Overview

Third-quarter sales and revenues were $12.981 billion, 13 percent higher than third quarter 2007 sales and revenues of $11.442 billion. Profit per share for the third quarter 2008 was $1.39, down $0.01 from profit per share of $1.40 in the third quarter of 2007.

We are pleased to have set a new third-quarter sales and revenues record, particularly considering the recessionary conditions in North America and growing weakness in Europe and Japan. Demand in emerging markets and commodity prices at levels that encourage investment in mining and energy have helped offset negative economic conditions in much of the developed world.

Recent financial market turbulence has focused attention on the financial strength of businesses of all kinds. We have a strong balance sheet, a solid credit rating and we have had access to the capital we need to run our business. That includes our captive finance company, Caterpillar Financial Services Corporation (Cat Financial). Despite difficult market conditions, Cat Financial has had good access to capital and continues to offer lending options to our customers. It is a tough environment, but we have a conservative business model which prudently manages risk and a great team that is executing well at Cat Financial. When the dust settles, we are confident that our customers and stockholders will be well served by Cat Financial's long-standing, sound lending practices.

Sales and revenues of $12.981 billion increased $1.539 billion from the third quarter of last year, $833 million from sales volume, $385 million from improved price realization, $262 million from the effects of currency and $59 million from higher Financial Products revenues. The geographic mix of sales continued to shift outside North America with sales and revenues increasing 22 percent in other regions compared to 3 percent inside North America. Sales and revenues outside North America represent 60 percent of total sales and revenues in the third quarter-up from 56 percent of the total one year ago.

Profit of $868 million was down $59 million from $927 million in the third quarter of 2007, a 6 percent decline, and profit per share was $1.39, a decrease of $0.01 from profit per share of $1.40 for the third quarter of 2007. The decrease was the result of higher manufacturing costs, primarily for materials.

We expected that material and freight costs would increase in the second half of 2008, and they did in the third quarter. Higher material costs, especially for steel, were the most significant headwind we faced in the quarter.

Outlook

We are maintaining our full-year outlook for 2008. We expect sales and revenues to top $50 billion, up from $44.958 billion in 2007, and profit per share of about $6.00 per share, up from $5.37 per share in 2007.

The 2009 economic outlook is extremely uncertain at this time, with substantial turmoil in financial markets and unprecedented government intervention around the world. Our current outlook for 2009 calls for sales and revenues to be about flat with our full-year 2008 results. In 2009 we expect pockets of strength in global mining, energy markets and in the area of emerging market infrastructure development to offset acute weakness in North America, Europe and Japan. Further, we are confident that our integrated service businesses, which have grown significantly this year, will offer revenue and earnings support in the coming year. That said, given the recent economic turmoil, we will issue our 2009 profit per share outlook with our year-end release in January. The world has experienced significant turbulence in financial markets, and we expect this will slow world economic growth over the next three or four quarters. While we are encouraged by the coordinated response by governments and central banks around the world and believe the actions they have taken will restore global liquidity, the depth and duration of economic decline and the timing and strength of the recovery are very uncertain. We are prepared for volatility, and we remain very positive about our longer-term growth prospects. With our financial strength, global manufacturing and distribution network, our focus on the Caterpillar Production System powered by 6 Sigma and our diversified business portfolio, we are poised to strengthen our global leadership position during this challenging period.

Note: Glossary of terms included on pages 43-44; first occurrence of terms shown in bold italics.

Consolidated Results of Operations

THREE MONTHS ENDED SEPTEMBER 30, 2008 COMPARED WITH THREE MONTHS ENDED SEPTEMBER
30, 2007

SALES AND REVENUES

The chart above graphically illustrates reasons for the change in Consolidated Sales and Revenues between third quarter 2007 (at left) and third quarter 2008 (at right). Items favorably impacting sales and revenues appear as upward stair steps with the corresponding dollar amounts above each bar, while items negatively impacting sales and revenues appear as downward stair steps with dollar amounts reflected in parentheses above each bar. Caterpillar management utilizes these charts internally to visually communicate with the company's Board of Directors and employees.

