CUMMINS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 1.   Summary of Accounting Policies

Basis of Presentation:Presentation

General

Cummins Inc. ("Cummins," "the Company," "we," "our," or "us") is a global power leader that designs, manufactures, distributes and services diesel and natural gas engines, electric power generation systems and engine-related products, including filtration and emissions solutions, fuel systems, controls and air handling systems.  We have prepared our Consolidated Financial Statements for the interim periods ended SeptemberMarch 28, 20032004 and September 29, 2002March 30, 2003, in conformity with accounting principles generally accepted in the United States.  EachStates of America (GAAP) and the rules and regulations of the Securities and Exchange Commission (the "SEC").  Each interim periodsperiod 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 recommendGAAP requires management to make certain estimates and judgments that youare reflected in the reported amounts of assets, liabilities, revenues and expenses and also in the disclosure of contingent liabilities.  The actual results may differ from the estimates.  Management exercises judgment and makes estimates for allowance for bad debts, inventory obsolescence, product warranty, asset impairment, depreciation, pension and post retirement benefits, income taxes, litigation and other contingencies. Management reviews these estimates on a systematic basis and, if necessary, any material adjustments are reflected in the Consolidated Financial Statements.   You should read ourthese interim financial statements in conjunction with the Consolidated Financial Statements included in our annual reportAnnual Report on Form 10-K for the year ended December 31, 2002.2003.  Our interim period financial results for the three month and nine monththree-month periods presented are not necessarily indicative of results to be expected for any other interim period, or for the entire year. 

We believe our Consolidated Financial Statements include all adjustments of a normal recurring nature, necessary to present fairlyfor a fair statement of our financial position, results of operations and cash flows for the interim periods presented. 

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

Prior Period Adjustment

In connection with the preparation of our Consolidated Financial Statements for the first quarter of 2003, 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 historical 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 these matters.  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.

Shipping and Handling 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 and administrative expenses" in our Consolidated Statements of Earnings.  For the three months ended SeptemberMarch 28, 20032004 and September 29, 2002,March 30, 2003, these costs were approximately $22$26 million and $20$19 million, respectively. 

Employee Stock Plans

            On January 1, 2003, we changed our method of accounting for stock-based employee awards to the fair value method preferred by Statement of Financial Accounting Standards No. 123, "Accounting for Stock-based Compensation" (SFAS 123). We made this change on a prospective basis only for new option grants or other stock awards made on or after January 1, 2003.  For awards granted prior to January 1, 2003, we follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25), as allowed under SFAS 123.  Under APB 25, we did not record compensation expense upon the issuance of stock options because the exercise price of stock options granted equaled the market price of the common stock on the grant date.  For the nine monthsquarters ended SeptemberMarch 28, 2004 and March 30, 2003, the pro forma compensation expense for stock awards granted prior to January 1, 2003, using the fair market value approach was not significant. 

            Additional contributed capital in our Consolidated Balance Sheets is presented net of employee loans for stock purchases.  As of March 28, 2004 and September 29, 2002, these costsMarch 30, 2003, the loan amounts were approximately $64$3 million and $62$12 million, respectively.

Income TaxRecently Adopted Accounting Pronouncements

Our provision            In December 2003, the FASB issued FIN 46R, a revised version of FIN 46 (referred to herein as FIN 46R). In 2003, we adopted the provisions of FIN 46R as it related to certain entities previously considered to be Special Purpose Entities (SPEs) under generally accepted accounting principles and for income taxesnew entities created on or after February 1, 2003.   As of March 28, 2004, we adopted FIN 46R for all other entities.  A description of the first quarter 2004 impact of adopting FIN 46R is determined usingincluded in Note 2 below. 

Note 2.  Variable Interest Entities

            FIN 46R provides guidance related to evaluating, identifying and reporting of variable interest entities (VIEs), including entities commonly referred to as SPEs. FIN 46R requires us to consolidate certain VIEs if we are deemed to be the assetprimary beneficiary, defined in FIN 46R, as the entity that absorbs a majority of the VIEs expected losses, receives a majority of the entity's expected residual returns, or both.   We adopted FIN 46R as of December 31, 2003, for entities previously considered to be SPEs under GAAP and liability method.  Under thisfor new entities created on or after February 1, 2003.  The adoption of those provisions of FIN 46R in 2003 required us to consolidate a VIE that was previously unconsolidated and to deconsolidate a VIE that was previously consolidated in our Consolidated Financial Statements. The impact of adopting FIN 46R as of December 31, 2003 was discussed in Note 2 to the Consolidated Financial Statements included in our 2003 Annual Report on Form 10-K.

In addition to the VIEs discussed in Note 2 of our Annual Report on Form 10-K, we have variable interests in other businesses including businesses accounted for under the equity method deferred taxof accounting and certain North American distributors that are deemed VIEs and are subject to the provisions of FIN 46R.  We adopted FIN 46R for these entities as of March 28, 2004.  The adoption of those FIN 46R provisions in 2004 required us to consolidate the assets and liabilities of three entities that were previously included in our Consolidated Balance Sheets as "Investments in and advances to equity investees."  First quarter results for these three entities are recognizedreflected as "Equity, royalty and other income from investees" in our Consolidated Statements of Earnings.  Beginning with the second quarter of 2004, results for these entities will no longer be accounted for under the equity method, but will be consolidated in our Consolidated Statements of Earnings.

Two of the three VIEs that were consolidated, Consolidated Diesel Corporation (CDC) and Cummins Komatsu Engine Corporation (CKEC), are engine manufacturing entities jointly owned and operated by us and our equity partners.  We were deemed the primary beneficiary of these VIEs due to the pricing arrangements of purchases and the substantial volume of our purchases made from these VIEs.  Our arrangements with CDC are more fully described in Note 5 to the Consolidated Financial Statements of our 2003 Annual Report on Form 10-K.  CDC has approximately $85 million of debt which is collateralized by substantially all of its inventory and fixed assets with a current book value of $21 million and $188 million, respectively, as of March 28, 2004.  CKEC has approximately $6 million of unsecured debt, all of which is due to the other equity partner.  Creditors of these entities have no recourse to the general credit of Cummins. 

The other VIE that was consolidated, AVK/SEG, manufactures alternators and power electronic components and is jointly owned by Cummins (50 percent) and other equity partners.  We were deemed the primary beneficiary of this VIE due to the existence of a put/call arrangement on an additional 13 percent ownership interest in the entity and our guarantee on portions of the entity's subordinated debt.  The entity has approximately $21 million of total debt ($3 million guaranteed by us), of which $12 million is collateralized by assets with a current book value of $16 million.  Except for the future tax effectsamount of temporary differences betweendebt guaranteed by Cummins, creditors of AVK/SEG have no recourse to the financial statement carrying amountsgeneral credit of existingCummins.

Sales for these entities were $643 million in 2003.  When results of these entities are consolidated in our Consolidated Statements of Earnings, a significant amount of their sales will be eliminated. Total gross assets added from these additional entities was $411 million before consolidation eliminations resulting in a net increase of $294 million.  The table below shows the increase in our assets and liabilities and their respective tax bases.  from consolidating these entities after elimination of intercompany items as of March 28, 2004. 

We also recognize future tax benefits associatedhave variable interests in certain of our North American distributors that were deemed to be VIEs in accordance with taxFIN 46R, but we were not deemed to be the primary beneficiary.  The principal business of the distributors is to sell Cummins engines and related service parts as well as provide repair and maintenance services on engines, including warranty repairs.  Our maximum potential loss related to these four distributors consisted of our ownership interest in three of the distributors totaling $10 million as of March 28, 2004, and credit carryforwardsour guarantee of the debt of two distributors totaling $17.5 million as deferred tax assets.of March 28, 2004.  Our deferred tax assets are reduced by a valuation allowance to the extent there is uncertaintyinvolvement with these distributors as to their ultimate realization.  We measure deferred tax assetsequity holders began in 2002 (two distributors) and liabilities using enacted tax rates2003 (one distributor).  Our debt guarantees have been in effectplace since 1987 and 2001, respectively.  Selected financial information for these four distributors as of and 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 tax rate of those taxable jurisdictions where we conduct business.  For the three and nine month periods ended September 28, 2003 and September 29, 2002, our effective tax rate was 25 percent on earnings (loss) before income taxes after deducting dividends on our preferred securities.

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Inventories

Our inventories are stated at the lower of cost or net realizable value. At December 31, 2002, 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 inventories2003, is generally valued using the first-in, first-out (FIFO) cost method.as follows:

Note 3. Inventories

            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. Due to significant movements of partially-manufactured components and parts between manufacturing plants, we do not internally measure nor do our accounting systems provide a meaningful distinctionsegregation between raw materials and work-in-process.   Inventories at SeptemberMarch 28, 20032004 and December 31, 2002,2003, were as follows:

Note 4.  Investments in Equity Investees

            SEC regulations require that summarized financial information about unconsolidated subsidiaries and 50 percent or less owned equity investees be included in the footnotes to our financial statements if, in the aggregate, they meet certain tests of a significant subsidiary. Dongfeng Cummins Engine Company Limited is a 50 percent-owned unconsolidated subsidiary accounted for under the equity method of accounting that meets the test of a significant subsidiary.  Dongfeng financial results are reported one month in arrears of our normal reporting structure.

            Summary financial information for Dongfeng for the three month interim periods was as follows:

Note 5.  Accrued Product Coverage and Product Liability

            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.Product Coverage

            Below is a summary of the activity in our current and long-term (recorded in "Other long-term liabilities") product coverage liability account for the ninethree months ended September 28, 2003, including adjustments to pre-existing warranties during the period:ended:

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 are generally self-insured on product liability claims, with excess insurance coverage on claims exceeding a specified dollar amount.  We provide reserves for these exposures when it is probable that we have suffered a loss and the loss is reasonably estimable.                        The activity in our product liability accrual for the nine months ended September 28, 2003,three month interim periods was as follows:

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Earnings Per Share

We calculate basic earnings per share (EPS) of common stock by dividing net earnings 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 and weighted average common shares outstanding for purposes of calculating basic and diluted net earnings per share:

For the nine-month periods ended September 28, 2003 and September 29, 2002, we 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 because the effect was antidilutive in each period.

The weighted average diluted common shares outstanding for the three months ended September 28, 2003 and September 29, 2002 excludes the effect of approximately 2.0 million and 5.7 million common stock options, respectively, since such options have an exercise price in excess of the average market value of Cummins common stock for the respective periods.  

The weighted average diluted common shares outstanding for the nine months ended September 28, 2003 and September 29, 2002 excludes the effect of approximately 4.1 million and 4.0 million common stock options, respectively, since such options have an exercise price in excess of the average market value of Cummins common stock for the respective periods.  

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Employee Stock Plans

On January 1, 2003, we adopted the accounting provisions of Statement of Financial Accounting Standard 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 fair valued on the date of grant and expensed over the vesting period.  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.  As more fully discussed in Note 5, the Company issued stock based compensation awards on September 16, 2003, and the third quarter results includes compensation expense of less than $1 million related to these awards.  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:

            Additional contributed capital in our Consolidated Statements of Financial Position is presented net of employee loans for stock purchases. As of September 28, 2003 and December 31, 2002, the loan amount was $7 million and $13 million, respectively.

