002, in addition to the $385 million revolving credit
agreement discussed below, we had $128 million of unused domestic and
international short-term credit facilities. The

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CUMMINS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

amount of borrowings outstanding under these short-term facilities at
December 31, 2002, was $19 million.

2002 2001
-------- --------
$ MILLIONS

Long-term debt: Revolving Credit Facility................... $ -- $ --
Notes 6.25% due 2003........................................ 115 125
Notes 6.45% due 2005........................................ 225 225
Notes 5.61% due 2010 (ESOP Trust)........................... -- 55
Senior Notes 9.5% due 2010.................................. 250 --
Debentures 6.75% due 2027................................... 120 120
Debentures 7.125% due 2028.................................. 250 250
Debentures 5.65% due 2098 (effective interest rate 7.48%)... 165 165
Other....................................................... 29 16
------ ----
1,154 956
Unamortized discount........................................ (40) (37)
Capital leases.............................................. 4 5
------ ----
Total....................................................... 1,118 924
Current maturities.......................................... (119) (9)
------ ----
Net long-term debt.......................................... $ 999 $915
====== ====

Principal payments required of long-term debt during the next five years are
$119 million in 2003, $17 million in 2004, $228 million in 2005, $2 million in
2006 and $2 million in 2007.

In 1997, we issued $120 million of unsecured 6.75% debentures that mature in
2027. Net proceeds of the issue were used to repay commercial paper borrowings.
Interest on the debentures is payable on February 15 and August 15 each year.
Holders of the debentures may elect to be repaid on February 15, 2007, at par
value together with accrued interest to February 15, 2007. Such election, which
is irrevocable, must be made between December 15, 2006 and January 15, 2007. The
debentures are also redeemable at our option after February 15, 2007, at a
redemption price of par value plus accrued interest or an amount designed to
ensure that the debenture holders are not penalized by the early redemption.

In February 1998, we issued $765 million of debt securities under a
$1 billion shelf registration statement that was filed with the Securities and
Exchange Commission in 1997. The issuance was comprised separately of
$125 million 6.25% Notes, $225 million 6.45% Notes, $250 million 7.125%
Debentures and $165 million 5.65% Debentures. Proceeds from the issuance, net of
debt discount and debt issue costs, were used to finance the acquisition of
Nelson Industries and to repay commercial paper borrowings. All of the Notes and
Debentures bear interest at the respective rates shown in the table above and
interest on each series of Notes and Debentures is payable on March 1 and
September 1 of each year. The Notes and Debentures are unsecured and are not
subject to any sinking fund requirements. The 2003 Notes and the 2005 Notes are
not redeemable prior to maturity. We can redeem the 2028 Debentures and the 2098
Debentures at any time prior to maturity at the greater of par plus accrued
interest or an amount designed to ensure that the debenture holders are not
penalized by the early redemption.

In November 2002, we repaid all of the outstanding 5.61% notes due 2010
issued by the ESOP Trust. The aggregate redemption price was approximately
$51 million, plus accrued interest and an

F-32

CUMMINS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

$8 million redemption premium. The loss due to the redemption premium is
reflected as "Loss on early retirement of debt" on our CONSOLIDATED STATEMENTS
OF EARNINGS.

In November 2002, we entered into a new revolving credit facility that
replaced our prior revolving credit facility. The new facility provides for
aggregate borrowings of up to $385 million and expires in November 2005. Up to
$150 million of the facility is available for total letters of credit. Up to
$60 million of the facility may be used for multi-currency borrowings or
multi-currency letters of credit. Interest on the facility varies based upon the
London interbank offered rate or the ABR rate plus a spread depending upon our
credit rating. Our obligations under the revolving credit facility are
collateralized by a security interest in certain of our domestic assets
(primarily current assets, investments in joint ventures and certain intangible
assets) and a pledge of a portion of the stock of certain foreign subsidiaries.
As of December 31, 2002, we had $291 million available for borrowings under this
facility. We are required to pay a quarterly facilities fee on unused
commitments under this facility based on our credit rating. The fee was 0.40% at
December 31, 2002.

In November 2002, we issued $250 million of unsecured 9.5% Senior Notes that
mature in 2010. Proceeds from the issuance of approximately $244 million, net of
debt issue costs, were used to repay amounts outstanding under our Sale of
Receivables facility (see Note 4) and for general corporate purposes. Interest
on the Notes is payable on June 1 and December 1 each year. We can redeem the
Notes in whole or in part at any time after December 1, 2006, at a premium equal
to 104.75% of par, declining to par in 2008, plus accrued interest. We have
entered into a registration rights agreement with holders of the Notes that
required us to register the Notes with the SEC within 180 days of the closing
date of the offering. We were unable to complete the registration within the
180 days and as a result are paying additional interest, as more fully described
in Note 2.

