2007 SUSTAINABILITY REPORT - SocialFunds.com 2007 Annual Report, ... 2 2007 CATERPILLAR...

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2007 SUSTAINABILITY REPORT

WWW.CAT.COM

PEORIA, IL 61629(309) 675-1000YECX1231

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prODUceD BYCaterpillar Corporate Public AffairsCaterpillar Corporate Sustainable Development

DeSiGNVSA Partners, Inc.

pHOtOGrapHYArtumas Group, Inc.Cat Dealer IIASA, EcuadorCaterpillar Television & Electronic Media SolutionsChicago Climate ExchangeGisela Carvalho, Sotreq S.A.

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FOr MOre iNFOrMatiON

We value your feedback. Please email our sustainability reporting team at [email protected], send us your comments online at www.cat.com/sustainability or write to us at:

Caterpillar Inc.Sustainable Development100 N.E. Adams StreetPeoria, IL 61629-3350

Chinese, French, Spanish, Portuguese, German and Tamil translations of this report are available online at www.cat.com/sustainability.

To learn more about Caterpillar, or to request a copy of our 2007 Annual Report, please visit www.cat.com.

Date of previous report: April 2007.

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aBOUt tHe cOVerTraditionally defined as development that meets the needs of the present without compromising the ability of future generations to meet their own needs, sustainable development incorporates economic, social and environmental dimensions. The cover images reflect Caterpillar’s commitment to fully integrating these interdependent aspects into our business to deliver value to our stakeholders, society and the planet on which we live.

traDeMarK iNFOrMatiONCAT, CATERPILLAR, their respective logos, TODAY'S WORK., TOMORROW'S WORLD.,“Caterpillar Yellow” and the POWER EDGE trade dress, as well as corporate and product identity used herein, are trademarks of Caterpillar and may not be used without permission. MaK is a trademark of Caterpillar Motoren GmbH & Co. KG and may not be used without permission. PROGRESS RAIL SERVICES and design is a trademark of Progress Rail Services Corporation and may not be used without permission. SOLAR, as well as corporate and product identity used herein, are trademarks of Solar Turbines Incorporated and may not be used without permission. PERKINS, the “square and circles” design and “Perkins Blue” are trademarks of Perkins Holdings Limited and may not be used without permission. FG WILSON and the “globe” design are trademarks of FG WILSON (Engineering) Limited and may not be used without permission.

SaFe HarBOr StateMeNtCertain statements in this report relate to future events and expectations that constitute forward-looking statements involving known and unknown factors that may cause actual results of Caterpillar Inc. to be different from those expressed or implied in the forward-looking statements. In this context, words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “will” or other similar words and phrases often identify forward-looking state-ments. Actual results of the company may differ materially from those described or implied by such forward-looking statements based on a number of factors and uncertainties, including, but not limited to, changes in economic, political or competitive conditions; market acceptance of the company’s products and services; changes in law, regulations and tax rates; and other general economic, business and financing conditions and factors described in more detail in the company’s filings with the Securities and Exchange Commission, including in its year-end report on Form 10-K filed on February 22, 2008. We do not undertake to update our forward-looking statements.

© 2008 Caterpillar All Rights Reserved Incorporated in Delaware An equal opportunity employer

IDENTIFY. ENGAGE. SHAPE.

Our business interests and the critical issues facing the world are inextricably linked. Providing reliable and efficient

energy solutions, promoting responsible use of materials, enabling the mobility of people and goods, and

developing quality infrastructure are key societal challenges. They are also the major areas where Caterpillar, our

dealers and our customers have been providing solutions for decades. We continue to identify the intersections

of our capabilities and the interests of society to increase our business focus on sustainable progress. Recognizing

that the need for growth, the demand for energy, and quality of life issues are interconnected, we partner

with like-minded organizations throughout the world to embrace the challenges and engage in the pursuit of bold

business goals. We promote safety, energy and materials efficiency, the reduction of adverse environmental

impacts and societal well-being both within our operations and with our customers. As these issues continue

to shape our business, we continue to explore how we can enrich the discussions, collaborate on solutions

and, ultimately, help shape a more sustainable world.

2 2007 CATERPILLAR Sustainability Report

To drive a transformation in our organization, building on years of

hard work by Caterpillar people, we solidified our vision of sustainable

development and identified a more aggressive and comprehensive set of

goals in 2007. Our vision is to contribute, through our diverse businesses,

to a society in which people’s basic needs are not only met but fulfilled in

a way that sustains the environment. Our goals establish 2020 targets for

our operations and our products, services and solutions – and, for the first

time, include customer energy efficiency, material efficiency and safety.

These goals, shown below, are bold aspirations for a company

like ours, whose core businesses intersect with some of the world’s

biggest sustainable development issues. We must establish aggressive

goals, however, because incremental improvements are no longer

enough – and at Caterpillar, bold goal-setting is the best way to drive

real and sustained progress. The time has come for Team Caterpillar to

think differently, to question assumptions and ask “what if?” as we

tackle the challenges sustainable development presents.

ENERGY AND CLIMATE.

Climate change has emerged as the number one environmental issue

of our time. While many countries and companies have taken steps to

reduce carbon dioxide (CO2) and other greenhouse gas (GHG) emissions,

overall progress has been limited and technology development slow.

The International Energy Agency predicts that a “business as usual”

approach will result in dramatic increases in emissions over the next

few decades. According to many scientists, however, CO2 emissions

must peak by 2015 at the latest – and drop 50 to 80 percent by 2050

How will the world’s deepening understanding

of sustainable development shape our business,

and how will we in turn contribute – through our

products, services and solutions – to a more

sustainable world? These are the fundamental

questions Caterpillar is asking and answering

as we continue on our sustainable development

journey. Today, we are more informed and

engaged than ever. We recognize the substantial

business opportunities sustainable development

presents and better comprehend the magnitude

of the challenges it entails. As our understanding

grows, however, so does our realization that

making development truly sustainable requires

dramatic changes in how society in general – and

business in particular – operates.

A MESSAGE FROM OUR CHAIRMAN

ENTERPRISE GOALS TO 2020

Increase customer energy efficiency by 20%

Increase customer material efficiency by 20%

Reduce customer greenhouse gas emissions by 20%

2020 GOALS FOR PRODUCTS, SERVICES AND SOLUTIONS

Provide leadership in the safety of people in, on and around our products

Established in 2007, these aspirational, enterprise-wide goals align our interests, market needs and customer opportunities to provide a framework for action as we pursue sustainable development as a business. In setting these goals, we evaluated significant aspects and impacts of our operations and our customers’ businesses. We then identified internal priorities related to performance within our operations, and external priorities related to those aspects of our customers’ businesses we may impact through capabilities we provide to the marketplace. These goals – relative to a 2006 base – clarify our role and further drive a focus on sustainability in every aspect and sector of our business. In 2008, we will continue to articulate plans for the measurement and execution of performance against these goals.

3

– to limit the average increase in global temperatures to a few degrees.

We must take action now or risk serious harm to our planet. But

achieving the necessary reductions in emissions will require dramatic,

fundamental changes in the world’s transportation, electricity and

industrial sectors, as well as unprecedented technology development

and deployment, and public-private collaboration.

Society as a whole is struggling to address this issue. At Caterpillar,

we’re working with customers and industry groups to determine what

reductions of this magnitude mean for the products we manufacture and

the markets we serve. One immediate challenge is continuing to reduce

currently regulated emissions from our clean diesel engines to meet ever

stricter regulations. We’ve achieved near-zero particulate matter (PM)

emissions in our on-highway engines and now will do the same for our

machines and other non-road products – at the same time bringing oxides

of nitrogen (NOx) emissions to near-zero levels and ensuring our engines

operate with increasing efficiency. Meeting this challenge has led to one

of the biggest new product introduction efforts in Caterpillar history. We’re

moving rapidly to meet increasingly stringent PM and NOx emissions

requirements while maintaining fuel efficiency. We’re also building on

our experience with biodiesel and the next generation of biofuels to reduce

GHG emissions and fossil fuel consumption.

Externally, we’re stepping up our efforts to influence technology

and policy development. In January 2007, we joined 12 other corporations

and environmental groups to create the U.S. Climate Action Partnership

(USCAP). Throughout the year, more than 20 additional organizations

signed on to this initiative, which is pressing for the establishment of a

mandatory “cap and trade” system that will put a price on carbon emissions

and drive significant reductions in an economically efficient manner.

We also hold a leadership role in the Council on Competitiveness’

Energy Security, Innovation and Sustainability Initiative and are active

participants in the U.K.-based Energy Technologies Institute, the Asia-

Pacific Partnership on Clean Development and Climate and other regional,

national and international organizations. We will continue to stay engaged

in the years ahead – not just to share expertise and best practices, but

also to expose our people to different ideas and new ways of thinking

about economically-efficient, market-based solutions to energy and

climate change.

GROWTH AND TRADE.

Closely tied to issues of energy and climate are economic growth and

international trade. As the December 2007 climate change talks in Bali

demonstrated, progress will be slow unless we eliminate the financial and

trade barriers preventing technology development and deployment. Nations

must be able to invest in much-needed emissions reduction solutions,

either by applying their own technologies or acquiring those developed

by others. At the same time, business must be allowed to sell technology

on the world market. Without a global exchange of capital and ideas,

there’s little chance of tackling climate change on a global scale.

The impact of growth and trade extends beyond climate change

to other key issues. In fact, encouraging economic development that

improves standards of living is the first step to a sustainable future.

Nations that can meet their citizens’ basic needs for food, shelter,

Reduce absolute greenhouse gas emissions from existing facilities by 25%

Reduce recordable workplace injury rate to 0.6 and lost-time case rate due to injury to 0.15

Increase energy efficiency by 25%

Design all new construction to meet Leadership in Energy and Environmental Design (LEED) – or comparable – green building criteria

Hold water consumption flatUse alternative /renewable sources to meet 20% of our energy needs

Send zero waste to landfills by reducing, reusing and recycling waste

2020 GOALS FOR OPERATIONS

A Message from our Chairman


healthcare, transportation and communications are better positioned

to address issues of environmental and social sustainability.

Key to this economic growth is international trade and investment.

According to the World Bank, free trade has lifted 200 million people

out of poverty in the last decade, the largest and fastest reduction ever

recorded. Eliminating remaining trade barriers and farm subsidies could

improve quality of life for 300 million more individuals.

