Results of Operations Net Sales:

In 2000, the Company's sales totaled $6.6 billion. Revenues from sales of engines were 52 percent of the Company's net sales in 2000, with engine revenues 5 percent lower than in 1999 and flat compared to 1998. The Company shipped 421,800 engines in 2000, compared to 426,100 engines in 1999 and 403,300 in 1998 as follows:

Revenues from non-engine products, which were 48 percent of net sales in 2000, were 5 percent higher than in 1999 and 11 percent higher than in 1998. The major increases within non-engine revenues were achieved in parts sales, company-owned distributors and the Holset turbocharger operations. Sales of the remaining non-engine products, in the aggregate, were essentially level with 1999.

The Company's net sales for each of its key segments during the last three years were:

Cummins' Engine Business, the Company's largest business segment, produces engines and parts for sale to customers in both automotive and industrial markets. Engine Business customers are serviced through the Company's worldwide distributor network. The engines are used in trucks of all sizes, buses and recreational vehicles, as well as a variety of industrial applications including construction, mining, agriculture, marine, rail and military. Engine Business revenues were $4.0 billion in 2000, a 4 percent decrease from 1999 and a 2 percent increase over 1998. The 2000 discussion and analysis of results has been aligned to reflect the organization structure of the Engine Business in addressing its markets.

Sales of $2.1 billion in the bus and truck markets were 13 percent lower than in 1999 and 5 percent lower than in 1998. In 2000, heavy-duty truck engine revenues of $1.4 billion were 19 percent lower than 1999 and 7 percent lower than 1998, reflecting the downturn in the North American heavy-duty truck market, where shipments were down 35 percent from 1999. This was partially offset by increases in international heavy-duty markets, where shipments increased 34 percent from 1999.

Medium-duty truck and bus engine revenues of $662 million were 4 percent higher than in 1999 and flat compared to 1998. In 2000, medium-duty truck engine volumes were 5 percent lower than in 1999 and reflect a 29 percent decline in North American volumes. This decline was partially offset by a 14 percent shipment increase in international medium-duty truck markets. Bus engine shipments were 41 percent higher than in 1999.

Sales of $830 million in the light commercial vehicle market were 7 percent higher than in 1999 and 16 percent higher than in 1998, reflecting an increase in engine shipments from 1999. Record unit shipments in 2000 to Daimler-Chrysler for the Dodge Ram pickup, while including a sharp downturn in the fourth quarter, were 16 percent higher than in 1999 for the full year.

Sales of $873 million to the construction, agriculture and marine markets were 4 percent higher than in 1999 and 3 percent higher than in 1998. In 2000, shipments were 4 percent higher than in 1999, driven by increases in the construction and marine markets. Shipment declines in North America were more than offset by increases in international markets.

Sales of $241 million to the high horsepower/mining market were 32 percent higher than in 1999 and 16 percent higher than in 1998. Engine shipments were 36 percent higher than in 1999, with higher demand in international markets accounting for much of the increase.

Revenues of $1.4 billion in 2000 for the Power Generation Business were 3 percent higher than in 1999 and 13 percent higher than in 1998. Sales of the Company's generator sets in 2000 were flat compared to 1999. Engine sales to generator set assemblers were up 17 percent from the prior year. Alternator sales decreased 7 percent as compared to 1999. Sales of small generator sets for recreational vehicles and other consumer applications were flat compared to last year.

Sales of $1.2 billion in 2000 for the Filtration Business and Other were 9 percent higher than in 1999 and 1998. In 2000, Fleetguard/Nelson revenues increased 2 percent, but reflected a drop in demand for OEM truck and construction equipment products as well as reduced sales to consumer-oriented small engine and equipment manufacturers. International distributor sales included in this segment increased 13 percent from 1999, while sales of Holset turbochargers increased 26 percent as compared to a year ago.

Net sales by marketing territory for each of the last three years were:

In total, international markets accounted for 43 percent of the Company's revenues in 2000. Europe and the CIS, representing 13 percent of the Company's sales in 2000, were 8 percent higher than in 1999 and 9 percent higher than in 1998. Sales to Canada, representing 6 percent of sales in 2000, were 12 percent lower than in 1999. Asian and Australian markets, in total, represented 14 percent of the Company's sales in 2000, with increases in sales to Asia from 1999. In Asia, sales to Southeast Asia increased 14 percent, sales to Korea increased 23 percent, sales to China increased 25 percent and sales to Japan and India were slightly higher than 1999 levels. Business in Mexico and Latin America, representing 7 percent of sales in 2000, was 20 percent higher than in 1999. Sales to Africa/Middle East, representing 3 percent of sales in 2000, increased 72 percent from 1999.

Gross Margin:

The Company's gross margin percentage was 19.1 percent in 2000, 21.4 percent in 1999 and 21.4 percent in 1998, excluding the special charges recorded for product coverage and inventory write-downs in 1998. The gross margin percent in 1998 including the special charges was 19.9 percent. Gross margins in 2000 were impacted by lower cost absorption in the Company's heavy-duty plants, changes in product mix, foreign exchange and higher product coverage costs. Product coverage costs were 4.2 percent of net sales in 2000, compared to 3.7 percent in 1999, and 3.3 percent in 1998, excluding the special charges. Including special charges, product coverage costs were 4.5 percent of net sales in 1998.

Operating Expenses:

Selling and administrative expenses were 11.8 percent of net sales in 2000, compared to 11.8 percent in 1999 and 12.5 percent in 1998.

Research and engineering expenses were 3.7 percent of net sales in 2000, compared to 3.7 percent in 1999 and 4.1 percent in 1998.

The Company's income from joint ventures and alliances was $9 million in 2000, compared to losses of $28 million in 1999 and losses of $30 million in 1998. This improvement resulted from the dissolution of the WŠrtsilŠ joint venture at the end of 1999.

In the past three years, Cummins has recorded restructuring and other charges to reflect business improvement initiatives committed to by the Company's management.

As disclosed in Note 4 to the Consolidated Financial Statements, the Company recorded charges of $160 million ($103 million after tax, or $2.71 per share) reflecting restructuring actions, asset impairments and other activities largely focused in the Engine Business. These actions are taken in response to the downturn in the North American heavy-duty truck market and related conditions. The charges include $42 million attributable to employee severance actions, $72 million for impairment of equipment and other assets, $30 million for impairment of software developed for internal use where the programs were cancelled prior to implementation and $16 million associated with exit costs to close or consolidate a number of smaller business operations. Of the $160 million charge, $131 million was assigned to the Engine Business, $19 million to the Power Generation Business and $10 million to the Filtration Business and Other.

Workforce reduction actions included overall cutbacks in staffing levels plus the impacts of closing and consolidating operations. Restructuring charges for workforce reductions included the severance costs and related benefits of terminating 600 salaried employees and 830 hourly employees. Costs for workforce reductions were based on amounts pursuant to benefit programs or statutory requirements of the affected operations.

The asset impairment loss of $72 million was calculated in accordance with the provisions of SFAS 121. Asset impairment of equipment from discontinuing operations was primarily for engine assembly and fuel system manufacturing equipment to be disposed of upon the closure or consolidation of production operations.The asset impairment charge included a write-down of $38 million for manufacturing equipment that will continue to be used for approximately two years. Depreciation will continue on these assets over that period of time. The expected recovery value of equipment to be disposed of was based on estimated salvage value and was excluded from the write-down. The charge also included $11 million for equipment available for disposal, $6 million for properties available for disposal, $10 million for investments and $7 million for intangibles and minority interest positions related to divesting smaller operations and investments. The carrying value of assets held for disposal and the effect from suspending depreciation on such assets is immaterial.

The asset impairment charge of $30 million consisted of capitalized software-in-process being developed for internal use. The charge was related to manufacturing, financial and administrative information technology programs cancelled during program development and prior to implementation.

Exit costs of $16 million to close or consolidate a number of small businesses and operations included $6 million for equipment removal costs, $5 million to satisfy contractual obligations and $5 million for other exit costs. As the restructuring actions consist primarily of the closing or consolidation of smaller operations, the Company does not expect these actions to have a material effect on future revenues.

Approximately $73 million, primarily related to the write-down of impaired equipment and software and employee severance payments, has been charged to the restructuring liabilities as of December 31, 2000. Of the total charges associated with the restructuring activities, cash outlays will approximate $54 million. The actions will be completed in 2001 and 2002 with the majority of the cash outlays in 2001. The associated annual savings are estimated at $55 million upon completion of the actions.

In December 1999, the Company recorded a charge of $60 million in connection with the dissolution of the Cummins WŠrtsilŠ joint venture. The joint venture termination was effective December 31, 1999, with the Company taking over the operations and assets of the product line manufactured in Daventry, England.

The Company recorded charges in 1998 totaling $125 million, comprised of $100 million of costs associated with the Company's plan to restructure, consolidate and exit certain business activities and $25 million for a civil penalty resulting from an agreement reached with the U.S. Environmental Protection Agency (EPA) and the Department of Justice regarding diesel engine emissions. In addition, the Company recorded special charges of $14 million for inventory write-downs associated with restructuring actions.

The Company is concluding the restructuring plan implemented in the third quarter of 1998. In the third quarter of 2000, the Company reversed excess accruals from 1998 of $7 million and recorded $7 million of charges related to new actions committed to during the quarter. Inclusive of the third quarter action, as of December 31, 2000, approximately $127 million has been charged against the liabilities associated with these actions. The Company funded the restructuring actions using cash generated from operations. The remaining actions to be completed consist primarily of the payment of severance commitments to terminated employees in early 2001 and the final EPA payment to be made in July 2001.

Other:

Interest expense of $86 million was $11 million higher than in 1999 and $15 million higher than in 1998. Higher borrowing levels in 2000 accounted for the increase from 1999. Increased borrowings and lower capitalization of interest accounted for the increase as compared to 1998. As disclosed in Note 5 to the Consolidated Financial Statements, other income and expense went from $8 million of expense in 1999 to $1 million of income in 2000, primarily due to non-recurring transactions recorded in both years.

Provision for Income Taxes:

The Company's income tax provision in 2000 was a benefit of $19 million, combining an effective tax rate of 23 percent from operations and an effective tax rate of 35 percent from special charges. The effective tax rate from operations in 2000 reflected reduced taxes on export sales and research tax credits. In 1999, the Company's tax provision was $55 million, reflecting an effective tax rate of 25 percent. In 1998, the Company's tax provision was $4 million, with the tax benefits from export sales and the research credit more than offset by the unfavorable tax effects of nondeductible losses in foreign joint ventures and nondeductible EPA penalty and goodwill amortization.

Minority Interest:

Minority interest in net earnings of consolidated entities was $14 million in 2000, an increase of $8 million from 1999 and an increase of $3 million from 1998. The increase from 1999 was primarily due to higher earnings attributable to minority partners of Cummins India Limited and improved performance of the joint venture with Scania.

Cash Flow and Financial Condition Key elements of cash flows were:

During 2000, net cash provided from operating activities was $388 million, reflecting the Company's decline in net earnings and the non-cash effect of depreciation and amortization, reduced by increases in working capital. As disclosed in Note 1 to the Consolidated Financial Statements, the Company sold receivables in 2000 in a securitization program, which yielded proceeds of $219 million. The Company is funding the cash requirements for restructuring actions using cash generated from operations with the majority of the cash requirement expected to occur in 2001. Net cash used in investing activities in 2000 was $312 million and included planned capital expenditures of $228 million. Capital expenditures were $215 million in 1999 and $271 million in 1998. The higher level of net cash requirements in 1998 was due primarily to the acquisition of Nelson. Acquisitions in 2000 included the South Africa distributorship and the purchase of assets from the dissolution of the WŠrtsilŠ joint venture. Investments in joint ventures and alliances in 2000 of $53 million reflected the net effect of capital contributions and cash generated by certain joint ventures.

Net cash used in financing activities was $86 million in 2000. This cash was used for dividend payments, repurchases of the Company's stock and payments on borrowings. As disclosed in Note 7 to the Consolidated Financial Statements, the Company issued $765 million face amount of notes and debentures in 1998 under a $1 billion registration statement filed with the Securities and Exchange Commission in December 1997. The net proceeds were used to finance the acquisition of Nelson and to pay down other indebtedness outstanding at December 31, 1997. Based on the Company's projected cash flows from operations and existing credit facilities, management believes that sufficient liquidity is available to meet anticipated capital and dividend requirements in the foreseeable future.

Legal/Environmental Matters:

The Company and its subsidiaries are defendants in a number of pending legal actions that arise in the normal course of business, including environmental claims and actions related to use and performance of the Company's products. Such matters are more fully described in Note 17 to the Consolidated Financial Statements. In the event the Company is determined to be liable for damages in connection with such actions or proceedings, the unreserved portion of such liability is not expected to have a material adverse effect on the Company's results of operations, cash flows or financial condition.

Market Risk:

The Company is exposed to financial risk resulting from volatility in foreign exchange rates, interest rates and commodity prices. This risk is closely monitored and managed through the use of derivative contracts. As clearly stated in the Company's policies and procedures, financial derivatives are used expressly for hedging purposes, and under no circumstances are they used for speculating or for trading. Transactions are entered into only with banking institutions with strong credit ratings, and thus the credit risk associated with these contracts is considered immaterial. Hedging program results and status are reported to senior management on a monthly and quarterly basis.

The following section describes the Company's risk exposures and provides results of sensitivity analyses performed on December 31, 2000. The sensitivity tests assumed instantaneous, parallel shifts in foreign currency exchange rates, commodity prices and interest rate yield curves.

A. Foreign Exchange Rates

Due to its international business presence, the Company transacts extensively in foreign currencies. As a result, corporate earnings experience some volatility related to movements in exchange rates. In order to exploit the benefits of global diversification and naturally offsetting currency positions, foreign exchange balance sheet exposures are aggregated and hedged at the corporate level through the use of foreign exchange forward contracts. The objective of the foreign exchange hedging program is to reduce earnings volatility resulting from the translation of net foreign exchange balance sheet positions. A hypothetical, instantaneous, 10 percent adverse movement in the foreign currency exchange rates would decrease earnings by approximately $4 million in the current reporting period. The sensitivity analysis ignores the impact of foreign exchange movements on Cummins' competitive position as well as the remoteness of the likelihood that all foreign currencies will move in tandem against the U.S. dollar. The analysis also ignores the offsetting impact on income of the revaluation of the underlying balance sheet exposures.

B. Interest Rates

The Company currently has in place three interest rate swaps that effectively convert fixed-rate debt into floating-rate debt. The objective of the swaps is to more efficiently balance borrowing costs and interest rate risk. A sensitivity analysis assumed a hypothetical, instantaneous, 100 basis-point parallel increase in the floating interest rate yield curve, after which rates remained fixed at the new, higher level for a one-year period. This change in yield curve would correspond to a $4 million increase in interest expense for the one-year period. This sensitivity analysis does not account for the change in the Company's competitive environment indirectly related to changes in interest rates and the potential managerial action taken in response to these changes.

C. Commodity Prices

The Company is exposed to fluctuation in commodity prices through the purchase of raw materials as well as contractual agreements with component suppliers. Given the historically volatile nature of commodity prices, this exposure can significantly impact product costs. The Company uses commodity swap agreements to partially hedge exposures to changes in copper and aluminum prices. Given a hypothetical, instantaneous, 10 percent depreciation of the underlying commodity price, with prices then remaining fixed for a 12-month period, the Company would experience a loss of approximately $1 million for the annual reporting period. This amount excludes the offsetting impact of decreases in commodity costs.

Forward-looking Statements

This Management's Discussion and Analysis of Results of Operations and Financial Condition, other sections of this Annual Report and the Company's press releases, teleconferences and other external communications contain forward-looking statements that are based on current expectations, estimates and projections about the industries in which Cummins operates and management's beliefs and assumptions. Words, such as "expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates," variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions ("Future Factors") which are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements. Cummins undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise.

Future Factors include increasing price and product competition by foreign and domestic competitors, including new entrants; rapid technological developments and changes; the ability to continue to introduce competitive new products on a timely, cost-effective basis; the mix of products; the achievement of lower costs and expenses; domestic and foreign governmental and public policy changes, including environmental regulations; protection and validity of patent and other intellectual property rights; reliance on large customers; technological, implementation and cost/financial risks in increasing use of large, multi-year contracts; the cyclical nature of Cummins' business; the outcome of pending and future litigation and governmental proceedings; and continued availability of financing, financial instruments and financial resources in the amounts, at the times and on the terms required to support Cummins' future business.

These are representative of the Future Factors that could affect the outcome of the forward-looking statements. In addition, such statements could be affected by general industry and market conditions and growth rates, general domestic and international economic conditions, including interest rate and currency exchange rate fluctuations, and other Future Factors.