Our debt agreements contain several restrictive covenants. The most
restrictive of these covenants applies to the $250 million 9.5% Senior Notes and
our new credit facility which will, among other things, limit our ability to
incur additional debt or issue preferred stock, enter into sale/leaseback
transactions, pay dividends, sell or create liens on our assets, make
investments and merge or consolidate with any other person. In addition, we are
subject to various financial covenants including a minimum net worth, a minimum
debt-to-equity ratio and a minimum interest coverage ratio. As of December 31,
2002, we were in compliance with all of the covenants under our borrowing
agreements. See Note 2 regarding current status of debt compliance subsequent to
December 31, 2002.

Commitments under outstanding letters of credit, guarantees and
contingencies at December 31, 2002, were approximately $104 million.

NOTE 9. CONVERTIBLE PREFERRED SECURITIES OF SUBSIDIARY TRUST

In June 2001, Cummins Capital Trust I (the "Trust"), a Delaware business
trust and our wholly-owned subsidiary, issued 6 million shares of 7% convertible
quarterly income preferred securities ("Preferred Securities"), to qualified
institutional buyers for net proceeds of $291 million. The Preferred Securities
represent an undivided beneficial ownership interest in the assets of the Trust.
The total proceeds from the issuance of the Preferred Securities by the Trust
were invested in $309 million aggregate principal amount of 7% convertible
subordinated debentures (the "Debentures") that we issued. The Debentures are
the sole assets of the Trust.

Holders of the Preferred Securities are entitled to receive preferential
cumulative cash dividends at an annual rate of 7% of the $50 per share
liquidation value. In addition, we are accreting the difference between the
liquidation amount and the original proceeds received as additional dividends to
the mandatory redemption date. The distribution rate and payment dates for the
Preferred Securities

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CUMMINS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

correspond to the interest rate and payment dates for the Debentures. We may
defer interest payments on the Debentures for a period not to exceed 20
consecutive quarters. If a deferral is made, the Trust will defer distributions
on the Preferred Securities for a corresponding period but will continue to
accrue for the distribution. We guarantee, on a subordinated basis,
distributions and other payments due on the Preferred Securities, to the extent
the Trust has available assets and subject to certain other restrictions (the
"Guarantee"). The Guarantee, when taken together with our obligations under the
Debentures, the indenture pursuant to which the Debentures were issued, and the
obligations under the Trust Agreement, provides a full and unconditional
guarantee of amounts due on the Preferred Securities.

The Debentures are redeemable for cash, at our option, in whole or in part,
on or after June 15, 2006. The debentures are also redeemable under certain
circumstances pursuant to a federal tax event, at par, plus accrued and unpaid
interest. Upon any redemption of the Debentures, the Trust will redeem a like
aggregate liquidation amount of Preferred Securities. The Preferred Securities
do not have a stated maturity date, however, they are subject to mandatory
redemption upon maturity of the Debentures on June 15, 2031, or upon earlier
redemption or upon the occurrence of an event of default.

Each Preferred Security and the related Debenture are convertible at any
time prior to the close of business on June 13, 2031, at the option of the
holder into shares of our common stock at the rate of 1.0519 shares per
Preferred Security (equivalent to a conversion price of $47.53 per share of
Cummins Inc. common stock). The Trust will convert Debentures only upon notice
of conversion by a holder of Preferred Securities.

NOTE 10. OTHER LIABILITIES

2002 2001
-------- --------
$ MILLIONS

Current:
Accrued salaries and wages.................................. $ 124 $ 95
Accrued retirement.......................................... 176 127
Income taxes payable........................................ 28 9
Other....................................................... 203 173
------ ----
$ 531 $404
------ ----

Non-current:
Accrued retirement and post employment benefits............. $1,010 $704
Accrued product coverage and marketing expenses............. 136 134
Accrued compensation........................................ 46 51
Deferred income taxes....................................... 22 18
Other....................................................... 71 67
------ ----
$1,285 $974
====== ====

NOTE 11. PENSION AND OTHER POSTRETIREMENT BENEFITS

PENSION PLANS

We have several contributory and noncontributory pension plans covering
substantially all employees. Generally, hourly employee pension benefits are
earned based on years of service and

F-34

CUMMINS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

compensation during active employment while future benefits for salaried
employees are determined using a cash balance formula. The level of benefits and
terms of vesting, however, may vary among plans. Pension plan assets are
administered by trustees and are principally invested in equity securities and
fixed income securities. As of December 31, 2002 and 2001, pension plan assets
included Cummins common stock with market values of $105 million and
$144 million, respectively. It is our policy to make contributions to the
various plans in accordance with statutory funding requirements and any
additional funding that our actuarial consultants advise to be appropriate. Plan
liabilities and the market-related value of our plan assets are determined based
on a November 30 measurement date.