Recently Adopted Accounting Pronouncements

In June 2001, the FASB issued Statement of Financial Accounting Standard 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 Standard 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.  The adoption of this pronouncement did not have a material effect on the financial position or results of operations for the three-month and nine month periods ended September 28, 2003.

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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 or nine-month period ended September 28, 2003.  See Note 10 for a discussion of our guarantees existing at September 28, 2003.

            In November 2002, the Emerging Issues Task Force (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. We adopted EITF 00-21 on June 30, 2003, on a prospective basis for revenue arrangements entered into after June 29, 2003. The adoption of this pronouncement did not have a material effect on the financial position or results of operations for the three-month period ended September 28, 2003.

            In May 2003, the FASB issued Statement of Financial Accounting Standard 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 adopted SFAS 150 for our existing financial instruments on June 30, 2003. The adoption of this statement resulted in the classification of our obligations associated with the Convertible Preferred Securities of Subsidiary Trust as a liability and resulted in the classification of the dividend payments on these securities as interest expense in our Consolidated Statements of Earnings. The adoption of this statement had no impact on net earnings or cash flows or on compliance with any of our financing arrangements.

            In May 2003, the Emerging Issues Task Force (EITF) reached consensus on EITF No. 03-04, "Determining the Classification and Benefit Attribution Method for a 'Cash Balance' Pension Plan" requiring certain cash balance pension plans to be accounted for as defined benefit plans.  Specifically, EITF 03-04 requires that actuarially determined pension expense for cash balance plans that have fixed-interest crediting rates and are not pay-related, be accounted for using the traditional unit credit method of accounting.  We have historically accounted for our cash balance plans as defined benefit plans.  However, because our cash balance plans have variable interest crediting rates and are pay-related, EITF 03-04 is not applicable to us.

Investments in Variable Interest Entities

            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 evaluating, identifying and reporting of variable interest entities (VIEs), including entities more commonly referred to as special purpose entities or SPEs.  FIN 46 requires the consolidation of certain VIEs if a company is deemed the 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. The consolidation requirements applicable to Cummins were originally effective for all periods beginning after June 15, 2003.

            On October 7, 2003, the FASB issued a FASB Staff Position (FSP), FSP No. Fin 46-e.  This FSP deferred the effective date of FIN 46 to periods ending after December 15, 2003 for public companies related to interests in entities meeting the following criteria:

• The interest was acquired before February 1, 2003

• The public entity has not issued financial statements reporting that variable interest entity in accordance with FIN 46

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We currently participate in four entities that have been identified as VIEs, two of which are currently consolidated.  Two of the entities are parties to our sale of receivables program as described in Note 4 of our 2002 Annual Report on Form 10-K.  Although we are still assessing the impact of FIN 46 on these entities, we believe we will still consolidate Cummins Receivables Corporation (CRC) and do not believe we are the primary beneficiary of the receivable securitization conduit to which CRC sells beneficial interests in its receivables.  At September 28, 2003, there were no amounts outstanding under our receivables securitization facility.

We are still evaluating the impact of FIN 46 on the VIE that is a party to the sale leaseback transaction involving our ISX assembly equipment more fully discussed in Note 18 of our 2002 Annual Report on Form 10-K.  Our maximum potential loss related to this entity is limited to our $9 million residual value guarantee.

We are also still evaluating the impact of FIN 46 on Cummins Capital Trust I (the Trust), the consolidated Trust that issued our Convertible Preferred Securities as more fully described in Note 9 of our 2002 Annual Report on Form 10-K.  Pursuant to FIN 46, it could be determined that (1) the Trust is a variable interest entity and (2) the Company is not the primary beneficiary of this Trust.  If such determinations are made, the Company would be required to de-consolidate the trust effective December 31, 2003.  The impact to Cummins of the deconsolidation would be that (1) the subordinated debentures between Cummins and the Trust would be reported as a component of Long-term debt in our Consolidated Statements of Financial Position (today they are identified as Preferred Securities but classified as a long-term liability), and (2) the total amount of our liabilities could increase by the amount of our equity investment in the Trust ($9 million).  This change would not impact the Trust's obligations to the preferred shareholders nor Cummins' obligations to the Trust.

                We have investments currently accounted for under the equity method that are potential VIEs under FIN 46.  In addition, we guarantee the obligations of certain North American distributors where we do not own an interest.  We are in the process of performing an analysis to determine the proper reporting treatment under FIN 46 for each of our joint ventures and equity method investments, primarily in our Engine business, investments in certain of our North American distributors and distributors for which we guarantee a portion of their debt.  These entities are further discussed in Note 4 of our 2002 Annual Report on Form 10-K.  Sales to these entities are disclosed as sales to related parties in our Consolidated Statements of Earnings.  Purchases from these entities are also disclosed in Note 4.  The amount of income related to these entities is disclosed on our Consolidated Statements of Earnings as "Joint Ventures and alliances income."  We believe our maximum exposure to losses related to these entities is limited to the amount of our investment ($319 million at September 28, 2003) and our guarantees on the obligations of certain of our distributors (See Note 10) as we have no requirements to fund losses, if any, of these entities.  We do have an obligation to fund certain working capital requirements of Consolidated Diesel Corporation as more fully discussed in Note 5 of our 2002 Annual Report on Form 10-K.  

Note 2.  Restatement of Prior Period 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 and nine-month information previously reported for the period ended September 29, 2002.  The accompanying financial statements reflect adjustments made to our previously reported information for the quarter and nine months ended September 29, 2002. These adjustments result from the 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:

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            1.          Adjustments stemming from the unreconciled accounts at our manufacturing locations referred to above. These adjustments did not have a material effect on the quarter or nine months ended September 29, 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 SAB 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 items in this category include adjustments to obligations associated with marketing programs and an interest accrual adjustment previously disclosed.

                        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.  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.

                        c.          Corrections to previously reported restructuring charges. These adjustments primarily relate to the timing of when certain charges were accrued or when excess reserves were reversed back into earnings as a result of changes in estimates for restructuring actions. The adjustments to our charges related to timing of recognition of certain employee related costs in restructuring actions. US GAAP requires that these costs be accrued only after a specific announcement to employees. We accrued certain costs after management made the decision to terminate employees but prior to an announcement meeting the specificity required by US GAAP. With regard to the excess reserve adjustments, we previously reversed excess restructuring reserves at the time the associated restructuring plan was substantially complete. The adjustment was made to reverse the reserve in the period in which it was determined to be in excess, as required under US GAAP.

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The following tables show the effect of the restatement adjustments on our financial statements for the three months and nine months ended September 29, 2002 as previously reported in our Form 10-Q for that period:

Note 3.  Restructuring, Asset Impairment and Other Charges

            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. For the year, the charge was partially offset by a $6 million reversal of excess 2000 restructuring reserves, a $5 million reversal of excess 2001 restructuring reserves and a recovery of $3 million from a non-recurring charge originally taken in 2000. 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 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 December 31, 2002 approximately 200 salaried and 350 hourly employees had been separated or terminated under this plan. 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 were not significant. The demographics of the workforce that was terminated differed from original expectations.  As such, costs were $1 million lower than the original estimates and the amount was reversed to income in the fourth quarter of 2002.  As of September 28, 2003, approximately $1 million remained accrued related to this action. The majority of this action was completed by September 28, 2003 and we expect to complete the remaining items by the end of 2003.   

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Note 4.  Other (Income) Expense

The major components of other (income) expense, net included in our Consolidated Statements of Earnings are shown below:  

Note 5.  Issuance of Stock Based Compensation

In September 2003, our shareholders approved the 2003 Stock Incentive Plan.  The Plan allows for the granting of up to 2.5 million stock based awards to executives and employees.  Awards available for grant under the plan include, but are not limited to, stock options, stock appreciation rights, performance shares, restricted stock and other stock awards.  In February, we granted, subject to shareholder approval of the Stock Incentive Plan, 528,740 stock options and 279,800 performance shares under this plan.  The grants became effective upon shareholder approval of the plan in September. 

The stock options were granted with a strike price equal to the fair market value of the stock on the date of grant.   The options have a ten year life.  As discussed in Note 1, we now account for stock options under the fair value method as preferred by SFAS 123. 

The options vest in February 2005 and thus the related compensation expense is being amortized ratably over the 17 month vesting period.  The amount of compensation expense recorded in the third quarter is not material.

The performance shares were granted as target awards and are earned based on Cummins' return on equity (ROE) performance during the 2003-2004 period.  A payout factor has been established ranging from zero to 100% of the grant based on the actual ROE performance during the two year period.  Any shares earned are then restricted for one additional year (until February 2006).  Employees leaving the corporation prior to February 2006 would forfeit their shares.  Compensation expense is recorded ratably over the period until the shares become unrestricted.  The shares are valued based on the market price of the stock on the date the plan was approved by shareholders.  Compensation expense is recorded based on the amount of the award expected to be earned under the plan formula and adjusted each reporting period based on current information.  The amount of expense recorded in the third quarter of 2003 is not material. 

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Note 6.  Power Rent Leasing Transaction

The Power Rent leases are described in detail in Note 18 of our 2002 Annual Report on Form 10-K.  In September 2003, the Company entered into a new lease for approximately $34 million of equipment.  This new lease essentially represented a refinancing of equipment already on lease from a different lessor.   Approximately $1 million of the equipment was new equipment that had never been previously leased.  Approximately $13 million of the equipment was held by the Company for a short period of time due to a delay in procuring the new lease.  The remainder of the equipment was transferred from the old lessor to the new lessor.  The new lease has a two year minimum term with monthly payments of approximately $334,000.  Cummins may extend the lease for four six-month renewal terms.  At the end of the minimum lease term or any renewal terms, we may either extend the lease (subject to a maximum lease term of 48 months after which any renewal would be renegotiated), purchase the equipment based on rates derived from the equipment's expected residual value or arrange the sale of the equipment to an unrelated third party for fair market value.  When the equipment is sold, we are obligated to pay the lessor the difference, if any, between the sale proceeds of the equipment and the lessor's unamortized value subject to maximum amounts ranging from 64% to 74% of the equipments original cost.  The lease is classified as an operating lease.  Because the majority of the equipment essentially transferred from one lessor to a new lessor, there was no gain or loss recorded by the Company as a result of this transaction. 

Note 7.6.  Borrowing Arrangements

We had $125 million of 6.25% Notes that 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 increase in our long-term debt from December 31, 2002 is primarily related to borrowings outstanding under our revolving credit facility.  The amount outstanding at September 28, 2003 was $52 million compared to $0 at December 31, 2002.the Notes.

