CUMMINS INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 10. SHORT-TERM BORROWINGS AND LONG-TERM DEBT

   Loans payable consist primarily of notes payable to financial institutions. The weighted-average interest rate for notes payable, bank overdrafts and current maturities of long-term debt at December 31, 2007, 2006 and 2005, was 7.43 percent, 7.13 percent, and 6.67 percent, respectively.

   As of December 31, 2007, we had $615 million available for borrowings under our $650 million revolving credit facility and $119 million available for borrowings under our international short-term credit facilities. The amount of borrowings outstanding under our international short-term facilities at December 31, 2007, was $13 million.

   Principal payments required on long-term debt during the next five years are $106 million in 2008, $33 million in 2009, $24 million in 2010, $17 million in 2011 and $14 million in 2012.

   Our revolving credit facility provides for aggregate borrowings of up to $650 million on an unsecured basis and matures in December 2009. Up to $200 million of the facility is available for total letters of credit; up to $60 million of the facility may be used for multi-currency borrowings or multi-currency letters of credit. Interest on the facility varies based upon the London Interbank Offered Rate (LIBOR) or the Alternate Base Rate plus a spread depending upon our credit rating. We are required to pay a quarterly facilities fee on the unused commitments under this facility based on our credit rating. The fee was 0.25 percent at December 31, 2007. As of December 31, 2007 and 2006 we had $35 million and $108 million, respectively, in letters of credit outstanding against this facility. There were no outstanding borrowings under this facility at December 31, 2007.

   Interest on the 9.5% senior notes was payable on June 1 and December 1 each year. The senior notes were redeemable in whole or in part at any time after December 1, 2006, at a premium equal to 104.75 percent of par, declining to par in 2008, plus accrued interest. On December 19, 2006, we redeemed the notes in whole for approximately $262 million, resulting in a loss on extinguishment of debt of approximately $12 million which has been recorded in ‘‘Other expenses (income)’’ on our Consolidated Statements Of Earnings.

   The 8.68% notes relate to a consolidated VIE (a grantor trust wholly-owned by a financial institution). Principal payments are made annually with a final payment due in April 2008. The consolidation of the VIE is discussed in Note 3. Interest payments are due on the notes quarterly. Principal and interest payments due on the notes coincide with the payments that are due to the grantor trust under our lease of manufacturing equipment from the grantor trust. Principal payments due over the next five years are included in the amounts above. Our lease is described in Note 19. The notes are secured by the assets of the grantor trust which include only the manufacturing equipment and the trust’s rights under the lease agreement with us.

   As discussed in Note 3, our total debt includes $25 million (none of which is included in ‘‘Loans payable’’ in above table) related to the consolidation of three joint ventures under FIN 46R, as of December 31, 2007. Included in this amount is a $25 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%. The note is collateralized by substantially all of CDC’s inventory and fixed assets with a current book value of $49 million and $135 million, respectively, as of December 31, 2007.

   Interest on the 6.75% debentures is payable on February 15 and August 15 each year. Holders of the debentures could elect to be repaid on February 15, 2007, at par value together with accrued interest to February 15, 2007. Such election, was irrevocable and was required to be made between December 15, 2006 and January 15, 2007. Approximately $62 million of the debentures were repaid on February 15, 2007, at the election of the holders. At December 31, 2006, we included the $62 million repaid on February 15, 2007, in short-term borrowings in our Consolidated Balance Sheet. The debentures were also redeemable at our option after February 15, 2007, at a redemption price of par value plus accrued interest or an amount designed to ensure that the debenture holders are not penalized by the early redemption.

   Interest on the $250 million 7.125% debentures and $165 million 5.65% debentures is payable on March 1 and September 1 of each year. The debentures are unsecured and are not subject to any sinking fund requirements. We can redeem the 7.125% debentures and the 5.65% debentures at any time prior to maturity at the greater of par plus accrued interest or an amount designed to ensure that the debenture holders are not penalized by the early redemption.

   Our debt agreements contain several restrictive covenants. The most restrictive of these covenants applies to our revolving credit facility which will, 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 maximum debt-to-EBITDA ratio and a minimum interest coverage ratio. As of December 31, 2007, we were in compliance with all of the covenants under our borrowing agreements.

   As of December 31, 2007 and 2006, commitments outstanding for letters of credit under our revolving credit facility and our international and other domestic facilities were $35 million and $108 million, and $38 million and $110 million, respectively. Commitments outstanding related to performance bonds and other performance-related guarantees were $50 million and $36 million as of December 31, 2007 and 2006, respectively.

Redemption of Junior Convertible Subordinated Debentures

   In June 2001, Cummins Capital Trust I (the ‘‘Trust’’), a Delaware business trust and our wholly-owned subsidiary, issued 6 million shares of 7% convertible quarterly income preferred securities (‘‘preferred securities’’), to qualified institutional buyers for net proceeds of $291 million. The preferred securities represented an undivided beneficial ownership interest in the assets of the Trust. The total proceeds from the issuance of the preferred securities by the Trust were invested in $309 million aggregate principal amount of 7% convertible subordinated debentures (the ‘‘debentures’’) that we issued. The debentures were the sole assets of the Trust and in accordance with the provisions of FIN 46R (see Note 3) the trust was not consolidated. The debentures were included in ‘‘Long-term debt’’ in our Consolidated Balance Sheets.

   On May 8, 2006, the Board of Directors approved our plan to redeem all of the 7% convertible quarterly income preferred securities. On May 9, 2006, we gave the trustee our formal irrevocable notification of our intent to redeem the preferred securities. This notification provided the holders of the preferred securities 30 days in which to convert their securities into shares of common stock. Upon expiration of the notification period, all remaining securities not converted were redeemed for cash at a premium above liquidation value. Substantially all of the $300 million 7% convertible subordinated debentures outstanding were converted into shares of our common stock during the second quarter of 2006. As a result of the conversion, approximately 6.3 million shares of common stock were issued which resulted in an increase of approximately $15 million to common stock outstanding and an increase of approximately $276 million to additional contributed capital. Since substantially all holders converted their preferred securities to common stock, the loss on extinguishment of this debt was not material.

The accompanying notes are an integral part of the Consolidated Financial Statements.