Mike DeWalt - Director of Investor Relations James Owens - Chairman & CEO Edward Rapp - Group President David Burritt - CFO

David Raso - Citigroup Investment Research Daniel Dowd - Sanford Bernstein Research Ann Duignan - J. P. Morgan Securities Jamie Cook - Credit Suisse Securities Robert Wertheimer - Morgan Stanley & Co. Inc. Seth Weber - Banc of America Securities Terry Darling - Goldman Sachs Robert McCarthy - Robert W. Baird Alexander Blanton - Ingalls & Snyder Andrew Casey - Wachovia

Good morning ladies and gentlemen and welcome to the Caterpillar Second Quarter 2008 earnings conference call. (Operator instructions). We will open the floor for your questions and comments following the presentation. It is now my pleasure to turn the floor over to your host, Mike DeWalt. Sir, the floor is yours.

Thank you very much and good morning everyone and welcome to Caterpillar's Second Quarter earnings call. I am Mike DeWalt the Director of Investor Relations and I am very pleased today to have our Chairman and CEO, Jim Owens; our Group President, Ed Rapp; and our CFO, Dave Burritt, on the call with me today. This call is copyrighted by Caterpillar Inc. and any use, recording, or transmission of any portion of this call without the express written consent of Caterpillar is strictly prohibited. If you would like a copy of today's call transcript, you can go to the SEC filings area of the Investor section of our cat.com web site or you can go to the SEC's web site where it will filed as an 8-K. In addition, certain information relating to projections of our results that we will be discussing today is forward-looking and involves risks, uncertainties, and assumptions that could cause the actual results to materially differ from the forward-looking information. A discussion of some of the factors that individually, or in the aggregate, we believe could make our actual results differ materially from our projections, can be found in our Cautionary Statements under Item 1A, which is Business Risk Factors of our Form 10-Q filed with the SEC on May 2nd of 2008. Okay, earlier this morning we reported results for the second quarter of 2008 and in addition to our normal quarterly release, we also filed an 8-K with the SEC this morning, outlining our 2009 price increase for machinery and engines. First the quarter: without a doubt, it was a very, very good second quarter. Our all-time best quarter ever for sales and revenues, for profit, and for profit per share. And I will spend a few minutes reviewing the key points from the quarter, the outlook for 2008, and the 2009 price increase announcement. Let me start with second quarter results and the headline numbers were: sales and revenues of $13.6 billion, and that was up 20% from the second quarter last year. And profit per share of $1.74, and that was up 40% from last year. If we look at the top line, sales and revenues were up 2.268 billion and the elements were machinery volume, up 787 million, or about 11%. Engine volume was up 615 million and that's an increase of about 18%. Price realization added 398 million and about 207 million of that was related to engines and 191 million related to machinery. Currency impacts increased sales by 384 million. And that means that sales that were denominated and currencies other than the U.S. dollar translated into more dollars because the dollar was weaker on average than the second quarter last year. And finally, financial products revenues were up 84 million in the quarter. Now if we take the 2.3 billion increase in sales and revenues by region, we see a continuing trend. Relative weakness in North America more than offset by strong growth outside North America. In fact, sales and revenues were up 52% in Asia Pacific, Latin America was up 27%. EMEA, our Europe, Africa, and Middle East region, which includes the CIS, was up 22%. And even in North America, we were up 7%. The strength outside North America is clear from those numbers particularly in the developing world. Latin America, Asia (excluding Japan), and the CIS, Africa and Middle East regions of EMEA. Many of these regions have been major beneficiaries of rising commodity prices. Their economies are growing faster than in the more developed world, and they are spending on infrastructure, mining and energy. This quarter, 60% of our sales and revenues were outside North America. A year ago in the second quarter, that number was 55%. But I think to really appreciate the magnitude of the shift in geographic mix, we need to go back and look at what happened over the past two years, when North America was coming off of its peak. Compared with the second quarter of 2006, Asia Pacific is up 84%, Europe, Africa, Middle East is up 60%, and Latin America is up 55%. And during that same period, sales and revenues in North America were down 3% and actually closer to 13 if you adjust for Progress Rail which we acquired at the end of the second quarter of 2006. Now, I do not really want to get too involved in a two-year retrospective, but I think the magnitude of that change is important. And remember, for machinery, which historically had higher margins in North America, and over the past two years, sales are down in North America. At the same time, we have seen those dramatic increases in sales to the developing world. And that has been a headwind to our machinery margin rate. Okay, that is enough on the two-year retrospective; let us get back to the comparison with the second quarter of 2007. And in that comparison, I would mention that North America was up 7% at the top line and that might be a surprise to you. You may be particularly surprised to see machinery sales up 8%. Please remember, though, that end-user demand for new machines is continuing to decline in North America and we are definitely still in a severe trough in the United States. There are several factors that you need to keep in mind that are helping our North American sales despite depressed in-markets for construction equipment. First, North American dealers reduced inventories in last year's second quarter by about $800 million. That means that dealers satisfied about 800 million of end-user demand from inventory. And that had a negative impact on our sales last year. This year dealers also reduced inventories in the second quarter, but only by about 200 million. So the negative impact on our sales was much less than last year. Second, mining is doing well, particularly for coal. Coal prices are up substantially from last year and U.S. exports of coal are rising. Sales to coal customers were well up from the same period a year ago. In addition, sales for engines were up in the quarter. On-highway, petroleum, marine, and industrial engine sales were all up. Also, remember that our machinery and engine sales include a wide array of services, including after-market parts, Progress Rail, CAT remanufacturing and CAT logistics. And these businesses are generally not as cyclical as the new machine sales. Okay, we had a record top line of 20% in the face of extreme softness in North America and a weakening in Europe. Let us turn for a moment to profit. Our second quarter, again, was the best ever for profit at 1,106,000,000 and $1.74 a share. Profit dollars were up 34% and per share was up 40%. We did have a discreet tax benefit in the quarter of $47 million. Without that tax adjustment, profit would have been up 29%, rather than 34, and profit per share would have been up 35 rather than 40%. The tax adjustment was a positive in the quarter, but it still would have been an all-time record for profit and profit per