No government aid package or corporate philanthropy effort

can have this impact. Unfortunately, the United States and European

Union maintain the highest trade barriers against products imported

from the world’s poorest countries, and developed-world agricultural

policies often undermine growth in developing nations. These practices

must stop. We must treat developing economies fairly and give all

people the opportunity to flourish. As quality of life around the world

improves, more governments can afford to invest in promoting clean

air, clean water and responsible use of natural resources – and more

citizens can engage in the global economy as consumers of the

products and services we provide.

For these reasons, Caterpillar has long been a staunch advocate

of free trade and global engagement. Our business is proof that

companies compete best in an open trading environment, and we have

seen firsthand – through our nearly 500 locations in 50 countries – the

benefits of increased trade in the developing world. We will continue

to speak out against trade barriers and encourage governments

worldwide to adopt trade policies that balance economic, environmental

and social concerns.

PEOPLE AND PLANET.

Through our products and services, Caterpillar helps societies improve

living standards for their people – the first step in sustainable development.

Through our operations, we also help people and communities acquire

skills and resources to maintain sustainable livelihoods. By providing

meaningful employment, often with access to healthcare and educational

opportunities, and by establishing consistent expectations for behavior,

we enable people to make choices that consider future implications –

decisions that ultimately have a positive impact on their livelihoods, the

communities in which they live and the environment we share.

Caterpillar’s values are at the foundation of our efforts to establish

uniformly high levels of performance in our operations – and uniformly

high expectations for our people – around the world. Our Values in Action,

Caterpillar’s Worldwide Code of Conduct, gives each member of Team

Caterpillar clear guidelines for working with integrity and honesty. It

commits us to diversity and inclusion, employee health and safety,

environmental responsibility, community development and continual

learning – including a redoubling of our efforts to educate employees

about sustainable development.

Similarly, the Caterpillar Production System establishes consistent

cultural, operating and management systems at our facilities worldwide.

It empowers people at all levels to make good decisions in their daily

work and to take responsibility for creating a safe, positive workplace.

Throughout Caterpillar’s 82-year history, we have been successful

in large part because of our focus on long-term versus short-term gains.

We move carefully to measure the effects of our actions on all stake-

Our vision is to contribute, through our diverse businesses, to a society in which people’s basic needs are not only met but fulfilled in a way that sustains the environment.

5

holders. We establish and maintain lasting relationships with customers,

dealers, suppliers and communities. Through our operations, strategies,

processes and philanthropic efforts, we are committed to investing in

people and the planet for the long-term.

FURTHER AND FASTER.

Caterpillar’s sustainable development journey began years ago, but it

publicly took shape with the release of our 2005 Sustainability Report.

This report highlighted many of the key issues we face and explained

what sustainable development means to our company. Last year’s report

went a step further, documenting strategies, progress and challenges

in four key areas of our business: energy, materials, mobility and

infrastructure development.

This year, our report examines the interconnectedness of these

business areas and explores how issues such as energy use, climate

change, economic growth, free trade and sustainability intertwine. It docu-

ments metrics for the year 2020 that will drive our performance. And it

demonstrates how our products and services are improving performance

worldwide across a number of dimensions of sustainability – as well as

how we are working to build capacity in developing nations and foster

process improvements in the developed world. In short, our 2007 report

aims to identify those areas where we have an impact, demonstrate how

we engage stakeholders around these issues and explain how doing so

will shape both our company and the marketplace.

Our thinking about sustainable development has evolved over the

past few years – a credit to Caterpillar people, who continue to embrace

the challenges and opportunities. Now the time has come to push

ourselves further and faster. I know it can be done. More than a decade

ago, we faced the challenge of reducing particulate matter emissions

from our on-highway diesel engines by 90 percent, a task many thought

was impossible. But our people, faced with a seemingly unreachable

goal, threw conventional thinking aside and developed new technology

that delivered the necessary reductions.

Likewise, struggling to improve our safety performance in 2000,

we declared that all accidents and injuries are preventable, and therefore

our goal for them must be zero. Another impossible goal? Perhaps. But

establishing it has created a “zero tolerance” mindset about injuries at

Caterpillar, and the results in just seven years have been dramatic.

We need this type of “nothing is impossible” approach across

our company – in every facility, for every product line, throughout every

service area. We need all employees to challenge waste, eliminate

inefficiencies and work to deepen their understanding of our true impact

on the world in which we live. Only then will we be able to provide the

products, services and solutions customers in a more sustainable world

demand – and at the same time, ensure the sustainability of our own

business for all our stakeholders.

James W. Owens

Chairman and CEO, Caterpillar Inc.

LUKE DANIELSON Attorney and Researcher; International Center for Law and Development

GEORGE C. EADS Senior Consultant; CRA International

KEISTER EVANS President; Tropical Forest Foundation

BRUCE M. EVERETT Professor; The Fletcher School, Tufts University

MARGARET FLAHERTY Managing Director; World Business Council for Sustainable Development

BRADLEY GOOGINS Executive Director; Boston College Center for Corporate Citizenship

STEPHANIE HANFORD President; Connectivity Consulting, LLC

STUART L. HART S.C. Johnson Chair in Sustainable Global Enterprise; Johnson Graduate School of Management, Cornell University

CALESTOUS JUMA Professor of the Practice of International Development; John F. Kennedy School of Government, Harvard University

FRED KRUPP President; Environmental Defense

THOMAS E. LOVEJOY President; Heinz Center for Science, Economics and the Environment

GEOFF LYE Vice Chairman; SustainAbility Ltd/Inc. Research Fellow, Green College, Oxford

MARK B. MILSTEIN Professor and Director; Center for Sustainable Global Enterprise, Cornell University

WILLIAM R. MOOMAW Professor and Director; Inter national Environmental Policy, The Fletcher School, Tufts University

KEVIN SWEENEY Independent Consultant; Visiting Faculty, University of California, Berkeley

ANDREW VICKERMAN Principal Advisor; Sustainable Development Communications & External Relations Department, Rio Tinto plc

WILLIAM A. WALLACE Past President and Member of the Governing Board; Engineers Without Borders – USA

DURWOOD ZAELKE Partner; Zelle, Hofmann, Voelbel, Mason & Getty

ADVISORSThis report, our third annual, was created to help Caterpillar employees and other stakeholders understand the critical role our organization plays in the sustainable development of the world. The following pages contain details about our strategies, accomplishments and challenges, as well as metrics that are driving, or will drive, desired behaviors toward meaningful goals. We thank the advisory council of experts (listed below) who provided input and guidance, and all the Caterpillar employees who contributed to our 2007 Sustainability Report.

A Message from our Chairman


REMAN END-OF-LIFE “TAKE BACK” BY WEIGHT

(Millions of pounds of end-of-life material received)

112

135

139

141

160

04 0405 06 07 2010

REMAN REUSE AND RECYCLE TECHNOLOGY PROJECTS

(6 Sigma-based)

20

100

207

212

160

05 06 07 2010

REMAN END-OF-LIFE “TAKE BACK” PERCENT 5

(Actual end-of-life returns / eligible returns) x 100

95%

94%

94%

93%

93%

04 05 06 07 2010

LANDFILL /INCINERATED WASTE 1, 2

(Pounds per million dollars of normalized revenue)

5,68

0

6,70

1

5,27

8

4,6

56

04 05 06 07

ENERGY INTENSITY 1, 2

(Gigajoules per million dollars of normalized revenue)

04 05 06 07

666

951

720

688

GHG INTENSITY 1, 2

(Metric tons of CO2 equivalent per million dollars of normalized revenue)

75.0

67.5

65.1

62.7

65.9

04 05 06 07 2010

PERCENT RECYCLED 3

(Pounds recycled waste / pounds total waste) x 100

04 05 06 07 2010

42

57

65

70

80

REMAN BUSINESS GROWTH

(Percent revenue increase over 2001 base)

38%

56% 67

%

110%

04 05 06 07 2010

182%

PERFORMANCE AT A GLANCE. These graphs provide a snapshot of performance

according to the existing set of key indicators reported in our previous sustainability reports.

As the integration of sustainability into our business systems matures, our reporting will continue

to evolve. Future reports will reflect metrics that align more directly with the goals outlined

on pages 2-3. Please see pages 36-44 for more detailed discussion of our performance against

these indicators.

ENVIRONMENTAL IMPACT(Data do not include Progress Rail operations.)

REMANUFACTURING (REMAN)(Data do not include Progress Rail operations.)

7

CERTIFIED REBUILD

(Number of rebuilds over 2001 base)

131 20

9

354 4

47

947

04 05 06 07 2010

SOLAR® GAS TURBINES 7

(NOx emissions from SoLoNOx™ as a percent of NOx emissions from standard combustion systems)

100%

33%

20%

12%

85 92 95 06

U.S. ON-HIGHWAY DIESEL ENGINES 6

(Pounds of particulate matter produced per year)

470.

4

196.

0

78.4

7.8

88 91 94 07

Except where otherwise noted, operations data from facilities represent an estimated 95 percent of Caterpillar’s enterprise total but do not include Progress Rail operations. Facilities include wholly owned subsidiaries and ventures where we have a controlling interest greater than 50 percent.

(1) All 2007 data reported relative to normalized revenue represent estimates based on the preliminary estimate of the annual 2007 Producer Price Index for Finished Goods issued by the U.S. Depart-ment of Labor, Bureau of Statistics.

(2) Normalized revenue is revenue adjusted for inflation from a 2002 base.

(3) PERCENT RECYCLED waste excludes the weight of metal, which is 100 percent recycled. Including metal raises the PERCENT RECYCLED to 86 percent.

(4) Safety data from facilities represent an estimated 100 percent of Caterpillar’s enterprise total.

(5) Data prior to 2007 have been restated to reflect the availability of more complete and accurate information.

(6) Particulate matter emissions typical of a heavy-duty on-highway truck traveling 120,000 miles (193,116 km) per year with 2.97 hphr /mile, based on the U.S. Environmental Protection Agency’s heavy-duty on-highway truck emissions regulations.

(7) Centaur™ 50 turbine operating at full load on pipeline-quality natural gas at ambient temperatures above 0°F.

LOST-TIME CASE FREQUENCY (LTCFR) 4

(Lost-time injuries per 200,000 hours worked)

04 05 06 07 2010

1.96

1.29

1.0

5

.71

0.30

RECORDABLE INJURY FREQUENCY (RIF) 4

(Recordable injuries per 200,000 hours worked)

04 05 06 07 2010

4.99

3.92

3.07

2.2

0

1.19

WATER USE 1, 2

(Thousand gallons per million dollars of normalized revenue)

04 05 06 07

170 17

7

166

139

EMISSIONS

WORKPLACE SAFETY

12%

07

Performance at a Glance


ENERGYAND CLIMATE

With energy-related products and services accounting for over one-fourth of Caterpillar’s business, we are uniquely

positioned to provide solutions that span the energy value chain. From more energy efficient engines and products

capable of running on renewable fuels to services that combine unique technologies, we help customers improve overall

efficiency and reduce emissions through solutions that improve the effectiveness of traditional resources. In addition

to our core businesses, we are finding new, innovative approaches – like the conversion of waste gases such as coke oven

gas and landfill methane into useful energy – to meet the world’s growing energy and environmental challenges.

