Cummins Inc. and its consolidated subsidiaries are hereinafter sometimes referred to as "Cummins," "the Company," "the registrant," "we," "our," or "us."

CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING INFORMATION

Certain parts of this quarterly report contain 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. Forward-looking statements are generally accompanied by words, such as "anticipates," "expects," "forecasts," "intends," "plans," "believes," "seeks," "estimates" or similar expressions. 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. Future factors that could cause our results to differ materially from the results discussed in such forward-looking statements are discussed below. We undertake no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise. Future factors that could affect the outcome of forward-looking statements include the following:

º price and product competition by foreign and domestic competitors, including new entrants;

º rapid technological developments of diesel engines;

º the ability to continue to introduce competitive new products in a timely, cost-effective manner;

º the sales mix of products;

º the continued achievement of lower costs and expenses;

º domestic and foreign governmental and public policy changes, including environmental regulations;

º protection and validity of patent and other intellectual property rights;

º reliance on large customers;

º technological, implementation and cost/financial risks in increasing use of large, multi-year contracts;

º the cyclical nature of some of our markets;

º the outcome of pending and future litigation and governmental proceedings;

º 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;

º the overall stability of global economic markets and conditions; and

º other risk factors described in Part II of this report under the caption "Risk Factors Relating to Our Business."

In addition, such statements could be affected by general industry and market conditions and growth rates, general domestic and international economic conditions, including the price of crude oil (diesel fuel), interest rate and currency exchange rate fluctuations, commodity prices and other future factors.

ORGANIZATION OF INFORMATION

The following Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") was prepared to provide the reader with a view and perspective of our business through the eyes of management and should be read in conjunction with our Consolidated Financial Statementsand related Notes to Consolidated Financial Statements in the "Financial Statements" section of our 2008 Form 10-K. Our MD&A is presented in the following sections:

º Executive Summary and Financial Highlights

º Results of Operations

º Restructuring Charges

º Outlook

º Operating Segment Results

º Liquidity and Capital Resources

º Off Balance Sheet Financing

º Application of Critical Accounting Estimates

º Recently Adopted and Recently Issued Accounting Pronouncements

EXECUTIVE SUMMARY AND FINANCIAL HIGHLIGHTS

We are a leading global power provider that designs, manufactures, distributes and services diesel and natural gas engines, electric power generation systems and engine-related component products, including filtration and exhaust aftertreatment, turbochargers, fuel systems, controls and air handling systems. 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 PACCAR Inc., International Truck and Engine Corporation (Navistar International Corporation), Chrysler LLC, Volvo AB, Daimler Trucks North America (formerly Freightliner), Ford Motor Company, Case New Holland, Komatsu, and Volkswagen. We serve our customers through a network of more than 500 company-owned and independent distributor locations and approximately 5,200 dealer locations in more than 190 countries and territories.

Our reportable operating segments consist of the following: Engine, Power Generation, Components and Distribution. This reporting structure is organized according to the products and markets each segment serves. This type of reporting structure allows management to focus its efforts on providing enhanced service to a wide range of customers. The Engine segment produces engines and parts for sale to customers in on-highway and various industrial markets. The engines are used in trucks of all sizes, buses and recreational vehicles, as well as various industrial applications including construction, mining, agriculture, marine, oil and gas, rail and military. The Power Generation segment is an integrated provider of power systems which sells engines, generator sets and alternators. The Components segment includes sales of filtration products, exhaust aftertreatment systems, turbochargers and fuel systems. The Distribution segment includes wholly-owned and partially-owned distributorships engaged in wholesaling engines, generator sets, and service parts, as well as performing service and repair activities on our products and maintaining relationships with various OEMs throughout the world.

Our financial performance depends, in large part, on varying conditions in the markets we serve, particularly the on-highway, 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 our customers' access to credit. Our sales may also be impacted by OEM inventory levels and production schedules and stoppages. Economic downturns in markets we serve generally result in reductions in sales and pricing of our products. As a worldwide business, our operations are also affected by political, economic and regulatory matters, including environmental and emissions standards, in the countries we serve. However, our geographic diversity and broad product and service offerings have helped limit the impact of any one industry or customer and the economy of any single country on our consolidated results. In the first three months of 2009 most global markets experienced additional declines from those levels experienced in the fourth quarter of 2008. We expect demand to remain weak in most of our markets through 2009. As a result, we took targeted restructuring actions in the first quarter of 2009, including global workforce reductions and closing or slowing certain local manufacturing operations to align our businesses with reduced customer demand. These restructuring actions, in conjunction with the significantly reduced demand negatively impacted our first quarter operating results. Should our future performance for the remainder of the year differ adversely from our projections, we could be required to take additional actions as local conditions require.