            Our debt agreements contain several restrictive covenants. The most restrictive of these covenants applies to theour $250 million 9.5% Senior Notes and our new credit facility which may, among other things, limit our 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 subject to various financial covenants including a minimum net worth, a minimum debt-to-equity ratio and a minimum interest coverage ratio. As of SeptemberMarch 28, 2003,2004, we were in compliance with all of the covenants under our borrowing agreements except as noted below.

            As a result of the restatement and reaudit, we delayed the filing of our Annual Report on Form 10-K for the year ended December 31, 2002, and our 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.

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            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 our 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 have cured the noncompliance under the abovementioned Indentures and are in compliance 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 our Quarterly Report on Form 10-Q for the three months ended March 31, 2003.agreements.

            In connection with the 2002 Indenture governing our 9.5% Senior Notes offering, we agreed to file an exchange offer registration statement with the SEC and complete that offer no later than May 19, 2003.  AsWe were unable to complete the exchange offer due to a result of the delay in filing our 2002 Annual Report on Form 10-K with the SEC,SEC.  As a result, we were unable to complete the exchange offer and became contractually obligated under the Indenture to pay an additional 0.25% per annum interest on the notes issued under that Indenture.these notes.  For each 90-day delay in the completion of the exchange offer, the interest rate on the 9.5% notes will increaseincreased by an additional 0.25% per annum up to a 1% maximum increase until such time as the exchange offer is completed.increase.  We expect to satisfycompleted our registration obligations relating to the 2002 Indenture in the near term, following whichfirst quarter of 2004 and the incremental interest and dividend payments will bewas 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 hadwas previously filed and hadwith the SEC.  The registration statement was 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, thisthe suspension of the resale prospectus 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, byafter the filing of our 2002 Annual Report on Form 10-K.

As discussed in Note 8.  Business Segments2, our total debt increased by $112 million as of March 28, 2004, due to the consolidation of three joint ventures under FIN 46R.  Included in this amount is an $85 million term loan at CDC with a financial institution.  The loan is due in annual installments, with a final payment due in 2008.  Interest is payable semi-annually at a rate of 6.92 percent.  The note is collateralized by substantially all of CDC's inventory and Geographic Information fixed assets with a current book value of $21 million and $188 million, respectively, as of March 28, 2004.

Note 7.  Pension and Other Postretirement Benefits

We have four reportable business segments: Engine, Power Generation, Filtrationseveral contributory and noncontributory pension plans covering our U.S. employees and employees in certain foreign countries.  Generally, hourly employee pension benefits are earned based on years of service and compensation during active employment while future benefits for salaried employees are determined using a cash balance formula. The level of benefits and terms of vesting, however, may vary among plans. Pension plan assets are administered by trustees and are principally invested in equity securities and fixed income securities.  It is our policy to make contributions to the various plans in accordance with statutory funding requirements and any additional funding that may be deemed appropriate. Plan liabilities and the market-related value of our plan assets are determined based on a November 30 measurement date.

            On January 1, 2004, we merged eleven defined benefit pension plans into a single plan.  The merger had no material impact to our results of operations, financial position or cash flows.

             Our postretirement benefit plans provide various health care and life insurance benefits to eligible employees who retire and satisfy certain age and service requirements and their dependents. The plans are contributory and contain cost-sharing features such as deductibles, coinsurance and spousal contributions. Company contributions are limited by formulas in each plan.  Retiree contributions for health care benefits are adjusted annually and we reserve the right to change benefits covered under these plans. There were no plan assets for the postretirement benefit plans as our policy is to fund benefits and expenses for these plans as claims and premiums are incurred. Plan liabilities are determined based on a November 30 measurement date.

             Effective December 31, 2003, we adopted Statement of Financial Accounting Standard No. 132 "Employers Disclosures about Pensions and Other Postretirement Benefits (SFAS 132R).  This standard requires the disclosure of components of net periodic benefit costs recognized during interim periods. 

            The components of net periodic pension and International Distributor.  Our business segments are organized accordingpostretirement expense under our plans consisted of the following ($ millions):

During the first quarter of 2004, we contributed approximately $23 million to our pension plans and paid $8 million of postretirement benefits.  We presently anticipate contributing an additional $102 million to our pension plans and paying an additional $55 million in claims and premiums for postretirement benefits during the remainder of 2004.  These contributions and payments include payments from Company funds to either increase pension plan assets or to make direct payments to plan participants.   

            In January 2004, the FASB issued FASB Staff Position No. FAS 106-1 , "Accounting and Disclosure Requirements Related to the productsMedicare Prescription Drug, Improvement and markets each segment serves.  This typeModernization Act of reporting structure allows management to focus its efforts on providing enhanced service2003 (FSP 106-1) in response to a wide rangenew law regarding prescription drug benefits under Medicare  providing a federal subsidy to certain sponsors of customers.retiree health care benefit plans.  Currently, SFAS 106, "Accounting for Postretirement Benefits Other Than Pensions," requires that changes in relevant law be considered in current measurement of postretirement benefit costs.  We have historically used Segment EBIT (definedare evaluating the impact of the new law and will defer its recognition, as profit before interest, taxes, minority interest, preferred dividends and cumulative effect of accounting change) and return on average net assets (excluding debt, taxes and minimum pension liability adjustment) as the primary bases for the chief operating decision maker, our Chairman and Chief Executive Officer, to evaluate the performance of each of our business segments. As a result, no allocation of debt-related items, minimum pension liability or income taxespermitted by FSP 106-1, until authoritative guidance is made to the individual segments. The segment information below for 2002 has been restated to reflect the adjustments described in issued. 

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 28, 2003 and September 29, 2002 is shown below:

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The tables below reconcile the segment information to the corresponding amounts in the Consolidated Financial Statements:

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Note 9.  Comprehensive Earnings 

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

Note 10.8.  Contingencies, Guarantees and Environmental Compliance

            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. 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 we entered into with the EPA, the U.S. Department of Justice and the California Air 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.

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.  The standards were established in a consent decree that we entered into with the EPA, the U.S. Department of Justice and the California Air Resources Board (CARB) in October 1998 along with other diesel engine manufacturers.  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

We have entered into an operating agreement with Citicorp Leasing, Inc. pursuant to which we agreeda financial institution that requires us to guarantee revolving loans, equipment term loans and leases, real property loans and letters of credit made by Citicorp Leasing, Inc.the financial institution to certain independent Cummins and Onan distributors in the United States, as well asand to certain distributors in which we own an equity interest. Under the terms of the operating agreement, our guarantee of any particular financing will beis 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 tocould borrow absent ourfrom the financial institution without Cummins guarantee.

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            In            Under the event thatterms of the operating agreement, if any distributor is in default under any financing or if we default on one of ourunder the financial covenants underof our $385 million revolving credit agreement, then we will be required to guarantee the entire amount of each financing under the terms of the operating agreement. In addition, by January 31, 2004 we are required to issue a letter of credit or purchase credit insurance covering distributor borrowings in excess of their borrowing base; otherwise we will be subject to a ratings trigger.  Under the ratings trigger, we could be required to guarantee the entire amount of each financing iffinancing. If our senior unsecured debt has a credit rating of less than "Ba2" from Moody's or less than "BB" from Standard & Poor's, of less than "BB" or a Moody's rating of less than "Ba2".  Also, 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 to Citicorp Leasing, Inc.the financial institution a monthly fee equal to 0.50%0.50 percent per annum on the daily average outstanding balance of each financing arrangement under the operating agreement.arrangement. Further, in the event thatif any distributor defaults under a particularany financing arrangement, then we will also be required to purchase the assets of that distributor.

            In January 2004, we issued letters of credit to the financial institution in the aggregate amount of $30 million, covering distributor that secure its borrowings underin excess of their borrowing base. As a result, we are no longer subject to the financing arrangement.credit ratings trigger contained in the operating agreement provided we maintain and annually renew this letter of credit.

            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 SeptemberMarch 28, 2003,2004, we had $25.1$25 million of guarantees and $30 million of letters of credit outstanding under the operating agreement relating to distributor borrowings of $227.3$85 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 September 28, 2003, we had $10.3 million of guarantees outstanding under these guarantee agreements relating to distributor borrowings of $20.6 million.

Residual Value Guarantees

            As more fully discussed in our 20022003 Annual Report on Form 10-K, we have various residual value guarantees on equipment leased under operating leases.  The amounts of those guarantees at SeptemberMarch 28, 20032004, are summarized as follows:

Other Guarantees

            In addition to the guarantees discussed above, from time to time we enter into other guarantee arrangements, including non-U.S. distributor financing, guarantees of third party debt and other miscellaneous guarantees. The maximum potential loss related to these other guarantees is $7.4$21 million at SeptemberMarch 28, 2003.2004.   

There were no significant new guarantee arrangements enteredNote 9.  Other (Income) Expense, net

The major components of other (income) expense included in the Consolidated Statements of Earnings are shown below:

Note 10.  Comprehensive Earnings (Loss)

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

Note 11.  Earnings (Loss) 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. The calculation of diluted EPS reflects the potential dilution that occurs if options or securities are exercised or converted into during 2003, thuscommon stock and the amounteffect of the liability recordedexercise or conversion reduces EPS.  We exclude shares of common stock held by our Retirement Savings Plan in the Employee Benefits Trust from weighted-average number of 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 (loss) per share:

            The weighted average diluted common shares outstanding for the three months ended March 30, 2003, exclude the effect of 6.3 million shares attributable to the conversion of our Preferred Securities of Subsidiary Trust because the effect was antidilutive.

The weighted average diluted common shares outstanding for the three months ended March 28, 2004 and March 30, 2003, excludes the effect of approximately 1.1 million and 5.6 million common stock options, respectively, since such options have an exercise price in excess of the average market value of Cummins common stock for those quarters.

Note 12.  Operating Segments 

            We define operating segments as components of an enterprise about which separate financial information is available that is evaluated regularly by our chief operating decision maker (CODM), or decision making group, in deciding how to allocate resources and in assessing performance. Our CODM is the Chief Executive Officer.

            Our reportable operating segments consist of the following: Engine, Power Generation, Filtration and Other and International Distributors. This reporting structure is organized according to the products and markets each segment serves. This type of reporting structure allows management to focus its efforts on providing enhanced service to a wide range of customers.   A description of each operating segment is included in Part I of our 2003 Annual Report on Form 10-K.

            Prior to January 1, 2004, intersegment transfers between the Engine segment and the Power Generation segment and between the Filtration and Other segment and the Engine segment were reported at cost and no sale was reported by the transferor segment.  Effective January 1, 2004, this intersegment activity was reflected in the sales of the transferor segments at a market-based transfer price discounted for certain items; further, certain intersegment cost allocations to the transferor segments have been eliminated.  We believe this change allows our segment management to focus on those pricing decisions and cost structuring actions that are within their control.  The net impact of these changes did not significant.have a material effect on segment EBIT for any of our segments.

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            We use segment EBIT (defined as earnings (loss) before interest, taxes, minority interests, preferred dividends and cumulative effects of change in accounting principles) as the primary basis for our CODM to evaluate the performance of each operating segment. Segment amounts exclude certain expenses not specifically identifiable to segments.