We’re also shaping the market and future technologies by promoting market-based approaches to address climate

change, and actively searching for solutions that promote energy security. For example, we actively endorse the

development of clean coal technologies to maintain this fuel – which generates about 40 percent of the world’s electricity

– as a reliable, low-emissions source of energy. We work closely with our mining customers to extract this abundant

resource as safely, cleanly and efficiently as possible, and look at the viability of gasified coal as a fuel for our gas engine

and turbine products. We also support leveraging commercially available technologies, and focused research and

development to bring mass-scale, cost-effective, carbon capture and storage programs to market.

We help our customers extract the world’s natural resources as safely, cleanly and efficiently as possible.

We enable the safe, efficient transport of fuels and fuel sources to market.

We promote the use of alternative fuels with our customers and governments.

We convert waste gases into clean, affordable energy.

We provide product and technology solutions to projects that enable the reduction of greenhouse gas emissions and potentially generate carbon credits.

EXTRACTION DISTRIBUTION CONVERSIONALTERNATIVE FUELS GHG EMISSIONS REDUCTIONS

9Energy and Climate


ALREADY ONE OF THE WORLD’S LARGEST REMANUFACTURERS, we continue to find

ways to use and expand our industry-leading expertise in this advanced form of recycling to help our customers

operate more efficiently and cost-effectively.

Progress Rail Services, a wholly owned Caterpillar subsidiary since 2006, remanufactures and recycles railcars,

locomotives, rail and track. As a leading service provider to the rail industry, Progress Rail’s extensive service

and supply network operates recycling and return programs that reduce waste, save energy and minimize the

consumption of raw materials needed to produce new parts.

Building on this service, Progress Rail began combining its expertise in remanufacturing locomotives with

Caterpillar’s expertise in enhanced electronics and engine systems integration. This has resulted in new solutions

that leverage a variety of existing capabilities into unique offerings to address specific customer and environmental

needs. For example, several projects were launched in late 2006 that will enable Progress Rail to replace a single,

older, less efficient locomotive engine with one, two or three state-of-the-art Caterpillar engines featuring ACERT®

Technology and other advanced technologies.

These flexible engine configurations are expected to reduce overall fuel consumption significantly – by as much

as 17 to 40 percent – and reduce regulated locomotive emissions by 50 to 90 percent. The new locomotives will

meet the U.S. Environmental Protection Agency Tier 2 and Tier 3 locomotive emissions regulations, and can qualify

as “Ultra-Low Emissions Locomotives” as defined by the California Air Resources Board. Additional projects

are underway to bring Caterpillar’s clean diesel engines and technologies to the railroad industry, creating more

sustainable transport solutions for moving goods – including fuel – to market.

11Energy and Climate


ENGINEERED FROM THE GROUND UP to help customers lower operating costs, increase productivity

and improve efficiencies, the D7E track-type tractor is the first of its kind. It uses a Cat C9 engine powered by

ACERT® Technology – compliant with Tier 3 regulations for criteria pollutants – and an on-board generator to efficiently

convert engine power into AC electrical current that drives the tractor. This electric drive train configuration has

60 percent fewer moving parts, requiring less service and replacement than conventional transmissions, enabling the

D7E to extend drive train component life and reduce lifetime operating costs by an average of 10 percent. The electric

drive system also enables the customer to move up to 25 percent more material per gallon of fuel consumed and

reduce the accompanying greenhouse gas (GHG) emissions by similar amounts – improvements that wouldn’t

be possible with conventional drive systems. Also, with visibility increases of 35 percent and improved access/egress,

the D7E is safe on the jobsite. To further evaluate and understand the sustainability related gains, the D7E is being

compared with its predecessor, the D7R Series 2, using life cycle assessment and sustainability index evaluations

that quantify environmental impacts such as GHG emissions and material content. The D7E is scheduled for

introduction in 2009.

13

AN ALTERNATIVE PATH TO EMISSIONS REDUCTIONS, biodiesel has proved to be an effective

alternative for our marine engines – offering our customers a low-carbon solution to increasing energy demands.

Most engine models are capable of burning up to B30 standard, a blend of 30 percent biodiesel and conventional

diesel fuel, with all new introductions planned for compatibility with appropriate biodiesel blends.

New, second-generation biofuels currently being studied are capable of reducing greenhouse gas (GHG) emissions

by up to 96 percent for each gallon of conventional diesel displaced in the blend, so we continue to test biofuel

capability and look to increase its use in our products. Beginning in spring 2008, half of the demonstration fleet of 65

machines at our Malaga Demonstration and Learning Center in Spain will convert to B20, a blend of 20 percent

biodiesel and conventional diesel fuel. Substituting biodiesel for a portion of the conventional diesel fuel consumed

annually will reduce the site’s GHG emissions while promoting alternate fuel use to over 12,000 visitors each year.

Because the use of inappropriately produced, blended or stored biofuels can cause significant engine damage,

we continue to provide clear and specific manufacturer recommendations and standards – found in our fuel

and fluids specifications – for biodiesel use in all of our products. We also recognize and support the additional work

needed to fully understand the total life cycle impacts, including those related to land use and farming practices,

of biofuel production and use.

Energy and Climate


WHEN CAPTURED AND USED FOR ENERGY, toxic gases like coke oven gas (COG) – a by-product

of the coking process used in the manufacture of steel – become a tremendous energy resource for growing

economies in countries like China. Solar Turbines Incorporated, a wholly owned Caterpillar subsidiary, is using COG

as a fuel for combined heat and power generation, and one way to address the growing energy shortage worldwide.

Solar has sold multiple gas turbine generator sets for operation on COG into combined heat and power applications

in China. These systems convert COG – a potentially significant source of greenhouse gas (GHG) emissions – into

electricity and useful thermal energy. Once installed, the systems will have a combined power generation capacity

of over 50 megawatts and average system efficiencies of 75 percent. Operation of the turbines will reduce

GHG emissions by over 420,000 metric tons per year – the equivalent of avoiding the consumption of almost one

million barrels of oil annually.

15

NEAR-ZERO PARTICULATE MATTER (PM) EMISSIONS in our 2007 on-highway engines marks

a significant achievement in the on-highway segment. Meeting the rigorous U.S. Environmental Protection Agency

(EPA) guidelines for PM emissions is an important step to advance cleaner diesel engines. To meet the challenge,

enhancements were made to our proprietary ACERT® Technology, enabling Cat engines to meet PM emissions targets

while still providing customers with consistent horsepower ratings and the same or better fuel economy – up to 4

percent improvement in C9 models.

Additionally, we have made marked improvements in the reduction of oxides of nitrogen (NOx) emissions with

a 50 percent reduction in our on-highway products in 2007. We expect to continue our full compliance with these

stringent, technology-forcing U.S. EPA regulations at the next threshold in 2010.

Equally challenging emissions standards for non-road engines will be phased in over the period 2011 to 2014,

leading to achievement of near-zero PM emissions for Caterpillar non-road engines beginning in 2011. A significant

reduction in NOx emissions over the same time frame will lead to near-zero NOx emissions beginning in 2014.

Energy and Climate


CONVERTING LANDFILL METHANE INTO USEFUL ENERGY is one way that Clean Development

Mechanism projects are achieving greenhouse gas emissions (GHG) reductions while providing energy solutions

to developing countries. (See opposite page for more details about the Clean Development Mechanism.)

Aterro São João, one of Brazil’s largest sanitary landfills, produces 15,000 cubic meters of methane gas – a significant

source of GHG emissions – per hour. When captured and converted through a complete site solution including

16 generator sets, sound attenuation, utility paralleling switchgear and installation/commissioning services – from

Caterpillar dealer Sotreq S.A., it will generate nearly 25 MW of continuous power for the local grid.

This project will supplement the electrical capacity for the world’s fourth largest city, reducing GHG emissions

by 800,000 metric tons annually, and generating a Certified Emission Reduction (CER) credit for each metric ton

of GHG emissions reduction.

A similar project at São Paulo’s Aterro Sanitário Municipal Bandeirantes landfill is now delivering 22 MW of

electrical energy and emissions reductions of over one million metric tons of GHG emissions annually along with the

associated CER credits.

17

HARNESSING THE POWER OF THE MARKET to address climate change, the Clean Development

Mechanism (CDM) allows industrialized countries to invest in projects that reduce greenhouse gas (GHG) emissions

in developing countries as an alternative to more expensive reductions at home. These projects generate Certified

Emission Reduction (CER) credits that can be sold in much the same way that a stock certificate is sold on a

stock market. Doing so offsets the overall cost of achieving emissions reductions, while the financial investment

and technology transfer associated with the projects help build capacity in developing countries.

From a small installation on a livestock farm in the Philippines to the world’s largest coal methane plant

in Jincheng, Shanxi Province, China, we work with our dealers to provide machines, engines, gas turbines and

support services that make CDM projects possible. By the end of 2012, for example, São Paulo, Brazil, expects to eliminate

the equivalent of 11 million metric tons of GHG emissions (offsetting emissions from 40 percent of the city’s

vehicles) from just the two projects mentioned on the previous page. Revenue from the sale of the CER credits from

the Bandeirantes project will help fund a series of environmental projects in the communities around the landfill site.

Energy and Climate


GROWTHANDTRADE

MOBILITY DEVELOPMENTMATERIALS

Open markets enable Caterpillar and other companies to fund, develop and deploy new tech nologies that address worldwide energy and climate challenges.

Growing economies rely on goods and resources from around the world. Our operations and customer solutions are designed to support more sustainable forms of production and consumption.

Mobility of people and goods is key to improved living standards. We seek to enable sustainable mobility – improving accessibility and efficiency while minimizing congestion and pollution.

Quality infrastructure improves access to markets, education and heathcare, enabling people to enhance their quality of life. We encourage development that occurs in an increasingly balanced, planned and thoughtful manner.

Free and open markets promote development, contribute to a healthy and prosperous global society, and present a significant

business opportunity for Caterpillar as we leverage technologies and make them accessible to the developing world.