While global demand for our products is expected to continue to decline in 2009, the actions that were initiated in the fourth quarter of 2008 and the first quarter of 2009 will enable us to navigate through the downturn and position us to emerge a stronger company. In 2009, management will work toward the following goals:

º Align costs and capacity with the real demand for our products, so that we maintain a solid profit through the downturn;
º Manage the business in such a way that generates positive cash flow; and
º Continue to invest in critical technologies and products for 2010 and beyond.

Net income attributable to Cummins was $7 million, or $0.04 per diluted share, on sales of $2.4 billion for the first quarter of 2009, compared to the first quarter of 2008 with net income attributable to Cummins of $190 million, or $0.97 per diluted share, on sales of $3.5 billion. The decrease in income was driven by a 30 percent decrease in net sales and a 37 percent decrease in gross margin, as we were impacted by lower demand across most of our businesses.
Focused cost reduction efforts helped mitigate the impact of lower volumes. Restructuring actions in the first quarter of 2009 were $66 million ($44 million after-tax, or $0.22 per diluted share). For a detailed discussion of restructuring see "Restructuring Charges" and Note 6 to the Condensed Consolidated Financial Statements.

RESULTS OF OPERATIONS



                                          Three Months Ended           Favorable/
                                       March 29,      March 30,      (Unfavorable)
In millions (except par value)            2009          2008        Amount    Percent
Net sales                              $    2,439    $     3,474   $ (1,035 )     (30 )%
Cost of sales                               1,994          2,767        773        28 %
Gross margin                                  445            707       (262 )     (37 )%
Operating expenses and income
Selling, general and administrative
expenses                                      300            351         51        15 %
Research, development and
engineering expenses                           85            103         18        17 %
Equity, royalty and interest income
from investees                                 33             67        (34 )     (51 )%
Restructuring charges                          66              -        (66 )      NM
Other operating income (expense),
net                                             2             (1 )        3        NM
Operating income                               29            319       (290 )     (91 )%
Interest income                                 2              6         (4 )     (67 )%
Interest expense                                7             11          4        36 %
Other (expense) income, net                    (3 )          (10 )        7        70 %
Income before income taxes                     21            304       (283 )     (93 )%
Income tax expense                              7            102         95        93 %
Net income                                     14            202       (188 )     (93 )%
Less: net income attributable to
noncontrolling interests                        7             12          5        42 %
Net income attributable to Cummins
Inc.                                   $        7    $       190   $   (183 )     (96 )%
Diluted earnings per share
attributable to Cummins Inc.           $     0.04    $      0.97   $  (0.93 )     (96 )%

Net Sales

Net sales for the three months ended March 29, 2009, decreased in all segments versus the comparable period in 2008, due to the following drivers.

º Demand decreased in all of our segments due to the global economic downturn.

º We experienced unfavorable foreign currency translation in all of our operating segments.

A more detailed discussion of sales by segment is presented in the Operating Segment Results section.

Gross Margin

Significant drivers of the change in gross margins for the three months ended
March 29, 2009, compared to the period ended March 30, 2008, were as follows:

                                           2009 vs. 2008
                    In millions         Increase (Decrease)
                    Volume/Mix         $                (284 )
                    Material costs                       (48 )
                    Production costs                     (13 )
                    Currency                              (8 )
                    Warranty expense                      (1 )
                    Price                                 85
                    Other                                  7
                    Total              $                (262 )

Gross margin decreased by $262 million, and decreased as a percentage of sales by 2.2 percentage points. The decrease was led by lower volumes followed by increased materials costs. These decreases in margin were partially offset by improved pricing. The decrease in volumes was mainly due to lower sales resulting from the global economic downturn. The increased materials costs were primarily due to increased commodity costs. The provision for warranties issued as a percent of sales was 3.1% in both periods.

A more detailed discussion of margin by segment is presented in the Operating Segments Results section.

Selling, General and Administrative Expenses

Selling, general and administrative expenses for the three months ended March 29, 2009, decreased versus the comparable period in 2008, primarily due to a $26 million decrease in discretionary spending, in order to conserve cash, and a $19 million decrease in compensation and related expenses. Compensation and related expenses include salaries, fringe benefits and variable compensation. Variable compensation was reduced due to lower sales and income compared to the prior year period. Selling, general and administrative expenses also decreased due to cost savings from restructuring actions. Overall selling, general and administrative expenses as a percentage of sales increased to 12.3 percent in 2009 compared to 10.1 percent in 2008 for the three month period.

