812-377-5000
(Registrant's Telephone Number) None.

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 proceedingpreceding 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:

days. Yes [x]
��  No [ ]
X

Indicate by check mark whether the number of shares outstanding of eachregistrant is an accelerated filer (as defined in Rule 12b‑2 of the issuer's classes of common stock as of the latest practicable date:

Act). Yes X  No 

            As of SeptemberJune 29, 2002,2003 there were 41.5 million shares of $2.50 par value per share common stock
outstanding.

CUMMINS INC.
TABLE OF CONTENTS
QUARTERLY REPORT ON FORM 10-Q
MARCH 30, 2003

 2

CUMMINS INC.
INTRODUCTORY NOTE

            Cummins Inc. is filing this Quarterly Report on Form 10‑Q to reflect the unaudited Consolidated Financial Statements for the quarter ended March 30, 2003,  and the unaudited restatement of its Consolidated Financial Statements for the period ended March 31, 2002.  As a result of the restatement, which is described in Note 2, "Restatement of Previously Issued Financial Statements", in the accompanying Consolidated Financial Statements, Cummins delayed filing this Quarterly Report on Form 10-Q for the quarter ended March 30, 2003.  On April 17, 2003, we furnished a Current Report on Form 8‑K that included our press release announcing the restatement and reaudit of our Consolidated Financial Statements for 2001 and 2000 and discussing results for the quarter ended March 30, 2003.

            The unaudited Consolidated Financial Statements contained in this quarterly report for the quarter ended March 31, 2002 supersede the unaudited Consolidated Financial Statements contained in our Quarterly Report on Form 10-Q that was previously filed on May 15, 2002 (Original Filing).  The unaudited Consolidated Financial Statements and financial information contained in the Original Filing have been revised herein to reflect the restatement adjustments described in Note 2 of our Consolidated Financial Statements.  We do not intend to amend our Quarterly Reports on Form 10-Q for the periods affected by the restatement that ended prior to December 31, 2002.  As a result, the financial statements and related information contained in such reports referenced above should no longer be relied upon.

            In connection with the preparation of our 2003 Consolidated Financial Statements, we became aware of certain isolated matters that were treated incorrectly in the restatement of our pre-2002 Consolidated Financial Statements.  The cumulative effect of these matters resulted in a $2.7 million understatement of retained earnings at December 31, 2002.  The amount of the understatement was not material to our pre 2003 financial statements nor to our expected full year 2003 financial statements.  As a result, our Consolidated Statement of Earnings for the first quarter of 2003 includes $3.6 million pre-tax income ($2.7 million after tax and $0.07 per share) to correct this matter.  The corrections are classified in the Statement of Earnings based upon the classification of the original transactions. Approximately $2.0 million of the correction is recorded in Cost of goods sold, $.2 million in Selling and administrative expenses and $1.4 million in Other (income) expense, net.  Our Consolidated Statement of Earnings for the first quarter of 2003 differs by these amounts from the Consolidated Statement of Earnings included in our From 8-K furnished April 17, 2003.

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Item 1. Financial Statements

CUMMINS INC.
CONSOLIDATED STATEMENTS OF EARNINGS   

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

 4

CUMMINS INC.
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION      

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*Derived from audited financial statements.

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

Page 45

CUMMINS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS            

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

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CUMMINS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 1.  Summary of Accounting Policies:Policies

Basis of Presentation:Presentation

We have prepared ourConsolidated Financial Statementsfor the interim periods ended September 29,March 30, 2003 and March 31, 2002 and 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, 2001.2002.  Our interim period financial results for the three and nine monththree-month periods presented are not necessarily indicative of results to be expected for the entire year.

We believe our 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.  Our Chief Executive Officer and Chief Financial Officer have certified that this 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.March 30, 2003. These certifications are included as Exhibits 99.131(a) and 99.231(b) to this Form 10-Q.  Our Chief Executive Officer and Chief Financial Officer have also provided certifications as to the effectiveness of our controls and procedures which are included in the exhibits previously referenced.