As growing markets look for new solutions to address their challenges, we are poised to deliver the products, services and

technologies to meet their needs. We contribute to economic growth around the world – including the rapidly

developing economies of Brazil, Russia, India and China – by enabling infrastructure development that provides improved

access to energy, materials and mobility. We work with policy makers to bring balance to debates over international

trade and sustainable development, and seek opportunities to partner with others to build viable frameworks that encourage

responsible growth, help our customers grow local economies and enable societies to meet their own goals.

ENERGY

19Growth and Trade


GROWING OUR REMANUFACTURING BUSINESS by creating distributed energy solutions is

one way Caterpillar is enabling development while preserving the environment in the Philippines and other countries.

In 2007, our Remanufacturing (Reman) Division launched a project that will take end-of-life diesel engines from

around the world and remanufacture them into methane-fueled generator sets. These Reman gen sets will

convert methane from animal waste into usable energy. The first units will be installed in pig farms in the Philippines

beginning in 2008, where they will burn methane, provide electricity and reduce greenhouse gas emissions.

A number of similar projects are planned over the next several years.

21Growth and Trade


COMBINING TECHNOLOGIES AND SERVICES IN UNIQUE WAYS to address changing

customer needs is key to Caterpillar’s and Cat dealers’ continued success. As many of our customers strategically

evaluate their operations, machine fleet management has emerged as a service growth opportunity.

Working closely with Cat dealer Wagner Equipment Co. and customer Holcim (US) Inc. – long regarded as

a sustainability leader in the cement and aggregate industry – Caterpillar and Wagner began to deploy a tailored,

customer-focused solution for fleet management to one of Holcim (US)’s quarry sites in 2007. Through a focus on

mobile equipment operation and orchestrated fleet management, our Job Site Solutions approach integrates a

variety of services and capabilities – including maintenance strategy and planning, rolling equipment plans, operator

training, production analysis and site management – to develop enhanced, fully supported fleets.

Initial results from several customers show improved operational efficiencies, reduced fuel consumption – potentially

as much as 20 percent on some sites – and reduced greenhouse gas and other emissions. These results enhance

the strong sustainable development performance Holcim advocates and that fundamentally strengthens its business.

We have a growing pipeline of requests for this approach with a goal to significantly expand U.S. operations

by year-end 2010, and to grow this business model in other industries and geographic regions.

23

GROWING THREE TIMES FASTER per year than the general waste stream, electronic waste (e-waste)

is a rapidly growing global problem. E-waste consists of end-of-life electrical or electronic components that reach

landfills and incinerators where they release hazardous materials that pose potential threats to human health and the

environment. When recycled properly, however, e-waste is a valuable source of material for remanufacturing or

a secondary source of raw materials when recycled back to virgin material.

Responding to this problem, Caterpillar’s Remanufacturing (Reman) Division developed a business model in 2007

to expand its current electronic take-back process to include all end-of-life Caterpillar electronic service parts.

This sustainable business model is based on leveraging our global Reman reverse logistics infrastructure and capturing

the value of returned electronic components through remanufacturing or recycling. Beginning in 2008, we will

increase our product offering of remanufactured electronic components while moving closer to our goal of “zero

e-waste” generated by Caterpillar electronic service parts around the world.

Growth and Trade


BY MAKING DIESEL ENGINES MORE READILY AVAILABLE to original equipment

manufacturers with operations in China and the Asia /Pacific region, we help to grow the local economy through the

broad deployment of clean diesel technology and state-of-the-art manufacturing processes. Construction of our

new small and medium diesel engine facilities in Wuxi, Jiangsu Province, China, is an important step in our overall

strategy to meet the power requirements of both our Caterpillar machine group and third-party customers. Once

the engine facilities in Wuxi are fully operational they will have the combined capacity to produce in excess of 100,000

diesel engines per year. As Chinese customers face future emissions reduction requirements, Caterpillar will

utilize its technology leadership to provide machines and engines that will meet their needs.

25

CONNECTING COMMUNITIES BY REBUILDING ROADS is the goal of the Chinese government’s

$13 billion project to build and improve 1.2 million kilometers of rural roads – more than half the current total length

of China’s expressways and highways – as part of an aggressive five-year urbanization and development plan. By 2010,

all of China’s administrative villages will be connected to highways, enabling further development and improvement

of the local economy – including better access to schools, hospitals and commerce.

Cat dealers in China are playing a pivotal role in the rehabilitation of rural roads by providing a machine fleet that

offers an environmentally friendly recycling approach. The in-place cold recycling process allows customers to

reuse existing surface layers of asphalt to form a new base, resulting in less wasted materials. The process also enables

project completion in one-third the time of traditional paving methods, and saves 50 percent of construction costs,

with results exceeding standard road specification requirements.

Growth and Trade


THE POSITIVE IMPACT OF A RELIABLE and adequate power supply is now seen in the southernmost

regions of Tanzania thanks to six Cat G3520C generators that have kept pace with a 25 percent increase in the local

power demand.

Nationwide, only about 11 percent of Tanzania’s estimated population of 39 million has access to reliable electricity.

Much of the region has experienced a prolonged power crisis brought on by extensive drought conditions and

other natural catastrophes. An adequate and reliable source of electric power is the crucial foundation for economic

and commercial development.

Home to 1.9 million people, Mtwara and Lindi have traditionally lacked reliable electric power supply and

infrastructure. A cooperative effort between the local Cat dealer, Mantrac, and Artumas Group, Inc. has ensured

the successful commissioning of a plant that is helping to meet the power generation needs of this region. With

reliable electricity, industries such as cashew nut factories and small enterprises have grown.

27

HELPING REBUILD NATURE’S INFRASTRUCTURE, Caterpillar is providing support to restoration

efforts following the wildfires in California, floods in Illinois and windstorms in Canada.

Although there are no quick fixes to restore a forest fallen victim to a natural disaster, Cat machines provided

a minimally invasive solution to restoration activities at Stanley Park in Vancouver, British Columbia, after a

major windstorm leveled nearly 20 percent of the park’s forested areas. The desire to protect the natural and cultural

environments made the need for an environmentally sensitive solution even more critical.

In response, two Caterpillar log loaders – a 330D FM and a 324 FM – were donated by Finning (Canada) and

Caterpillar to assist in the removal of fallen forest timber. By design, the tracked machines operate with minimal

environmental impact through optimized engine performance, low exhaust emissions and reduced air pollution.

They also tread lightly on the forest – the 80,000-pound 324D FM operates with a ground pressure similar to a 220-

pound person walking through the park. The reach and 360-degree turning ability of the loaders also allow for minimal

ground disruption during forest operations.

Growth and Trade


PEOPLEANDPLANET

Our uniform safety standards enable our employees to identify and make safety-conscious choices, both inside and outside of work.

We invest in communities where we work and live, ensuring residents have the knowledge and skills to make good decisions, and access to resources that will fulfill their most basic needs.

We develop partnerships to determine how responsible development and preservation can occur simultaneously, and have processes for our buildings and customer sites that promote design for efficiency, effectiveness and low environmental impact.

SAFETY CAPACITY BUILDING DEVELOPMENT AND PRESERVATION

Sustainable development is about present day actions that consider future implications. As a company with a long-term

focus, Caterpillar considers the future when we invest in people by providing solutions that meet their current needs

while enabling them to make long-term decisions that support sustainability.

Uniformly high standards as outlined in Our Values in Action – Caterpillar’s Worldwide Code of Conduct – a document

that defines our convictions and beliefs and details the uncompromising ethical standards our company has upheld

since its founding in 1925 – guide our operations around the world.

As our company expands its global reach, the giving of our Caterpillar Foundation is also growing to better reflect our

geographic expansion. In 2007, the Foundation’s gifts totaled $36 million, with 20 percent of the total given outside of

the U.S. The number of gifts given to programs outside the United States has nearly doubled since 2005 with targets for

an additional 25 to 50 percent growth – accounting for approximately one-third of the Foundation’s total budget – by 2008.

29People and Planet


SAFETY IS THE NUMBER ONE PRIORITY in all that we do. Vision Zero, the uniform safety process

being deployed across our company, is at the heart of our efforts to achieve zero injuries, drive best practices and

hold leaders accountable for results.

Because ergonomic strains and sprains are the most common recordable injury experienced by our employees,

we launched an enterprise-wide project that focused on these specific injuries with the goal of reducing

recordable injuries by 30 percent and lost-time injuries by 48 percent. Achieving these results for ergonomic-related

injuries closes the gap to our 2010 safety goals. We are using the Caterpillar Production System and Simulated Work

Environments to redesign workstations, eliminate safety-related wastes and help us achieve needed improvements.

Employee engagement has risen throughout this process as employees are directly involved in suggesting and

implementing solutions to improve ergonomics and decrease their personal potential for injury. In 2008, our goal

is to quantitatively assess every job for safety and ergonomic risk. All facilities will report progress monthly.

31People and Planet


WE BUILD CAPACITY in locations where we live and do business. Through our connection with Opportunity

International (OI), a microfinance organization that provides opportunity for the world’s poor to rise out of poverty,

we directly impacted the skills of more than 220 people in the first half of 2007. The Caterpillar-Opportunity University

Training Program provides training in business management, business values and ethics, job skills and worksite

safety to micro-business owners, migrant workers and individuals in the early stages of developing a micro-business.

Keeping with our focus on safety, we were also able to work closely with our dealers, leaders of the China

Labor Department and OI China to sponsor job safety training that raises overall safety awareness in the country. Lei

Shing Hong, Caterpillar’s largest dealer in China, facilitated the initial pilot through a rural-based operator training

and recruiting program for its machine rental fleet. Following completion of the training, workers are equipped with

safety training and personal protection equipment, enabling them to be marketable to local employers, including

Cat dealers. An estimated 200 students were trained in 2007 with plans to reach an additional 1,800 by the end of 2008.

33

BUILDING SKILLS THAT BUILD LIVES is one solution to the shortage of skilled technicians exposed

by the world’s explosive infrastructure growth. Recognizing that this shortfall exists globally, Caterpillar and its

dealers created ThinkBIG, a college-level education and multi-dealer internship program that trains future Caterpillar

dealer technicians. Since its inception in 1998, the program has reached over 2,000 individuals, many of whom

come from small villages where they were living below the poverty line. More than 1,450 students have graduated

from the program.

While its roots are in the U.S., the program has grown to six countries throughout the world. Following the

two-year, hands-on training program, participants are equipped with an associate’s degree in applied science

and a skill set that places them five to seven years ahead of their peers. They are then placed in jobs at the local

Cat dealership where, many times, their newfound skills are utilized in projects that are building – or rebuilding

– their own villages and communities.

