UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

~~FORM 10-Q~~

FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the quarterly period ended ~~September 30, 2003~~

March 31, 2004
OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________________ to ________________
Commission File Number: 1-768

CATERPILLAR INC.
(Exact name of registrant as specified in its charter)

Delaware
(State or other jurisdiction of incorporation)

37-0602744
(IRS Employer I.D. No.)
100 NE Adams Street, Peoria, Illinois
(Address of principal executive offices)

61629
(Zip Code)
Registrant's telephone number, including area code:
(309) 675-1000

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ X ] No [ ].

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).
Yes [ X ] No [ ]

At ~~September 30, 2003, 347,240,332~~March 31, 2004, 341,902,131 shares of common stock of the Registrant were outstanding.

This summary page highlights selected information and may not contain all of the information that is important to you. For a detailed analysis of the company's results for the third quarter, you should read the entire document.

~~SUMMARY OF RESULTS~~

On October 16, 2003 Caterpillar Inc. (NYSE: CAT) reported third-quarter 2003 sales and revenues of $5.55 billion and profit of $222 million or $0.62 per share. Profit excluding a bond retirement charge was up 23 percent compared to third-quarter 2002 at $262 million* or $0.73* per share. The bond retirement resulted in a non-recurring charge of $40 million after-tax ($0.11 per share). Through the third quarter, sales and revenues were $16.3 billion and profit was $750 million or $2.15 per share.

~~Sales and revenues of $5.55 billion were up 9 percent compared to $5.08 billion in the third quarter 2002. The increase was primarily due to higher~~~~Machinery~~ ~~volume of $226 million, a favorable~~~~currency~~ ~~impact on sales of $128 million (due mainly to the stronger euro) and higher~~~~Financial Products~~~~revenues for the third quarter of $58 million or about 15 percent compared to third quarter 2002.~~

"Our sales benefited from key market recoveries, as generally lower interest rates continued to spark construction spending and replacement buying. We also benefited from a recognized need for reliable energy which fueled electric power demand," said Chairman and CEO Glen Barton. "During the quarter we continued to demonstrate our ability to respond to market fluctuations."

Profit of $222 million or $0.62 per share was slightly above $213 million or $0.61 per share in the third quarter 2002. Profit excluding a bond retirement charge was up 23 percent compared to third quarter 2002 at $262 million* or $0.73* per share. The bond retirement resulted in a non-recurring charge of $40 million after-tax ($0.11 per share). The profit increase was due to lower~~core operating costs~~ ~~of $59 million and improved~~~~price realization~~ ~~of $34 million. The favorable impact of higher~~~~sales volume/mix~~ was only $15 million as higher sales volume was partially offset by negative sales mix compared to third quarter 2002. The positive factors were partially offset by $71 million of higher retiree pension, healthcare and related benefit costs.

~~"Overall, this quarter's results, particularly lower core operating costs, show that~~~~6 Sigma~~ is driving a continuous improvement culture in which employees look for efficiency gains in all aspects of our business. Through these efforts, sales and revenues per employee continued to show improvement over last year. These efforts will multiply as we increase the number of active 6 Sigma Black Belts and embed veteran Black Belts into other management positions to apply their experience and improve processes throughout the company," Barton said.

* A complete definition and discussion of Caterpillar's use of non-GAAP measures, identified by an asterisk (*), is included on page 45.

~~OUTLOOK~~

"We still expect 2003 sales and revenues to be up about 10 percent but have raised our full-year profit to be about $3.00 per share as a result of continued focus on cost control," Barton said. Based on our preliminary outlook, 2004 company sales and revenues are expected to be up about 10 percent from 2003. (Complete outlook begins on page 31.)

~~Note: Glossary of terms included on pages 32-33; first occurrence of terms shown in bold italics.~~

~~Page 1~~

Part I. FINANCIAL INFORMATION

Item 1. Financial Statements

Caterpillar Inc. Consolidated Statement of Results of Operations (Unaudited) (Dollars in millions except per share data)
	Three Months Ended
	March 31,
		2004		2003

Sales and revenues:
Sales of Machinery and Engines	$	6,002	$	4,424
Revenues of Financial Products		465		397

Total sales and revenues		6,467		4,821

Operating costs:
Cost of goods sold		4,699		3,630
Selling, general and administrative expenses		724		570
Research and development expenses		214		152
Interest expense of Financial Products		118		120
Other operating expenses		138		127

Total operating costs		5,893		4,599


Operating profit		574		222

Interest expense excluding Financial Products		57		66
Other income (expense)		47		18


Consolidated profit before taxes		564		174

Provision for income taxes		158		49

Profit of consolidated companies		406		125

Equity in profit (loss) of unconsolidated affiliated companies		6		4


Profit	$	412	$	129




Profit per common share	$	1.20	$	0.37

Profit per common share - diluted (1)	$	1.16	$	0.37

Weighted average common shares outstanding (thousands)
- Basic		342,612		344,316
- Diluted (1)		355,736		346,826

Cash dividends declared per common share	$	-	$	-


¹Diluted by assumed exercise of stock options, using the treasury stock method.
See accompanying notes to Consolidated Financial Statements.

Caterpillar Inc.
Consolidated Statement of Results of Operations
(Unaudited)
(Dollars in millions except per share data)

Three Months Ended

September 30,

2003

2002
Sales and revenues:

Sales of Machinery and Engines
$
5,112

$
4,700

Revenues of Financial Products

433

375

Total sales and revenues

5,545

5,075

Operating costs:

Cost of goods sold

4,143

3,798

Selling, general and administrative expenses

627

538

Research and development expenses

173

167

Interest expense of Financial Products

116

135

Other operating expenses

101

113

Total operating costs

5,160

4,751

Operating profit

385

324

Interest expense excluding Financial Products

61

66

Other income (expense)

(40)

25

Consolidated profit before taxes

284

283

Provision for income taxes

69

71

Profit of consolidated companies

215

212

Equity in profit (loss) of unconsolidated affiliated companies

7

1

Profit
$
222

$
213

Profit per common share
$
0.64

$
0.62

Profit per common share - diluted¹
$
0.62

$
0.61

Weighted average common shares (millions)

- Basic

346.3

344.2
- Diluted¹

356.1

346.2

Cash dividends paid per common share
$
0.35

$
0.35
1 Diluted by assumed exercise of stock options, using the treasury stock method.
See accompanying notes to Consolidated Financial Statements.

~~Page 2~~

Caterpillar Inc.
Consolidated Statement of Results of Operations
(Unaudited)
(Dollars in millions except per share data)

Nine Months Ended

September 30,

2003

2002
Sales and revenues:

Sales of Machinery and Engines
$
15,037

$
13,659

Revenues of Financial Products

1,261

1,116

Total sales and revenues

16,298

14,775

Operating costs:

Cost of goods sold

12,102

11,079

Selling, general and administrative expenses

1,801

1,587

Research and development expenses

494

524

Interest expense of Financial Products

354

393

Other operating expenses

358

305

Total operating costs

15,109

13,888

Operating profit

1,189

887

Interest expense excluding Financial Products

192

206

Other income (expense)

15

18

Consolidated profit before taxes

1,012

699

Provision for income taxes

273

196

Profit of consolidated companies

739

503

Equity in profit (loss) of unconsolidated affiliated companies

11

(10)

Profit
$
750

$
493

Profit per common share
$
2.17

$
1.43

Profit per common share - diluted¹
$
2.15

$
1.42

Weighted average common shares (millions)

- Basic

345.1

343.9
- Diluted¹

349.0

347.2

Cash dividends paid per common share
$
1.05

$
1.05
1 Diluted by assumed exercise of stock options, using the treasury stock method.
See accompanying notes to Consolidated Financial Statements.

~~Page 3~~

Caterpillar Inc.
Consolidated Statement of Changes in Stockholders' Equity
For the Nine Months Ended
(Unaudited)
(Millions of dollars)

September 30,

September 30,

2003

2002
Common stock:

Balance at beginning of period
$
1,034

$
1043

Common shares issued from treasury stock

2

(8)

Balance at end of period

1,036

1,035

Treasury stock:

Balance at beginning of period

(2,669)

(2,696)

Shares issued: 09/30/03 - 2,985,265; 09/30/02 - 805,228

98

24

Balance at end of period
(2,571)
(2,672)

Profit employed in the business:

Balance at beginning of period

7,849

7,533

Profit

750

$
750

493

$
493

Dividends declared

(242)

(241)

Balance at end of period

8,357

7,785

Accumulated other comprehensive income:

Foreign currency translation adjustment:

Balance at beginning of period

86

(17)

Aggregate adjustment for period

149

149

79

79

Balance at end of period

235

62

Minimum pension liability adjustment - consolidated companies:

Balance at beginning of period (net of tax of: 09/30/03-$383; 09/30/02-$82)

(771)

(161)

Aggregate adjustment for period

-

-

-

-

Balance at end of period (net of tax of: 09/30/03-$383; 09/30/02-$82)

(771)

(161)

Minimum pension liability adjustment - unconsolidated companies:

Balance at beginning of period

(37)

(41)

Aggregate adjustment for period

(1)

(1)

(1)

(1)

Balance at end of period

(38)

(42)

Derivative financial instruments:

Balance at beginning of period (net of tax of: 09/30/03-$5; 09/30/02-$17)

11

(26)

Gains/(losses) deferred during period (net of tax of: 09/30/03-$5; 09/30/02-$3)

(11)

(11)

3

3

(Gains)/losses reclassified to earnings (net of tax of: 09/30/03-$19; 09/30/02-$13)

39

39

27

27

Balance at end of period (net of tax of: 09/30/03-$19; 09/30/02-$1)

39

4

Available-for-sale securities:

Balance at beginning of period (net of tax of: 09/30/03-$17; 09/30/02-$13)

(31)

(24)

Gains/(losses) deferred during period (net of tax of: 09/30/03-$6; 09/30/02-$5)

31

31

(10)

(10)

(Gains)/losses reclassified to earnings (net of tax of 09/30/03-$9; 09/30/02-$0)

5

5

1

1

Balance at end of period (net of tax of: 09/30/03-$2; 09/30/02-$18)

5

(33)

Total accumulated other comprehensive income

(530)

(170)

Comprehensive income

$
962

$
592
Stockholders' equity at end of period
$
6,292

$
5,978

See accompanying notes to Consolidated Financial Statements.

~~Page 4~~

Caterpillar Inc.
Consolidated Statement of Financial Position
(Unaudited)
(Millions of dollars)
September 30,
December 31,
2003
2002
Assets
Current Assets:

Cash and short-term investments
$
397

$
309

Receivables - trade and other

3,183

2,838

Receivables - finance

7,158

6,748

Deferred and refundable income taxes

434

642

Prepaid expenses

1,782

1,328

Inventories

3,057

2,763

Total current assets

16,011

14,628

Property, plant and equipment - net

7,083

7,046

Long-term receivables - trade and other

79

66

Long-term receivables - finance

7,240

6,714

Investments in unconsolidated affiliated companies

752

747

Deferred income taxes

854

850

Intangible assets

276

281

Goodwill

1,399

1,402

Other assets

1,373

1,117
Total Assets
$
35,067

$
32,851

Liabilities

Current liabilities:

Short-term borrowings

1,726

2,175

Accounts payable

2,497

2,269

Accrued expenses

1,599

1,620

Accrued wages, salaries and employee benefits

1,229

1,178

Dividends payable

-

120

Deferred and current income taxes payable

162

70

Long-term debt due within one year

3,830

3,912

Total current liabilities

11,043

11,344

Long-term debt due after one year

13,171

11,596

Liability for post-employment benefits

4,023

4,038

Deferred income taxes and other liabilities

538

401
Total Liabilities

28,775

27,379

Contingencies
-
-
Stockholders' Equity

Common stock of $1.00 par
Authorized shares: 900,000,000
Issued shares: (09/30/03 and 12/31/02 - 407,447,312) at paid in amount

1,036

1,034

Treasury stock (09/30/03 - 60,206,980; 12/31/02 - 63,192,245) at cost

(2,571)

(2,669)

Profit employed in the business

8,357

7,849

Accumulated other comprehensive income

(530)

(742)

Total Stockholders' Equity

6,292

5,472
Total Liabilities and Stockholders' Equity
$
35,067

$
32,851

See accompanying notes to Consolidated Financial Statements.

~~Page 5~~

Caterpillar Inc.
Condensed Consolidated Statement of Cash Flow
(Unaudited)
(Millions of dollars)

Nine Months Ended

September 30,
Cash flow from operating activities:
2003

2002

Profit
$
750

$
493

Adjustments for non-cash items:

Depreciation and amortization

1,008

910

Other

46

21

Changes in assets and liabilities:

Receivables - trade and other

(220)

(147)

Inventories

(294)

(159)

Accounts payable and accrued expenses

108

322

Other - net

9

(80)
Net cash provided by operating activities

1,407

1,360

Cash flow from investing activities:

Capital expenditures - excluding equipment leased to others

(352)

(498)

Expenditures for equipment leased to others

(781)

(762)

Proceeds from disposals of property, plant and equipment

451

360

Additions to finance receivables

(12,245)

(11,323)

Collection of finance receivables

10,044

8,652

Proceeds from the sale of finance receivables

1,472

1,995

Investments and acquisitions

(26)

(290)

Other - net

(55)

(41)
Net cash used for investing activities

(1,492)

(1,907)

Cash flow from financing activities:

Dividends paid

(361)

(361)

Common stock issued, including treasury shares reissued

81

8

Proceeds from long-term debt issued

4,233

3,855

Payments on long-term debt

(2,992)

(2,772)

Short-term borrowings - net

(788)

(165)

Net cash provided by (used for) financing activities

173

565
Effect of exchange rate changes on cash

-

27

Increase (Decrease) in cash and short-term investments

88

45

Cash and short-term investments at beginning of period

309

400

Cash and short-term investments at end of period
$
397

$
445

All short-term investments, which consist primarily of highly liquid investments with original maturities of three months or less, are considered to be cash equivalents.
See accompanying notes to Consolidated Financial Statements.

~~Page 6~~

	1

Caterpillar Inc. Consolidated Statement of Changes in Stockholders' Equity For the Three Months Ended (Unaudited) (Millions of dollars)
		March 31,						March 31,
	��	2004						2003

Common stock
Balance at beginning of period		$	1,059					$	1,034
Common shares issued from treasury stock			42						(1	)

Balance at end of period			1,101						1,033


Treasury stock:
Balance at beginning of period			(2,914	)					(2,669	)
Shares issued: 03/31/04 – 1,350,091; 03/31/03 – 197,747			35						5
Shares repurchased: 03/31/04 – 3,210,000; 03/31/03 - 0			(250	)					-

Balance at end of period			(3,129	)					(2,664	)


Profit employed in the business:
Balance at beginning of period			8,450						7,849
Profit			412		$	412			129		$	129
Dividends declared			-						-

Balance at end of period			8,862						7,978


Accumulated other comprehensive income:
Foreign currency translation adjustment:
Balance at beginning of period			348						86
Aggregate adjustment for period			2			2			54			54

Balance at end of period			350						140


Minimum pension liability adjustment - consolidated companies:
Balance at beginning of period (net of tax of: 03/31/04 - $383; 03/31/03 - $82)			(934	)					(771	)
Aggregate adjustment for period			-			-			-			-

Balance at end of period (net of tax of: 03/31/04 - $383; 03/31/03 - $82)			(934	)					(771	)


Minimum pension liability adjustment - unconsolidated companies:
Balance at beginning of period			(48	)					(37	)
Aggregate adjustment for period			(1	)		(1	)		(1	)		(1	)

Balance at end of period			(49	)					(38	)


Derivative financial instruments:
Balance at beginning of period (net of tax of: 03/31/04 - $54; 03/31/03 - $4)			104						11
Gains/(losses) deferred during period (net of tax of: 03/31/04 - $11; 03/31/03 - $12)			21			21			(23	)		(23	)
(Gains)/losses reclassified to earnings (net of tax of: 03/31/04 - $5; 03/31/03 - $4)			(10	)		(10	)		8			8

Balance at end of period (net of tax of: 03/31/04 - $60; 03/31/03 - $4)			115						(4	)


Available-for-sale securities:
Balance at beginning of period (net of tax of: 03/31/04 - $7; 03/31/03 - $17)			13						(31	)
Gains/(losses) deferred during period (net of tax of: 03/31/04 - $3; 03/31/03 - $3)			6			6			(5	)		(5	)
(Gains)/losses reclassified to earnings (net of tax of 03/31/04 - $1; 03/31/03 - $1)			(1	)		(1	)		1			1

Balance at end of period (net of tax of: 03/31/04 - $10; 03/31/03 - $19)			18						(35	)


Total accumulated other comprehensive income			(500	)					(708	)


Comprehensive income					$	429					$	163


Stockholders' equity at end of period		$	6,334					$	5,639


See accompanying notes to Consolidated Financial Statements.

Caterpillar Inc. Consolidated Statement of Financial Position (Unaudited) (Millions of dollars)
		March 31, 2004			December 31, 2003

Assets
Current Assets:
Cash and short-term investments	$	368		$	342
Receivables - trade and other		3,751			3,666
Receivables - finance		7,989			7,605
Deferred and refundable income taxes		729			707
Prepaid expenses		1,351			1,424
Inventories		3,678			3,047

Total current assets		17,866			16,791

Property, plant and equipment - net		7,153			7,290
Long-term receivables - trade and other		109			82
Long-term receivables - finance		7,972			7,822
Investments in unconsolidated affiliated companies		817			800
Deferred income taxes		585			616
Intangible assets		234			239
Goodwill		1,400			1,398
Other assets		1,722			1,427

Total Assets	$	37,858		$	36,465


Liabilities
Current liabilities:
Short-term borrowings:
Machinery and Engines		163			72
Financial Products		2,773			2,685
Accounts payable		3,309			3,100
Accrued expenses		1,636			1,638
Accrued wages, salaries and employee benefits		1,644			1,802
Dividends payable		-			127
Deferred and current income taxes payable		271			216
Long-term debt due within one year:
Machinery and Engines		6			32
Financial Products		3,398			2,949

Total current liabilities		13,200			12,621

Long-term debt due after one year:
Machinery and Engines		3,660			3,367
Financial Products		10,910			10,711
Liability for post-employment benefits		3,222			3,172
Deferred income taxes and other liabilities		532			516

Total Liabilities		31,524			30,387


Stockholders' Equity
Common stock of $1.00 par
Authorized shares: 900,000,000
Issued shares: (03/31/04 and 12/31/03 - 407,447,312) at paid in amount		1,101			1,059
Treasury stock (03/31/04 – 65,545,181 shares; 12/31/03 – 63,685,272 shares) at cost		(3,129	)		(2,914	)
Profit employed in the business		8,862			8,450
Accumulated other comprehensive income		(500	)		(517	)

Total Stockholders' Equity		6,334			6,078

Total Liabilities and Stockholders' Equity	$	37,858		$	36,465

See accompanying notes to Consolidated Financial Statements.

	3

Caterpillar Inc. Condensed Consolidated Statement of Cash Flow (Unaudited) (Millions of dollars)
	Three Months Ended
	March 31,
		2004			2003

Cash flow from operating activities:
Profit	$	412		$	129
Adjustments for non-cash items:
Depreciation and amortization		350			332
Other		(37	)		17
Changes in assets and liabilities:
Receivables - trade and other		(197	)		(115	)
Inventories		(631	)		(301	)
Accounts payable and accrued expenses		260			248
Other - net		(59	)		(92	)

Net cash provided by operating activities		98			218


Cash flow from investing activities:
Capital expenditures - excluding equipment leased to others		(106	)		(86	)
Expenditures for equipment leased to others		(240	)		(261	)
Proceeds from disposals of property, plant and equipment		206			160
Additions to finance receivables		(4,812	)		(3,386	)
Collection of finance receivables		3,854			2,995
Proceeds from the sale of finance receivables		264			269
Investments and acquisitions (net of cash acquired)		(13	)		(17	)
Other - net		(65	)		(40	)

Net cash used for investing activities		(912	)		(366	)


Cash flow from financing activities:
Dividends paid		(127	)		(120	)
Common stock issued, including treasury shares reissued		69			-
Treasury shares purchased		(250	)		-
Proceeds from long-term debt issued		1,808			2,053
Payments on long-term debt		(913	)		(985	)
Short-term borrowings - net		220			(773	)

Net cash provided by financing activities		807			175

Effect of exchange rate changes on cash		33			(9	)

Increase in cash and short-term investments		26			18

Cash and short-term investments at beginning of period		342			309

Cash and short-term investments at end of period	$	368		$	327

All short-term investments, which consist primarily of highly liquid investments with original maturities of three months or less, are considered to be cash equivalents.
See accompanying notes to Consolidated Financial Statements.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1.
A. Financial Statement Presentation

In the opinion of management, all adjustments, consisting only of normal recurring adjustments necessary for a fair presentation of (a) the consolidated results of operations for the ~~three- and nine-month~~three-month periods ended ~~September 30,~~March 31, 2004 and 2003, ~~and 2002,~~ (b) the changes in stockholders' equity for the ~~nine-month~~three-month periods ended ~~September 30,~~March 31, 2004 and 2003, ~~and 2002,~~ (c) the consolidated financial position at ~~September 30, 2003~~March 31, 2004 and December 31, ~~2002,~~2003, and (d) the consolidated statement of cash flow for the ~~nine-month~~three-month periods ended ~~September 30,~~March 31, 2004 and 2003, ~~and 2002,~~ have been made. Certain amounts for prior periods have been reclassified to conform to the current period financial statement presentation.

In the second quarter of 2003, we revised our policy regarding the classification of certain costs related to distributing replacement parts. Previously, these costs were included in selling, general and administrative expenses and now are included in cost of goods sold. This classification is more consistent with industry practice. The parts distribution costs include shipping and handling (including warehousing) along with related support costs such as information technology, purchasing and inventory management.

Prior period amounts have been revised to conform to the new classification. The ~~amounts~~amount reclassified from selling, general and administrative expenses to cost of goods sold ~~were $108 million and $328~~was $106 million for the three ~~and nine~~ months ended ~~September 30, 2002, respectively.~~March 31, 2003. The reclassification had no impact on operating profit.

The December 31, ~~2002 balance sheet~~2003 financial position data included herein is derived from the audited consolidated financial statements included in the Company's annual report on Form 10-K for the year ended December 31, ~~2002, as amended.~~

2003.
B. Nature of Operations

We operate in three principal lines of business:

(1)
Machinery-– A principal line of business which includes the design, manufacture and marketing of construction, mining ~~agricultural~~ and forestry machinery - track and wheel tractors, track and wheel loaders, pipelayers, motor graders, wheel tractor-scrapers, track and wheel excavators, backhoe loaders, mining shovels, log skidders, log loaders, off-highway trucks, articulated trucks, paving products, telescopic handlers, skid steer loaders and related parts.

Also includes logistics services for other companies.

(2)
Engines -– A principal line of business including the design, manufacture and marketing of engines for Caterpillar ~~Machinery,~~machinery, electric power generation systems; on-highway vehicles and locomotives; marine, petroleum, construction, industrial, agricultural and other applications; and related parts. Reciprocating engines meet power needs ranging from 5 to over 22,000 horsepower (4 to over 16 200 kilowatts). Turbines range from 1,600 to 19,500 horsepower (1 000 to 14 500 kilowatts).

(3)
Financial Products -– A principal line of business consisting primarily of Caterpillar Financial Services Corporation (Cat Financial), Caterpillar Insurance Holdings, Inc. (Cat Insurance) and their subsidiaries. Cat Financial provides a wide range of financing alternatives for Caterpillar machinery and engines, Solar gas turbines, as well as other equipment and marine vessels. Cat Financial also extends loans to customers and ~~dealers for the purchase and lease of Caterpillar and other equipment, as well as some financing for Caterpillar sales to~~ dealers. ~~Financing plans include operating and finance leases, installment sale contracts, working capital loans and wholesale financing plans. The division also~~Cat Insurance provides various forms of insurance to customers and dealers to help support the purchase and lease of our equipment. ~~This line of business consists primarily of Caterpillar Financial Services Corporation (Cat Financial) and Caterpillar Insurance Holdings Inc. (Cat Insurance) and their subsidiaries.~~

Our Machinery and ~~Enginesoperations~~Enginesoperations are highly integrated. Throughout the Notes, Machinery and Engines represents the aggregate total of these principal lines of business.

~~Page 7~~

	5

C. Stock-Based Compensation

We use the intrinsic value method of accounting for stock-based employee compensation in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." Therefore, no compensation expense is recognized in association with our options. ~~We adopted the disclosure requirements of SFAS 148 in December 2002.~~ Pro forma net profit and ~~earnings~~profit per share were:

We use the intrinsic value method of accounting for stock-based employee compensation in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." Therefore, no compensation expense is recognized in association with our options. We adopted the disclosure requirements of SFAS 148 in December 2002. Pro forma net profit and earnings per share were:

Three Months Ended
September 30,
(Dollars in millions except per share data)
2003

2002
Profit, as reported
$
222

$
213
Deduct: Total stock-based employee compensation expense determined
under fair value based method for all awards, net of related tax effects

(19)

(18)

Pro forma profit
$
203

$
195

Profit per share of common stock:

As reported:

Basic
$
0.64

$
0.62

Assuming dilution
$
0.62

$
0.61

Pro forma:

Basic
$
0.59

$
0.57

Assuming dilution
$
0.57

$
0.56

	Three Months Ended March 31,
(Dollars in millions except per share data)		2004			2003

Profit, as reported	$	412		$	129
Deduct: Total stock-based employee compensation expense determinedunder fair value based method for all awards, net of related tax effects		(18	)		(18	)

Pro forma profit	$	394		$	111


Profit per share of common stock:
As reported:
Basic	$	1.20		$	0.37
Diluted	$	1.16		$	0.37
Pro forma:
Basic	$	1.15		$	0.32
Diluted	$	1.11		$	0.32

Nine Months Ended
September 30,
(Dollars in millions except per share data)
2003

2002
Profit, as reported
$
750

$
493
Deduct: Total stock-based employee compensation expense determined
under fair value based method for all awards, net of related tax effects

(50)

(47)

Pro forma profit
$
700

$
446

Profit per share of common stock:

As reported:

Basic
$
2.17

$
1.43

Assuming dilution
$
2.15

$
1.42

Pro forma:

Basic
$
2.03

$
1.30

Assuming dilution
$
2.00

$
1.28

2.

The results for the ~~three- and nine-month periods~~three-month period ended ~~September 30, 2003~~March 31, 2004 are not necessarily indicative of the results for the entire year ~~2003.~~
2004.

3.

Environmental and Legal Matters

The company is regulated by federal, state, and international environmental laws governing our use of substances and control of emissions in all our operations. Compliance with these existing laws has not had a material impact on our capital expenditures, earnings, or competitive position.

We are cleaning up hazardous waste at a number of locations, often with other companies, pursuant to federal and state laws. When it is likely we will pay clean-up costs at a site and those costs can be estimated, the costs are charged against our earnings. In doing that estimate, we do not consider amounts expected to be recovered from insurance companies and others.

The amount accrued for environmental clean-up is not material and is included in "Accrued expenses" in the Statement of Financial Position. If a range of liability estimates is available on a particular site, we accrue at the lower end of that range.

We cannot estimate costs on sites in the very early stages of clean-up. Currently, we have five sites in the very early stages of clean-up, and there is no more than a remote chance that a material amount for clean-up will be required.

~~Page~~ 8

Pursuant to a consent decree Caterpillar entered with the ~~United States Environmental Protection Agency (EPA), we were~~EPA, the company was required to meet certain emission standards by October 2002. The decree provides that if ~~the~~engine manufacturers were unable to meet the standards at that time, they would be required to pay a~~nonconformance penalty~~ Non-Conformance Penalty (NCP) on each engine sold that did not meet the standard. The amount of the NCP would be based on how close to meeting the standard the engine came - the more out of compliance the higher the penalty. WeThe company began ~~shipping lower emission~~introduction of fully compliant ACERT engines in ~~October 2002 as a bridge until~~2003 and by the end of 2003 Caterpillar was only producing fully compliant ~~Advanced Combustion Emission Reduction Technology (ACERT)~~engine models. As a result, NCPs are not payable for any engines ~~were introduced~~built in ~~2003.~~

2004. The ~~consent decree also provided~~company’s first quarter 2004 operating profit was favorably impacted by $49 million due to the ~~ability to "bank" emissions credits prior to October 2002 that could be used to offset nonconforming engines produced after January 1, 2003. That is, if a company was able to produce and sell engines~~absence of NCPs that were ~~below~~recorded in the ~~applicable standard prior to October 2002, then the company could apply the emission credits created by those engines to engines produced after January 1, 2003 that do not meet~~first quarter 2003.

In addition, the consent decree ~~standard. For example, an engine produced~~required Caterpillar to pay a fine of $25 million, which was expensed in 1998 and ~~sold prior~~ to ~~October 2002 that produced 3.5 grams~~make investments totaling $35 million in environmental-related products by July 7, 2007. Total qualifying investments to date for these projects are $30 million, of ~~NOx as compared to 4.0 gram standard would create an emissions credit. This credit would be "banked"~~which $1 million was made through the first quarter of 2004. A future benefit is expected to be ~~used~~realized from these environmental projects related to ~~offset~~Caterpillar's ability to capitalize on the ~~NOx deficiency of an engine produced after January 1, 2003 that did not meet~~technologies it developed in complying with its environmental project obligations. In short, Caterpillar expects to receive a positive net return on the ~~consent decree standard. Given this scenario, a company could produce and sell an engine that exceeds~~environmental projects by being able to market the 2.5 gram standard in 2003 without paying an NCP. Caterpillar has a legal right, as described in the consent decree, to use its banked credits as offsets agai nst NCPs for noncompliant engines produced after December 31, 2002. The EPA has approved the process by which the credits are calculated. Through the first nine months of 2003, the net unfavorable impact from emissions changes was $54 million before tax. The net impact includes price increases, production cost increases which include incremental ramp-up production costs and NCPs. We expect the full-year unfavorable impact to be $53 million before tax.technology it developed.

We are a party to litigation matters and claims that are normal in the course of our operations, and, while the results of such litigation and claims cannot be predicted with certainty, management believes, based on the advice of counsel, the final outcome of such matters will not have a materially adverse effect on our consolidated financial position.

On January 16, 2002, Caterpillar commenced an action in the Circuit Court of the Tenth Judicial Circuit of Illinois in Peoria, Illinois, against Navistar International Transportation Corporation and International Truck and Engine Corporation (collectively Navistar). The lawsuit arises out of a long-term purchase contract between Caterpillar and Navistar effective May 31, 1988, as amended from time to time (the Purchase Agreement). The ~~lawsuit~~pending complaint alleges that Navistar breached its contractual obligations by: (i) paying Caterpillar $8.08 ~~(whole dollars)~~ less per fuel injector than the agreed upon price for new unit injectors delivered by Caterpillar; (ii) refusing to pay contractually agreed upon surcharges owed as a result of Navistar ordering less than planned volumes of replacement unit injectors; and ~~(iii)~~(ii i) refusing to pay contractually agreed upon interest stemming from ~~Navistar's~~Navistar’s late payments. ~~Caterpillar seeks a declaratory judgment upholding~~At March 31, 2004, the ~~contract and more than $100 million in damages arising fro m Navistar's alleged breach of contract. On January 22, 2003, Caterpillar amended its~~past due receivable from Navistar regarding the foregoing was $139 million. The pending complaint ~~to add four new defendants --~~also has claims alleging that Franklin Power Products, Inc., Newstream Enterprises, ~~Sturman Industries, Inc., and Sturman Engine Systems, Inc. The pending complaint adds claims alleging that Franklin, Newstream,~~ and Navistar, collectively and individually, failed to pay the applicable price for shipments of unit injectors to Franklin and ~~Newstream;~~Newstream. At March 31, 2004, the past due receivables for the foregoing totaled $12 million. The pending complaint further alleges that Sturman Industries, Inc., and Sturman Engine Systems, Inc., colluded with Navistar to utilize technology that Sturman Industries, Inc., misappropriated from Caterpillar to help Navistar develop its G2 fuel system, and tortiously interfered with the Purchase Agreement and Caterpillar’s prospective economic relationship with Navistar. The pending complaint further alleges that the two parties’ collusion led Navistar to select Sturman Engine S ystems, Inc. and another company, instead of Caterpillar, to develop and manufacture the G2 fuel system.

On May 7, 2002, International Truck and Engine Corporation (International) commenced an action against Caterpillar in the Circuit Court of DuPage County, Illinois that alleges Caterpillar breached various aspects of a long-term agreement term sheet. In its fourth amended complaint, International seeks a declaration from the court that the term sheet constitutes a legally binding contract for the sale of heavy-duty engines at specified prices through the end of 2006, alleges that Caterpillar breached the term sheet by raising certain prices effective October 1, 2002, and also alleges that Caterpillar breached an obligation to negotiate a comprehensive long-term agreement referenced in the term sheet. International further claims that Caterpillar improperly restricted the supply of h eavy-duty engines to International from June through September 2002, and claims that Caterpillar made certain fraudulent misrepresentations with respect to the availability of engines during this time period. International seeks damages "in an amount to be determined at trial" and injunctive relief. Caterpillar filed an answer denying International's claims and has filed a counterclaim seeking a declaration that the term sheet has been effectively terminated. Caterpillar denies International's claims and will vigorously contest them. On September 24, 2003, the Appellate Court of Illinois, ruling on an interlocutory appeal, issued an order consistent with Caterpillar's position that, even if the court subsequently determines that the term sheet is a binding contract, it is indefinite in ~~excess~~duration and was therefore terminable at will by Caterpillar after a reasonable period.Caterpillar anticipates that a trial currently scheduled for the fourth quarter of 2004 will address all remaining issues in this matter.This matter is not related to the breach of contract action brought by Caterpillar against Navistar currently pending in the Circuit Court of Peoria County, Illinois.