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

Prior Period Adjustment

PrinciplesIn connection with the preparation of Consolidation:

Ourour 2003 Consolidated Financial Statements, include we became aware of certain isolated matters that were treated incorrectly in the accountsrestatement of all majority-owned 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 ourpre-2002 Consolidated FinancialStatements.  Where our ownership interest is less than 100 percent, the minority ownership interest  The cumulative effect of these entities is reportedmatters resulted in a $2.7 million understatement of retained earnings at December 31, 2002.  The amount of the understatement was not material to our historical financial statements nor to our expected full year 2003 results.  As a result, our Consolidated Statement of Financial Positionas a liability.  Earnings for the first quarter of 2003 includes $3.6 million pre-tax income, ($2.7 million after tax and $0.07 per share) to correct this matter.  The minority ownership portion of earnings or loss, net of tax, of these entities iscorrections are classified as "Minority interest" in ourConsolidatedthe Statement of Earnings.

We useEarnings based upon the equity method to account for our investments in joint ventures, affiliated companies and alliances in which we haveclassification of the ability to exercise significant influence, generally represented by common stock ownership or partnership equityoriginal transactions. Approximately $2.0 million of at least 20 percent and not more than 50 percent.  Generally, under the equity 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 alliancecorrection is recorded according to our levelin Cost 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 venture, affiliated companiesgoods sold, $.2 million in Selling and alliances is reportedadministrative expenses and $1.4 million in ourConsolidated S tatement of Earnings as "Joint ventures and alliances income."  Significant transactions with unconsolidated entities are eliminated in ourConsolidated Financial Statements.  Our investments are classified as "Investments in and advances to joint ventures and alliances" in ourConsolidated Statement of Financial Position.other (income) expense, net.

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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 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 established maximum allowances for returned product.

Shipping and Handling Costs:Costs

Our shipping and handling costs are expensed as incurred.  The majority of these costs are associated with operations of our inventory distribution centers and warehouse facilities and are classified as Selling"Selling and administrative expensesexpenses" in ourConsolidated StatementStatements of Earnings.  InFor the third quarterthree months ended March 30, 2003 and the first nine months ofMarch 31, 2002 respectively, these costs were approximately $19 million and $20 million, and $62 million.  In the third quarter and the first nine months of 2001, these costs were approximately $21 million and $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 us to access highly liquid and efficient markets to finance our working capital needs when receivables 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 its affiliates hold any direct or indirect equity interests in either Cummins Receivable Corporation or Cummins Capital Trust other than through holdings of Cummins common stock.

In 2001, we entered into a lease agreement in 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 independent and not affiliated with Cummins.  The financial institution maintains a substantial equity investment in the SPE.

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Income Tax Accounting: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 t axtax rate of those taxable jurisdictions where we conduct business.  For the three monththree-month periods ended March 30, 2003 and nine month periods ending September 29,March 31, 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.securities. 

Inventories: 7

Inventories

Our inventories are stated at the lower of cost or net realizable value. At December 31, 2001, approximately 222002, 26 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 at March 30, 2003, and December 31, 2002, were as follows:

Product Coverage

            We charge the estimated costs of product coverage programs, other than product recalls, to earnings at the time products are shipped to customers. We use historical experience of product coverage programs to estimate the remaining liability for our various product coverage programs. As a result of the uncertainty surrounding the nature and frequency of product recall programs, the liability for such programs is recorded when the recall action is announced. We review and assess the liability for these programs on a quarterly basis.

            Below is a summary of the activity in our product coverage liability account for the three months ended March 30, 2003, including adjustments to pre-existing warranties during the period:

Product Liability

            From time to time, we issue indemnifications to our customers and joint venture partners which indicate that we will indemnify them against any loss suffered as a result of a defective product we have sold them. In addition, periodically, we enter into license agreements or joint venture agreements where we license a patent, trademark or other similar intangible asset and agree to indemnify the licensee against any losses suffered should the patent, trademark or intangible asset infringe upon a third party asset. We provide reserves for these exposures when it is probable that we have suffered a loss, the loss is reasonably estimable and the loss exceeds any insurance coverage we may have. The activity in our product liability accrual for the three months ended March 30, 2003, was as follows:

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Earnings Per Share:

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.  We exclude shares of common stock held by the Company's Retirement Savings Plan in the Employee Benefits Trust from weighted average shares outstanding for the EPS calculation until those shares are distributed from the Trust.  Following is a reconciliation of net earnings (loss) and weighted average common shares outstanding for purposes of calculating basic and diluted net earnings per share:

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For the ninethree months ended September 23, 2001, approximatelyMarch 31, 2002, excludes the effect of .2 million shares of outstanding common stock options were excluded fromsince the calculation of diluted EPS becauseimpact would have been anti-dilutive due to losses in the effect was antidilutive.period.   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 ninethree months ended September 29,March 30, 2003 and March 31, 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.

antidilutive due to losses in each period. 