share, even without it. Our improvement in profit versus a year ago was the result of 398 million of improved price realization, the higher physical sales volume, and the $47 million tax benefit. Those positive impacts were partially offset by higher manufacturing costs, particularly for material. And about 80 million of negative product mix; essentially, all related to machinery. Overall, manufacturing costs were up 143 million and essentially all of that increase was material and freight. Material costs were about two-thirds of that total and freight and expediting, the other third. Now supply chain related operating and efficiency and tight capacity in many of our facilities continues to be a problem. We had those issues this quarter and we had them a year ago. That said, the situation is stabilized and we expect continued improvement as the year progresses. Our manufacturing costs increase in the quarter was virtually all related to material and freight costs. Everything else, including the impact of inflation, was about flat. Machinery and engines SG&A and R&D expenses combined up about 113 million but declined slightly as a percent of sales. And the increase in operating costs was mitigated somewhat by the absence of a $44 million pre-tax pension charge from the second quarter of last year. And finally, the impact of currency on operating profit was a negative again this quarter by about 62 million. I am going to switch gears for a minute and talk about our operating profit rate. For machinery and engines, operating profit was 1,430,000,000 or 11.2% of sales. And that compares with operating profit of 1,120,000,000 a year ago, or 10.65 of sales in the second quarter last year. All of that operating profit improvement was related to engines, machinery operating profit was little change from last year. Without a doubt, our engine businesses had an outstanding quarter. And I will hit a few key points to help put the machinery and engines margins into perspective. First, machinery is about two-thirds of total sales and engines are about a third. And more than half of this quarter's improvement and price realization was related to engines and that really helped engines operating profit. Of our total material cost increase, it was virtually all machines. Engine-related material costs were about flat with last year. All of the negative currency impact was related to machines. And sales mix was about 80 million negative for machinery, while engine mix was very slightly favorable. Okay, that's a summary of the quarter. I'm going to move for a minute to the full year outlook. We adjusted the outlook slightly. We expect sales and revenues to be about 50 billion for 2008 and profit per share to be about $6.00. Our previous outlook was a range of 47.2 to 49.5 billion at the top line. And that was up 5 to 10% from 2007. Our product profit outlook was a range of 564 to 618, or up 5 to 15%. And the mid-point of the outlook was 48.4 billion at the top line and 591 per share. I know we did not increase the numbers much, but a few of the elements of the outlook did change. In terms of sales, we are a little more bullish overall, particularly in the developing world, Asia/Pacific, Latin America and our EMEA region, excluding Europe. However, we continue to be pessimistic about new machine sales in the U.S. and have lowered our already negative full year machine industry expectations a bit more. That said, overall we are slightly more positive on our full year 2008 North American sales in total. We had a good second quarter. Engine sales are up. And our integrated service businesses are not as cyclical as new machine sales. We have, however, lowered our expectations for European machine sales. Like other companies, you have heard from, we have seen declines in Europe. We expect those declines to continue through 2008. We have adjusted our outlook accordingly and we expect to lower production schedules somewhat in Europe, particularly for smaller machines. In terms of profit, our product forecast had a mid-point of 591 per share. Our current outlook is about $6.00 a share, up slightly. The positives are higher sales volume, better price realization, and that second quarter tax adjustment, which was not in our prior outlook. Two negatives to the outlook are higher material costs and freight costs. Higher steel and fuel are the principal drivers. In terms of material costs, we now expect 2008 to be up 2½ to 3% versus 2007. Okay, let me put that outlook for full year material costs and price realization in context. First, we expect that for the full year 2008 and actually, for the second half of 2008, that price realization will see material cost increases. In fact, for the full year we expect that price realization in dollars will be more than double our material cost increase. So that is a positive. However, if you look at price realization and material costs compared with the outlook that we issued in April with our first quarter release, our previous outlook, we're seeing a bit more of an increase in material costs than we are in price realization. And that is a bit of a drag on the full year outlook. And it is offsetting much of the profit improvement related to our increase in the outlook sales volume. That said, our outlook is better at the top line and better at the bottom line than the mid-point of our previous outlook. And that considers a weaker Europe and that considers more of a drag from material costs than we previously expected. Six key points here, just to summarize: first, we had a good quarter, our best ever for sales and revenues and profit. Despite severe weakness in the U.S., a weaker Europe, a negative product mix and a negative impact related to currency. Second, our costs are up from last year. But when you consider overall inflation, we are doing fairly well. In fact, manufacturing costs in the second quarter were only up 1.4%, and that includes labor, overhead and material costs. And considering where inflation has been, particularly for material costs, that is not too bad. That said, we still have a lot of room to improve. And we think we are doing the right things to drive that improvement. Okay, third point, in terms of the outlook, we do see a weakening picture in North America, Western Europe and Japan and they are all included in our full year outlook. Fourth point, our order backlog continues to be very strong. Commodity-related end markets are doing very well and from a geographic standpoint, the developing world continues with good growth. Point five, sales of many of our products are production constrained. For most large machines and engines, we are selling as much as we can make. And finally, we have a diverse business in terms of products, services, end-markets, and geographies. We have some that are doing very well and that are helping to offset very negative impacts from others. Okay, one more thing before we move to the Q&A. We did announce our 2009 price increase this morning. And that was an increase of 5 to 7% on machines and engines effective January of 2009. That is more than we did early this year, and it is more than we did last year. The announcement is about six weeks earlier than our price announcement last year. But given order backlogs and the material cost environment, we decided to announce the increases a little earlier this year. Okay, that is it. We are ready to move to the Q&A portion of the call. And again, please limit yourself to one question and one follow-up so we can get as many people in as we can. Operator, we are ready for our first call please.