4.
Inventories

Inventories (principally "last-in, first-out" method) comprise the following:

(Millions of dollars)	March 31,		December 31,
	2004		2003

Raw materials	$	1,268	$	1,105
Work-in-process		552		377
Finished goods		1,655		1,381
Supplies		203		184

Total inventories	$	3,678	$	3,047

5.
Intangible Assets and Goodwill

Intangible assets are comprised of the following:

	March 31,			December 31,
(Millions of dollars)	2004			2003

Intellectual property	$	125		$	126
Pension-related		157			157

Total intangible assets - gross		282			283
Less: Accumulated amortization of intellectual property		(48	)		(44	)

Intangible assets - net	$	234		$	239

Amortization expense for the three months ended March 31, 2004 and 2003 was $4 million and $3 million, respectively. Amortization expense related to intangible assets is expected to be:

(Millions of dollars)
2004

2005

2006

2007

2008

Thereafter
$
16

$
14

$
14

$
12

$
8

$
13

During the three months ended March 31, 2004 and 2003, no goodwill was acquired, impaired or disposed.

	8

6.
Unconsolidated Affiliated Companies

Our investment in affiliated companies accounted for by the equity method consists primarily of a 50% interest in Shin Caterpillar Mitsubishi Ltd. (SCM) in Japan. Combined financial information of the unconsolidated affiliated companies accounted for using the equity method (generally on a three month lag, e.g., SCM results reflect the periods ending December 31) was as follows:

	Results of Operation
	Three Months Ended
	March 31,		March 31,
(Millions of dollars)	2004		2003

Sales	$	813	$	713
Cost of sales		629		569

Gross profit	$	184	$	144

Profit	$	17	$	8

Caterpillar's profit	$	6	$	4


	Financial Position
	March 31,		December 31,
(Millions of dollars)	2004		2003

Assets:
Current assets	$	1,613	$	1,494
Property, plant and equipment - net		1,047		961
Other assets		199		202

		2,859		2,657
Liabilities:
Current liabilities		1,414		1,247
Long-term debt due after one year		314		343
Other liabilities		263		257

		1,991		1,847

Ownership	$	868	$	810


Caterpillar's investment in unconsolidated affiliated companies
Investment in equity method companies	$	460	$	432
Plus: Investment in cost method companies		357		368

Total investment in unconsolidated affiliated companies	$	817	$	800

7.	Segment Information

We have developed an internal measurement system, which is not based on generally accepted accounting principles (GAAP), that is intended to motivate desired behavior and drive performance rather than measure a division's contribution to enterprise results. It is the comparison of actual results to budgeted results that makes our internal reporting valuable to management. Consequently, we believe that segment disclosure based on Statement of Financial Accounting Standards No. 131 (SFAS 131) "Disclosures about Segments of an Enterprise and Related Information" has limited value to our external readers. As a result, in addition to the required SFAS 131 compliant segment information presented below, we are continuing to disclose GAAP-based financial results for our three lines of business (Machinery, Engines, and Financial Products) in our Management's Discussion and Analysis beginning on page 17.

We made several changes to our segment reporting methodologies in the first quarter of 2004. Most notable are a change in the current cost methodology used to value inventory and cost of sales and a change in the manner that interest expense is charged to profit centers. In addition, certain corporate costs that were charged to segments in prior years are now reported as reconciling items. Prior year amounts have been restated to conform to the new methodology.

Business SegmentsThree Months Ended March 31,(Millions of dollars)
	Machinery and Engines																			Financing
2004	Asia/PacificMarketing			Construction & MiningProducts		EAMEMarketing		LatinAmericaMarketing			PowerProducts		NorthAmericaMarketing		AllOther			Total		and Insurance Services		Consolidated Total
External sales and revenues	$	533		$	138	$	843	$	354		$	1,733	$	2,037		$	329	$	5,967	$	532	$	6,499
Intersegment sales & revenues		110			2,821		841		225			1,835		86			600		6,518		-		6,518

Total sales and revenues	$	643		$	2,959	$	1,684	$	579		$	3,568	$	2,123		$	929	$	12,485	$	532	$	13,017
Accountable profit	$	46		$	310	$	101	$	50		$	19	$	87		$	161	$	774	$	106	$	880
Accountable assets at March 31, 2004	$	624		$	2,402	$	1,162	$	660		$	3,746	$	103		$	2,729	$	11,426	$	20,867	$	32,293


	Machinery and Engines																			Financing
2003	Asia/ Pacific Marketing			Construction & Mining Products		EAME Marketing		Latin America Marketing			Power Products		North America Marketing		All Other			Total		and Insurance Services		Consolidated Total
External sales and revenues	$		370	$	45	$	687	$		235	$	1,379	$	1,418	$		247	$	4,381	$	475	$	4,856
Intersegment sales & revenues			79		2,045		536			116		1,426		48			597		4,847		-		4,847

Total sales and revenues	$		449	$	2,090	$	1,223	$		351	$	2,805	$	1,466	$		844	$	9,228	$	475	$	9,703
Accountable profit (loss)	$		35	$	101	$	52	$		10	$	(91)	$	51	$		76	$	234	$	69	$	303
Accountable assets at December 31, 2003	$		627	$	2,190	$	1,018	$		692	$	3,710	$	293	$		2,537	$	11,067	$	20,235	$	31,302

Reconciliation of Sales & Revenues:

(Millions of dollars)
Machinery
and
Engines

Financing and
Insurance
Services

Consolidating
Adjustments

Consolidated
Total
Three Months Ended March 31, 2004:

Total external sales and revenues frombusiness segments
$
5,967

$
532
$
-

$
6,499

Other

35

(30)

(37)⁽¹⁾

(32)

Total sales and revenues
$
6,002

$
502
$
(37)
$
6,467

Three Months Ended March 31, 2003:

Total external sales and revenues frombusiness segments
$
4,381

$
475
$
-
$
4,856

Other

43

(35)

(43)⁽¹⁾

(35)

Total sales and revenues
$
4,424

$
440
$
(43)
$
4,821

⁽¹⁾Elimination of Financial Products revenues earned from Machinery and Engines.

Reconciliation of Profit Before Taxes:

(Millions of dollars)

Machinery and
Engines

Financing and
Insurance Services

Consolidated
Total
Three Months Ended March 31, 2004:

Total accountable profit from business segments

$
774

$
106

$
880

Corporate costs

(128)

-

(128)

Timing

(56)

-

(56)

Methodology differences:

Inventory/cost of sales

(29)

-

(29)

Postretirement benefit expense

(83)

-

(83)

Financing costs

18

-

18

Other methodology differences

(50)

8

(42)

Other

4

-

4

Total profit before taxes

$
450

$
114

$
564

Three Months Ended March 31, 2003:

Total accountable profit from business segments

$
234

$
69

$
303

Corporate costs

(79)

-

(79)

Timing

(18)

-

(18)

Methodology differences:

Inventory/cost of sales

1

-

1

Postretirement benefit expense

(43)

-

(43)

Financing costs

19

-

19

Other methodology differences

(33)

11

(22)

Other

13

-

13

Total profit before taxes

$
94

$
80

$
174

Reconciliation of Assets:

(Millions of dollars)

Machinery
and
Engines

Financing and
Insurance Services

Consolidating
Adjustments

Consolidated
Total
March 31, 2004:

Total accountable assets from business segments

$
11,426

$
20,867

$
-

$
32,293
Items not included in segment assets:

Cash and short-term investments

220

148

-

368
Intercompany trade receivables

378

295

(673)

-
Investment in affiliated companies

331

-

-

331
Investment in Financial Products

2,603

-

(2,603)

-
Deferred income taxes and prepaids

2,657

83

(243)

2,497
Intangible assets and other assets

2,039

-

-

2,039
Service center assets

984

-

-

984
Liabilities included in segment assets

919

-

-

919
Inventory methodology differences

(2,148)

-

-

(2,148)
Other

424

151

-

575
Total assets

$
19,833

$
21,544

$
(3,519)

$
37,858

December 31, 2003:

Total accountable assets from business segments

$
11,067

$
20,235

$
-

$
31,302
Items not included in segment assets:

Cash and short-term investments

220

122

-

342
Intercompany trade receivables

572

397

(969)

-
Investment in affiliated companies

325

-

-

325
Investment in Financial Products

2,547

-

(2,547)

-
Deferred income taxes and prepaids

2,736

77

(228)

2,585
Intangible assets and other assets

1,874

-

-

1,874
Service center assets

895

-

-

895
Liabilities included in segment assets

925

-

-

925
Inventory methodology differences

(2,035)

-

-

(2,035)
Other
84

168

-

252
Total assets

$
19,210

$
20,999

$
(3,744)

$
36,465

8.	Available-For-Sale Securities

Caterpillar Insurance and Caterpillar Investment Management Ltd. had investments in certain debt and equity securities at March 31, 2004 that are classified as available-for-sale in accordance with Statement of Financial Accounting Standards No. 115 (SFAS 115) and recorded at fair value based upon quoted market prices. These fair values are included in "Other assets" in the Statement of Financial Position. Unrealized gains and losses arising from the revaluation of available-for-sale securities are included, net of applicable deferred income taxes, in equity ("Accumulated other comprehensive income" in the Statement of Financial Position). Realized gains and losses on sales of investments are determined using the specific identification method for debt instruments and the FIFO method for equity se curities. Realized gains and losses are included in "Other income (expense)" in the Statement of Results of Operations.

	March 31, 2004

			Unrealized
			Pretax Net
(Millions of dollars)	Cost Basis		Gains		Fair Value

Government debt	$	153	$	1	$	154
Corporate bonds		297		6		303
Equity securities		195		19		214

Total	$	645	$	26	$	671

	December 31, 2003

			Unrealized
			Pretax Net
(Millions of dollars)	Cost Basis		Gains		Fair Value

Government debt	$	102	$	-	$	102
Corporate bonds		288		3		291
Equity securities		191		21		212

Total	$	581	$	24	$	605

Investments in an unrealized loss position that are not other-than-temporarily impaired:

(Millions of dollars)

March 31, 2004

Less than 12 months(1)

More than 12 months(1)
Total

Fair
Value

Unrealized
Losses

Fair
Value

Unrealized
Losses

Fair
Value

UnrealizedLosses
Government debt

$
30

$
-
$
-
$
-
$
30

$
-
Corporate bonds

55

(1)

18

(1)

73

(2)
Equity securities

22
-
16
-
38
-
Total

$
107

$
(1)

$
34

$
(1)

$
141

$
(2)
⁽¹⁾Indicates length of time that individual securities have been in a continuous unrealized loss position.

The fair value of the available-for-sale debt securities at March 31, 2004, by contractual maturity, is shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to prepay and creditors may have the right to call obligations.

(Millions of dollars)

Fair Value

Due in one year or less

$
9

Due after one year through five years

$
234

Due after five years through ten years

$
33

Due after ten years

$
181

Proceeds from sales of investments in debt and equity securities during the three months ended March 31, 2004 and 2003 were $93 million and $27 million, respectively. Gross gains of $3 million and gross losses of $2 million were included in current earnings for the three months ended March 31, 2004. There were no gains or losses included in current earnings for the three months ended March 31, 2003.

9.	Derivative Instruments and Hedging Activities

Our earnings and cash flow are subject to fluctuations due to changes in foreign currency exchange rates, interest rates and commodity prices. Our Risk Management Policy (policy) allows for the use of derivative financial instruments to prudently manage foreign currency exchange rate, interest rate and commodity price exposure. Our policy specifies that derivatives are not to be used for speculative purposes. Derivatives that we use are primarily foreign currency forward and option contracts, interest rate swaps and commodity forward and option contracts. Our derivative activities are subject to the management, direction and control of our financial officers. Risk management practices, including the use of financial derivative instruments, are presented to the Audit Committee of the Board of Directors at least annually.

Foreign Currency Exchange Rate Risk

Foreign currency exchange rate movements create a degree of risk by affecting the U.S. dollar value of sales made and costs incurred in foreign currencies. Movements in foreign currency rates also affect our competitive position as these changes may affect business practices and/or pricing strategies of non-U.S. based competitors. Additionally, we have balance sheet positions denominated in foreign currency, thereby creating exposure to movements in exchange rates.

Machinery and Engines operations purchase, manufacture and sell products in many locations around the world. As we have a diversified revenue and cost base, we manage our future foreign currency cash flow exposure on a net basis. We use foreign currency forward and option contracts to manage unmatched foreign currency cash inflow and outflow. Our objective is to minimize the risk of exchange rate movements that would reduce the U.S. dollar value of our foreign currency cash flow. Our policy allows for managing anticipated foreign currency cash flow for up to four years.

In managing foreign currency risk for our Financial Products operations, our objective is to minimize earnings volatility resulting from conversion and the remeasurement of net foreign currency balance sheet positions. Our policy allows the use of foreign currency forward contracts to offset the risk of currency mismatch between our receivables and debt. All such foreign currency forward contracts are undesignated.

Gains / (losses) included in current earnings [Other income (expense)] on undesignated contracts:

Three Months Ended
March 31,
(Millions of dollars)

2004

2003

Machinery and Engines:

On undesignated contracts
$
(2
) $ 3
Financial Products:

On undesignated contracts

16

(30
)

$ 14 $
(27
)

Gains and losses on the Financial Products contracts above are substantially offset by balance sheet remeasurement and conversion gains and losses.

13

Interest Rate Risk

Interest rate movements create a degree of risk by affecting the amount of our interest payments and the value of our fixed rate debt. Our policy is to use interest rate swap agreements and forward rate agreements to manage our exposure to interest rate changes and lower the cost of borrowed funds.

Machinery and Engines operations generally use fixed rate debt as a source of funding. Our objective is to minimize the cost of borrowed funds. Our policy allows us to enter into fixed-to-floating interest rate swaps and forward rate agreements to meet that objective with the intent to designate as fair value hedges at inception of the contract all fixed-to-floating interest rate swaps. Designation as a hedge of the fair value of our fixed rate debt is performed to support hedge accounting. During 2001, our Machinery and Engines operations liquidated all fixed-to-floating interest rate swaps. Deferred gains on liquidated fixed-to-floating interest rate swaps, which were previously designated as fair value hedges, are being amortized to earnings ratably over the remaining life of the hedged debt. W e designate as cash flow hedges at inception of the contract all forward rate agreements. Designation as a hedge of the anticipated issuance of debt is performed to support hedge accounting. Machinery and Engines forward rate agreements are 100% effective.

Financial Products operations have a "match funding" objective whereby, within specified boundaries, the interest rate profile (fixed rate or floating rate) of their debt portfolio matches the interest rate profile of their receivables. In connection with that objective, we use interest rate derivative instruments to modify the debt structure to match the receivable portfolio. This "match funding" reduces the volatility of margins between interest-bearing assets and interest-bearing liabilities, regardless of which direction interest rates move. We also use these instruments to gain an economic and/or competitive advantage through a lower cost of borrowed funds. This is accomplished by changing the characteristics of existing debt instruments or entering into new agreements in combination with the issuance of new debt.

Our policy allows us to use floating-to-fixed, fixed-to-floating, and floating-to-floating interest rate swaps to meet the "match funding" objective. To support hedge accounting, we designate fixed-to-floating interest rate swaps as fair value hedges of the fair value of our fixed rate debt at the inception of the contract. Financial Products policy is to designate most floating-to-fixed interest rate swaps as cash flow hedges of the variability of future cash flows at inception of the contract. During 2002, our Financial Products operations liquidated four fixed-to-floating interest rate swaps. As a result, the fair value adjustment of the original debt is being amortized to earnings ratably over the remaining life of the hedged debt.

Gains (losses) included in current earnings [Other income (expense)]:

Three Months Ended
March 31,
(Millions of dollars)
2004

2003
Fixed-to-floating interest rate swaps

Machinery and Engines:

Gain/(loss) on designated interest rate derivatives
$
-

$
-

Gain/(loss) on hedged debt

-

-

Gain/(loss) on liquidated swaps

1

2

Financial Products:

Gain/(loss) on designated interest rate derivatives

(34)

-

Gain/(loss) on hedged debt

34

-

Gain/(loss) on liquidated swaps – included in interest expense

1

1

Floating-to-fixed interest rate swaps

Financial Products:

Gain/(loss) due to ineffectiveness

-

-

$
2

$
3

Deferred net gains (losses) included in equity (Accumulated other comprehensive income) expected to be reclassified to current earnings (Other income (expense)) over the next twelve months:

	Three Months Ended March 31,
(Millions of dollars)	2004			2003

Machinery and Engines:
Forward Rate Agreement Liquidation	$	-		$	-
Financial Products:
Floating-to-Fixed Interest Rate Swaps	$	(18	)	$	(25	)

The reclassification of the remaining deferred amount to current earnings ("Other income (expense)") will occur over a maximum of 27 years. There were no circumstances where hedge treatment was discontinued during the three months ended March 31, 2004 or 2003.

Commodity Price Risk

Commodity price movements create a degree of risk by affecting the price we must pay for certain raw material. Our policy is to use commodity forward and option contracts to manage the commodity risk and reduce the cost of purchased materials.

Our Machinery and Engines operations purchase aluminum, copper and nickel embedded in the components we purchase from suppliers. Our suppliers pass on to us price changes in the commodity portion of the component cost.

Our objective is to minimize volatility in the price of these commodities. Our policy allows us to enter commodity forward and option contracts to lock in the purchase price of a portion of these commodities within a four-year horizon. All such commodity forward and option contracts are undesignated. Gains on the undesignated contracts of $7 million and $1 million were recorded in current earnings ("Other income (expense)") for the three months ended March 31, 2004 and March 31, 2003, respectively.

10.	Guarantees and product warranty

We have guaranteed to repurchase loans of certain Caterpillar dealers from the Dealer Capital Asset Trust (DCAT) in the event of their default. These guarantees arose in conjunction with Cat Financial's relationship with third party dealers who sell Caterpillar equipment. These guarantees have terms ranging from one to four years and are secured primarily by dealer assets. At March 31, 2004 and December 31, 2003 amounts outstanding under these guarantees were $355 million and $380 million, respectively. The related book value was $5 million ~~respectively,~~at March 31, 2004 and December 31, 2003.

Our product warranty liability is determined by applying historical claim rate experience to the current field population and dealer inventory. Generally, historical claim rates are developed using a 12-month rolling average of actual warranty payments. These rates are applied to the field population and dealer inventory to determine the liability.

(Millions of dollars)

2004

Warranty liability, January 1
$ 622
Payments

(125
)
Provision for warranty
136

Ending Warranty liability, March 31
$ 633

(Millions of dollars)

2003

Warranty liability, January 1
$ 693
Payments

(484
)
Provision for warranty
413

Ending Warranty liability, December 31
$ 622

11.	Computations of Profit Per Share

Three Months Ended
March 31,

(Dollars in millions except per share data)
2004

2003
I.
Profit for the period (A):
$
412
$
129

II.
Determination of shares (thousands):

Weighted average number of common shares outstanding (B)

342,612

344,316

Shares issuable on exercise of stock options, net of shares
assumedto be purchased out of proceeds at average market price

13,124

2,510

Average common shares outstanding for fully diluted computation (C)

355,736

346,826

III.
Profit per share of common stock:

Assuming no dilution (A/B)
$
1.20
$
0.37

Assuming full dilution (A/C)
$
1.16
$
0.37

Stock options to purchase 27,879,699 shares of common stock at a weighted average price of $54.34 were outstanding as of March 31, 2003, but were not included in the computation of diluted profit per share because the options’ exercise price was greater than the average market price of the common shares. As of March 31, 2004, all stock options were included in the computation of diluted profit per share.

12.	Postretirement Benefits

A. Pension and postretirement benefit costs

	(Millions of Dollars)

	U.S. Pension Benefits				Non-U.S. Pension Benefits				Other Postretirement Benefits

	March 31,				March 31,				March 31,

Components of net periodic benefit cost:	2004		2003		2004		2003		2004		2003

Service cost	$	36	$	30	$	12	$	10	$	17	$	17
Interest cost		137		139		22		20		71		75
Expected return on plan assets		(167)		(165)		(24)		(23)		(18)		(22)
Amortization of:
Net asset existing at adoption of SFAS 87		-		-		1		1		-		-
Prior service cost (1)		11		12		2		1		(12)		(11)
Net actuarial loss (gain)		35		7		9		4		19		9

Total cost (benefit) included in results of operations	$	52	$	23	$	22	$	13	$	77	$	68


Weighted-average assumptions used todetermine net cost:
Discount rate	6.2%		7.0%		5.1%		5.4%		6.2%		7.0%
Expected return on plan assets	9.0%		9.0%		7.4%		7.1%		9.0%		9.0%
Rate of compensation increase	4.0%		4.0%		3.2%		3.3%		4.0%		4.0%

⁽¹⁾Prior service costs are amortized using the straight-line method over the average remaining service period to the full retirement eligibility date of employees expected to receive benefits from the plan amendment.

Our U.S. postretirement health care plans provide for prescription drug benefits. On December 8, 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the Act) was signed into law. The Act introduces a prescription drug benefit under Medicare (Medicare part D) as well as a federal subsidy to sponsors of retiree health care benefit plans that provide a benefit that is at least actuarially equivalent to Medicare part D. In accordance with FASB Staff Position FAS 106-1, "Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003" any measures of accumulated postretirement benefit obligation or net periodic postretirement benefit cost in the financial statements and accompanying notes do not reflect the effects of the Act on the plans. Specific authoritative guidance on the accounting for the federal subsidy is pending and that guidance, when issued, could require us to change previously reported information, to reflect this expected benefit.

B. Defined contribution benefit costs

Total company costs related to U.S. and non-U.S. defined contribution plans were the following:

Three Months Ended
March 31,
(Millions of dollars)

2004
2003

U.S. Plans
$
30
$
22

Non-U.S. Plans

3

3

$
33
$
25

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

A. Overview

We have made tremendous productivity gains in the last few years, and we continue to benefit from a lean and efficient workforce. Whilethere were some higher costs related to surging volume, we leveraged6 Sigmadisciplines to help overcome supply chain bottlenecks and meet stronger than expected demand.Our record first-quarter results show that people are making a positive difference across the entire value chain.

We remain focused on managing our cost structure as the economy recovers, ensuring we deliver outstanding results over the business cycle. We will continue to rely on our 6 Sigma culture to ensure we are growing profitably. We now have more than 2,700 trained black belts, who are launching thousands of new projects this year as we continue to demonstrate the value of 6 Sigma in achieving our business strategy. Virtually all of our employees are involved in 6 Sigma and engaged in making continuous improvement a way of life.

It appears the world economy will have one of the strongest, broadest recoveries in years. Economic stimulus in the United States is producing strong growth and the Asian economies are improving on last year’s outstanding performance. Low interest rates throughout the world and higher commodity prices are encouraging much needed construction spending and investments in the mining industry. Sales opportunities are increasing and we are exceptionally well positioned to benefit with our broad product offerings and strong global dealer network. We anticipate that keeping pace with volume growth will require additional hiring through the remainder of the year.

Note: Glossary of terms included on pages 26-27; first occurrence of terms shown in bold italics.

B. Consolidated Results of Operations

THREE MONTHS ENDED MARCH 31, 2004 COMPARED WITH THREE MONTHS ENDED MARCH 31, 2003

SALES AND REVENUES

The chart above graphically illustrates reasons for the change in Consolidated Sales and Revenues between first quarter 2003 (at left) and first quarter 2004 (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 parenthesis above each bar. Caterpillar management utilizes these charts internally to visually communicate with its Board and employees.

MACHINERY AND ENGINES

Sales and Revenues (Millions of dollars)

	Total		North America		EAME			LatinAmerica		Asia/ Pacific

Three Months Ended March 31, 2004
Machinery	$	4,152	$	2,283	$	963	$	295	$	611
Engines*		1,850		870		559		195		226
Financial Products**		465		334		83		21		27

	$	6,467	$	3,487	$	1,605	$	511	$	864

Three Months Ended March 31, 2003
Machinery	$	2,935	$	1,532	$	787	$	183	$	433
Engines*		1,489		676		494		123		196
Financial Products**		397		285		70		24		18

	$	4,821	$	2,493	$	1,351	$	330	$	647

* Does not include internal engine transfers of $374 million and $321 million in first quarter 2004 and first quarter 2003, respectively. Internal engine transfers are valued at prices comparable to those for unrelated parties.
** Does not include revenues earned from Machinery and Engines of $37 million and $43 million in first quarter 2004 and first quarter 2003, respectively.
Refer to table on page 21 for reconciliation of Machinery and Engine Sales by Geographic Region to External Sales by Marketing Segment.

	18

Machinerysaleswere $4.15 billion, an increase of $1.22 billion or 41 percent from first quarter 2003.Sales volumewas up about 36 percent while the favorable impact ofcurrencyaccounted for about 4 percent and improvedprice realizationadded about 1 percent. Sales in North America increased 49 percent from first quarter 2003, 45 percent due to higher volume and the remainder due to improved price realization. Volume benefited from higher dealer deliveries into construction and mining, the result of improved economic conditions in those sectors. In addition, dealers added more to inventories than they did last year to support higher deliveries. Sales inEAMEincreased 22 percent, benefiting from both the favorable currency impact of a stronger euro and higher sales volume. Major contributors to the volume gain were increased dealer deliveries into the construction sectors of oil-producing countries in Africa/Middle East and increased replacement demand particularly from rental fleets in Europe. InLatin America, sales were 61 percent higher than last year, resulting almost entirely from increased deliveries into mining. In Asia/Pacific, sales rose 41 percent from last year as dealer deliveries increased in many countries and dealers built inventories to support anticipated higher demand.

Enginessaleswere $1.85 billion, an increase of $361 million or24percent from first quarter 2003. Sales volume was up about 18percent, the favorable impact of currency accounted for about 4 percent and improved price realization added about 2 percent.Stronger economic and investment growth bolstered sales in all geographic regions. The North American sales gain of 29 percent was led by a 41 percent increaseinsales of on-highway truck engines compared to last year’s first quarter which was negatively impacted by truck manufacturers buying engines before the October 2002 engine emission regulations became effective. North American sales to the electric power sector increased 40 percent while sales to the petroleum sector rose 7 percent. Sales in EAME rose 13 percent mostly due to 39 percen t growth in engine sales in the petroleum sector and 37 percent stronger demand for engines sold into the electric power sector which more than offset lower sales into the marine and industrial sectors. Sales rose 59 percent in Latin America with 70 percent growth in engine sales into the electric power sector and 47 percent growth in engine sales in the petroleum sector. Widespread economic growth contributed to the 15 percent sales increase in Asia/Pacific where engine sales into the electric power sector more than doubled helped by surging investment. Globally, engine sales into the electric power sector rose 51 percent, aided by widespread industry growth and the favorable effects of currency. Engine sales into the global on-highway truck and bus sector rose43percent due to stronger industry demand and improved price realizat ion. Sales into the petroleum sector were up15 percent. Global sales of industrial engines were up 4 percent due to favorable effects of currency which more than offset lower volume as key customers bought engines in fourth quarter 2003 before the final European Tier II emissions law went into effect in January 2004. Global sales of marine engines were 3 percent below last year as customers moved some orders for large reciprocating engines from first quarter 2004 into the second quarter.

Financial Productsrevenueswere $465 million, an increase of $68 million or 17 percent from first quarter 2003. The increase was due primarily to the favorable impact of $57 million from continued growth ofEarning Assetsat Cat Financial and an $11 million increase in e arned premiums and fees on extended service contracts at Cat Insurance. These favorable items were partially offset by a $19 million impact of lower interest rates on new and existing finance receivables at Cat Financial.

OPERATING PROFIT

Higher sales volume in all regions and most industries positively impacted operating profit by $405 million. Improved price realization of $74 million reflected the favorable impact of modest price increases taken on mostmachines, parts and engines. Operating profit was also favorably impacted by $49 million due to the absence ofNon-Conformance Penalties (NCPs)that were recorded in the first quarter 2003.

Partially offsetting the favorable items were $77 million in highercore operating costs, a $68 million unfavorable impact of currency on operating profit due primarily to the continued weakening of the dollar compared with the British pound and the Japanese yen and $55 million of higherretirement benefits.

The increase in core operating costs reflects higher spending to support volume growth including higher steel prices, production ramp-up, material expediting costs and general support costs to meet current demand. In addition, higher incentive compensation due to increasing our outlook above what was originally anticipated and increased spending on product development programs also contributed to higher core operating costs. These unfavorable items were partially offset by the positive impact of continued material cost reductions.

Operating Profit (Loss)

(Millions of Dollars)

Three Months Ended

March 31,
2004

March 31,2003

Machinery*
$ 452 $ 218
Engines*
40
(54
)
Financial Products 105 77
Consolidating Adjustments
(23
)
(19
)

$
574

$
222

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

Machinery operating profitwas up $234 million, or 107 percent, from first quarter 2003. The favorable impact of higher sales volume and improved price realization were partially offset by higher core operating costs (as outlined above), the unfavorable impact of currency and higher retirement benefits.

Engines operating profitwas up $94 million from first quarter 2003. The favorable impact of the absence of NCPs, higher sales volume and improved price realization were partially offset by higher retirement benefits.

Financial Products operating profitwas up $28 million, or 36 percent from first quarter 2003. The increase was primarily due to a $20 million impact from the growth of earning assets and a favorable change in gain/loss on sale of equipment returned from lease of $8 million at Cat Financial.

Reconciliation of Machinery and Engine Sales by Geographic Region to External Sales by Marketing Segment

Three Months Ended

(Millions of Dollars)

March 31,2004

March 31,2003

North American Geographic Region
$ 3,153 $ 2,208
Engine sales included in the Power Products segment
(870
)
(676
)
Company owned dealer sales included in the All Other segment

(123
)
(75
)
Other*

(123
)
(39
)

North American Marketing external sales
$ 2,037 $ 1,418

EAME Geographic Region
1,522 1,281
Power Products sales not included in the EAME Marketing segment

(533
)
(404
)
Other*

(146
)
(190
)

EAME Marketing external sales
$ 843 $ 687

Latin America Geographic Region
490 306
Power Products sales not included in the Latin America Marketing segment

(191
)
(102
)
Other*
55 31

Latin America Marketing external sales
$ 354 $ 235

Asia/Pacific Geographic Region
$ 837 $ 629
Power Products sales not included in the Asia/Pacific Marketing segment

(139
)
(197
)
Other*

(165
)
(62
)

Asia/Pacific Marketing external sales
$ 533 $ 370

* Represents primarily external sales of the Construction and Mining Products and the All Other segments.

OTHER PROFIT/LOSS ITEMS

Interest expense excluding Financial Products was $9 million lower compared to first quarter 2003 primarily due to lower borrowing rates.

Other income/expense was income of $47 million compared with income of $18 million in first quarter 2003. The favorable change was mostly due to the favorable impact of Machinery and Engines currency gains and the favorable impact of commodity hedges.

Caterpillar’s profit and cash flows are subject to fluctuation due to changes in foreign exchange rates and the company uses currency forward and option contracts to reduce the risk of fluctuations in exchange rates. The impact of currency in the first quarter on Machinery and Engines other income/expense was favorable $18 million reducing the net unfavorable profit before tax impact of currency to $50 million.

The provision for income taxes in the first quarter reflects an estimated annual tax rate of 28 percent for 2004. We are anticipating a 28 percent rate for the full year compared to 27 percent in 2003 primarily due to a change in our geographic mix of profits. This annual tax rate is based on currently enacted legislation and therefore includes existing Extraterritorial Income Exclusion (ETI) provisions for 2004.

The equity in profit/loss of unconsolidated affiliated companies favorably impacted profit$2 million over first quarter a year ago.

EMPLOYMENT

At the end of first quarter 2004, Caterpillar's worldwide employment was 70,815 compared with 67,063 one year ago. The higher employment is necessary to support our increased volume and growing Caterpillar Logistics operations in addition to the impact of acquiring a controlling interest in Hindustan Powerplus Ltd.

OTHER SIGNIFICANT EVENTS

On April 8, 2004, the company made a cash contribution of $494 million into its U.S. pension plans in support of retirement benefit obligations. Robust cash flow due to improved profit, excellent performance by its pension fund managers and a strong financial position have allowed Caterpillar to improve the funded position of its pension plans.

OTHER MATTERS

Environmental and Legal Matters

The amount recorded for environmental clean-up is not material andis included in the Consolidated Statement of Financial Position on page 3 under "Accrued expenses."If a range of liability estimates is available on a particular site, we accrue at the lower end of that range.

Pursuant to a consent decree Caterpillar entered with the EPA, the company was required to meet certain emission standards by October 2002. The decree provides that if engine manufacturers were unable to meet the standards at that time, they would be required to pay a Non-Conformance Penalty (NCP) on each engine sold that did not meet the standard. The amount of the NCP would be based on how close to meeting the standard the engine came - the more out of compliance the higher the penalty. The company began introduction of fully compliant ACERT engines in 2003 and by the end of 2003 Caterpillar was only producing fully compliant engine models. As a result, NCPs are not payable for any engines built in 2004. The company’s first quarter 2004 operating profit was favorably impacted by $49 million du e to the absence of NCPs that were recorded in the first quarter 2003.

In addition, the consent decree required Caterpillar to pay a fine of $25 million, which was expensed in 1998 and to make investments totaling $35 million in environmental-related products by July 7, 2007. Total qualifying investments to date for these projects are $30 million, of which $1 million was made through the first quarter of 2004. A future benefit is expected to be realized from these ~~defendants. With respect~~environmental projects related to Caterpillar's ability to capitalize on the technologies it developed in complying with its environmental project obligations. In short, Caterpillar expects to receive a positive net return on the environmental projects by being able to market the technology it developed.

The company is a party to litigation matters and claims that are normal in the course of its operations, and, while the results of such litigation and claims cannot be predicted with certainty, management believes, based on the advice of counsel, the final outcome of such matters will not have a materially adverse effect on our consolidated financial position.