The weighted average diluted common shares outstanding for September 29,March 30, 2003 and March 31, 2002, and September 23, 2001 excludes the effect of approximately 5.65.3 million and 2.73.7 million common stock options, respectively, because thesince such options have an exercise price of the options is in excess of the average market value of Cummins common stock for those quarters.

Employee Stock Plans

On January 1, 2003, we adopted the respective periods.accounting provisions of Statement of Financial Accounting Standards No. 123 "Accounting for Stock Based Compensation" (SFAS 123) for stock based employee awards.  We had previously been accounting for these awards under Accounting Principles Board Opinion No. 25, as allowed by SFAS 123.  SFAS 123 requires stock based employee awards to be accounted for at fair value on the date of grant.  As allowed under SFAS 123, as amended by SFAS 148, we are adopting the accounting provisions only for new awards issued on or after January 1, 2003.  We did not issue any stock based employee awards during the three-month period ended March 30, 2003.  Consistent with the provisions of SFAS 123, the following table summarizes the pro forma net earnings and earnings per share amounts as if we had accounted for all previously awarded stock options using the fair market value approach:

9

           Additional contributed capital in our Consolidated Statements of Financial Position is presented net of employee loans for stock purchases. As of March 30, 2003 and December 31, 2002, the loan amount was $12 million and $13 million, respectively.

 Recently Adopted Accounting Pronouncements

In June 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 143, "Accounting for Asset Retirement Obligations" (SFAS 143).  SFAS 143 requires obligations associated with retirement of long-lived assets to be capitalized as part of the carrying value of the related asset.  We adopted this statement on January 1, 2003.  The adoption of this statement did not have a material effect on our financial statements.

In June 2002, the FASB issued Statement of Financial Accounting Standards No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" (SFAS 146).  This standard nullifies Emerging Issues Task Force (EITF) Issue No. 88-10 "Costs Associated with Lease Modification or Termination" and EITF Issue No. 94-3 "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred in a Restructuring)."  SFAS 146 requires that a liability for a cost associated with an exit or disposal activity be recognized and measured at its fair value when the liability is incurred.  We adopted the provisions of SFAS 146 for exit or disposal activities, such as restructuring, involuntarily terminating employees, and costs associated with consolidating facilities, for actions begun after December 31, 2002, as required. 

10

In November 2002, the FASB issued FASB Interpretation No. 45 (FIN 45), "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others."  FIN 45 elaborates on the disclosures to be made by a guarantor about its obligations under certain guarantees that it has issued.  In addition, this interpretation requires a guarantor to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee.  The disclosure provisions of FIN 45 are effective for annual or interim financial statements for periods ending after December 15, 2002.  The recognition provisions of FIN 45 are applicable only on a prospective basis for guarantees issued or modified after December 31, 2002.  The impact of adopting this statement did not have a significant impact on our financial position or results of operations for the three-month period ended March 30, 2003.  See Note 9 for a discussion of our guarantees existing at March 30, 2003.

Recently Issued Accounting Pronouncements Not Yet Effective

            In November 2002, the EITF issued EITF Issue 00-21, "Revenue Arrangements with Multiple Deliverables." This issue provides guidance as to how to determine when an arrangement involving multiple deliverables contains more than one unit of accounting and when more than one unit of accounting exists, how the arrangement consideration should be allocated to the multiple units. The application of this issue could affect the timing of the recognition of revenue for multiple deliverable arrangements. The guidance in this issue is prospective for revenue arrangements entered into after June 30, 2003. We are in the process of analyzing the impact this EITF will have, if any, on our revenue recognition in the future.

