UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM 10-Q

Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934

CUMMINS INC.

812-377-5000
(RegistrantsRegistrant's Telephone Number)

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 proceeding 12 months and (2) has been subject to such filing requirements for the past 90 days:

      Yes [x]
       No [ ]

Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date:

     As of June 30,September 29, 2002, there were 41.341.5 million shares of $2.50 par value common stock
   outstanding.

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PART 1.   FINANCIAL INFORMATION

Item 1.  Financial Statements

CUMMINS INC.
CONSOLIDATED STATEMENT OF EARNINGS 
(Unaudited) 

The accompanying notes are an integral part of the consolidated financial statements.

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CUMMINS INC.
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
(Unaudited)

*Derived from audited financial statements.

The accompanying notes are an integral part of the consolidated financial statements.

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CUMMINS INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
Unaudited

The accompanying notes are an integral part of the consolidated financial statements.

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CUMMINS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Unaudited(Unaudited)

Note 1.  Summary of Accounting Policies:

Basis of Presentation:

We have prepared our consolidated financial statementsforConsolidated Financial Statementsfor the interim periods ended June 30,September 29, 2002 and June 24,September 23, 2001 in conformity with accounting principles generally accepted in the United States. Each of the interim periods contains 13 weeks.  Our interim period financial statements are unaudited and include estimates and assumptions that affect reported amounts based upon currently available information and management's judgment of current conditions and circumstances.   We recommend that you read our interim financial statements in conjunction with theConsolidated Financial Statements included in our annual report on Form 10-K for the year ended December 31, 2001.  Our interim period financial results for the three and nine month periods presented are not necessarily indicative of results to be expected for the entire year.

We believe the statements and disclosuresour Consolidated Financial Statements include all adjustments of a normal recurring nature necessary to present fairly our financial position, results of operations and cash flows for the interim periods presented.  We recommendOur Chief Executive Officer and Chief Financial Officer have certified that you readthis quarterly report fairly presents, in all material respects, the financial condition and results of operations of Cummins Inc. as of, and for the period ended, September 29, 2002.  These certifications are included as Exhibits 99.1 and 99.2 to this Form 10-Q. Our Chief Executive Officer and Chief Financial Officer have also provided certifications as to the effectiveness of our interim financial statements in conjunction with the consolidated financial statementscontrols and procedures which are included in our annual report on Form 10-K for the year ended December 31, 2001. Our interim period financial results for the three and six month periods presented are not necessarily indicative of results to be expected for the entire year.exhibits previously referenced.

We have reclassified certain amounts in prior period financial statements to conform to the presentation of the current period financial statements.

Principles of Consolidation:

Our consolidated financial statementsConsolidated Financial Statements include the accounts of all majority-owned subsidiaries.subsidiaries where our ownership is more than 50 percent but less than 100 percent of common stock.  All significant intercompany balances and transactions with majority-owned subsidiaries are eliminated in our consolidated financial statements. JointConsolidated FinancialStatements.  Where our ownership interest is less than 100 percent, the minority ownership interest of these entities is reported in ourConsolidated Statement of Financial Positionas a liability.  The minority ownership portion of earnings or loss, net of tax, of these entities is classified as "Minority interest" in ourConsolidated Statement of Earnings.

Investments in Unconsolidated Entities:

We use the equity method to account for our investments in joint ventures, affiliated companies and alliances in which we have the ability to exercise significant influence, generally represented by common stock ownership or partnership equity of at least 20 percent and not more than 50 percent, are accounted forpercent.  Generally, under the equity method.method, original investments in these entities are recorded at cost and are subsequently adjusted by our share of equity in earnings or losses after the date of acquisition.  Equity in earnings or losses of each joint venture, affiliate and alliance is recorded according to our level of ownership; if losses accumulate, we record our share of losses until our investment has been fully depleted.  If our investment has been fully depleted, we recognize additional losses only when we are the primary funding source.  Our share of the results from joint ventures,venture, affiliated companies and alliances is reported in ourConsolidated StatementS tatement of Earningsas "Joint ventures and alliances income."  Significant transactions with equity investees have been eliminated. The consolidated financial statements include the results of otherunconsolidated entities where we own more than 50 percent but less than 100 percentare eliminated in ourConsolidated Financial Statements.  Our investments are classified as "Investments in and whose minority ownership is shown onadvances to joint ventures and alliances" in ourConsolidated Statement of Financial PositionPosition.. The minorit y ownership portion of net earnings (loss) from such entities reduces the amount reported in our consolidated results and is reported as Minority Interest in ourConsolidated Statement of Earnings.

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Revenue Recognition:

We recognize revenues on the sale of our products, net of estimated costs of returns, allowances and sales incentives, when our products are shipped to customers and title and risk of ownership transfers.  Products are generally sold on open account under credit terms customary to the geographic region of distribution.  We perform ongoing credit evaluations of our customers and generally do not require collateral to secure our accounts receivables. Sales of engines,receivable.  Engines, service parts, service tools and other items sold to independent distributors and to partially owned distributors accounted for under the equity method are recorded when title and risk of ownership transfers. This transfer is based on the agreement in effect with the respective distributor, and in the United States and most international locations occurs generally when the products are shipped.  To the extent of our ownership percentage, margins on sales to distributors accounted for under th e equity method are deferred until the distributor sells the product to unrelated parties.  We record a provision for estimated sales returns from distributors at the time of sale based on historical experience of product returns and establish edestablished maximum allowances for returned product.

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Shipping and Handling Costs:

Our shipping and handling costs are expensed as incurred.  AThe majority of these costs are associated with operations of our inventory distribution centers and warehouse facilities and are classified as Selling and administrative expenses in ourConsolidated Statement of Earnings as selling and administrative expenses..  In the secondthird quarter and the first halfnine months of 2002, respectively, these costs were estimated at $21approximately $20 million and $42$62 million.  In the secondthird quarter and the first halfnine months of 2001, respectively, these costs were estimated at $22approximately $21 million and $44$65 million, respectively.

Off-Balance Sheet Arrangements and Special Purpose Entities

We use a special purpose entity (SPE), Cummins Receivable Corporation, in connection with the sale of our trade accounts receivable.  Cummins Receivable Corporation is a wholly-owned, bankruptcy-remote special purpose subsidiary that transfers an interest in our receivables, without recourse, to limited purpose receivable securitization entities (conduits) that are established and managed by an independent financial institution.  Following the transfer of the sold receivables to the conduits, receivables are no longer assets of Cummins and the sold receivables no longer appear on our balance sheet.  The use of this financing arrangement enables Cumminsus to access the highly liquid and efficient markets for the sale ofto finance our working capital needs when receivables when they are sold and packaged in this type of structure.  As of September 29, 2002, there were no proceeds outstanding under the securitization program.

In June 2001, we issued 6 million shares of convertible quarterly income preferred securities through Cummins Capital Trust I, a Delaware special purpose trust and wholly-owned subsidiary of Cummins.  The proceeds from the issuance of the preferred securities of $291 million were invested by the Trust in convertible subordinated debentures issued by Cummins.  The sole assets of the Trust are the debentures.

None of our officers, directors or employees of Cummins or theirits affiliates hold any direct or indirect equity interests in either SPECummins Receivable Corporation or Cummins Capital Trust other than through holdings of Cummins common stock.

In 2001, we entered into a lease agreement wherein which we sold and leased back certain heavy-duty engine manufacturing equipment with a nationally prominent, creditworthy lessor who had an established SPE to facilitate the financing of the equipment for Cummins.  The use of the SPE allows the parties providing the lease financing to isolate particular assets in a single entity and thereby syndicate the financing to multiple third parties.  This is a conventional financing technique used to lower the cost of borrowing and thus, the lease cost to Cummins.  There is a well-established market in which financial institutions participate in the financing of such property through their purchase of interests in such SPE's.  The SPE established to facilitate the equipment lease to Cummins is owned by an institution, which is truly independent and not affiliated with Cummins.  The financial institution maintains a substantial equity investment in the SPE.

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Income Tax Accounting:

Our provision for income taxes is determined using the asset and liability method.  Under this method, deferred tax assets and liabilities are recognized for the future tax effects of temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.  We also recognize future tax benefits associated with tax loss and credit carryforwards as deferred tax assets.  Our deferred tax assets are reduced by a valuation allowance to the extent there is uncertainty as to their ultimate realization.  We measure deferred tax assets and liabilities using enacted tax rates in effect for the year in which we expect to recover or settle the temporary differences.  The effect of a change in tax rates on deferred taxes is recognized in the period that the change is enacted.  During interim reporting periods our income tax provision is based upon the estimated annual effective taxt ax rate of those taxable jurisdictions where we conduct busi ness.business.  For the three month and sixnine month periods ending June 30,September 29, 2002, and September 23, 2001 our effective tax rate was 25 percent on earnings (loss) before income taxes after deducting dividends on our preferred securities and 33 percent for restructuring and other non-recurring charges.