On January 16, 2002, Caterpillar commenced an action in the Circuit Court of the Tenth Judicial Circuit of Illinois in Peoria, Illinois, against Navistar International Transportation Corporation and International Truck and Engine Corporation (collectively Navistar). The lawsuit arises out of a long-term purchase contract between Caterpillar and Navistar effective May 31, 1988, as amended from time to time (the Purchase Agreement). The pending complaint alleges that Navistar breached its contractual obligations by: (i) paying Caterpillar $8.08 less per fuel injector than the agreed upon price for new unit injectors delivered by Caterpillar; (ii) refusing to pay contractually agreed upon surcharges owed as a result of Navistar ordering less than planned volumes of replacement unit injector s; and (iii) refusing to pay contractually agreed upon interest stemming from Navistar's late payments. At March 31, 2004, the past due receivable from Navistar regarding the foregoing was $139 million. The pending complaint also has claims alleging that Franklin Power Products, Inc., Newstream Enterprises, and Navistar, collectively and individually, failed to pay the applicable price for shipments of unit injectors to Franklin and Newstream. At March 31, 2004, the past due receivables for the foregoing totaled $12 million. The pending complaint further alleges that Sturman Industries, Inc. and Sturman Engine Systems, Inc.~~, the pending complaint alleges that the two companies~~ colluded with ~~International~~Navistar to utilize technology that Sturman Industries, Inc. misappropriated from Caterpillar to help Navistar develop its G2 fuel system, and tortiously interfered with the Purchase Agreement and Caterpillar's prospective economic relationship with Navistar. The pending complaint further alleges that the two ~~part ies'~~parties' collusion led Navistar to select Sturman Engine Systems, Inc., and another company, instead of Caterpillar, to develop and manufacture the G2 fuel system.

On May 7, 2002, International Truck and Engine Corporation (International) commenced an action against Caterpillar in the Circuit Court of DuPage County, Illinois, that alleges Caterpillar breached various aspects of a long-term agreement term sheet. In its fourth amended complaint, International seeks a declaration from the court that the term sheet constitutes a legally binding contract for the sale of heavy-duty engines at specified prices through the end of 2006, alleges that Caterpillar breached the term sheet by raising certain prices effective October 1, 2002, and also alleges that Caterpillar breached an obligation to negotiate a comprehensive long-term agreement referenced in the term sheet. International further claims that Caterpillar improperly restricted the supply of hea vy-duty engines to International from June through September 2002, and claims that Caterpillar made certain fraudulent misrepresentations with respect to the availability of engines during this time period. International seeks damages "in an amount to be determined at trial" and injunctive relief. Caterpillar filed an answer denying International's claims and has filed a counterclaim seeking a declaration that the term sheet has been effectively terminated. Caterpillar denies International's claims and will vigorously contest them. On September 24, 2003, the Appellate Court of Illinois, ruling on an interlocutory appeal, issued an order consistent with Caterpillar's position that, even if the court subsequently determines that the term sheet is a binding contract, it is indefinite in duration and was therefore terminable at will by Caterpillar after a reasonable period.Caterpillar anticipates that a trial currently scheduled f or the fourth quarter of 2004 will address all remaining issues in this matter.This matter is not related to the breach of contract action brought by Caterpillar against Navistar currently pending in the Circuit Court of Peoria County, Illinois.

SALES AND REVENUES OUTLOOK

We project company sales and revenues will increase about 20 percent from 2003, up from the previous forecast of 12 percent growth. Machinery and Engines volume is expected to increase about 16 percent and the favorable impact of currency is expected to contribute about 2 percent with the remainder coming from improved price realization and Financial Products revenues. Included in this outlook are worldwide machine price increases of 2 to 3 percent that have been communicated to dealers with an effective date of July 1, 2004. Our outlook factors in no significant disruption due to work stoppages at any of our facilities worldwide. The outlook factors in a timely ratification of a new 6-year labor agreement between Caterpillar and the United Auto Workers (UAW), which will enable our mid-western U.S. f acilities to remain competitive and succeed long-term. On April 25, 2004, employee members of the UAW voted to reject the company's contract proposal for a new 6-year labor agreement. Operations continue as normal.

The world economy is in a vigorous recovery and global economic growth should be about 4 percent this year, up from 2.5 percent last year. All regions are improving but the recovery in the Euro-zone economy is still weak. Industrial production in many developing countries increased significantly over the past year, often at double-digit rates.

Interest rates are the lowest in decades in many countries and we anticipate little change through the rest of the year. Despite increases in commodity and some asset prices, broad inflation measures are within Central Bank targets. As a result, we expect that Central Banks will be cautious about tightening policies and that any increases in interest rates would be modest and not significant enough to undermine economic recoveries that are underway.

The world economy should provide a favorable climate for our businesses. We expect continued low interest rates will encourage more replacement buying as well as drive recoveries in housing and nonresidential construction. Rising personal incomes and corporate profits should also benefit construction.

Recent increases in coal and metals prices have prompted mining sectors in most countries to increase investments. Further increases in industrial production in addition to tight supplies should help to maintain prices at favorable levels. We expect the mining recovery to strengthen further.

We expect company sales and revenues to continue to be strong in future quarters but year-over-year comparisons should reflect smaller increases than in the first quarter. Sales and revenues strengthened significantly over the course of 2003 and we do not expect sales and revenues in the remaining quarters of 2004 to improve as rapidly as they did last year.

North America (United States and Canada)

U.S. economic data were often weaker than expected at the beginning of the year but improved as the quarter progressed. We believe first quarter growth was around 4 percent and growth should improve further in subsequent quarters resulting in full year growth of about 4.5 to 5 percent. Canada, which has had to reverse recent interest rate hikes, should have economic growth near 3 percent this year.

We estimate that Machinery and Engines sales will increase about 32 percent in 2004. Positives include continued strong demand for housing, a recovery in commercial construction and increased funding for highways. Coal mining should benefit from stronger demand and increases in spot prices. We expect the North American on-highway truck and bus industry will benefit from low financing costs, higher freight-handling requirements and improved fleet operating profits. Stronger economic growth is expected to support increases in all North American engine industries.

EAME

We estimate that Machinery and Engines sales in EAME should rise about 9 percent in 2004. In Europe, economic recovery and low interest rates should support increased replacement buying and the expansion of rental fleets. We anticipate that sales in both Africa/Middle East and the CIS will benefit from the positive impact that high commodity prices are having on economic growth. Finally, the ongoing favorable impact of the strong euro is expected to contribute 2 percent to sales.

Latin America

Economies recovered late last year and we expect economic growth will improve to about 4 percent this year – the highest since 2000. The stronger world economy is boosting regional exports, higher metals prices should encourage more investment in mining and foreign investors are returning. As a result of the economic recovery, we project that sales of Machinery and Engines should be up about 15 percent in 2004.

Asia/Pacific

The region should remain the fastest growing in the world this year with about 6.5 percent growth. China’s economy could slow a bit in response to modest tightening in economic policies but faster growth in most other countries should more than offset this slowing. Exports should benefit from the worldwide economic recovery and low local interest rates should encourage more domestic spending.

We expect sales of Machinery and Engines to increase around 16 percent in 2004. The sizable mining sector, which had a strong first quarter, should continue to do well. Low interest rates and higher standards of living should benefit housing and commercial construction. Strong economic growth in China has resulted in widespread electric power shortages and we expect sales into this sector should benefit.

Financial Products

We expect continued growth in Financial Products for the remainder of 2004, with revenues expected to increase approximately 10 percent versus 2003 primarily due to higher average earning assets in 2004. New financing activity growth is primarily due to expected improvement in Machinery and Engines sales and other growth initiatives.

PROFIT OUTLOOK

We now expect profit per share to be up 65 to 70 percent from 2003, compared to about 40 percent in the previous outlook. We expect to deliver 6.5 to 7 percentReturn on Sales and Revenuesin 2004 as compared to 4.8 percent in 2003 despite an increase in retirement benefits of about $250 million and pressure on core operating costs associated with supporting higher than anticipated volumes. Due to this improved profitability and our solid financial position, we expect strong operating cash flow in 2004.

SUPPLEMENTAL INFORMATION

Dealer New Machine Deliveries

Worldwide dealer deliveries of new machines to end users in first quarter 2004 were 37 percent higher than the same quarter last year and 19 percent above the previous first quarter high in 1998. Gains were widespread, occurring in all regions and in most industries. In particular, deliveries into mining had a broad, strong recovery.

Dealers in North America increased machine deliveries 43 percent, the biggest year-over-year gain since the current recovery in deliveries started in first quarter 2003. Factors which supported growth in 2003 such as replacement buying, upgrading of rental fleets and increased construction activity continued this quarter. In addition, the depressed coal mining sector showed improvement.

Deliveries into North American general construction were up 56 percent from last year. Low mortgage interest rates and higher prices for new homes caused housing starts to increase 12 percent while nonresidential building construction appeared to bottom. Dealer deliveries into heavy construction were up 53 percent, driven by continued strong highway and sewer and water construction. Increased production and prices for quarry andaggregates caused dealer deliveries into that industry to rise 5 percent. A robust housing industry boosted lumber prices leadi ng to a 60 percent increase in dealer deliveries into forestry. Mining, buoyed by rebounds in both coal production and prices, had a 52 percent increase in dealer deliveries compared to last year. Deliveries into industrial applications increased 23 percent, the result of higher industrial production.

EAME dealer deliveries of new machines in first quarter 2004 rose 19 percent from last year. Europe, despite a slow recovery, had a 19 percent increase which was heavily weighted toward deliveries into rental fleets. Deliveries into Africa/Middle East surged 33 percent, largely into those countries with sizable energy and commodity sectors as higher prices generated the income needed to finance investments. Partially offsetting those two increases were deliveries into the CIS, which tend to be volatile, fell 28 percent from a strong first quarter last year.

In Latin America, new machine deliveries increased 49 percent. The mining sector, responding to significant increases in output prices, accounted for all the gain. Recoveries in most countries started fairly recently and have not yet progressed sufficiently to allow recoveries in construction.

In Asia/Pacific, dealer deliveries to end users improved 39 percent from a strong first quarter 2003. Strength in the region was pervasive as most countries and industries showed improvement. China continues to do well and many of the other large economies in the region had double-digit gains in dealer deliveries. Low interest rates and fast economic growth are boosting construction activity and deliveries into mining rose sharply due to higher output prices.

Dealer Inventories of New Machines

Worldwide dealer inventories at the end of first quarter 2004 were higher than a year earlier in all regions. However, increases in inventories failed to keep pace with deliveries, causing inventory to delivery ratios to decline in all regions.

Engine Deliveries to End Users and OEMs

Worldwide engine deliveries to end users and OEMs in the first quarter of 2004 rose20percent compared to deliveries in first quarter 2003.Stronger economic growth, higher corporate profits and rising business and investor confidence supported improving global investment and industry conditions. Increased engine deliveries to the electric power, on-highway truck and petroleum sectors more than offset lower deliveries of engines to the industrial and marine sectors. Worldwide engine deli veries to end users in the electric power sector rose 37percent with stronger sales in all geographic regions. Truck engine deliveries rose 28 percent with all of the gain occurring in the Americas where industry demand strengthened.Worldwide deliveries to end users in thepetroleum sector rose 17 percent due to stronger industry demand caused by very favorable energy prices.Global deliveries of industrial engines declined8percent partially due to a fourth quarter 2003 pre-buy and a shift in product mix to smaller engines. Worldwide marine engine deliveries were down 3 percent due to delayed demand for large reciprocating engines used in ocean-going vessels.

In North America, engine deliveries to end users and OEMs were up 20 percent from first quarter 2003. Engine deliveries to the electric power, industrial, petroleum and on-highway truck sectors all rose. Engines delivered to North American truck and bus manufacturers rose 27 percent with all of the growth caused by stronger industry demand associated with higher fleet operating profits and more confidence in new engine emissions technologies.Caterpillar maintained its leadership position in the North American on-highway truck and bus industry.Engine deliveries to end users and OEMs in the industrial sector increased 19 pe rcent helped by stronger industry demand as corporate profits and business investment continued to strengthen. Deliveries of engines to the electric power sector rose 11 percent as most of the gain came from robust demand for turbines sold to industrial cogeneration applications. Deliveries of engines to the petroleum sector rose 10 percent, positively impacted by robust industry profits caused by favorable energy prices. Deliveries of engines to the marine sector declined 3 percent due to lower demand for large reciprocating engines used in ocean-going vessels.

In EAME, overall engine deliveries to end users and OEMs rose 6 percent with higher deliveries to the petroleum and electric power sectors accounting for all of the overall sales gain. Petroleum deliveries rose 46 percent and deliveries to the electric power sector rose 16 percent. EAME deliveries of large engines gained from particular strength in the Middle East. Deliveries to the Middle East remained strong due to favorable oil prices and revenues and continuing reconstruction efforts. EAME deliveries of engines to the industrial sector fell 15 percent resulting from weak economic growth in Western Europe and a fourth quarter 2003 pre-buy prior to the final European Tier II emissions laws going into effect in January 2004. Engine deliveries to the marine sector fell 17 percent due to lower demand for large engines used in ocean-going vessels.

Deliveries to end users and OEMs in Latin America rose 80 percent as economic and investment growth strengthened. Engine deliveries to the electric power, on-highway truck and industrial sectors more than doubled from deliveries in first quarter 2003 when Latin American economic growth was sluggish. Deliveries into the petroleum sector were up 42 percent and deliveries to the marine sector were up 19 percent. Deliveries of turbines to the electric power and petroleum sectors accounted for over half of the Latin American quarterly growth. Deliveries of turbines and turbine services to the Latin American electric power sector increased primarily in Venezuela where investments were made to reduce shortages of electrical capacity. Turbine services sales increased in the Latin American pet roleum sector driven primarily by strong production demand for turbine aftermarket products.

Deliveries to end users and OEMs in Asia/Pacific were up 24 percent compared to last year with engine deliveries to the electric power sector more than doubling, 25 percent growth in marine primarily due to deliveries of large marine engines and 17 percent lower deliveries to the petroleum sector. Asia/Pacific demand for turbines used in the petroleum sector weakened from last year’s strong levels due to shipment timing.

Dealer Inventories of Engines

Worldwide dealer engine inventories at the end of the first quarter were 4 percent above last year and were at normal levels compared to selling rates. North American and Latin American dealers have continued to reduce their inventories and their respective inventories are at normal levels. EAME dealer inventories rose as dealers pre-positioned inventory to support expected Middle Eastern reconstruction efforts. Dealer inventories in Asia/Pacific rose as dealers ordered engines to cover expected sales.

GLOSSARY OF TERMS

1. Consolidating Adjustments– Eliminations of transactions between Machinery and Engines and Financial
Products.

2. Constant Dollars– The dollar value of machine and engine deliveries adjusted for changes in price and currency.

3. Core Operating Costs– Machinery and Engines operating cost change adjusted for volume. It excludes the
impact of currency, Non-Conformance Penalties and retirement benefits.

	26

4. Currency– With respect to sales and revenues, currency represents the translation impact on sales resulting from changes in foreign currency exchange rates versus the U.S. dollar. With respect to operating profit, currency represents the net translation impact on sales and operating costs resulting from changes in foreign currency exchange rates versus the U.S. dollar. With respect to other income/expense, currency represents the period over period change in the translation of monetary assets and liabilities not denominated in the functional currency and the change in hedging gains/losses from foreign currency forward and option contracts. C urrency includes the impacts on sales and operating profit for the Machinery and Engines lines of business only; currency impacts on the Financial Products line of business are included in the Financial Products portions of the respective analyses.

5. EAME– Geographic region including Europe, Africa, the Middle East and the Commonwealth of Independent States (CIS).

6. Earning Assets– These assets consist primarily of total net finance receivables plus equipment on operating leases, less accumulated depreciation at Cat Financial. Net finance receivables represent the gross receivables amount less unearned income and the allowance for credit losses.

7. Engines- A principal line of business including the design, manufacture and marketing of engines for Caterpillar machinery, electric power generation systems; on-highway vehicles and locomotives; marine, petroleum, construction, industrial, agricultural and other applications; and related parts. Reciprocating engines meet power needs ranging from 5 to over 22,000 horsepower (4 to over 16 200 kilowatts). Turbines range from 1,600 to 19,500 horsepower (1 000 to 14 500 kilowatts).

8. Financial Products– A principal line of business consisting primarily of Caterpillar Financial Services Corporation (Cat Financial), Caterpillar Insurance Holdings, Inc. (Cat Insurance) and their subsidiaries. Cat Financial provides a wide range of financing alternatives for Caterpillar machinery and engines, Solar gas turbines, as well as other equipment and marine vessels. Cat Financial also extends loans to customers and dealers. Cat Insurance provides various forms of insurance to customers and dealers to help support the purchase and lease of our equipment.

9. Latin America– Geographic region including the Central and South American countries and Mexico.

10. Machinery– A principal line of business which includes the design, manufacture and marketing of construction, mining, agricultural and forestry machinery – track and wheel tractors, track and wheel loaders, pipelayers, motor graders, wheel tractor-scrapers, track and wheel excavators, backhoe loaders, mining shovels, log skidders, log loaders, off-highway trucks, articulated trucks, paving products, telescopic handlers, skid steer loaders and related parts. Also includes logistics services for other companies.

11. Machinery and Engines– Due to the highly integrated nature of operations, represents the aggregate total of the Machinery and Engines lines of business and includes primarily our manufacturing, marketing and parts distribution operations.

12. Non-Conformance Penalties (NCPs)- Pursuant to a consent decree Caterpillar and other engine manufacturers entered into with the United States Environmental Protection Agency (EPA), the company was required to meet certain emission standards by October 2002 for engines manufactured for on-highway use. Under the consent decree, an engine manufacturer was required to pay a non-conformance penalty (NCP) to the EPA for each engine manufactured after October 1, 2002 that did not meet the standards. The amount of the NCP was based on how close to meeting the standards the engine came - the more the engine was out of compliance, th e higher the penalty per engine.

13. Price Realization– The impact of net price changes excluding currency.

14. Retirement Benefits – Cost of defined benefit pension plans, defined contribution plans and retirement healthcare and life insurance.

15. Return on Sales and Revenues– Profit divided by Sales and Revenues.

16. Sales Volume– With respect to sales and revenues, sales volume represents the impact of changes in the quantities sold for machines, engines and parts. With respect to operating profit, sales volume represents the impact of changes in the quantities sold for machines, engines and parts combined with the net operating profit impact of changes in the relative weighting of machines, engines and parts sales with respect to total sales.

17. 6 Sigma– On a technical level, 6 Sigma represents a measure of variation that achieves 3.4 defects per million opportunities. At Caterpillar, 6 Sigma represents a much broader cultural philosophy to drive continuous improvement throughout the value chain. It is a fact-based, data-driven methodology that we are using to improve processes, enhance quality, cut costs, grow our business and deliver greater value to our customers through black belt-led project teams. At Caterpillar, 6 Sigma goes beyond mere process improvement; it has become the way we work as teams to process business information, solve problems and manage our business successfully.

C. Liquidity & Capital Resources

Sources of funds

We generate our capital resources primarily through operations. Consolidated operating cash flow was $98 million through the first quarter of 2004, compared with $218 million through the first quarter of 2003. The decrease is primarily the result of higher working capital requirements, partially offset by increased profits during 2004 as compared to 2003. We anticipate that the majority of future capital resource requirements will be funded by operating cash flow, which is largely sourced from profits. See our Outlook on page 23.

Total debt as of March 31, 2004 was $20.9 billion, an increase of $1 billion from year-end 2003. Debt related to Machinery and Engines incresed $358 million, primarily due to the repurchase of $250 million of outstanding shares. Debt related to Financial Products increased $736 million due to growth at Cat Financial. We have two global credit facilities with a syndicate of banks totaling $4.675 billion available in the aggregate to both Machinery and Engines and Financial Products to support commercial paper programs. Based on management's allocation decision, which can be revised at any time, the portion of the facility available to Cat Financial at March 31, 2004 was $4.075 billion. The five-year facility of $2.125 billion expires in September 2006. The 364-day facility of $2.55 billion expires in September 2004. The facility expiring in September 2004 has a provision that allows Caterpillar or Cat Financial to obtain a one-year loan in September 2004 that would mature in September 2005. Our total credit commitments as of March 31, 2004 were:

(Millions of dollars)
Consolidated
Machinery
and Engines

Financial
Products

Credit lines available:

Global credit facility

$
4,675

$
600

$
4,075

Other external
1,689 833 856
Total credit lines available
6,364 1,433 4,931
Less: Global credit facility supporting commercial paper
4,129 336 3,793
Less: Utilized credit
366 127 239

Available credit

$
1,869

$
970

$
899

We also generate funding through the securitization of receivables. Through the first quarter of 2004, we generated $264 million of capital resources from the securitization of trade receivables. As of March 31, 2004, we had trade and finance receivables of $1.5 billion and $16.0 billion, respectively.

We do not generate material funding through structured finance transactions.

Machinery and Engines

Net cash used for operating activities was $149 million compared with $81 million for the same period a year ago. The unfavorable change was due to higher working capital requirements in 2004 consisting primarily of increased inventory related to higher sales volume and a higher incentive compensation payout. These items were partially offset by higher profit in 2004.

Pursuant to the share repurchase program authorized by the Board of Directors in October 2003, $250 million was spent to purchase 3.21 million shares during the first quarter of 2004. There were 342 million shares outstanding at the end of the first quarter 2004. The goal of the share repurchase program, which expires in October 2008, is to reduce the company’s outstanding shares to 320 million.

Capital expenditures, excluding equipment leased to others, during the three months ended March 31, 2004 were $101 million, an increase of $20 million from the same period a year ago. The increase is a result of increased spending to support growth and new product introductions.

Financial Products

Operating cash flow was $251 million through the first quarter 2004, compared with $309 million for the same period a year ago. The decrease was the result of higher working capital requirements, partially offset by an increase in profit through the first quarter 2004 as compared to the same period a year ago. Cash used to purchase equipment leased to others was $240 million during the first quarter of 2004 compared to $261 million for the first quarter of 2003. In addition, net cash used for finance receivables was $694 million for the first quarter of 2004, compared to $122 million for the first quarter of 2003.

Financial Products total borrowings were $17.08 billion at March 31, 2004, an increase of $736 million from December 31, 2003 due to financing a higher amount of assets. Debt repayment in Financial Products depends primarily on timely repayment and collectibility of the receivables portfolio. At March 31, 2004, finance receivables past due over 30 days were 2.8 percent, compared with 3.1 percent at the end of March 31, 2003. The allowance for credit losses was 1.48 percent of finance receivables, net of unearned income, at March 31, 2004, compared to 1.49 percent at March 31, 2003. Receivables written off due to uncollectibility, net of recoveries on receivables previously written off, were $11 million and $22 million for the three months ended March 31, 2004 and 2003, respectively.

	28

D. Critical Accounting Policies

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect reported amounts. The more significant estimates include: residual values for leased assets, fair market values for goodwill impairment tests, and reserves for warranty, product liability and insurance losses, postretirement benefits, post-sale discounts, credit losses and income taxes. Following are the methods and assumptions used in determining our estimates and an indication of the risks inherent in each.

Residual values for leased assets- Determined based on the product, specifications, application and hours of usage. Each product has its own model for evaluation that includes market value cycles and forecasts. Consideration is also given to the amount of assets that will be returned from lease during a given time frame. Residual values could decline due to economic factors, obsolescence or other adverse circumstances.

Fair market values for goodwill impairment tests -Determined for each reporting unit by discounting projected cash flow for five years and adding a year-five residual value based upon a market Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) multiple. The estimated fair value could be impacted by changes in interest rates, growth rates, costs, capital expenditures and market conditions.

Warranty reserve- Determined by applying historical claim rate experience to the current field population and dealer inventory. Generally, historical claim rates are developed using a 12-month rolling average of actual warranty expense. These rates are applied to the field population and dealer inventory to determine the reserve. Warranty payments may differ from those estimated if actual claim rates are higher or lower than our historical rates.

Product liability and insurance loss reserve -Determined based upon reported claims in process of settlement and actuarial estimates for losses incurred but not reported. Loss reserves, including incurred but not reported reserves, are based on estimates and ultimate settlements may vary significantly from such estimates due to increased claims frequency or severity over historical levels.

Postretirement benefits- Primary actuarial assumptions are determined as follows:

The U.S. expected long-term rate of return on plan assets is based on our estimate of long-term passive returns for equities and fixed income securities weighted by the allocation of our plan assets. Based on historical performance, we increase the passive returns due to our active management of the plan assets. A similar process is used to determine the rate for our non-U.S. pension plans. This rate is impacted by changes in general market conditions, but because it represents a long-term rate, it is not significantly impacted by short-term market swings. Changes in our allocation of plan assets would also impact this rate. For example, a shift to more fixed income securities would lower the rate. A decrease in the rate would increase our expense.
The assumed discount rate is used to discount future benefit obligations back to today's dollars. The U.S. discount rate is based on the Moody's Aa bond yield as of our measurement date, November 30. A similar process is used to determine the assumed discount rate for our non-U.S. plans. This rate is sensitive to changes in interest rates. A decrease in the discount rate would increase our obligation and future expense.
The expected rate of compensation increase is used to develop benefit obligations using projected pay at retirement. It represents average long-term salary increases. This rate is influenced by our long-term compensation policies. An increase in the rate would increase our obligation and expense.
The assumed health care trend rate represents the rate at which health care costs are assumed to increase and is based on historical and expected experience. Changes in our projections of future health care costs due to general economic conditions and those specific to health care (e.g. technology driven cost changes) will impact this trend rate. An increase in the trend rate would increase our obligation and expense.

	29

Post-sale discount reserve- The company extends numerous merchandising programs that provide discounts to dealers as products are sold to end users. The reserve is determined based on historical data adjusted for known changes in merchandising programs. Discounts paid may differ from those estimated if actual program usage is higher or lower than our historical or expected rates.

Credit loss reserve– The allowance for credit losses is evaluated on a regular basis and adjusted based upon management’s best estimate of probable losses inherent in our finance receivables. In estimating probable losses, we review accounts that are past due, non-performing, or in bankruptcy. We also review accounts that may be at risk using information available about the customer, such as financial statements, news reports, and published credit ratings. We also use general information regarding industry trends and the general economic environment. Using an estimate of current fair market value of collateral and factoring in credit enhancements, such as additional collateral and third par ty guarantees, we arrive at an estimated loss for specific accounts and estimate an additional amount for the remainder of the finance receivables based upon historical trends. Adverse economic conditions or other factors that might cause deterioration of the financial health of our customers could change the timing and level of payments received and thus necessitate a change in our estimated losses.

Income tax reserve– Despite our belief that our tax return positions are consistent with applicable tax law, we believe that certain positions are likely to be challenged by taxing authorities. Settlement of any challenge can result in no change, a complete disallowance, or some partial adjustment reached through negotiations or litigation. Significant judgment is required in evaluating our tax reserves. Our reserves are adjusted in light of changing facts and circumstances, such as the progress of our tax audits. Our income tax expense includes the impact of reserve provisions and changes to reserves that we consider appropriate, as well as related interest. Unfa vorable settlement of any particular issue would require use of our cash. Favorable resolution would be recognized as a reduction to income tax expense at the time of resolution.

We have incorporated many years of data into the determination of each of these estimates and we have not historically experienced significant adjustments.

E. Pension and Other Postretirement Benefits

We recognizedpension expense of $74 million for the three months ended March 31, 2004, as compared to $36 million for the three months ended March 31, 2003. The increase in expense was primarily a result of the amortization of actuarial losses resulting from a declining discount rate and poor performance of the equity markets primarily in 2001 and 2002. SFAS 87, "Employers’ Accounting for Pensions" requires companies to discount future benefit obligations back to today’s dollars using a discount rate that is based on high-quality fixed-income investments. A decrease in the discount rate increases the pension bene fit obligation. This increase is amortized into earnings as an actuarial loss. SFAS 87 also requires companies to use an expected long-term rate of return for computing current year pension expense. Differences between the actual and expected returns are amortized into earnings as actuarial gains and losses.

Other postretirement benefit expense was $77 million in first quarter 2004, up $9 million from first quarter 2003. The increase in expense is the result of the amortization of actuarial losses resulting from a declining discount rate, higher than expected benefit costs and an increase in expected health care inflation.

At the end of 2003, unrecognized actuarial losses related to pension and other postretirement benefit plans were $3.20 billion and $1.38 billion, respectively. The unrecognized actuarial losses for both pensions and other postretirement benefits will be impacted in future periods by actual asset returns, actual health care inflation, discount rate changes and other factors that impact these expenses. These losses are currently being amortized into earnings on a straight-line basis over the remaining service period of active employees expected to receive benefits under the benefit plans.

SFAS 87 requires the recognition of an Additional Minimum Liability if the market value of plan assets is less than the accumulated benefit obligation at the end of the measurement date. Future changes to the Additional Minimum Liability will be dependent on several factors including actual returns on our pension plan assets, company contributions, benefit plan changes and our assumed discount rate.

Although we have no ERISA funding requirements in 2004, on April 8, 2004, we made a voluntary cash contribution of $494 million to fund our U.S. pension plans. We also expect to make $90 million of contributions to certain non-U.S. pension plans during 2004. We have adequate liquidity resources to fund all U.S. and non-U.S. plans.

F. Supplemental Consolidating Data

We are providing supplemental consolidating data for the purpose of additional analysis. The data has been grouped as follows:

Consolidated –Caterpillar Inc. and its subsidiaries.

Machinery and Engines –The Machinery and Engines data contained in the schedules on pages 32 to 37 are "non-GAAP financial measures" as defined by the Securities and Exchange Commission in Regulation G. These non-GAAP financial measures have no standardized meaning prescribed by U.S. GAAP, and therefore, are unlikely to be comparable with the calculation of similar measures for other companies. Management does not intend these items to be considered in isolation or as a substitute for the related GAAP measures. Caterpillar defines Machinery and Engines as it is presented in the supplemental data as Caterpillar Inc. and its subsidiaries with Financial Products accounted for on the equity basis. M achinery and Engines information relates to our design, manufacturing, marketing and parts distribution operations. Financial Products information relates to the financing to customers and dealers for the purchase and lease of Caterpillar and other equipment. The nature of these businesses is different especially with regard to the financial position and cash flow items. Caterpillar management utilizes this presentation internally to highlight these differences. We also believe this presentation will assist readers in understanding our business.

Financial Products –our finance and insurance subsidiaries, primarily Cat Financial and Cat Insurance.

Consolidating Adjustments –eliminations of transactions between Machinery and Engines and Financial Products.

Pages 32 to 37 reconcile Machinery and Engines with Financial Products on the Equity Basis to Caterpillar Inc. Consolidated financial information.

Caterpillar Inc. Supplemental Data for Results of Operations For The Three Months Ended March 31, 2004 (Unaudited) (Millions of dollars)
			Supplemental Consolidating Data

	Consolidated		Machinery and Engines(1)		FinancialProducts		Consolidating Adjustments

Sales and revenues:
Sales of Machinery and Engines	$	6,002	$	6,002	$	-	$	-
Revenues of Financial Products		465		-		502		(37)²

Total sales and revenues		6,467		6,002		502		(37)

Operating costs:
Cost of goods sold		4,699		4,699		-		-
Selling, general and administrative expenses		724		595		140		(11)³
Research and development expenses		214		214		-		-
Interest expense of Financial Products		118		-		121		(3)⁴
Other operating expenses		138		2		136		-

Total operating costs		5,893		5,510		397		(14)


Operating profit		574		492		105		(23)

Interest expense excluding Financial Products		57		58		-		(1)⁴
Other income (expense)		47		16		9		22 ⁵


Consolidated profit before taxes		564		450		114		-

Provision for income taxes		158		119		39		-

Profit of consolidated companies		406		331		75		-
Profit of consolidated companies
Equity in profit (loss) of unconsolidated affiliated companies		6		5		1		-
Equity in profit of Financial Products' subsidiaries		-		76		-		(76)⁶


Profit	$	412	$	412	$	76	$	(76)

¹Represents Caterpillar Inc. and its subsidiaries with Financial Products accounted for on the equity basis.
²Elimination of Financial Products revenues earned from Machinery and Engines.
³Elimination of expenses recorded by Machinery and Engines paid to Financial Products.
⁴Elimination of interest expense recorded by Financial Products paid to Machinery and Engines subsidiaries.
⁵Elimination of discount recorded by Machinery and Engines on receivables sold to Financial Products, and of interest income earned by Machinery and Engines from Financial Products.
⁶Elimination of Financial Products profit due to equity method of consolidation.

Caterpillar Inc. Supplemental Data for Results of Operations For The Three Months Ended March 31, 2003 (Unaudited) (Millions of dollars)
			Supplemental Consolidating Data
	Consolidated		Machinery and Engines(1)			FinancialProducts		ConsolidatingAdjustments


Sales and revenues:
Sales of Machinery and Engines	$	4,424	$	4,424		$	-	$	-
Revenues of Financial Products		397		-			440		(43)²

Total sales and revenues		4,821		4,424			440		(43)

Operating costs:
Cost of goods sold		3,630		3,630			-		-
Selling, general and administrative expenses		570		476			114		(20)³
Research and development expenses		152		152			-		-
Interest expense of Financial Products		120		-			124		(4)⁴
Other operating expenses		127		2			125		-

Total operating costs		4,599		4,260			363		(24)


Operating profit		222		164			77		(19)

Interest expense excluding Financial Products		66		66			-		-
Other income (expense)		18		(4	)		3		19 ⁵


Consolidated profit before taxes		174		94			80		-

Provision for income taxes		49		20			29		-

Profit of consolidated companies		125		74			51		-

Equity in profit (loss) of unconsolidatedaffiliated companies		4		2			2		-
Equity in profit of Financial Products' subsidiaries		-		53			-		(53)⁶


Profit	$	129	$	129		$	53	$	(53)



¹RepresentsCaterpillar Inc. and its subsidiaries with Financial Products accounted for on the equity basis.
²Elimination of Financial Products revenues earned from Machinery and Engines.
³Elimination of expenses recorded by Machinery and Engines paid to Financial Products.
⁴Elimination of interest expense recorded by Financial Products paid to Machinery and Engines.
⁵Elimination of discount recorded by Machinery and Engines on receivables sold to Financial Products, and of interest income earned by Machinery and Engines from Financial Products.
⁶Elimination of Financial Products profit due to equity method of consolidations.

