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

CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING INFORMATION

Certain parts of this quarterly report contain forward-looking statements intended to qualify for the safe harbors from liability established by the Private Securities Litigation Reform Act of 1995. Forward-looking statements include those 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," "could," "should" or words of similar meaning. 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. Some future factors that could cause our results to differ materially from the results discussed in such forward-looking statements are discussed below and shareholders, potential investors and other readers are urged to consider these future factors carefully in evaluating forward-looking statements. Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date hereof. Future factors that could affect the outcome of forward-looking statements include the following:

† general economic, business and financing conditions, including emerging markets;

† a slowdown in infrastructure development;

† increasingly stringent environmental laws and regulations;

† unpredictability in the adoption, implementation and enforcement of emission standards around the world;

† the actions of joint ventures and other investees that we do not directly control;

† changes in the outsourcing practices of significant customers;

† any significant problems in our new engine platforms;

† currency exchange rate changes;

† supply shortages and supplier financial risk;

† variability in material and commodity costs;

† product recalls and liability claims;

† competitor pricing activity;

† increasing global competition among our customers;

† global political and economic conditions;

† changes in taxation;

† the price and availability of energy;

† increasing our capacity and production at the appropriate pace;

† the development of new technologies;

† obtaining customers for our new light-duty diesel engine platform;

† new governmental actions, legislation and regulations;

† the performance of our pension plan assets;

† labor relations;

† changes in accounting standards;

†          our sales mix of products;



†          protection and validity of our patent and other intellectual property
rights;

† technological implementation and cost/financial risks in our 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 and

† other risk factors described in our Form 10-K, Part 1, Item IA under the caption "Risk Factors."

Shareholders, potential investors and other readers are urged to consider these factors carefully in evaluating the forward-looking statements and are cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements made herein are made only as of the date of this quarterly report and we undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise.

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 accompanying Notes to Consolidated Financial Statements in the "Financial Statements" section of our 2011 Form 10-K. Our MD&A is presented in the following sections:

† Executive Summary and Financial Highlights

† Outlook

† Results of Operations

† Operating Segment Results

† Liquidity and Capital Resources

† Application of Critical Accounting Estimates

† Recently Adopted and Recently Issued Accounting Pronouncements

EXECUTIVE SUMMARY AND FINANCIAL HIGHLIGHTS

We are a global power leader that designs, manufactures, distributes and services diesel and natural gas engines, engine-related component products, including emission solutions, filtration, fuel systems and air handling systems, and power generation products, including electronic power generation systems and related products. 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, Chrysler Group, LLC, Daimler Trucks North America, Ford Motor Company, Komatsu and Volvo AB. We serve our customers through a network of more than 600 company-owned and independent distributor locations and approximately 6,500 dealer locations in more than 190 countries and territories.

Our reportable operating segments consist of the following: Engine, Components, Power Generation and Distribution. This reporting structure is organized according to the products and markets each segment serves and 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. Our 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 equipment. The Components segment sells filtration products, exhaust aftertreatment systems, turbochargers and fuel systems. The Power Generation segment is an integrated provider of power systems. The segment sells engines, generator sets, alternators, power systems and services. 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 currency, political, economic and regulatory matters, including adoption and enforcement of environmental and emission standards, in the countries we serve. As part of our growth strategy, we invest in businesses in certain countries that carry high levels of these risks such as China, Brazil, India, Mexico, Russia and countries in the Middle East and Africa. At the same time, our geographic diversity and broad product and service offerings have helped limit the impact from a drop in demand in any one industry or customer or the economy of any single country on our consolidated results.

In the first six months of 2012, we experienced growth in several end markets in North America, especially the North American on-highway markets. Demand for heavy-duty on-highway products in North America increased 53 percent in the first six months of 2012 as compared to the same period in 2011. In addition, medium-duty truck and bus shipments in North America increased 24 percent in the first six months of 2012 compared to the same period in 2011. North American light-duty on-highway demand improved with an increase in shipments to Chrysler of 25 percent in the first six months of 2012 compared to the same period in 2011. Demand in certain emerging markets including Brazil and China has declined in 2012. The on-highway medium-duty truck market in Brazil declined as the result of the 2011 pre-buy ahead of the new 2012 emission requirements, and the off-highway construction markets in China have continued to deteriorate. The governments of China and India have controlled inflation through tight monetary policies in the form of rising interest rates and tightening access to credit, although both countries have begun easing these policies in response to reduced inflationary concerns. Easing monetary policies could enhance our end markets, however, there likely would be a delay between when these policies are implemented and when our end markets respond. The European economy remains an uncertainty with continued volatility in the Euro countries. Although we do not have any significant direct exposure to European sovereign debt, we generated approximately nine percent of our net sales from Euro zone countries in 2011 and approximately eight percent in the first six months of 2012.

