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:

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

† rapid technological developments of diesel engines;

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

† the sales mix of products;

† the continued 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 some of our markets;

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

† 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;

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

† 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 Statements and 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:

† Executive Summary and Financial Highlights

† Results of Operations

† Restructuring Charges

† Outlook

† Operating Segment Results

† Liquidity and Capital Resources

† Off Balance Sheet Financing

† Application of Critical Accounting Estimates

† 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 Group, LLC (Chrysler), 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 could impact 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. At the same time, 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.

However, as was the case in the first quarter of 2009, the widespread nature of the current global economic recession continues to create immediate challenges for most of our businesses and the markets in which they operate. Demand continued to fall in nearly every market and geographic region around the world, despite some modest improvement in China and India. We expect demand to remain weak in most of our markets through 2009. As a result, we took restructuring actions in the first half 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 operating results for the three and six months ended June 28, 2009. 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 we expect global demand for our products to be weak for the remainder of the year, certain emerging markets are expected to improve in the second half of the year. The actions that were initiated in the fourth quarter of 2008 and the first half of 2009 have and will continue to enable us to navigate through the downturn and position us to emerge a stronger company. Our short term priorities remain:

† to align costs and capacity with the real demand for our products, so that we maintain a solid profit through the downturn;

† to manage the business in such a way that generates positive cash flow; and

† to continue to invest in critical technologies and products for 2010 and beyond.

Net income attributable to Cummins was $56 million, or $0.28 per diluted share, on sales of $2.4 billion for the three month interim reporting period ended June 28, 2009, versus the comparable prior year period with net income attributable to Cummins of $293 million, or $1.49 per diluted share, on sales of $3.9 billion. The decrease in income

was driven by a 37 percent decrease in net sales and a 49 percent decrease in gross margin primarily due to significantly lower demand and volumes across most of our businesses.

Net income attributable to Cummins was $63 million, or $0.32 per diluted share, on sales of $4.9 billion for the six month interim reporting period ended June 28, 2009, versus the comparable prior year period with net income attributable to Cummins of $483 million, or $2.46 per diluted share, on sales of $7.4 billion. The decrease in income was driven by a 34 percent decrease in net sales and a 44 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 half of 2009 were $73 million ($48 million after-tax, or $0.24 per diluted share). For a detailed discussion of restructuring see "Restructuring Charges" and Note 6 to the Condensed Consolidated Financial Statements.

We continued to strengthen our balance sheet in a challenging environment. Cash, cash equivalents and marketable securities increased $48 million from year end as we reduced inventories by 14 percent in the same period. We also reduced total debt by $18 million compared to December 31, 2008.

RESULTS OF OPERATIONS



                                Three months ended           Favorable/           Six months ended           Favorable/
                              June 28,      June 29,       (Unfavorable)        June 28,     June 29,      (Unfavorable)
In millions (except per
share amounts)                  2009          2008        Amount    Percent       2009         2008       Amount    Percent
Net sales                    $    2,431    $     3,887   $ (1,456 )     (37 )% $    4,870   $    7,361   $ (2,491 )     (34 )%
Cost of sales                     1,983          3,008      1,025        34 %       3,977        5,775      1,798        31 %
Gross margin                        448            879       (431 )     (49 )%        893        1,586       (693 )     (44 )%
Operating expenses and
income
Selling, general and
administrative expenses             287            370         83        22 %         587          721        134        19 %
Research, development and
engineering expenses                 79            104         25        24 %         164          207         43        21 %
Equity, royalty and
interest income from
investees                            57             69        (12 )     (17 )%         90          136        (46 )     (34 )%
Restructuring charges                 7              -         (7 )      NM            73            -        (73 )      NM
Other operating (expense)
income, net                         (11 )           (6 )       (5 )     (83 )%         (9 )         (7 )       (2 )     (29 )%
Operating income                    121            468       (347 )     (74 )%        150          787       (637 )     (81 )%
Interest income                       1              4         (3 )     (75 )%          3           10         (7 )     (70 )%
Interest expense                     10             12          2        17 %          17           23          6        26 %
Other (expense) income,
net                                 (13 )           (3 )      (10 )      NM           (16 )        (13 )       (3 )     (23 )%
Income before income taxes           99            457       (358 )     (78 )%        120          761       (641 )     (84 )%
Income tax expense                   29            147        118        80 %          36          249        213        86 %
Net income                           70            310       (240 )     (77 )%         84          512       (428 )     (84 )%
Less: net income
attributable to
noncontrolling interests             14             17          3        18 %          21           29          8        28 %
Net income attributable to
Cummins Inc.                 $       56    $       293   $   (237 )     (81 )% $       63   $      483   $   (420 )     (87 )%
Diluted earnings per
common share attributable
to Cummins Inc.              $     0.28    $      1.49   $  (1.21 )     (81 )% $     0.32   $     2.46   $  (2.14 )     (87 )%

Net Sales

Net sales for the three and six month periods ended June 28, 2009, decreased in all segments versus the comparable periods in 2008, primarily due to decreased demand in all of our segments due to the global economic downturn.

A more detailed discussion of sales by segment is presented in the OPERATING SEGMENT RESULTS section.

Sales to international markets based on location of customers for the three and six month periods ended June 28, 2009, were 56 percent and 54 percent of total net sales, compared with 61 percent and 59 percent of total net sales for the comparable periods in 2008.

A summary of net sales (dollar amount and percentage of total) by geographic territory follows:

                                Three months ended                          Six months ended
In millions            June 28, 2009         June 29, 2008        June 28, 2009          June 29, 2008
United States        $    1,075      44 %  $    1,532      39 % $    2,253      46 %  $    3,024       41 %
Asia/Australia              554      23 %         824      21 %      1,016      21 %       1,540       21 %
Europe/CIS(1)               355      15 %         745      19 %        748      16 %       1,391       19 %
Mexico/Latin
America                     207       8 %         420      11 %        384       8 %         755       10 %
Africa/Middle East          162       7 %         223       6 %        303       6 %         391        5 %
Canada                       78       3 %         143       4 %        166       3 %         260        4 %
Total
international             1,356      56 %       2,355      61 %      2,617      54 %       4,337       59 %
Total consolidated
net sales            $    2,431     100 %  $    3,887     100 % $    4,870     100 %  $    7,361      100 %

Gross Margin



Significant drivers of the change in gross margins for the three and six month
periods ended June 28, 2009, versus the comparable periods ended June 29, 2008,
were as follows:



                                          Increase (Decrease)
                                             2009 vs. 2008
            In millions        Three months ended      Six months ended
            Volume/Mix         $              (451 )  $             (735 )
            Warranty expense                   (35 )                 (36 )
            Material costs                     (30 )                 (78 )
            Currency                            (9 )                 (17 )
            Production costs                    43                    30
            Price                               57                   142
            Other                               (6 )                   1
            Total              $              (431 )  $             (693 )

Gross margin decreased by $431 million and $693 million for the three and six month periods ended June 28, 2009, versus the comparable periods in 2008, and decreased as a percentage of sales by 4.2 percentage points and 3.2 percentage points, respectively. The decrease was led by lower volumes, increased warranty expense and increased materials costs. These decreases in margin were partially offset by improved pricing and decreased production costs. The decrease in volumes was due to lower sales resulting from the global economic downturn. The increased materials costs were largely due to losses on hedged commodities which were partially offset by decreasing commodity costs. The provision for warranties issued as a percent of sales for the three and six month periods was 3.3 percent and 3.2 percent in 2009 compared to 2.9 percent and 3.0 percent in 2008.

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 and six month periods ended June 28, 2009, decreased versus the comparable periods in 2008, primarily due to decreases of $25 million and $51 million in discretionary spending, in order to conserve cash, and decreases of $33 million and $52 million in compensation and related expenses, respectively. 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 11.8 percent and 12.1 percent in 2009 compared to 9.5 percent and 9.8 percent in 2008 for the three and six month periods ended, respectively.

Research, Development and Engineering Expenses

Research, development and engineering expenses for the three and six month periods ended June 28, 2009, decreased versus the comparable periods in 2008, primarily due to decreased discretionary spending to conserve cash, increased reimbursements for engineering projects and implemented severance programs. Overall, research, development and engineering expenses as a percentage of sales increased to 3.2 percent and 3.4 percent in 2009

from 2.7 percent and 2.8 percent in 2008 for the three and six month periods ended, respectively. Research activities continue to focus on development of new products to meet future environmental standards around the world and improvements to fuel economy performance.

Equity, Royalty and Interest Income From Investees



Equity, royalty and interest income from investees for the three and six month
periods ended June 28, 2009, decreased significantly versus the comparable
periods in 2008, primarily due to the following:



                                                        Increase/(Decrease)
                                                  June 28, 2009 vs. June 29, 2008
                                                   Three months          Six months
 In millions                                          ended                 ended
 Dongfeng Cummins Engine Company, Ltd. (DCEC)   $              (13 )     $       (27 )
 Cummins MerCruiser Diesel LLC (MerCruiser)                     (4 )              (9 )
 Tata Cummins Ltd. (TCL)                                         -                (7 )
 Chongqing Cummins Engine Company, Ltd.                          5                 6

These decreases were due to lower demand as a result of the global economic conditions and were partially offset by the increase in income from Chongqing Cummins Engine Company, Ltd. due to a one-time tax benefit recorded in the second quarter of 2009.

Other Operating (Expense) Income, net



                                               Three months ended                         Six months ended
In millions                           June 28, 2009        June 29, 2008        June 28, 2009        June 29, 2008
Other operating (expense) income:
Flood loss                           $            (9 )   $               (6 )  $            (3 )   $               (6 )
Other (expense), net                              (2 )                    -                 (6 )                   (1 )
Total other (expense) income, net    $           (11 )   $               (6 )  $            (9 )   $               (7 )

Interest Income

Interest income for the three and six month periods ended June 28, 2009, decreased versus the comparable periods in 2008, primarily due to lower interest rates in 2009 compared to 2008.

Interest Expense

Interest expense for the three and six month periods ended June 28, 2009, decreased versus the comparable periods in 2008, primarily due to declining short-term interest rates and lower debt.

Other (Expense) Income, Net



                                               Three months ended                       Six months ended
In millions                           June 28, 2009        June 29, 2008        June 28, 2009      June 29, 2008
Other (expense) income:
Foreign currency (losses), net       $           (10 )   $               (3 )  $           (18 )  $           (13 )
Other, net                                        (3 )                    -                  2                  -
Total other (expense) income, net    $           (13 )   $               (3 )  $           (16 )  $           (13 )

Income Tax Expense

Our effective tax rate for the year is expected to approximate 30 percent, absent any additional discrete period activity. Our tax rate is generally less than the 35 percent U.S. income tax rate primarily due to lower tax rates on foreign income and research tax credits. The tax rates for the three and six month periods ended June 28, 2009, were 29 percent and 30 percent, respectively. Our effective tax rates for the comparable prior year periods were 32 percent and 33 percent, respectively.

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 and six month periods ended June 28, 2009, decreased versus the comparable periods in 2008, primarily due to lower income at Cummins India Ltd. and Wuxi Holset Engineering Co. Ltd. reflecting the decline in demand 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 and six month periods ended June 28, 2009, decreased versus the comparable periods 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, lower research, development and engineering expenses and lower income tax expense.

RESTRUCTURING CHARGES

2009 Restructuring Actions

In 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 850 professional employees. In addition, we took numerous employee actions at many of our manufacturing locations, including approximately 2,600 hourly employees, significant downsizing at numerous facilities and complete closure of several facilities and 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 June 28, 2009, were substantially completed.

In response to closures and downsizing noted above, we incurred $2 million of restructuring expenses for lease terminations and $4 million of restructuring expenses for asset impairments. During 2009 we recorded a total pre-tax restructuring charge of $73 million, net of the $1 million favorable change in estimate related to 2008 actions, in "Restructuring charges" in the Condensed Consolidated Statements of Income related to the 2009 actions. These restructuring actions included:

                                               Estimated Completion
                In millions            2009            Date
                Workforce reductions   $  68      September 2009
                Exit activities            6      September 2009

The following table summarizes the balance of accrued restructuring charges by expense type 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.

                                           Severance       Exit
          In millions                        Costs      Activities     Total
          2009 Restructuring charges       $       68   $         6   $    74
          Cash payments for 2009 actions          (51 )          (1 )     (52 )
          Noncash items                             -            (4 )      (4 )
          Balance at June 28, 2009         $       17   $         1   $    18

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                        $          33
                   Power Generation                          6
                   Components                               26
                   Distribution                              4
                   Non-segment                               4
                   Total restructuring charges   $          73
. . .