Caterpillar Inc.
Supplemental Data for Financial Position
At March 31, 2004
(Unaudited)
(Millions of dollars)

Supplemental Consolidating Data

Consolidated

Machinery and
Engines(1)

FinancialProducts

ConsolidatingAdjustments

Assets:

Current assets:

Cash and short-term investments

$
368
$ 220 $ 148 $
-

Receivables - trade and other
3,751 2,914 1,510
(673)²

Receivables - finance
7,989 - 7,989
-

Deferred and refundable income taxes
729 666 63
-

Prepaid expenses
1,351 1,366 18
(33)³

Inventories
3,678 3,678 -
-

Total current assets
17,866 8,844 9,728 (706)

Property, plant and equipment - net
7,153 4,582 2,571
-

Long-term receivables - trade and other
109 106 3
-

Long-term receivables - finance
7,972 - 7,972
-

Investments in unconsolidated affiliated companies
817 455 362
-

Investments in Financial Products subsidiaries
- 2,603 -
(2,603)⁴

Deferred income taxes
585 775 20
(210)⁵

Intangible assets
234 225 9
-

Goodwill
1,400 1,400 -
-

Other assets
1,722 843 879
-

Total assets

$
37,858
$ 19,833 $ 21,544 $ (3,519)

Liabilities

Current liabilities:

Short-term borrowings
2,936 328 3,041
(433)⁶

Accounts payable
3,309 3,132 174
3 ⁷

Accrued expenses
1,636 847 804
(15)⁸

Accrued wages, salaries and employee benefits
1,644 1,636 8
-

Dividends payable
- - -
-

Deferred and current income taxes payable
271 186 85
-

Deferred liability
- - 261
(261)⁹

Long-term debt due within one year
3,404 6 3,398
-

Total current liabilities
13,200 6,135 7,771 (706)
Long-term debt due after one year
14,570 3,660 10,910
-

Liability for postemployment benefits
3,222 3,222 -
-

Deferred income taxes and other liabilities
532 482 260
(210)⁵

Total liabilities
31,524 13,499 18,941 (916)

Stockholders' equity

Common stock
1,101 1,101 890
(890)⁴

Treasury stock

(3,129
)
(3,129
) -
Profit employed in the business
8,862 8,862 1,572
(1,572)⁴

Accumulated other comprehensive income

(500
)
(500
) 141
(141)⁴

Total stockholders' equity
6,334 6,334 2,603 (2,603)
Total liabilities and stockholders' equity
$ 37,858 $ 19,833 $ 21,544 $ (3,519)


¹Represents Caterpillar Inc. and its subsidiaries with Financial Products accounted for on the equity basis.

²Elimination of receivables between Machinery and Engines and Financial Products.

³Elimination of Machinery and Engines insurance premiums which are prepaid to Financial Products.

⁴Elimination of Financial Products equity which is accounted for on Machinery and Engines on the equity basis.

⁵Reclassification of Financial Products deferred tax liability to a deferred tax asset on a consolidated basis.

⁶Elimination of short-term borrowings between Machinery and Engines and Financial Products.

⁷Elimination of payables between Machinery and Engines and Financial Products.

⁸Elimination of prepaid insurance in Financial Products accrued expenses.

⁹Elimination of Financial Products deferred liabilities with Machinery and Engines.

Caterpillar Inc.
Supplemental Data for Financial Position
At December 31, 2003
(Unaudited)
(Millions of dollars)

Supplemental Consolidating Data

Consolidated

Machinery
and
Engines(1)

Financial
Products

ConsolidatingAdjustments

Assets:

Current assets:

Cash and short-term investments

$
342
$ 220 $ 122 $ -
Receivables - trade and other
3,666 2,993 1,642
(969)²

Receivables – finance
7,605 - 7,605 -
Deferred and refundable income taxes
707 645 62
-

Prepaid expenses
1,424 1,403 27
(6)³

Inventories
3,047 3,047 -
-

Total current assets
16,791 8,308 9,458 (975)

Property, plant and equipment – net
7,290 4,682 2,608
-

Long-term receivables - trade and other
82 81 1
-

Long-term receivables – finance
7,822 - 7,822
-

Investments in unconsolidated affiliated companies
800 426 374
-

Investments in Financial Products subsidiaries
- 2,547 -
(2,547)⁴

Deferred income taxes
616 819 19
(222)⁵

Intangible assets
239 230 9
-

Goodwill
1,398 1,398 -
-

Other assets
1,427 719 708
-

Total assets

$
36,465
$ 19,210 $ 20,999 $ (3,744)

Liabilities

Current liabilities:
Short-term borrowings
2,757 72 3,160
(475)⁶

Accounts payable
3,100 3,078 243
(221)⁷

Accrued expenses
1,638 857 802
(21)⁸

Accrued wages, salaries and employee benefits
1,802 1,788 14
-

Dividends payable
127 127 -
-

Deferred and current income taxes payable
216 166 50
-

Deferred liability
- - 259
(259)⁹

Long-term debt due within one year
2,981 32 2,949
-

Total current liabilities
12,621 6,120 7,477 (976)
Long-term debt due after one year
14,078 3,367 10,711
-

Liability for postemployment benefits
3,172 3,172 -
-

Deferred income taxes and other liabilities
516 473 264
(221)⁵

Total liabilities
30,387 13,132 18,452 (1,197)

Stockholders' equity

Common stock
1,059 1,059 890
(890)⁴

Treasury stock

(2,914
)
(2,914
) -
-

Profit employed in the business
8,450 8,450 1,495
(1,495)⁴

Accumulated other comprehensive income

(517
)
(517
) 162
(162)⁴

Total stockholders' equity
6,078 6,078 2,547 (2,547)
Total liabilities and stockholders' equity
$ 36,465 $ 19,210 $ 20,999 $ (3,744)


¹Represents Caterpillar Inc. and its subsidiaries with Financial Products accounted for on the equity basis.

²Elimination of receivables between Machinery and Engines and Financial Products.

³Elimination of Machinery and Engines insurance premiums which are prepaid to Financial Products.

⁴Elimination of Financial Products equity which is accounted for on Machinery and Engines on the equity basis.

⁵Reclassification of Financial Products deferred tax liability to a deferred tax asset on a consolidated basis.

⁶Elimination of Financial Products short-term borrowings from Machinery and Engines.

⁷Elimination of payables between Machinery and Engines and Financial Products.

⁸Elimination of prepaid insurance in Financial Products accrued expenses.

⁹Elimination of Financial Products deferred liabilities with Machinery and Engines.

35

Caterpillar Inc.
Supplemental Data for Cash Flow
For the Three Months Ended March 31, 2004
(Unaudited)
(Millions of dollars)

Supplemental Consolidating Data

Consolidated

Machinery
and
Engines(1)

FinancialProducts

ConsolidatingAdjustments

Cash flow from operating activities:

Profit
$ 412 $ 412 $ 76
$
(76)²

Adjustments for non-cash items:

Depreciation and amortization
350 202 148 -
Undistributed profit of Financial Products
-
(76
) -
76 ³

Other

(37
)
(25
)
(3
)
(9)⁴

Changes in assets and liabilities:

Receivables - trade and other

(197
)
(143
) 39
(93)⁴

Inventories

(631
)
(631
) - -
Accounts payable and accrued expenses
260 228
(39
)
71 ⁴

Other – net

(59
)
(116
) 30
27 ⁴

Net cash provided by (used for) operating activities
98
(149
) 251 (4)

Cash flow from investing activities:

Capital expenditures - excluding equipment leased to others

(106
)
(101
)
(5
) -
Expenditures for equipment leased to others

(240
) -
(240
) -
Proceeds from disposals of property,
plant and equipment
206 7 199 -
Additions to finance receivables

(4,812
) -
(4,812
) -
Collection of finance receivables
3,854 - 3,854 -
Proceeds from the sale of finance receivables
264 - 264 -
Net intercompany borrowings
- 209
(6
)
(203)⁵

Investments and acquisitions (net of cash acquired)
(13
)
(13
) - -
Other – net

(65
)
(5
)
(60
) -

Net cash provided by (used for) investing activities

(912
) 97
(806
) (203)

Cash flow from financing activities:

Dividends paid

(127
)
(127
) - -
Common stock issued, including treasury
shares reissued
69 69 - -
Treasury shares purchased

(250
)
(250
) - -
Net intercompany borrowings
- 6
(209
)
203 ⁵

Proceeds from long-term debt issued
1,808 255 1,553 -
Payments on long-term debt

(913
)
(25
)
(888
) -
Short-term borrowings - net
220 91 129 -

Net cash provided by financing activities
807 19 585 203

Effect of exchange rate on cash
33 33
(4
)
4 ⁶

Increase in cash and short-term investments
26 - 26 -
Cash and short-term investments at
beginning of period
342 220 122 -

Cash and short-term investments at end of period
$ 368 $ 220 $ 148 $ -

¹Represents Caterpillar Inc. and its subsidiaries with Financial Products accounted for on the equity basis.

²Elimination of Financial Products profit after tax due to equity method of consolidation.

³Non-cash adjustment for the undistributed profit from Financial Products.

⁴Elimination of non-cash adjustments and changes in assets and liabilities related to consolidated reporting.

⁵Net proceeds and payments to/from Machinery and Engines and Financial Products.

⁶Elimination of the effect of exchange on intercompany balances.

Caterpillar Inc.
Supplemental Data for Cash Flow
For the Three Months Ended March 31, 2003
(Unaudited)
(Millions of dollars)

Supplemental Consolidating Data

Consolidated

Machinery
and
Engines(1)

FinancialProducts

ConsolidatingAdjustments

Cash flow from operating activities:

Profit
$ 129 $ 129 $ 53
$
(53)²

Adjustments for non-cash items:

Depreciation and amortization
332 205 127 -
Undistributed profit of Financial Products
-
(53
) -
53 ³

Other
17 11 1
5 ⁴

Changes in assets and liabilities:

Receivables - trade and other

(115
)
(53
)
(35
)
(27)⁴

Inventories

(301
)
(301
) - -
Accounts payable and accrued expenses
248 43 170
35 ⁴

Other - net

(92
)
(62
)
(7
)
(23)⁴

Net cash provided by (used for) operating activities
218
(81
) 309 (10)

Cash flow from investing activities:

Capital expenditures - excluding equipmentleased to others

(86
)
(81
)
(5
) -
Expenditures for equipment leased to others

(261
) -
(261
) -
Proceeds from disposals of property,
plant and equipment
160 - 160 -
Additions to finance receivables

(3,386
) -
(3,386
) -
Collection of finance receivables
2,995 - 2,995 -
Proceeds from the sale of finance receivables
269 - 269 -
Net intercompany borrowings
- 522 10
(532)⁵

Investments and acquisitions (net of
cash acquired)

(17
)
(7
)
(10
) -
Other - net

(40
)
(13
)
(40
)
13 ⁶

Net cash provided by (used for) investing activities

(366
) 421
(268
) (519)

Cash flow from financing activities:

Dividends paid

(120
)
(120
) - -
Common stock issued, including treasury
shares reissued
- - 13
(13)⁶

Net intercompany borrowings
-
(10
)
(522
)
532 ⁵

Proceeds from long-term debt issued
2,053 79 1,974 -
Payments on long-term debt

(985
)
(250
)
(735
) -
Short-term borrowings - net

(773
) 8
(781
) -

Net cash provided by (used for) financing
activities
175
(293
)
(51
) 519

Effect of exchange rate on cash

(9
)
(14
)
(5
)
10 ⁷

Increase (Decrease) in cash
and short-term investments
18 33
(15
) -
Cash and short-term investments at beginning
of period
309 146 163 -

Cash and short-term investments at end of period
$ 327 $ 179 $ 148 $ -

1 Represents Caterpillar Inc. and its subsidiaries with Financial Products accounted for on the equity basis.

2 Elimination of Financial Products profit after tax due to equity method of consolidation.

3 Non-cash adjustment for the undistributed profit from Financial Products.

4 Elimination of non-cash adjustments and changes in assets and liabilities related to consolidated reporting.

5 Net proceeds and payments to/from Machinery and Engines and Financial Products.

6 Change in investment and common stock related to Financial Products.

7 Elimination of the effect of exchange on intercompany balances.

G.Safe Harbor Statement under the Securities Litigation Reform Act of 1995

Certain statements contained in our first quarter 2004 Form 10-Q and prepared statements from the related results webcast are forward-looking and involve uncertainties that could significantly impact results. The words "believes," "expects," "estimates," "anticipates," "will be", "should" and similar words or expressions identify forward-looking statements made on behalf of Caterpillar. Uncertainties include factors that affect international businesses, as well as matters specific to the company and the markets it serves.

World Economic Factors

A vigorous worldwide economic recovery is now underway and global economic growth is expected to be about 4 percent in 2004, or about 1½ percentage points more than in 2003. All regions are improving, although the recovery in the Euro-zone economy is still weak. Industrial production in many developing countries increased sharply over the past year, often at double-digit rates.

Low interest rates initiated economic recoveries and low inflation rates likely will encourage central bankers to be cautious about implementing any interest rate hikes. Modest interest rate hikes (less than 100 basis points) probably would not much affect the 2004 outlook. If, however, central bankers decide to raise interest rates significantly, the recovery would be less robust than assumed, likely weakening Machinery and Engines sales.

Recent increases in coal and metals prices have prompted mining sectors in most countries to increase investments. Further increases in industrial production, plus tight supplies, should maintain prices at favorable levels and cause the mining recovery to strengthen further. An unexpected, sharp decline in prices would harm the recovery.

U.S. economic data were often weaker than expected at the start of the year but improved as the quarter progressed. First quarter growth was probably 4 percent or more and growth should improve further, allowing full year growth between 4.5 and 5 percent. Canada, which has had to reverse recent interest rate hikes, should have economic growth near 3 percent this year. Positives for Machinery and Engines sales include continued strong demand for housing, a recovery in commercial construction, increased funding for highways and favorable metals and energy prices. Coal mining, benefiting from stronger demand and sharp increases in spot prices, should increase significantly. Should any of these factors change substantially, our sales probably would be weaker than assumed.

While Euro-zone economies were weaker than expected in the first quarter, we expect some improvement in coming quarters. In addition, other European economies are experiencing stronger recoveries, which should keep overall European economic growth near 2 percent this year, enough to help our sales. Economies in both Africa/Middle East and the CIS should benefit from another year of high commodity prices. As a result, we project some growth in Machinery and Engines sales in EAME in 2004. However, the European economy is still fragile and any slowing in economic growth could adversely impact sales. Growth in sales in both Africa/Middle East and CIS are highly dependent upon a continued high level of energy and other commodity prices.

The Japanese economy has been in recovery for eight consecutive quarters and our outlook assumes that measures employed by the Bank of Japan - zero interest rates, the maintenance of high levels of reserves in the banking system and the purchase of long-term government bonds - will allow this recovery to continue. We project economic growth of 3 percent in 2004, somewhat better than in 2003 and the best year since 1996. The economy remains vulnerable to any tightening in financial conditions and should that occur, the recovery could stall. Slower economic growth would adversely affect our sales in that country and could have a negative impact on other economies, particularly those in the region.

Latin American economies recovered sharply late last year and we expect economic growth will improve to about 4 percent this year – the best year since 2000. The stronger world economy is boosting regional exports, higher metals prices should encourage more investment in mining and foreign investors are returning. As a result of the economic recovery, we project significant improvement in Machinery and Engines sales in 2004. Any slowing in world growth, collapse in commodity prices or sharp increases in interest rates would jeopardize the expected sales recovery.

The Asia/Pacific region should remain the fastest growing economic bloc in the world this year, with about 6.5 percent growth. China’s economy could slow a bit in response to modest tightening in economic policies but faster growth in most other countries will more than compensate. Exports will benefit from the worldwide economic recovery and low local interest rates will encourage more domestic spending. We expect sales of Machinery and Engines to increase again in 2004. Either a rapid slowdown in the Chinese economy or intensified trade frictions is a sizable risk to the sales improvement expected.

Commodity Prices

Commodities represent a significant sales opportunity, with prices and production as key drivers. Prices have improved sharply over the past year and our outlook assumes continued growth in the world economy will cause metals prices to hold at or above recent prices in 2004. Any unexpected weakening in world industrial production, however, could cause prices to drop sharply to the detriment of our results.

Coal production and prices have improved this year and our sales have benefited. We expect these trends to continue. Should coal prices soften, due to a slowing in world economic growth, the ongoing sales recovery would be vulnerable.

Oil and natural gas prices have continued fairly high into 2004 due to strong demand and tight inventories. Our outlook assumes that increased production will ease shortages in both oil and natural gas, allowing prices to ease some. We do not yet view higher energy prices as a threat to economies since it is strong demand that is boosting prices and world production is still increasing. However, should significant supply cuts occur, such as from OPEC production cuts or political unrest in a major producing country, the resulting price spikes likely would slow economies, potentially with a depressing impact on our sales.

Monetary and Fiscal Policies

For most companies operating in a global economy, monetary and fiscal policies implemented in the U.S. and abroad could have a significant impact on economic growth, and accordingly, demand for a product. In general, higher than expected interest rates, reductions in government spending, higher taxes, significant currency devaluations, and uncertainty over key policies are some factors likely to lead to slower economic growth and lower industry demand.

	38

While economic data are looking more favorable, central banks in most developed countries are still holding interest rates steady. Two (Reserve Bank of Australia and Bank of England) have implemented modest interest rate increases. Our outlook assumes that Central Banks will take great care to ensure that economic recoveries continue and that interest rates will remain low throughout 2004. Should Central Banks raise interest rates too aggressively, both economic growth and our sales could suffer.

Budget deficits in many countries have increased, which has limited the ability of governments to boost economies with tax cuts and more spending. Our outlook assumes that governments will not aggressively raise taxes and slash spending to deal with their budget imbalances. Such actions could disrupt growth and negatively affect sales to public construction.

Political Factors

Political factors in the United States and abroad have a major impact on global companies.

Our outlook assumes that there will be no major escalations of military conflict in the forecast period. Such military conflicts could severely disrupt sales into countries affected, as well as nearby countries.

Our outlook further assumes that efforts by countries to increase their exports will not result in retaliatory countermeasures by other countries to block such exports, particularly in the Asia/Pacific region. In addition, our outlook assumes that any change in ETI provisions will not negatively impact our tax liability.

Currency Fluctuations

The company has costs and revenues in many currencies and is therefore exposed to risks arising from currency fluctuations. Many currency positions are fairly closely balanced, which, along with the diversity of currency positions, helps diminish exchange rate risks.

The company's largest manufacturing presence is in the United States. So any unexpected strengthening of the dollar tends to raise the foreign currency value of costs and reduce our global competitiveness.

Dealer Practices

The company sells primarily through an independent dealer network. Dealers carry inventories of both new and rental equipment and adjust those inventories based on their assessments of future needs. Such adjustments can impact our results either positively or negatively. The current outlook assumes dealers will reduce inventories slightly in 2004; more drastic reductions would adversely affect sales.

Other Factors

The rate of infrastructure spending, housing starts, commercial construction and mining play a significant role in the company's results. Our products are an integral component of these activities and as these activities increase or decrease in the United States or abroad, demand for our products may be significantly impacted.

Projected cost savings or synergies from alliances with new partners could also be negatively impacted by a variety of factors. These factors could include, among other things, higher than expected wages, energy and/or material costs, and/or higher than expected financing costs due to unforeseen changes in tax, trade, environmental, labor, safety, payroll or pension policies in any of the jurisdictions where the alliances conduct their operations.

Our outlook factors in no significant disruption due to work stoppages at any of our facilities worldwide. Our outlook factors in the timely ratification of a new 6-year labor agreement between Caterpillar and the United Auto Workers. If, for whatever reason, there were to be a prolonged labor disruption, our sales and revenues and profit would likely be negatively impacted.

Results may be impacted positively or negatively by changes in the sales mix. Our outlook assumes a certain geographic mix of sales as well as a product mix of sales. If actual results vary from this projected geographic and product mix of sales, our results could be negatively impacted.

The company operates in a highly competitive environment and our outlook depends on a forecast of the company's share of industry sales. An unexpected reduction in that share could result from pricing or product strategies pursued by competitors, unanticipated product or manufacturing difficulties, a failure to price the product competitively, or an unexpected buildup in competitors' new machine or dealer owned rental fleets, leading to severe downward pressure on machine rental rates and/or used equipment prices.

The environment also remains very competitive from a pricing standpoint. Our outlook assumes that the company will be successful in implementing worldwide machine price increases communicated to dealers with an effective date of July 1, 2004. If for whatever reason the price increases are not accepted in the marketplace, our results will be negatively impacted. Moreover, additional price discounting would result in lower than anticipated realization.

Inherent in the operation of the Financial Products Division is the credit risk associated with its customers. The creditworthiness of each customer, and the rate of delinquencies, repossessions and net losses on customer obligations are directly impacted by several factors, including, but not limited to, relevant industry and economic conditions, the availability of capital, the experience and expertise of the customer's management team, commodity prices, political events, and the sustained value of the underlying collateral. Additionally, interest rate movements create a degree of risk to our operations by affecting the amount of our interest payments and the value of our fixed rate debt. Our match funding policy manages interest rate risk by matching t he interest rate profile (fixed rate or floating rate) of our debt portfolio with the interest rate profile of our receivables portfolio within certain parameters. To achieve our match funding objectives, we issue debt with a similar interest rate profile to our receivables and also use interest rate swap agreements to manage our interest rate risk exposure to interest rate changes and in some cases to lower our cost of borrowed funds. If interest rates move upward more sharply than anticipated, our financial results could be negatively impacted. With respect to our insurance and investment management operations, changes in the equity and bond markets could cause an impairment of the value of our investment portfolio, thus requiring a negative adjustment to profit.

	39

In general, our results are sensitive to changes in economic growth, particularly those originating in construction, mining and energy. Developments reducing such activities also tend to lower our sales. In addition to the factors mentioned above, our results could be negatively impacted by any of the following:

Any sudden drop in consumer or business confidence
Delays in legislation needed to fund public construction
Regulatory or legislative changes that slow activity in key industries; and/or
Unexpected collapses in stock markets.

This discussion of uncertainties is by no means exhaustive but is designed to highlight important factors that may impact our outlook. Obvious factors such as general economic conditions throughout the world do not warrant further discussion, but are noted to further emphasize the myriad of contingencies that may cause the company's actual results to differ from those currently anticipated.

Item 4. Controls and Procedures .

An evaluation was performed under the supervision and with the participation of the company's management, including the Chief Executive Officer (CEO) and Chief Financial Officer (CFO), of the effectiveness of the design and operation of the company's disclosure controls and procedures as of the end of the period covered by this quarterly report. Based on that evaluation, the company's management, including the CEO and CFO, concluded that the company's disclosure controls and procedures are effective to ensure that information required to be disclosed by the company in reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in Securities and Exchange Commission rules and forms. During the last fiscal quarter, there have been no significant changes in the company's internal controls over financial reporting that has materially affected, or is reasonably likely to materially affect, the company's internal control over financial reporting. Although the design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote, management's evaluation provided reasonable assurance that these controls will be effective.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings.

The disclosure regarding legal proceedings contained in Part I - Item 3 "Legal Proceedings" of our Form 10-K filed with the Securities and Exchange Commission for the year ended December 31, 2003 is updated by the following disclosure:

On January 16, 2002, Caterpillar commenced an action in the Circuit Court of the Tenth Judicial Circuit of Illinois in Peoria, Illinois, against Navistar International Transportation Corporation and International Truck and Engine Corporation (collectively Navistar). The lawsuit arises out of a long-term purchase contract between Caterpillar and Navistar effective May 31, 1988, as amended from time to time (the Purchase Agreement). The pending complaint alleges that Navistar breached its contractual obligations by: (i) paying Caterpillar $8.08 less per fuel injector than the agreed upon price for new unit injectors delivered by Caterpillar; (ii) refusing to pay contractually agreed upon surcharges owed as a result of Navistar ordering less than planned volumes of replacement unit injector s; and (iii) refusing to pay contractually agreed upon interest stemming from Navistar's late payments. At March 31, 2004, the past due receivable from Navistar ~~related~~regarding the foregoing was $139 million. The pending complaint also has claims alleging that Franklin Power Products, Inc., Newstream Enterprises, and Navistar, collectively and individually, failed to ~~this case was $125~~pay the applicable price for shipments of unit injectors to Franklin and Newstream. At March 31, 2004, the past due receivables for the foregoing totaled $12 million. The pending complaint further alleges that Sturman Industries, Inc. and Sturman Engine Systems, Inc. colluded with Navistar to utilize technology that Sturman Industries, Inc. misappropriated from Caterpillar to help Navistar develop its G2 fuel system, and tortiously interfered with the Purchase Agreement and Caterpillar's prospective economic relationship with Navistar. The pending complaint further alleges that the two parties' collusion led Navistar to select Sturman Engine Systems, Inc., and another company, instead of Caterpillar, to develop and manufacture the G2 fuel system.

On May 7, 2002, International Truck and Engine Corporation (International) commenced an action against Caterpillar in the Circuit Court of DuPage County, Illinois that alleges Caterpillar breached various aspects of a long-term agreement term sheet. In its fourth amended complaint, International seeks a declaration from the court that the term sheet constitutes a legally binding contract for the sale of heavy-duty engines at specified prices through the end of 2006, alleges that Caterpillar breached the term sheet by raising certain prices effective October 1, 2002, and also alleges that Caterpillar breached an obligation to negotiate a comprehensive long-term agreement referenced in the term sheet. International further claims that Caterpillar improperly restricted the supply of heavy-duty engines to International from June through September 2002, and claims that Caterpillar made certain fraudulent misrepresentations with respect to the availability of engines during this time period. International seeks damages "in an amount to be determined at trial" and injunctive relief. Caterpillar filed an answer denying International's claims and has filed a counterclaim seeking a declaration that the term sheet has been effectively terminated. Caterpillar denies International's claims and will vigorously contest them. On September 24, 2003, the Appellate Court of Illinois, ruling on an interlocutory appeal, issued an order consistent with Caterpillar's position that, even if the court subsequently determines that the term sheet is a binding contract, it is indefinite in duration and was therefore terminable at will by Caterpillar after a reasonable period.Caterpillar anticipates that a trial currently scheduled for the ~~second~~fourth quarter of 2004 will address all remaining issues in this matter.This matter is not related to the breach ofo f contract action brought by Caterpillar against Navistar currently pending in the ~~Cir cuit~~Circuit Court of Peoria County, Illinois.

~~Page 9~~

4.	~~New Accounting Pronouncements~~

On August 30, 2002, a World Trade Organization (WTO) arbitration panel determined that the European Union (EU) may impose up to $4.04 billion per year in retaliatory tariffs if the U.S. tax code is not brought into compliance with an August 2001 WTO decision that found the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 143 (SFAS 143), "Accounting for Asset Retirement Obligations." SFAS 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible, long-lived assets and the associated asset retirement costs. This Statement requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred by capitalizing it as partextraterritorial tax (ETI) provisions of the ~~carrying amount~~FSC Repeal and Extraterritorial Income Exclusion Act of 2000 constitute an export subsidy prohibited by the ~~long-lived assets. As required by SFAS 143, we adopted this new accounting standard~~WTO Agreement on ~~January 1, 2003. The adoption of SFAS 143 did not have any impact on our financial statements.~~

~~In November~~Subsidies and Countervailing Measures. Since August 2002, the ~~Financial Accounting Standards Board issued FASB Interpretation No. 45 (FIN 45), "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees~~EU has developed a list of ~~Indebtedness of Others." FIN 45 elaborates~~U.S. origin products on which the disclosures to be made by a guarantor about its obligations under certain guarantees. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. As required by FIN 45, on January 1, 2003, we adopted the initial recognition and measurement provisions on a prospective basis for guarantees issued or modified after December 31, 2002. The adoption of the recognition/measurement provisions did not have any impact on our financial statements.

In January 2003, the FASB issued Interpretation No. 46 (FIN 46), "Consolidation of Variable Interest Entities - an Interpretation of ARB No. 51." FIN 46 addresses consolidation by business enterprises of variable interest entities that have certain characteristics. Transferors to qualifying special-purpose entities and "grandfathered" qualifying special-purpose entities subject to the reporting requirements of SFAS 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," are excluded from the scope of FIN 46. FIN 46 is applicable immediately to variable interest entities created or obtained after January 31, 2003 (none created or obtained in the first nine months of 2003). For variable interest entities, which we acquired before February 1, 2003, FIN 46 is applicable to usEU could impose tariffs as ~~of December 31, 2003. We early adopted FIN 46 during the third quarter and it did not have a material impact on our financial statements.~~

In April 2003, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 149 (SFAS 149), "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." SFAS 149 amends SFAS 133 to provide clarification on the financial accounting and reporting for derivative instruments and hedging activities and requires similar accounting treatment for contracts with comparable characteristics. The adoption of SFAS 149, effective primarily for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003, had no impact on our financial statements.

In May 2003, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 150 (SFAS 150), "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." SFAS 150 addresses financial accounting and reporting for certain financial instruments with characteristics of both liabilities and equity. This statement requires that an issuer classify a financial instrument that is within its scopehigh as a liability (or an asset in some circumstances) because that financial instrument embodies an obligation of the issuer. As required by SFAS 150, we adopted this new accounting standard effective July 1, 2003. The adoption of SFAS 150 did not have a material impact on our financial statements.

5.	~~Inventories~~
	~~Inventories (principally "last-in, first-out" method) comprise the following:~~

(Millions of dollars)

September 30,

December 31,

2003

2002
Raw materials

$
1,024

$
806

Work-in-process

330

316

Finished goods

1,518

1,454

Supplies

185

187

Total inventories

$
3,057

$
2,763

~~We had long-term material purchase obligations of approximately $844 million at September 30, 2003.~~

~~Page 10~~

6.	~~Intangible Assets and Goodwill~~

As of September 30, 2003 and December 31, 2002, total intangible assets were $276 million and $281 million, respectively. This included $191 million of pension-related intangible assets for both periods. The remaining $85 million and $90 million as of September 30, 2003 and December 31, 2002, respectively, represents the net carrying value of intellectual property. The gross carrying amount of the intellectual property as of September 30, 2003 and December 31, 2002 was $125 million and $137 million, respectively, with accumulated amortization of $40 million and $47 million, respectively. Amortization expense for the three and nine months ended September 30, 2003 was $6 million and $10 million, respectively. Amortization expense for the three and nine months ended September 30, 2002 was $2 million and $7 million, respectively. Amortization expense related to intangible assets is expected to be:

(Millions of dollars)
2003
2004
2005
2006
2007
Thereafter
$
15
$
14
$
13
$
12
$
8
$
24

~~During the three and nine months ended September 30, 2003, no goodwill was acquired or impaired. During the third quarter we disposed of assets with related goodwill of $3 million.~~

7.	~~Unconsolidated Affiliated Companies~~
	Our investment in affiliated companies accounted for by the equity method consists primarily of a 50% interest in Shin Caterpillar Mitsubishi Ltd. (SCM) in Japan. Combined financial information of the unconsolidated affiliated companies accounted for using the equity method (generally on a three month lag, e.g., SCM results reflect the periods ending June 30) was as follows:

Results of Operation
Three Months Ended
Nine Months Ended
September 30,
September 30,
September 30,
September 30,
(Millions of dollars)
2003
2002
2003
2002
Sales
$
805
$
651
$
2,261
$
1,920
Cost of sales
624
520
1,765
1,528

Gross profit
$
181
$
131
$
496
$
392
Profit (loss)
$
17
$
-
$
27
$
(21)

Caterpillar's profit (loss)
$
7
$
1
$
11
$
(10)

Financial Position

September 30,

December 31,
(Millions of dollars)
2003

2002
Assets:

Current assets
$
1,400

$
1,389

Property, plant and equipment - net

923

1,209

Other assets

181

493

2,504

3,091

Liabilities:

Current liabilities

1,136

1,117

Long-term debt due after one year

367

808

Other liabilities

239

249

1,742

2,174

Ownership
$
762

$
917

Caterpillar's investment in unconsolidated affiliated companies

Investment in equity method companies
$
396

$
437

Plus: Investment in cost method companies

356

310

Total investment in unconsolidated affiliated companies
$
752

$
747

~~Page 11~~

8.	~~Segment Information~~

Caterpillar is organized based on a decentralized structure that has established accountabilities to continually improve business focus and increase our ability to react quickly to changes in both the global business cycle and competitors' actions. Our current structure uses a product, geographic matrix organization comprised of multiple profit center and service center divisions.

We have developed an internal measurement system, which is not based on generally accepted accounting principles (GAAP), that is intended to motivate desired behavior and drive performance rather than measure a division's contribution to enterprise results. It is the comparison of actual results to budgeted results that makes our internal reporting valuable to management. Consequently, we believe that segment disclosure based on Statement of Financial Accounting Standards No. 131 (SFAS 131) "Disclosures about Segments of an Enterprise and Related Information" has limited value to our external readers. As a result, in addition to the required SFAS 131 compliant segment information presented below, we are continuing to disclose GAAP-based financial results for our three lines of business (Machinery, Engines, and Financial Products) in our Management's Discussion and Analysis beginning on page 20.