Research, Development and Engineering Expenses

Research, development and engineering expenses for the three months ended March 29, 2009, decreased versus the comparable period in 2008, primarily due to increased reimbursements for engineering projects and decreased discretionary spending to conserve cash. Overall, research, development and engineering expenses as a percentage of sales increased to 3.5 percent in 2009 from 3.0 percent in 2008 for the three month period. Research activities continue to focus on development of new products to meet future environmental standards around the world.

Equity, Royalty and Interest Income From Investees

Equity, royalty and interest income from investees for the three months ended March 29, 2009, decreased significantly versus the comparable period in 2008, primarily due to decreased income from Dongfeng Cummins Engine Company, Ltd. (DCEC) of $14 million, Tata Cummins Ltd. (TCL) of $7 million, Cummins MerCruiser Diesel Marine LLC of $5 million and other manufacturing entities of $10 million.
These decreases were due to lower demand as a result of the global economic conditions. These decreases were partially offset by the increase in income from our North American distributors of $4 million.

Other Operating Income (Expense), net



                                                   Three months ended
      In millions                         March 29, 2009       March 30, 2008
      Other operating income (expense):
      Flood gain(1)                       $             6     $              ?
      Royalty income                                    2                    4
      Royalty (expense)                                (3 )                 (2 )
      Amortization of intangibles                      (2 )                 (2 )
      Other (expense), net                             (1 )                 (1 )
      Total other (expense) income, net   $             2     $             (1 )

(1)The $6 million ($4 million net of tax, or $0.02 per share) of flood gains related to insurance recoveries on equipment damaged in the 2008 flood.

Interest Income

Interest income for the three months ended March 29, 2009, decreased versus the comparable period in 2008, primarily due to lower average cash balances and interest rates in 2009 compared to 2008.

Interest Expense

Interest expense for the three months ended March 29, 2009, decreased versus the
comparable period in 2008, primarily due to declining short-term interest rates.



Other (Expense) Income, Net

                                                   Three months ended
     In millions                          March 29, 2009        March 30, 2008
     Other (expense) income:
     Foreign currency losses, net        $             (8 )    $             (9 )
     Other, net                                         5                    (1 )
     Total other (expense) income, net   $             (3 )    $            (10 )

Income Tax Expense

Our effective tax rate for the year is expected to approximate 30 percent, absent any additional discrete period activity. This is less than the 35 percent U.S. income tax rate primarily due to lower tax rates on foreign income and research tax credits. The rate for the three months ended March 29, 2009, was 33 percent as a tax benefit was not provided for certain entities with estimated operating losses. Our effective tax rate for the three months ended March 30, 2008, was 34 percent and was less than the U.S. income tax rate primarily due to lower taxes on foreign income.

Noncontrolling Interests

Noncontrolling interests eliminate the income or loss attributable to non-Cummins ownership interests in our consolidated entities. Noncontrolling interests in income of consolidated subsidiaries for the three months ended March 29, 2009, decreased versus the comparable period in 2008, primarily due to lower income at Cummins India Limited reflecting the declines in both the domestic and export markets for industrial and power generation equipment as a result of the global economic downturn.

Net income and diluted earnings per share attributable to Cummins Inc.

Net income and diluted earnings per share attributable to Cummins Inc. for the three months ended March 29, 2009, decreased versus the comparable period in 2008, primarily due to significantly lower volumes, restructuring charges and lower equity income. These decreases were partially offset by decreased selling, general and administrative expenses and lower income tax expense.

RESTRUCTURING CHARGES

2009 Restructuring Actions

In the first quarter of 2009, we executed restructuring actions in response to a reduction in orders in most of our U.S. and foreign markets due to the continuing deterioration in the global economy. We reduced our global workforce by approximately 800 professional employees. In addition, we took numerous employee actions at many of our manufacturing locations, including significant downsizing at numerous facilities and complete closure of two facilities and several branch distributor locations. Employee termination and severance costs were recorded based on approved plans developed by the businesses and corporate management which specified positions to be eliminated, benefits to be paid under existing severance plans, union contracts or statutory requirements and the expected timetable for completion of the plan. Estimates of restructuring were made based on information available at the time charges were recorded. Due to the inherent uncertainty involved, actual amounts paid for such activities may differ from amounts initially recorded and we may need to revise previous estimates. Total workforce reductions as of March 29, 2009 were as follows:

                                               2009 Plan
                        Terminations announced     2,854
                        Terminations completed    (2,683 )
                        Remaining terminations       171