            In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation of Variable Interest Entities", an Interpretation of Accounting Research Bulletin No. 51 "Consolidated Financial Statements" (FIN 46). FIN 46 provides guidance related to identifying variable interest entities (VIEs), including entities more commonly referred to as special purpose entities or SPEs, and in determining whether such entities should be consolidated by the entities' primary beneficiary, defined in FIN 46 as the entity that holds the majority of the variable interests in the VIE. In addition, FIN 46 requires disclosure for both consolidated and non-consolidated VIEs. Certain disclosure provisions of FIN 46 are effective for financial statements issued after January 31, 2003, and the consolidation requirements applicable to Cummins are effective for all periods beginning after June 15, 2003. Currently we participate in four VIEs, two of which are already consolidated. We are assessing the impact of this interpretation on the other two VIEs, one that is a party to our sale-leaseback transaction entered into in 2001 and a receivable securitization conduit to which our consolidated VIE sells receivables. Although we are still assessing the impact, we currently do not believe we are considered the primary beneficiary of either VIE and therefore would not be required to consolidate these entities. Our maximum potential loss related to the sale-leaseback SPE is limited to the amount of our residual value guarantee ($9 million at March 30, 2003). At March 30, 2003, our maximum potential loss related to the receivable securitization conduit was zero as there were no receivables outstanding under the facility.

            In May 2003, the FASB issued Statement of Financial Accounting Standards No. 150 "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity" (SFAS 150). SFAS 150 establishes standards for how companies classify and measure certain financial instruments with characteristics of both liabilities and equity. SFAS 150 requires financial instruments meeting certain criteria to be reported as liabilities that were previously reflected as equity or in between liabilities and equity. We are required to adopt SFAS 150 for our existing financial instruments on July 1, 2003. The adoption of this statement will result in the classification of our obligations associated with the Convertible Preferred Securities of Subsidiary Trust as a liability and will result in the classification of future payments related to these obligations as interest expense in our Consolidated Statements of Earnings. The adoption of this statement will have no impact on net earnings.

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Note 2.  Restatement of Previously Issued Financial Statements

            On April 14, 2003, we announced that we had determined that our previously issued financial statements for the years ended December 31, 2000 and 2001 would require restatement and reaudit. The restatement was necessary to correct prior period accounting errors related primarily to unreconciled accounts payable accounts at two of our manufacturing locations, the majority of which were associated with the integration of a new enterprise resource planning system into our accounting processes. We were required to have these restated financial statements audited by our current auditors, since Arthur Andersen LLP, our predecessor auditor for the years subject to restatement, had ceased operations.

            The restatement and reaudit of our financial statements included a comprehensive review of the accounting records underlying our financial statements for the related periods. The work performed during this review also resulted in a restatement of the quarterly information previously reported for the quarter ended March 31, 2002.  The accompanying financial statements reflect adjustments made to our previously reported information for the quarter ended March 31, 2002, as a result of this comprehensive review and the work performed during the restatement and reaudit process in order to correct accounting errors primarily associated with the period of accounting recognition. We have segregated these adjustments into the following categories:

            1.         Adjustments stemming from the unreconciled accounts at our manufacturing locations referred to above. These items did not have a material effect on the results for the quarter ended March 31, 2002.

            2.         Adjustments related to the correction of accounting errors previously recorded in the period management identified the error. Generally Accepted Accounting Principles (GAAP) and Staff Accounting Bulletin 99 permit these types of adjustments to be recorded in the period errors are identified to the extent they are not deemed material for purposes of restating prior period financial statements. The most significant items in this category are related to the reconciliation of certain intercompany accounts and other clearing or suspense accounts associated with receivables, accounts payable and accrued payroll. As a result of the restatement, management has now reflected these items in the periods to which they relate.

            3.         Other adjustments to correct errors were identified during the restatement process and have been categorized and summarized as follows:

                        a.         Revisions to various accounts (primarily reserve and accrual accounts) that relate to significant estimates, uncertainties and judgments where the original amount was either calculated incorrectly or documentation directly supporting the original amount could not be located. The most significant item in this category relates to adjustments for obligations associated with marketing programs.

                        b.         Adjustments to certain accounts to achieve proper and consistent application of GAAP throughout our organization. For example, this category includes adjustments for liabilities or reserves not recorded by certain of our locations that are required by US GAAP. The most significant item in this category relates to the omission of an accrual for long-term variable incentive compensation in 2001 that had previously been recorded in 2002. This category also includes adjustments related to the calculation of expense for certain non-US subsidiary defined benefit pension plans in accordance with US GAAP.