Business Segments
Three Months Ended September 30,
(Millions of dollars)

Machinery and Engines
Financing
&
Insurance
Services
Consolidated
Total
2003
Asia/
Pacific
Marketing
Construction
& Mining
Products
EAME
Marketing
Latin
America
Marketing
Power
Products
North
America
Marketing
All
Other
Total
External sales and revenues
$
457
$
75
$
746
$
316
$
1,600
$
1,545
$
354
$
5,093
$
513
$
5,606

Intersegment sales & revenues

2

1,740

541

66

1,445

50

407

4,251

-

4,251

Total sales and revenues
$
459
$
1,815
$
1,287
$
382
$
3,045
$
1,595
$
761
$
9,344
$
513
$
9,857

Accountable profit (loss)
$
20
$
90
$
24
$
15
$
13
$
49
$
84
$
295
$
103
$
398

Accountable assets at September 30, 2003
$
512
$
2,161
$
1,043
$
523
$
3,651
$
2,073
$
2,226
$
12,189
$
18,972
$
31,161

Machinery and Engines
Financing
&
Insurance
Services
Consolidated
Total
2002
Asia/
Pacific
Marketing
Construction
& Mining
Products
EAME
Marketing
Latin
America
Marketing
Power
Products
North
America
Marketing
All
Other
Total
External sales and revenues
$
414
$
59
$
723
$
272
$
1,609
$
1,291
$
316
$
4,684
$
446
$
5,130

Intersegment sales & revenues

-

1,526

456

38

1,377

40

411

3,848

-

3,848

Total sales and revenues
$
414
$
1,585
$
1,179
$
310
$
2,986
$
1,331
$
727
$
8,532
$
446
$
8,978

Accountable profit (loss)
$
23
$
5
$
8
$
8
$
5
$
3
$
73
$
125
$
64
$
189

Accountable assets at December 31, 2002
$
436
$
2,214
$
991
$
470
$
3,757
$
1,574
$
2,297
$
11,739
$
17,417
$
29,156

Business Segments
Nine Months Ended September 30,
(Millions of dollars)

Machinery and Engines
Financing
&
Insurance
Services
Consolidated
Total
2003
Asia/
Pacific
Marketing
Construction
& Mining
Products
EAME
Marketing
Latin
America
Marketing
Power
Products
North
America
Marketing
All
Other
Total
External sales and revenues
$
1,430
$
194
$
2,348
$
862
$
4,524
$
4,601
$
1,037
$
14,996
$
1,492
$
16,488

Intersegment sales & revenues

4

5,309

1,688

167

4,001

139

1,225

12,533

-

12,533

Total sales and revenues
$
1,434
$
5,503
$
4,036
$
1,029
$
8,525
$
4,740
$
2,262
$
27,529
$
1,492
$
29,021

Accountable profit (loss)
$
100
$
337
$
152
$
33
$
(112)
$
102
$
275
$
887
$
264
$
1,151

Accountable assets at September 30, 2003
$
512
$
2,161
$
1,043
$
523
$
3,651
$
2,073
$
2,226
$
12,189
$
18,972
$
31,161

Machinery and Engines
Financing
&
Insurance
Services
Consolidated
Total
2002
Asia/
Pacific
Marketing
Construction
& Mining
Products
EAME
Marketing
Latin
America
Marketing
Power
Products
North
America
Marketing
All
Other
Total
External sales and revenues
$
1,164
$
154

$
2,051
$
904
$
4,258
$
4,201
$
878
$
13,610
$
1,311
$
14,921

Intersegment sales & revenues

2

5,034

1,484

129

3,700

122

1,178

11,649

-

11,649

Total sales and revenues
$
1,166
$
5,188

$
3,535
$
1,033
$
7,958
$
4,323
$
2,056
$
25,259
$
1,311
$
26,570

Accountable profit (loss)
$
51
$
128

$
66
$
32
$
(153)
$
6
$
158
$
288
$
206
$
494

Accountable assets at December 31, 2002
$
436
$
2,214

$
991
$
470
$
3,757
$
1,574
$
2,297
$
11,739
$
17,417
$
29,156

~~Page 12~~

Reconciliation of Sales & Revenues:
(Millions of dollars)
Machinery
and
Engines

Financing &
Insurance
Services

Consolidating
Adjustments

Consolidated
Total
Three Months Ended September 30, 2003:

Total external sales and revenues from business segments
$
5,093

$
513

$
-

$
5,606

Other

19

(34)

(46)

(61)

Total sales and revenues
$
5,112

$
479

$
(46)

$
5,545

Three Months Ended September 30, 2002:

Total external sales and revenues from business segments
$
4,684

$
446

$
-

$
5,130

Other

16

(20)

(51)

(55)

Total sales and revenues
$
4,700

$
426

$
(51)

$
5,075

Reconciliation of Sales & Revenues:
(Millions of dollars)
Machinery
and
Engines
Financing &
Insurance
Services
Consolidating
Adjustments
Consolidated
Total
Nine Months Ended September 30, 2003:
Total external sales and revenues from business segments
$
14,996
$
1,492
$
-
$
16,488
Other
41
(98)
(133)
(190)
Total sales and revenues
$
15,037
$
1,394
$
(133)
$
16,298
Nine Months Ended September 30, 2002:
Total external sales and revenues from business segments
$
13,610
$
1,311
$
-
$
14,921
Other
49
(64)
(131)
(146)
Total sales and revenues
$
13,659
$
1,247
$
(131)
$
14,775

~~Page 13~~

Reconciliation of Profit Before Taxes:
(Millions of dollars)
Machinery
and
Engines
Financing &
Insurance Services
Consolidated
Total
Three Months Ended September 30, 2003:
Total accountable profit from business segments
$
295
$
103
$
398
Corporate costs
(135)
-
(135)
Methodology differences:
Inventory/cost of sales
19
-
19
Postretirement benefit expense
(36)
-
(36)
Financing costs
84
-
84
Other methodology differences
(60)
-
(60)
Other
14
-
14
Total profit before taxes
$
181
$
103
$
284

Three Months Ended September 30, 2002:
Total accountable profit from business segments
$
125
$
64
$
189
Corporate costs
14
-
14
Methodology differences:
Inventory/cost of sales
(248)
-
(248)
Postretirement benefit expense
48
-
48
Financing costs
83
-
83
Other methodology differences
161
32
193
Other
4
-
4
Total profit before taxes
$
187
$
96
$
283

Reconciliation of Profit Before Taxes:
(Millions of dollars)
Machinery
and
Engines
Financing &
Insurance Services
Consolidated
Total
Nine Months Ended September 30, 2003:
Total accountable profit from business segments
$
887
$
264
$
1,151
Corporate costs
(204)
-
(204)
Methodology differences:
Inventory/cost of sales
(127)
-
(127)
Postretirement benefit expense
(122)
-
(122)
Financing costs
270
-
270
Other methodology differences
(14)
17
3
Other
41
-
41
Total profit before taxes
$
731
$
281
$
1,012

Nine Months Ended September 30, 2002:
Total accountable profit from business segments
$
288
$
206
$
494
Corporate costs
15
-
15
Methodology differences:
Inventory/cost of sales
(556)
-
(556)
Postretirement benefit expense
98
-
98
Financing costs
245
-
245
Other methodology differences
366
13
379
Other
24
-
24
Total profit before taxes
$
480
$
219
$
699

~~Page 14~~

Reconciliation of Assets:
(Millions of dollars)
Machinery
and
Engines

Financing &
Insurance
Services

Consolidating
Adjustments

Consolidated
Total
September 30, 2003:

Total accountable assets from business segments
$
12,189
$
18,972
$
-
$
31,161
Items not included in segment assets:
Cash and short-term investments
263
134
-
397
Intercompany trade receivables
531
359
(890)
-
Investment in affiliated companies
285
-
-
285
Investment in Financial Products
2,343
-
(2,343)
-
Deferred income taxes and prepaids
3,070
60
(158)
2,972
Intangible assets and other assets
1,865
-
-
1,865
Service center assets
765
-
-
765
Dealer receivables double counted in segment assets
(2,263)
-
-
(2,263)
Liabilities included in segment assets
860
-
-
860
Inventory methodology differences
(1,509)
-
-
(1,509)
Other
412
153
(31)
534

Total assets
$
18,811
$
19,678
$
(3,422)
$
35,067
December 31, 2002:
Total accountable assets from business segments
$
11,739
$
17,417
$
-
$
29,156
Items not included in segment assets:
Cash and short-term investments
146
163
-
309
Intercompany trade receivables
917
343
(1,260)
-
Investment in affiliated companies
283
-
-
283
Investment in Financial Products
1,961
-
(1,961)
-
Deferred income taxes and prepaids
2,802
75
(133)
2,744
Intangible assets and other assets
1,541
-
-
1,541
Service center assets
810
-
-
810
Dealer receivables double counted in segment assets
(1,857)
-
-
(1,857)
Liabilities included in segment assets
848
-
-
848
Inventory methodology differences
(1,590)
-
-
(1,590)
Other
493
149
(35)
607
Total assets
$
18,093
$
18,147
$
(3,389)
$
32,851

9.	~~Available-For-Sale Securities~~

Caterpillar Insurance and Caterpillar Investment Management, Ltd. had investments in certain debt and equity securities at September 30, 2003 that are classified as available-for-sale in accordance with Statement of Financial Accounting Standards No. 115 (SFAS 115) and recorded at fair value based upon quoted market prices. These fair values are included in "Other Assets" in the Statement of Financial Position. Unrealized gains and losses arising from the revaluation of available-for-sale securities are included, net of applicable deferred income taxes, in equity ("Accumulated other comprehensive income" in the Statement of Financial Position). Realized gains and losses on sales of investments are determined using the specific identification method for debt instruments and the FIFO method for equity securities. Realized gains and losses are included in "Other income (expense)" in the Statement of Results of Operations.

September 30, 2003

Unrealized

Pretax Net

(Millions of dollars)
Cost Basis

Gains (Losses)

Fair Value
Government debt
$
99

$
1

$
100

Corporate bonds

291

5

296

Equity securities

189

1

190

Total
$
579

$
7

$
586

~~Page 15~~

December 31, 2002

Unrealized

Pretax Net

(Millions of dollars)
Cost Basis

Gains (Losses)

Fair Value
Government debt
$
89

$
-

$
89

Corporate bonds

208

1

209

Equity securities

220

(51)

169

Total
$
517

$
(50)

$
467

The fair value of the available-for-sale debt securities at September 30, 2003, by contractual maturity, is shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to prepay and creditors may have the right to call obligations.

(Millions of dollars)

Fair Value
Due in one year or less

$
18

Due after one year through five years

$
210

Due after five years through ten years

$
18

Due after ten years

$
150

Proceeds from sales of investments in debt and equity securities during the three and nine months ended September 30, 2003 were $201 million and $280 million, respectively. Proceeds were $156 million and $197 million for the three and nine months ended September 30, 2002, respectively. Gross gains of $3 million and gross losses of $1 million were included in current earnings for the three and nine months ended September 30, 2003, respectively. Gross gains of $7 million and $1 million were included in current earnings for the three and nine months ended September 30, 2002, respectively.

In accordance with the application of SFAS 115 for "other than temporary" declines in the market value of securities (in both the Caterpillar Insurance and Caterpillar Investment Management Ltd. investment portfolios), we recognized pretax charges of $8 million and $32 million for the three and nine months ended September 30, 2003, respectively. We recognized a $1 million and $41 million pretax charge for "other than temporary" declines for the three and nine months ended September 30, 2002, respectively. These charges were accounted for as realized losses and were included in "Other income (expense)" in the Statement of Results of Operations. The cost basis of the impacted securities was adjusted to reflect these charges.

~~10.~~

~~Derivative Instruments and Hedging Activities~~

Our earnings and cash flow are subject to fluctuations due to changes in foreign currency exchange rates, interest rates and commodity prices. Our "Risk Management Policy" (Policy) allows for the use of derivative financial instruments to prudently manage foreign currency exchange rate, interest rate and commodity price exposure. Our derivative activities are subject to the management, direction and control of our Financial Officers. Risk management practices, including the use of financial derivative instruments, are presented to the Audit Committee of the Board of Directors at least annually.

~~Foreign Currency Exchange Rate Risk~~
Foreign currency exchange rate movements create a degree of risk by affecting the U.S. dollar value of sales made and costs incurred in foreign currencies. Movements in foreign currency rates also affect our competitive position as these changes may affect business practices and/or pricing strategies of non-U.S. based competitors. Additionally, we have balance sheet positions denominated in foreign currency, thereby creating exposure to movements in exchange rates.

Our Machinery and Engines operations purchase, manufacture and sell products in many locations around the world. As we have a diversified revenue and cost base, we manage our future foreign currency cash flow exposure on a net basis. We use foreign currency forward and option contracts to manage unmatched foreign currency cash inflow and outflow. Our objective is to minimize the risk of exchange rate movements that would reduce the U.S. dollar value of our foreign currency cash flow. Our Policy allows for managing anticipated foreign currency cash flow for up to four years.

~~Page 16~~

We generally designate as cash flow hedges at inception of the contract any Australian dollar, Brazilian real, British pound, Canadian dollar, euro, Japanese yen, Mexican peso or Singapore dollar forward or option contracts that exceed 90 days in duration. Designation is performed on a specific exposure basis to support hedge accounting. The remainder of Machinery and Engines foreign currency contracts are undesignated. Gains of $1 million and $5 million on the undesignated contracts were recorded in current earnings ("Other income (expense)" in the Statement of Results of Operations) for the three and nine months ended September 30, 2003, respectively. Gains of $0.1 million and $1 million on undesignated contracts were recorded for the three and nine months ended September 30, 2002, respectively. Gains of $0.1 million due to changes in time value on options were excluded from effectiveness calculations and included in current earnings ("Other income (expense)") for the nine months ended September 30, 2003. Losses of $0.3 million and $0.6 million were included in current earnings for the three and nine months ended September 30, 2002, respectively. As of September 30, 2003, $23 million of deferred net gains included in equity ("Accumulated other comprehensive income" in the Statement of Financial Position) are expected to be reclassified to current earnings ("Other income (expense)") over the next twelve months. As of September 30, 2002, this projected reclassification was $14 million. There were no circumstances where hedge treatment was discontinued during the three or nine months ended September 30, 2003 or 2002.

In managing foreign currency risk for our Financial Products operations, our objective is to minimize earnings volatility resulting from conversion and the remeasurement of net foreign currency balance sheet positions. Our Policy allows the use of foreign currency forward contracts to offset the risk of currency mismatch between our receivable and debt portfolio. All such foreign currency forward contracts are undesignated and as such are not accounted for as hedges. "Other income (expense)" included losses of $21 million and gains of $2 million on the undesignated contracts for the three months ended (losses of $71 million and $59 million for the nine months ended) September 30, 2003 and 2002, respectively. substantially offset by balance sheet remeasurement and conversion gains and losses.

~~Interest Rate Risk~~
Interest rate movements create a degree of risk to our operations by affecting the amount of our interest payments and the value of our fixed rate debt. Our Policy is to use interest rate swap agreements and forward rate agreements to manage our exposure to interest rate changes and lower the cost of borrowed funds.

Our Machinery and Engines operations generally use fixed rate debt as a source of funding. Our objective is to minimize the cost of borrowed funds. Our Policy allows us to enter into fixed-to-floating interest rate swaps and forward rate agreements to meet that objective with the intent to designate as fair value hedges at inception of the contract all fixed-to-floating interest rate swaps. Designation as a hedge of the fair value of our fixed rate debt is performed to support hedge accounting. During 2001, our Machinery and Engines operations liquidated all fixed-to-floating interest rate swaps. Deferred gains on these liquidated fixed-to-floating interest rate swaps, which were previously designated as fair value hedges, are being amortized to earnings ratably over the remaining life of the hedged debt. Gains of $1 million and $5 million on the liquidated swaps were amortized to current earnings ("Other income (expense)") for the three and nine months ended September 30, 2003, respectively. Gains of $2 million and $6 million were amortized to earnings for the three and nine months ended September 30, 2002, respectively. We designate a s cash flow hedges at inception of the contract all forward rate agreements. Designation as a hedge of the anticipated issuance of debt is performed to support hedge accounting. Machinery and Engines forward rate agreements are 100% effective. As of September 30, 2003, $0.3 million of deferred net gains included in equity ("Accumulated other comprehensive income") are expected to be reclassified to current earnings ("Other income (expense)") over the next twelve months. The reclassification of the remaining deferred amount to current earnings ("Other income (expense)") will occur over a maximum of thirty years. There were no circumstances where hedge treatment was discontinued during the nine months ended September 30, 2003.

Our Financial Products operations have a "match funding" policy whereby the interest rate profile (fixed rate or floating rate) of their debt portfolio matches the interest rate profile of their receivable portfolio within established guidelines. In connection with that policy, we use interest rate derivative instruments to modify the debt structure to match the receivable portfolio. This "match funding" reduces the volatility of margins between interest-bearing assets and interest-bearing liabilities, regardless of which direction interest rates move. We also use these instruments to gain an economic and/or competitive advantage through a lower cost of borrowed funds. This is accomplished by changing the characteristics of existing debt instruments or entering into new agreements in combination with the issuance of new debt.

~~Page 17~~

We use floating-to-fixed, fixed-to-floating, and floating-to-floating interest rate swaps to meet our "match funding" policy. To support hedge accounting, we designate fixed-to-floating interest rate swaps as fair value hedges of the fair value of our fixed rate debt at the inception of the contract. As Financial Products fixed-to-floating interest rate swaps are 100% effective, gains on designated interest rate derivatives of $1 million and $70 million were offset completely by losses on hedged debt of $1 million and $70 million in current earnings ("Other income (expense)") for the three and nine months ended September 30, 2003. Gains of $22 million and $69 million for the three and nine months ended September 30, 2002 were completely offset by losses of $22 million and $69 million in the same period. During the second quarter of 2002, our Financial Products operations liquidated four fixed-to-floating interest rate swaps. As a result, the fair value adjustment of the original debt wil l be amortized to earnings ratably over the remaining life of the hedged debt. Gains of $0.5 million and $1 million on the liquidated swaps were amortized to current earnings ("Interest expense of Financial Products") for the three and nine months ended September 30, 2003. A gain of $1 million was amortized to current earnings for the nine months ended September 30, 2002. Financial Products' policy is to designate most floating-to-fixed interest rate swaps as cash flow hedges of the variability of future cash flows at inception of the contract. For the three and nine months ended September 30, 2003 and 2002, gains of less than $1 million were included in current earnings ("Other income (expense)") for both the ineffectiveness on floating-to-fixed interest rate swaps designated as cash flow hedges and our mark-to-market on undesignated floating-to-fixed and floating-to-floating interest rate swaps. As of September 30, 2003, $21 million of deferred net losses included in equity ("Accumulated other comprehens ive income") is expected to be reclassified to current earnings ("Interest expense of Financial Products") over the next twelve months. As of September 30, 2002, $26 million of deferred net losses was expected to be reclassified to current earnings. There were no circumstances where hedge treatment was discontinued during the three or nine months ended September 30, 2003 or 2002.

~~Commodity Price Risk~~
Commodity price movements create a degree of risk by affecting the price we must pay for certain raw material. Our policy is to use commodity forward and option contracts to manage the commodity risk and reduce the cost of purchased materials.

Our Machinery and Engines operations purchase aluminum, copper and nickel embedded in the components we purchase from suppliers. Our suppliers pass on to us price changes in the commodity portion of the component cost.

Our objective is to minimize volatility in the price of these commodities. Our policy allows us to enter commodity forward and option contracts to lock in the purchase price of the commodities within a four-year horizon. All such commodity forward and option contracts are undesignated. Gains on the undesignated contracts of $7 million and $8 million were recorded in current earnings ("Other income (expense)") for the three and nine months ended September 30, 2003. Losses of $9 million and $3 million were recorded in earnings for the three and nine months ended September 30, 2002.

~~11.~~

~~Guarantees and product warranty~~

We have guaranteed to repurchase loans of certain Caterpillar dealers from the Dealer Capital Asset Trust (DCAT) in the event of default. These guarantees arose in conjunction with Cat Financial's relationship with third party dealers who sell Caterpillar equipment. These guarantees have terms ranging from one to four years and are secured primarily by dealer assets. At September 30, 2003, and December 31, 2002 amounts outstanding under these guarantees were $373 million and $290 million, respectively. The related book value was $3 million at September 30, 2003 versus zero at December 31, 2002.

Our product warranty liability is determined by applying historical claim rate experience to the current field population and dealer inventory. Generally, historical claim rates are developed using a 12-month rolling average of actual warranty payments. These rates are applied to the field population and dealer inventory to determine the liability.

(Millions of dollars)

2003

2002
Warranty liability, January 1

$
693

$
652
Payments

(353)

(494)
Provision for warranty

306

535
Ending Warranty liability*

$
646

$
693
* 2003 as of September 30 and 2002 as of December 31

~~Page 18~~

~~12.~~

~~Computations of Profit Per Share~~

Three Months Ended
September 30,

(Dollars in millions except per share data)
2003

2002
I.

Profit for the period (A):
$
222

$
213

II.

Determination of shares (millions):

Weighted average number of common shares outstanding (B)

346.3

344.2

Shares issuable on exercise of stock options, net of shares assumed to be purchased out of proceeds at average market price

9.8

2.0

Average common shares outstanding for fully diluted computation (C)

356.1

346.2

III.

Profit per share of common stock:

Assuming no dilution (A/B)
$
0.64

$
0.62

Assuming full dilution (A/C)
$
0.62

$
0.61

Nine Months Ended
September 30,

(Dollars in millions except per share data)
2003

2002
I.

Profit for the period (A):
$
750

$
493

II.

Determination of shares (millions):

Weighted average number of common shares outstanding (B)

345.1

343.9

Shares issuable on exercise of stock options, net of shares assumed to be purchased out of proceeds at average market price

3.9

3.3

Average common shares outstanding for fully diluted computation (C)

349.0

347.2

III.

Profit per share of common stock:

Assuming no dilution (A/B)
$
2.17

$
1.43

Assuming full dilution (A/C)
$
2.15

$
1.42

~~13.~~

~~Early Retirement of Debt~~

During the third quarter of 2003, we redeemed our $250 million 6% debentures due in 2007. These debentures were issued with a significant original issue discount and had an effective annual interest rate of 13.3%. The early retirement resulted in a pretax charge of $55 million ($40 million after tax) for accelerated recognition of the unamortized original issue discount.

~~14.~~

~~Securitized Assets~~

During the second quarter of 2003 and third quarter of 2002, Cat Financial securitized retail installment sale contracts and finance leases into public asset-backed securitization facilities. These finance receivables, which are being held in securitization trusts, are secured by new and used equipment. Cat Financial retained servicing responsibilities and subordinated interests related to these securitizations. Subordinated interests for the 2003 and 2002 securitizations include $9 million and $9 million in subordinated certificates, an interest in future cash flows (excess) with an initial fair value of $14 million and $11 million, and a reserve account with an initial fair value of $10 million and $10 million, respectively. Cat Financial's retained interests are generally subordinate to the investors' interests. Net proceeds from the 2003 and 2002 transactions were $693 million and $641 million, respectively. Net gains on these transactions of $22 million and $18 million were recognized in the second quarter of 2003 and the third quarter of 2002, respectively. Significant assumptions used to estimate the fair value of the subordinated certificates for the 2003 and 2002 transactions include a 5.00% and 4.83% discount rate, a weighted-average prepayment rate of 14% and 14%, and expected credit losses of 1% and 1%, respectively. Significant assumptions used to estimate the fair value of the excess and the reserve accounts for both the 2003 and 2002 transactions include a 14% discount rate, a weighted-average prepayment rate of 14%, and expected credit losses of 1%. Cat Financial receives annual servicing fees of approximately 1% of unpaid note value for both the 2003 and 2002 transactions.

~~Page 19~~

~~Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations~~

A.~~Consolidated Results of Operations~~

~~THREE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED WITH THREE MONTHS ENDED SEPTEMBER 30, 2002~~

~~SALES AND REVENUES~~

The chart above graphically illustrates reasons for the change in Consolidated Sales and Revenues between third quarter 2002 (at left) and third quarter 2003 (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 parenthesis above each bar. Caterpillar management utilizes these charts internally to visually communicate with its Board and employees.

~~Third-quarter 2003 sales and revenues were $5.55 billion compared to $5.08 billion in the third quarter of 2002. The 9~~100 percent increase was primarily due to higher Machinery volume of $226 million, a favorable currency impact on sales of $128 million (due mainly to the stronger euro) and higher Financial Products revenues of $58 million.

~~Page 20~~

MACHINERY AND ENGINES

Sales and Revenues
(Millions of dollars)

Total

North
America

EAME

Latin
America

Asia/
Pacific

Three Months Ended September 30, 2003
Machinery
$
3,250
$
1,760
$
842
$
230
$
418
Engines*
1,862
808
576
232
246
Financial Products**
433
308
78
25
22

$
5,545
$
2,876
$
1,496
$
487
$
686
Three Months Ended September 30, 2002
Machinery
$
2,905
$
1,531
$
802
$
193
$
379
Engines*
1,795
873
530
180
212
Financial Products**
375
275
67
19
14
$
5,075
$
2,679
$
1,399
$
392
$
605

*
Does not include internal engine transfers of $341 million and $329 million in third quarter 2003 and third quarter 2002, respectively. Internal engine transfers are valued at prices comparable to those for unrelated parties.
**
Does not include revenues earned from Machinery and Engines of $46 million and $51 million in third quarter 2003 and third quarter 2002, respectively.

Refer to table on page 23 for reconciliation of Machinery and Engine Sales by Geographic Region to External Sales by Marketing Segment.

Machinery sales were $3.25 billion, an increase of $345 million or about 12 percent from third quarter 2002. Sales volume was up about 8 percent, the favorable impact of currency accounted for about 3 percent and improved price realization added about 1 percent. In North America, sales of machinery increased 15 percent, mostly due to improved price realization and higher volume. Sales volume rose because of an 11 percent increase in dealer deliveries, largely into construction, where activity was higher than in third quarter 2002. In~~EAME~~, sales of machinery increased 5 percent due to the favorable currency impact of a stronger euro. However, sales volume declined largely as a result of weak economic conditions in Europe. Company sales in~~Latin America~~ were up 19 percent from third quarter 2002 due to higher dealer deliveries into mining. Asia/Pacific sales were up 10 percent from a year earlier, the result of significant sales volume growth. Low interest rates and stro ng economic growth boosted both construction and demand for new machines, especially in China.

~~Engines~~ ~~sales~~ were $1.86 billion, an increase of $67 million or about 4 percent from third quarter 2002. The favorable impact of currency accounted for about 3 percent and improved price realization and emissions related price increases contributed about 2 percent. These positive factors were partially offset by lower volume of about 1 percent. Sales increased 29 percent in Latin America, 9 percent in EAME and 16 percent in Asia/Pacific which more than offset 7 percent lower sales in North America. In North America, despite higher price realization on heavy-duty on-highway truck and bus engines, sales of on-highway truck and bus engines fell 16 percent from third quarter last year which was abnormally bolstered by strong sales to truck manufacturers before the October 2002 emissions standards became effective. Additionally, North American sales of engines into the petroleum sector were down 26 percent due to lower demand for turbines and turbine services compared to last year's strong third quarter that benefited from higher investments by the gas compression industry. Sales in EAME were higher due to stronger demand for engines sold into the electric power sector and the favorable effects of currency. The increase in Latin America resulted from stronger sales of turbines and turbine services into the electric power and petroleum sectors. Global sales into the electric power sector were up 26 percent while sales into other sectors were down from 2 to 15 percent.

~~Financial Products revenues~~~~for the third quarter were $433 million, up $58 million or about 15 percent compared with third quarter 2002. The favorable impact of approximately $50 million due to continued growth of~~~~earning assets~~ at Cat Financial was partially offset by the approximately $32 million impact of generally lower interest rates on new and existing finance receivables. Additionally, there was a $20 million increase in earned premiums on extended service contracts at Cat Insurance.

~~Page 21~~

~~OPERATING PROFIT~~

The chart above graphically illustrates reasons for the change in Consolidated Operating Profit between third quarter 2002 (at left) and third quarter 2003 (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 parenthesis above each bar. Caterpillar management utilizes these charts internally to visually communicate with its Board and employees.

Operating profit was favorably impacted by $59 million lower core operating costs, improved price realization of $34 million, improvements at Financial Products of $25 million, the favorable profit impact of additional sales volume (net of unfavorable sales mix) of $15 million and the net favorable impact of currency of $9 million. Lower core operating costs were the result of reductions in material costs and quality improvements reflected in lower warranty costs partially offset by higher performance related variable pay elements as a result of our improved financial performance. Variable pay consists of short-term and long-term incentive compensation. The accrual for these costs was approximately $75 million higher. The full year impact is estimated to be about $100 million higher.

~~Partially offsetting the favorable items was $71 million in higher retiree pension, healthcare and related benefit costs. In addition, the~~~~changes in emission standards~~ ~~for on-highway truck and bus engines in North America resulted in a net unfavorable impact of approximately $11 million (no impact in third quarter 2002).~~

Operating Profit (Loss)
(Millions of Dollars)

Three Months Ended

September 30,
2003

September 30,
2002

Machinery
$
239

$
207

Engines

80

77

Financial Products

92

67

Consolidating Adjustments

(26)

(27)

$
385

$
324

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

~~Page 22~~

Machinery operating profit increased 15 percent, or $32 million, from third quarter 2002. The favorable impact of improved price realization, higher volume, and lower core operating costs more than offset higher retiree pension, healthcare and related benefit costs and unfavorable sales mix.

~~Engine operating profit~~ increased 4 percent, or $3 million, from third quarter 2002 as lower core operating costs were almost entirely offset by higher retiree pension, healthcare and related benefit costs, unfavorable sales volume/mix and the unfavorable profit impact of changes in emission standards (no impact in third quarter 2002).

~~Financial Products operating profit~~was $92 million, up $25 million or 37 percent from third quarter 2002. The growth in earning assets contributed $15 million to the increase in operating profit while a favorable change in gain/loss on the sale of equipment returned from lease added $10 million.

Reconciliation of Machinery and Engine Sales by Geographic Region to External Sales by Marketing Segment
Three months ended
(Millions of Dollars)
September 30,
2003

September 30,
2002
North American Geographic Region
$
2,568

$
2,404
Engine sales included in the Power Products segment

(808)

(874)
Company owned dealer sales included in the All Other segment

(97)

(92)
Other*

(118)

(147)

North American Marketing external sales
$
1,545

$
1,291

EAME Geographic Region
$
1,418

$
1,332
Power Products sales not included in the EAME Marketing segment

(446)

(436)
Other*

(226)

(173)

EAME Marketing external sales
$
746

$
723

Latin America Geographic Region
$
462

$
373
Power Products sales not included in the Latin America Marketing segment

(210)

(173)
Other*

64

72

Latin America Marketing external sales
$
316

$
272

Asia/Pacific Geographic Region
$
664

$
591
Power Products sales not included in the Asia/Pacific Marketing segment

(136)

(126)
Other*

(71)

(51)

Asia/Pacific Marketing external sales
$
457

$
414

* Represents primarily external sales of the Construction and Mining Products and the All Other segments.

~~OTHER PROFIT/LOSS ITEMS~~

~~Interest expense excluding Financial Productswas $5 million lower compared to third quarter 2002.~~

~~Other income/expense~~was expense of $40 million compared with income of $25 million in third quarter 2002 for an unfavorable impact of $65 million. The change was primarily due to the $55 million pre-tax charge ($40 million after-tax) for early retirement of~~Machinery and Engines~~ ~~$250 million 6% debentures due in 2007 and $18 million less gain on publicly~~~~securitized finance receivables~~ at Cat Financial. The debentures were issued at a significant original issue discount and had an effective annual interest rate of 13.3%. This charge reflects accelerated recognition of the unamortized original issue discount; however, the early retirement will positively impact future earnings and cash flow. The decrease in securitized finance receivables gain was related to the timing of Cat Financial's public securitization, which took place in the second quarter this year ($22 million in second quarter 2003 versus a similar gain of $18 million in the third quarter of 2002). These unfavorable items were partially offset by a favorable impact of commodity hedging of $15 million for Machinery and Engines.

~~The provision for income taxes~~ in the third quarter reflects an estimated annual tax rate of 27 percent for 2003 compared to 28 percent a year ago. Third-quarter 2003 tax expense reflects an adjustment of $7 million resulting from a decrease in the estimated annual tax rate from 28 to 27 percent for the first six months of 2003 due to changes in the estimated tax benefits from export sales and the geographic mix of profits.

~~Page 23~~

~~The equity in profit/loss of unconsolidated affiliated companies~~ ~~increased $6 million from third quarter a year ago, due in part to improved profitability of Shin Caterpillar Mitsubishi Ltd. resulting from improved export business into China and North America.~~

~~EMPLOYMENT~~

At the end of third quarter 2003, Caterpillar's worldwide employment was 68,006 compared with 70,379 one year ago. Employment was reduced by 2,373 or about 3 percent, year over year. This includes the impact of acquiring a controlling interest in Hindustan Powerplus Ltd. and increases to support our growing Caterpillar Logistics operation, which combined added approximately 900 employees.

~~OPERATING COST RECLASSIFICATION~~

In the second quarter, we revised our policy regarding the classification of certain costs related to distributing replacement parts. Previously, these costs were included in selling, general and administrative expenses and now are included in cost of goods sold. This classification is more consistent with industry practice. The parts distribution costs include shipping and handling (including warehousing) along with related support costs such as information technology, purchasing and inventory management.

The amounts reclassified from selling, general and administrative expenses to cost of goods sold were $108 million and $328 million for the three months and nine months ended September 30, 2002, respectively. These costs were $110 million and $329 million for the three months and nine months ended September 30, 2003, respectively. The reclassification had no impact on operating profit.

~~OTHER MATTERS~~

~~Environmental and Legal Matters~~
The disclosure regarding environmental and legal matters contained in Item 2 "Management's Discussion and Analysis of Financial Condition and Results of Operations" of our Form 10-Q for the quarter ended June 30 2003, filed with the Securities and Exchange Commission on August 14, 2003 is updated by the following:

We will use "banked" credits to offset a portion of NCPs on non-conforming medium heavy-duty engines built during calendar year 2003. As of September 30, 2003, we expect these banked credits will be fully utilized during 2003 and we will have to pay NCPs (of about $2,500 per engine) on approximately 1,100 of the approximately 31,400 non-conforming medium heavy-duty engines we expect to produce during calendar year 2003. We had previously disclosed that we would be able to utilize 1,230.2 Mg of heavy-duty banked credits in 2003 from 958 heavy-duty engines built in 2002. In our final emissions credit report to the EPA, due and filed during the third quarter, we identified 731 heavy-duty engines that generated banked credits totaling 969.2 Mg. The number of engines generating emissions credits in our final report to the EPA was lowered for a variety of reasons including a more detailed analysis of engines actually produced that were eligible to generate credits and the identification of engines shipped to customers outside the United States which were not eligible to generate emissions credits. Of the approximately 45,000 non-conformi ng heavy-duty engines we expect to build during 2003, banked credits are expected to offset the NCPs on approximately 1,900 of these units.