Inventories:

Our inventories are stated at the lower of cost or net realizable value.  At December 31, 2001, approximately 22 percent of our domestic inventories (primarily heavy-duty and high-horsepower engines and parts) were valued using the last-in, first-out (LIFO) cost method.  The cost of other inventories is generally valued using the first-in, first-out (FIFO) cost method.  Our inventories at interim reporting dates include estimates for adjustments related to annual physical inventory results and for inventory cost changes under the LIFO cost method.

Inventories are as follows:

Earnings Per Share:

We calculate basic earnings per share (EPS) of common stock by dividing net earnings (loss) available to common shareholders by the weighted-average number of common shares outstanding for the period.  Diluted EPS reflects the potential dilution that occurs if options or securities are exercised or converted into common stock and the effect of the exercise or conversion reduces EPS.

For the three months ended June 24, 2001, we excluded approximately .2 million  Following is a reconciliation of net earnings and weighted average common shares attributable to the exerciseoutstanding for purposes of outstanding common stock options from the calculation ofcalculating basic and diluted EPS because the effect was antidilutive. For the first half ended June 30, 2002 and June 24, 2001, we excluded .3 million shares and .2 million shares, respectively from the calculation of diluted EPS because the effect was antidilutive.

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In addition, we also excluded 6.3 million shares attributable to the conversion of the Company's Preferred Securities of Subsidiary Trust, issued in June 2001, from the calculation of diluted EPS for the second quarter and first half ended June 30, 2002 and June 24, 2001 because the effect was antidilutive.

Shares of common stock held by our employee benefits trust are not included in the calculation of EPS until the shares are distributed from the plan.

net earnings per share:

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For the nine months ended September 23, 2001, approximately .2 million shares of outstanding common stock options were excluded from the calculation of diluted EPS because the effect was antidilutive.  In addition, we also excluded 6.3 million shares attributable to the conversion of our Preferred Securities of Subsidiary Trust, issued in June 2001, from the calculation of diluted EPS for the nine months ended September 29, 2002 and September 23, 2001 because the effect was antidilutive.  Shares of common stock held by our employee benefits trust are also excluded from the EPS calculation until the shares are distributed from the plan.

$ 0.33
          0.33

$ (2.14)
(2.14)

$ (0.42)
(0.42)

$ (2.82)
(2.82)

The weighted average diluted common shares outstanding for June 30,September 29, 2002 and June 24,September 23, 2001 excludes the effect of approximately 2.55.6 million and 2.7 million common stock options, respectively, since suchbecause the exercise price of the options have an exercise priceis in excess of the average market value of Cummins common stock for the respective periods.

Note 2.  Related Party Transactions:

Joint ventures and partnerships

We purchase significant quantities of mid range diesel and natural gas engines, components and service parts from Consolidated Diesel Company (CDC), an unconsolidated general partnership.  The partnership was formed in 1980 with J. I. Case (Case) to jointly fund engine development and manufacturing capacity. Cummins and Case (now CNH Global N.V.) are general partners and each partner shares 50 percent ownership in CDC.  Under the terms of the agreement, CDC is obligated to make its entire production of diesel engines and related products available solely to the partners.  Each partner is entitled to purchase up to one-half of CDC's actual production; a partner may purchase in excess of one-half of actual production to the extent productive capacity is available beyond the other partner's purchase requirement..  The partners are each obligated, unconditionally and severally, to purchase annually at least one engine or engine kit produced by CDC, provided a minimum of one engine or kit is produced.  The transfer price of CDC's engines to the partners must be sufficient to cover its manufacturing cost in such annual accounting period, including interest and financing expenses, depreciation expense and payment of principal on any of CDC's indebtedness.  In addition, each partner is obligated to contribute one-half of the capital investment required to maintain plant capacity and each partner has the right to invest unilaterally in plant capacity, which additional capacity can be utilized by the other partner for a fee.  To date, neither partner has made a unilateral investment in plant capacity at CDC.

We are not a guarantor of any of CDC's obligations or commitments; however, we are required to provide up to 50 percent of CDC's base working capital as defined by the agreement.  The amount of base working capital is calculated each quarter and if supplemental funding greater than the base working capital amount is required, the amount is funded through third party financing arranged by CDC, or Cummins may elect to fund the requirement although under no obligation to do so.  To date, when supplemental funding is required above the base working capital amount, we have elected to provide that funding to CDC.  If the amount of supplemental funding required is less than the base working capital amount, it is funded equally by the partners.  Excess cash generated by CDC is remitted to Cummins until CDC's working capital amount is reduced to the base working capital amount.  Any further cash remittances from CDC to the partners are shared equall y by the partners.

All marketing, selling, warranty, and research and development expenses related to CDC products are the responsibility of the partners and CDC does not incur any of these expenses.  Cummins also provides purchasing and administrative procurement services to CDC for an annual fee shared by the partners.

All of our engine purchases from CDC are shipped directly from CDC to our customers and recorded as Cost of sales in ourConsolidated Statement of Earnings.  Our engine purchases from CDC are recorded at CDC's transfer price which is based upon total production costs of products shipped and an allocation of all other costs incurred during the reporting period, resulting in break-even results for CDC.  We account for our investment in CDC under the equity method of accounting (see Note 1).  Our investment in CDC is classified as "Investments in and advances to joint ventures and alliances" in ourConsolidated Statement of Financial Position.

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The following table summarizes our related party purchases included in Cost of goods sold in ourConsolidated Statement of Earnings:

Distributors

We have an extensive worldwide distributor and dealer network through which we sell and distribute our products and services.  Generally, our distributors are divided by geographic region.  Some of our distributors are wholly-owned by Cummins, some partially-owned and the majority are independently-owned.  We consolidate all wholly-owned distributors and account for partially-owned distributors using the equity method of accounting (see Note 1).

We guarantee the revolving loans, term loans and leases in excess of a specified borrowing base for a group of our independently owned and operated North American distributors under an operating agreement with a lender.  As of September 29, 2002 and September 23, 2001, we had guaranteed $53 million and $59 million of financing arrangements, respectively, for our distributors under the agreement.  All distributors that are partially-owned and those who participate in the guaranteed loan program are considered to be related parties in ourConsolidated Financial statements..

In addition, we are contractually obligated to repurchase new engines, parts and components and signage from our North American distributors following an ownership transfer or termination of the distributor.  Outside of North America, repurchase obligations and practices vary by region.

Note 3.  Goodwill and Other Intangible Assets - Recently Adopted Accounting Standard:

In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 142 (SFAS 142), "Goodwill and Other Intangible Assets" concurrent with SFAS No. 141, "Business Combinations".  SFAS No. 142 addresses financial accounting and reporting for goodwill and intangible assets.  Under SFAS 142, goodwill and certain other intangible assets having indefinite useful lives are no longer amortized but are reallocated to applicable reporting units for purposes of performing annual impairment tests using a fair-value-based analysis.

As required by SFAS No. 142, we applied this new accounting standard on January 1, 2002 to our previously recognized goodwill and intangible assets.  At December 31, 2001, our net goodwill related to consolidated entities was approximately $343 million.  For purposes of impairment testing, we assigned $332 million of goodwill to a component within the Filtration and Other reporting segment, $6 million to a component within the Engine Business reporting segment and $5 million to the International Distributor reporting segment.  During the first quarter 2002, we completed the first step of the transitional goodwill impairment test which required us to compare the fair value of our reporting units to the carrying value of the net assets of our reporting units as of January 1, 2002.  For each of our reporting units, the estimated fair value was determined utilizing the expected present value of the future cash flows of the units.  Based on this analysis,ana lysis, we concluded that the fair value of eac heach of our reporting units exceeded their carrying, or book value, including goodwill, and therefore we did not recognize any write-downimpairment of goodwill.

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Page 9We have elected to perform the annual impairment test of our recorded goodwill as required by SFAS 142 as of the end of our fiscal third quarter.  The results of this annual impairment test are not yet finalized but preliminary indications are that the fair value of each of our reporting units as of September 29, 2002 exceeded their carrying, or book value, including goodwill, and therefore our recorded goodwill was not subject to impairment.

As required by SFAS No. 142, ourConsolidated Statement of Earnings for periods prior to its adoption have not been restated.  However, the effect on our net earnings and earnings per share of excluding goodwill amortization is shown in the table below:

The following table summarizes other intangible assets with finite useful lives that are subject to amortization at the dates indicated.amortization:

Amortization expense for software and other intangibles totaled $17$26 million and $16$25 million for the sixnine months ended June 30,September 29, 2002 and June 24,September 23, 2001, respectively.  Amortization for the twelve months ended December 31, 2001, totaled $34 million.  Internal and external software costs (excluding those related to research, reengineering and training) and trademarks and patents are amortized generally over a five yearfive-year period.  The projected amortization expense of our intangible assets, assuming no further acquisitions or dispositions, is approximately $33 million in 2002, $27 million in 2003, $22 million in 2004, $12 million in 2005 and $5 million in 2006.