            The accounting policies of our operating segments are the same as those applied in the Consolidated Financial Statements. We prepared the financial information of our operating segments on a basis that is consistent with the manner in which we internally disaggregate financial information to assist in making internal operating decisions. We have allocated certain common costs and expenses, primarily corporate functions, among segments differently than we would for stand-alone financial information prepared in accordance with GAP. These include certain costs and expenses of shared services, such as information technology, human resources, legal and finance. We also do not allocate debt-related items, minimum pension liabilities or income taxes to individual segments.  Our definition of segment EBIT may not be consistent with measures used by other companies.

            A summary of operating results and net assets by segment for the three-months ended is shown below:      

            A reconciliation of our segment information to the corresponding amounts in the Consolidated Financial Statements is shown in the table below as of and for the three months ended:

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

The Management's Discussionfollowing is management's discussion and Analysisanalysis of Financial Conditionthe interim financial results, liquidity and  Resultscapital resources, financial covenants and credit ratings, off balance sheet arrangements, financial guarantees, critical accounting policies and other key items related to our business and performance. Our objective is to provide investors and readers with an understanding of Operations has been revisedthe key variables and other qualitative and quantitative factors that are unique to reflect the restatementour business and that management focuses on in evaluating and measuring our financial performance and financial condition. We will discuss and analyze significant known trends, demands, commitments, events and uncertainties that we believe are important to an understanding of our business. In addition, we will provide a quarter-over-quarter discussion and analysis of our consolidated operating results and a similar discussion of our business segment results and sales to geographic markets. This section should be read in conjunction with our Consolidated Financial Statements forand related notes in the period ended September 29, 2002 as"Financial Statements" section of our 2003 Annual Report on Form 10-K.  As discussed below under Business Segment Results and in Note 2 of11 to the Consolidated Financial Statements.  We recommend that you read Note 2 of the Consolidated Financial Statements, in conjunction with this Management's Discussion and Analysis. 

Overview

Cummins net earningsall first quarter 2004 intersegment activity reflects a change to market-based transfer pricing effective January 1, 2004.  Due to impracticability, Business Segment results for the thirdprior year quarter 2003have not been restated for this change.  All references to per share amounts are diluted per share amounts. Certain prior year amounts included in this section have been reclassified to conform to the current year presentation. At the end of this section, we have also provided a business outlook.

EXECUTIVE SUMMARY

      Cummins is a global power leader comprised of four reportable complementary business segments: Engine, Power Generation, Filtration and Other, and International Distributors. Our businesses design, manufacture, distribute and service diesel and natural gas engines and related technologies, including fuel systems, controls, air handling and filtration, emissions solutions and electrical power generation systems. Our products are sold to original equipment manufacturers (OEMs), distributors and other customers worldwide. Major OEM customers include DaimlerChrysler, PACCAR, International Truck and Engine Corporation (Navistar), Volvo, Komatsu, Ford, Volkswagen, and CNH Global. We serve our customers through more than 680 company-owned and independent distributor locations in 137 countries and territories. Our business units share technology, customers, strategic partners, brands and our distribution network.

Our financial performance is affected by the cyclical nature and varying conditions of the markets we serve, particularly the automotive, construction and general industrial markets. Demand in these markets fluctuates in response to overall economic conditions and is particularly sensitive to changes in the price of crude oil (fuel costs), freight tonnage, interest rate levels, non-residential construction spending and general industrial capital spending. Economic downturns in the markets we serve generally result in reductions in sales and pricing of our products and reduce our earnings and cash flow.

In the first quarter of 2004, our earnings were $24$33 million, or $0.60$0.76 per share, compared to net earningson sales of $44 million, or $1.05 per share a year ago.  Earnings from each of our four business segments declined in the third quarter 2003$1.771 billion, compared to a net loss of $31 million, or $0.79 per share, on sales of $1.387 billion in the first quarter of 2003.  The improvement in earnings in the first quarter of 2004 compared to the prior year ago.  Last year, resultsquarter was generated by the performance of our Engine Business segment benefited from accelerated purchaseswhich experienced increased demand across nearly all engine markets, particularly the North American heavy-duty truck market.  The increase in sales comes after a long period of uncertainty which included a recessionary economy and weak recovery, a sales "spike" as OEMs (original equipment manufacturers) and fleets "pre-bought" a large number of engines to avoid federally mandated EPA controls for engines made after October 2002, and then a decline in demand for new models, starting late in 2002.  Sales in the first quarter of 2004 also increased in each of our other business units compared to the first quarter of 2003 reflecting substantial improvement in demand and business conditions.

Earlier this year, we extended the availability of our Uptime Guarantee Program for our EPA-certified heavy-duty truck engines to include engines placed in service through December 31, 2004.  The guarantee covers our ISX and ISM engines for the first 12 months of operations and reimburses customers for up to three day's truck rental for any failure that cannot be repaired within 24 hours.  We have sold over 46,000 EPA-certified heavy-duty engines prior tothat have accumulated over 2.6 billion miles of service.  Our share of the new October 1, 2002 emissions standards.  This yearNorth American heavy-duty truck market has improved several percentage points in recent months based upon data published by an independent market research firm.  We believe this increase in market share indicates our customers are confident about the technology, performance and reliability of Cummins engines.   

Our Power Generation business reached breakeven resultshas been adversely affected by excess inventory in the market coupled with extreme pricing pressure and low volumes during the thirdpast two years.  The weakness in the commercial generator set market was partially offset by improved sales of our mobile generator sets to the recreational vehicle market.  During the first quarter while results at ourof 2004, progress in the economic recovery resulted in solid growth in the commercial markets with increased demand for mid-sized and large generator sets providing improved performance in this business segment.  Our Filtration and Other Business achieved significant sales growth in the first quarter of 2004 and our International Distributor Business reported increased sales in nearly all of its distributor locations.  Net sales and earnings of our joint ventures and alliances also increased significantly in the first quarter of 2004 compared to 2003, primarily from the expansion of our joint venture in China, Dongfeng Cummins Engine Company, in the second quarter of 2003.

            In January 2004, we entered into a new three year credit facility program involving sales of our accounts receivables.  Under the program, we sell an interest in a designated pool of trade receivables to a new, wholly-owned special purpose subsidiary.  The program replaces a similar program except the financial institution purchases a direct interest in the receivables rather than funding the purchase of receivables through commercial paper conduits.  The maximum amount of receivables outstanding is limited to the lesser of $200 million or the amount of qualifying receivables held by the subsidiary.  The sale of receivables in the first quarter of 2004 was not significant.            

            In February 2004, we commenced and completed an offer to exchange new 9.5% Senior Notes due 2010 (the "new notes") for all of our outstanding unregistered 9.5% Senior Notes due 2010 (the "original notes").  We offered and sold the original notes in a private placement in November 2002 and they were slightly below earnings reported last year. not registered under the Securities Act of 1933 at that time.  The new notes are registered, have substantially the same terms and conditions as the original notes and are free of the transfer restrictions that applied to the original notes.  The interest rate on the original notes was 9.5% (10.5% at the time of the exchange) and the interest rate on the new notes is 9.5%.

On a year-to-date basis,March 28, 2004, we adopted certain provisions of Financial Accounting Standards Board (FASB) Interpretation No. 46 (revised December 2003), "Consolidation of Variable Interest Entities," (FIN 46R) which were effective in the first quarter of 2004.  The interpretation resulted in the balance sheet consolidation of three joint venture entities previously reported under the equity method of accounting.  The financial impact of consolidating these entities increased total assets by $294 million and total debt by $112 million.  The consolidation is not expected to impact our net earnings or any of our debt covenants in future periods.  Sales for these entities were $643 million in 2003.  When results of these entities are consolidated in our ConsolidatedStatements of Earningsbeginning in the second quarter of 2004, a significant amount of their sales will be eliminated.  If we had consolidated their sales in 2003, total sales would have increased approximately $170 million.    

RESULTS OF OPERATIONS

Net Sales

            The table below sets forth net sales for each of our key business segments during the comparative interim periods:

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Sales increased in all of our business segments in the first quarter of 2004 compared to the prior year quarter, with over half of the increase occurring in the Engine Business, up 40 percent (sales increased $89 million after the change in transfer pricing).   Engine Business sales increased primarily due to higher heavy-and medium-duty truck engine shipments, increased shipments to Chrysler of midrange engines for the Dodge Ram truck and increases in engine volumes for industrial applications.  Power Generation sales increased 38 percent compared to the prior year's quarter, buoyed by strong consumer demand for generator sets manufactured for RVs and higher demand across most other market segments.  Filtration and Other Business sales increased 37 percent (sales increased $47 million after the change in transfer pricing) primarily from OEMs.  Sales in the International Distributor business increased 26 percent with approximately half of the increase due to the impact of foreign currency exchange rates. 

Gross Margin

Our gross margin was $345 million in the first quarter of 2004 compared to $218 million in the first quarter of 2003, with related gross margin percentages of 19.5 percent and 15.7 percent, respectively. The increase in gross margin was primarily a result of the increased volumes across all of our business segments ($87 million), absorption impact on fixed manufacturing costs from higher North American automotive shipments ($33 million), and the favorable impact of currency exchange rates ($12 million).  The increase was partially offset by an adjustment for increased product coverage costs related to extended warranties on a specific group of older products ($5 million) and the impact of higher commodity prices.  

Selling and Administrative Expenses

Selling and administrative expenses were $223 million (12.6 percent of net sales) in first quarter 2004 compared to $195 million (14.0 percent of net sales) in the prior year quarter, or an increase in absolute dollars of $28 million.   Included in the increase is approximately $11 million from the impact of foreign currency rate changes at our foreign locations.  Approximately $17 million of the total increase was related to selling expenses and $11 million to administrative expenses.  The increase in selling expense was primarily attributable to increases in packaging, warehouse, and transportation costs from higher sales volume ($5 million), higher compensation expense from incremental sales staffing to support growth initiatives ($4 million), increases in fringe expenses including pension costs ($2 million), increases in variable incentive compensation due to higher earnings ($2 million) and other volume variable expenses that individually are not material. 

The increase in administrative expenses primarily results from increases in consulting services including those related to the implementation of Sarbanes-Oxley Act requirements ($2 million), increases in variable incentive compensation ($4 million), increase in bad debt expense from a customer bankruptcy ($2 million) and other miscellaneous items that individually were not significant. 

Research and Engineering Expenses

Research and engineering expenses were $56 million (3.2 percent of net sales) in first quarter 2004 compared to $47 million (3.4 percent of net sales) in first quarter 2003, or an increase of $9 million.  Most of the increase was attributable to increased variable compensation as a result of improved earnings ($5 million), development costs of European Tier II high horsepower engines partially offset by decreased spending for midrange product launches in late 2003 ($1 million), higher development costs related to filtration products ($2 million) and other expenses that individually were not material.  Included in the increase was approximately $1 million attributable to the impact of foreign currency rate changes at foreign locations. 