Two of our heavy heavy-duty models -- the C13 and C15 (the ACERT versions of the current C-12 and C-15, respectively) - have been certified by the EPA. The C15 is in full production and we are expecting to reach full production capability for the C13 in the fourth quarter. We expect to receive EPA Certification for the C11 (the ACERT version of the current C-10) prior to reaching full production capability for this engine late in the fourth quarter. We do not anticipate paying NCPs beyond 2003.

As of September 30, 2003 we expect the net unfavorable impact of emission standard changes in 2003 to be $38 million (after tax) or $21 million (after tax) more adverse than in 2002 due to higher shipments of bridge engines in 2003. The net impact includes price increases, production cost increases which include incremental ramp-up production costs and NCPs. The following table reflects the projected 2003 impact of the emission standard changes as of September 30, 2003.

~~Page 24~~

~~Full-Year 2003~~ ~~(Millions of dollars)~~
~~Price (Bridge or ACERT Price Increase x Projected Engine Sales)~~	$	~~206~~
~~Production Cost Increases and Ramp-up Production Costs~~		~~(94)~~
~~NCPs (Projected NCP per Engine x Projected Engine Sales - banked credits)~~	$	~~(165)~~

~~Net Effect PreTax~~		~~(53)~~
~~Tax~~		15

~~Net Effect After Tax~~	$	~~(38)~~

As reflected in this table, our projections for 2003 are subject to assumptions regarding price increases, volumes, mix of ACERT and Bridge engines sold, and the mix of engines subject to NCPs (because NCPs vary by engine model). The table above assumes an average NCP of approximately $3,750 per heavy-duty engine subject to NCPs, use of banked credits to offset NCPs on approximately 1,900 heavy-duty engines, payment of NCPs of approximately $2,500 per engine on 1,100 mid-range engines, and the estimated mix of engine models to be sold in 2003. EPA emissions testing has been finalized for all bridge models except for one heavy-duty engine family, which is currently being re-tested. The test results of this last engine family are not expected to unfavorably impact the NCP rate per engine used in the table above. However, because NCPs vary by engine model, the number and mix of engines built subject to NCPs will impact the total NCPs ultimately paid.

Our September 30, 2003 projection reflects a greater ratio of Bridge engines sold to total engines sold than our prior projection. NCPs decreased from our prior projection due to a fewer number of mid-range engines being subject to NCPs and a lower NCP rate per heavy duty engine reflecting completed EPA emissions testing results.

In addition to the above, the consent decree required Caterpillar to pay a fine of $25 million, which was expensed in 1998 and to make investments totaling $35 million in environmental-related products by July 7, 2007. Total qualifying investments to date for these projects are $28 million, of which $7 million was made through the first nine months of 2003. A future benefit is expected to be realized from these environmental projects related to Caterpillar's ability to capitalize on the technologies it developed in complying with its environmental project obligations. In short, Caterpillar expects to receive a positive net return on the environmental projects by being able to market the technology it developed.

~~SUPPLEMENTAL INFORMATION~~

We are providing supplemental information including deliveries to users and dealer inventory levels. We sell the majority of our machines and engines to independently owned and operated dealers and original equipment manufacturers (OEMs) to meet the demands of their customers, the end users. Due to time lags between our sales and deliveries to end users we believe this information will help readers better understand our business and the industries we serve. Information provided in the supplemental information is in constant dollars.

~~Dealer New Machine Deliveries~~
Worldwide dealer deliveries of new machines to end users were up 10 percent from third quarter 2002. Low interest rates and accelerating economic growth benefited deliveries into construction in both North America and Asia/Pacific. Much higher metals prices initiated recoveries in deliveries to mining in most regions.

Dealer machine deliveries in North America rose 11 percent from third quarter 2002. The acceleration of the economic recovery in the third quarter began to favorably impact activity in more of the key industries dealers serve. In addition, the combination of low interest rates and rising profits encouraged some users to upgrade fleets. Deliveries to general construction were up 17 percent, due to continued strong housing construction and the start of a recovery in nonresidential building construction. Dealers delivered 13 percent more new machines to heavy construction, the result of significantly higher sewer and water construction and increased petroleum exploration. Prices for construction materials were higher than last year so deliveries to quarries and aggregates increased 3 percent. Economic conditions in mining did not improve sufficiently to encourage users to resume normal buying and dealer deliveries dropped 17 percent. Metals production continued to decline and coal prices were lower than a year ago.

~~Page 25~~

Dealer deliveries to end users in EAME were up 6 percent from the same quarter last year. In Europe, deliveries fell 7 percent from last year since most key economies were weak. Particularly large declines occurred in France and Italy. Deliveries in Africa/Middle East increased slightly, with the largest gain in Turkey where the economy grew rapidly. The CIS, with a ninefold increase in deliveries, accounted for nearly all the region's growth. Higher metals and oil prices boosted mining and energy investment.

~~Dealers delivered 16 percent more new machines in Latin America. The increase in deliveries was entirely in mining as higher prices prompted iron ore and gold mines to increase output.~~

In Asia/Pacific, dealers delivered 14 percent more new machines than in third quarter 2002. China, which is rapidly developing into a major user of construction equipment, accounted for the largest part of that increase. India, Indonesia and Malaysia accounted for most of the rest. Economies in all these countries grew rapidly and interest rates were quite low; both developments benefited construction.

~~Dealer Inventories of New Machines~~
Worldwide dealer inventories were slightly lower than last year, with a large decline in EAME more than offsetting increases in the other regions. Relative to delivery rates, inventories were lower than last year in all regions.

~~Engine Deliveries to End Users and OEMs~~
Worldwide Caterpillar and Caterpillar dealer engine deliveries to end users and OEMs were flat with last year. A 42 percent gain in worldwide deliveries to end users in the electric power sector, a 6 percent gain in deliveries to the industrial sector, and a 4 percent gain in deliveries to the marine sector offset a 7 percent decline in deliveries to the petroleum sector and a 25 percent drop in engine deliveries to the on-highway truck and bus sector. Global business fundamentals for marine, industrial and electric power sectors in third quarter 2003 continued to improve compared to last year when economic growth was sluggish, corporate profits were depressed and businesses and investors were delaying capital spending decisions. Worldwide petroleum deliveries were 7 percent below last year despite favorable oil and gas prices and revenues and higher drilling activity.

In North America, Caterpillar engine deliveries to end users and OEMs in third quarter 2003 fell 16 percent compared to third quarter 2002 despite strong gains (25+ percent) in deliveries to the electric power and industrial sectors. Caterpillar engine deliveries to end users and OEMs in electric power and industrial sectors were positively impacted by stronger economic growth, rising industry profits and more favorable investment trends. Dealers continued to work down surplus inventories of electric power products. Deliveries of engines to the petroleum sector declined 23 percent due to lower demand for turbines and turbine services compared to last year's abnormally strong deliveries caused by highly favorable natural gas prices. Caterpillar's third-quarter deliveries of on-highway truck and bus engines were negatively impacted (down 27 percent) by lower industry demand for both mid-range and heavy-duty engines compared to last year's abnormally strong third quarter. In the third quarter of 2002, truck manufacturers were raising their production schedules in response to higher dealer and customer orders for pre-October 2002 heavy-duty engines. Caterpillar continued its leadership position in the NAFTA on-highway truck and bus engine industry through the third quarter.

In EAME, overall deliveries to end users and OEMs rose 9 percent, with higher deliveries in most sectors and strong growth in deliveries to the electric power sector, up 24 percent. EAME deliveries of reciprocating engines gained from favorable exchange rate movements and particular strength in the Middle East. Deliveries in the Middle East strengthened caused by favorable oil prices and revenues, slowly improving confidence after the end of major military action in Iraq and continuing reconstruction efforts. However, weak economic trends and corporate profits in Western Europe continued to restrict growth in demand in key industries.

Deliveries to end users in Latin America rose 63 percent, with gains in deliveries to all engine sectors and a doubling of engine deliveries into the electric power sector. Economic and investment growth has improved compared to last year's depressed third-quarter levels and engine industry demand and Caterpillar deliveries are clearly benefiting. Latin American deliveries to end users in the electric power and petroleum sectors were helped by stronger demand for turbines and turbine services in key oil-producing countries where increased infrastructure investment occurred.

Dealer deliveries to end users and OEMs in Asia/Pacific in the third quarter were up 16 percent compared to last year led by a 74 percent sales gain in deliveries to the electric power sector. Improving economic growth, rising business investment, and favorable currency movements again supported sales growth. Asia/Pacific demand for large engines used in the petroleum sector weakened from last year's strong third-quarter sales when select countries in Asia/Pacific increased oil and gas development and production.

~~Page 26~~

~~Dealer Inventories of Engines~~
Worldwide dealer engine inventories at the end of the third quarter were lower than a year ago. Inventories were lower in North America and Latin America but higher in EAME and Asia/Pacific. Inventories compared to selling rates were lower than year-earlier levels in North America and Latin America and are close to normal levels. Dealer inventories compared to selling rates were higher than year-earlier levels in EAME and Asia/Pacific as in-transit inventories rose significantly.

~~NINE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED WITH NINE MONTHS ENDED SEPTEMBER 30, 2002~~

~~SALES AND REVENUES~~

The chart above graphically illustrates reasons for the change in Consolidated Sales and Revenues between September YTD 2002 (at left) and September YTD 2003 (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 parenthesis above each bar. Caterpillar management utilizes these charts internally to visually communicate with its Board and employees.

Sales and revenues for nine months ended September 30, 2003 were $16.3 billion, $1.52 billion or 10 percent higher than the first nine months of 2002. The increase was primarily due to higher Machinery volume of $520 million, a favorable currency impact on sales of $483 million (due mainly to the stronger euro) and higher price realization of $197 million.

~~Page 27~~

MACHINERY AND ENGINES

Sales and Revenues
(Millions of dollars)

Total

North
America

EAME

Latin
America

Asia/
Pacific

Nine Months Ended September 30, 2003
Machinery
$
9,851
$
5,222
$
2,657
$
637
$
1,335
Engines*
5,186
2,346
1,653
493
694
Financial Products**
1,261
906
224
71
60

$
16,298
$
8,474
$
4,534
$
1,201
$
2,089
Nine Months Ended September 30, 2002

Machinery
$
8,824
$
4,875
$
2,276
$
633
$
1,040
Engines*
4,835
2,233
1,436
509
657
Financial Products**
1,116
836
187
54
39
$
14,775
$
7,944
$
3,899
$
1,196
$
1,736

*
Does not include internal engine transfers of $996 million and $970 million in 2003 and 2002, respectively. Internal engine transfers are valued at prices comparable to those for unrelated parties.
**
Does not include revenues earned from Machinery and Engines of $133 million and $131 million in 2003 and 2002, respectively.

Refer to table on page 30 for reconciliation of Machinery and Engine Sales by Geographic Region to External Sales by Marketing Segment.

Machinery sales were $9.85 billion, an increase of $1.03 billion or about 12 percent from the first nine months of 2002. Sales volume was up about 6 percent, the favorable impact of currency accounted for about 4 percent and improved price realization added about 2 percent. In North America, sales of machinery increased 7 percent, mostly due to higher volume and improved price realization. Sales volume rose because of a 6 percent increase in dealer deliveries largely to upgrade fleets, especially rental fleets. In EAME, sales of machinery increased 17 percent due to the favorable currency impact of a stronger euro. Asia/Pacific sales were up 28 percent due to significant sales volume growth. Low interest rates and strong economic growth boosted both construction and demand for new machines, especially in China.

~~Engines sales~~ were $5.19 billion, an increase of $351 million or about 7 percent from the first nine months of 2002. The favorable impact of currency accounted for about 3 percent, emissions related price increases contributed about 3 percent and sales volume was up about 1 percent. Sales increased 15 percent in EAME, 6 percent in Asia/Pacific, and 5 percent in North America which more than offset 3 percent lower sales in Latin America. Sales in EAME were higher due to stronger demand for engines sold into the electric power sector and the favorable effects of currency. Sales in Asia/Pacific rose in all sectors except petroleum where sales of large engines in petroleum declined from last year's strong performance. North American engine sales into the petroleum and industrial sectors rose 17 percent and 16 percent respectively with slight sales gains into marine and on-highway truck and bus sectors. North American engine sales into the electric power sector declined due to aggressive dealer effort s to reduce surplus inventories. Strong Latin American engine sales gains into electric power and industrial sectors were not enough to offset lower sales of large engines into the petroleum sector. Global sales into the electric power sector were up 16 percent while sales into other sectors were flat to up 6 percent.

~~Financial Products revenues~~were $1.26 billion, up $145 million or about 13 percent from the first nine months of 2002. The favorable impact of approximately $166 million due to continued growth of earning assets, $11 million higher fee income (primarily buyout and guarantee fees), and $9 million higher securitization income was partially offset by the approximately $92 million impact of generally lower interest rates on new and existing finance receivables at Cat Financial. Additionally, there was a $47 million increase in earned premiums on extended service contracts at Cat Insurance

~~Page 28~~

~~OPERATING PROFIT~~

The chart above graphically illustrates reasons for the change in Consolidated Operating Profit between September YTD 2002 (at left) and September YTD 2003 (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 parenthesis above each bar. Caterpillar management utilizes these charts internally to visually communicate with its Board and employees.

Operating profit was favorably impacted by $290 million lower core operating costs, improved price realization of $197 million, improvements at Financial Products of $39 million, the favorable profit impact of additional sales volume (net of unfavorable sales mix) of $16 million and the net favorable impact of currency of $15 million. Lower core operating costs were primarily the result of reductions in material costs and quality improvements reflected in lower warranty costs somewhat offset by higher performance related variable pay elements as a result of our improved financial performance.

Partially offsetting the favorable items was $197 million in higher retiree pension, healthcare and related benefit costs. In addition, the changes in emission standards for on-highway truck and bus engines in North America resulted in a net unfavorable impact of approximately $54 million (no impact in the first nine months of 2002).

Operating Profit (Loss)
(Millions of Dollars)

Nine Months Ended

September 30,
2003

September 30,
2002

Machinery
$
879

$
581

Engines

118

149

Financial Products

258

219

Consolidating Adjustments

(66)

(62)

$
1,189

$
887

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

~~Page 29~~

~~Machinery operating profit~~ increased 51 percent, or $298 million, from the first nine months of 2002 as higher price realization, lower core operating costs and higher volume more than offset higher retiree pension, healthcare and related benefit costs and unfavorable sales mix.

~~Engine operating profit~~ decreased 21 percent, or $31 million, from the first nine months of 2002 as lower core operating costs were more than offset by higher retiree pension, healthcare and related benefit costs, unfavorable sales volume/mix and the net unfavorable profit impact of changes in emission standards (no impact in the first nine months of 2002).

~~Financial Products operating profit~~was $258 million, up $39 million or 18 percent from the first nine months of 2002. The improvement in operating profit was primarily due to the growth of earning assets partially offset by the impact of generally lower interest rates.

Reconciliation of Machinery and Engine Sales by Geographic Region to External Sales by Marketing Segment
Nine months ended
(Millions of Dollars)
September 30,
2003

September 30,
2002
North American Geographic Region
$
7,568

$
7,108
Engine sales included in the Power Products segment

(2,346)

(2,237)
Company owned dealer sales included in the All Other segment

(264)

(258)
Other*

(357)

(412)

North American Marketing external sales
$
4,601

$
4,201

EAME Geographic Region
$
4,310

$
3,712
Power Products sales not included in the EAME Marketing segment

(1,345)

(1,184)
Other*

(617)

(477)

EAME Marketing external sales
$
2,348

$
2,051

Latin America Geographic Region
$
1,130

$
1,142
Power Products sales not included in the Latin America Marketing segment

(421)

(446)
Other*

153

208

Latin America Marketing external sales
$
862

$
904

Asia/Pacific Geographic Region
$
2,029

$
1,697
Power Products sales not included in the Asia/Pacific Marketing segment

(412)

(391)
Other*

(187)

(142)

Asia/Pacific Marketing external sales
$
1,430

$
1,164

* Represents primarily external sales of the Construction and Mining Products and the All Other segments.

~~OTHER PROFIT/LOSS ITEMS~~

~~Interest expense excluding Financial Productswas $14 million lower compared to the first nine months of 2002.~~

~~Other income/expense~~was income of $15 million, $3 million lower compared to the first nine months of 2002. The change was primarily due to the unfavorable impact of the $55 million pre-tax charge ($40 million after-tax) for early retirement of Machinery and Engines $250 million 6% debentures due in 2007 mostly offset by the favorable impact of currency, lower investment impairments, additional interest income and the favorable impact of commodity hedging. The debentures were issued at a significant original issue discount and had an effective annual interest rate of 13.3%. This charge reflects accelerated recognition of the unamortized original issue discount; however, the early retirement will positively impact future earnings and cash flow.

~~The provision for income taxes~~ reflects an estimated annual tax rate of 27 percent for 2003 compared to 28 percent a year ago. The decrease in the estimated annual tax rate from 28 to 27 percent for the first nine months of 2003 is due to changes in the estimated tax benefits from export sales and the geographic mix of profits.

~~The equity in profit/loss of unconsolidated affiliated companies~~ ~~increased $21 million from a year ago, due mostly to improved profitability of Shin Caterpillar Mitsubishi Ltd. resulting from improved export business, especially to China.~~

~~Page 30~~

~~SALES AND REVENUES OUTLOOK~~

The world economy appears to be strengthening in the last half of 2003 and full-year growth should be about 2.5 percent. More than ten countries cut short-term interest rates in the third quarter and some developing countries likely will cut rates in the fourth quarter. Central banks in the developed countries are expected to keep interest rates steady for the rest of the year.

Recent developments in the world economy resulted in several positives for our businesses that should persist through year end. Many countries have the lowest interest rates in decades, which is benefiting construction, especially housing. Also, many businesses are experiencing better cash flows enabling them to make needed equipment purchases. In addition, stronger demand for metals has caused price increases indicating the potential reversal of a long, deep slump in mining investments.

For the year, we expect company sales and revenues to increase about 10 percent. Machinery and Engines volume should contribute about 55 percent of the gain, currency about 25 percent, Financial Products revenues about 10 percent, with the rest from price realization. We project that North America and Asia/Pacific will be the major contributors to volume increases.

~~North America (United States and Canada)~~
Third-quarter economic data suggest the U.S. economy grew in excess of a 4 percent annual rate, indicating that low interest rates, tax cuts and the weaker dollar are helping. These factors remain in place and should allow continued strong economic growth in the fourth quarter.

Machinery and Engines sales turned in strong year-over-year gains in both the second and third quarters of this year and we expect this to continue in the fourth quarter. Low interest rates should further benefit construction and favorable energy prices should boost sales into petroleum and natural gas. We forecast that Machinery and Engines sales will increase about 10 percent in 2003.

~~EAME~~
While the European economy stagnated in third quarter 2003, signs of recovery are beginning to emerge. In addition, favorable energy prices and the recovery in other commodity prices will significantly help many of the developing economies of Africa/Middle East and the CIS region.

~~We project that sales in EAME will rise about 10 percent in 2003 almost entirely due to the ongoing favorable translation impact of the strong euro on sales.~~

~~Latin America~~
Economic conditions are slowly improving in Latin America, the result of higher commodity prices and some reductions in local interest rates. Sales of Machinery and Engines in 2003 should be about the same as last year, the result of a last half recovery in mining.

~~Asia/Pacific~~
We project sales of Machinery and Engines will increase between 15 and 20 percent from 2002. Economic growth, already strong in the first half, will get an additional boost from further reductions in short-term interest rates and higher commodity prices. Competitive currencies will allow many countries to continue increasing exports rapidly.

Record direct investment inflows into China should keep capital investment and purchases of construction equipment strong through year end. The stronger Australian dollar, while undermining the competitiveness of some commodity exports, will continue to have a favorable currency impact on sales.

~~Financial Products~~

~~We expect growth in Financial Products for the remainder of 2003, with revenues expected to increase approximately 10 percent versus 2002.~~

~~PROFIT OUTLOOK~~

~~We now expect full-year profit to be about $3.00 per share as a result of continued focus on cost control.~~

~~Page 31~~

~~PRELIMINARY 2004 SALES AND REVENUES OUTLOOK~~

Developments favorable to our businesses are occurring in the last half of 2003, brightening the prospects for 2004. Many commodity prices continue to increase; more than 10 countries have cut short-term interest rates since July 1; housing starts are strong in many countries; and exchange rates remain favorable. We anticipate interest rates should remain low throughout 2004 in the industrial countries and several of the developing countries could cut rates further. As a result, economic growth is expected to improve in all regions, raising world growth to 3.5 percent in 2004. We expect the world total machine industry to be up about 7 percent, ranging from no change in Japan to 12 percent growth in both North America and Latin America. In addition, we expect a 6 percent growth in world engine industry demand. This global economic recovery will benefit both Machinery and Engines, as well as provide opportunities for continued growth in earning assets at Cat Financial. Therefore, the preliminary 2004 forecast anticipates that company sales and revenues will be about 10 percent higher than 2003.

~~GLOSSARY OF TERMS~~

Changes in Emissions Standards (Emissions) - Generally, emissions describes the financial impacts of industry emission standard changes for on-highway truck and bus engines in North America. With respect to sales and revenues, emissions represents the impact of price increases. With respect to operating profit, emissions represents the net impact of price increases, production cost increases which include incremental ramp-up production costs and non-conformance penalties (NCPs).
~~Consolidating Adjustments - Eliminations of transactions between Machinery and Engines, and Financial Products.~~
Core Operating Costs - Machinery and Engines operating cost change adjusted for volume. It excludes currency, retiree benefits and emissions production cost increases, ramp-up production costs and non-conformance penalties.
Currency - With respect to sales and revenues, currency represents the translation impact on sales resulting from changes in foreign currency exchange rates versus the U.S. dollar. With respect to operating profit, currency represents the net translation impact on sales and operating costs resulting from changes in foreign currency exchange rates versus the U.S. dollar. Currency includes the impacts on sales and operating profit for the Machinery and Engines lines of business only; currency impacts on the Financial Products line of business are included in the Financial Products portions of the respective analyses.
~~EAME - Geographic region including Europe, Africa, the Middle East and the Commonwealth of Independent States (CIS).~~
Earning Assets - These assets consist primarily of total net finance receivables plus equipment on operating leases, less accumulated depreciation at Cat Financial. Net finance receivables represent the gross receivables amount less unearned income and the allowance for credit losses.
Engines - A principal line of business including the design, manufacture and marketing of engines for Caterpillar machinery, electric power generation systems; on-highway vehicles and locomotives; marine, petroleum, construction, industrial, agricultural and other applications; and related parts. Reciprocating engines meet power needs ranging from 5 to over 22,000 horsepower (4 to over 16 200 kilowatts). Turbines range from 1,600 to 19,500 horsepower (1 000 to 14 500 kilowatts).
Financial Products - A principal line of business consisting primarily of Caterpillar Financial Services Corporation (Cat Financial), Caterpillar Insurance Holdings Inc. (Cat Insurance) and their subsidiaries. Cat Financial provides a wide range of financing alternatives for Caterpillar machinery and engines, Solar® gas turbines, as well as other equipment and marine vessels. Cat Financial also extends loans to customers and dealers. Cat Insurance provides various forms of insurance to customers and dealers to help support the purchase and lease of our equipment.
~~Latin America - Geographic region including the Central American countries and Mexico.~~
Machinery - A principal line of business which includes the design, manufacture and marketing of construction, mining, agricultural and forestry machinery - track and wheel tractors, track and wheel loaders, pipelayers, motor graders, wheel tractor-scrapers, track and wheel excavators, backhoe loaders, mining shovels, log skidders, log loaders, off-highway trucks, articulated trucks, paving products, telescopic handlers, skid steer loaders and related parts.
Machinery and Engines (M&E) - Due to the highly integrated nature of operations, represents the aggregate total of the Machinery and Engines lines of business and includes primarily our manufacturing, marketing and parts distribution operations.
~~Page 32~~
Nonconformance Penalties (NCPs) - Represents the expense related to penalties that have been or will be paid to the United States Environmental Protection Agency (EPA) for each on-highway truck and bus engine sold which does not meet revised industry emission standards enacted in October 2002.
~~Price Realization - The impact of net price changes excluding emissions price increases and currency.~~
Sales Volume/Mix - The net operating profit impact of changes in the quantities sold for machines, engines and parts combined with the net operating profit impact of changes in the relative weighting of machines, engines and parts sales with respect to total sales.
Securitized Finance Receivables - Cat Financial sells retail installment sale contracts and finance leases into public asset-backed securitization facilities. Gains/losses on the securitization of finance receivables represent the difference between the carrying value and fair value of the receivables.
6 Sigma - On a technical level, 6 Sigma represents a measure of variation that achieves 3.4 defects per million opportunities. At Caterpillar, 6 Sigma represents a much broader cultural philosophy to drive continuous improvement throughout the value chain. It is a fact-based, data-driven methodology that we are using to improve processes, enhance quality, cut costs, grow our business and deliver greater value to our customers through Black Belt-led project teams. At Caterpillar, 6 Sigma goes beyond mere process improvement; it has become the way we work as teams to process business information, solve problems and manage our business successfully.

B.~~Liquidity & Capital Resources~~

~~Sources of funds~~
We generate our capital resources primarily through operations. Consolidated operating cash flow was $1.41 billion through the third quarter of 2003, compared with $1.36 billion through the third quarter of 2002. The improvement is primarily the result of increased profits during 2003 as compared to 2002, partially offset by higher working capital requirements. We anticipate that the majority of future capital resource requirements will be funded by operating cash flow, which is largely sourced from profits. See our Outlook on page 31. The $563 million pension contribution discussed on page 36 was made with existing cash resources. The $250 million debt retirement in the first quarter of 2003 was made using available cash and the $250 million early debt retirement in the third quarter of 2003 discussed on page 23 was made using available cash and low interest commercial paper.

Total debt as of September 30, 2003 was $18.7 billion, an increase of $1 billion from year-end 2002. Debt related to Machinery and Engines decreased $334 million, primarily due to the retirement of the debt obligations. Debt related to Financial Products increased $1.32 billion due to growth at Cat Financial. We have two global credit facilities with a syndicate of banks totaling $4.675 billion available in the aggregate to both Machinery and Engines and Financial Products to support commercial paper programs. Based on management's allocation decision, which can be revised at any time during the year, the portion of the facility available to Cat Financial at September 30, 2003 was $4.075 billion. The five-year facility of $2.125 billion expires in September 2006. The 364-day facility of $2.55 billion expires in September 2004. The facility expiring in September 2004 has a provision that allows Caterpillar or Cat Financial to obtain a one-year loan in September 2004 that would mature in September 2005. Our total credit commitments as of September 30, 2003 were:

(Millions of dollars)

Machinery

Financial

Consolidated

and Engines

Products
Credit lines available:

Global credit facility
$
4,675

$
600

$
4,075

Other external

1,496

689

807

Intercompany

-

708

823

Total credit lines available

6,171

1,997

5,705
Less: Five year global credit facility supporting commercial paper

2,125

-

2,125
Less: Utilized credit

268

480

574
Available credit
$
3,778

$
1,517

$
3,006

We also generate funding through the securitization of receivables. Through the third quarter of 2003, we generated $811 million and $693 million of capital resources from the securitization of trade and finance receivables, respectively. As of September 30, 2003, we had trade and finance receivables of $3.26 billion and $14.40 billion, respectively.

~~Page 33~~

~~We do not generate material funding through structured finance transactions.~~

On October 8, 2003, Caterpillar Inc. increased its quarterly cash dividend by two cents to thirty-seven cents ($0.37) per share on its common stock, payable November 20, 2003, to stockholders of record at the close of business October 20, 2003. The previous rate was thirty-five cents ($0.35) per share. Including this increase, Caterpillar's quarterly dividend has grown more than eightfold in the last decade.

Also on October 8, 2003, the Board of Directors approved an extension of the share repurchase program with the goal of reducing the company's outstanding shares to 320,000,000. The program authorization now expires in October 2008.

~~Committed funds~~
We have committed cash outflow related to long-term debt (including that due within one year and classified as current), operating lease agreements, unconditional purchase obligations and other contractual obligations. Minimum payments for these long-term obligations are:

(Millions of dollars)
2003
2004
2005
2006
2007
After
2007
Total
Long-Term Debt:
Machinery and Engines
$
33
$
62
$
292
$
33
$
35
$
2,874
$
3,329
Financial Products
3,797
543
2,990
2,485
855
3,002
13,672
Total Long-Term Debt
3,830
605
3,282
2,518
890
5,876
17,001

Operating Leases
163
116
81
59
239
75
733
Other Long-Term Obligations
89
83
64
52
106
31
425
Unconditional Purchase Obligations
69
91
97
95
375
117
844
Total Contractual Obligations
$
4,151
$
895
$
3,524
$
2,724
$
1,610
$
6,099
$
19,003

~~We had commitments for the purchase or construction of capital assets of approximately $278 million at September 30, 2003.~~

~~Machinery and Engines~~
Operating cash flow was $787 million through the third quarter 2003, compared with $891 million for the same period a year ago. The decrease is due to the higher working capital requirements in 2003, mainly attributable to the pension contribution, partially offset by higher profit in 2003.

Capital expenditures, excluding equipment leased to others, during the nine months ended September 30, 2003 were $335 million, a decrease of $138 million from the same period a year ago due to tight controls on spending.

~~Financial Products~~
Operating cash flow was $603 million through the third quarter 2003, compared with $453 million for the same period a year ago. The improvements is primarily the result of an increase in profit through the third quarter 2003 as compared to the same period a year ago and slightly lower working capital requirements. Cash used to purchase equipment leased to others was $771 million during the first three quarters of 2003 compared to $762 million for the first three quarters of 2002. In addition, net cash used for finance receivables was $729 million for the first three quarters of 2003, compared to $676 million for the first three quarters of 2002.

Financial Products total borrowings were $15.34 billion at September 30, 2003, an increase of $1.32 billion from December 31, 2002, and primarily comprised $11.74 billion of medium-term notes, $2.98 billion of commercial paper, $354 million of money market funds, $155 million of short-term notes payable to banks, $44 million of long-term notes payable to banks and $7 million of loans from a company-owned partnership. Debt repayment in Financial Products depends primarily on timely repayment and collectibility of the receivables portfolio. At September 30, 2003, finance receivables past due over 30 days were 3.1%, compared with 4.2% at the end of September 30, 2002. The allowance for credit losses was 1.56% of finance receivables, net of unearned income, at September 30, 2003, compared to 1.50% at September 30, 2002. Receivables written off due to uncollectibility, net of recoveries on receivables previously written off, were $57 million or 0.38% of the average finance receivable portfolio, net of unearned income, for the nine months ended September 2003.

~~Financial Products was in compliance with all debt covenants at September 30, 2003.~~

~~Page 34~~

C.~~Critical Accounting Policies~~

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect reported amounts. The more significant estimates include: residual values for leased assets, fair market values for goodwill impairment tests, impairment of available for sale securities and reserves for warranty, product liability and insurance losses, postemployment benefits, post-sale discounts and credit losses. We use the following methods and assumptions in determining our estimates:

~~Residual values for leased assets~~ - Determined based on the product, specifications, application and hours of usage. Each product has its own model for evaluation that includes market value cycles and forecasts. Consideration is also given to the number of machines that will be returned from lease during a given time frame.

~~Fair market values for goodwill impairment tests -~~Determined for each reporting unit by discounting projected cash flow for the upcoming five years and adding a year-five residual value based upon a market Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) multiple.

~~Impairment of available-for-sale securities~~ - Securities are reviewed monthly to identify market values below cost of 20 percent or more. If a decline for a debt security is in excess of 20 percent for 6 months, the investment is evaluated to determine if the decline is due to general declines in the marketplace or if the investment has been impaired and should be written down to market value pursuant to SFAS 115. After the 6-month period, debt securities with declines from cost in excess of 20 percent are evaluated monthly for impairment. For equity securities, if a decline from cost of 20 percent or more continues for a 12-month period, an other-than-temporary impairment is recognized without continued analysis.

~~Warranty reserve -~~Determined by applying historical claim rate experience to the current field population and dealer inventory. Generally, historical claim rates are developed using a 12-month rolling average of actual warranty expense. These rates are applied to the field population and dealer inventory to determine the reserve.

~~Product liability and insurance loss reserves -~~~~Determined based upon reported claims in process of settlement and actuarial estimates for losses incurred but not reported.~~

~~Postemployment benefits~~ ~~- Primary actuarial assumptions were determined as follows:~~

The U.S. expected long-term rate of return on plan assets is based on our estimate of long-term passive returns for equities and fixed income securities weighted by the allocation of our pension assets. Based on historical performance, we adjust passive returns due to our active management. A similar process is used to determine this rate for our non-U.S. pension plans.
The assumed discount rate is used to discount future benefit obligations back to today's dollars. The U.S. discount rate is based on the Moody's Aa bond yield as of our measurement date, November 30. A similar process is used to determine the assumed discount rate for our non-U.S. plans.
~~The expected rate of compensation increase is used to develop benefit obligations using projected pay at retirement. It represents average long-term salary increases.~~
~~The assumed health care trend rate represents the rate at which health care costs are assumed to increase and is based on historical and expected experience.~~

Post-sale discount reserve- We extend numerous merchandising programs that provide discounts to dealers as products are sold to end users. The reserve is determined based on historical data adjusted for known changes in merchandising programs.

~~Credit loss reserve~~~~- Determined by applying historical credit loss experience to the current receivable portfolio with consideration given to the condition of the economy and trends in past due accounts.~~

We have incorporated many years of historical data into the determination of each of these estimates. We have a proven history of using accurate estimates and sound assumptions to calculate and record appropriate reserves and residual values.

~~Page 35~~

D.~~Pension and Other Postretirement Benefits~~

We recognized pension expense of $28 million and $100 million for the three and nine months ended September 30, 2003, as compared to a net pension benefit of $18 million and $54 million for the three and nine months ended September 30, 2002. The increase in expense for both periods was primarily a result of the impact of lower plan assets due to continued poor performance of the equity markets, lower long term return assumptions on pension plan assets and a lower assumed discount rate. SFAS 87, "Employers' Accounting for Pensions" requires companies to use an expected long-term rate of return for computing current year pension expense. Differences between the actual and expected returns are amortized into future earnings as actuarial gains and losses. At the end of 2002, unrecognized actuarial losses of $2.56 billion primarily reflected lower than expected returns on our pension plan assets.

Other postretirement benefit expense was $68 million in third-quarter 2003, up $17 million from third quarter 2002. The increase in expense is the result of inflation on health care costs and a lower long-term return assumption on plan assets. We recognized other postretirement benefit expense of $203 million for the nine-month period ended September 30, 2003, as compared to $190 million for the same period a year ago. The increase in expense is the result of inflation on health care costs and a lower long-term return assumption on plan assets, partially offset by changes to our U.S. benefit plans implemented during the second quarter 2002 (nine months of benefit recognition in 2003 versus five months in 2002). The plan changes include an increase in retiree cost sharing of health care benefits, elimination of company payments for Medicare part B premiums and significant reductions in retiree life insurance. In total, these changes lowered our existing benefit obligation by approximat ely $475 million, which will be amortized into earnings over seven years (the average remaining service period of employees affected by the plan changes) or $68 million per year. In addition to this amortization, our ongoing annual expense will decrease approximately $45 million from the plan changes. The total benefit from the plan changes was approximately $28 million and $84 million for the three and nine months ended September 30, 2003, as compared to $28 million and $47 million for the three and nine months ended September 30, 2002.

Unrecognized actuarial losses for other postretirement plans were $976 million at the end of 2002. These losses reflect lower than expected plan asset returns, higher than expected benefit costs, a decrease in the assumed discount rate and an increase in expected health care inflation. These losses will be amortized into future earnings in accordance with SFAS 106, "Employer's Accounting for Postretirement Benefits Other than Pensions."

The unrecognized actuarial losses for both pensions and other postretirement benefits will be impacted in future periods by actual asset returns, actual health care inflation, discount rate changes and other factors that impact these expenses. If actual experience is as assumed, we will be required to recognize significant actuarial losses in future periods as a result of recent equity market performance and declining interest rates. These losses are amortized on a straight-line basis over the remaining service period of active employees expected to receive benefits under the benefit plans.

SFAS 87 requires the recognition of an Additional Minimum Liability if the market value of plan assets is less than the accumulated benefit obligation at the plan measurement date. Future changes to the Additional Minimum Liability will be dependent on several factors including actual returns on our pension plan assets, company contributions, benefit plan changes and our assumed discount rate.

Although we have no ERISA funding requirements for 2003, on July 18, 2003, we contributed $563 million to fund our U.S. plans. With this contribution, there will not be any ERISA funding requirements in 2004. We are required to make nominal contributions to certain non-U.S. pension plans during 2003. We have adequate liquidity resources to fund both U.S. and non-U.S. pension plans.

E.~~Supplemental Consolidating Data~~

~~We are providing supplemental consolidating data for the purpose of additional analysis. The data has been grouped as follows:~~

~~Consolidated - Caterpillar Inc. and its subsidiaries.~~

~~Machinery and Engines - primarily our manufacturing, marketing and parts distribution operations, with Financial Productsaccounted for on the equity basis.~~

~~Financial Products - our finance and insurance subsidiaries, primarily Cat Financial and Cat Insurance.~~

~~Consolidating Adjustments - eliminations of transactions between Machinery and Engines and Financial Products.~~

~~Pages 37 - 44 reconcile Machinery and Engines with Financial Products on the Equity Basis to Caterpillar Inc. Consolidated financial information.~~

~~Page 36~~

Caterpillar Inc.
Supplemental Data for Results of Operations
For The Three Months Ended September 30, 2003
(Unaudited)
(Millions of dollars)

Supplemental Consolidating Data

Consolidated

Machinery &
Engines¹

Financial
Products

Consolidating
Adjustments
Sales and revenues:

Sales of Machinery and Engines
$
5,112

$
5,112

$
-

$
-

Revenues of Financial Products

433

-

479

(46)²

Total sales and revenues

5,545

5,112

479

(46)

Operating costs:

Cost of goods sold

4,143

4,143

-

-

Selling, general and administrative expenses

627

505

139

(17)³

Research and development expenses

173

173

-

-

Interest expense of Financial Products

116

-

119

(3)⁴

Other operating expenses

101

(28)

129

-

Total operating costs

5,160

4,793

387

(20)

Operating profit

385

319

92

(26)

Interest expense excluding Financial Products

61

70

-

(9)⁴

Other income (expense)

(40)

(68)

11

17⁵

Consolidated profit before taxes

284

181

103

-

Provision for income taxes

69

33

36

-

Profit of consolidated companies

215

148

67

-

Equity in profit (loss) of unconsolidated affiliated companies

7

5

2

-

Equity in profit of Financial Products' subsidiaries

-

69

-

(69)⁶

Profit
$
222

$
222

$
69

$
(69)

1 Represents Caterpillar Inc. and its subsidiaries with Financial Products accounted for on the equity basis.
2 Elimination of Financial Products revenues earned from Machinery and Engines subsidiaries.
3 Elimination of expenses recorded by Machinery and Engines subsidiaries paid to Financial Products.
4 Elimination of interest expense recorded by Financial Products paid to Machinery and Engines subsidiaries.
5 Elimination of discount recorded by Machinery and Engines subsidiaries on receivables sold to Financial Products, and of interest income
     earned by Machinery and Engines subsidiaries from Financial Products.
6 Elimination of Financial Products profit for the period reported on Machinery and Engines statement on the equity basis.

~~Page 37~~

Caterpillar Inc.
Supplemental Data for Results of Operations
For The Three Months Ended September 30, 2002
(Unaudited)
(Millions of dollars)

Supplemental Consolidating Data

Consolidated

Machinery &
Engines¹

Financial
Products

Consolidating
Adjustments

Sales and revenues:

Sales of Machinery and Engines
$
4,700

$
4,700

$
-

$
-

Revenues of Financial Products

375

-

426

(51)²

Total sales and revenues

5,075

4,700

426

(51)

Operating costs:

Cost of goods sold

3,798

3,798

-

-

Selling, general and administrative expenses

538

451

106

(19)³

Research and development expenses

167

167

-

-

Interest expense of Financial Products

135

-

140

(5)⁴

Other operating expenses

113

-

113

-

Total operating costs

4,751

4,416

359

(24)

Operating profit

324

284

67

(27)

Interest expense excluding Financial Products

66

66

-

-

Other income (expense)

25

(31)

29

27⁵

Consolidated profit before taxes

283

187

96

-

Provision for income taxes

71

37

34

-

Profit of consolidated companies

212

150

62

-

Equity in profit (loss) of unconsolidated affiliated companies

1

(1)

2

-

Equity in profit of Financial Products' subsidiaries

-

64

-

(64)⁶

Profit
$
213

$
213

$
64

$
(64)

1 Represents Caterpillar Inc. and its subsidiaries with Financial Products accounted for on the equity basis.
2 Elimination of Financial Products revenues earned from Machinery and Engines subsidiaries.
3 Elimination of expenses recorded by Machinery and Engines subsidiaries paid to Financial Products.
4 Elimination of interest expense recorded by Financial Products paid to Machinery and Engines subsidiaries.
5 Elimination of discount recorded by Machinery and Engines subsidiaries on receivables sold to Financial Products, and of interest income earned by Machinery and Engines subsidiaries from Financial Products.
6 Elimination of Financial Products profit for the period reported on Machinery and Engines statement on the equity basis.

~~Page 38~~

Caterpillar Inc.
Supplemental Data for Results of Operations
For The Nine Months Ended September 30, 2003
(Unaudited)
(Millions of dollars)

Supplemental Consolidating Data

Consolidated

Machinery &
Engines¹

Financial
Products

Consolidating
Adjustments
Sales and revenues:

Sales of Machinery and Engines
$
15,037

$
15,037

$
-

$
-

Revenues of Financial Products

1,261

-

1,394

(133)²

Total sales and revenues

16,298

15,037

1,394

(133)

Operating costs:

Cost of goods sold

12,102

12,102

-

-

Selling, general and administrative expenses

1,801

1,470

387

(56)³

Research and development expenses

494

494

-

-

Interest expense of Financial Products

354

-

365

(11)⁴

Other operating expenses

358

(26)

384

-

Total operating costs

15,109

14,040

1,136

(67)

Operating profit

1,189

997

258

(66)

Interest expense excluding Financial Products

192

201

-

(9)⁴

Other income (expense)

15

(65)

23

57 ⁵

Consolidated profit before taxes

1,012

731

281

-

Provision for income taxes

273

174

99

-

Profit of consolidated companies

739

557

182

-

Equity in profit (loss) of unconsolidated affiliated companies

11

7

4

-

Equity in profit of Financial Products' subsidiaries

-

186

-

(186)⁶

Profit
$
750

$
750

$
186

$
(186)

1 Represents Caterpillar Inc. and its subsidiaries with Financial Products accounted for on the equity basis.
2 Elimination of Financial Products revenues earned from Machinery and Engines subsidiaries.
3 Elimination of expenses recorded by Machinery and Engines subsidiaries paid to Financial Products.
4 Elimination of interest expense recorded by Financial Products paid to Machinery and Engines subsidiaries.
5 Elimination of discount recorded by Machinery and Engines subsidiaries on receivables sold to Financial Products, and of interest income earned by Machinery and Engines subsidiaries from Financial Products.
6 Elimination of Financial Products profit for the period reported on Machinery and Engines statement on the equity basis.

~~Page 39~~

Caterpillar Inc.
Supplemental Data for Results of Operations
For The Nine Months Ended September 30, 2002
(Unaudited)
(Millions of dollars)

Supplemental Consolidating Data

Consolidated

Machinery &
Engines¹

Financial
Products

Consolidating
Adjustments

Sales and revenues:

Sales of Machinery and Engines
$
13,659

$
13,659

$
-

$
-

Revenues of Financial Products

1,116

-

1,247

(131)²

Total sales and revenues

14,775

13,659

1,247

(131)

Operating costs:

Cost of goods sold

11,079

11,079

-

-

Selling, general and administrative expenses

1,587

1,326

317

(56)³

Research and development expenses

524

524

-

-

Interest expense of Financial Products

393

-

406

(13)⁴

Other operating expenses

305

-

305

-

Total operating costs

13,888

12,929

1,028

(69)

Operating profit

887

730

219

(62)

Interest expense excluding Financial Products

206

206

-

-

Other income (expense)

18

(44)

-

62 ⁵

Consolidated profit before taxes

699

480

219

-

Provision for income taxes

196

116

80

-

Profit of consolidated companies

503

364

139

-

Equity in profit (loss) of unconsolidated affiliated companies

(10)

(16)

6

-

Equity in profit of Financial Products' subsidiaries

-

145

-

(145)⁶

Profit
$
493

$
493

$
145

$
(145)

1 Represents Caterpillar Inc. and its subsidiaries with Financial Products accounted for on the equity basis.
2 Elimination of Financial Products revenues earned from Machinery and Engines subsidiaries.
3 Elimination of expenses recorded by Machinery and Engines subsidiaries paid to Financial Products.
4 Elimination of interest expense recorded by Financial Products paid to Machinery and Engines subsidiaries.
5 Elimination of discount recorded by Machinery and Engines subsidiaries on receivables sold to Financial Products, and of interest income earned by Machinery and Engines subsidiaries from Financial Products.
6 Elimination of Financial Products profit for the period reported on Machinery and Engines statement on the equity basis.

~~Page 40~~

Caterpillar Inc.
Supplemental Data for Financial Position
At September 30, 2003
(Unaudited)
(Millions of dollars)

Supplemental Consolidating Data

Consolidated

Machinery &
Engines¹

Financial
Products

Consolidating
Adjustments
Assets:

Current assets:

Cash and short-term investments
$
397

$
263

$
134

$
-

Receivables - trade and other

3,183

2,553

1,520

(890)²

Receivables - finance

7,158

-

7,158

-

Deferred and refundable income taxes

434

373

61

-

Prepaid expenses

1,782

1,772

27

(17)³

Inventories

3,057

3,057

-

-

Total current assets

16,011

8,018

8,900

(907)

Property, plant and equipment - net

7,083

4,606

2,477

-

Long-term receivables - trade and other

79

79

-

-

Long-term receivables - finance

7,240

-

7,240

-

Investments in unconsolidated affiliated companies

752

403

349

-

Investments in Financial Products subsidiaries

-

2,343

-

(2,343)⁴

Deferred income taxes

854

1,012

14

(172)⁵

Intangible assets

276

267

9

-

Goodwill

1,399

1,399

-

-

Other assets

1,373

684

689

-

Total assets
$
35,067

$
18,811

$
19,678

$
(3,422)

Liabilities

Current liabilities:

Short-term borrowings

1,726

62

2,083

(419)⁶

Accounts payable

2,497

2,546

188

(237)⁷

Accrued expenses

1,599

782

822

(5)⁸

Accrued wages, salaries and employee benefits

1,229

1,213

16

-

Dividends payable

-

-

-

-

Deferred and current income taxes payable

162

87

75

-

Deferred liability

-

-

246

(246)⁹

Long-term debt due within one year

3,830

33

3,797

-

Total current liabilities

11,043

4,723

7,227

(907)

Long-term debt due after one year

13,171

3,296

9,875

-

Liability for postemployment benefits

4,023

4,023

-

-

Deferred income taxes and other liabilities

538

477

233

(172)⁵
Total liabilities

28,775

12,519

17,335

(1,079)

Contingencies

-

-

-

-
Stockholders' equity

Common stock

1,036

1,036

870

(870)⁴

Treasury stock

(2,571)

(2,571)

-

-

Profit employed in the business

8,357

8,357

1,417

(1,417)⁴

Accumulated other comprehensive income

(530)

(530)

56

(56)⁴

Total stockholders' equity

6,292

6,292

2,343

(2,343)
Total liabilities and stockholders' equity
$
35,067

$
18,811

$
19,678

$
(3,422)

1 Represents Caterpillar Inc. and its subsidiaries with Financial Products accounted for on the equity basis.
2 Elimination of receivables between Machinery and Engines and Financial Products.
3 Elimination of Machinery and Engines insurance premiums which are prepaid to Financial Products.
4 Elimination of Financial Products equity which is accounted for on Machinery and Engines on the equity basis.
5 Reclassification of Financial Products deferred tax liability to a deferred tax asset on a consolidated basis.
6 Elimination of Financial Products short-term borrowings from Machinery and Engines.
7 Elimination of payables between Machinery and Engines and Financial Products.
8 Elimination of prepaid insurance in Financial Products' accrued expenses.
9 Elimination of Financial Products deferred liabilities with Machinery and Engines.

~~Page 41~~

Caterpillar Inc.
Supplemental Data for Financial Position
At December 31, 2002
(Unaudited)
(Millions of dollars)

Supplemental Consolidating Data

Consolidated

Machinery &
Engines¹

Financial
Products

Consolidating
Adjustments
Assets:

Current assets:

Cash and short-term investments
$
309

$
146

$
163

$
-

Receivables - trade and other

2,838

2,712

1,386

(1,260)²

Receivables - finance

6,748

-

6,748

-

Deferred and refundable income taxes

642

579

63

-

Prepaid expenses

1,328

1,356

7

(35)³

Inventories

2,763

2,763

-

-

Total current assets

14,628

7,556

8,367

(1,295)

Property, plant and equipment - net

7,046

4,848

2,198

-

Long-term receivables - trade and other

66

66

-

-

Long-term receivables - finance

6,714

-

6,714

-

Investments in unconsolidated affiliated companies

747

398

349

-

Investments in Financial Products subsidiaries

-

1,961

-

(1,961)⁴

Deferred income taxes

850

971

12

(133)⁵

Intangible assets

281

277

4

-

Goodwill

1,402

1,402

-

-

Other assets

1,117

614

503

-

Total assets
$
32,851

$
18,093

$
18,147

$
(3,389)

Liabilities

Current liabilities:

Short-term borrowings

2,175

64

2,906

(795)⁶

Accounts payable

2,269

2,334

151

(216)⁷

Accrued expenses

1,620

840

806

(26)⁸

Accrued wages, salaries and employee benefits

1,178

1,161

17

-

Dividends payable

120

120

-

-

Deferred and current income taxes payable

70

35

35

-

Deferred liability

-

-

259

(259)⁹

Long-term debt due within one year

3,912

258

3,654

-

Total current liabilities

11,344

4,812

7,828

(1,296)

Long-term debt due after one year

11,596

3,403

8,193

-

Liability for postemployment benefits

4,038

4,038

-

-

Deferred income taxes and other liabilities

401

368

165

(132)⁵
Total liabilities

27,379

12,621

16,186

(1,428)

Contingencies

-

-

-

-
Stockholders' equity

Common stock

1,034

1,034

837

(837)⁴

Treasury stock

(2,669)

(2,669)

-

-

Profit employed in the business

7,849

7,849

1,232

(1,232)⁴

Accumulated other comprehensive income

(742)

(742)

(108)

108 ⁴

Total stockholders' equity

5,472

5,472

1,961

(1,961)
Total liabilities and stockholders' equity
$
32,851

$
18,093

$
18,147

$
(3,389)

1 Represents Caterpillar Inc. and its subsidiaries with Financial Products accounted for on the equity basis.
2 Elimination of receivables between Machinery and Engines and Financial Products.
3 Elimination of Machinery and Engines insurance premiums which are prepaid to Financial Products.
4 Elimination of Financial Products equity which is accounted for on Machinery and Engines on the equity basis.
5 Reclassification of Financial Products deferred tax liability to a deferred tax asset on a consolidated basis.
6 Elimination of Financial Products short-term borrowings from Machinery and Engines.
7 Elimination of payables between Machinery and Engines and Financial Products.
8 Elimination of prepaid insurance in Financial Products' accrued expenses.
9 Elimination of Financial Products deferred liabilities with Machinery and Engines.

~~Page 42~~

Caterpillar Inc.
Supplemental Data for Cash Flow
For the Nine Months Ended September 30, 2003
(Unaudited)
(Millions of dollars)

Supplemental Consolidating Data

Consolidated

Machinery
& Engines¹

Financial
Products

Consolidating
Adjustments
Cash flow from operating activities:



Profit

$
750

$
750

$
186

$
(186)²

Adjustments for non-cash items:

Depreciation and amortization

1,008

611

397

-

Profit of Financial Products

-

(186)

-

186 ³

Other

46

39

12

(5)⁴

Changes in assets and liabilities:

Receivables - trade and other

(220)

(140)

(120)

40 ⁴

Inventories

(294)

(294)

-

-

Accounts payable and accrued expenses

108

87

21

--

Other - net

9

(80)

107

(18)⁴
Net cash provided by (used for) operating activities

1,407

787

603

17

Cash flow from investing activities:

Capital expenditures - excluding equipment leased to others

(352)

(335)

(17)

-

Expenditures for equipment leased to others

(781)

(10)

(771)

-

Proceeds from disposals of property, plant and equipment

451

-

451

-

Additions to finance receivables

(12,245)

-

(12,245)

-

Collection of finance receivables

10,044

-

10,044

-

Proceeds from the sale of finance receivables

1,472

-

1,472

-

Net intercompany borrowings

-

391

2

(393)⁵

Investments and acquisitions (net of cash acquired)

(26)

(17)

(9)

-

Other - net

(55)

(6)

(82)

33 ⁶

Net cash provided by (used for) investing activities

(1,492)

23

(1,155)

(360)
Cash flow from financing activities:

Dividends paid

(361)

(361)

-

-

Common stock issued, including treasury shares reissued

81

81

33

(33)⁶

Net intercompany borrowings

-

-

(391)

391 ⁵

Proceeds from long-term debt issued

4,233

83

4,150

-

Payments on long-term debt

(2,992)

(500)

(2,492)

-

Short-term borrowings - net

(788)

(2)

(786)

-

Net cash provided by (used for) financing activities

173

(699)

514

358
Effect of exchange rate on cash

-

6

9

(15)⁷

Increase (Decrease) in cash and short-term investments

88

117

(29)

-
Cash and short-term investments at beginning of period

309

146

163

-

Cash and short-term investments at end of period

$
397

$
263

$
134

$
-

1 Represents Caterpillar Inc. and its subsidiaries with Financial Products accounted for on the equity basis.
2 Elimination of Financial Products profit after tax due to equity method of consolidation.
3 Non-cash adjustment for the undistributed earnings from Financial Products.
4 Elimination of non-cash adjustments and changes in assets and liabilities related to consolidated reporting.
5 Net proceeds and payments to/from Machinery and Engines and Financial Products.
6 Change in investment and common stock related to Financial Products.
7 Elimination of the effect of exchange on intercompany balances.

~~Page 43~~

Caterpillar Inc.
Supplemental Data for Cash Flow
For the Nine Months Ended September 30, 2002
(Unaudited)
(Millions of dollars)

Supplemental Consolidating Data

Consolidated

Machinery &
Engines¹

Financial
Products

Consolidating
Adjustments
Cash flow from operating activities:

Profit

$
493

$
493

$
145

$
(145)²

Adjustments for non-cash items:

Depreciation and amortization

910

596

314

-

Profit of Financial Products

-

(145)

-

145 ³

Other

21

(40)

48

13 ⁴

Changes in assets and liabilities:

Receivables - trade and other

(147)

20

(132)

(35)⁴

Inventories

(159)

(159)

-

-

Accounts payable and accrued expenses

322

231

46

45 ⁴

Other - net

(80)

(105)

32

(7)⁴
Net cash provided by (used for) operating activities

1,360

891

453

16

Cash flow from investing activities:

Capital expenditures - excluding equipment leased to others

(498)

(473)

(25)

-

Expenditures for equipment leased to others

(762)

-

(762)

-

Proceeds from disposals of property, plant and equipment

360

43

317

-

Additions to finance receivables

(11,323)

-

(11,323)

-

Collection of finance receivables

8,652

-

8,652

-

Proceeds from the sale of finance receivables

1,995

-

1,995

-

Net intercompany borrowings

-

(5)

26

(21)⁵

Investments and acquisitions (net of cash acquired)

(290)

(23)

(267)

-

Other - net

(41)

(19)

(56)

34⁶

Net cash provided by (used for) investing activities

(1,907)

(477)

(1,443)

13
Cash flow from financing activities:

Dividends paid

(361)

(361)

-

-

Common stock issued, including treasury shares reissued

8

8

34

(34)⁶

Net intercompany borrowings

-

(26)

5

21 ⁵

Proceeds from long-term debt issued

3,855

248

3,607

-

Payments on long-term debt

(2,772)

(194)

(2,578)

-

Short-term borrowings - net

(165)

(154)

(11)

-

Net cash provided by (used for) financing activities

565

(479)

1,057

(13)
Effect of exchange rate on cash

27

39

4

(16)⁷

Increase (Decrease) in cash and short-term investments

45

(26)

71

-
Cash and short-term investments at beginning of period

400

251

149

-

Cash and short-term investments at end of period

$
445

$
225

$
220

$
-

1 Represents Caterpillar Inc. and its subsidiaries with Financial Products accounted for on the equity basis.
2 Elimination of Financial Products profit after tax due to equity method of consolidation.
3 Non-cash adjustment for the undistributed earnings from Financial Products.
4 Elimination of non-cash adjustments and changes in assets and liabilities related to consolidated reporting.
5 Net proceeds and payments to/from Machinery and Engines and Financial Products.
6 Elimination of the effect of exchange on intercompany balances.

~~Page 44~~

F. ~~Non-GAAP Financial Measures~~

The following definitions are provided for "non-GAAP financial measures" in connection with Regulation G issued by the Securities and Exchange Commission. These non-GAAP financial measures have no standardized meaning prescribed by U.S. GAAP, and therefore, are unlikely to be comparable with the calculation of similar measures for other companies. Management does not intend these items to be considered in isolation or as a substitute for the related GAAP measures.

~~Machinery and Engines~~
Caterpillar defines Machinery and Engines as it is presented in the supplemental data as Caterpillar Inc. and its subsidiaries with Financial Products accounted for on the equity basis. Machinery and Engines information relates to the design, manufacture and marketing of our products. Financial Products information relates to the financing to customers and dealers for the purchase and lease of Caterpillar and other equipment. The nature of these businesses is different especially with regard to the financial position and cash flow items. Caterpillar management utilizes this presentation internally to highlight these differences. We also believe this presentation will assist readers in understanding our business. Pages 37 - 44 reconcile Machinery and Engines with Financial Products on the Equity Basis to Caterpillar Inc. Consolidated financial information.

~~Profit Excluding a Bond Retirement Charge~~
Caterpillar reports selected financial data excluding the charge for early retirement of debt. Management believes excluding this charge provides comparability to third quarter 2002 data and highlights the impact of this charge on period-to-period fluctuations.

~~Profit Excluding a Bond Retirement Charge~~
Caterpillar defines profit excluding a bond retirement charge as GAAP profit after tax excluding the charge for early retirement of debt. The table on page 45 reconciles GAAP profit and profit excluding a bond retirement charge.

~~Profit Per Share Excluding a Bond Retirement Charge~~
Caterpillar defines profit per share excluding a bond retirement charge as GAAP profit per share (PPS) excluding the charge for early retirement of debt. The table on page 45 reconciles GAAP PPS and PPS excluding a bond retirement charge.

Caterpillar Inc.
Reconciliation of Profit to Profit Excluding a Bond Retirement Charge
(Unaudited)
(Millions of Dollars)

Three Months Ended

Nine Months Ended

September 30,

September 30,

2003

2002

2003

2002

Profit
$
222

$
213

$
750

$
493

Bond retirement charge

40

-

40

-

Profit excluding a bond retirement charge
$
262

$
213

$
790

$
493

Caterpillar Inc.
Reconciliation of PPS to PPS Excluding a Bond Retirement Charge
(Unaudited)
(Dollars)

Three Months Ended

Nine Months Ended

September 30,

September 30,

2003

2002

2003

2002

PPS
$
0.62

$
0.61

$
2.15

$
1.42

Bond retirement charge

0.11

-

0.11

-

PPS excluding a bond retirement charge
$
0.73

$
0.61

$
2.26

$
1.42

~~Page 45~~

G. ~~Safe Harbor Statement under the Securities Litigation Reform Act of 1995~~

Certain statements contained in our third-quarter 2003 results release and prepared statements from the related results webcast are forward-looking and involve uncertainties that could significantly impact results. The words "believes," "expects," "estimates," "anticipates," "will be", "should" and similar words or expressions identify forward-looking statements made on behalf of Caterpillar. Uncertainties include factors that affect international businesses, as well as matters specific to the company and the markets it serves.

~~World Economic Factors~~
The world economy appears to be strengthening in last half 2003 and major central banks are holding interest rates steady. Our outlook assumes that current economic policies will be sufficient to allow the recovery to strengthen throughout 2004. If, however, the recovery proves less robust than assumed, economic growth would likely slow further, weakening machinery and engine sales.

Recent economic data suggests that the U. S. economy grew in excess of a 4 percent annual rate in third quarter 2003. Our outlook assumes that the combination of the recent tax cut, June's interest rate cut, slightly lower oil prices, and the favorable impact of a weaker U.S. dollar will allow good growth to continue into 2004. Faster growth should allow the improvement in machinery and engine sales that occurred so far this year to continue into 2004. If, however, the boost provided by monetary and fiscal easing proves transitory, a return to weak growth could threaten our machinery and engine sales.

Economic growth in the EAME region as a whole was weak in the first three quarters of the year. Flat growth in Europe was balanced by stronger growth in Africa/Middle East and in the Commonwealth of Independent States. Recently, leading indicators and business surveys suggest economic conditions in Europe are ready to improve and the European Central Bank ("ECB") has indicated it is not planning on cutting interest rates further. Our outlook assumes the European economy will improve in the remaining months of 2003 and in 2004. Potential risks include the ECB quickly raising interest rates or the stronger euro depressing exports. Should these occur, the resulting weaker economic growth could weaken machinery and engine sales.

The Japanese economy grew much faster than expected in first half 2003. Our outlook assumes that measures employed by the Bank of Japan - zero interest rates, the maintenance of high levels of reserves in the banking system and the purchase of long-term government bonds - will allow this recovery to continue. The economy remains vulnerable to any tightening in financial conditions and should that occur, the recovery could stall. Slower economic growth would further reduce our sales in that country and could have a negative impact on other economies, particularly those in the region.

Asia/Pacific economies grew rapidly in the first three quarters and economic policies in place support a continuation of fast growth. Growth has benefited from competitive exchange rates and rapid growth in China. Industrial countries have voiced dissatisfaction with the region's exchange rate practices and the Chinese economy shows signs of overheating. The potential for trade frictions could slow exports and regional growth; the Chinese government could tighten policies too much and sharply slow growth. Our outlook assumes neither risk occurs. Should that prove incorrect, our results could be negatively impacted.

The Latin American economy has grown slowly and our outlook projects further improvement throughout the forecast horizon. This improvement assumes a recovery in foreign direct investment inflows, further reductions in local interest rates and higher commodity prices. If, for whatever reason, these assumptions prove untrue, our results could be negatively impacted.

~~Commodity Prices~~
Commodities represent a significant sales opportunity, with prices and production as key drivers. Prices and production of metals have improved this year and our outlook assumes continued growth in the world economy will cause metals prices to increase further. Any unexpected weakening, however, could cause prices to drop sharply to the detriment of our results.

While coal stocks are high and prices have been soft, our outlook assumes production and prices will improve late this year. If coal production and prices do not improve, our results could be negatively affected.

Oil and natural gas prices have remained fairly high this year due to tight inventories. Our outlook assumes that increased production will ease shortages in both oil and natural gas, allowing prices to ease. Should supplies tighten sharply in response to either OPEC production cuts or a severe winter, the resulting high prices likely would slow economies, potentially with a depressing impact upon our sales.

~~Monetary and Fiscal Policies~~
For most companies operating in a global economy, monetary and fiscal policies implemented in the U.S. and abroad could have a significant impact on economic growth, and accordingly, demand for a product. In general, higher than expected interest rates, reductions in government spending, higher taxes, significant currency devaluations, and uncertainty over key policies are some factors likely to lead to slower economic growth and lower industry demand.

~~With economic data looking more favorable, major central banks are holding interest rates steady and a few have even started reviewing when rate hikes might be necessary.~~

Our outlook assumes that central banks will take great care to ensure that economic recoveries continue. Should they be slow to react to worsening conditions or raise interest rates too aggressively, such actions could cause recessions and depress our results.

Weak economic growth has increased budget deficits in many countries and limited the ability of governments to boost economies with tax cuts and more spending. Our outlook assumes that governments will not aggressively raise taxes and slash spending to deal with their budget imbalances. Such actions could disrupt growth and negatively affect sales to public construction.

~~Political Factors~~
~~Political factors in the United States and abroad have a major impact on global companies.~~

Our outlook assumes that there will be no significant military conflict in North Korea or the Middle East in the forecast period. Such a military conflict could severely disrupt sales into countries affected, as well as nearby countries.

~~Page 46~~

Our outlook also assumes that there will be no major terrorist attacks. If there is a major terrorist attack, confidence could be undermined, causing a sharp drop in economic activities and our sales. Attacks in major developed economies would be the most disruptive.

Our outlook further assumes that efforts by countries to increase their exports will not result in retaliatory countermeasures by other countries to block such exports, particularly in the Asia/Pacific region.

~~Currency Fluctuations~~
The company has costs and revenues in many currencies and is therefore exposed to risks arising from currency fluctuations. Many currency positions are fairly closely balanced, which, along with the diversity of currency positions, helps diminish exchange rate risks.

The company's largest manufacturing presence is in the United States. So any unexpected strengthening of the dollar tends to raise the foreign currency value of costs and reduce our global competitiveness.

The stronger euro had a favorable impact on translating European sales into U. S. dollars in the third quarter. The outlook assumes similar benefits in the future. Should the euro collapse, our results could be negatively impacted.

~~Dealer Practices~~
The company sells primarily through an independent dealer network. Dealers carry inventories of both new and rental equipment and adjust those inventories based on their assessments of future needs. Such adjustments can impact our results either positively or negatively. The current outlook assumes dealers will reduce inventories slightly in 2003; more drastic reductions would adversely affect sales.

~~Other Factors~~
The rate of infrastructure spending, housing starts, commercial construction and mining play a significant role in the company's results. Our products are an integral component of these activities and as these activities increase or decrease in the United States or abroad, demand for our products may be significantly impacted.

Pursuant to a Consent Decree Caterpillar entered into with the United States Environmental Protection Agency (EPA), the company was required to meet certain emission standards by October 2002. The Consent Decree provides for the possibility that diesel engine manufacturers may not be able to meet these standards exactly on that date, and allows companies to continue selling non-compliant engines if they pay non-conformance penalties (NCPs) on those engines. The company began shipping lower emission engines in October 2002 as a "bridge" until the fully compliant ACERT® engines are introduced in 2003. These "bridge" engines require the payment of NCPs. We expect emissions standard changes to negatively impact our financial results in 2003 by $38 million (after tax) or $21 million (after tax) more adverse than in 2002 due to higher shipments of bridge engines in 2003. Early in 2003, Caterpillar began ramping up production of medium-duty and heavy-duty compliant ACERT engines. We do not anticipate payin g NCPs beyond 2003. Our outlook for 2003 is subject to assumptions regarding projected NCPs, price increases, and volumes. We are able to make fairly accurate predictions of the NCP levels per engine due to our engineering knowledge, development process and internal testing during development. Our net price increase for heavy-duty bridge engines was successfully implemented on October 1, 2002; this increase was competitive with price increases implemented by other engine manufacturers on that date. We implemented an additional price increase in the first quarter 2003 to truck manufacturers that purchase our heavy-duty ACERT engines. This increase has been communicated to the truck manufacturers and is based on the additional value that we expect truck owners to receive from ACERT engines compared to our competitors as a result of better fuel economy, less maintenance and greater durability. The ultimate net price increase we are able to achieve for our ACERT engines is dependent upon marketplace accepta nce of these engines versus competitive alternatives. While we estimate volume to the best of our ability, industry volume is an issue out of our control. If our assumptions regarding NCP levels, market acceptance of the price increases and/or engine volume are not realized, company performance could be negatively impacted.