12

            The following tables show the effect of the restatement adjustments on our financial statements for the three months ended March 31, 2002, as previously reported in our Form 10-Q for that quarter:

Note 3.  Related Party Transactions:Transactions

Joint ventures and partnerships

We purchase significant quantities of mid rangemid-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..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.

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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 yequally 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"Cost of salesgood sold" in ourConsolidated StatementStatements 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).accounting.  Our investment in CDC is classified as "Investments in and advances to joint ventures and alliances" in ourConsolidated StatementStatements of Financial Position.

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The following table summarizes our related party purchases included in Cost"Cost of goods soldsold" in ourConsolidated StatementStatements of Earnings:Earnings

Distributors:

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-ownedwholly‑owned by Cummins, some partially-ownedpartially‑owned and the majority are independently-owned.independently owned. We consolidate all wholly-ownedwholly‑owned distributors and account for partially-ownedpartially‑owned distributors using the equity method of accounting (see Note 1).accounting.

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 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 142,addition, we applied this new accounting standard on January 1, 2002 to our previously recognized goodwill and intangible assets.  At December 31, 2001, our net goodwillprovide guarantees related to consolidated entities was approximately $343 million.  For purposescertain obligations of impairment testing,some distributors as more fully discussed in Note 9. We continually monitor the financial condition of these independent distributors. We recognize revenue on sales to these distributors when 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 ana lysis, wehave concluded that the fair value of each of our reporting units exceeded their carrying, or book value, including goodwill,performance under these guarantees is unlikely. All distributors that are partially‑owned and therefore we did not recognize any impairment of goodwill.

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We 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 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 shownthose who participate in the table below:

The following table summarizes other intangible assets with finite useful lives thatguaranteed loan program are subjectconsidered to amortization:

Amortization expense for software and other intangibles totaled $26 million and $25 million for the nine months ended September 29, 2002 and September 23, 2001, respectively.  Amortization for the twelve months ended December 31, 2001, totaled $34 million.  Internal and external software costs (excluding thosebe related to research, reengineering and training) and trademarks and patents are amortized generally over a five-year period.  The projected amortization expense ofparties in 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.Consolidated Financial Statements.

Page 11 14

Note 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, 2001 and 2002 accompanied by schedules that present, by major cost component and by year of provision, activity related to the restructuring charges, including adjustments to the original charges follow:

Note 5.  Other (Income) Expense:Expense

The major components of other"Other (income) expense, net" included in theour Consolidated StatementStatements of Earnings are shown below:

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Note 6.5.  Derivatives and otherOther Financial Instruments: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 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 Rate 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 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 forecasted transactions. These forward 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 Statements of Financial Position at fair value in Other Current Assets"Other current assets" and Oth er Accrued Liabilities.other liabilities.  The effective portion of the unrealized gain or loss on the forward contract is deferred and reported as a component of "Accumulated other comprehensive income".  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 thirdfirst quarter ended September 29, 2002, $2March 30, 2003, $3 million of gain was reclassified from Accumulated"Accumulated other comprehensive incomeincome" to earnings.  The ineffective portion of the hedge, unrealized gain or loss, if any, is recognized in "Other (income) expense"expense, net" in current earnings during the period of change.  As of September 29, 2002, $5March 30, 2003, $2 million of deferred gainslosses were included in equity ("Accumulated"Accumulated other comprehensive income" in theConsolidated StatementStatements of Financial Position) and are expected to be reclassified t oto earnings over the next twelve months.  For ninethe three months ended September 29, 2002,March 30, 2003, there were no circumstances that would have resulted in the discontinuance of a cash flow hedge.

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Our internal hedging policy allows for managing anticipated foreign currency cash flow for up to one year. As of September 29, 2002,At March 30, 2003, approximately 9396 percent of the notional amount of the forward contracts shown in the table above were attributable to fourfive currencies, the British Pound (55(46 percent), the Australian Dollar (20(21 percent), the Euro (13(11 percent), the Mexican Peso (12 percent), and the Japanese Yen (5(6 percent). As of September 23, 2001,March 31, 2002, approximately 9088 percent of the contracts were attributable to the samethree currencies, the British Pound (55(35 percent), the AustraliaAustralian Dollar (14 percent), the Euro (18(34 percent) and the Japanese Yen (3Euro (19 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"expense, net" in Note 5 to ourConsolidated StatementStatements of Earnings.Earnings Such net transaction gains wereand included a lossof  $3 million and $3$1 million for the thirdfirst quarters ended September 29,March 30, 2003 and March 31, 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.