Thank you. (Operator instructions) Our first question today is coming from David Raso. Please announce your affiliation, then pose your question. David Raso - Citigroup: Citigroup. The question I have, you just commented that price would be twice as much as your increase in material costs. If you look at the guidance material costs, you said 2½ to 3%. So if I take the mid-point of that, it is saying your costs will be up about 900 million. For a price to be 1800 or a billion eight, that means you need the back half of the year price realization of over a billion one, a billion two. Just to make sure I am reading that correctly, you are saying price realization is going to accelerate to well over 5% each of the next two quarters, after you just did 3.3 in the first half. I know you did a mid-year price increase but is that correct?

No, it is not quite correct. I think your material cost number is a little high. You want to base it on something more like 22 billion. David Raso – Citigroup: So it is the material cost increase, it is not your total operating cost?

Oh no, material. It is the second half of this year. And the price increase is for '09. David Raso – Citigroup: Correct. I am just trying to think for the second half of the year. It still seems that your baking in a little more price realization than the first half of the year.

Yes, David, that is correct. We had the mid-year price increase, remember. So price realization in the second half of the year we think will be a little better than the first half. But material costs are going to be higher in the second half. And probably up a little more second half to first half and price realization is up. And price realization will be up more than material costs but not as much more than the first half. David Raso – Citigroup: And for the price increase for '09, after that level of price increase the question was raised about demand destruction . Can you take us through where you think it would get obviously mining, oil and gas, you would think, but can you take us through a little more detail where you think you can get that kind of pricing and not have a demand response.

David, Jim Owens. As Mike said, we indicated our price plans a little earlier this year for '09 because of our concern about cost pressures that are out there in the marketplace, stemming from higher steel prices. There is a lot of pressure to take steel prices up significantly in the second half of this year, and energy costs and transportation costs of course. And steel is in a lot of the things we buy, so it's not just direct steel purchases, but components that include steel. Our global purchasing group, working very closely with our product managers is working very hard with key strategic suppliers to hold back those price increases. But the overall economy in the OECD world begins to bottom and accelerate and pick up a little bit in '09, '10. We think those cost pressures are real and will be there, so we are trying to protect ourselves in being sure that we can fully cover material costs with a price out in the '09 timeframe. David Raso – Citigroup: And by announcing the price increase this early, Jim, which is a good two, three, four months earlier than you normally do, can we expect January 1 a large majority of your shipments will be going out with the price increase?

Well, for some of our products, yes, I think we will still have some price protection probably that spills over into '09, but not a lot. And that is why we announced it early, so we would not have that price protection issue. But I want to stress one other point. We are going to obviously be very attentive to what the market will bear. The question you had is can we get that. Certainly, in mining, in oil and gas, in a lot of places where commodity prices are very strong and demand for our products, is very strong, we would expect those will happen. In some cases, we are indexed, our prices are indexed to produce a price index. So as the steel and energy costs work their way through, we get it automatically. But in all cases, we're going to be looking very carefully at the marketplace, the value that we provide to customers, and being sure we're competitive and holding our market position. So it depends on what the market will allow us to do. Thanks David. Next question please.

Thank you. Our next question today is coming from Daniel Dowd. Please announce your affiliation, then pose your question. Daniel Dowd – Bernstein: Good morning, Bernstein. Let me actually touch base on guidance, because as I look at your guidance for North America, you said that you have taken it up but it only reflects the earlier part, better strength in the earlier part of the year. I think that implies that you are not seeing a weaker second half in North America. And while you are also seeing weakening in Europe, you have also indicated that Europe, Africa, Middle East as a region is actually net going up compared to your previous expectations. And your guidance seems to imply if you end up hitting six, that your EPS in the second half of the year is actually probably lower than it is in the second half of last year. Can you just talk through if you view that as conservative or if you think that actually the weakening is such that your EPS growth year on year is likely to be minimal in the second half of the year.