Equity, Royalty and Other Income from Investees

Earnings from our joint ventures and equity method investees were $18 million in the first quarter of 2004, compared to $7 million in the first quarter of 2003, or an increase of $11 million. The increase was attributable to improved earnings across most of our joint ventures, primarily Dongfeng Cummins Engine Company Ltd. ($7 million) where demand remains strong after expanding the joint venture agreement in the second quarter of 2003 and our North American distributor joint ventures ($3 million), partially offset by losses from Chongqing Cummins Engine Company Ltd. ($3 million) due to a pension liability adjustment.  Income from royalties and technical fees were $1 million in the first quarter of 2004.

Interest Expense

Interest expense was $27 million in the first quarter of 2004, compared to net earnings of $36$20 million in 2002.the first quarter of 2003.   The decline in earnings for the third quarter and nine months of 2003 compared to 2002$7 million increase is primarily attributable to lower sales volumethe adoption of SFAS No. 150, effective July 1, 2003, which required dividends on our preferred securities to be prospectively classified as interest expense in our heavy-duty engine business, increased pension and postretirement benefits, up $26 million and higherConsolidated Statements of Earnings (see Note 1, Recently Adopted Accounting Pronouncements).  Compared to the prior year, interest expense resulting from increases in our borrowing rates and debt levels.  Interest expense, including dividends on our preferred securities, is up $5increased $1 million, primarily related to interest on capital leases for information technology equipment.  In our Consolidated Balance Sheets, the preferred securities were previously classified between long-term debt and shareholders' equity and are now classified as long-term debt.

The amount of interest paid in the first quarter of 2004 and 2003 was $33 million and $28 million, respectively.

Other Income and Expense

Other income and expense was a net expense of $6 million in the thirdfirst quarter 2003 compared to 2002 and is up $16 million for the first nine months of 2003.        

Worldwide net sales in the third quarter of 2003 were $1.634 billion, slightly below sales levels of $1.648 billion in the third quarter of 2002.  Sales in each of our four businesses increased during the third quarter 2003 compared to 2002 with the exception of the Engine Business.  Sales in the Engine Business were down $91 million, or 9 percent2004 compared to a year ago reflecting the favorable impactnet income of the October 2002 pre-buy activity.  Power Generation sales were up $48$7 million or 15 percent, Filtration and Other sales were up $19 million, or 8 percent, and International Distributor sales increased $22 million, or 14 percent.  Net sales for the first nine months of 2003 were $4.560 billion, up $121 million, or 3 percent, compared to sales of $4.439 billion in the first nine months of 2002 with increases across all of our segments except the Engine Business.     

Net Sales Summary

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

Net sales for the Engine Business were $942 million in the third quarter 2003, down $91 million, or 9 percent, compared to net sales in the third quarter of 2002.  Most of the sales decrease is heavy-duty truck related as discussed below.  Sales in the Power Generation Business were $363 million, up $48 million, or 15 percent compared to a year ago.  Sales of the Filtration and Other Business were $255 million, an increase of $19 million, or 8 percent, compared to 2002, reflecting improvement in original equipment manufacturers (OEMs) and aftermarket demand.  Sales of the International Distributor Business were $174 million, up $22 million, or 14 percent, compared to third quarter 2002 sales, reflecting strong improvement in parts, service and power generator sales.   

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            On a year-to-date basis, Engine Business sales were down $12 million, or less than 1 percent, primarily automotive related, as industrial engine sales increased 1 percent.  Power Generation sales were up $35 million, or 4 percent, primarily due to strong third quarter sales.  Sales of the Filtration and Other business were up $67 million, or 9 percent, in the nine months of 2003 compared to a year earlier reflecting some improvement in demand and increased market share.  International Distributor sales were up $58 million, or 14 percent, year-over-year with modest improvement in engine, parts and service sales across most geographic regions.

Gross Margin

Our gross margin was $293 million, (17.9 percent of net sales), in the third quarter of 2003, compared to $313 million, (19.0 percent of net sales), in the third quarter of 2002.  The overall decline in gross margin percent is primarily driven by a decrease in the margins of our Engine Business, down .9 percent compared to the prior year's quarter.  Third quarter 2002 margins were favorably impacted by higher volumes and the sales mix of heavy-duty engines in the pre-buy period prior to the October 1, 2002 new emissions standards.  Heavy-duty engines sold during the pre-buy period were mature products with a lower cost structure and in conjunction with the increased pre-buy volumes resulted in a higher absorption of fixed manufacturing costs compared to the current quarter.  Our new emission compliant engines, which began shipping in the fourth quarter of 2003, have typically lower margins during introduction.  In addition, market demand for heavy-duty engines was adversely impacted by the higher volumes of the 2002 pre-buy period which resulted in lower production volumesincome in 2003, and lower absorption of manufacturing costs in our plants.  Increases in pension and postretirement benefits expense also hador a negative impact on our margins in the third quarter.  

Product coverage costs were $54$13 million or 3.3 percent of net sales, in the third quarter 2003, compared to $59 million, or 3.6 percent of net sales, a year ago.decrease. Most of the decline in product coverage expense quarter-over-quarter was directly related to lower sales volumes of heavy-duty engines.  Excluding product coverage costs, gross margin for the quarter was $347 million, (21.2 percent of net sales), compared to $372 million, (22.6 percent of net sales), in the third quarter last year.

Gross margin for the first nine months of 2003 was $787 million, or 17.3 percent of net sales, compared to $823 million, or 18.5 percent of net sales, in the first nine months of 2002.  The decline in gross margin percent year-over-year is primarily attributable to the higher sales mix of new emissions compliant engines that experience lower margins during product introduction, lower volumes resulting in under absorption of fixed manufacturing costs and higher pension and postretirement benefits expense.

Selling and Administrative

Total selling and administrative expenses were $208 million, (13 percent of net sales), in the third quarter 2003 compared to $189 million, (12 percent of net sales), in the third quarter 2002.  Approximately $11 million of the increase was related to selling expenses and $8 million was related to administrative expenses.  The increase in selling expenses is primarily attributable to funding of growth initiatives in our filtration business ($4 million), increased compensation expense from incremental sales staffing ($2 million), the impact of unfavorable exchange rate differences ($4 million), increased pension expense ($6 million) and other volume variable items that individually are not material.  The increase in administrative expenses resulted from increased software amortization ($2 million), legal settlements ($1 million) and other items that individually are not material.       

Selling and administrative expenses during the first nine months of 2003 were $603 million, or 13 percent of sales, compared to $564 million, or 13 percent of sales, in the first nine months of 2002.  The majority of the increase is attributable to a number of factors, including funding of growth initiatives, primarily in the filtration business ($8 million), the impact of changes in exchange rates ($8 million),  increased audit fees ($7 million), increased pension expense ($11 million) and other items.   

Research and Engineering Expenses

Total research and engineering expenses were $51 million, (3 percent of net sales), in the third quarter 2003 compared to $53 million, (3 percent of net sales), last year.  Most of the decrease is a result of completing a majority of the development work on our new emission compliant heavy-duty engines in 2002 and reduced spending on new midrange products introduced last year.

Research and engineering expenses during the first nine months of 2003 were $148 million, (3 percent of sales), compared to $164 million, (4 percent of net sales), in the first nine months of 2002.  A majority of the decrease is attributable to completionan impairment write-down of development work on our 2002 emissions compliant productsa cost method investment in a private emissions-related technology company ($5 million), foreign currency exchange losses ($4 million) and reduced spending associated with funding pre-production research on engines produced by our European Engine Alliance (EEA) joint venture. 

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Results of Joint Ventures and Alliances

Our earnings from joint ventures and alliances were $20 million in the third quarter 2003, compared to $9 million a year ago.  On a year-to-date basis earnings from joint ventures and alliances were $44 million in the first nine months of 2003, compared to $16 million in the first nine months of 2002, or a $28 million improvement.  The increase in quarter-over-quarter and year-over-year results from improved earnings at most of our joint ventures, primarily domestic distributorships and a significant increase from our recently expanded joint venture in China, Dongfeng Cummins Engine Co. Ltd., a supplier to China's second largest truck manufacturer. 

Interest Expense

Interest expense was $25 million in the third quarter of 2003 compared to $15 million in the third quarter last year.  For the first nine months of 2003, interest expense was $65 million compared to $44 million a year ago.  The increase in quarter-over-quarter and year-over-year interest expense reflects the higher costs of borrowed funds, specifically the issuance of our 9.5% Senior Notes in November, 2002 and higher borrowing levels.  In addition, $5 million of third quarter dividends on our preferred securities are now classified as interest expense, effective July 1, 2003, in accordance with a new accounting standard issued by the Financial Accounting Standards Board (see Recently Adopted Accounting Pronouncements below).    

Cash payments of interest for the first nine months of 2003 and 2002 are disclosed in the Consolidated Statements of Cash Flows. 

Other (Income) Expense

Other income was $7 million in the third quarter 2003 compared to $3 million of income in the third quarter of 2002, or a $4 million increase.  On a year-to-date basis, other income was $17 million compared to $10 million a year ago.miscellaneous non-operating items.  The major components of other income and expense classified as either operating or non-operating, are disclosed in Note 4 of9 to the Consolidated Financial StatementsStatements.  .      

Restructuring, Asset Impairment and Other ChargesProvision for Income Taxes

            IncludedOur income tax provision in the first nine months of 2002 is a net $2 million charge for restructuring actions.  The charge was recorded in the second quarter of 2002 and2004 was comprised of a restructuring charge of $16$14 million, that was partially offset by a $6 million reversal of excess 2000 restructuring charges, a $5 million reversal of excess 2001 restructuring charges and recovery of a $3 million charge originally recorded in 2000.  The second quarter 2002 restructuring charge included $11 million attributablecompared to workforce reduction actions, $3 million for asset impairment and $2 million related to facility closures and consolidations.  Of this charge, $5 million was associated with the Engine Business, $4 million with the Power Generation Business, $3 million with the Filtration and Other Business and $4 million with the International Distributor Business.

The charge included severance costs and benefit costs of terminating approximately 220 salaried and 350 hourly employees and was 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 December 31, 2002, approximately 200 salaried and 350 hourly employees had been separated or terminated under this plan.  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 were not significant.  In the fourth quarter 2002, the number and mix of employees that were terminated under this plan differed from our original estimate.  As a result, approximately $1 million of the charge relating to severance costs and related benefits was reversed to income in that quarter.  During the third quarter of 2003 approximately $1 million related to this plan was disbursed and as of September 28, 2003, $1 million of restructuring charges remain in accrued liabilities.  We expect to complete the remaining items related to this plan by December 31, 2003.   

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            This restructuring action is expected to generate approximately $13 million in annual savings.  For the quarter and first nine months ended September 28, 2003, approximately $3 million and $9 million in savings was recognized as a reduction in Cost of goods sold in our Consolidated Statements of Earnings.