Sales and revenues for third quarter 2008 were $12.981 billion, up $1.539 billion, or 13 percent, from third quarter 2007. Machinery volume was up $591 million, and Engines volume was up $242 million, both driven by growth in emerging markets and our broad global footprint in industries like mining and energy. Price realization improved $385 million, and currency had a positive impact on sales of $262 million. In addition, Financial Products revenues increased $59 million.

Sales and Revenues by Geographic Region
(Millions of dollars)                    %         North        %                      %         Asia/        %         Latin        %
                           Total       Change     America     Change      EAME       Change     Pacific     Change     America     Change
3rd Quarter 2007
Machinery                $  7,123                $ 3,156                $ 2,166                $   999                $   802
Engines  1                  3,545                  1,311                  1,362                    608                    264
Financial        2
Products                      774                    520                    118                     63                     73
                         $ 11,442                $ 4,987                $ 3,646                $ 1,670                $ 1,139
3rd Quarter 2008
Machinery                $  8,051      13 %      $ 3,245       3    %   $ 2,270       5 %      $ 1,437      44 %      $ 1,099      37 %
Engines  1                  4,097      16 %        1,400       7    %     1,617      19 %          757      25 %          323      22 %
Financial        2
Products                      833       8 %          491      (6 )  %       150      27 %          108      71 %           84      15 %
                         $ 12,981      13 %      $ 5,136       3    %   $ 4,037      11 %      $ 2,302      38 %      $ 1,506      32 %

1 Does not include internal engines transfers of $738 million and $629 million in third quarter 2008 and 2007, respectively. Internal engines transfers are valued at prices comparable to those for unrelated parties.
2 Does not include internal revenues earned from Machinery and Engines of $64 million and $89 million in third quarter 2008 and 2007, respectively.

Machinery Sales - Sales of $8.051 billion increased $928 million, or 13 percent, from third quarter 2007.

† Sales volume increased $591 million, with the gain coming from developing economies. Most developed economies were weak, with several entering into recession.

† Price realization increased $164 million.

† Currency benefited sales by $173 million.

† Geographic mix between regions (included in price realization) was $3 million favorable.

† Dealers reported higher inventories in all regions, which was a positive for sales volume. Inventories in months of supply were slightly higher than a year earlier, with Asia Pacific the only region to show a decrease.

† In North America, sales volume declined in response to weak U.S. construction and quarrying. Higher coal and crude oil prices benefited coal mining and oil sands development.

† Sales volume in Europe declined sharply from a year earlier as economies in the euro-zone and the United Kingdom were very weak. Both residential and nonresidential construction declined.

† Sales increased in the developing regions of Africa/Middle East, the Commonwealth of Independent States (CIS), Asia/Pacific and Latin America where most countries maintained healthy economic growth and increased exports. Higher commodity prices and increased production of these commodities boosted government revenues resulting in continued construction spending and investment in oil, coal and metals production capacity.

North America - Sales increased $89 million, or 3 percent.

† Sales volume decreased $18 million.

† Price realization increased $107 million.

† Sales volume declined in response to lower demand from end users, particularly in the United States. Dealers reported higher inventories than a year earlier in both dollars and months of supply.

† The decline in sales volume resulted from ongoing weaknesses in construction and construction-related industries such as quarrying and forestry. Energy-related industries, such as coal mining and oil sands, contributed positively.

† U.S. housing starts declined 32 percent from a year earlier, and the median price of new homes dropped more than 5 percent. Lower employment, high mortgage interest rates, declining home prices and excessive stocks of unsold homes caused the decline in new construction.

† Orders for nonresidential construction declined 12 percent. Negatives included rising vacancy rates, declining property prices, tighter credit conditions for businesses and increased pressure on state and local government budgets.

† The decline in construction in the United States caused nonmetals mining and quarry production to drop almost 16 percent from third quarter 2007.

† Coal prices more than doubled from a year earlier following price increases in Asia. U.S. coal production increased 3 percent, largely to accommodate substantial increases in exports which rose more than 50 percent in the first half of the year. Higher coal prices are encouraging Canadian miners to increase capital expenditures more than 70 percent this year.

† Oil prices averaged more than $115 per barrel in the quarter, which made further development of Canada's oil sands attractive. Capital expenditures should increase about 23 percent this year, the fifth consecutive year with an increase in excess of 20 percent.