Dan that was one question and nine follow-ups all wrapped in one. But I will try and take them all. First off, on North America, we did have a pretty good second quarter. When you look at our guidance for North America, one thing you do need to remember is that much of the dealer inventory came out in the first half last year. So the second quarter of last year, so when we are looking at our sales quarter over quarter, there is probably a bigger impact from the dealer inventory change in the first half than the second half. Second thing, if you just look at sales and users of new machines, that continued to decline, I think, second half without a doubt, is probably going to be weaker than the first half, because that's continuing to decline. But engine sales are doing pretty good. Mining is doing very well. Coal mining is up a lot. Energy, machines in the energy sector are doing very well. So there is still good pieces of North America as well. With respect to Europe, or EMEA - Europe, Africa, Middle East, that is right, overall we took our guidance for EMEA just a little bit, a few percentage points. I think it was 7 to 12% a range last time and now I think we are talking 10 to 15. And we have seen continued good growth in EMEA outside of Western Europe and we have seen declines in Western Europe without a doubt. But again, when you think about our products, many of them being we are selling as much as we can produce. To some degree, to the extent that Europe is down, we can divert a little bit more production to some of the other areas. So that is a help there in some of the other areas. In terms of first half, second half, profit, I think the observation that you, and I think others have made, that our second half profit expectation is lower than the first half, is absolutely true. Let me kind of put that in some context. First, we had sales declining a bit in the second half. We had I think 25.6 billion in the first half and we are looking at about 25.4 billion in the second half. So a decline at 50 billion even of about 800 million. And I said a minute ago, that our price realization for the second half was going to be a little bit better. So that means that volume in the second half is actually down a little bit from the first half. And so that will be a bit negative to profit overall. The relationship between price realization and material costs, we are going to get more of a material cost increase in the second half than we are going to get increased price realization. We are going to have more price realization and materials costs but relative to the first half, it is not going to be quite as net net favorable. So that will be a little bit of a drag on second half profit versus first half. And then do not forget we had two things in the first half that are not going to repeat in the second half. Remember we sold our interest in ASV to Terex in the first quarter and we had about a $60 million gain related to that. Secondly, in the second quarter of this year we had the tax adjustment, $47 million after-tax. So those two items certainly are not going to repeat in the second half and so those helped improve the first half profit. So I think that is a reasonable summary of first half, second half. A little bit of a tighter comparison on price versus material costs. Volume going down a little bit, second half versus first half. And remember, first half is normally kind of the selling season. Normally second quarter is the big strongest quarter for sales. So you would normally expect, particularly in the third quarter, sales to go down a bit. So sort of at a high level, I think the summary of first half, second half and an update of the regions. Daniel Dowd – Bernstein: If you were going to put a range on that $6.00 number, can you give us a sense of what that range would be?

Well, since we didn't I'm not going to now, but I think you can probably infer that since we just kind of gave out one number and said about, that, you know, we have a reasonable level of confidence, you know, based on the results that we've seen. Daniel Dowd – Bernstein: Okay, thanks Mike.

Thank you. Our next question today is coming from Ann Duignan. Please announce your affiliation then pose your question. Ann Duignan - J. P. Morgan: Hi, it is Ann, JPMorgan. Good morning, guys. I guess I will focus on something slightly different, well first, Mike, could you just confirm, my analysis suggests that your input costs will be somewhere around a little bit north of 600 million. Is that kind of directionally where you are thinking?

Now when you say input cost do you mean material cost? Ann Duignan - J. P. Morgan: Material cost, yes.

Yes. I mean, we said sort of 2 ½ to 3% and our purchase volume is, you know, order of magnitude, you know 22 billion. Ann Duignan - J. P. Morgan: Okay. Yes. Okay. I just wanted to make sure I was calculating it correctly. My question is on the financial services business. Past dues were up to 3.35 in the second quarter. I know that that is below your last cycle's peak. But, you know, given the environment out there, you know, could you just give us a little bit more color on what is going on in financial services and just, you know, how bad could it get for that part of the business? I mean one would think that the cycle is worse than the last downturn and could be more prolonged and so things could deteriorate quickly on the finance side.

Yes Ann, this is Ed Rapp. I will cover that one. Yes, you know, needless to say we are watching it very close. As you pointed out, you know, past dues did grow to about 3.35% net, and that is up, you know, from the 2.09 last year. But, you know, if you look at the write offs net of recoveries, just you know, 19 million for the quarter versus 12 million for last year. So that shows you from a write off perspective, you know, very much I would say under control. If you look at, you know, our allowance to loss ratios, you know, I think being well managed and I think we're in a good position in that regard. So I think we are well below the last downturn. If you go back to 2002 and kind of look at those numbers, the past dues then peaked about 4.78, you know, versus that 3.35 we are having now. Another critical one is that if you were the write offs at that point in time, you know, we peaked at about a .69% of the average retail portfolio and that's kind of more than double the annualized rate we saw in the second quarter of this year. So yes, you know, there is the softening in North America and probably some risk there, but, you know, I think it is being well managed and it is well below the kind of peaks that we saw from the pressure on the financial side in the 2002 period. I think the other thing on Cat financial that's important to note is that in terms of new retail business they had a record second quarter, over $4.6 billion globally of new retail business. And I think it just shows the benefit of the global expansion of Cat Finance, where they are benefitting from some of the growth globally that we are seeing in other parts of the business. Access to funding continues to be good. You know, the recent issuance on medium-term notes have been oversubscribed in the three to four to one type ratio, so we still have good access to funds. And I think overall Cat Finance is kind of doing what we expect them to do is, you know, just deliver good, sustainable earnings through, you know, the peaks and valleys.