Page 1011

Note 3.4.  Restructuring, Asset Impairment and Other Charges:

We have continued a restructuring program initiated in 1998 to improve the Company's cost structure.  The charges related to this program include staffing reorganizations and reductions in various business segments, asset impairment write-downs for manufacturing equipment, facility closure and consolidation costs, dissolution costs and restructuring actions related to joint venture operations, cancellation of a new engine development program and exit costs related to several small business operations.  As of December 31, 2001 all activities associated with the 1998 and 1999 restructuring actions were complete.  The 2000 and 2001 actions were a result of the downturn in the North American heavy-duty truck market and several other end-markets and were taken in order to achieve lower production costs and improve operating efficiencies under difficult economic conditions.

A detailed discussion of the restructuring charges incurred during 2000, through2001 and 2002 acco mpaniedaccompanied by schedules that present, by major cost component and by year of provision, activity related to the restructuring charges, for 2000, 2001, and 2002, including adjustments to the original charges follow:

Restructuring Plan - 2000

During the fourth quarter of 2000, we announced restructuring plans in response to the downturn in the North American heavy-duty truck market where our shipments had declined 35 percent from 1999 and recorded a restructuring charge of $160 million.  Of this amount, $131 million was associated with our Engine Business, $19 million with our Power Generation Business and $10 million with our Filtration and Other Business.  The charges included workforce reduction costs of $42 million, $102 million for asset impairments (including $30 million for software developed for internal use) and $16 million associated with exit costs to close or consolidate a number of small business operations.

The workforce reduction actions included overall reductions in staffing levels and the impact of divesting a small business operation.  The charges included severance and benefit costs of terminating approximately 600 salaried and 830 hourly employees and were based on amounts pursuant to established benefit programs or statutory requirements of the affected operations.  In the fourth quarter 2001, we realigned our workforce reduction plans and reallocated $3 million of excess liabilities for termination benefits to recent workforce reduction actions committed to during that quarter.  All employees affected by this workforce reduction plan have beenwere separated or terminated by June 30, 2002 and we expect to pay remaining severance costs and related benefits before the end of 2002. Approximately 660 salaried and 725 hourly employees were affected by the workforce reduction actions associated with this plan.

Page 1112

The asset impairment charge of $102 million was calculated in accordance with the provisions of SFAS 121.  Of this charge,Approximately $30 million of the charge consisted of capitalized software-in-process related to manufacturing, financial and administrative information technology programs that were cancelled during program development and prior to implementation.  The remaining $72 million included $38 million for engine assembly and fuel system manufacturing equipment to be disposed of upon closure or consolidation of production operations.  The equipment iswas expected to continue in use and be depreciated for approximately two years prior tofrom the date of the charge until closure or consolidation.  The expected recovery value of the equipment was based on estimated salvage value and was excluded from the impairment charge.  The charge also included $11 million for equipment available for disposal, $6 million for properties available for disposal, $10 millionm illion for investments, and $7 million for intangibles and minority interest p ositionspositions related to divesting smaller operations and investments.  The carrying value of assets held for disposal and the effect of suspending depreciation on such assets is not significant.

In the second quarter 2002, we cancelled plans to close a filtration manufacturing plant, transferred impaired power generation equipment that was previously slated for disposal to a foreign operation and realigned our workforce reduction plan.  These actions resultingresulted in a reversal of $12 million in excess charges related to this plan. As of June 30,September 29, 2002, $9$8 million of restructuring charges remained in accrued liabilities.liabilities for this plan. We expect to complete this restructuring action by the end of 2002.

Restructuring Plan - 2001

In the second quarter of 2001, as a result of the continuing downturn in the North American heavy-duty truck market and several other end-markets, we announced further restructuring actions and recorded restructuring charges of $125 million.  The charges included $14 million attributable to workforce reduction actions, $110 million for asset impairment and $1 million attributed to the divestiture of a small business operation.  Of this charge, $118 million was associated with the Engine Business, $5 million with the Power Generation Business and $2 million with the Filtration and Other Business.

The workforce reduction actions included overall reductions in staffing levels and the impact of divesting a small business operation.  The charges included severance and benefit costs of terminating approximately 400 salaried and 150 hourly employees and were based on amounts pursuant to established benefit programs or statutory requirements of the affected operations.  All employees affected by this workforce reduction plan and the subsequent fourth quarter 2001 realignment plan will have beenbe terminated by the end of the fourth quarter 2002 and remaining severance costs and related benefits will be paid through the end of the first quarter 2003. As of June 30, 2002 a total of 360 salaried and 125 hourly employees have been separated or terminated under the workforce reduction actions of this plan.

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The asset impairment charge was for equipment, tooling and related investment supporting a new engine development program that was cancelled during the quarter.second quarter of 2001.  The charges included the investment in manufacturing equipment previously capitalized and cancellation charges for capital and tooling purchase commitments.  The charge was reduced by the estimated salvage value related to the planned equipment disposals.  In the second quarter 2002, we recovered $8 million of salvage proceeds on planned equipment disposals, of which $5 million was in excess of previously estimated recoveries and was reversed against the original restructuring charge.

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As of June 30,September 29, 2002 $5approximately 400 salaried and 180 hourly employees have been separated or terminated under the workforce reduction actions of this plan and $4 million of restructuring charges related to unpaid severance costs and termination benefits remained in accrued liabilities. We expect to complete all activities associated with this restructuring plan in the fourth quarter 2002.

Restructuring Plan - 2002

In the second quarter 2002, we took further restructuring actions precipitated by continued weak market conditions across most of our businesses and recorded a restructuring charge of $16 million.  The charge was partiallymore than offset by a $12 million reversal of excess 2000 restructuring reserves and a $5 million reversal of excess 2001 restructuring reserves.  The charge included $11 million attributable to workforce reduction actions, $3 million for asset impairment and $2 million related to facility closures and consolidations.  Of this charge, $ 5$5 million was associated with the Engine Business, $4 million with Power Generation, $3 million with Filtration and Other and $4 million with the International Distributor Business.

The charges included severance cost and benefit costs of terminating approximately 220 salaried and 350 hourly employees and were based on amounts pursuant to established benefit programs or statutory requirements of the affected operations.  These actions reflect overall reductions in staffing levels due to closing operations and moving production to locations with available capacity.  As of June 30,September 29, 2002 approximately 170180 salaried and 150300 hourly employees had been separated or terminated under this plan.  We expect to complete all workforce reduction actions associated with this action by the end of the first quarter 2003.

The asset impairment charge related to equipment that was made available for disposal.  The carrying value of the equipment and the effect of suspending depreciation on the equipment waswere not significant.

As of June 30,September 29, 2002, $7$5 million of restructuring charges remained in accrued liabilities.  ; We expect to complete this restructuring action in the first quarter 2003 and related cash payments to be disbursed by the end of second quarter 2003.

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Note 4.5.  Other (Income) Expense:

The major components of other (income) expense included in theConsolidated Statement of Earnings are shown below:

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Note 5.6.  Derivatives and other Financial Instruments:

We are exposed to financial risk resulting from volatility in foreign exchange rates, interest rates and commodity prices.  This risk is closely monitored and managed through the use of financial derivative contracts.instruments.  As stated in our policies and procedures, financial derivatives are used expressly for hedging purposes, and under no circumstances are they used for speculation or trading.  Our derivative transactions are entered into only with banking institutions that have strong credit ratings, and thus the credit risk associated with these contracts is not considered significant.  The status and results of our hedging program activities are reported to senior management on a periodic basis.  The following table summarizes our outstanding derivatives by risk category and instrument type:

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Foreign Currency Exchange ContractsRate Risks

Due to our international business presence, we are exposed to foreign currency exchange risks.  We transact business extensively in foreign currencies and as a result, our earnings experience some volatility related to movements in foreign currency exchange rates.  To help manage our exposure to exchange rate volatility, we use foreign exchange forward contracts.

contracts on a regular basis to hedge forecasted inter-company and third party sales and purchases denominated in non-functional currencies.  In April 2002, we began hedging our foreign currency exposure to variability in the functional currency equivalent cash flows associated with anticipatedforecasted transactions.  These derivativeforward contracts are designated and qualify as foreign currency cash flow hedges under SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities". and are recorded in the Consolidated Balance Sheet at fair value in Other Current Assets and Oth er Accrued Liabilities.  The effective portion of the unrealized gain or loss on the derivative instrumentforward contract is deferred and reported as a component of accumulated"Accumulated other comprehensive income andincome".  When the hedged forecasted transaction (sale or purchase) occurs, the unrealized gain or loss is reclassified into earnings in the same line item associated with the hedged transaction in the same period or periods during which the hedged transaction affects earnings.  For the third quarter ended September 29, 2002, $2 million of gain was reclassified from Accumulated other comprehensive income to earnings.  The ineffective portion of the hedge, unrealized gain or loss, on the derivative instrument, if any, is recognized in "Other Income"(income) expense" in current earnings during the period of change.   As of September 29, 2002, $5 million of deferred gains included in equity ("Accumulated other comprehensive income" in theConsolidated Statement of Financial Position) are expected to be reclassified t o earnings over the next twelve months.  For derivative instruments not designated as hedging instruments,nine months ended September 29, 2002, there were no circumstances that would have resulted in the fair value gains or losses from these foreign currency derivatives are recognized directly in earnings. discontinuance of a cash flow hedge.