EAME - Sales increased $104 million, or 5 percent.

† Sales volume decreased $17 million. Lower volume in Europe offset gains in both Africa/Middle East and the CIS.

† Price realization increased $17 million.

† Currency benefited sales by $104 million.

† Dealers reduced inventories during the quarter, which is normal, but inventories at the end of the quarter were higher than a year earlier in both dollars and months of supply.

† Sales declined significantly in both the euro-zone and the United Kingdom. The combination of financial market turmoil, high interest rates and strong currencies caused these economies to slow abruptly. Some economies within the euro-zone were in recession.

† Slower growth and high interest rates weakened construction. Housing permits in the euro-zone were down 22 percent in the first half, and in the United Kingdom third-quarter housing orders fell 44 percent from a year earlier. Third-quarter infrastructure construction in the euro-zone declined almost 4 percent.

† The sales increase in Africa/Middle East occurred largely in the oil producing countries. Oil production increased almost 5 percent from a year earlier, and prices were up more than 70 percent. Higher oil revenues enabled countries to spend more on construction and increase the drill rig count by 3 percent.

† Sales volume expanded in most countries in the CIS region. The increase in oil prices offset a decline in production, allowing governments to spend more for construction. Other positives included higher metals and coal prices.

Asia/Pacific - Sales increased $438 million, or 44 percent.

† Sales volume increased $382 million.

† Price realization increased $20 million.

† Currency benefited sales by $36 million.

† Dealers reported much higher inventories, which benefited sales. However, months of supply were slightly lower than a year earlier.

† Sales also benefited from higher customer demand as reported by dealers. Good economic growth and favorable commodity prices led to increased demand, with most of the gain concentrated in China, Indonesia and Australia.

† Sales volume increased substantially in China, the result of the introduction of locally produced wheel loaders this year and growth in both construction and mining. Spending increased 33 percent for housing construction and 18 percent for commercial construction. Coal production was up 14 percent, and iron ore production rose 3 percent.

† Indonesia, the world's largest thermal coal exporter, benefited from much higher coal prices. Construction has been increasing at about an 8 percent annual rate.

† High interest rates in Australia slowed economic growth and caused the housing sector to decline. However, higher coal and iron ore prices led to more than 50 percent increases in exploration expenditures for both these commodities. In addition, infrastructure construction increased 11 percent in the first half, in part to alleviate transportation problems resulting from increased mine output.

Latin America - Sales increased $297 million, or 37 percent.

† Sales volume increased $247 million.

† Price realization rose $17 million.

† Currency benefited sales by $33 million.

† Dealers reported significant additions to inventories during the quarter, which contributed to the gain in sales volume. Inventories were higher than a year ago in both dollars and months of supply. Inventories had been low, so the increase returned months of supply to more normal rates and supports future growth in dealer deliveries.

† Brazil was the biggest contributor to sales volume growth. Although interest rates increased this year, the economy continued to benefit from the large rate reductions during the past two years. As a result, construction increased over 9 percent in the first half. The country's large commodity sector grew rapidly, with oil production up more than 5 percent and mining output up more than 8 percent.

† In Mexico, energy revenues rose substantially due to higher oil prices and a 14 percent increase in natural gas production. These higher revenues, along with some growth in construction, led to a large gain in sales volume.

† Sales volume increased in Colombia, largely as a result of much higher coal prices.

Engines Sales - Sales of $4.097 billion increased $552 million, or 16 percent, from third quarter 2007.

† Sales volume increased $242 million.

† Price realization increased $221 million.

† Currency benefited sales $89 million.

† Geographic mix between regions (included in price realization) was $2 million favorable.

† Dealer-reported inventories were up, and months of supply were up slightly, supporting stronger delivery rates.

North America - Sales increased $89 million, or 7 percent.

† Sales volume increased $9 million.

† Price realization increased $80 million.

† Sales for marine applications increased 68 percent, with strong demand for petroleum supply vessels to support offshore drilling.

† Sales for industrial applications increased 30 percent in small- and medium-sized product due to increased demand in agricultural and mining applications as a result of high commodity prices.

† Sales for on-highway truck applications increased 7 percent, which resulted from a slight improvement in the North American on-highway heavy-duty truck market compared with a very weak third quarter 2007.