People and Planet


CREATING A PATH TO OPPORTUNITY, a mine site in a developing community improves the quality

of life for local residents by empowering them with skills and experience that help provide long-term job security.

When Newmont Mining Company acquired two operations in West Africa, local dealer Mantrac was there

to help overcome some significant challenges that exist in a new operation. These include – among other issues – the

need to develop infrastructure and support for equipment and staff; the need to transport equipment, tools and

workers; and the need to train, educate and provide healthcare for workers and their families. In many developing

countries, these challenges can often be compounded by the lack of a stable government and regulatory processes

that facilitate provision of these services.

Because developing a proposal for a greenfield mine site is a complex process, Caterpillar developed and made

available to Cat dealers a Greenfield Guidebook that outlines beneficial planning and activity from the time the

initial customer contact is made until the equipment is commissioned at the customer site. Utilizing this approach,

Mantrac Ghana helped Newmont mark its first year of successful operation in Ghana, bringing an operation to

the community that performs at the highest levels of safety, financial return, production, environmental stewardship

and social responsibility.

35

PARTNERING TO PROMOTE CONSERVATION, economic sustainability and human well-being

is the objective of the Nature Conservancy’s Great Rivers Partnership. In 2007, the Partnership leveraged a multi-year

$12 million contribution from the Caterpillar Foundation to garner support from other businesses, governments and

environmental organizations. This additional support allowed the expansion of protection and management practices

to Africa’s Zambezi River.

The Partnership, established in 2005, provides education and resources needed to safeguard the world’s

vanishing freshwater supply and transform the manner in which large, economically important river systems are

preserved and protected. More than 42 million people and a myriad of diverse wildlife populations depend on the

Zambezi River for survival. The Partnership is working with the Zambezi River Authority and other stakeholders

to assess the river system and develop recommendations for improving environmental flows through dams

in the region, and the management of protected areas along the river.

The Partnership has produced effective land management collaborations among landowners, governments,

conservationists and businesses along tributaries of the Mississippi River in the United States, the Yangtze in China,

the Paraguay-Paraná in Brazil and now the Zambezi in Africa.

People and Planet


SUSTAINABLEDEVELOPMENTSTRATEGY

Our last two reports laid out goals relative to our internal infrastructure

and processes. In support of these goals, we created a staffing model

in line with a matrix organization – adding resources to work with our

business units to plan action and coordinate all reporting activities.

Additionally, recognizing that successful integration of sustainable

development into our business model requires employee engagement

and involvement at all levels of the organization, we developed and

deployed an interactive e-learning module to support our Sustainable

Development Strategic Area of Improvement. Designed for all

employees, the module complements our previous sustainability

reports and aims to improve employees’ understanding of sustainable

development, the implications for our business and the key role that

they play.

Our next focus is on goals and metrics that will enable us to further

embed sustainable development into our business. Prior to establishing

goals, we articulated an overall direction that defines our desired level

of performance and a path to reach that level.

Our vision is a world in which all people’s basic requirements – for

shelter, clean water, effective sanitation and reliable power – are not

only met but also fulfilled in a way that sustains our environment.

Our mission is to enable economic growth through infrastructure

and energy development, and to provide solutions that protect people

and preserve the planet.

Our strategy is to provide work environments, products, services

and solutions that make wise use of the world’s natural resources and

reduce harmful impacts on people, the environment and the economy. This

means that we leverage assets, including technology and innovation, to:

Promote and protect individual safety and well-being. ›

Provide employment, education and training. ›

Minimize the use of energy, materials, water and land. ›

Maximize recycling (remanufacturing). ›

Minimize harmful emissions (e.g. air pollutants, noise, etc.), ›

water discharges, waste and use of hazardous substances.

Optimize the use of renewable resources. ›

The execution of our strategy is expressed through a collection of

aspirational goals – set through 2020 – for our operations and our products,

services and solutions. (These goals can be found on pages 2-3 of this

report.) To establish our operational goals, we benchmarked companies

both inside and outside of our industry and evaluated global trends and

past Caterpillar enterprise performance. Collectively, these goals provide

a comprehensive sustainable operations strategy. Data collected from

significant customer segments and emerging regulatory trends around

the world guided the creation of our product, service and solution goals.

We also compared and contrasted broadly accepted criteria used to

judge sustainability at the enterprise level – for us and our customers –

from such sources as the Dow Jones Sustainability Index and the World

Business Council for Sustainable Development. This evaluation shows

that Caterpillar’s pursuit of these goals aligns with our customers’ goals

to become more sustainable in their respective industries.

As we work toward our enterprise growth goals of becoming a

$50 billion company by 2010, we believe that establishing revenue

targets for products, services and solutions that support sustainable

development is an essential step. Such revenue targets must be

substantive and meaningful, and must legitimately drive further

integration of sustainable development principles into our businesses.

In 2008, we will continue to further integrate sustainable development

into business strategies by refining our enterprise direction while

enabling our business units to drive their own sustainable development

Because sustainable development is a broad and complex topic, it is essential that we align our

efforts with our business strategy and focus on areas where we have the potential to make a

significant positive impact. By solidifying and communicating a clear vision, mission and strategy

that will guide our work through 2020 and beyond, we will sharpen and maintain our focus on

substantial, sustainable and profitable actions. This portion of the book is comprised of three

sections – a discussion of our strategy and methodology used to develop our goals; an overview

of our sustainable operations strategy, including current results and plans to meet future goals;

and a dialogue about solutions – both in place and planned – that begin to address the

challenges outlined in our product, service and solution goals.

INITIATIVES, ACCOMPLISHMENTS, CHALLENGES AND PLANS

37

business strategies. Plans include identifying business models for the

industries we serve that will establish focused revenue targets for

specific segments of our business, and drive additional activity to

support sustainable development.

We will continue to establish meaningful partnerships that support

sustainable development, and engage internal and external stakeholders

to help identify initiatives in all aspects of our business: our operations,

our existing products and services, and our future solutions.

PURSUINGOPERATIONALSUSTAINABILITYGOALS

At Caterpillar, sustainability begins within our own operations as our

employees identify and implement practices that impact their own health

and safety and that of the environment.

By addressing sustainability issues in our own operations, we can

improve efficiency, thereby reducing costs; we can identify growth and

business opportunities before our competitors; and we can prepare for

future challenges, instead of merely reacting to them.

We have established high performance standards for our facilities

that extend beyond compliance with laws and regulations. This proactive

perspective demonstrates leadership in our industry and moves us closer

to our goal of achieving world-class performance.

Our employees are committed to defining excellence in safety,

health and environmental practices, holding themselves accountable

for the achievement of high standards across the enterprise. We continue

to work toward engaging employees at even broader levels and replicating

best practices throughout the enterprise.

We are driving deeper awareness of health, safety and

environmental issues into the Caterpillar culture by:

Engaging the enterprise in our safety vision of zero injuries. ›

Creating awareness about exposure risks, specifically addressing ›

ergonomic conditions and industrial hygiene risks.

Driving environmental performance in materials and energy efficiency. ›

SAFETY & HEALTH

Our Vision and Current Progress In 2003, Caterpillar defined its vision

for safety – we believe all accidents and injuries are preventable; therefore,

our ultimate goal is zero. Over the past four years, we have seen a 76

percent reduction in our lost-time case injuries and a 64 percent reduction

in our recordable injuries.

Challenges remain as more than 50 percent of our recordable

injuries occur in only 10 facilities. In these “Watch List” facilities, we have

conducted focused deployments of Caterpillar’s uniform standardized

safety process – Vision Zero. In 2007, we also provided focused support

for these facilities through supervisor training and Caterpillar Production

System deployments that implement lean manufacturing improvements

in all of our facilities and manufacturing processes.

In 2007, Caterpillar made significant strides toward achieving

world-class performance and meeting our recordable injury and

lost-time case frequency targets. Data from Progress Rail, Shin

Caterpillar Mitsubishi Ltd. and the Franklin, Indiana, Remanufacturing

Facility are included in these results:

Recordable injury frequency dropped to › 2.20 in 2007 from 3.07 in 2006,

an improvement of 28 percent.

Lost-time case frequency dropped to › 0.71 in 2007 from 1.05 in 2006,

an improvement of 32 percent.

In › 2007, 58 manufacturing and logistics facilities ended the year with

zero recordable injuries, and 105 facilities – roughly 44 percent of our

reporting locations – performed at or better than our 2010 targets.

Our workplaces are safer today than ever before – in 2007 over 1,000

more employees returned home safely to their families than in 2006 as

a result of our efforts to establish safe work practices.

Our pace of improvement is accelerating. Conventional thinking

might indicate that gains would be harder to achieve as performance

gets better, but thanks to the hard work of our employees and the

leadership of our management team, we are defying that paradigm

at Caterpillar.

Initiatives, Accomplishments, Challenges and Plans

Over the past four years, we have seen a 76 percent reduction in our lost-time case injuries and a 64 percent reduction in our recordable injuries.


Activities For the enterprise, the next step in Caterpillar’s journey to

zero injuries focuses on creating ergonomic excellence. An enterprise-

wide 6 Sigma Strategic Improvement Project was launched with the

goal to close the gap between our 2010 safety targets and our current

rate of improvement.

The project delivers a requirement for proactive assessment of

safety and ergonomic risk in our operations with a goal to identify and

eliminate high-risk jobs. Specific deliverables provide guidelines for

product design and process planning, create recommendations for

tooling and material handling, introduce a new leading enterprise risk

metric and establish accountability for ergonomic conditions with the

manufacturing engineering function.

In addition, a majority of our manufacturing facilities deployed

the Similar Exposure Group (SEG) process in 2006 and 2007. This process

identifies and mitigates risks using predictive statistical software tools.

These risks could affect our employees through long-term exposures to

physical, chemical and biological agents. The health risks we are

quantifying and working to reduce generally relate to long-term

exposure – with potentially 10 to 30 years before the onset of symp-

toms. SEG will further enhance our ability to identify potential exposures

before they lead to adverse health effects.

Result of Safety Improvements One way Caterpillar drives health

and safety performance improvement is through a robust recognition

program. We honor facilities that have contributed to creating culture

change for Team Caterpillar. At the 2007 Chairman’s Awards ceremony,

100 locations – 77 manufacturing /logistics facilities and 23 offices –

qualified for Facility and Office of Distinction Awards for being two years

ahead of their targets.

In 2007, one facility – comprised of over 1,600 operators and a

heavy build schedule – improved its performance dramatically and is

now actively contributing best practices to the enterprise.