I mean, I would add just a little bit to that, Ed, I mean, our spreads, too, I mean, spreads in the market are a little higher but we have been able to take that to the marketplace so we are not being penalized by little tighter spreads. And they have needed to be there just to manage risk, but the other thing I think that gives me a lot of encouragement about Cat Financial, we have been through some very difficult times. I remember most prominently the Asian crisis in '97 where, when we had a really cataclysmically negative situation across a lot of areas that Cat Financial had a lot of exposure, and we managed that at the end of the day with very little write offs. We had a lot of late payments and we moved a lot of product around, but keep in mind, again, we get good down payments. We know the customers. We know the product. When we have to repossess it, we can repossess it and remarket it. So that has been a real strength for Cat Financial, the highly integrated nature of how it works with our dealers and with the Caterpillar organization. Ann Duignan - J. P. Morgan: So are you confident at this point then that even if the downturn in the United States or North America is as bad or worse than 2002, that the diversification can support the business? Is that where your confidence is coming from?

Ann, this is Mike. I think that if you are looking at just, you know, U.S., our business is down that much now already in the U.S. You know, our new machine sales to users are off order of magnitude 40%.

You know, the thing that gives me a lot of encouragement is our last half of the year outlook is for continuation of what I would describe as significant recessionary condition in essentially the old OECD world, United States, Western Europe and Japan, all down between 30 and 40% and sliding. And with that outlook, that being an integral part of our outlook, we are still confident enough to say that we think that we will be around $6 a share. Ann Duignan - J. P. Morgan: Okay. I will get back in line then and talk to you off line, whatever.

Okay. Ann Duignan - J. P. Morgan: Thanks.

Thank you. Our next question is coming from Jamie Cook. Please announce your affiliation and pose your question. Jamie Cook - Credit Suisse: Hi, good morning. Credit Suisse and congratulations. My question, just a follow-up on the guidance, I mean, you grew the first half 19% and the back half implies 4%. And I am just trying to get a feel for to ask Daniel's question differently, if I look at what you grew EMEA in the first half and what is implied for the second half, it seems like a dramatic fall off. So I mean, can you just comment more? What you are seeing in Western Europe and from Ann's question, did you say you expect that to be down 30 to 40%? And then also on the Asia Pacific side, too, just your implied guidance in the back half of the year just seems, you know, that the growth is going to be much lower or is that all Japan or are you seeing any weakness in China and India?

Well a couple of things, Jamie. One, I think--remember for a lot of product we are supply constrained. You know, if we had a unconstrained forecast our sales number would be higher than it is, so I think that is one factor, particularly for large machines and large engines. That is a bit of a limiting factor on our top line for the second half of the year. And we are doing a lot of things to add capacity. CPS is helping. We announced investment in North American, in Asia, India and China in particular. But, you know, in the short term first half to second half here, that, you know, our ability to produce is a bit of a dampening factor. We do think that we didn't quantify it, but we do believe that Western Europe or Europe is, other than the CIS, is going to be down, but the region overall for the year anyway is up a little bit. But if you look at first half to second half we had pretty good increase last year, but I think again we are a little bit constrained on our ability to supply second half. Jamie Cook - Credit Suisse: So it's--

We do see Europe weakening and we do see demand in North America weakening. No doubt. Jamie Cook - Credit Suisse: When you see Western Europe weakening are you expecting it to the magnitude that you see North America, because I think you said peak-to-trough you are off 40%?

Yes. Peak-to-trough, that is going back to Q1 2006. I think historically, you know, Europe's peak-to-trough has not been quite as dramatic as North America historically. But we do not really disclose, you know, the regions of the EMEA separately. Jamie Cook - Credit Suisse: Okay. And then just a follow-up question on your peak earnings of 8 to 10 bucks per share, I think I asked last quarter how you felt about that and you said one of your biggest concerns is North America takes a little longer to recover, which is happening. And now we have Western Europe falling off. So I mean, how comfortable are you with the 8 to 10? And are there any offsets that you're seeing, whether it's through CPS or pricing that give you confidence that you can achieve that number in would it seems like a weaker macro environment?

Jim Owens. Just a comment on that, the 8 to 10 was not a peak by the way. Jamie Cook - Credit Suisse: Well, for 2010.

The range that we anticipated with strategy we are working hard to deploy that we would be able to achieve in 2010. And my answer is we are still quite comfortable with that. The United States will eventually begin to recover, I mean, housing starts this year are going to be below a million starts. I think the country needs somewhere between 1.6 and 1.8 million. We will eventually work through this credit crisis and we will burn off the excess inventory. And I think we are demonstrating we can function pretty well and deliver pretty good results in the face of pretty severe recessionary conditions in the U.S. housing market certainly. And again, with some recessionary conditions in many of the markets we serve in Europe and Japan. So I think there is a high probability that we will start to see recovery in those areas by 2010 and a lot of the other capacity expansion work, Cat production system work, et cetera, give us confidence in the range that we have provided you for 2010. Jamie Cook - Credit Suisse: Alright. Thanks. I will give it back to you.

Thank you. Our next question today is coming from Robert Wertheimer. Please announce your affiliation and pose your question. Robert Wertheimer - Morgan Stanley: It is Morgan Stanley and good morning everybody.

Good morning, Rob. Robert Wertheimer - Morgan Stanley: I guess my biggest question is on pricing in North America. I think you had up three which I thought was extremely strong, especially given your comments on where at least the construction side of the end market is going. So I wonder if you can maybe give any granularity on what mining is versus construction or whether you are positive in construction and how you manage to do that in such a steep downturn?

Okay. And we are talking about second quarter here, just to clarify for everybody? Robert Wertheimer - Morgan Stanley: That is correct.

A couple of points, Rob, Jim made a comment earlier that mining for example, a good piece of that was formulaic based on partnership agreements or alliance agreements that we have with mining customers. So certainly there, is pricing in industries like that. The second thing to remember is, you know, if you go back and look at what happened because we are comparing second quarter to second quarter. If you go back and you look at the second quarter last year, pricing was very weak. In fact, it was down versus the prior year, actually negative. And it was a year where we were working with dealers to really help get inventory out and that was negative to price realization in the second quarter last year. So I think that I guess the way I would describe price realization in North America is Q2 last year was particularly weak and this year we still have a pretty tough environment, but you know, we did not take $800 million worth--help dealers take $800 worth of inventory out. Robert Wertheimer - Morgan Stanley: That is fair enough. Let me follow up on the inventory question then. The North American dealer inventories were up you said in dollars and months year-over-year. Is that because, you know, the dealers are more optimistic than you are going forward? Or do you think they just missed their sales forecast and that is why they ended up with a little bit more inventory?

Yes, that is a good question, Rob. First off I will just sort of clarify, both of those numbers, both the months of supply and in dollars are up slightly versus a year ago. It is not a stampede of inventory. And I think, in fact, if you were to poll most dealers, my guess is they would tell you that they would like more inventory. And it goes back to the point that particularly for, you know, core and large machines and large engines, you know, we're selling what we can get produced. You know, they see a tight supply. Normally at this stage of a North American or U.S. machinery cycle, there is plenty of availability of product. We are not seeing that today and my guess is they would like to see better delivery performance than they are getting right now. It is a lot tighter because of the strength outside the U.S., again we are a big net exporter from the U.S., particularly for the large machines and engines.

So I would say tight supply driven by the rest of the world is a factor and maybe Mike, just a little bit of color on that. Our marketing companies are working hand in glove with our dealers to manage their inventory positions. They know we are moving to, you know, with the Cat production system, a process to deliver more just in time to their needs, more standard configurations, and to really pull that inventory back out of the dealer channel. So we are managing pretty carefully orders, so we do not have excess pockets of inventory build up anywhere in the system. And that is a global phenomenon that we are increasingly aggressive on, trying to manage dealer inventory levels to appropriate levels to get the business but not have excess inventory.

Thanks, Rob. Robert Wertheimer - Morgan Stanley: Thanks gentlemen.

Thank you. Our next question today is coming from Seth Weber. Please announce your affiliation then post your question. Seth Weber - Banc of America: Hi, good morning. It is Banc of America.

Good morning, Seth. Seth Weber - Banc of America: Good morning. Mike, given your comments about, you know, capacity constraints on the big machines and big engines, can you give us some idea of, you know, what percentage of, you know, new capacity you will be adding and when that will roll in so we can start to think about, you know, '09 revenue growth?

Well, we have talked about it in a couple of ways. You know, one, just the continued implementation of CPS should improve throughput, so that is a positive. And that is ongoing. You know, we have seen some benefits of that this year and, you know, that should continue on to '09 and '10. And then, let us see, in June, I think mid-June we announced capacity increases for the big Illinois facilities which produce a lot of the large machines. And that's this year, next year, we announced essentially I think a three-year program of a billion dollar capacity increase, so that will come on over the next few years, so I think that's the most we've said so far on, you know, kind of the details of how it is coming in. But I mean, if you look, last year right now, you know, we were tight on supply and we are up versus a year ago. So without a lot of new bricks and mortar we have been able to get production schedules up and we expect to get them up some more next year.

It might be just a little more because the Lafayette capacity is coming on as we speak and that's helping us on the big engine side and that's about a $400 million investment that's by the end of this year will be fully deployed and that's a significant capacity increase there. But it's ramping up as we speak this year. We also have four new plants under construction in China as we speak, two announced just recently that will be under construction in India, so our footprint in the emerging markets, and that would be supported by a lot of supplier development work, will be adding significantly to our capacity and we bought SEM in China. We are looking now to brown field expansion around that facility and lifting capacity there. So we're not about to give you a 2009 outlook yet, but certainly we're working on a lot of things that will over the next, as Mike said, three years begin to bear fruit in the way of new capacity available to us. Seth Weber - Banc of America: Okay, thanks. If I could just ask a follow-up on the North American market, have you noticed a material decline in activity from, you know, local infrastructure or, you know projects that are being funded by tax receipts from this point?

Yes, I think in fact I just looked at that this morning. At the conclusion of this call, we will post up the retail numbers. You know, I think what we have seen in North America is that with the exception of, at least for the big categories, with the exception of energy and mining, pretty much everything: housing, non-res, infrastructure, you know, they are all down similarly. Seth Weber - Banc of America: Okay, thanks very much.

Thank you. Our next question is coming from Terry Darling. Please announce your affiliation and then pose your question. Terry Darling - Goldman Sachs: Goldman Sachs, thanks. Mike, trying to think about the price of raw material balance as you move into 2009, and I guess, you know, in particular the $600 million cost inflation number which I think you had indicated two-thirds of which is material and a third was freight, but maybe that whole piece is materials. But in either case, I guess in this context I think you'd disclosed earlier that 10% or so of your materials is steel. So that's 2 and ½ billion with the spot market up, you know, 60 to 100%. I know you get a lot of protection this year. I am wondering if in this context you can help us think about that price of raw material trade off? As you go into '09 obviously you're aggressively raising price and so, you know, we would assume that those material costs will ramp up aggressively as well from 600 million in '09, but if we just assume steel price sort of stayed flat through the end of '09 from here, so let's say a very theoretical exercise, how much of those raw materials go up on you in '09?

Terry, I am going to be very careful. We do not have any '09 guidance. So I am going to be very careful in answering it. But, I think Jim alluded to this earlier. Our purchasing group has done a pretty darn good job of holding back price increases, working on the timing, working on offsets. You know, trying to work with these steel suppliers to find things that we can do to mitigate the increase. And we have done a decent job of that. I think you see that in our second quarter numbers. And I think, all things considered you see that in the guidance that we have for the full year. And that number that you were talking about did not include freight. That was just material provided. So I think in context, we have done a darn good job of managing, in this material cost environment this year. But your point is a good one. And it is I would say, directionally correct. If things do not change 2009 is going to be quite a bit more challenging in cost than 2008. Terry Darling - Goldman Sachs: Okay and then we're a quarter further down the journey on CPS and it is good to see that you are not seeing the sort of friction costs from manufacturing inefficiencies that we are. I guess we are all hoping to see that turn from neutral to something positive. I am wondering if we are far enough down the path here where we might be able to talk a little bit more specifically about what you think that number could like in 2009?

Well next quarter, our history, anyway, is in the third quarter we tend to start talking about the following year. So my guess is we'll probably be able to give you a little bit more color on that when we start talking about '09.

Let me just add a brief though on the Cat production system. We have talked about this as a journey and quite frankly the 300 manufacturing facilities around the world, it is a big change management process by a lot of metrics. But my sense is we are beginning to get a lot of traction. We have talked about this before, but certainly our safety numbers and quality numbers have improved. And improved steadily and in some cases dramatically. But across the board on the how metrics, now, you know things like product availability, our on time shipments, percent of the material coming through on pull, inventory record accuracy, et cetera, et cetera. Almost across the board those metrics continue to get steadily better every month. I am impatient, also, to see pull through on cost and on velocity. But I think these are things you are going to see steadily over the latter half of '08, '09, '10. You know our target was to have this thing at world class performance level by '10. I wish it could happen overnight. It's not going to. But our team is working very hard on it across the organization and you can see discernible traction. And for those of you that have visited our facilities it is there. It is going to yield a dramatic improvement, I think, certainly in inventory turns between here and 2010. Stay tuned. Terry Darling - Goldman Sachs: Thanks. And then just lastly if you could address the China question that was asked earlier about some of the signs of decel (ph 00:53:22) going on there.

China has been very good growth. Actually I do not see any signs of declining demand in China. It looks pretty good. Now again, our sales to a degree are limited by production. Now the Asia region in total, China looked pretty good. Terry Darling - Goldman Sachs: Thanks much.

Thank you. Our next question today is coming from Robert McCarthy. Please announce your affiliation then pose your question. Robert McCarthy - Robert W. Baird: It is Robert W. Baird. Good morning gentlemen.

Good morning Rob. Robert McCarthy - Robert W. Baird: Just to confirm first. I want to make sure that I understand correctly. Second quarter results were modestly better than internal expectations?

Yes they were. Particularly because of the tax change. That was not a part of our outlook. Robert McCarthy - Robert W. Baird: Understood. Excluding the tax change is my question.

We do not do quarterly guidance. So other than that, I am going to let that question go. Robert McCarthy - Robert W. Baird: Okay. And in terms of the large machine products in particular, where you were capacity constrained, sold out for some period of time, and in turbines, are these products where over the last quarter you have seen your delivery lead times remain relatively static? Or have they actually increased?

I think in general, I will not say necessarily over the last quarter, but compared to a year ago, without any new factories producing these things our volume is up. So, I think compared to a year ago we are doing more. Yes, particularly large engines. As Jim said, Lafayette's production is up. Solar had a good quarter. And mining as a percent of our total sales actually rose in the quarter versus a year ago. And that is an indicator of big machines. So yes, I think we are doing better. Robert McCarthy - Robert W. Baird: I am sorry. I do not mean to be dense. So you are saying that you think delivery lead times have actually come down somewhat?

No delivery lead times are a function of what the order board looks like, not just what you are able to produce. Lead times, particularly for big products are still pretty long. But our shipment performance, our volume have both improved. Robert McCarthy - Robert W. Baird: Right, but my question was whether lead times have been relatively unchanged or have extended?

