PART II

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

ACCOUNTING PRONOUNCEMENTS ISSUED BUT NOT YET EFFECTIVE

   In September 2006, the FASB issued SFAS No. 157, ‘‘Fair Value Measurements’’ (SFAS 157), which defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. We will adopt SFAS 157 effective January 1, 2008. We do not expect the adoption of SFAS 157 to have a material impact on our Consolidated Financial Statements.

   In February 2007, the FASB issued SFAS No. 159, ‘‘The Fair Value Option for Financial Assets and Financial Liabilities—Including an Amendment of FASB Statement No. 115’’ (SFAS 159), which is effective for fiscal years beginning after November 15, 2007. SFAS 159 permits an entity to choose to measure many financial instruments and certain other items at fair value at specified election dates. Subsequently unrealized gains and losses on items for which the fair value option has been elected will be reported in earnings. We do not expect to elect the fair value methodology under SFAS 159 for any of our financial instruments, thus the adoption of SFAS 159 will not impact our Consolidated Financial Statements.

   In December 2007, the FASB issued SFAS No. 141 (revised 2007), ‘‘Business Combinations’’ (SFAS 141R), which is effective for fiscal years beginning after December 15, 2008. SFAS 141R makes significant changes to both the accounting and disclosures related to the acquisition of a business and could materially impact how we account for future business combination transactions. Because the standard will only impact transactions entered into after January 1, 2009, SFAS 141R will not impact our consolidated financial statements upon adoption.

   In December 2007, the FASB issued SFAS No. 160, ‘‘Noncontrolling Interests in Consolidated Financial Statements’’ (SFAS 160), which is effective for fiscal years beginning after December 15, 2008. SFAS 160 amends Accounting Research Bulletin No. 51, ‘‘Consolidated Financial Statements’’ (ARB 51) and establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. For Cummins, the most significant impact of the standard, at adoption, will be to reclass our minority interests ($293 million at December 31, 2007) to be included as a part of equity, which may affect certain performance and equity ratios. We are currently evaluating the potential additional impact that SFAS 160 may have on our Consolidated Financial Statements.