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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.risk. Currently, we have oneno 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 gains/losses on the swap are completely offset by the fair value adjustment to the underlying debt.swaps outstanding.

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 the thirdfirst quarter of 2003 and 2002 was $.6 million and 2001 was $.7 million, respectively.  The remaining balance of the deferred gain is classified with "Long-term debt" in our Consolidated Statements of Financial Position.

            In November 2002, we terminated an interest rate swap relating to our 6.45% Notes that mature in 2005. The swap acted as a fair value hedge and converted $225 million notional amount from fixed rate debt into floating rate debt and would have matured in 2005. The termination of the swap resulted in a $12.3 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 during the first quarter of 2003 was $1.3 million. The remaining balance of the deferred gain is classified with "Long-term debt" in our Consolidated Statements of Financial Position.

We have equity method investees whose financial results are not consolidated that have entered into floating-to-fixed interest rate swap agreements. The swaps have been designated and qualify as cash flow hedges under SFAS 133. We record our share of the gain or loss on these instruments in "Accumulated other comprehensive income." As of March 30, 2003, the gains recognized for the first nine months of 2002 and 2001losses related to these swaps were $2.2 million and $1.7 million, respectively.not material.

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 under SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities" and are recorded in theConsolidated StatementStatements of Financial Position at fair value in Other Current Assets"Other current assets" and Other Accrued Liabilities.other 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,March 30, 2003, unrealized gains and losses related to commodity swaps were not material.  The ineffective portion of the hedge is recognized in "Other (income) expense"expense, net" in current earnings in the period in which the ineffectiveness occurs.

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Our internal policy allows for managing commodity cash flow hedges for up to three years. For the ninethree months ended September 29, 2002,March 30, 2003, there were no circumstances that would have resulted in the discontinuance of a cash flow hedge.

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Note 7.6.  Borrowing Arrangements:Arrangements

We havehad $125 million of 6.25% Notes maturingthat matured on March 1, 2003.  These notes were repaid during the first quarter of 2003.  There was no gain or loss recorded upon repayment of these notes.

The notes are classified as current maturities ofincrease in our long-term debt in ourConsolidated Statement of Financial Position based upon their maturity date.  In addition, we have a five-year revolving credit agreement with a group of banks that provides forfrom December 31, 2002, is primarily related to borrowings up to $500 million that expires in January 2003.  As of 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 expectfacility.  The amount outstanding at March 30, 2003 was $70 million compared to enter into a new agreement in the fourth quarter of$0 at December 31, 2002.

Our debt and credit agreements contain several financial covenants, therestrictive covenants. The most restrictive of these covenants relatesapplies to the $250 million 9.5% Senior Notes and our guarantee of notes issued bynew credit facility which may, among other things, limit our Employee Stock Ownership Plan (ESOP) trust.  Under the provisions of the guarantee,ability to incur additional debt or issue preferred stock, enter into sale/leaseback transactions, pay dividends, sell or create liens on our assets, make investments and merge or consolidate with any other person. In addition, we are requiredsubject to maintain a debt to capital ratio of 55 percent andvarious financial covenants including a minimum net worth, as defined in the agreement, of $1.159 billion as of 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 borrowingsa minimum debt-to-equity ratio and sale-lease back transactions, as defined in the agreement, to $200 million or less.a minimum interest coverage ratio. As of September 29, 2002, our subsidiary borrowings and sale-leaseback indebtedness was $170 million.  We areMarch 30, 2003, we were in compliance with all of the covenants and restrictions under all of our borrowing agreements except as noted below.