Projected cost savings or synergies from alliances with new partners could also be negatively impacted by a variety of factors. These factors could include, among other things, higher than expected wages, energy and/or material costs, and/or higher than expected financing costs due to unforeseen changes in tax, trade, environmental, labor, safety, payroll or pension policies in any of the jurisdictions where the alliances conduct their operations.

Results may be impacted positively or negatively by changes in the sales mix. Our outlook assumes a certain geographic mix of sales as well as a product mix of sales. If actual results vary from this projected geographic and product mix of sales, our results could be negatively impacted.

The company operates in a highly competitive environment and our outlook depends on a forecast of the company's share of industry sales. An unexpected reduction in that share could result from pricing or product strategies pursued by competitors, unanticipated product or manufacturing difficulties, a failure to price the product competitively, or an unexpected buildup in competitors' new machine or dealer owned rental fleets, leading to severe downward pressure on machine rental rates and/or used equipment prices.

~~The environment also remains very competitive from a pricing standpoint. Additional price discounting would result in lower than anticipated realization.~~

Inherent in the operation of the Financial Products Division is the credit risk associated with its customers. The creditworthiness of each customer, and the rate of delinquencies, repossessions and net losses on customer obligations are directly impacted by several factors, including, but not limited to, relevant industry and economic conditions, the availability of capital, the experience and expertise of the customer's management team, commodity prices, political events, and the sustained value of the underlying collateral. Additionally, interest rate movements create a degree of risk to our operations by affecting the amount of our interest payments and the value of our fixed rate debt. While our policy is to use interest rate swap agreements to manage our exposure to interest rate changes and lower the costs of borrowed funds, if interest rates move upward more sharply than anticipated, it could negatively impact our results. With respect to our insurance and investment management operations, change s in the equity and bond markets could cause an impairment of the value of ~~our investment portfolio, thus requiring~~the product. Negotiations among EU Member States, the European Commission, and the private sector over which products would be listed were intense. The EU finalized the list in Decembe r 2003 and in March 2004 began to impose retaliatory tariffs of 5 percent on certain U.S. origin goods. These tariffs will increase 1 percentage point per month to a ~~negative adjustment to earnings.~~

~~In general, our results are sensitive to changes~~maximum of 17 percent after one year. The gradual increase in economic growth, particularly those originating in construction, mining and energy. Developments reducing such activities also tend to lower our sales. In addition to the factors mentioned above, our results could be negatively impacted by any of the following:

~~Any sudden drop in consumer or business confidence~~
~~Delays in legislation needed to fund public construction~~
~~Regulatory or legislative changes that slow activity in key industries; and/or~~
~~Unexpected collapses in stock markets.~~

~~Page 47~~

~~This discussion of uncertainties is by no means exhaustive but~~tariffs is designed to ~~highlight important factors that may~~place increasing pressure on the U.S. government to bring its tax laws into compliance with its WTO obligations. Given the makeup of the final retaliation list, some Caterpillar parts and components will be subjected to these additional tariffs. We do not believe these tariffs will materially impact our ~~outlook. Obvious factors such as general economic conditions throughout~~financial results. The company has production facilities in the ~~world do~~EU, Russia, Asia, and South America. Products sold into the EU from these plants are not ~~warrant further discussion, but are noted to further emphasize the myriad of contingencies that may cause the company's actual results to differ from those currently anticipated.~~

~~Item 4. Controls and Procedures~~

An evaluation was performed under the supervision and with the participation of the company's management, including the Chief Executive Officer (CEO) and Chief Financial Officer (CFO), of the effectiveness of the design and operation of the company's disclosure controls and procedures as of the end of the period coveredaffected by this ~~quarterly report. Based on~~retaliatory tariff. Congress is currently under increasing pressure to repeal ETI. We cannot predict how the U.S. legislative process will affect the company’s 2004 income tax liability. Although we don’t expect a material impact, it is possible that evaluation, the company's management, including the CEO and CFO, concluded that the company's disclosure controls and procedures are effective to ensure that information required to be disclosed by the company in reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in Securities and Exchange Commission rules and forms. Subsequent to the date of this evaluation, there have been no significantenacted changes in the company's internal controls over financial reporting that has materially affected, or is reasonab ly likely to materially affect, the company's internal control over financial reporting. Although the design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote, management's evaluation provided reasonable assurance that these controls will be effective.

~~PART II. OTHER INFORMATION~~

~~Item 1. Legal Proceedings.~~

~~The disclosure regarding legal proceedings contained in Part II - Item 1 "Legal Proceedings" of~~legislation could significantly lower our ~~Form 10-Q filed with the Securities and Exchange Commission for the quarter ended June 30, 2003 is updated by the following disclosure:~~expected 2004 export benefits.

On January 16, 2002, Caterpillar commenced an action in the Circuit Court of the Tenth Judicial Circuit of Illinois in Peoria, Illinois against Navistar International Transportation Corporation and International Truck and Engine Corporation (collectively Navistar). The lawsuit arises out of a long-term purchase contract between Caterpillar and Navistar effective May 31, 1988, as amended from time to time (the Purchase Agreement). The lawsuit alleges that Navistar breached its contractual obligations by: (i) paying Caterpillar $8.08 (whole dollars) less per fuel injector than the agreed upon price for new unit injectors delivered by Caterpillar; (ii) refusing to pay contractually agreed upon surcharges owed as a result of Navistar ordering less than planned volumes of replacement unit injectors; and (iii) refusing to pay contractually agreed upon interest stemming from Navistar's late payments. Caterpillar seeks a declaratory judgment upholding the contract and more than $100 million in damages arising fro m Navistar's alleged breach of contract. On January 22, 2003, Caterpillar filed its First Amended Complaint to add four new defendants -- Franklin Power Products, Inc., Newstream Enterprises, Sturman Industries, Inc., and Sturman Engine Systems, Inc. The Amended Complaint adds claims alleging that Franklin, Newstream, and Navistar, collectively and individually, failed to pay the applicable price for shipments of unit injectors to Franklin and Newstream; Caterpillar seeks damages in excess of $2 million and $5 million, respectively, from these defendants. With respect to Sturman Industries, Inc. and Sturman Engine Systems, Inc., the Amended Complaint alleges that the two companies colluded with International to utilize technology that Sturman misappropriated from Caterpillar to help Navistar develop its G2 fuel system, and tortiously interfered with the Purchase Agreement and Caterpillar's prospective economic relationship with Navistar. The Amended Complaint further alleges that the two parties' collusi on led Navistar to select Sturman Engine Systems, Inc. and another company, instead of Caterpillar, to develop and manufacture the G2 fuel system. At September 30, 2003, the past due receivable from Navistar related to this case was $125 million.

Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities.

Issuer Purchases of Equity Securities

Period

Total numberof SharesPurchased

Average PricePaid per Share

Total Numberof Shares Purchased Under the Program

Maximum Numberof Shares that MayYet Be PurchasedUnder the Program
January 1-31, 2004

1,081,900

79.11

1,081,900

23,355,594
⁽¹⁾
February 1-29, 2004

2,128,100

77.21

2,128,100

21,427,249
⁽¹⁾
March 1-31, 2004
- - -
21,902,131
⁽¹⁾
Total

3,210,000

77.85

3,210,000

(1) On October 8, 2003, the board of directors approved an extension of the share repurchase program (through October 2008) with the goal of reducing the company's outstanding shares to 320,000,000. Amount represents the shares outstanding at the end of the period less 320,000,000.

Non-U.S. Employee Stock Purchase Plans

We have ~~twenty-seven~~27 employee stock purchase plans administered outside the United States for our foreign employees. As of ~~September 30, 2003,~~March 31, 2004, those plans had approximately ~~9,448~~8,160 participants in the aggregate. During the ~~third~~first quarter of ~~2003,~~2004, a total of ~~161,849 shares~~102,451shares of Caterpillar common stock or foreign denominated equivalents were distributed under the plans. Participants in some foreign plans have the option of receiving non-U.S. share certificates (foreign-denominated equivalents) in lieu of U.S. shares of Caterpillar Inc. common stock upon withdrawal from the plan. These equivalent certificates are tradable only on the local stock market and are included in our determination of shares ~~outstanding.~~outstandi ng.

~~Page 48~~

	41

Item4. Submission of Matters to a Vote of Security Holders .

The Annual Meeting of Stockholders of Caterpillar Inc. was held on April 14, 2004, for the purpose of electing directors and voting on the proposals described below. Proxies for the meeting were solicited pursuant to Section 14(a) of the Securities Exchange Act of 1934 and there was no solicitation in opposition to management's solicitations. A plurality vote of the shares present at the meeting was required for election of directors.An affirmative vote of the majority of shares present at the meeting was required for approval of all other proposals. Abstentions and broker non-votes have the effect of a no vote on matters other than director elections. Quorum exists if at least one-third of Caterpillar stockholders are present in person or by proxy at the meeting. Abstentions and broker non-votes are counted as present for establishing a quorum.

Proposal 1 - Election of Directors

All of management's nominees for directors as listed in the proxy statement were elected with the following vote:

Shares Voted
"FOR"
Shares
"WITHHELD"

John T. Dillon
292,840,884.68
14,334,813.52

Juan Gallardo
293,424,533.12
13,751,165.09

William A. Osborn
296,375,468.41
10,800,229.79

Gordon R. Parker
292,587,843.74
14,587,854.47

Edward B. Rust, Jr.
293,486,033.26
13,692,664.95

Proposal 2 - Amend Stock Option Plan

The management proposal requesting approval of an amendment to the Caterpillar Inc. Stock Option and Long-Term Incentive Plan was approved with the following vote:

Shares Voted"FOR"

Shares Voted"AGAINST"

Shares"ABSTAINING"

Broker
Non-Votes

193,693,578.06

73,180,116.84

7,948,527.31

32,353,476

Proposal 3 - Ratification of Auditors

The management proposal requesting ratification of Auditors was approved with the following vote:

Shares Voted"FOR"

Shares Voted"AGAINST"

Shares"ABSTAINING"

Broker
Non-Votes

289,639,985.21

10,552,921.88

6,983,875.12

0

Proposal 4 - Stockholder Proposal - Shareholder Rights Plan

The stockholder proposal requesting the Board of Directors to redeem or terminate the company's shareholder rights plan unless put to shareholder vote was defeated with the following vote:

Shares Voted"FOR"

Shares Voted"AGAINST"

Shares"ABSTAINING"

Broker
Non-Votes

147,486,605.18

118,852,353.92

8,483,263.11

32,353,476

Proposal 5 - Stockholder Proposal - Sale of Equipment to Israel

The stockholder proposal requesting the Board of Directors to report on whether sales of equipment to Israel comports with the company’s Code of Conduct was defeated with the following vote:

Shares Voted"FOR"

Shares Voted"AGAINST"

Shares"ABSTAINING"

Broker
Non-Votes

9,691,465.96

232,722,811.89

32,407,944.35

32,353,476

Proposal 6 - Stockholder Proposal - HIV/AIDS

The stockholder proposal requesting the Board of Directors to report on the economic effects of the HIV/AIDS, tuberculosis and malaria pandemics on the company's business strategy was defeated with the following vote:

Shares Voted"FOR"

Shares Voted"AGAINST"

Shares"ABSTAINING"

BrokerNon-Votes

14,675,847.59

227,812,962.48

32,333,412.14

32,353,476

Item 6. Exhibits and Reports on Form 8-K

.

(a)
Exhibits:

~~31.1~~
3.3
Bylaws, amended and restated as of February 11, 2004.
31.1
Certification of ~~Glen A. Barton,~~James W. Owens, Chairman and Chief Executive Officer of Caterpillar Inc., as required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2
Certification of F. Lynn McPheeters, Chief Financial Officer of Caterpillar Inc., as required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32
Certification of ~~Glen A. Barton,~~James W. Owens, Chairman and Chief Executive Officer of Caterpillar Inc. and F. Lynn McPheeters, Chief Financial Officer of Caterpillar Inc., as required pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

~~(b)~~
(b)
During the quarter ended ~~September 30, 2003,~~March 31, 2004, reports on Form 8-K were filed pursuant to Item 5 on ~~July 1, July 17, July 18,~~January 27, February 12, March 2 (two), and ~~September 5,~~March 22, and furnished pursuant to Item 912 on ~~July 17.~~January 27. Additional reports on Form 8-K were filed on ~~October 8~~April 14, April 15, and ~~October 16, 2003~~April 22 pursuant to Item 5 and furnished on ~~October 16, 2003~~April 22, 2004 pursuant to Item 12. No financial statements were filed as part of those reports.

~~SIGNATURES~~	43

SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

~~CATERPILLAR INC.~~

~~November 13, 2003~~
~~/s/ Glen A. Barton~~
CATERPILLAR INC.

May 6, 2004
/s/ James W. Owens
Chairman of the Board and Chief Executive Officer

(~~Glen A. Barton)~~

James W. Owens)

~~November 13, 2003~~
May 6, 2004
/s/ F. Lynn McPheeters

Vice President and Chief Financial Officer

(F. Lynn McPheeters)

~~November 13, 2003~~
May 6, 2004
/s/ David B. Burritt

Controller and Chief Accounting Officer

(David B. Burritt)

~~November 13, 2003~~
May 6, 2004
/s/ James B. Buda

Secretary

(James B. Buda)

~~Page 49~~
44

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
~~FORM 10-Q~~

FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended ~~September 30, 2003~~ March 31, 2004 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________________ to ________________
Commission File Number: 1-768
CATERPILLAR INC. (Exact name of registrant as specified in its charter)
Delaware (State or other jurisdiction of incorporation)	37-0602744 (IRS Employer I.D. No.)
100 NE Adams Street, Peoria, Illinois (Address of principal executive offices)	61629 (Zip Code)
Registrant's telephone number, including area code: (309) 675-1000
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ X ] No [ ]. Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes [ X ] No [ ]
At ~~September 30, 2003, 347,240,332~~March 31, 2004, 341,902,131 shares of common stock of the Registrant were outstanding.

Caterpillar Inc. Consolidated Statement of Results of Operations (Unaudited) (Dollars in millions except per share data)
		Three Months Ended
		September 30,
		2003		2002
Sales and revenues:
	Sales of Machinery and Engines	$	5,112	$	4,700
	Revenues of Financial Products		433		375

	Total sales and revenues		5,545		5,075

Operating costs:
	Cost of goods sold		4,143		3,798
	Selling, general and administrative expenses		627		538
	Research and development expenses		173		167
	Interest expense of Financial Products		116		135
	Other operating expenses		101		113

	Total operating costs		5,160		4,751


Operating profit			385		324

	Interest expense excluding Financial Products		61		66
	Other income (expense)		(40)		25


Consolidated profit before taxes			284		283

	Provision for income taxes		69		71

	Profit of consolidated companies		215		212

	Equity in profit (loss) of unconsolidated affiliated companies		7		1


Profit		$	222	$	213



Profit per common share		$	0.64	$	0.62

Profit per common share - diluted¹		$	0.62	$	0.61

Weighted average common shares (millions)
- Basic			346.3		344.2
- Diluted¹			356.1		346.2

Cash dividends paid per common share		$	0.35	$	0.35

1 Diluted by assumed exercise of stock options, using the treasury stock method.
See accompanying notes to Consolidated Financial Statements.

Caterpillar Inc. Consolidated Statement of Results of Operations (Unaudited) (Dollars in millions except per share data)
		Nine Months Ended
		September 30,
		2003		2002
Sales and revenues:
	Sales of Machinery and Engines	$	15,037	$	13,659
	Revenues of Financial Products		1,261		1,116

	Total sales and revenues		16,298		14,775

Operating costs:
	Cost of goods sold		12,102		11,079
	Selling, general and administrative expenses		1,801		1,587
	Research and development expenses		494		524
	Interest expense of Financial Products		354		393
	Other operating expenses		358		305

	Total operating costs		15,109		13,888


Operating profit			1,189		887

	Interest expense excluding Financial Products		192		206
	Other income (expense)		15		18


Consolidated profit before taxes			1,012		699

	Provision for income taxes		273		196

	Profit of consolidated companies		739		503

	Equity in profit (loss) of unconsolidated affiliated companies		11		(10)


Profit		$	750	$	493



Profit per common share		$	2.17	$	1.43

Profit per common share - diluted¹		$	2.15	$	1.42

Weighted average common shares (millions)
- Basic			345.1		343.9
- Diluted¹			349.0		347.2

Cash dividends paid per common share		$	1.05	$	1.05

1 Diluted by assumed exercise of stock options, using the treasury stock method.
See accompanying notes to Consolidated Financial Statements.

1.	A. Financial Statement Presentation
	In the opinion of management, all adjustments, consisting only of normal recurring adjustments necessary for a fair presentation of (a) the consolidated results of operations for the ~~three- and nine-month~~three-month periods ended ~~September 30,~~March 31, 2004 and 2003, ~~and 2002,~~ (b) the changes in stockholders' equity for the ~~nine-month~~three-month periods ended ~~September 30,~~March 31, 2004 and 2003, ~~and 2002,~~ (c) the consolidated financial position at ~~September 30, 2003~~March 31, 2004 and December 31, ~~2002,~~2003, and (d) the consolidated statement of cash flow for the ~~nine-month~~three-month periods ended ~~September 30,~~March 31, 2004 and 2003, ~~and 2002,~~ have been made. Certain amounts for prior periods have been reclassified to conform to the current period financial statement presentation. In the second quarter of 2003, we revised our policy regarding the classification of certain costs related to distributing replacement parts. Previously, these costs were included in selling, general and administrative expenses and now are included in cost of goods sold. This classification is more consistent with industry practice. The parts distribution costs include shipping and handling (including warehousing) along with related support costs such as information technology, purchasing and inventory management. Prior period amounts have been revised to conform to the new classification. The ~~amounts~~amount reclassified from selling, general and administrative expenses to cost of goods sold ~~were $108 million and $328~~was $106 million for the three ~~and nine~~ months ended ~~September 30, 2002, respectively.~~March 31, 2003. The reclassification had no impact on operating profit. The December 31, ~~2002 balance sheet~~2003 financial position data included herein is derived from the audited consolidated financial statements included in the Company's annual report on Form 10-K for the year ended December 31, ~~2002, as amended.~~ 2003.
	B. Nature of Operations
	We operate in three principal lines of business:
	(1)	Machinery-– A principal line of business which includes the design, manufacture and marketing of construction, mining ~~agricultural~~ and forestry machinery - track and wheel tractors, track and wheel loaders, pipelayers, motor graders, wheel tractor-scrapers, track and wheel excavators, backhoe loaders, mining shovels, log skidders, log loaders, off-highway trucks, articulated trucks, paving products, telescopic handlers, skid steer loaders and related parts. Also includes logistics services for other companies.
	(2)	Engines -– A principal line of business including the design, manufacture and marketing of engines for Caterpillar ~~Machinery,~~machinery, electric power generation systems; on-highway vehicles and locomotives; marine, petroleum, construction, industrial, agricultural and other applications; and related parts. Reciprocating engines meet power needs ranging from 5 to over 22,000 horsepower (4 to over 16 200 kilowatts). Turbines range from 1,600 to 19,500 horsepower (1 000 to 14 500 kilowatts).
	(3)	Financial Products -– A principal line of business consisting primarily of Caterpillar Financial Services Corporation (Cat Financial), Caterpillar Insurance Holdings, Inc. (Cat Insurance) and their subsidiaries. Cat Financial provides a wide range of financing alternatives for Caterpillar machinery and engines, Solar gas turbines, as well as other equipment and marine vessels. Cat Financial also extends loans to customers and ~~dealers for the purchase and lease of Caterpillar and other equipment, as well as some financing for Caterpillar sales to~~ dealers. ~~Financing plans include operating and finance leases, installment sale contracts, working capital loans and wholesale financing plans. The division also~~Cat Insurance provides various forms of insurance to customers and dealers to help support the purchase and lease of our equipment. ~~This line of business consists primarily of Caterpillar Financial Services Corporation (Cat Financial) and Caterpillar Insurance Holdings Inc. (Cat Insurance) and their subsidiaries.~~
	Our Machinery and ~~Enginesoperations~~Enginesoperations are highly integrated. Throughout the Notes, Machinery and Engines represents the aggregate total of these principal lines of business.

			Three Months Ended September 30,
(Dollars in millions except per share data)			2003		2002
Profit, as reported			$	222	$	213
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects				(19)		(18)

Pro forma profit			$	203	$	195


Profit per share of common stock:
	As reported:
		Basic	$	0.64	$	0.62
		Assuming dilution	$	0.62	$	0.61
	Pro forma:
		Basic	$	0.59	$	0.57
		Assuming dilution	$	0.57	$	0.56

			Nine Months Ended September 30,
(Dollars in millions except per share data)			2003		2002
Profit, as reported			$	750	$	493
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects				(50)		(47)

Pro forma profit			$	700	$	446


Profit per share of common stock:
	As reported:
		Basic	$	2.17	$	1.43
		Assuming dilution	$	2.15	$	1.42
	Pro forma:
		Basic	$	2.03	$	1.30
		Assuming dilution	$	2.00	$	1.28

(Millions of dollars)
2004		2005		2006		2007		2008		Thereafter

$	16	$	14	$	14	$	12	$	8	$	13

Reconciliation of Sales & Revenues:
(Millions of dollars)	Machinery and Engines		Financing and Insurance Services		Consolidating Adjustments		Consolidated Total

Three Months Ended March 31, 2004:
Total external sales and revenues frombusiness segments	$	5,967	$	532	$	-	$	6,499
Other		35		(30)		(37)⁽¹⁾		(32)

Total sales and revenues	$	6,002	$	502	$	(37)	$	6,467


Three Months Ended March 31, 2003:
Total external sales and revenues frombusiness segments	$	4,381	$	475	$	-	$	4,856
Other		43		(35)		(43)⁽¹⁾		(35)

Total sales and revenues	$	4,424	$	440	$	(43)	$	4,821


⁽¹⁾Elimination of Financial Products revenues earned from Machinery and Engines.

Reconciliation of Profit Before Taxes:
(Millions of dollars)	Machinery and Engines		Financing and Insurance Services		Consolidated Total

Three Months Ended March 31, 2004:
Total accountable profit from business segments	$	774	$	106	$	880
Corporate costs		(128)		-		(128)
Timing		(56)		-		(56)
Methodology differences:
Inventory/cost of sales		(29)		-		(29)
Postretirement benefit expense		(83)		-		(83)
Financing costs		18		-		18
Other methodology differences		(50)		8		(42)
Other		4		-		4

Total profit before taxes	$	450	$	114	$	564


Three Months Ended March 31, 2003:
Total accountable profit from business segments	$	234	$	69	$	303
Corporate costs		(79)		-		(79)
Timing		(18)		-		(18)
Methodology differences:
Inventory/cost of sales		1		-		1
Postretirement benefit expense		(43)		-		(43)
Financing costs		19		-		19
Other methodology differences		(33)		11		(22)
Other		13		-		13

Total profit before taxes	$	94	$	80	$	174

Reconciliation of Assets:
(Millions of dollars)	Machinery and Engines		Financing and Insurance Services		Consolidating Adjustments		Consolidated Total

March 31, 2004:
Total accountable assets from business segments	$	11,426	$	20,867	$	-	$	32,293
Items not included in segment assets:
Cash and short-term investments		220		148		-		368
Intercompany trade receivables		378		295		(673)		-
Investment in affiliated companies		331		-		-		331
Investment in Financial Products		2,603		-		(2,603)		-
Deferred income taxes and prepaids		2,657		83		(243)		2,497
Intangible assets and other assets		2,039		-		-		2,039
Service center assets		984		-		-		984
Liabilities included in segment assets		919		-		-		919
Inventory methodology differences		(2,148)		-		-		(2,148)
Other		424		151		-		575

Total assets	$	19,833	$	21,544	$	(3,519)	$	37,858


December 31, 2003:
Total accountable assets from business segments	$	11,067	$	20,235	$	-	$	31,302
Items not included in segment assets:
Cash and short-term investments		220		122		-		342
Intercompany trade receivables		572		397		(969)		-
Investment in affiliated companies		325		-		-		325
Investment in Financial Products		2,547		-		(2,547)		-
Deferred income taxes and prepaids		2,736		77		(228)		2,585
Intangible assets and other assets		1,874		-		-		1,874
Service center assets		895		-		-		895
Liabilities included in segment assets		925		-		-		925
Inventory methodology differences		(2,035)		-		-		(2,035)
Other		84		168		-		252

Total assets	$	19,210	$	20,999	$	(3,744)	$	36,465

(Millions of dollars)	Fair Value

Due in one year or less	$	9
Due after one year through five years	$	234
Due after five years through ten years	$	33
Due after ten years	$	181


(Millions of dollars)	2004

Warranty liability, January 1	$	622
Payments		(125	)
Provision for warranty		136

Ending Warranty liability, March 31	$	633

	(Millions of dollars)
	Consolidated			Machinery and Engines		Financial Products

Credit lines available:
Global credit facility	$	4,675	$	600	$	4,075
Other external		1,689		833		856
Total credit lines available		6,364		1,433		4,931
Less: Global credit facility supporting commercial paper		4,129		336		3,793
Less: Utilized credit		366		127		239

Available credit	$	1,869	$	970	$	899

Business Segments Three Months Ended September 30, (Millions of dollars)
	Machinery and Engines																				Financing & Insurance Services		Consolidated Total
2003	Asia/ Pacific Marketing		Construction & Mining Products		EAME Marketing			Latin America Marketing		Power Products		North America Marketing		All Other			Total				Financing & Insurance Services		Consolidated Total
External sales and revenues	$	457	$	75	$	746	$		316	$	1,600	$	1,545		$	354	$		5,093		$	513	$	5,606
Intersegment sales & revenues		2		1,740		541			66		1,445		50			407			4,251			-		4,251

Total sales and revenues	$	459	$	1,815	$	1,287	$		382	$	3,045	$	1,595		$	761	$		9,344		$	513	$	9,857
Accountable profit (loss)	$	20	$	90	$	24	$		15	$	13	$	49		$	84	$		295		$	103	$	398
Accountable assets at September 30, 2003	$	512	$	2,161	$	1,043	$		523	$	3,651	$	2,073		$	2,226	$		12,189		$	18,972	$	31,161

	Machinery and Engines																				Financing & Insurance Services		Consolidated Total
2002	Asia/ Pacific Marketing		Construction & Mining Products		EAME Marketing			Latin America Marketing		Power Products		North America Marketing		All Other			Total				Financing & Insurance Services		Consolidated Total
External sales and revenues	$	414	$	59	$	723	$		272	$	1,609	$	1,291	$		316	$	4,684			$	446	$	5,130
Intersegment sales & revenues		-		1,526		456			38		1,377		40			411		3,848				-		3,848

Total sales and revenues	$	414	$	1,585	$	1,179	$		310	$	2,986	$	1,331	$		727	$	8,532			$	446	$	8,978
Accountable profit (loss)	$	23	$	5	$	8	$		8	$	5	$	3	$		73	$	125			$	64	$	189
Accountable assets at December 31, 2002	$	436	$	2,214	$	991	$		470	$	3,757	$	1,574	$		2,297	$	11,739			$	17,417	$	29,156

Business Segments Nine Months Ended September 30, (Millions of dollars)
	Machinery and Engines																				Financing & Insurance Services		Consolidated Total
2003	Asia/ Pacific Marketing		Construction & Mining Products		EAME Marketing			Latin America Marketing		Power Products		North America Marketing		All Other			Total				Financing & Insurance Services		Consolidated Total
External sales and revenues	$	1,430	$	194	$	2,348		$	862	$	4,524	$	4,601	$		1,037	$			14,996	$	1,492	$	16,488
Intersegment sales & revenues		4		5,309		1,688			167		4,001		139			1,225				12,533		-		12,533

Total sales and revenues	$	1,434	$	5,503	$	4,036		$	1,029	$	8,525	$	4,740	$		2,262	$			27,529	$	1,492	$	29,021
Accountable profit (loss)	$	100	$	337	$	152		$	33	$	(112)	$	102	$		275	$			887	$	264	$	1,151
Accountable assets at September 30, 2003	$	512	$	2,161	$	1,043		$	523	$	3,651	$	2,073	$		2,226	$			12,189	$	18,972	$	31,161

	Machinery and Engines																				Financing & Insurance Services		Consolidated Total
2002	Asia/ Pacific Marketing		Construction & Mining Products		EAME Marketing			Latin America Marketing		Power Products		North America Marketing		All Other			Total				Financing & Insurance Services		Consolidated Total
External sales and revenues	$	1,164	$	154	$	2,051		$	904	$	4,258	$	4,201	$		878	$			13,610	$	1,311	$	14,921
Intersegment sales & revenues		2		5,034		1,484			129		3,700		122			1,178				11,649		-		11,649

Total sales and revenues	$	1,166	$	5,188	$	3,535		$	1,033	$	7,958	$	4,323	$		2,056	$			25,259	$	1,311	$	26,570
Accountable profit (loss)	$	51	$	128	$	66		$	32	$	(153)	$	6	$		158	$			288	$	206	$	494
Accountable assets at December 31, 2002	$	436	$	2,214	$	991		$	470	$	3,757	$	1,574	$		2,297	$			11,739	$	17,417	$	29,156

	September 30, 2003
			Unrealized
			Pretax Net
(Millions of dollars)	Cost Basis		Gains (Losses)		Fair Value
Government debt	$	99	$	1	$	100
Corporate bonds		291		5		296
Equity securities		189		1		190

Total	$	579	$	7	$	586

	December 31, 2002
			Unrealized
			Pretax Net
(Millions of dollars)	Cost Basis		Gains (Losses)		Fair Value
Government debt	$	89	$	-	$	89
Corporate bonds		208		1		209
Equity securities		220		(51)		169

Total	$	517	$	(50)	$	467

Operating Profit (Loss) (Millions of Dollars)
	Three Months Ended
	September 30, 2003		September 30, 2002
Machinery	$	239	$	207
Engines		80		77
Financial Products		92		67
Consolidating Adjustments		(26)		(27)

	$	385	$	324

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

		(Millions of dollars)
				Machinery		Financial
		Consolidated		and Engines		Products
Credit lines available:
	Global credit facility	$	4,675	$	600	$	4,075
	Other external		1,496		689		807
	Intercompany		-		708		823

Total credit lines available			6,171		1,997		5,705
Less: Five year global credit facility supporting commercial paper			2,125		-		2,125
Less: Utilized credit			268		480		574

Available credit		$	3,778	$	1,517	$	3,006

Period	Total numberof SharesPurchased	Average PricePaid per Share	Total Numberof Shares Purchased Under the Program	Maximum Numberof Shares that MayYet Be PurchasedUnder the Program

January 1-31, 2004	1,081,900	79.11	1,081,900	23,355,594	⁽¹⁾
February 1-29, 2004	2,128,100	77.21	2,128,100	21,427,249	⁽¹⁾
March 1-31, 2004	-	-	-	21,902,131	⁽¹⁾
Total	3,210,000	77.85	3,210,000

(1) On October 8, 2003, the board of directors approved an extension of the share repurchase program (through October 2008) with the goal of reducing the company's outstanding shares to 320,000,000. Amount represents the shares outstanding at the end of the period less 320,000,000.

Proposal 1 - Election of Directors All of management's nominees for directors as listed in the proxy statement were elected with the following vote:
		Shares Voted "FOR"	Shares "WITHHELD"

	John T. Dillon	292,840,884.68	14,334,813.52
	Juan Gallardo	293,424,533.12	13,751,165.09
	William A. Osborn	296,375,468.41	10,800,229.79
	Gordon R. Parker	292,587,843.74	14,587,854.47
	Edward B. Rust, Jr.	293,486,033.26	13,692,664.95

Proposal 2 - Amend Stock Option Plan The management proposal requesting approval of an amendment to the Caterpillar Inc. Stock Option and Long-Term Incentive Plan was approved with the following vote:
	Shares Voted"FOR"	Shares Voted"AGAINST"	Shares"ABSTAINING"	Broker Non-Votes

	193,693,578.06	73,180,116.84	7,948,527.31	32,353,476

Item 6. Exhibits and Reports on Form 8-K .
	(a)	Exhibits:
		~~31.1~~ 3.3	Bylaws, amended and restated as of February 11, 2004.
		31.1	Certification of ~~Glen A. Barton,~~James W. Owens, Chairman and Chief Executive Officer of Caterpillar Inc., as required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
		31.2	Certification of F. Lynn McPheeters, Chief Financial Officer of Caterpillar Inc., as required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
		32	Certification of ~~Glen A. Barton,~~James W. Owens, Chairman and Chief Executive Officer of Caterpillar Inc. and F. Lynn McPheeters, Chief Financial Officer of Caterpillar Inc., as required pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
	~~(b)~~
	(b)	During the quarter ended ~~September 30, 2003,~~March 31, 2004, reports on Form 8-K were filed pursuant to Item 5 on ~~July 1, July 17, July 18,~~January 27, February 12, March 2 (two), and ~~September 5,~~March 22, and furnished pursuant to Item 912 on ~~July 17.~~January 27. Additional reports on Form 8-K were filed on ~~October 8~~April 14, April 15, and ~~October 16, 2003~~April 22 pursuant to Item 5 and furnished on ~~October 16, 2003~~April 22, 2004 pursuant to Item 12. No financial statements were filed as part of those reports.

SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
	~~CATERPILLAR INC.~~
~~November 13, 2003~~	~~/s/ Glen A. Barton~~ CATERPILLAR INC.
May 6, 2004	/s/ James W. Owens	Chairman of the Board and Chief Executive Officer

	(~~Glen A. Barton)~~ James W. Owens)

~~November 13, 2003~~ May 6, 2004	/s/ F. Lynn McPheeters	Vice President and Chief Financial Officer

	(F. Lynn McPheeters)

~~November 13, 2003~~ May 6, 2004	/s/ David B. Burritt	Controller and Chief Accounting Officer

	(David B. Burritt)

~~November 13, 2003~~ May 6, 2004	/s/ James B. Buda	Secretary

	(James B. Buda)