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Our internal policy allows for managing anticipated foreign currency cash flow for up to one year.  As of June 30,September 29, 2002, approximately 9293 percent of the notional amount of the forward contracts shown in the table above were attributable to threefour currencies, the British Pound (48(55 percent), the AustraliaAustralian Dollar (27(20 percent), the Euro (13 percent) and the Euro (17Japanese Yen (5 percent).  As of June 24,September 23, 2001, approximately 8890 percent of the contracts were attributable to the same currencies, the British Pound (35(55 percent), the Australia Dollar (14 percent), the Euro (19(18 percent) and the Australian Dollar (34Japanese Yen (3 percent).

To minimize the earnings volatility resulting from the remeasurement of receivables and payables and payables denominated in foreign currency, we enter into foreign currency forward contracts.  The objective is to offset the gain or loss from remeasurement with the fair market valuation of the forward contract.   These derivative instruments are not designated as hedges under Statement of Financial Accounting Standards No. 133, "Accounting Standards for Derivative Instruments and Hedging Activities".  Gain or loss on the derivative instrument and remeasurement of the receivable and payable is reported as "Other (income) expense" in Note 5 to ourConsolidated Statement of Earnings.  Such net transaction gains were $3 million and $3 million for the third quarters ended September 29, 2002 and September 23, 2001, respectively, and a $3 million loss and $1 million gain for the nine months ended September 29, 2002 an d September 23, 2001, respectively.

Interest Rate Swaps

We are exposed to market risk from fluctuations in interest rates.  We manage our exposure to interest rate fluctuations through the use of interest rate swaps.  The objective of the swaps is to more effectively balance our borrowing costs and interest rate risk and reduce financing costs.  Currently, we have one interest rate swap relating to our 6.45% Notes that mature in 2005.  The swap converts $225 million notional amount from fixed rate debt into floating rate debt and matures in 2005.  The interest rate swap is designated as a fair value hedge of our fixed rate debt.  As the critical terms of the swap and the debt are the same, the swap is assumed to be 100 percent effective and the fair value gainsgains/losses on the swap are completely offset by the fair value adjustment to the underlying debt.

In March 2001, the Company terminated three fixed-to-floating interest rate swap agreements related to Cummins 6.25% Notes with principal amount of $125 million due in 2003 and 6.45% Notes with principal amount of $225 million due in 2005.  The termination of these swaps resulted in a $9 million gain.  The gain is being amortized to earnings as a reduction of interest expense over the remaining life of the debt.  The amount of gain recognized in secondthe third quarter of 2002 and 2001 was $.7 million and the gains recognized for the first halfnine months of 2002 $1.4 million.

Page 15and 2001 were $2.2 million and $1.7 million, respectively.

Commodity Price Swaps

We are exposed to fluctuations in commodity prices due to contractual agreements with component suppliers.  In order to protect ourselves against future price volatility and, consequently, fluctuations in gross margins, we enter into fixed price swaps with designated banks to fix the cost of certain raw material purchases with the objective of minimizing changes in inventory cost due to market price fluctuations.  The fixed price swaps are derivative contracts and are designated as cash flow hedges.hedges under SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities" and are recorded in theConsolidated Statement of Financial Position at fair value in Other Current Assets and Other Accrued Liabilities.  The effective portion of the unrealized gain or loss is deferred and reported as a component of "Accumulated other comprehensive income".  When the hedged forecasted transaction (purchase) occurs, the unrealized gain or loss is reclassified into earnings in the same line item associated with the hedged transaction in the same period or periods during which the hedged transaction affects earnings.  As of September 29, 2002, unrealized gains and losses related to commodity swaps were not material.  The ineffective portion of the hedge is recognized in our"Other (income) expense" in current earnings in the period in which the ineffectiveness occurs.

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Our internal policy allows for managing cash flow hedges for up to three years. For the nine months ended September 29, 2002, there were no circumstances that would have resulted in the discontinuance of a cash flow hedge.

Note 6.7.  Borrowing Arrangements:

We have $125 million of 6.25% Notes maturing on March 1, 2003.  We haveThe notes are classified the notes as current maturities of long-term debt asin ourConsolidated Statement of March 31, 2002Financial Position based upon their maturity date.  In addition, we have a five-year revolving credit agreement with a group of banks that provides for borrowings up to $500 million that expires in January 2003.  As of June 30,September 29, 2002, outstanding borrowings under the revolving credit agreement were $40 million and are classified in ourConsolidated Statement of Financial Position as loans payable based upon our intent to repay the borrowings prior to the expiration date of the agreement.  We are currently renegotiating the terms of our revolving credit agreement with our lenders and expect to enter into a new agreement in the thirdfourth quarter of 2002.

Our debt and credit agreements contain several restrictive financial covenants. Undercovenants, the most restrictive of these covenants relates to our guarantee of notes issued by our Employee Stock Ownership Plan (ESOP) trust.  Under the provisions of the guarantee, we are required to maintain a debt to capital ratio of 55 percent and a minimum net worth, level (asas defined in the agreement)agreement, of $1.149 million$1.159 billion as of June 30,September 29, 2002.  Our net worth, as of September 29, 2002, as defined by the ESOP loan covenant, was $1.209 billion.  The agreement also limits our subsidiary borrowings and sale leasesale-lease back transactions, as defined in the agreement, to $200 million or less.  As of June 30,September 29, 2002, we wereour subsidiary borrowings and sale-leaseback indebtedness was $170 million.  We are in compliance with all of the covenants and restrictions under all of our borrowing agreements.

agreements as of September 29, 2002.

Note 7.8.  Business Segments and Geographic Information:

We have four reportable business segments: Engine, Power Generation, Filtration and Other and International Distributor.  Our business segments are organized according to the products and markets each segment serves.  This type of reporting structure allows management to focus theirits efforts on providing enhanced service to a wide range of customers.  Profit before interest and taxes and other nonrecurring charges and return on average net assets excluding debt, taxes and nonrecurring accruals are the primary basis for the chief operating decision maker, our Chairman and Chief Executive Officer, to evaluate the performance of each of our business segments.  In the fourth quarter of 2001, we realigned our reporting structure and created a new business segment, International Distributor.  As a result, we have reclassified certain historical business segment data to reflect this change.  A summary of operating results by segment for the three monththree-month and six monthnine-month periods ended September 29, 2002 and September 23, 2001 is shown below:

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17

The tables below reconcilereconciles the segment information to the corresponding amounts in the consolidated financial statementsConsolidated Financial Statements:

Note 8.9.  Comprehensive Earnings:

A reconciliation of our net earnings (loss) to comprehensive earnings (loss) for the three monththree-month and six monthnine-month periods is shown in the table below:

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Note 9.10.  Contingencies and Environmental Compliance

The Company and its subsidiaries are defendants in a number of pending legal actions, including actions related to use and performance of our products.  Our engine products are also subject to extensive statutory and regulatory requirements that directly or indirectly impose standards with respect to emissions and noise.  A more complete description of our legal contingencies and environmental compliance is disclosed in our Annual Report on Form 10-K for the year ended December 31, 2001.  We have reviewed the status of the disclosures contained in our Form 10-K and believe there are no material changes except for the following:

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OnIn April 1, 2002, we received certification from the U.S. Environmental Protection Agency (EPA) for our ISX heavy-duty diesel truck engine.  TheIn May 2002, we received certification affirmsfrom the EPA for our medium-duty 5.9-litre ISB engine that is used in trucks, buses, RV's, step vans and other medium-duty applications.  In September 2002, the EPA certified our ISM heavy-duty diesel truck engine.  These certifications affirm our compliance with stringent new emission standards that becomebecame effective October 1, 2002 and permitspermit us to produce and sell this enginethese engines under the new emissions standards.  The standards were established in a consent decree that weCummins entered into with the EPA, the U.S. Department of Justice and CARB (California Air Research Board) in October 1998 along with other diesel engine manufacturers.  In issuing our certification,certifications, the EPA also affirmed the use of Auxiliary Emissions Control Devices (AECD) that we submitted.&nb sp; The use of AECD's is permitted under existing law when engine protection is deemed necessary under certain operating conditions.  AECD's are used in engines throughout the industry today and are approved as part of the EPA regulations and certification process.