The facilities winning our Most Improved Manufacturing U.S. and

Global awards – Oxford, Mississippi, and West Plains, Missouri – also

posted dramatic improvements to their safety results, attributed to an

aggressive implementation of Vision Zero with clearly communicated

goals and expectations from their division leadership. They also improved

their incident investigations, deployed observation-based safety and

proactively communicated best practices across their facilities.

To earn the Best Performance in Manufacturing award, the Tosno,

Russia, facility logged more than 1.4 million hours without a recordable

injury. Two facilities tied for Best Performance Logistics – our

Peterborough Logistics Centre and our Mercedes-Benz Regional

Logistics Center Singapore both operated two years without a record-

able injury. These facilities are demonstrating that achieving zero injuries

in manufacturing and logistics environments is possible.

We not only honor facility achievements but also recognize the

individual efforts necessary to create commendable facility performance.

Caterpillar recognizes front-line supervisors and employees who earned

Safety Stars for going above and beyond in establishing a safe work

culture for their co-workers.

To further personalize our message about safety in 2007, we

launched the “I Promise to Be Safe for You” campaign. Caterpillar

children spoke about the risks in the jobs of their adult family members

and asked them to be safe at work so they could return home safely to

their loved ones. Our employees are actively internalizing Caterpillar’s

motto, “Safely Home. Everyone. Every day.™”

Going Forward Our 2010 strategic goal is to achieve world-class safety.

Caterpillar’s Vision 2020 states, “The safety of our employees is paramount

and our safety performance leads the industry.” We remain committed

to achieving our vision for creating a zero-injury workplace.

To realize this aspiration, beginning in 2008, our goal is to

quantitatively assess all jobs for safety and ergonomic risk. Our

objective is to reduce all high-risk jobs to medium- or low-risk by 2010.

Ergonomic capability building is being integrated into the orientation

and continuing education curricula of our design engineers and our

process planning professionals.

With Caterpillar’s commitment to achieving ergonomic excellence,

our work environments will be designed with the specifications,

limitations and body mechanics of the human being in mind.

MATERIALS EFFICIENCY

Eco-efficiency – doing more with less – is at the core of our business

case for sustainable development. Because natural resources are

limited – scarcities threaten the global eco-system and could potentially

impact business operations – we limit our consumption of resources,

minimize waste generated, maximize recycling and responsibly dispose

of all remaining waste. We also work to conserve water, reduce wasteful

usage and reuse material where possible. Data from facilities represent

an estimated 95 percent of Caterpillar’s enterprise total, but do not

include Progress Rail operations.

Waste Management At Caterpillar, it is our goal to minimize the

waste generated from our offices, warehouses and factories. We take

action throughout the waste stream to reduce, reuse and recycle. We

attempt to extract the maximum practical benefit from materials used

in our business.

In 2005, we established a goal to recycle 70 percent of our waste

by 2010. This seemed a very bold goal at a time when we were

recycling only 42 percent of our waste. We are proud to report that in

2007, we have achieved this goal – three years early. Nearly 400 million

pounds of waste were recycled while 175 million pounds were

landfilled or incinerated. These figures exclude scrap metal, which is

fully recovered. With metals included, our recycling rate in 2007

increases to 86 percent.

Our best-in-class facilities currently recycle more than 90 percent

of their waste. As an enterprise, we are building on the performance of

39

these facilities and setting the bar even higher. We have established a

new goal to achieve 80 percent recycling by 2010 and to send zero waste

to landfills by 2020.

We use our key business processes, such as 6 Sigma and the

Caterpillar Production System, to harness the power of employee ideas

and deliver innovative solutions.

An example of this creativity in action is the project winner of the

2006 Caterpillar Chairman’s Award for Environmental Excellence. Our

Mossville Engine Center (MEC), located in Illinois, uses engine oil in new

engines during testing. The oil must then be drained before engine

shipment. Previously, oil was collected but could not be reused since

contaminants could have been introduced during test. A small oil

reclamation system was in place, but was not convenient or capable of

handling the quantity of oil consumed at the facility. Instead, used oil

was moved around the facility in small totes and trucked offsite in large

tankers. This was costly and wasteful. In response, MEC installed an

underground pipe from the test cells to a new and larger reclamation

unit. This allowed the oil to be filtered and reused, and avoided

transporting oil totes above ground. Within eight months of installing

the new system, MEC saved more than $600,000 by reducing virgin oil

purchases and fees for transporting and processing used oil offsite. This

saved the equivalent of 26 tanker trucks of oil.

Another example is in U.S. Operations-East Peoria facility in Illinois.

The facility regularly produces up to 120,000 pounds of grinding fines

(swarf) each week. More than half of this weight was being landfilled.

With the help of a grant from the Illinois Department of Commerce and

Economic Opportunity, East Peoria purchased a machine to compress

the swarf into briquettes that can be sold as scrap metal. Designed to

expand recycling efforts and reduce landfill material in Illinois, the grant

enabled the facility to turn an expense into revenue to avoid sending

millions of pounds of material to the landfill.

While we are proud of these results, we recognize that the optimal

path is to prevent waste from being created in the first place. In 2007,

we created a packaging council whose charter is to optimize packaging

used for incoming and outgoing material. Part of the optimization is to

consider the environmental impact of the packaging to determine where

waste can be reduced or eliminated with a more aggressive look into

returnable packaging and redesign of current packaging for ease of

recycling or reuse.

In 2007, the amount of hazardous waste reported for U.S. facilities

increased slightly. The inability to find a buyer for a hazardous waste

stream that had been sold for reuse in the past contributed significantly

to the increase. Also in 2007, we began collecting hazardous waste

information from facilities outside of the U.S. based on how each country

or region defines hazardous waste. We are continuing to review the

data collected and plan to include it in future reports.

Water Management Water management has always been an impor-

tant issue for Caterpillar. However, our focus has primarily been on

ensuring water quality through appropriate water treatment by bringing

it up to production standards prior to use and prior to discharge. Our

primary uses of water include process cooling, parts and machine clean-

ing, and meeting the basic needs of people in our facilities.

In 2007, enterprise water consumption decreased more than 12

percent – a reduction of approximately 750 million gallons. This reduction

has been driven primarily by fluctuations in business volumes.

Several facilities are taking proactive approaches to manage their

overall water usage. Our remanufacturing facility in Corinth, Mississippi,

found an innovative way to reduce its water consumption through reuse

of air conditioning condensation. Since the project’s completion in 2005,

nearly 7 million gallons of water have been reused.

Caterpillar Xuzhou Limited (CXL) implemented a project to recycle

the wash water used for hydraulic excavators. Annually CXL was using

168,000 gallons of wash water on machines. The wastewater was

disposed directly into CXL’s wastewater treatment system. A recycle

system was established at the wash booth which allowed 70 percent

Our employees are committed to defining excellence in safety, health and environmental practices, holding themselves accountable for the achievement of high standards across the enterprise.



of the wash water to be directly recycled, eliminating waste of more

than 113,000 gallons of water, one of China’s critical resources.

Another water project conducted at the High Performance

Extrusions facility in Oxford, Mississippi, made it possible to recycle and

reuse about 75 percent of plating and coating rinse water in the chemical

process area. This beneficial reuse has delivered an annualized water

savings of over 10 million gallons.

While these numbers might not be large, they demonstrate the

efforts that are placed on water reduction at facilities. In the past, we

have not acted aggressively to conserve water because, in general,

supplies have been abundant. In locations where water supply has been

a concern, facilities have addressed this issue on an individual basis.

Currently, we see water availability and quality emerging as a more

prominent global issue. Because of this, efficient water management

becomes a prudent risk mitigation activity for Caterpillar. Therefore, we

have established an enterprise goal to hold consumption flat (from 2006

base year) by the year 2020. We will do this during a time when we

expect significant business growth of our company, and therefore will

seek significant productivity improvement in our water usage.

ENERGY EFFICIENCY

Managing the greenhouse gas (GHG) emissions associated with climate

change has emerged as the most significant global environmental issue

in recent years. At Caterpillar, we are taking proactive steps to drive

energy efficiency and carbon reduction throughout our operations.

We joined the U.S. Environmental Protection Agency Climate

Leaders program in 2003 and committed to reduce our GHG intensity

by 20 percent by 2010 (from base year 2002). We established an even

more aggressive internal goal as a part of our Vision 2020 enterprise

strategy – to reduce GHG intensity by 35 percent by 2010 (2002 base

year). Our 2007 GHG intensity represents a 38 percent reduction from a

2002 base – exceeding both our internal and external goals.

Sales volume in 2007 – excluding the acquisition of Progress

Rail – increased about 1 percent over 2006, while our absolute GHG

emissions increased less than 1 percent over the same period. We will

continue to drive further efficiencies and engage more actively in energy

management activities in order to decrease our absolute GHG emissions

levels. We have established a new goal to reduce absolute GHG emissions

of our existing facilities 25 percent by 2020 (from base year 2006). To

achieve these reductions, we are challenging ourselves to seek innovative

ways to reduce energy consumption.

An example of this effort is the 2007 winner of the Caterpillar

Chairman’s Award for Environmental Excellence. By providing efficiency

improvements in the two paint lines at the Electric Power Division’s

factory in Springvale, Northern Ireland, energy consumption was reduced

by 38 percent and GHG emissions by 29 percent. The efficiency gains

allow the facility to intermittently operate one of the two paint lines to

meet required capacity. By utilizing only one paint line, natural gas,

electricity and water consumption are greatly reduced. These

improvements also allowed the facility to recycle about 95 percent of

the overspray paint. Overall this project has positively impacted energy,

water use and material efficiency for the facility.

There are many more examples of Caterpillar employees engaged

in making important decisions that protect the environment. For

example, the opening of Caterpillar’s worldwide distribution chain

facility in Russia reduces 280,000 ton miles of airfreight per year – air

transportation emits about 18 times more CO2 than road transpor-

tation – and makes parts inventory more readily available to the diverse

Russian market. Since its opening, order deliveries have improved from

5 to 8 days to 1 to 4 days for emergency orders with stock order lead-

times reduced by more than 20 days.

RENEWABLE /ALTERNATIVE SOURCES OF ENERGY

In addition to our energy efficiency initiatives, we will be transferring our

As stakeholder interest in sustainability issues increases, we are broadening our focus to deliver solutions that help our customers become more sustainable in their respective industries.

41

consumption from traditional energy sources to more renewable and

alternative sources. We have established a goal to meet 20 percent of

our energy needs through renewable and alternative sources by 2020.