Provision for Income Taxes

We recorded an income tax provisionbenefit of $9 million in the thirdfirst quarter of 2003 compared to a $16 million tax provision recorded in the third2003.  The first quarter of 2002.  Our2004 and 2003 income tax provision for the first nine months of 2003 was $5 million compared to $15 million in the first nine months of 2002.  The third quarter and first nine months of 2003 and 2002 income tax provisionbenefit reflect an estimated annual effective tax rate of 28 percent and 25 percent, ofrespectively, on earnings (loss) before income taxes after deducting dividends on our preferred securities.  Our effective income tax rate for both 2004 and 2003 was lower than the 35 percent U.S. corporate income tax rate primarily because of reduced taxes on export sales and research tax credits.

Minority InterestInterests in Earnings of Consolidated Entities

Our minority interest fromMinority interests in our consolidated operations was $3 million in the third quarter of 2003, unchanged from the $3 million in the third quarter of 2002.  For the first nine months, earnings from minority interest were $9 million compared to $11$4 million in the first nine monthsquarter of 2002.  The decrease2004 compared to $4 million in minority interest is primarilythe first quarter of 2003. Minority interests increased slightly in the first quarter of 2004 from the effects of consolidating a non wholly-owned leasing entity in accordance with FIN 46R but were offset by lower earnings at Wuxi Holset, a 55 percent owned-subsidiary and Cummins India Limited, a 51 percent owned-subsidiary.from other non wholly-owned subsidiaries.     

Dividends on Preferred Securities

 Dividends on our preferred securities were $5$6 million in the thirdfirst quarter of 2002 and have been prospectively classified as interest expense, effective2003.  Effective July 1, 2003, in accordance with a new accounting standard issued by the Financial Accounting Standards Board (see Note 1 Recently Adopted Accounting Pronouncements).   Accordingly, for the first nine months of 2003, dividends on our preferred securities were $11 million compared to $16 million for the first nine monthsprospectively classified as interest expense in our Consolidated Statements of 2002.Earnings in accordance with a new standard (see Note 1, "Recently Adopted Accounting Pronouncements"). A description of theour obligation relating to these preferred securities is provided in Note 9, "Convertible Preferred Securities of Subsidiary Trust" of our Consolidated Financial Statements in our most recent annual report filed on Form 10-K. 

Business Segment Results

A discussion of sales and operating results for our four business segments follows.  Note 8Trust," of our Consolidated Financial Statements describesincluded in our segment reporting structure and also contains financial information relating to our business segments.2003 Annual Report on Form 10-K.

Net Earnings (Loss)

Engine Business

            The revenues and operating income for the Engine Business segment for the third quarter and first nine months interim periods were as follows:

The Engine Business shipped 82,100 engines in the third quarter 2003, a decrease of 8,500 units, or 9 percent, compared to engines shipped in the third quarter of 2002.  Most of the sales variance between periods was a result of accelerated purchases of heavy-duty engines in the third quarter of 2002 in response to the October 1, 2002 new emissions standards.  Shipments of heavy-duty engines declined 9,800 units, or 45 percent while shipments of midrange engines increased 2 percent and shipments of high-horsepower engines were flat compared to third quarter 2002.  Total engine shipments to automotive related markets were 64,000 in the current quarter compared to 73,500 units a year ago, or a decline of 13 percent.  Engine shipments to the off-highway industrial markets were 18,000 units in the third quarter of 2003, up 5 percent compared to shipments a year ago. 

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On a comparative year-to-date basis, unit shipments for the Engine Business are down 2,600 units, or slightly more than 1 percent, with shipments to automotive related markets nearly flat, and shipments to industrial markets down 2,700 units, or 5 percent.    

Earnings from Operations

Operating earnings before interest and taxes for the Engine Business in the third quarter and first nine months of 2003 were $36 million and $38 million, respectively, compared to operatingNet earnings in the thirdfirst quarter of 2004 were $33 million, or $0.76 per share, compared to a net loss of $31 million, or $0.79 per share, in the first quarter of 2003.  The improvement in earnings was primarily attributable to the absorption impact of higher North American automotive shipments and increased sales volumes across our other business segments.  Our first nine months of 2002 of $51 million and $50 million, respectively.  The decrease in operatingquarter 2004 earnings for the third quarter and first nine months resulted from lower heavy-duty engine volumes andperformance was also enhanced by higher costs associated with the launch ofearnings at our new emissions compliant products, both of which adversely affected operating results and slightlyjoint ventures, partially offset by higher selling and administrative expenses, (up $4 million), partially offset by lower product coverage costs,increased research and development expenses (down $2 million) and improvedadjustments for product coverage, investments and joint venture results. 

BUSINESS SEGMENT RESULTS

We have four reportable business segments: Engine, Power Generation, Filtration and Other and International Distributors. This reporting structure is organized according to the products and markets each segment serves and allows management to focus its efforts on providing enhanced service to a wide range of customers. We evaluate the performance of each of our business segments based on earnings at our joint ventures, (up $11 million)before interest, taxes, minority interests, and cumulative effect of accounting changes (Segment EBIT).   

A summaryPrior to January 1, 2004, intersegment transfers between the Engine segment and the Power Generation segment and between the Filtration and Other segment and the Engine segment were reported at cost and no sale was reported by the transferor segment.  Effective January 1, 2004, this intersegment activity is reflected in the sales and unit shipments of unit shipmentsthe transferor segments at a market-based transfer price discounted for certain items; further, certain intersegment cost allocations to the transferor segments have been eliminated.  We believe this change allows our segment management to focus on those pricing decisions and cost structuring actions that are within their control.  As a result of the change, first quarter 2004 Engine Business sales increased $89 million, Filtration and Other Business sales increased $47 million, Power Generation Business sales decreased $9 million and sales eliminations increased $127 million.  The net impact of these changes did not have a material effect on segment EBIT for any of our segments.

Engine Business

The net sales and segment EBIT for the Engine Business by engine classification is shownfor the comparative interim periods follows:

            Total net sales for the Engine Business increased $323 million, or 40 percent, (includes $234 million of intersegment sales in 2004) compared to sales in the table below:first quarter of 2003.  Nearly one-third of the improvement was from engine sales to North American heavy-duty truck OEMs.  Sales also increased to the medium-duty truck and bus market and strong sales demand continued for shipments of our ISB engine to Chrysler for the Dodge Ram truck.  Total automotive-related engine sales were 68 percent of total Engine Business sales in the first quarter of 2004, compared to 71 percent in the prior year quarter.

A summary and discussion of net sales for the Engine Business by market application follows:

Heavy-duty Truck

The Engine Business shipped 97,800 units in the first quarter of 2004, an increase of 24,000 units, or 33 percent (includes 18,300 units of intersegment transfers in 2004), compared to unit shipments a year ago.  A summary of shipments by engine category (including unit shipments to the Power Generation Business in 2004) during the interim periods follows:

Heavy-Duty Truck

Sales to the heavy-duty truck market were $278 million in the third quarter of 2003, down $100increased $105 million, or 2644 percent, compared to a year ago.  Unit shipments were 9,500sales in the third quarter 2003 compared to 18,500 units aprior year ago, a decrease of 9,000 units, or 49 percent.  Sales to the heavy-duty truck market during the first nine months of 2003 were down $82 million compared to 2002, or 10 percent, while unit shipments declined 31 percent compared to the prior year.quarter. The higher sales and volumes in the third quarter 2002 areincrease was primarily attributable to accelerated pre-buy activity as a result of the October 1, 2002 emissions standards change.  Unit shipments torecovery in the North American heavy-duty truck market continue to be adversely impactedevidenced by the change in the emissions standards, while unitstrong first quarter demand from OEMs.  Unit shipments of heavy-duty truck engines to international markets increased 966 percent in the thirdfirst quarter of 20032004 compared to 2003.  The variance between the sales and unit shipment percentage increases was a year ago.    

Medium-duty Truckresult of the sales mix between engines and Bus

Medium-duty truck and bus revenuesparts.  Part sales increased 21 percent in the thirdfirst quarter 2003 were down $51 million, or 27 percent below sales levels a year ago.  Revenues for the medium-duty truck market decreased 5 percentof 2004, compared to the prior year'syear quarter, while unit shipments declined 14 percent.but were a lower percentage of total sales in the first quarter of 2004.  Unit shipments to the North American medium-duty truck marketOEMs were down 50up 75 percent compared to a year ago whiledriven by the growing acceptance of our engines as truck fleets replace aging equipment.  Unit shipments of heavy-duty engines to international locations were up 24 percent, with higher sales to OEMs in Mexico.    

Medium-Duty Truck and Bus

            Sales to the medium-duty truck and bus markets increased $43 million, or 35 percent, in the first quarter of 2004 compared to the prior year quarter, reflecting strong sales increases to OEMs.  Unit shipments of medium-duty truck engines increased 117 percent in North America with strong demand from all OEMs.  Shipments of medium-duty truck engines to international markets increased 15 percent, primarily to OEMs in Latin America.  Revenues from sales of bus engines declined 70 percent compared to third quarter 2002 with most of the decline a result of lower demand from North American OEMs due to the emissions change and lower market share.  Shipments to international bus marketslocations were down 1 percent compared to the third quarter of 2002.

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Medium-duty truck and bus revenues during the first nine months of 2003 were down $83 million, or 17up 8 percent with increased shipments to the North American market down 63 percent while shipments to international markets increased 8 percent.  On a year-to-date basis, salesLatin America and Europe.  Shipments of medium-duty bus engines were down 5211 percent mostly toworldwide, with a 27 percent decline in North American OEMs as a result of the emissions change andAmerica, primarily from lower market share.share, and a 5 percent decline in international shipments. 

Light-dutyLight-Duty Automotive

Revenues from the            Sales of light-duty automotive marketengines increased $28$52 million, or 1223 percent, in the first quarter of 2004 compared to third quarter 2002 revenues.the prior year quarter.  Total unit shipments were up 19also increased 20 percent compared to the prior year with most of the increase attributable to strong demand from DaimlerChrysler partially offset by a reduction in unit shipments to the recreational vehicle market.  Total shipmentsquarter. Sales to DaimlerChrysler for the Dodge Ram truck were 34,400a record high in the thirdfirst quarter 2003, anof 2004 with shipments of over 38,000 engines, a 21 percent increase of 7,600 units, or 28 percent higher than a year ago primarily from the strong market acceptance of the new Dodge Ram pickup model.  For the first nine months of 2003, we shipped 97,400 engines to DaimlerChrysler, up 28,300 units, or 41 percent, compared to 69,100 engines shipped a year ago.  Engine sales to the recreational vehicle market were down 26 percent in the third quarter 2003 compared to the prior year quarter, driven by strong demand and Chrysler's market share improvement in truck sales. Engine shipments wereto recreational vehicle OEMs increased 17 percent year-over-year, also down 26 percent from a year ago due to the emissions standards change.   Year-to-datedriven by increased demand.  

Industrial

            Engine sales to the recreational vehicle market are off 27construction, mining, marine, agricultural, oil and gas, government, and rail markets and to our Power Generation Business were $123 million, or 52 percent compared to 2002.  While some recovery is evident in this industry and our market share has increased primarily from favorable product acceptance, the change to the new emissions standards has adversely impacted sales.

Industrial

Sales to the construction, marine and agriculture marketshigher, in the thirdfirst quarter 2003 were up $22of 2004 (includes $24 million or 13 percent,of intersegment sales), compared to the third quarter 2002prior year quarter.  Approximately 39 percent of total industrial engine shipments were to North American markets and were flat on61 percent to international markets compared to 42 percent and 58 percent, respectively, a year-to-date basis.  Worldwide shipments inyear ago.  Sales to the construction equipment market increased 833 percent compared to the third quarter of 2002year-over-year with unitengine shipments to North America relatively flat,American OEMs up 131 percent and shipments to international marketsOEMs up 12 percent, primarily to OEMs in Asia.  For the first nine months of 2003, worldwide shipments to the construction market were down 3 percent, with shipments to North American OEMs down 15 percent and shipments to international markets up 729 percent, primarily in Asia partially offset by lowerKorea and East Asia.  Engine shipments to European OEMs.  Overall demand in the construction equipment market remains weak as capital spending levels have declined due to slow economic growth.    

Shipments to the marine markets decreased 9 percent compared to third quarter 2002, and are down 18 percent year-to-date.  The decline in year-to-date marine business is primarily attributable to the formation of the Cummins Mercruiser joint venture in March 2002 with Mercury Marine, a division of Brunswick Corporation, which builds recreational marine vessels.  Engine sales for the recreational marine market are now recorded by the joint venture.  Shipments to the agricultural equipment market increased 2414 percent from thirdin the first quarter of 2002,2004 compared to the prior year quarter, with a 26 percent decline in shipments to North American OEMs that was more than offset by a 44 percent increase in shipments to international OEMs, primarily to Latin America and are up 3 percent forEuropean OEMs.  Sales of our K and Q series high-horsepower engines to manufacturers of mine equipment increased in the first nine monthsquarter 2004 compared to the prior year quarter, primarily due to higher copper and gold commodity prices, with shipments in North America up 13 percent and international shipments up 5 percent. Engine sales to the marine market increased 21 percent in the first quarter of 2004 compared to the year.  Unitprior year quarter, while unit shipments declined 10 percent reflecting a shift in sales mix to high-horsepower commercial applications.  Engine shipments to the recently entered oil and gas market increased significantly in the first quarter of 2004 compared to a low base in the prior year quarter, primarily due to market share penetration in North American market are down 24 percent during the quarter while shipments to international markets increased 86 percent,America with strong demand from OEMs in Latin America.

High-horsepower Industrial

Total salesour K series engine.  Sales of high-horsepower industrial engines were $67 millionto the government market, primarily V series military applications, decreased 14 percent in the thirdfirst quarter 2003of 2004 compared to $57 million athe prior year ago, an increase of $10 million, or 18 percent.  For the first nine months of 2003, revenues from sales of high-horsepower industrial engines are up slightly increasing 5 percent.  Sales to the high-horsepower mining market were up 20 percent in third quarter 2003 and 13 percent for the first nine months of 2003 with shipments increasing to both domestic and international regions despite a continued soft market from lower commodity prices.  High-horsepower enginequarter.  Engine sales to the rail sectorequipment market, primarily international railcar builders, increased 30 percent in the thirdfirst quarter which are primarily international sales, were down 10 percentof 2004 compared to the prior year quarter, indicating strong demand in this sector.

Segment EBIT

            Segment EBIT for the Engine Business was $40 million in the first quarter and 50 percent year-to-date while high-horsepower sales to government markets, primarily engines for military applications, were up 50 percentof 2004 compared to third quarter 2002,a $22 million loss in the prior year quarter.  The improvement in earnings was primarily a result of higher gross margin ($83 million) from increased engine volumes and up 69 percent for the first nine monthsaccompanying benefits of 2003, with increased salesfixed cost absorption at our manufacturing plants and higher earnings from joint ventures ($10 million), partially offset by increases in selling and administrative expenses ($15 million) and research and development expenses ($6 million) and other income and expense ($10 million).  The increase in joint venture income was attributable to bothhigher volumes and earnings from our recently expanded China joint venture, Dongfeng Cummins Engine Co. Ltd., and earnings from our North American distributorships. The increase in selling and international markets.administrative expenses is primarily from higher incentive compensation ($4 million), an increase in bad debt expense from a customer bankruptcy ($2 million) and other volume variable spending, none of which individually is significant.  The increase in research and development expenses resulted from higher incentive compensation ($4 million) and development costs for high-horsepower engines.  Other income and expense declined primarily from the impairment write-down of a cost method investment in a private emissions related technology company deemed to be impaired ($5 million) and foreign currency losses ($4 million).  

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Power Generation Business

            The revenuesnet sales and operating resultssegment EBIT for the Power Generation Business segment for the third quarter and first nine monthcomparative interim periods were as follows:

                                                          &nbs p;                                          

Sales            Net sales in the Company'sour Power Generation Business were $363increased $102 million, up 38 percent from first quarter of 2003.  A majority of the sales increase results from increased demand for commercial power equipment with higher sales value and strong demand in the third quarter 2003, up $48 million, or 15consumer market, primarily generator sets for recreational vehicles.  Overall, sales of generator drives increased 36 percent, compared to third quarter sales a year ago.  For the first nine months of 2003, Power Generation salesgenerator sets were up $35 million, or 444 percent, as weak demand continues in the commercial generator set business.      

Earnings from Operations

In the third quarter of 2003, Power Generation results were break-even before interestalternator sales increased 80 percent, and taxes, compared to $3 million operating income before interest and taxes in the third quarter last year.  For the first nine months of 2003, Power Generation incurred an operating loss of $29 million before interest and taxes compared to a $14 million operating loss in 2002.  While we continue with our cost reduction actions, those benefits were more than offset by continued market pricing pressure and unfavorable sales mix attributable to lower sales of high-horsepower units with typically higher margins as well as increases in healthcare and pension costs.  Third quarter 2003 operating results also include a $2 million benefitsmall generator sets to the consumer mobile/RV market increased 29 percent, primarily from the reversal of a second quarter pension curtailment charge related to expected staffing reductions.  Due to forecast improvements in business conditions, the staffing reduction actions were subsequently revised and as a result, fewer employees will be terminated and the threshold for measuring a pension curtailment will not be achieved.improved economic conditions.  

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

Total engine shipments for generator drive assemblies were 64Power Generation by engine category follows:

Total unit sales of power generation equipment increased 700 units, or 14 percent, of total engine shipments in the thirdfirst quarter 2003,of 2004 compared to 57 percent athe prior year ago. Third quarter and year-to-date revenues of generator drive units were $65 million and $161 million, respectively, up 38 percent and 21 percent, respectively as a result of increased volumes.  Shipments of generator drive units were up 33 percent compared to third quarter 2002 and were up 14 percent for the first nine months of 2003.  The increase in shipments was across most geographic regions with strong demand in Europe, Mid-East and North America.  Shipmentsquarter.  Sales of generator drive units powered by midrange engines declined 18 percent in the first quarter of 2004, while sales of midrange powered generator set units were up 3435 percent.  Total sales of equipment powered by heavy-duty engines increased 300 units, or 30 percent, compared to thirdthe first quarter of 2003. Unit sales of heavy-duty powered generator drives were up 50 percent from a year ago, and were up 17 percent on a year-to-date basis.  Unit shipmentswhile unit sales of generator drives with heavy-duty engines were up 58 percent in the third quarter compared to a year ago and were up 15 percent for the year.  Shipments of high-horsepower generator drive units increased 11 percent quarter-over-quarter and were up 4 percent year-over-year. 

Total shipments ofpowered generator sets were flatincreased 17 percent.  Power generation equipment sales with high-horsepower engines, which typically have higher margins, increased 300 units, or 27 percent compared to the prior year's quarter as midrange unitsyear quarter.  Unit sales of high-horsepower generator drives increased 614 percent heavy-duty units were down 5 percent andyear-over-year, while unit sales of high-horsepower units decreased 12 percent with shipments to North America down 5 percent and international shipments up 6 percent.    For the first nine months of 2003, shipments of generator sets were down 4 percent with shipments of high-horsepower units with typically higher margins down 20 percent.  Total revenues from generator sets were up 7increased 52 percent compared the prior year period.  The overall increase in first quarter 2004 unit sales of power generation equipment is attributable to third quarter 2002 and were down 6 percent year-over-year, primarily from the decline in high-horsepower unit sales.  Shipments of generator setsimproved demand in North America were down 8 percent during the quarter and 3 percent for the first nine months of 2003, whileAmerican commercial markets as well as robust growth in international shipments were up 6 percent during the quarter, primarily to the Mid-East andmarkets, including China, Latin America and down 7 percent for the first nine months.Middle East. 

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 Sales of alternators, representing 12 percent of third quarter net salesSegment EBIT for the Power Generation Business, increased 48 percent compared to third quarter 2002 and were up 24 percent for the first nine months of 2003 reflecting strong demand from manufacturers of power generation equipment.  Generator set sales to the consumer mobile/RV market, representing 19 percent of third quarter net sales, were up 10 percent during the quarter and 5 percentwas $6 million in the first nine monthsquarter of 2004, compared to a $14 million loss in the first quarter of 2003, also reflectingor a $20 million improvement.  A majority of the improvement was attributable to increased demand.gross margin from higher sales volume and absorption benefits ($16 million), pricing actions ($4 million) and benefits from cost reduction initiatives ($4 million), partially offset by higher material costs of copper and steel ($3 million) and other items that individually are not significant.    

Filtration and Other Business

            The revenuesnet sales and operating incomesegment EBIT for the Filtration and Other Business segment for the third quarter and first nine monthscomparative interim periods were as follows:

Revenues in the            The Filtrationand Other Business were $255sales increased $93 million up $19 million, or 8 percent, compared to third quarter 2002.  Forin the first nine monthsquarter of 2003, revenues were up $672004 ( includes $46 million or 9 percent.  Whileof intersegment sales increased to OEMs and aftermarket customers, approximately one-halfin 2004).  A majority of the increase is attributable to the Emissions Solutions businesswas volume related and favorable currency effects accounted for approximately $5 million of the increase.  Geographically, salesreflects strong OEM and aftermarket demand across all filtration products.  Sales of filtration products increased in the U.S. increased 12 percent while sales to international markets increased 22 percent, most notably in Europe/CIS.  Sales of Holset turbochargers were up 837 percent in the thirdfirst quarter and 12of 2004 (31 percent year-to-date with international sales up 10 percent forexcluding the quarter and 14 percent year-to-date.  Revenues from the Holset turbocharger business were up 10 percent over third quarter 2002 primarily as a result of increased shipmentschange in transfer pricing) compared to the Europeanprior year quarter with higher sales to OEMs, aftermarket sales and sales to joint ventures partially offset by lower sales declines in China resulting from local sourcing.  Approximately 14 percent of the sales increase in the Filtration and Other segment was related to China.  Year-to-date sales for Holset were up 9 percent compared to 2002.   movement in foreign currency exchange rates.        