The following tables contain sales and earnings before interest expense, income taxes and noncontrolling interests (EBIT) results by operating segment for the three and six months ended July 1, 2012 and June 26, 2011. Refer to the section titled "Operating Segment Results" for a more detailed discussion of net sales and EBIT by operating segment, including the reconciliation of segment EBIT to income before taxes.

Operating Segments



                                               Three months ended
                        July 1, 2012                  June 26, 2011             Percent change
                          Percent                        Percent                2012 vs. 2011
In millions      Sales    of Total     EBIT     Sales    of Total     EBIT     Sales       EBIT
Engine          $ 2,841         64 %  $  376   $ 2,900         62 %  $  377        (2 )%       -
Components        1,036         23 %     116     1,032         22 %     120         -         (3 )%
Power
Generation          909         20 %      94       909         20 %     105         -        (10 )%
Distribution        794         18 %      92       785         17 %     106         1 %      (13 )%
Intersegment
eliminations     (1,128 )      (25 )%      -      (985 )      (21 )%      -        15 %        -
Non-segment           -          -        (9 )       -          -        67         -         NM
Total           $ 4,452        100 %  $  669   $ 4,641        100 %  $  775        (4 )%     (14 )%

"NM" - not meaningful information.

Net income attributable to Cummins was $469 million, or $2.47 per diluted share, on sales of $4.5 billion for the three month interim reporting period ended July 1, 2012, versus the comparable prior year period with net income attributable to Cummins of $505 million, or $2.60 per diluted share, on sales of $4.6 billion. The decrease in income was driven by the following:

† the 2011 gain on the disposition of certain assets and liabilities of our exhaust business;

† lower volumes, particularly in the international construction and medium-duty truck markets, which were offset by improved gross margin as a percentage of sales;

† higher research, development and engineering expenses;

† higher selling, general and administrative expenses and

† lower equity, royalty and interest income from investees.

These increases were partially offset by a lower effective tax rate.

Diluted earnings per share for the three months ended July 1, 2012 also benefited $0.02 from lower shares primarily due to the stock repurchase program.

Operating Segments



                                                 Six months ended
                        July 1, 2012                    June 26, 2011             Percent change
                          Percent                         Percent                 2012 vs. 2011
In millions      Sales    of Total     EBIT      Sales    of Total     EBIT      Sales       EBIT
Engine          $ 5,700         64 %  $   757   $ 5,291         62 %  $   667         8 %       13 %
Components        2,135         24 %      259     1,956         23 %      225         9 %       15 %
Power
Generation        1,689         19 %      170     1,704         20 %      194        (1 )%     (12 )%
Distribution      1,569         17 %      186     1,427         17 %      195        10 %       (5 )%
Intersegment
eliminations     (2,169 )      (24 )%       -    (1,877 )      (22 )%       -        16 %        -
Non-segment           -          -        (45 )       -          -         26         -         NM
Total           $ 8,924        100 %  $ 1,327   $ 8,501        100 %  $ 1,307         5 %        2 %

Net income attributable to Cummins was $924 million, or $4.85 per diluted share, on sales of $8.9 billion for the six month interim reporting period ended July 1, 2012, versus the comparable prior year period with net income attributable to Cummins of $848 million, or $4.34 per diluted share, on sales of $8.5 billion. The increase in income was driven by the following:

† higher volumes, primarily in the North American on-highway markets;

† improved gross margins and

† a lower effective tax rate.

These increases were partially offset by the following:

† higher selling, general and administrative expenses;

† higher research, development and engineering expenses and

† the 2011 gain on the disposition of certain assets and liabilities of our exhaust business.

Diluted earnings per share for the six months ended July 1, 2012 also benefited $0.01 from lower shares primarily due to the stock repurchase program.