A project to explore the viability of alternative energy solutions

for our manufacturing facilities has resulted in a detailed feasibility study

being carried out for two wind turbines at the Caterpillar engine manu-

facturing facility in Peterborough, England. Situating wind-powered

turbines on the site would produce enough capacity to cover approxi-

mately 20 percent of the site’s electricity needs and offset CO2 emissions

by 4,000 metric tons annually. All power generated by the turbines would

be used by the facility. Additional wind applications, as well as combined

heat and power solutions, are being explored as alternative energy

solutions for other facilities.

SUSTAINABLE FACILITIES

In 2007, Caterpillar launched a new sustainable facilities policy that

endorses facility design and construction to minimize adverse environ-

mental impact, yield life-cycle economic benefits and demonstrate our

commitment to sustainable operations. This policy requires all new

Caterpillar facilities to be designed to include sustainable features

enabling certification under Leadership in Energy and Environmental

Design (LEED®) or equivalent international standards. LEED®, a program

developed by the U.S. Green Building Council, is a widely accepted

benchmark for design, construction and operation of high performance

green buildings.

This sustainable facilities policy is the first enterprise initiative in

support of sustainable facility design. It applies globally to all new

facilities or greenfield sites. Currently, plans are underway for more than

a dozen new facilities designed to comply with the policy. A policy for

existing buildings will be developed in 2008 and several pilot projects

are underway.

PURSUING PRODUCT,SERVICE AND SOLUTIONSUSTAINABILITY GOALS

As stakeholder interest in sustainability issues increases, we are

broadening our focus to deliver solutions that help our customers

become more sustainable in their respective industries. Our near-term

strategy is to fully leverage and deploy existing offerings that signif-

icantly enhance sustainability. Longer term, we will develop new

technology, product and service offerings that will help us achieve our

2020 goals and position us for future opportunities.

At the international level, Caterpillar is actively involved in develop-

ing International Standards Organization (ISO) standards and chairs the

technical committee that develops global standards for earthmoving

machines. Past work includes the development of standards in areas

such as visibility, rollover protection structures, access systems and

braking. Our current efforts for earthmoving machines include leading

the national and international subcommittee for safety and – most

recently – the working groups for sustainability and energy use, and

participating in the working groups for recyclability and noise. Once

developed, the standards and test methods developed by these groups

will enable customers, manufacturers and other stakeholders to accu-

rately quantify and compare sustainability improvements across machines

and suppliers.

Customer Safety To promote the safety and health of everyone in, on

or around our products, Caterpillar’s Customer Safety Services group

launched SAFETY.CAT.COM™, one of the most comprehensive safety

sites for the industries Caterpillar serves.

The website builds on Caterpillar’s commitment to providing its

customers with the safest and most reliable products and services avail-

able, and reinforces safety messages found in the company’s Operation

and Maintenance Manuals (OMM). The site also features virtual walk-

around inspections and operating tips that are available on demand.

Utilized by customers worldwide, the site is being translated

into nine languages to broaden its reach. Feedback from visitors to

the site has referenced the usefulness of information as a training tool

for employees and the visible example of Caterpillar’s commitment

to safety.

In 2008, the Caterpillar Safety Services Division (CSS) will assume

responsibility for developing and implementing a suite of safety services

that can be offered to customers either individually or as part of a Fleet

Management Services agreement. CSS will continue to have responsibility

for expanding the safety information and materials available through

the focused website. This includes the development of industry specific

content to address the variances among industries and initially targeting

the following industries: agriculture, waste, quarry & aggregates, electric

power, rental and scrap & recycling.

Materials Efficiency Our deepening understanding of materials

efficiency and total life cycle impact enable us to help our customers

achieve higher levels of materials efficiency within their operations.

Current solutions focus on extending product and component life –

making them last as long as they can – and finding innovative ways to

create another useful life for end-of-life materials.

Life Cycle Assessment Life Cycle Assessment (LCA) quantifies the

environmental impact of products and processes by considering the full

life cycle – from material extraction to the end-of-life (recycling,

remanufacturing, etc.) – of Caterpillar machines.

We have completed assessments of only a few of our products;

however, we recognize the value of the process and continue to invest

R&D funding that cultivates in-house LCA expertise to study our engines,

machines and manufacturing processes. By using ISO standard LCA

methodologies to develop Caterpillar specific quantitative tools we:



Enable designers to develop new products with environmentally ›

smart designs and improve existing products by considering impacts

of design decisions on the environment, including the use of alternative

energy sources.

Prioritize the largest environmental impacts of products and processes ›

considering supply chain, manufacturing, field application and cradle-

to-cradle life cycle management.

Develop a framework for reporting progress in environmental ›

product metrics.

In 2008, the Life Cycle Management group will continue to develop and

integrate LCA methodology into the design process through the

introduction of a sustainability index that will provide a framework for

comparison between existing and new designs. The index will encourage

design features that are becoming increasingly important to customers,

such as improved energy efficiency, lower GHG emissions, increased

recyclable content and improved remanufacturability.

Percent recycled content in machines Caterpillar has developed a

robust process to account for recycled content in our products through

the use of our Bill of Material, material specifications and our supplier

base information. We completed analysis for several product models

and have plans to expand the analysis to other high-volume North

American models in 2008. This information delivers a report card to our

customers – as well as our internal product development groups –

relative to this aspect of the sustainability of our products. By

documenting our recycled content, we can ensure our engineers

understand the value of using recycled content in the manufacture of

our products. This information also helps increase our customers’

knowledge of the value of using recycled or remanufactured products

as a way to decrease the use of virgin raw materials.

Cat Certified Rebuild When most competitive models would require

replacement, Cat equipment can be rebuilt to deliver a cost-effective

“second life” for customers. By transforming products back to their

original like-new condition – often incorporating critical engineering

updates – at the end of their first useful life, the Cat Certified Rebuild

program available from authorized dealers extends the product life cycle

of machines, engines and components for multiple lifetimes. Using this

proprietary process – including more than 350 tests and inspections and

the automatic replacement of approximately 7,000 parts – dealers reuse

or recondition an average of 70 percent of the original machine content.

They use Cat Reman and new parts for components that do not meet

the Certified Rebuild reuse criteria. On some machines, product

upgrades are available to take advantage of new emissions technology,

increased fuel economy or improved control systems. For roughly half

the price of a new machine, customers receive a model that meets or

exceeds requirements for emissions standards, safety, operator comfort

and productivity.

In 2007, the number of rebuilds – including machine, engine and

component – delivered to customers through the Cat Certified Rebuild

program increased more than 25 percent over 2006. Goals are currently

in place to more than double the current size of this program by 2010.

Contamination Control The contamination control initiative unites

Caterpillar facilities, dealers and customers in common practices that

prolong the life of our products by ensuring that the fluids used in our

machines are as contaminant free as possible. Customers conducting a

comprehensive contamination control program can expect at least 20

percent increase in component life as well as a minimum 20 percent

reduction in machine owning and operating costs. For example, customer

Minera Alumbrera Ltd. has extended major component life in its truck

fleet – equating to a $7 million savings over the life of the mine – through

the use of a thorough contamination control program combined with

operator training. Additional benefits of contamination control practices

include extended life of machine fluids and reduction of waste, as well

as increased sales of service, parts and machines, lower repair costs,

decreased warranty and greater customer satisfaction.

“Kidney Looping” is a key contamination control practice,

pioneered by Caterpillar. In this process an external kidney loop cart

containing high efficiency filters is connected to a machine fluid reservoir

such as the hydraulic system. The fluid is then continuously circulated

through the machine and kidney loop cart until it meets specified

cleanliness standards. This process can be repeated at various machine

use intervals until the fluid loses its performance characteristics and

has to be replaced. TRAKINDO customer, Batu Hajai, has used “kidney

looping” extensively for several years. This, along with other contam-

ination control practices, has resulted in significant increases in

component lives, lower operating cost and less oil consumption and

disposal cost – contributing to an improved environmental footprint.

Another customer, Boral Limited, looked to partner with Caterpillar and

Cat dealer Westrac on sustainability-focused initiatives. As a result, in

2007 a “kidney looping” cart was installed on one of its job sites near

Melbourne, Australia, where we expect to see similar results.

Cat World Trading Corporation Cat World Trading Corporation (CWTC)

is one way we help create markets for recycled materials. By utilizing

excess inventories and capacities of customers to minimize the

consumption of new resources, CWTC assists customers in moving their

recyclable commodities to market.

For the past decade, CWTC has focused on Caterpillar consumables

by trading products for scrap metal, wood products, coal and iron ore

used in our facilities. For example, iron ore from a major North American

steel company is taken as trade for Caterpillar equipment. The iron ore

is then sold to a Mexican steel mill and used in the production of steel

that is sold to Caterpillar’s supply base and used in the production of

Caterpillar parts. The parts are supplied to Caterpillar facilities and

assembled into Caterpillar products.

43

In 2008, CWTC will expand its focus to meet the needs of customers

and suppliers, finding markets for recyclable materials and connecting

those who have materials with those who need them.

Energy, Emissions and Alternative/Renewable Fuels Improving

energy efficiency can be a cost-effective, near-term solution to address

issues of climate change and energy security. Through improvements

in efficiency, the same amount of work can be done with less energy

consumed and fewer emissions generated. Operating our machines,

engines and gas turbines on alternative and renewable fuels can also,

in many cases, reduce GHG emissions. We are actively working with

our customers to provide solutions that improve efficiency, reduce

emissions and allow those customers to operate on a variety of

alternative and renewable fuels.

Technology Solutions Technology products are becoming increasingly

important to customers around the world. Caterpillar offers a variety of

products that increase job site productivity – enabling a site manager

to design an efficient operation, reduce waste, eliminate rework and

lower fuel consumption.

Haulage Optimization Haulage Optimization – a service utilizing

a set of collaborative, knowledge-based, decision-making tools

– helps mine sites optimize worksite productivity, profitability and

compliance by identifying critical issues like haul road grade

irregularities and defects, traffic congestion spots, productivity

mismatches and slow trucks. Once issues are identified, potential

solutions are determined through simulation. The business impacts

of improvements are then quantified and both short- and long-

term worksite management options are implemented in order to

achieve best-in-class haulage operation results. Results include

reduced cycle haul times, improved powertrain component lives,

increased fuel efficiency and reduced GHG emissions.

MineStar® An additional technology available to our mining

customers, MineStar is a comprehensive, integrated mining infor-

mation system. Through a series of sub-systems for production

reporting, truck assignment, machine health monitoring and fleet

analysis, MineStar links information gathered in the field produc-

tion and maintenance planning in the office.

MineStar provides the tools and services needed to help the

mine get the most from its mining assets – maximizing machine

utilization and improving productivity and ore recovery – while

lowering the cost per ton of materials produced.