Earnings from Operations

Earnings before interest and taxes            Segment EBIT for the Filtration and Other Business increased $4 million in the thirdfirst quarter 2003 were $16 millionof 2004 compared to $19 million a year earlier.  For the first nine monthsquarter of 2003, earnings before interest and taxes2003.  Earnings were $61 million compared to $66 millionhigher in 2002.  Operating results for the third quarter were up $8 million2004 primarily from increased volumes and absorption benefitbenefits ($8 million) and the impact of foreign currency ($4 million), but were offsetadversely effected by additional expenses for healthcarethe sales mix between OEM and pension expenses, up $3 million quarter over quarter,aftermarket customers, the increase in steel prices used in manufacturing filters and higherexhaust products ($2 million) and increased selling and administrative expenses up $8 million, primarily fromattributable to funding targeted growth initiatives ($6 million). 

During the first quarter of 2004, the Filtration Business announced it plans to close a manufacturing facility in the United Kingdom by December 2005 as a primary customer is moving its operations to another country.  We are in the process of finalizing plans related to employees and other one-time costs including product liability settlements.  Thirdto the use of assets at this location and expect to finalize our plans in the second quarter and year-to-date operating results have also been affected by changes in sales mix as incremental marginsof 2004.  The estimated pre-tax charges related to this action range from sales of our Emissions Solutions business are generally lower than the base filtration business.    $2 million to $4 million.

International Distributor Business

            The revenuesnet sales and operating incomesegment EBIT for the International Distributor Business segment for the third quarter and the nine monthcomparative interim periods were as follows:

Revenues from            Sales of the International Distributor Business were $174increased $35 million, or 26 percent in the thirdfirst quarter 2003,of 2004 compared to the prior year quarter. Sales of engines increased slightly with sales of parts, service and power generation equipment accounting for a majority of the increase.  Sales were up $22at all of our distributor locations with the exception of  Zimbabwe and Germany, with significant increases  reported by our distributors in Australia, India, South Africa and Dubai.  Approximately one-half of the sales increase in this segment is attributable to movement in foreign exchange rates.

            Segment EBIT for the International Distributor Business increased $2 million, or 1433 percent in the first quarter of 2004 compared to third quarter 2002 with modest improvement noted across most regions.  Forthe prior year quarter. The increase in earnings was attributable to higher sales volume of parts and service and improved margins on generator set sales ($2 million) and the favorable impact of foreign exchange rates on margins ($4 million), partially offset by the impact of exchange rates on selling and administrative expenses ($4 million).

Geographic Markets

            Sales to international markets in the first nine monthsquarter of 2003, revenues were up $582004 increased $166 million, or 1426 percent compared to the first nine monthsquarter of 2002.  Sales2003 and were 46 percent of engines, parts and service in the South Pacific and South Africa and increased power generationtotal net sales in the Middle East were strong during the third quarter and first nine months with sales declines reported by our distributorship in Hong Kong related to the economic impact of the SARS virus.    

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Earnings from Operations

Earnings before interest and taxes for the International Distributor Business were $9 million in the third quarter 2003, down $1 million, or 10 percent, compared to third quarter 2002.  Operating results improved by $6 million due to increased volumes but were offset by lower margins on47 percent of total net sales of power generation equipment and higher selling and administrative expenses.  Year-to-date earnings were $27 million, up $10 million, or 59 percent year-over-year, as a resultyear ago.  A summary of increased engine and parts sales and lower exchange losses, primarily in Latin America. 

Geographic Markets

The  Company's net sales by geographic region duringterritory for the comparative interim periods were:follows:

Sales to international markets represented 47 percent of total revenues in the third quarter of 2003 compared to 39 percent in the third quarter of 2002.  Total international sales in the third quarter 2003 increased $116 million, or 18 percent, over the third quarter of 2002, while year-to-date international sales are up $191 million, or 10 percent.  Sales to the U.S. market were down $130 million in the third quarter of 2003 compared to 2002 and down $70 million on a year-to-date basis.  Most of the decline in third quarter and year-to-date domestic sales was attributable to accelerated purchases of heavy-duty engines in the third quarter of 2002 in response to the October 1, 2002 new emissions standards

Shipments of heavy-duty truck engines to international markets in the first quarter of 2004 were up 924 percent compared to thirda year ago, primarily to OEMs in Mexico and North Asia.  Shipments of midrange automotive engines to international markets increased 8 percent compared to first quarter 20022003, primarily to OEMs in Latin America and Europe/CIS with lower shipments to OEMs in Brazil and Mexico.  Engine shipments to international bus markets decreased 5 percent compared to a year ago, primarily to Europe, but were partially offset by increased shipments to China. Shipments of light-duty automotive engines to international markets increased 19 percent in the first quarter of 2004 compared to the prior year quarter, primarily to an OEM in Brazil. Industrial engine shipments to international locations were up 428 percent forin the year-to-date periodfirst quarter of 2004 compared to the prior year quarter, primarily from strong demand of agricultural OEMs in Latin America and Europe/CIS, up 44 percent, and to construction equipment markets, up 29 percent, primarily to marketsOEMs in Asia and Europe/CIS. Shipments of midrange truck engines to international marketsgenerator sets increased 15 percent during the quarter and were up 12 percent for the first nine months of 2003, primarily from higher demand at Latin American OEMs.  Total engine shipments to the international bus market were down 1 percent quarter-over-quarter and 6 percent year-over-year as a result of demand fall-off in Mexico and Asia.  Shipments of industrial engines to international markets were up 1049 percent in the thirdfirst quarter of 20032004 compared to 2002 and are up 3 percent year-over-year with most of the increase in Asia and Latin America.

Sales to the Asia/Australia region increased $29 million, or 11 percent, compared to third quarter 2002, primarily from increased demand for construction applications in Asia partially offset by lower engine sales to the bus market.  Sales to this geographic region were up $64 million, or 9 percent for the first nine months of 2003 compared to the prior year.  Sales to Europe/CIS, representing 27 percent of international sales and 12 percent of worldwide sales in the third quarter 2003, were up $26 million, or 15 percent, compared to the prior year's quarter with increased sales in the Filtration and Other Business and strong sales of generator drives where unit shipments were up 85 percent for the quarter and 40 percent year-over-year.  Business in Mexico/Latin America was 17 percent of total international sales in the third quarter 2003, compared to 12 percent a year ago, with revenues up $50 million, or 63 percent during the quarter, primarily due todriven by higher shipmentsdemand in all markets, most notably, Latin America, Europe/CIS and East Asia. 

LIQUIDITY AND CAPITAL RESOURCES

Overview of heavy-duty truck engines, midrange truck engines and industrial engines to agriculture OEMs partially offset by lower sales to bus OEMs.  Sales to the Canadian region, representing 8 percent of international sales in the third quarter 2003 and 4 percent of worldwide sales, were down 26 percent compared to third quarter 2002, and down 2 percent on a year-to-date basis, primarily due to lower sales of remanufactured engines.  Sales to the Africa/Middle East region were up $34 million, or 92 percent, quarter-over-quarter compared to 2002 and up $58 million, or 55 percent year-over-year, primarily on strong engine and part sales and sales of power generation equipment at distributorships in Dubai and South Africa and increased engine kit sales to BMC, our licensee in Turkey. Capital Structure

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LiquiditySince fiscal 2000, we have made a strategic effort to improve our cost structure and Capital Resources

improve efficiencies from continuing operations through monetization of assets and restructuring actions. As a result, we have undertaken various initiatives to improve cash flow, reduce debt and improve our financial flexibility. Excluding severe downturns in our markets, our operations have historically generated sufficient cash to fund our businesses, capital expenditures, research and development, interest and dividend payments. Cash provided by continuing operations is a major source offor funding our working capital funding.capital. At certain times, cash provided by operations is subject to seasonal fluctuations, and as a result, we use periodic borrowings, primarily our receivable sales program and our revolving credit facility, to fund working capital requirements.

            In January 2004, we moved our receivable securitization program to another financial institution and modified its structure. A more complete description of this program, which discloses certain cash flows related to the program, is found below under the caption, "Off Balance Sheet Financing-Sale of Accounts Receivable" and in Note 4 to the Consolidated Financial Statements in our 2003 Annual Report on Form 10-K. We also have available various short and long-term credit arrangements, which are discussed below and disclosed in Note 8, "Borrowing Arrangements"Arrangements," of our Consolidated Financial Statementsalso found in our 2002 annual report filed2003 Annual Report on Form 10-K.  These

            We believe our cash generated from operations, credit arrangements and our accounts receivable securitization program provide the financial flexibility necessaryrequired to satisfy future short-term funding requirements for our debt service obligations, capital spending, pension funding, and projected working capital requirements and capital spending.  With the exception of payments required under our operating lease agreements, and minimum pension funding requirements, we do not have anyrequirements. Our next major fixed cash payment obligations occurring untilobligation occurs in March 2005 when our 6.45% Notes with principal amount of $225 million mature. We expect to refinance or repay all or a portion of the principal amount of these Notes at their maturity date.  As of March 28, 2004, our total debt including convertible subordinated debentures was $1.526 billion compared to $1.429 billion at December 31, 2003. Included in long-term debt at March 28, 2004 and December 31, 2003, was $71 million and $90 million, respectively, attributable to the consolidation of a leasing entity under the provisions of FIN 46R (see Notes 2 and 8 to the Consolidated Financial Statements in our 2003 Annual Report on Form 10-K).  Also included in long-term debt at March 28, 2004, was $99 million from the consolidation of three joint ventures previously reported under the equity method of accounting and now consolidated under the provisions of FIN 46R.  (See Note 2 to the Consolidated Financial Statements).  The consolidation of the joint ventures is not expected to impact our net earnings or any of our debt covenants in future periods.  Total debt, including our convertible subordinated debentures, as a percentage of our total capital, including total long-term debt, was 60.2 percent at March 28, 2004, compared to 60.1 percent at December 31, 2003. Based uponon projected cash flows from operations and existing credit facilities, management believes the Company haswe believe we have sufficient liquidity available to meet anticipated capital, pension funding, debt and dividend requirements in the foreseeable future.

            In connection with the 2002 Senior Notes offering, 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 offer and became contractually obligated to pay additional interest on the Notes. For each 90-day delay in the completion of the exchange offer, the premium interest rate on the notes increased by an additional 0.25% per annum up to a 1% maximum increase until such time as the exchange offer is completed.  As of December 31, 2003, we were paying an additional 0.75% interest on the Notes and the total amount of premium paid in 2003 was $0.7 million. The exchange offer registration statement was declared effective on February 24, 2004 and the exchange was completed by March 24, 2004, at which time the interest rate on the Notes returned to 9.5%. A more complete description of our Senior Notes is disclosed in Note 8 to the Consolidated Financial Statements in our 2003 Annual Report on Form 10-K.

Available Credit Capacity

            The following table provides the components of available credit capacity for the interim periods: