CUMMINS INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 15. SHAREHOLDERS’ EQUITY

   In May 2007, the shareholders approved a proposal to increase our share authorization to 300 million shares. Changes in shares of common stock are as follows:

Cash Dividends

   In July 2007, the Board of Directors voted to increase the quarterly cash dividend per share by 39 percent and increased cash dividends to $0.125 per common share (adjusted for the two-for-one stock split on January 2, 2008) in the third and fourth quarter of 2007. Dividends per share paid to common shareholders for the years ended December 31, were as follows:

   Total dividends paid to common shareholders for the years ended December 31, 2007, 2006 and 2005 were $89 million, $66 million, and $56 million, respectively. Declaration and payment of dividends in the future depends upon earnings and liquidity position, among other factors.

Treasury Stock

   Shares of common stock repurchased by us are recorded at cost as treasury stock and result in a reduction of shareholders’ equity in our Consolidated Balance Sheets. From time to time, treasury shares may be reissued as part of our stock-based compensation programs. When shares are reissued, we use the weighted-average cost method for determining cost. The difference between the cost of the shares and the issuance price is added or deducted from additional paid-in-capital.

   Treasury stock activity for the three-year period ended December 31, 2007, consisting of shares issued and purchased is presented in the Consolidated Statements of Shareholders’ Equity. In July 2006, the Board of Directors authorized us to acquire up to two million shares (eight million shares, adjusted for the impact of a two-for-one stock split on April 9, 2007 and an additional two-for-one stock split on January 2, 2008) of Cummins common stock in addition to what had been acquired under previous authorizations. For the year ended December 31, 2007, we repurchased $335 million of common stock, which concluded the share repurchase program authorized by the Board of Directors in July 2006. In December 2007, the Board of Directors authorized the acquisition of up to $500 million worth of Cummins common stock, with repurchases set to begin during 2008. In 2007, we also converted 0.8 million shares from our Employee Benefit Trust into treasury stock. These shares are not considered purchases under the Board authorized purchase plan.

Employee Stock Ownership Plan

   We have an Employee Stock Ownership Plan (ESOP) Trust that was established in 1989 for certain domestic salaried and non-bargained employees participating in our 401(k) Retirement and Savings Plan (RSP). The ESOP has a note payable to us which will be funded through future Company contributions to the ESOP Trust.

   Our annual cash contributions during plan year 2007, 2006 and 2005 along with dividends received on unallocated shares of our common stock held by the ESOP Trust and cash contributions from the Employee Benefit Trust were equal to the required principal and interest payments due under the ESOP notes and amounted to $10 million, $9 million and $9 million, respectively. Dividends received on allocated ESOP shares are used to purchase shares of our common stock from the Employee Benefit Trust. Those shares are then allocated to the participant accounts. As the debt is repaid, shares are released from the ESOP and are allocated to participants in proportion to their contributions to the RSP. Compensation expense is recorded as shares are allocated to plan participants each year and reduced by the common stock dividends received by the ESOP Trust. Unearned compensation is included in shareholders’ equity and represents compensation expense we will record in the future as the remaining shares are allocated to participants. All shares issued to the ESOP Trust are considered outstanding for purposes of computing earnings per share. Dividends on unallocated ESOP shares used to service a portion of the principal and interest due on the ESOP notes were $1 million for each of the years ended December 31, 2007, 2006 and 2005. Annual compensation expense for the ESOP was $4 million for the year ended December 31, 2007 and $3 million for 2006 and 2005. At December 31, 2007, the ESOP Trust held 2,099,690 shares allocated to participants, 1,101,632 unreleased and unallocated shares and 232,586 committed to be allocated shares.

Employee Benefits Trust

   In 1997, we established the Employee Benefits Trust funded with common stock for use in meeting our future obligations under employee benefit and compensation plans. The primary sources of cash for the Employee Benefits Trust are dividends received on unallocated shares of our common stock held by the Employee Benefits Trust. Contributions charged to earnings were not material in 2007, $9 million in 2006 and $10 million in 2005. We also converted 0.8 million shares into treasury stock and sold 0.3 million shares on the open market from the Employee Benefits Trust and used the $66 million of proceeds to fund other non-qualified employee benefit plans.

Other Comprehensive Income (Loss)

   Following are the items included in other comprehensive income (loss) and the related tax effects:

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