In response to closures and downsizing noted above, we incurred $1 million of restructuring expenses for lease terminations and $5 million of restructuring expenses for asset impairments. During the first quarter of 2009 we recorded a total pre-tax restructuring charge of $66 million in "Restructuring charges" in the Condensed Consolidated Statements of Income related to the 2009 actions. These restructuring actions included:

                                                   Estimated
                   In millions          2009    Completion Date
                   Workforce reductions $  60         June 2009
                   Exit activities          6         June 2009

     In millions                    Severance Costs     Exit Activities     Total
     2009 Restructuring charges     $             60   $               6   $    66
     Cash payments for 2009 actions              (17 )                (1 )     (18 )
     Noncash items                                 ?                  (4 )      (4 )
     Balance at March 29, 2009      $             43   $               1   $    44

We do not include restructuring charges in our operating segment results. The pretax impact of allocating restructuring charges to the segment results would have been as follows:

                    In millions                   2009 Charges
                    Engine                        $          31
                    Power Generation                          3
                    Components                               24
                    Distribution                              4
                    Non-segment                               4
                    Total restructuring charges   $          66

If the restructuring actions are successfully implemented, we expect the annualized savings from the professional actions to be approximately $50 million. Our charge related to these actions was approximately $30 million. Approximately 40 percent of the savings from the restructuring actions will be realized in cost of sales, 45 percent in selling, general and administrative expenses, and 15 percent in research, development and engineering expenses. We expect all of the pretax charge, except for asset impairment amounts, to be paid in cash which will be funded with cash generated from operations.

2008 Restructuring Actions

In 2008 we executed restructuring actions in response to the continued
deterioration in our U.S. businesses and most key markets around the world in
the second half of 2008, as well as a reduction in orders in most U.S. and
foreign markets for 2009.  We reduced our global workforce by approximately 650
professional employees.  In addition, we took numerous employee actions at many
of our manufacturing locations, including approximately 800 hourly employees.
Total workforce reductions as of March 29, 2009, were as follows:

                                                 2008 Plan
                      Terminations announced         1,450
                      Terminations completed        (1,416 )
                      Remaining terminations (1)        34


                          (1)The remaining

The charges recorded during the year ended December 31, 2008, included severance costs related to both voluntary and involuntary terminations. During 2008, we incurred a pretax charge related to the professional and hourly restructuring initiatives of $37 million. The following table summarizes the balance of accrued restructuring charges and the changes in the accrued amounts for the applicable periods. The restructuring related accruals were recorded in "Other accrued expenses" in the Condensed Consolidated Balance Sheets.

                 In millions                    Severance Costs
                 Balance at December 31, 2008                34
                 Cash payments for 2008 actions             (17 )
                 Balance at March 29, 2009                   17

There were no material changes to the estimated savings, or periods under which we expect to recognize the savings, for the 2008 actions.

OUTLOOK

Near-Term:

We expect sales and profits to be lower in 2009 given the economic outlook. Many of the markets we serve are slowing significantly as a result of the credit crisis and softening global economic environment and we expect 2009 sales will be down significantly from 2008 levels. Forecasting for 2009 is a significant challenge with these uncertain market conditions. Our operating results in 2009 will depend on how the current global economic recession impacts the markets we serve. In response to anticipated market conditions we initiated voluntary and involuntary separation actions in December of 2008 and the first quarter of 2009. We also initiated certain exit activities during the first quarter of 2009. We expect to continue to focus on cost reductions and scaling production to meet current demand. If uncertainties in the credit and capital markets continue, the overall impact on our customers as well as end user demand for our products could have a significant adverse impact on our near-term results. In light of current economic conditions, if demand continues to worsen in 2009, it is reasonably possible that we may be required to take additional restructuring actions and incur additional costs as we decrease production. These costs could have a material impact on our results of operations and financial position. At this time we cannot estimate these potential charges.

Long-Term:

While there is uncertainty in the near-term market as a result of the current economic conditions, we continue to be confident that opportunities for long-term growth and profitability will continue in the future.

OPERATING SEGMENT RESULTS

Our reportable operating segments consist of the following: Engine, Power Generation, Components and Distribution. This reporting structure is organized according to the products and markets each segment serves. We use segment EBIT (defined as earnings or loss before interest expense, income taxes and noncontrolling interests) as the primary basis for the chief operating decision-maker to evaluate the performance of each operating segment.

Following is a discussion of operating results for each of our business segments.

Engine Segment Results

Financial data for the Engine segment was as follows:
. . .