We generated $397 million of operating cash flows for the six months ended July 1, 2012, compared to $744 million for the six months ended June 26, 2011. Refer to the section titled "Operating Activities" in the "Liquidity and Capital Resources" section for a discussion of items impacting cash flows.

In February 2011, the Board of Directors authorized the acquisition of up to $1 billion of our common stock. We repurchased $196 million in the first six months of 2012. Our debt to capital ratio (total capital defined as debt plus equity) at July 1, 2012, was 11.0 percent, compared to 11.8 percent at December 31, 2011. In addition to the $1.4 billion in cash and marketable securities on hand, we have sufficient access to our revolver and accounts receivable program to meet currently anticipated growth and funding needs.

In July 2012, the Board of Directors authorized a dividend increase of 25 percent from $0.40 per share to $0.50 per share on a quarterly basis effective in the third quarter.

Our global pension plans, including our unfunded and non-qualified plans, were 98 percent funded at December 31, 2011. Our United States (U.S.) qualified plan, which represents approximately 60 percent of the worldwide pension obligation, was 103 percent funded and our United Kingdom (U.K.) plan was 106 percent funded. We expect to contribute $130 million to our global pension plans in 2012.

OUTLOOK

Near-Term

In the first six months of 2012, North American demand in heavy-, medium- and light-duty truck markets remained strong.

We expect the following challenges to our business that may reduce our earnings potential in the remainder of 2012:

† One of our Brazilian customers replaced our B6.7 engine with a proprietary engine in 2012, which should be partially offset by the 2012 launch of our ISF and 9 liter engines in new light-duty on-highway and medium-duty truck applications, respectively, with this same customer. The launch of these new engine applications could be negatively impacted by the weakening Brazilian economy.

† Our 2012 engine sales in Brazil could continue to be negatively impacted by pre-buy activity in 2011 ahead of the implementation of Euro V emission regulations.

† The weakening economy in Brazil could continue to have adverse impacts on our other businesses.

† In China demand in certain industrial markets could remain low through the remainder of the year.

† In India the Rupee could continue to depreciate in value, which would create additional pressure on earnings, while higher inflation could negatively impact sales, especially industrial sales in the remainder of 2012.

† Demand in certain European markets could continue to decline in 2012 due to economic uncertainty.

† Currency volatility could continue to put pressure on earnings in 2012.

† North American oil and gas markets could continue to decline through the remainder of the year.

We will continue to invest in new product development.

Long-Term

We believe that, over the longer term, there will be economic improvements in most of our current markets and that our opportunities for long-term profitable growth will continue in the future as the result of the following four macroeconomic trends that will benefit our businesses:

† tightening emissions controls across the world;

† infrastructure needs in emerging markets;

† energy availability and cost issues and

† globalization of industries like ours.

RESULTS OF OPERATIONS



                                             Three months ended           Favorable/              Six months ended             Favorable/
                                           July 1,       June 26,        (Unfavorable)         July 1,       June 26,        (Unfavorable)
In millions (except per share amounts)       2012          2011        Amount     Percent        2012          2011        Amount      Percent
Net Sales                                 $    4,452    $    4,641    $   (189 )       (4 )%  $    8,924    $    8,501    $     423          5 %
Cost of sales                                  3,242         3,438         196          6 %        6,516         6,341         (175 )       (3 )%
Gross Margin                                   1,210         1,203           7          1 %        2,408         2,160          248         11 %
Operating Expenses and Income
Selling, general and administrative
expenses                                         487           463         (24 )       (5 )%         962           852         (110 )      (13 )%
Research, development and engineering
expenses                                         187           157         (30 )      (19 )%         368           286          (82 )      (29 )%
Equity, royalty and interest income
from investees                                   104           117         (13 )      (11 )%         208           213           (5 )       (2 )%
Gain on sale of businesses                         6            68         (62 )      (91 )%           6            68          (62 )      (91 )%
Other operating income (expense), net              2             -           2         NM              4            (6 )         10         NM
Operating Income                                 648           768        (120 )      (16 )%       1,296         1,297           (1 )        -
Interest income                                    7            10          (3 )      (30 )%          15            16           (1 )       (6 )%
Interest expense                                   8            13           5         38 %           16            23            7         30 %
Other income (expense), net                       14            (3 )        17         NM             16            (6 )         22         NM
Income before income taxes                       661           762        (101 )      (13 )%       1,311         1,284           27          2 %
Income tax expense                               166           225          59         26 %          341           382           41         11 %
Consolidated Net Income                          495           537         (42 )       (8 )%         970           902           68          8 %
Less: Net income attributable to
noncontrolling interests                          26            32           6         19 %           46            54            8         15 %
Net income attributable to Cummins
Inc.                                      $      469    $      505    $    (36 )       (7 )%  $      924    $      848    $      76          9 %
Diluted earnings per common share
attributable to Cummins Inc.              $     2.47    $     2.60    $  (0.13 )       (5 )%  $     4.85    $     4.34    $    0.51         12 %




                            Three months ended       Favorable/        Six months ended       Favorable/
                           July 1,     June 26,     (Unfavorable)     July 1,   June 26,     (Unfavorable)
Percent of sales             2012        2011     Percentage Points    2012       2011     Percentage Points
Gross margin                   27.2 %      25.9 %               1.3      27.0 %     25.4 %               1.6
Selling, general and
administrative expenses        10.9 %      10.0 %              (0.9 )    10.8 %     10.0 %              (0.8 )
Research, development
and engineering expenses        4.2 %       3.4 %              (0.8 )     4.1 %      3.4 %              (0.7 )

Net Sales

Net sales for the three months ended July 1, 2012, decreased versus the comparable period in 2011. The decrease in sales by segment was primarily driven by the following:

† Foreign currency fluctuations unfavorably impacted sales approximately three percent.

† Engine segment sales decreased by two percent for the three months ended due to lower volumes in international construction markets, primarily in China, and international medium-duty truck markets, especially in Brazil.

This decrease was partially offset by the following:

† Distribution segment sales increased by one percent for the three months ended due to increased demand in most product lines and geographic regions led by Asia Pacific and Africa, which were mostly offset by decreased demand in Europe and the Middle East.

† Components segment sales slightly increased due to higher demand in the emission solutions business, which were mostly offset by decreased demand in the filtration and turbo technologies businesses and $37 million of disposition sales in the second quarter of 2011.

† Power Generation segment sales remained flat versus the comparable period in 2011 with increased demand in power products and power systems being offset by lower demand in generator technologies and power solutions businesses.

Net sales for the six months ended July 1, 2012, increased versus the comparable period in 2011. The increase in sales by segment was primarily driven by the following:

† Engine segment sales increased by eight percent due to strong growth in the North American on-highway markets led by the heavy-duty business, which was partially offset by weakness in industrial demand, especially in international construction markets, and lower volumes in the international medium-duty truck market, primarily in Brazil.

† Components segment sales increased by nine percent due to higher demand in the emission solutions business.

† Distribution segment sales increased by 10 percent due to higher demand in most product lines and geographic regions led by Asia Pacific, North and Central America and Africa.

These increases were partially offset by the following:

† Foreign currency fluctuations unfavorably impacted sales approximately two percent.

† Power Generation segment sales decreased by one percent due to lower demand in the generator technologies and power solutions businesses, which were partially offset by growing demand in the power product business, especially in North America.

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 July 1, 2012, were 50 percent of total net sales for both periods, compared with 57 percent of total net sales for both of the comparable periods in 2011.

Gross Margin

Gross margin was relatively flat for the three months ended July 1, 2012, versus the comparable period in 2011, as lower volumes were offset by favorable product mix, lower costs and improved price realization. Gross margin increased for the six months ended July 1, 2012, versus the comparable period in 2011, as favorable product mix, higher volumes, improved price realization, lower material costs and lower warranty costs were partially offset by unfavorable foreign currency fluctuations. The decrease in manufacturing costs was partially due to productivity improvements and cost reduction actions in our manufacturing plants.

Gross margin as a percentage of sales increased by 1.3 percentage points for the three months ended July 1, 2012, versus the comparable period in 2011, as lower volumes were more than offset by favorable product mix, improved price realization, lower warranty costs and lower material costs. The decrease in manufacturing costs was partially due to productivity improvements and cost reduction actions in our manufacturing plants. Gross margin as a percentage of sales increased by 1.6 percentage points for the six months ended July 1, 2012, . . .