Customers who have implemented MineStar technology

estimate that the system has increased the overall efficiency of

mine operations between 10 to 15 percent.

AccuGrade™ AccuGrade is helping customers move dirt with

greater accuracy, higher productivity, lower operating costs and

more profitability. This high-technology earthmoving tool allows

operators to grade and fill with increased accuracy through the

use of advanced positioning technology, machine-integrated

components, and an off-board GPS and laser infrastructure. This

machine control system provides precise elevation information

on an in-cab display to achieve accurate blade positioning that

results in improved efficiency, and achieving grade faster and in

fewer passes. In a recent road construction productivity study,

we measured AccuGrade site level productivity gains of up to 100

percent with fuel savings of 43 percent. Work that took three days

using conventional, staked methods took only 1.5 days with the

AccuGrade system.

Product Link Product Link facilitates remote equipment monitor-

ing, thereby enabling customers to keep jobs on schedule, maintain

machine health, and reduce overall owning and operating costs.

The wireless solution integrates equipment information along

with Cat Dealer support to aid in effective fleet management –

increasing machine availability, maximizing machine uptime and

optimizing the efficiency and output of each machine. Specific

information about machine usage, location and health information

is delivered to customers through an integrated software applica-

tion. Product Link can be retrofitted on both Cat machines and

equipment from other manufacturers.

Specific customer experiences with Product Link have led to

early hour identification of maintenance – ultimately resulting in

less downtime for repair and less serious damage than might have

otherwise occurred without the use of the Product Link solution.

Combined Heat and Power Solutions Solar’s gas turbines in combined

heat and power (CHP) applications are capable of overall efficiencies of

75 to 90 percent, and can reduce GHG emissions by 2,500 metric tons

of CO2 per megawatt (or more), when compared to electric utility grid

power and heat produced by a conventional gas-fired boiler. As

companies worldwide seek to improve the energy efficiency of their

operations while reducing GHG emissions, the demand for gas turbine

generator sets producing combined heat and power is on the rise.

Emissions Reductions Because diesel engines represent a durable and

economical source of power, we are taking significant steps to advance

cleaner diesel engines, including work to meet the rigorous standards

from the U.S. Environmental Protection Agency for traditional pollutants.

Solutions include both the development of new technologies as well as

retrofit solutions.

Retrofit solutions Increasing regulations and the focus on

sustainable business has made it necessary for customers to lower

emissions from their legacy equipment in order to stay competitive.



Cat Emissions Solutions offers customers several options for cost-

effective solutions to achieve lower emissions levels.

Diesel Particulate Filters are used primarily to reduce particulate

matter, carbon monoxide and hydrocarbons from diesel engine

exhaust through catalytic oxidation and filtration. Retrofitting

legacy equipment with the Diesel Particulate Filter can signifi-

cantly lower the emissions output of the machine or engine. An

Emissions Repower solution replaces an in-use engine with a

new or Cat Reman engine that achieves lower emissions levels.

In 2007, through application of retrofit solutions, an estimated

1,291 tons of carbon monoxide, 248 tons of hydrocarbons (HC),

298 tons of particulate matter, and up to 1,800 tons of NOx will

be removed over the lifetime of the machines.

Criteria Pollutants In 2007, Solar reduced the criteria pollutant

emissions (NOx and CO) for operation on diesel fuel by 25 percent

on the majority of its SoLoNOx product line. This work will continue

in 2008 by the end of which all of Solar’s latest SoLoNOx product

portfolio will be at this reduced emissions level.

Biodiesel and Cleaner Fuels Biofuels are part of the path to a low-carbon

transport solution with near-zero net carbon emissions while requiring

minimal changes to engines. Ensuring that our engines and machines

can operate on appropriate biodiesel blends serves a growing customer

demand. By engaging in this space we ensure that diesel engines have

a place in a carbon-constrained economy.

The main focus of our work has been to investigate the compatibility

of biodiesel with the latest low emissions engine technologies. As an

enterprise we are actively working with customers on field trials in the

U.S., Europe and Australia.

Global variation in quality and sources presents the biggest

challenge in effective biodiesel use. We work with organizations like the

Engine Manufacturer’s Association to gain approval of appropriate

biodiesel standards. In addition, we are engaged in a project co-funded

by the U.K. Government’s Carbon Trust Organization to investigate the

effects of next generation biodiesel properties on combustion.

We are also evaluating other alternative, low-carbon fuels as

options for our machines and equipment.

In 2007, Solar completed the development work on its ultra-lean

premix Mercury 50 turbine, qualifying it for operation on landfill and

digester gas. Several Mercury 50 turbines will be commissioned into

this application in 2008. Solar continues to develop the capability of its

SoLoNOx products to run on a wider variety of alternative gaseous fuels

in response to an increasing market demand to operate turbines on

fuels other than natural gas.

Ultra Low Sulfur Diesel (ULSD) fuel enables the use of cleaner

technology diesel engines and vehicles with advanced emissions control

devices, resulting in significantly improved air quality and was mandated

for use in on-highway engines beginning in 2007. Utilizing ULSD in all

operations at our Medium Engine Center and Technical Center realized

a reduction in sulfur-related particulate matter by an estimated 0.6 tons

in 2007 compared to the use of Low Sulfur Diesel (LSD).

Partnerships We collaborate with a number of groups – governments,

regulatory agencies and other stakeholders – to look for opportunities

that enable the advancement of sustainable business opportunities.

Specifically, we work to:

Establish meaningful energy and climate change policies, regulations ›

and incentives.

Educate governments and other agencies worldwide to expand the ›

worldwide market for remanufactured goods.

Ensure the smooth introduction of new technologies and the ›

establishment of technical standards for biodiesel and other

alternative fuels.

Build relationships with those who can help us explore new ways to ›

improve quality of life while protecting the environment.

Energy Technologies Institute The Energy Technologies Institute

(ETI) was incorporated in 2007 to play a major role in developing

the technologies that will enable the U.K. to meet the British

Government’s energy goals. These goals include a 60 percent

reduction in CO2 emissions by 2050 and participation in interna-

tional technology deployment.

Continued participation in ETI positions Caterpillar for significant

growth in the energy space. It also provides the enterprise with

an opportunity for strategic alignment with global energy com-

panies on energy issues, while at the same time leveraging up to

22:1 R&D funding for sustainable energy research. Membership

in the ETI also gives Caterpillar a voice in a strong policy-setting

organization outside of the United States.

World Resources Institute/EMBARQ Helping to improve the

quality of life in the world’s fastest growing cities was the driving

force behind a Caterpillar Foundation grant of $7.5 million to the

World Resources Institute Center for Transport and the

Environment, known as EMBARQ. The project addresses the issues

of traffic congestion, air pollution, GHG emissions and safety. In

addition to engineering efficient mass transportation routes, key

to these solutions is replacing outdated equipment and retrofitting

existing buses with modern diesel technology – an area where

Caterpillar has significant expertise.

A successful project in Mexico City, where 250,000 passengers

travel by bus each day, has resulted in a 50 percent reduction in

travel times and 43,000 tons per year reduction in greenhouse

gases. Over the next five years, EMBARQ plans to replicate its

Mexico City success in other locations, including several in Mexico;

Porte Alegre, Brazil; Istanbul, Turkey; and growing cities in Asia.

creDitS

prODUceD BYCaterpillar Corporate Public AffairsCaterpillar Corporate Sustainable Development

DeSiGNVSA Partners, Inc.

pHOtOGrapHYArtumas Group, Inc.Cat Dealer IIASA, EcuadorCaterpillar Television & Electronic Media SolutionsChicago Climate ExchangeGisela Carvalho, Sotreq S.A.

Mitch Colgan, Colgan PhotographicOpportunity International

priNtiNGWilliamson Printing CorporationISO 9001, 14001 CertifiedFSC & SFI Certified

FOr MOre iNFOrMatiON

We value your feedback. Please email our sustainability reporting team at [email protected], send us your comments online at www.cat.com/sustainability or write to us at:

Caterpillar Inc.Sustainable Development100 N.E. Adams StreetPeoria, IL 61629-3350

Chinese, French, Spanish, Portuguese, German and Tamil translations of this report are available online at www.cat.com/sustainability.

To learn more about Caterpillar, or to request a copy of our 2007 Annual Report, please visit www.cat.com.

Date of previous report: April 2007.

FSc certiFicatiONForest Stewardship Council Chain of Custody certification ensures that the forest resources used throughout the papermaking process meet stringent guidelines – from the forest to the finished product.

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aBOUt tHe cOVerTraditionally defined as development that meets the needs of the present without compromising the ability of future generations to meet their own needs, sustainable development incorporates economic, social and environmental dimensions. The cover images reflect Caterpillar’s commitment to fully integrating these interdependent aspects into our business to deliver value to our stakeholders, society and the planet on which we live.

traDeMarK iNFOrMatiONCAT, CATERPILLAR, their respective logos, TODAY'S WORK., TOMORROW'S WORLD.,“Caterpillar Yellow” and the POWER EDGE trade dress, as well as corporate and product identity used herein, are trademarks of Caterpillar and may not be used without permission. MaK is a trademark of Caterpillar Motoren GmbH & Co. KG and may not be used without permission. PROGRESS RAIL SERVICES and design is a trademark of Progress Rail Services Corporation and may not be used without permission. SOLAR, as well as corporate and product identity used herein, are trademarks of Solar Turbines Incorporated and may not be used without permission. PERKINS, the “square and circles” design and “Perkins Blue” are trademarks of Perkins Holdings Limited and may not be used without permission. FG WILSON and the “globe” design are trademarks of FG WILSON (Engineering) Limited and may not be used without permission.

SaFe HarBOr StateMeNtCertain statements in this report relate to future events and expectations that constitute forward-looking statements involving known and unknown factors that may cause actual results of Caterpillar Inc. to be different from those expressed or implied in the forward-looking statements. In this context, words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “will” or other similar words and phrases often identify forward-looking state-ments. Actual results of the company may differ materially from those described or implied by such forward-looking statements based on a number of factors and uncertainties, including, but not limited to, changes in economic, political or competitive conditions; market acceptance of the company’s products and services; changes in law, regulations and tax rates; and other general economic, business and financing conditions and factors described in more detail in the company’s filings with the Securities and Exchange Commission, including in its year-end report on Form 10-K filed on February 22, 2008. We do not undertake to update our forward-looking statements.

© 2008 Caterpillar All Rights Reserved Incorporated in Delaware An equal opportunity employer

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2007 SUSTAINABILITY REPORT

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