I guess I would say overall there are puts and takes but overall not dramatically better. Robert McCarthy - Robert W. Baird: Okay. Thank you.

Thank you. Our next question today is coming from Alexander Blanton. Please announce your affiliation then pose your question. Alexander Blanton - Ingalls & Snyder: It's Ingalls & Snyder. I have got sort of a broader question, although I have the same concerns as most people. The fact that your second half guidance of 282 is below 290 earned a year ago, and well below the 304 that had been expected by the street. But I think you have gone over a lot of the reasons for that already. But it seems to me that you have got a problem coming up in 2009. And I'd like to get Jim's view on this as an economist because you have announced 5 to 7% price increases for 2009 to overcome inflationary cost increases. Inflation in this country, including food and energy is about 5% now, compensation is up 3%. A little better at 3.2%. Clearly if everybody increased prices 5 to 7% the Fed would have to step in and do something. Now you said that the efforts to reduce inflation in these developing countries with interest--the increases in interest that have been announced have not been very effective. So if they are not effective and this inflation of commodities continues, it would seem to me that that is going to make the economic in the U.S. considerably worse. The Fed will have to do something to prevent inflation from becoming embedded. Or if it does become embedded then that is an even worse situation. So do we have a dilemma here? Is there a way out, Jim? What do you think is going to happen in the inflation environment, worldwide, globally in 2009?

Well that is a pretty big, sweeping question. I guess we should call Bernanke and see if he can help us here. But I do not see us going into any kind of '70s style high inflation, stagflation. I think the emerging markets of the world being prudently conservative now and beginning to tighten their monetary policies and raise interest rates and try to slow growth and slow inflation, somewhat. And hopefully they will do that well. Commodity prices, as we have indicated several times, could drop fairly significantly. I am talking 30 percentish (ph 00:59:10)and still be at levels that would be attractive to drive investment in the mining and oil and gas industries because there has been such a prolonged period of under investment. I am a little concerned, very specifically, about the steel industry because there is more concentration globally in the steel industry. The energy costs are clearly up quite a bit. Iron ore pellet prices are up quite a bit. And they have a pretty strong position to push a lot of that through to the market. I hope we are being prudently conservative. But we wanted to position ourselves to be sure we could cover materially cost increases that might work themselves through in the latter half of '08 as we go in to '09. That would be the best way I know how to say that. Alexander Blanton - Ingalls & Snyder: Well, you are benefitting, as usual, from the increases in inflation rates that have occurred in worldwide economies. This always happens with Caterpillar in every cycle. But as those inflation rates come down, and as commodity prices come down the other side of it works and you get hurt. But you are saying that you think you could see a substantial decline in commodity prices and still not see a big decline in demand. Is that right?

That is correct. I think if there is a significant decline in commodity prices, from current levels, then you will still see pretty strong demand because of the, again, very prolonged under investment that occurred in global mining and in global energy. And that would be coal, oil, gas, power distribution, et cetera. Those things played to our strengths. And I think even with the commodity price decline which is likely in my view, we will see continued strong demand in those sectors. Thanks Alex. Alexander Blanton - Ingalls & Snyder: Okay. Thank you.

Thank you. Our next question today is coming from Andy Casey. Please announce your affiliation then pose your question. Andrew Casey - Wachovia: Wachovia. Good morning everybody.

Good morning. Andrew Casey - Wachovia: Asking Alex's question a little bit differently, when you look out to 2010, the 8 to 10 goal, which you just kind of reaffirmed that you have a high comfort level with, do you have to have a recovery in North America and Europe to achieve that?

Well, I think if we are in severe recessionary conditions in the U.S. and Europe, we probably will not be there. But I think if we're anywhere near trend levels of activity, which I would expect to be, then we have a very high probability. That's why we have a range by the way, a very high probability of being in that range. Andrew Casey - Wachovia: Okay and then--

You know, it would be extraordinarily unusual for the U.S. not to be in a fairly significant recovery by 2010 in my view.

This is Mike. I think, you know, there is frequently this glass half-empty view that North America, the U.S. is declining and going to get worse. I mean, it has been going down now for over two years. It is way off the peak. It is down order of magnitude new machine sales to users 40%, so you know, it has already seen quite a fall.

It has dropped as much as it did in the last two recessions, the '91-'92 and the 2001-02 recession already, and will probably get a little worse. Then I think it will begin to recover. I do not know when that recovery is going to start as we get out to '09. We will give you the '09 outlook , but whether it is early '09, mid-'09, late '09, we'll see, but I would be very surprised if it isn't underway before we get to 2010. Andrew Casey - Wachovia: Okay. And then just a follow-up if I could. If we do see a recovery it likely will be prefaced a little bit by some accommodative measure from the, you know, the central financial institutions in each region. What sort of timing would you kind of throw out there that that would have to occur, you know, to see that 2010?

Our outlook, the only thing that we have actually said is our outlook for this year presumes that the Fed is going to take another rate cut later this year. Andrew Casey - Wachovia: Okay. Thank you.

Yes. We are slightly past 11:00. I want to thank everybody for your participation today and we will talk to you again at the end of the third quarter. Thank you.

Thank you ladies and gentlemen, this does conclude today's conference call. You may disconnect your phone lines at this time and have a wonderful day. Thank you for your participation.