† Sales for petroleum engine applications declined 3 percent due to a temporary pause in North American drill rig production. Turbine sales for gas transmission projects were down due to timing of customer project schedules. This was partially offset by an increase in turbine-related services.

† Sales for electric power applications were about the same as the third quarter of 2007.

EAME - Sales increased $255 million, or 19 percent.

† Sales volume increased $95 million.

† Price realization increased $85 million.

† Currency benefited sales by $75 million.

† Sales for electric power applications increased 20 percent, with strong demand in Africa/Middle East offsetting weaker demand in Europe and the CIS.

† Sales for marine applications increased 49 percent to support higher demand for workboats and commercial vessels.

† Sales for industrial applications increased 12 percent, with strong demand for agriculture and mining support equipment.

† Sales for petroleum applications increased 8 percent based on strong demand for engines used in drilling and production. Turbine-related services were up as well but were offset by a decline in shipments of turbines for oil and gas production projects in the Middle East due to timing of customer project schedules.

Asia/Pacific - Sales increased $149 million, or 25 percent.

† Sales volume increased $88 million.

† Price realization increased $47 million.

† Currency benefited sales by $14 million.

† Sales for marine applications increased 49 percent, with continued strong demand for workboat and offshore shipbuilding.

† Sales of electric power engines increased 32 percent, with strong demand in gas generator sets for industrial power in Bangladesh and with demand for data and telecommunication centers in China.

† Sales for petroleum applications increased 11 percent in support of Chinese drill rig builders that continue to manufacture at record levels and to support increased demand from Asian shipyards in support of offshore drilling. Sales of turbine-related services increased but were offset by a decline in shipments of turbines for oil and gas production projects due to timing of customer project schedules.

Latin America - Sales increased $59 million, or 22 percent.

† Sales volume increased $52 million.

† Price realization increased $7 million.

† Sales for petroleum applications increased 44 percent driven by strong demand for on-site power generation to support oil production across the region and to support drilling in Venezuela. Turbines and turbine-related services increased for oil and gas production applications in Mexico.

† Sales of electric power engines increased 24 percent as strong demand was driven by high commodity prices and infrastructure investment.

† Sales for on-highway truck applications decreased 57 percent as a result of Original Equipment Manufacturer (OEM) customers working down inventory that was accumulated prior to emission law changes in the region.

Financial Products Revenues - Revenues of $833 million increased $59 million, or 8 percent, from the third quarter 2007.

† Growth in average earning assets increased revenues $101 million, which was partially offset by a decrease of $59 million due to lower interest rates on new and existing finance receivables.

† Revenues from earned premiums at Cat Insurance increased $20 million.

OPERATING PROFIT

The chart above graphically illustrates reasons for the change in Consolidated Operating Profit between third quarter 2007 (at left) and third quarter 2008 (at right). Items favorably impacting operating profit appear as upward stair steps with the corresponding dollar amounts above each bar, while items negatively impacting operating profit appear as downward stair steps with dollar amounts reflected in parentheses above each bar. Caterpillar management utilizes these charts internally to visually communicate with the company's Board of Directors and employees. The bar entitled Other includes the operating profit impact of consolidating adjustments and Machinery and Engines other operating expenses.

Operating profit in third quarter 2008 of $1.173 billion was $140 million lower than third quarter 2007 as improved price realization and higher sales volume were more than offset by higher costs and the unfavorable impact of currency.

Manufacturing costs rose $442 million compared with third quarter 2007. The majority of the manufacturing cost increase was driven by higher material and freight costs. Material costs increased due to higher steel and commodity prices, and freight costs increased primarily due to higher fuel prices. In addition, manufacturing labor and overhead costs increased to support capacity expansion and velocity initiatives.

Selling, General and Administrative (SG&A) and Research and Development (R&D) costs were up $158 million to support significant new product programs and growth.

Currency had a $65 million unfavorable impact on operating profit as the benefit to sales was more than offset by the negative impact on costs.

Operating Profit by Principal Line of Business

                                   Third Quarter     Third Quarter       $           %
(Millions of dollars)                  2007              2008          Change     Change
Machinery                     1    $        681      $        464     $ (217 )   (32 ) %
Engines        1                            529               616         87      16   %
Financial Products                          178               144        (34 )   (19 ) %
Consolidating Adjustments                   (75 )             (51 )       24
Consolidated Operating Profit      $      1,313      $      1,173     $ (140 )   (11 ) %

1 Caterpillar operations are highly integrated; therefore, the company uses a number of allocations to determine lines of business operating profit for Machinery and Engines.

Operating Profit by Principal Line of Business

† Machinery operating profit of $464 million was down $217 million, or 32 percent, from third quarter 2007. Improved price realization and higher sales volume were more than offset by higher costs and the unfavorable impact of currency.

† Engines operating profit of $616 million was up $87 million, or 16 percent, from third quarter 2007. Improved price realization and higher sales volume were partially offset by higher costs.

† Financial Products operating profit of $144 million was down $34 million, or 19 percent, from third quarter 2007. The decrease was primarily attributable to a $38 million impact from decreased net yield on average earning assets, a $17 million increase in SG&A expenses and a $13 million increase in the provision for credit losses at Cat Financial, partially offset by a $40 million favorable impact from higher average earning assets.

Other Profit/Loss Items

† Other income/expense was income of $138 million compared with income of $51 million in third quarter 2007. The increase was primarily due to the favorable impacts of currency.

† The provision for income taxes in the third quarter of 2008 reflects an estimated annual tax rate of 31.5 percent compared to an actual rate of 30.5 percent for the third quarter 2007 and 30 percent for the full-year 2007. The increase over 2007 is attributable to expected changes in our geographic mix of profits from a tax perspective and the expiration of the U.S. research and development tax credit. The renewal of the U.S. research and development tax credit in October 2008 will be reflected in the fourth quarter as a reduction of approximately one percentage point in the estimated annual tax rate.

† Equity in profit/(loss) of unconsolidated affiliated companies was income of $11 million compared with income of $27 million in the third quarter of 2007. The decline reflects lower profit at Shin Caterpillar Mitsubishi Ltd. (SCM) and the absence of profit due to the sale of our investment in A.S.V. Inc. during the first quarter 2008.

On August 1, 2008, SCM redeemed one-half of Mitsubishi Heavy Industries Ltd.'s (MHI's) shares in SCM for $464 million. Caterpillar now owns 67 percent of the renamed entity, Caterpillar Japan Ltd. (Cat Japan). Because Cat Japan is accounted for on a lag, we consolidated Cat Japan's August 1, 2008 financial position on September 30, 2008. We will begin consolidating Cat Japan's results of operations in the fourth quarter.

NINE MONTHS ENDED SEPTEMBER 30, 2008 COMPARED WITH NINE MONTHS ENDED SEPTEMBER
30, 2007

SALES AND REVENUES

The chart above graphically illustrates reasons for the change in Consolidated Sales and Revenues between September 2007 YTD (at left) and September 2008 YTD (at right). Items favorably impacting sales and revenues appear as upward stair steps with the corresponding dollar amounts above each bar, while items negatively impacting sales and revenues appear as downward stair steps with dollar amounts reflected in parentheses above each bar. Caterpillar management utilizes these charts internally to visually communicate with the company's Board of Directors and employees.

Sales and revenues for the nine months ended September 30, 2008 were $38.401 billion, up $5.587 billion, or 17 percent, from the nine months ended September 30, 2007. Machinery volume was up $2.102 billion, and Engines volume was up $1.220 billion, both driven by growth in emerging markets and our broad global footprint in industries like mining and energy. Price realization improved $1.044 billion, and currency had a positive impact on sales of $956 million. In addition, Financial Products revenues increased $265 million.

Sales and Revenues by Geographic Region
(Millions of dollars)                                %        North        %                     %        Asia/        %         Latin        %
                                        Total      Change    America     Change      EAME      Change    Pacific     Change     America     Change
Nine months ended
September 30, 2007
Machinery                              $ 20,899              $  9,484              $  6,266               $ 2,832                $ 2,317
Engines  1                                9,703                 3,817                 3,628                 1,482                    776
Financial Products       2                2,212                 1,513                   329                   178                    192
                                       $ 32,814              $ 14,814              $ 10,223               $ 4,492                $ 3,285

Nine months ended
September 30, 2008
. . .