We are on schedule to meet the requirements to pull forward the reduction of emissions levels for off-highway engines of 300 to 750 horsepower that becomesbecome effective under the consent decree on January 1, 2005.  We believe meeting this requirement has been facilitated by our development work for the on-highway heavy-duty and medium-duty engines.

Manufacturers who signed the EPA consent decree in 1998 are required to pay nonconformance penalties to the EPA if they sell engines that are noncompliant with the new and lower emissions levels determined by the consent decree.  The payment of nonconformance penalties will allow a manufacturer who signed the consent decree to sell noncompliant engines while it completes the development work necessary to produce and sell a compliant product. We do not expect to build and sell a significant number of noncompliant products and therefore we do not expect to pay a material amount of nonconformance penalties.

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

Results of Operations

SecondThird Quarter and the First SixNine Months of 2002 Compared to 2001

Net salesOverview

Cummins net sales during the secondthird quarter of 2002 were $1.458$1.648 billion, unchanged whenan increase of $240 million, or 17 percent, compared to sales of $1.408 billion in the third quarter of 2001.  Net sales increased $190 million, or 13 percent, compared to net sales of $1.461 billion in the second quarter of 2001, reflecting continued weakness in the majority of our end markets.2002.  Net sales for the first halfnine months of 2002 were $2.791$4.439 billion compared to $2.810$4.218 billion in the same period last year, an increase of $221 million, or essentially flat5 percent year-over-year.

Earnings before interest and taxes for the current quarter were $78 million compared to $30 million in the third quarter a year over year. While engineago.  Net earnings for the third quarter 2002 were $39 million, or $.96 per share, compared to $3 million, or $.08 per share, in the third quarter 2001.  For the first nine months of 2002, earnings before interest and taxes were $109 million compared to a $70 million loss before interest and taxes in 2001.  Net earnings for the first nine months of 2002 were $23 million, or $.60 per share, compared to a net loss of $105 million, or ($2.74) per share, in 2001.  Net earnings for the first nine months of 2002 included a $1 million net pre-tax restructuring credit while net earnings for the first nine months of 2001 included a $125 million pre-tax restructuring charge.

Each of the interim reporting periods ending September 29, 2002 and September 23, 2001 contain 13 weeks.

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Net Sales

Net sales for each of the Company's key business segments during the comparative interim periods follows:

Sales increased in all of our business segments during the third quarter 2002 compared with the third quarter of 2001 with the exception of our Power Generation Business.  Engine sales increased $266 million, or 35 percent, primarily reflecting strong demand in the heavy-duty truck sector in advance of the October 1, 2002 EPA emissions deadline and higher sales for the Dodge Ram truck.  Power Generation sales were slightly higher during$315 million, down $56 million, or 15 percent compared to the secondprior year's quarter as a result of lower demand and slow economic activity.  Sales in the Filtration and Other Business increased $25 million, or 12 percent, year-over-year, reflecting demand improvement and increased market penetration.  In our International Distributor Business, sales increased $16 million, or 12 percent, compared to third quarter 2001, primarily due to increased business at our distributors in Australia and Asia.

For the first halfnine months of 2002, they were offsetnet sales increased $221 million, or 5 percent, compared to 2001.  Most of the improvement is attributable to increased sales in the Engine Business and Filtration and Other Business, primarily driven by higher sales volume in the third quarter 2002 compared to the prior year.  Power Generation sales experienced a 15 percent decline compared to the prior year, primarily due to lower revenues from power generation products duringdemand in the same periods.commercial generator set markets.

Gross margin

Our gross margin forin the secondthird quarter 2002 increased from 18.4was $310 million, or 18.8 percent in 2001of sales, compared to 18.8 percent. Our year to datea gross margin of $255 million, or 18.1 percent of sales a year ago.  Compared to the prior year, gross margin increased $55 million on a net sales increase of $240 million, or a 23 percent return on incremental net sales. The increase in 2002 was 17.9gross margin dollars and the improvement in gross margin percent comparedreflect higher absorption of fixed manufacturing costs due primarily to 17.8 percentincreased engine production and continuing improvements in the same period in 2001. our cost reduction efforts.

Included in secondthird quarter gross margin were product coverage costs of $51 million, or 3.5 percent of net sales, compared to $53$59 million, or 3.6 percent of netsales, compared to $45 million or 3.2 percent of sales in 2001, reflecting better reliabilitythe third quarter a year ago.  The increase in product coverage costs results from a higher concentration of our newerheavy-duty engine models where we have focused significant quality improvement efforts.shipments during the quarter.  Excluding product coverage costs, gross margin for the quarter was $325 million or 22.322.4 percent compared to $32221.3 percent in the third quarter last year.

On a year-to-date basis, gross margin for 2002 was $810 million, or 22.018.2 percent, a year ago, a $3of sales compared to $756 million, increase. The benefitsor 17.9 percent, of oursales in 2001, again reflecting better absorption of fixed manufacturing costs, primarily from increased volume and continued cost reduction, efforts and improved manufacturing cost absorption at our heavy-duty engine plants helped topartially offset by lower volumes in our power generationPower Generation business.

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Selling and administrative expenses

Selling and administrative expenses in the secondthird quarter and first half of 2002 were slightly higher than$192 million, an increase of $15 million, or 8 percent, above spending levels in the same periods in 2001, up $3 million and $6 million, respectively, primarily ascomparable quarter a result of funding for certain growth initiatives due to earnings improvement.year ago.  For the first sixnine months of 2002 selling and administrative expenses were 13.3 percent$564 million compared to $543 million in 2001.  The increase in selling and administrative expenses quarter over quarter and year over year is primarily a result of net sales compared with 13.0 percentvolume variable expenditures, funding of sales for the first six months of 2001.focused growth initiatives and higher variable compensation expense due to improved earnings, partially offset by cost reduction actions.

Research and engineering expenses

Research and engineering expenses in the secondthird quarter and the first halfnine months of 2002 were slightly lower$53 million and $164 million, respectively, unchanged respectively, from the comparable periods in 2001.  Second quarterOverall, research and engineering expenses decreased $3 million compared to a year agoare lower due to the cancellation of a major engine development program in the second quarter of 2001 partiallyand cost reduction actions, equally offset by higher engineering costs associated withrelated to the development of our '022002 emissions products. For the first six months, research and engineering expenses were 4.0 percent of net sales for 2001 and 2002.

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Joint ventures and alliances income

Our income from joint ventures and alliances for the secondthird quarter 2002 was $7$9 million compared to $3$2 million in the secondthird quarter a year ago and $16 million for the first nine months of 2002 compared to $7 million for the first half compared to $5 million for the first half ofnine months in 2001.  The increase resultedin the third quarter and nine-month period was primarily attributable to improved earnings from our distributor joint ventures in North America and improved earnings across several of our China joint ventures as well as our new marine joint venture, Cummins Mercruiser.in China.

Interest expense

Interest expense for the secondthird quarter and first nine months of 2002 was $17$15 million and $31$46 million, for the first half of 2002, $6respectively, compared to $15 million and $15$61 million respectively, lower thanin the comparable periods in 2001.third quarter and first nine months of 2001, respectively.  The lower year-to-date interest expense wasis primarily due to the issuance of our preferred securities in the second quarter of 2001, and lower interest rates. The $5 million in dividends2001.  Dividends on our preferred securities are classified as a separate captionseparately from interest expense on ourConsolidated Statement of Earnings.Interest expense infor the second quarterfirst nine months of 2002 included a $2 million adjustment relating to prior accounting periods that wasin the second quarter necessary to properly state our liability for accrued interest.

Other income and expense net

Other income in the secondthird quarter of 2002 was $5$4 million compared to a net zero amount$3 million in the comparable quarter a year ago.  For the first sixnine months of 2002, other income net, was $6$10 million compared to $4$1 million of net expense for the first sixnine months of 2001.  A gain on the sale of a U.S.North American distributor, income from royalty fees and the discontinuance of goodwill amortization were the significant items contributing to the increase.  The impact on our earnings of discontinuing goodwill amortization is disclosed in Note 23 to theConsolidated Financial Statements. Theand major components of other income and expense, classified as either operating andor non-operating, items are disclosed in Note 45 to theConsolidated Financial Statements.