            As a result of September 29, 2002.the restatement and reaudit, we delayed the filing of our Annual Report on Form 10-K for the year ended December 31, 2002, and this Quarterly Report on Form 10-Q for the quarter ended March 30, 2003, with the Securities and Exchange Commission (SEC). As previously disclosed, the delay in filing resulted in a breach of a requirement for timely satisfaction of SEC filing obligations under several of our credit agreements, the most significant of which are discussed below. A majority of our long-term debt is governed by three Indenture agreements summarized as follows:

•                A November 20, 2002, Indenture between the Company and BNY Midwest Trust Company as Trustee for $250 million in 9.5% Senior Notes;
  

•                A June 18, 2001, Indenture between the Company and BNY Midwest Trust Company as Trustee for $300 million in 7% convertible preferred securities; and,
  

•                A March 1, 1986, Indenture between the Company and JPMorgan Chase Bank (formerly The Chase Manhattan Bank) for four series of securities with an aggregate value of $765 million.

            Under each of the Indentures, we are required to deliver to the respective Trustees a copy of our Annual Report on Form 10-K within specified periods of time after such filings are due (March 31, 2003). The breach caused by the delay in filing our 2002 Annual Report on Form 10-K gave certain rights to the Trustees and debt holders under the Indentures to accelerate maturity of our indebtedness if they give us notice and we do not cure the breach within 60 days. However, neither the Trustees nor the respective debt holders gave us such notice. By filing our 2002 Annual Report on Form 10-K and this Quarterly Report on Form 10-Q for the first quarter ended March 30, 2003, with the SEC and by delivering a copy of these filings to the Trustees of the Indentures and to our lender under the credit facility agreement, we will cure the noncompliance under the above mentioned Indentures and comply with the terms of the credit facility agreement.

            In November 2002, we entered into a new credit facility agreement that provides for aggregate borrowings of up to $385 million and is available on a revolving basis for a period of three years. The agreement requires that we annually deliver audited financial statements to the lenders within a specified period of time. As a result of the restatement and reaudit process, we received a waiver from our lenders through November 30, 2003, of any breach due to a delay in the delivery of our audited financial statements. As mentioned above, this breach has been cured by the filing of our Form 10-K for the year ended December 31, 2002, and this Quarterly Report on Form 10-Q for the three months ended March 30, 2003.

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            In connection with the 2002 Indenture, we agreed to file an exchange offer registration statement with the SEC and complete that offer no later than May 19, 2003. As a result of the delay in filing our 2002 Annual Report on Form 10-K with the SEC, we were unable to complete the exchange offer and became contractually obligated to pay an additional 0.25% per annum interest on the notes issued under that Indenture. For each 90-day delay in the completion of the exchange offer, the interest rate on the 9.5% notes will increase by an additional 0.25% per annum up to a 1% maximum increase until such time as the exchange offer is completed.  We expect to satisfy our registration obligations relating to the 2002 Indenture in the near term, following which the incremental interest and dividend payments will be discontinued.

            In connection with the 2001 Indenture governing the issue of our 7% convertible preferred securities, we exercised our right to suspend the use of the resale prospectus, which is part of a shelf registration statement that we had filed and had declared effective to permit the resale of these securities, pending the filing of our 2002 Annual Report on Form 10-K with the SEC.  Effective March 1, 2003, this suspension resulted in an increase of 0.5% per annum in the dividend rate borne by these securities.  The 0.5% premium was paid until we removed the suspension of the use of the resale prospectus on August 5, 2003, after the filing of our 2002 Annual Report on Form 10-K.

Note 8.7.  Business Segments and Geographic Information: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 its efforts on providing enhanced service to a wide range of customers.  Profit before interest, and taxes, restructuring and other nonrecurring charges and return on average net assets excluding debt, taxes, minimum pension liability adjustment and nonrecurring accruals are the primary basisbases 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 businessno allocation of debt-related items, minimum pension liability or income taxes is made to the individual segments. The segment datainformation below for 2002 has been restated to reflect this change.the adjustments described in Note 2. In addition, the segment net asset information has been recast to reflect management's current methodology of allocating assets to segments.  A summary of operating results by segment for the three-month and nine-month periods ended September 29,March 30, 2003 and March 31, 2002 and September 23, 2001 is shown below:

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The tablestable below reconciles the segment information to the corresponding amounts in the Consolidated Financial Statements::

Note 9.8.  Comprehensive Earnings:

Earnings

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

Note 10.9.  Contingencies, Guarantees and Environmental Compliance

The Company and its subsidiaries            We are defendants in a number of pending legal actions, including actions related to the use and performance of our products. We carry product liability insurance covering significant claims for damages involving personal injury and property damage. In the event we are determined to be liable for damages in connection with actions and proceedings, the unaccrued portion of such liability is not expected to be material. We also have been identified as a potentially responsible party at several waste disposal sites under U.S. and related state environmental statutes and regulations and have joint and several liability for any investigation and remediation costs incurred with respect to such sites. We deny liability with respect to many of these legal actions and environmental proceedings and are vigorously defending such actions or proceedings. We have established reserves that we believe are adequate for our expected future liability in such actions and proceedings where the nature and extent of such liability can be reasonably estimated based upon presently available information.

            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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In April 2002, we received certification from the U.S. Environmental Protection Agency (EPA) for our ISX heavy-duty diesel truck engine. In May 2002, we received certification from 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 became effective October 1, 2002, and permit us to produce and sell these engines under the new emissions standards. The standards were established in a consent decree that Cumminswe entered into with the EPA, the U.S. Department of Justice and CARB (Californiathe California Air Research Board)Resources Board (CARB) in October 1998 along with other diesel engine manufacturers. In issuing our 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.

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We believe 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 become 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.

U.S. Distributor Guarantees

Manufacturers who signed            We have entered into an operating agreement with Citicorp Leasing, Inc. pursuant to which we agreed to guarantee revolving loans, equipment term loans and leases, real property loans and letters of credit made by Citicorp Leasing, Inc. to certain independent Cummins and Onan distributors in the EPA consent decreeUnited States, as well as certain distributors in 1998 arewhich we own an equity interest. Under the terms of the operating agreement, our guarantee of any particular financing will be limited to the amount of the financing in excess of a particular distributor's "borrowing base." The "borrowing base" of any particular distributor is equal to the amount that Citicorp Leasing, Inc. would have allowed the distributor to borrow absent our guarantee.

            In the event that any distributor is in default under any financing or:

• at any time on or before August 31, 2004, the rating on our long-term senior unsecured debt from Standard & Poor's is less than "BB" or from Moody's is less than "Ba2"; or
  
• at any time on or after September 1, 2004, the rating on our long-term senior unsecured debt from Standard & Poor's is less than "BBB-" or from Moody's is less than "Baa3";

then we will be required to guarantee the entire amount of each financing under the terms of the operating agreement. In addition, in the event the rating on our long-term senior unsecured debt falls below the thresholds described above, we will also be required to pay nonconformance penaltiesto Citicorp Leasing, Inc. a monthly fee equal to 0.50% per annum on the daily average outstanding balance of each financing arrangement under the operating agreement. Further, in the event that any distributor defaults under a particular financing arrangement, we will be required to purchase the assets of that distributor that secure its borrowings under the financing arrangement.

            The operating agreement will continue in effect until February 7, 2007, and may be renewed by the parties for additional one-year terms. As of March 30, 2003, we had $39 million of guarantees outstanding under the operating agreement relating to distributor borrowings of $279 million.

Canadian Distributor Guarantees

            We have entered into a number of guarantee agreements with The Bank of Nova Scotia pursuant to which we have agreed to guarantee borrowings of certain independent distributors of our products. Under the terms of these agreements, our guarantee with respect to any one financing arrangement between a distributor and The Bank of Nova Scotia is limited to 50% of the aggregate principal amount of the financing. As of March 30, 2003, we had $14 million of guarantees outstanding under these guarantee agreements relating to distributor borrowings of $29 million.

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Residual Value Guarantees

            As more fully discussed in our 2002 Annual Report on Form 10-K, we have various residual value guarantees on equipment leased under operating leases.  The amounts of those guarantees at March 30, 2003, are summarized as follows:

Other Guarantees

            In addition to the EPA if they sell engines that are noncompliantguarantees discussed above, from time to time we enter into other guarantee arrangements, including sale of foreign receivables with therecourse, guarantees of non-U.S. distributor financing and other miscellaneous guarantees of third party debt. The maximum potential loss related to these other guarantees is $12 million at March 30, 2003.

            There were no significant new and lower emissions levels determined byguarantee arrangements entered into during 2003, thus 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.the liability recorded was not significant.

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