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Restructuring charges

Restructuring, asset impairment and other non-recurring charges were $16For the first nine months of 2002, we recorded a net $1 million credit for restructuring charges.  The credit was recorded in the second quarter 2002 and was comprised of a $16 million second quarter charge offset by a $17 million reversal of excess restructuring accruals related to previous actions that were realigned or cancelled.  RestructuringFor the first nine months of 2001, restructuring charges were $125 million and were recorded in the second quarter of 2001 were $125 million.2001.  We have continued a restructuring program initiatedthat began in 1998 to improve the Company's cost structure.  The related charges include staffing reorganizations and reductions in various business segments, asset impairment write-downs for manufacturing equipment, facility closure and consolidation costs, dissolution costs and restructuring actions related to joint venture operations, cancellation of a new engine development program and other exit costs related to small business operations.

As of December 31, 2001 all activities associated with the 1998 and 1999 restructuring actions are complete.  The restructuring actions taken in 2000 and 2001 actions were a result ofdirectly related to the downturn in the North American heavy-duty truck market and related conditionsseveral other end-markets and were takennecessary in order to achieve lower production costs, improve operating efficiencies, and enhance management effectiveness under difficult economic conditions.  A detailed discussion of theour restructuring chargesactions during 2000, through2001 and 2002 follows.

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2000 Restructuring charges

During the fourth quarter of 2000, we announced restructuring plans primarily in response to the downturn in the North American heavy-duty truck market and several other end-markets where our shipments had declined 35 percent from 1999 and recorded a restructuring charge of $160 million.  Of this amount, $131 million was associated with our Engine Business, $19 million with our Power Generation Business and $10 million with our Filtration and Other Business.  The charges included workforce reduction costs of $42 million, $102 million for asset impairments (including $30 million for internally developed software) and $16 million associated with exit costs to close or consolidate a number of small business operations.

The workforce reduction actions included overall reductions in staffing levels and the impact of divesting a small business operation.  The charges included severance and benefit costs of terminating approximately 600 salaried and 830 hourly employees and were based on amounts pursuant to established benefit programs or statutory requirements of the affected operations. In the fourth quarter 2001, we realigned our workforce reduction plan and reallocated $3 million of excess liabilities for termination benefits to recent workforce reduction actions committed to during that quarter.  All employees affected by this workforce reduction plan have beenwere separated or terminated by June 30, 2002 and we expect to pay remaining severance costs and related benefits before the end ofunder this action by year-end 2002.  Approximately 660 salaried and 725 hourly employees were affected by this plan.

The asset impairment charge of $102 million was calculated in accordance with the provisions of SFAS 121. Approximately $30 million of the charge consisted of capitalized software-in-process related to manufacturing, financial and administrative information technology programs that were cancelled during program development and prior to implementation.  The remaining $72 million included $38 million for engine assembly and fuel system manufacturing equipment to be disposed of upon closure or consolidation of production operations.  The equipment is expected to continue in use and be depreciated for approximately two years prior tofrom the date of the charge until closure or consolidation.  The expected recovery value of the equipment was based on estimated salvage value and was excluded from the impairment charge.   The charge also included $11 million for equipment available for disposal, $6 million for properties available for disposal, $10 million for investments,inv estments, and $7 million for intangibles and minority interest positions related to divesting smaller operations and investments.  The carrying value of assets held for disposal and the effect of suspending depreciation on these assets was not significant.

In the second quarter 2002, we cancelled plans to close a filtration manufacturing plant, transferred impaired power generation equipment to a foreign operation and realigned our workforce reduction plan resulting in a reversal of $12 million in charges related to this plan.  During the third quarter 2002, we paid approximately $1 million related to liabilities under this plan.  As of June 30,September 29, 2002, $9$8 million of restructuring charges remained in accrued liabilities related to this plan.  We expect to complete this restructuring action in 2002.

In the secondthird quarter 2002, we recognized approximately $15$16 million in savings under this plan comprised of $12 million in cost of goods sold, $2$3 million in selling, general and administrative expenses and $1 million in research and engineering expenses.

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2001 Restructuring charges

In the second quarter of 2001, primarily as a result of the continuing downturn in the North American heavy-duty truck market and related conditions,several other end-markets, we announced further restructuring actions and recorded restructuring charges of $125 million.  The charges included $14 million attributable to workforce reduction actions, $110 million for asset impairment and $1 million attributed to the divestiture of a small business operation.  Of this charge, $118 million was associated with the Engine Business, $5 million with the Power Generation Business and $2 million with the Filtration and Other Business.

The workforce reduction actions included overall reductions in staffing levels and the impact of divesting a small business operation.  The charges included severance costs and related benefits of terminating approximately 400 salaried and 150 hourly employees and were based on amounts pursuant to established benefit programs or statutory requirements of the affected operations.   All employees affected by this workforce reduction plan and the subsequent fourth quarter 2001 realignment plan will have been terminated by the end of the fourth quarter 2002 and remaining severance costs and related benefits will be paid through the end of the first quarter 2003.  A total of 360400 salaried and 125180 hourly employees were affected by this plan.

The asset impairment charge was for equipment, tooling and related investment supporting a new engine development program that was cancelled during the quarter.  The charges included the investment in manufacturing equipment previously capitalized and cancellation charges for capital and tooling purchase commitments.  The charge was reduced by the estimated salvage value related to the planned equipment disposals.  In the second quarter 2002, we recovered $8 million of salvage proceeds on planned equipment disposals, of which $5 million was in excess of estimated recoveries and was reversed against the original restructuring charge.

As of June 30,September 29, 2002 $5$4 million of restructuring charges related to unpaid severance costs and termination benefits remained in accrued liabilities.  We expect to complete all activities associated with this restructuring plan in the fourth quarter 2002.

For the secondthird quarter ended June 30,September 29, 2002 we recognized savings from this restructuring action of approximately $4$3 million in cost of goods sold, $1$2 million in selling, general and administration expenses and $1 million in research and engineering expenses.

2002 Restructuring charges

In the second quarter 2002, we announced further restructuring actions precipitated by weak market conditions, related primarily to our Engine Business and Power Generation Business and recorded additional restructuring charges of $16 million.  The charges included $11 million attributable to workforce reduction actions, $3 million for asset impairmentimpairments and $2 million related to facility closures and consolidations.  Of this charge, $5 million was associated with the Engine Business, $4 million with Power Generation, $3 million with Filtration and Other and $4 million with the International Distributor Business.

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The charges included severance costs and related benefits of terminating approximately 220 salaried and 350 hourly employees and were based on amounts pursuant to established benefit programs or statutory requirements of the affected operations.  These actions reflect overall reductions in staffing levels due to closing operations and moving production to available capacity.  As of June 30,September 29, 2002 approximately 170180 salaried and 150300 hourly employees had been separated or terminated under this plan.  We expect to complete all workforce reduction actions associated with this plan by the end of the first quarter 2003.

The asset impairment charge is related to equipment available for disposal.  The carrying value of the equipment and the effect of suspending depreciation on the equipment were not significant.

We expectThis action is expected to realizegenerate approximately $13 million in annual savings as a result of this action.savings.  For the secondthird quarter ended June 30,September 29, 2002, approximately $1$2 million in savings was recognized in cost of goods sold.  As of June 30,September 29, 2002, $7$5 million of restructuring charges remained in accrued liabilities.  We expect to complete this restructuring action in the first quarter 2003 and make related cash flow payments to be completed by the end of second quarter 2003. We expect to fund the

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The $17 million in remaining costs of our 2000, 2001 and 2002 restructuring actions with funds generatedare expected to be funded from cash provided by operations.

Note 34 to the consolidated financial statements includes schedules that present, by major cost component and by year of expense, activity related to the restructuring charges discussed above duringfor the years 2000 through 2002, including adjustments to the original charges.

Provision for income taxes

We recorded an income tax provision of $6$15 million in the secondfor our third quarter of 2002 earnings compared to a $39$2 million benefit recorded in the secondprovision for our third quarter of 2001.2001 earnings.  For the first sixnine months of 2002, we recorded a $3$12 million provision for income tax benefit astaxes compared to a $46$44 million tax benefit recorded for the first six months ofsame period in 2001. The second quarter and first six months of 2002 and 2001All reporting periods reflect an estimated annual effective tax rate of 25 percent on our earnings or loss before income taxes and after deducting dividends on our preferred securities and an effective tax rate of 33 percent for restructuring, asset impairments and other non-recurring charges.

Minority interest

Our minorityMinority interest fromin income of our consolidated operations was $5$4 million in the secondthird quarter of 2002 compared to $4 million in the secondthird quarter of 2001, an increase of $1 million, due to improved earnings at Cummins India Limited.2001.  For the first halfnine months of 2002 and 2001, our minority interest income from consolidated operations was $8$12 million.  Our income from minority interest is primarily from consolidating the operating results of Cummins India Limited.

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Net earnings

Net earnings for the secondthird quarter 2002 including restructuring charges were $13$39 million, or $.33$.96 per share, compared to an $82 million loss or $(2.14) in the second quarter of 2001. Excluding restructuring charges, net earnings for the second quarter were $12of $3 million, or $.31 per share compared to $2 million or $0.06$.08 per share, in the secondthird quarter of 2001.  For the first halfnine months of 2002, we recorded a net loss of $16earnings were $23 million, or $(.42)$.60 per share compared to a net loss of $108$105 million, or $(2.82)$2.74 per share in 2001.  For the first halfnine months of 2001. Most2002 and 2001, net earnings included a $1 million pre-tax credit and a $125 million pre-tax charge for restructuring actions, respectively.  A majority of the increase in net earnings, excluding restructuring charges, wasis attributable to increased engine volumes with improved overhead absorption at our heavy-duty engine plants due to increased volumes, continued focus on cost reduction activities, lower product coverage expenses and earnings improvement in our Filtration and Other Business, partially offset by lower earnings in our Power Generation Business.

Business Segment Results

Engine Business

Total sales for the Engine Business sales in the third quarter were $850 million, up $64$1.033 billion, an increase of $266 million, or 835 percent, compared to secondsales of $767 million in the third quarter 2001.  For the first halfnine months of 2002, engine sales were $1.626$2.659 billion, up $72$338 million, or 515 percent, compared to sales of $1.554$2.321 billion in the first halfnine months of 2001.  A summary and discussion of net sales for the Engine Business by market follows:

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Engine unit shipments for the Engine Business in the third quarter 2002 were 90,600 compared to 70,500 units shipped in the third quarter 2001, an increase of 20,100 units, or 29 percent.  Year-to-date engine shipments were 237,200 compared to 217,200 a year ago. A summary of engine unit shipments by engine category follows:

Heavy-duty Truck

Sales to the heavy-duty truck market were $265$378 million in the secondthird quarter of 2002, up $30$156 million, or 1370 percent, compared to the secondthird quarter of 2001 reflecting a recent2001.  The increase primarily reflects an upturn in OEM order rates partiallyengine shipments in response to accelerated purchases before new engine emissions standards take effectprior to the October 1, 2002. 2002 effective date of the new emissions standards.

For the first half,nine months of 2002, sales of heavy-duty salesengines were $484$862 million, up $13$169 million, or 324 percent, compared to the first halfnine months of 2001.  Unit shipments of heavy duty truck engines were 11,20018,500 in secondthird quarter 2002 compared to 9,8008,700 in 2001, or an increase of 14 percent.113 percent quarter-over-quarter.  On a comparative year-to-date basis, unit shipments of heavy-duty truck engines for the first half of 2002 were 6 percent below the comparable period a year ago.37,400 compared to 28,800, an increase of 30 percent.  Shipments of our new ISX engine continue to increase and were 9052 percent higher than last year on a year-to-date basis as demand shifts away from our N14 engine.unit shipments in the second quarter 2002 and nearly three times the quantity shipped in the third quarter 2001.

Medium-duty Truck and Bus

Medium-duty truck and bus revenues increased $10$56 million, or 741 percent, above sales levels a year ago.ago reflecting increased demand as a result of the October 1, 2002 emissions standards.  Unit shipments to the North American medium-duty truck market were down 30increased 43 percent compared to a year ago while medium-duty shipments to international markets were up 13 percent, primarily on higher sales to Latin American and European OEMs.increased 8 percent.  Bus engine sales were down 3increased 32 percent globally while unit shipments declined 7increased 25 percent, with a 24 percent declinesignificant increase in shipments to North American OEMs. Internationally, bus engine shipments were up 16declined 56 percent, primarily in China, which was partially offset by a decreasewith some decline in shipments to India. bus OEMs in Mexico.

For the first halfnine months of 2002, sales of medium-duty truck and bus sales were essentially flat whenengines increased $60 million, or 14 percent compared withto the first halfsame period in 2001.  Most of 2001.

the increase occurred during the third quarter, reflecting higher demand due to the new emissions standards.

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Light-duty Automotive

Revenues from theour light-duty automotive market increased $28$71 million, or 1943 percent, compared to secondthird quarter 2001.  Total unit shipments were up 1023 percent compared to the prior year's quarter with most of the increase in units evenly distributed between shipments to DaimlerChryslerAG and shipments to OEMs in the North American RV market.  ShipmentsEngine shipments to DaimlerChryslerDaimlerChryslerAG for the Dodge Ram truck were 22,500,26,800, an increase of 1,5004,600 units or 721 percent higher than secondthird quarter a year ago, primarily from improved demand and lower production constraints at DaimerChrysler.driven by the introduction of the new Dodge Ram truck model.  Unit shipments to the recreational vehicle market increased 71 percentmore than doubled year-over-year from previously weak demand levels, reflecting recovery in consumer markets and growth in the diesel-powered segment of this market.

For the first halfnine months of 2002 revenues from light-duty revenuesautomotive engine sales were up 24$135 million, or 31 percent, compared to the first halfnine months of 2001,2001.  The increase is primarily due to DaimlerChrysler AG,sales of Dodge Ram truck engines, up 17$70 million, or 21 percent, and sales to the RV industry, up 57$69 million, or 81 percent.

Industrial

SalesTotal industrial sales to the construction, marine and agricultureagricultural markets were down $3 million, or relatively flat compared to the secondthird quarter 2001.  WorldwideFor the nine months, total industrial sales were unchanged from the previous year with increases in sales to agricultural markets offset by declining sales to the construction equipment market were down 2 percent year over year.market.  Unit shipments to construction OEMs in North America declined 97 percent, reflecting continued weakness in construction equipment markets.economic weakness.  Shipments to international markets were down 11construction OEMs increased 9 percent compared to secondthird quarter 2001, due to declining sales to Europeprimarily in East Asia, South Pacific and Korea.Central Europe.  Engine salesshipments to the agricultural equipment marketsmarket increased 632 percent from a year ago off of a low base, with increases in Europethe increase evenly distributed between North America and Latin America.international OEMs.  In the marine market, unit shipments reflected in our consolidated sales during the secondthird quarter 2002 were down 3225 percent compared to secondthird quarter 2001 due to the formation of our new joint venture with Brunswick Corporation, Cummins Mercruiser JV. Sales of our midrange engines for marine marketsengines are now recorded by the joint venture. Total first half engine sales in 2002 to the industrial market were flat compared to the first ha lf of 2001 with sales to the construction market lower offset by higher sales to the agriculture market.

High-horsepower Industrial

Cummins salesSales of our V, K and Q series high-horsepower industrial engines in the third quarter 2002 were relatively flatdown 20 percent compared to a year ago while unit shipments were up slightly, reflecting a shift in sales mix.the prior year's quarter.  Shipments to the North American mining market declined but were partially offset by increased60 percent while shipments to international markets. Secondmining markets declined 31 percent compared to third quarter 2002 unit shipments2001. Shipments of high-horsepower engines to the rail sector, which is primarily international business, were down 1733 percent after four quarters of sustained demand. Salesbut up slightly compared to the previous quarter.  Shipments of high-horsepower engines to government markets, primarily V series military applications, were up 960 percent with the majority of the increase in domestic markets. First halfNorth America.  For the first nine months, sales of high horsepowerhigh-horsepower industrial engines were down 812 percent compared to first half sales in 2001, largely attributable to lower shipments to the mining market.and rail markets.

Earnings from Operations

Operating incomeThe operating earnings before interest and taxes for the Engine Business were $50 million in the secondthird quarter 2002, was $14 million compared to an operating loss before interest and taxes of $18 million a loss of $24 million in the second quarter last year ago, or an improvement of $38$68 million on a sales increase of $64$266 million.  The overall improvement in profitabilityoperating earnings was attributable to increasedthe increase in engine volumes resulting in betterand the accompanying benefit of fixed cost absorption mainly at our heavy-dutymanufacturing plants and our continued focus on cost reductions and lower product coverage costs.

Page 25reduction.

Power Generation Business

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Sales in our Power Generation Business were $304$315 million, down $56 million or 15 percent compared to the third quarter 2001.  Total engine unit shipments for the power generation markets were 6,100 units, down 1,800 units, or 23 percent lower than a year ago.  On a year-to-date basis, Power Generation sales were $902 million compared to $1.064 billion for the same period a year ago, a decline of $162 million, or 15 percent, reflecting weak demand and slow economic growth.

A summary of engine unit shipments for the Power Generation business by engine category follows:

Total engine unit shipments for the Power Generation Business were 6,100 in the secondthird quarter 2002, down $80 million,1,800 units, or 2123 percent, fromcompared to third quarter 2002.  Unit sales of generator drives declined 19 percent while unit sales of generator sets were down 28 percent in the secondthird quarter of 2001.2002 compared to the prior year.   In North America, unit sales of generator sets declined 26 percent while unit sales of generator drives were down 57 percent compared to a year ago, with lower demand in commercial generator setsgenset markets due to slow economic activity, reduced emergency power needs, and a continuationcontinuance of high inventory levels in the marketplace.  This declinedecrease was partially offset by increased demand fromin consumer segments of the market, primarily genset sales to recreational vehicle OEM's which increased 27 percent compared to third quarter 2001.  Internationally, lower demand caused revenues to decrease across all markets except Australia and Southeast A sia.  Unit shipments of generator drives and generator sets to international customers were down 17 percent and 30 percent, respectively.

For the recreational vehicle OEMs. Internationally, our revenues decreased in Europe, India and Chinafirst nine months of 2002, engine shipments for the Power Generation Business were 17,100 compared to second quarter20,500 units a year ago, due to lower demand across mosta decrease of our markets. Revenues were up3,400 units, or 17 percent in Latin America, due to the continued effects of the energy crisis. Total unit shipments for the generator drive and generator set markets were 5,700 units during the second quarter 2002 compared to unit shipments of 6,700 during the same period a year ago. For th e first half of 2002, Power Generation sales were $587 million, down 15 percent compared to sales of $693 million in the first half of 2001.percent. Most of the decline in sales forunit shipments is attributable to weakening demand in the first halfheavy-duty and high-horsepower power generation equipment segments.

Earnings from Operations

In the third quarter of 2002, is a result of weak demand and high inventory levels as unit shipments are off 13 percent on a year-to-date basis.

Our Power Generation Business incurred a $2 millionan operating loss before interest and taxes in the second quarter 2002of $1 million, compared to an operating profitearnings before interest and taxes of $32$29 million a year ago.last year.  For the first halfnine months of 2002, Power GenerationGenerations reported a $17 millionan operating loss before interest and taxes of $19 million compared to $40earnings before interest and taxes of $64 million operating profit in the first halfnine months of 2001.

The overall decline in margin and profitabilityearnings before interest and taxes in the Power Generation Businessbusiness is attributable to several factors.  First, is a declinethe decrease in volume anddue to economic weakness, second, a shift in sales mix, with thea decline in volumes primarily in theunit shipments of higher margin large power generation equipment. Secondly,heavy-duty and high-horsepower products. Third, the decliningoverall decline in sales volume in North America and Europe resulted in underabsorption of fixed overhead costs at our manufacturing facilities.  Lastly,Fourth, excess inventory in the marketplace has createdcontinues to create pricing pressures resulting in heavier discounting to retain our market share.  Lastly, utilization of the Power Generation rental fleet is lower than last year due to overall weaker demand, resulting in reduced profitability in the rental business.

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Filtration and Other Business

Second

Third quarter revenues in the Filtrationand Other Business were $243$236 million, up $18$25 million, or 812 percent, compared to secondthird quarter 2001 sales.  Revenues from the sale of filtration products in the U.S were up $14$11 million, or 9 percent, over the comparable quarter a year ago, primarily due to increases inreflecting demand improvement and increased market penetration at North American OEM businesses where we have increased market penetration.OEMs.  Sales to European OEMs in the second quarter 2002Europe, Australia, Mexico and other international locations also increased compared to secondthird quarter 2001.  Revenues from the sale of Holset turbochargers increased 12 percent compared to third quarter 2001, primarily from continuing strong business in China.

For the first nine months of 2002, Filtration and Other Business sales increased $56 million, or 9 percent, compared to 2001 reflecting improvement across most markets, offset by lower sales in Canada and Latin America.  Approximately 20 percent of the sales improvement in the Filtration and Other Business is attributable to increased sales of our Holset turbocharger business increased 13 percent over second quarter 2001 with increased shipments to China.business.

Earnings from Operations

Operating earningsEarnings before interest and taxes for the Filtration and Other Business in the secondthird quarter 2002 were $23$19 million compared to $16$11 million a year earlier.  The improvement in profitability is primarily a result of volume increases and the discontinuance of goodwill amortization.  In addition, incremental expenses from this segment's new EmissionsEmission Solutions business were offset by benefits from restructuring actions and 6 Sigma cost reduction efforts.  For the first halfnine months of 2002, operating earnings were $60 million, up $9$18 million, overor 43 percent, compared to 2001.  The increase in earnings before interest and taxes for the comparablenine month period in 2001.is related to increased volume, benefits from cost reductions and discontinuing goodwill amortization

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International Distributor Business

Revenues from the International Distributor Business were $145$152 million, up $2$16 million compared to the secondthird quarter of 2001.  Increased salesSales of parts and engines increased at distributor locations in Australia, East and Southeast Asia and Central Europe and were partially offset by sales declines in Europe.Latin America and Korea.  For the first halfnine months of 2002, revenues were $269$421 million compared to $276$412 million in 2001.  A majority of the first half of 2001. Secondincrease is attributable to our Australian, East and Southeast Asia distributors, offset by declining sales at our distributor in Argentina.  Sales in the third quarter 2001 and the first halfnine months of 2001 sales included $11$7 million and $26$35 million, respectively, of certain OEM engine sales that are now being reported as revenuessales in the Engine Business segment.  This reporting change did not affect earnings results in either segment's operating results. Operating earningsbusiness segment.

Earnings from Operations

Earnings before interest and taxes for the International Distributor Business were $10 million in the secondthird quarter 2002 compared to $7$8 million in the secondthird quarter 2001.  The increase in operating earnings is primarily a result of improvedincreased engine and parts sales and the favorable impact of currency translation adjustments.sales.  For the first halfnine months of 2002, operating profitsearnings before interest and taxes were $11$17 million and were unchanged fromcompared to $18 million for the comparable period in 2001.2001, a decrease of $1 million, primarily from the effects of foreign currency exchange losses in Latin America.

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Geographic Markets

Sales to international markets representedin the third quarter of 2002 were $645 million, or 39 percent of total net sales compared to $665 million, or 47 percent, of our revenuesnet sales in the second quarter of 2002 compared to 46 percent in the secondthird quarter 2001.  TotalFor the first nine months of 2002, international sales were relatively flat, up $3 million$1.94 billion, or 44 percent of total net sales, compared to second quarter$1.96 billion, or 46 percent of total net sales, in the same period of 2001.  A summary of our net sales by geographic territory follows:

Heavy-duty truck engine shipments to international markets were down 7in the third quarter 2002 increased 11 percent compared to a year ago while midrange automotive engine shipments to international markets increased 138 percent.  Total engine shipments to the international bus market increased 16decreased 56 percent compared to a year ago, primarily in China, where shipments were up 700 units shipped declined 1,000 over the comparable quarter a year ago. Presently, CumminsShipments of light-duty automotive engines power over 2,500 busesto international markets declined 36 percent in the Beijing, China public transit system.third quarter 2002 compared to 2001.  Engine shipments to international agricultural and construction equipment markets were up 11 percent compared to third quarter 2001 while engine shipments to international mining and rail markets were down 32 percent.

Sales to the Asia/Australia region increased $35$28 million, or 1512 percent, compared to secondthird quarter 2001, primarily from increased demand for engines, power generationgenerator drives and international distributor sales.sales at our Australian distributorship. Sales to Europe/CIS, representing 1311 percent of total sales and 28 percent of international sales in the secondthird quarter 2002, were down 117 percent compared to the prior year's quarter, mostly in the heavy-duty and medium-duty truck markets in the UK. Business in Mexico, Brazil and Latin America increased 5decreased 44 percent in secondthird quarter of 2002, primarily from lower power generation revenues and a decline in bus sales, offset by increases in sales of engines for the agricultural and construction equipment sales.market.  Sales to Canada, representing 5 percent of net sales in the secondthird quarter 2002, were down 17up 28 percent compared to secondthird quarter 2001 due to lowerincreased heavy-duty truck production.production and improved filtration sales.

For the first halfnine months of 2002, total international sales were flat$1.94 billion, down $20 million, or 1 percent, compared to the first halfnine months of 2001.  Sales to the Asia/Australia regionmarket increased 10 percent, largely due to sales of midrange and heavy duty engines.  Europe/CIS sales for the first halfnine months of 2002 declined 87 percent compared to the first half of 2001 as a result of weakening demand from UK/EuropeEuropean truck OEM's.  First half sales forSales to Mexico/Latin America were up slightly from increased agriculture and construction engines sales. First half sales for Canada were down 1114 percent compared toduring the first half 2001nine months of 2002, primarily due to lower demand for heavy-duty engines. First halfdeclining power generation sales foras the energy crisis subsides.  Sales to Canada and Africa/Middle East were essentiallyrelatively flat year over year.year-over-year.

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The Company's net sales by geographic region for comparative interim periods follow: