The following Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from the results discussed in the forward-looking statements. Factors that might cause a difference include, but are not limited to, those discussed under Item 1A. Risk Factors in this Annual Report on Form 10-K. The following section is qualified in its entirety by the more detailed information, including our financial statements and the notes thereto, which appears elsewhere in this Annual Report.

Overview

Organization

Ingersoll-Rand Company Limited (IR-Limited), a Bermuda company, and its consolidated subsidiaries (we, our, the Company) is a diversified, global company that provides products, services and solutions to enhance the quality and comfort of air in homes and buildings, transport and protect food and perishables, secure homes and commercial properties, and increase industrial productivity and efficiency. Our business segments consist of Air Conditioning Systems and Services, Climate Control Technologies, Industrial Technologies and Security Technologies, each with strong brands and leading positions within their respective markets. We generate revenue and cash primarily through the design, manufacture, sale and service of a diverse portfolio of industrial and commercial products that include well-recognized, premium brand names such as Club Car®, Hussmann®, Ingersoll-Rand®, Schlage ®, Thermo King® and Trane®.

We are dedicated to inspiring progress for our customers, shareholders, employees and communities by achieving:

• Dramatic Growth, by focusing on innovative solutions for our customers;

• Operational Excellence, by pursuing continuous improvement in all of our operations; and

• Dual Citizenship, by bringing together the talents of all Ingersoll Rand people to leverage the capabilities of our global enterprise.

To achieve these goals and to become a more diversified company with strong growth prospects, we transformed our enterprise portfolio by divesting cyclical, low-growth and asset-intensive businesses. In addition, our acquisition strategy has helped deliver more consistent revenue and earnings performance across all phases of the economic cycle. Aside from our portfolio transformation, we continue to focus on increasing our recurring revenue stream, which includes revenues from parts, service, used equipment and rentals. We also intend to continuously improve the efficiencies, capabilities, products and services of our high-potential businesses.

Trends and Economic Events

We are a global corporation with worldwide operations. As a global business, our operations are affected by worldwide, regional and industry-specific economic factors, as well as political factors, wherever we operate or do business. Our geographic and industry diversity, as well as the diversity of our product sales and services, has helped limit the impact of any one industry or the economy of any single country on our consolidated operating results.

The recent extreme volatility and disruption of financial markets in the United States, Europe and Asia have contributed to weakening worldwide economic conditions. As a result, we have seen weaker

demand for many of our products and services during the second half of 2008. In addition, the uncertainty related to the cost and availability of credit has further depressed the overall business climate. Our revenues from continuing operations for 2008 increased 50.9% compared with 2007, primarily associated with the acquisition of Trane Inc. (Trane). Excluding the results of Trane, our revenues from continuing operations for 2008 increased less than 1% compared with 2007.

Despite the increasingly challenging economic environment, we continue to execute our business strategy. The divestiture of both Compact Equipment and the Road Development business unit in 2007, in addition to the acquisition of Trane in 2008, has enabled us to become more balanced across the products we offer. In addition, our current enterprise-wide restructuring actions initiated in the fourth quarter of 2008 are designed to streamline the footprint of our manufacturing facilities and reduce our general and administrative cost base.

Given the broad range of products manufactured and geographic markets served, management uses a variety of factors to predict the outlook for the Company. We monitor key competitors and customers in order to gauge relative performance and the outlook for the future. In addition, our order rates are indicative of future revenue and thus a key measure of anticipated performance. In those industry segments where we are a capital equipment provider, revenues depend on the capital expenditure budgets and spending patterns of our customers, who may delay or accelerate purchases in reaction to changes in their businesses and in the economy.

For 2009, we expect current market conditions continuing to negatively affect our financial results. Declining markets in North America and Western Europe partially offset by slight to moderate growth in the developing economies of Eastern Europe, Asia and Latin America will have a negative impact. In addition, with more than 40% of our revenues generated outside of the U.S., the recent appreciation of the U.S. dollar against most major currencies could negatively impact our 2009 revenue.

Despite the current economic turmoil, we have a solid foundation of global brands and leading market shares in all of our major product lines. In addition, our growing geographic and industry diversity coupled with our large installed product base provides growth opportunities within our service, parts and replacement revenue streams.

Acquisition of Trane

At the close of business on June 5, 2008 (the Acquisition Date), we completed the acquisition of 100% of the outstanding common shares of Trane. Trane, previously named American Standard Companies Inc., provides systems and services that enhance the quality and comfort of the air in homes and buildings around the world. Trane's systems and services have leading positions in premium commercial, residential, institutional and industrial markets, a reputation for reliability, high quality and product innovation and a powerful distribution network. Trane's 2007 annual revenues were $7.5 billion.

We paid a combination of (i) 0.23 of an IR-Limited Class A common share and
(ii) $36.50 in cash, without interest, for each outstanding share of Trane common stock. The total cost of the acquisition was approximately $9.6 billion, including change in control payments and direct costs of the transaction. We financed the cash portion of the acquisition with a combination of cash on hand, commercial paper and a 364-day senior unsecured bridge loan facility.

The components of the purchase price were as follows:

In billions
Cash consideration                                                      $       7.3
Stock consideration (Issuance of 45.4 million IR-Limited Class A
common shares)                                                                  2.0
Estimated fair value of Trane stock options converted to 7.4
million IR-Limited stock options                                                0.2
Transaction costs                                                               0.1
Total                                                                   $       9.6

As a result of the acquisition, the results of the operations of Trane have been included in the statement of financial position at December 31, 2008 and the consolidated statements of operations and cash flows since the Acquisition Date. For further details on the acquisition of Trane, see Note 3 to the consolidated financial statements.

Significant events in 2008

As discussed in Acquisition of Trane above, on June 5, 2008, we acquired 100% of the outstanding common shares of Trane for approximately $9.6 billion.

In August 2008, we filed a universal shelf registration statement with the Securities and Exchange Commission (SEC) for an indeterminate amount of securities for future issuance and issued $1.6 billion of long-term debt pursuant to the shelf registration statement. This issuance consisted of $250 million Senior Floating Rate Notes due in 2010, $600 million 6.000% Senior Notes due in 2013 and $750 million 6.875% Senior Notes due in 2018. These notes are fully and unconditionally guaranteed by IR-Limited, which directly owns 100% of the subsidiary issuer, IR Global Holding Company Limited. The net proceeds from the offering were used to partially reduce the amount outstanding under the senior unsecured bridge loan facility, which had a balance of $754 million at December 31, 2008.

In October 2008, we announced plans to initiate enterprise-wide restructuring actions. These actions include streamlining the footprint of manufacturing facilities and reducing the general and administrative cost base. Projected costs will approximate $110 million. As of December 31, 2008, we have incurred $71 million of costs associated with this restructuring.

In the fourth quarter of 2008, we tested goodwill and other indefinite-lived intangible assets for impairment. As a result of decreased global equity valuations, the tightening of industrial and retail end markets and a resulting decline in our 2009 projected financial performance, we incurred a non-cash pre-tax impairment charge of $3,710.0 million, $3,385.0 million after-tax.

Significant events in 2007

On November 30, 2007, we completed the sale of our Bobcat, Utility Equipment and Attachments business units (collectively, Compact Equipment) to Doosan Infracore for cash proceeds of approximately $4.9 billion, subject to post-closing purchase price adjustments. Compact Equipment manufactured and sold compact equipment including skid-steer loaders, compact track loaders, mini-excavators and telescopic tool handlers; portable air compressors, generators, light towers; general-purpose light construction equipment; and attachments. We are currently in the process of resolving the final purchase price adjustments with Doosan Infracore.

On April 30, 2007, we completed the sale of our Road Development business unit to AB Volvo (publ) for cash proceeds of approximately $1.3 billion. The Road Development business unit manufactured and sold asphalt paving equipment, compaction equipment, milling machines and construction-related material handling equipment.

During the fourth quarter of 2007, we recorded a non-cash charge to earnings of discontinued operations of $449 million ($277 million after-tax) relating to the company's liability for all pending and estimated future asbestos claims through 2053. This charge resulted from an increase in our recorded liability for asbestos claims by $538 million, from $217 million to $755 million, offset by a corresponding $89 million increase in our recorded asset for probable asbestos-related insurance recoveries, from $161 million to $250 million at December 31, 2007. For a further discussion of asbestos matters, see Note 22 to the consolidated financial statements.

On July 20, 2007, the Company and its consolidated subsidiaries received a notice from the Internal Revenue Service (IRS) containing proposed adjustments to the Company's tax filings in connection with an audit of the 2001 and 2002 tax years. The IRS did not contest the validity of the Company's reincorporation in Bermuda. The most significant adjustments proposed by the IRS involve treating the entire intercompany debt incurred in connection with the Company's reincorporation in Bermuda as equity. As a result of this recharacterization, the IRS has disallowed the deduction of interest paid on the debt and imposed dividend withholding taxes on the payments denominated as interest. These adjustments proposed by the IRS, if upheld in their entirety, would result in additional taxes with respect to 2002 of approximately $190 million plus interest, and would require the Company to record additional charges associated with this matter. At this time, the IRS has not yet begun their examination of the Company's tax filings for years subsequent to 2002. However, if these adjustments or a portion of these adjustments proposed by the IRS are ultimately sustained, it is likely to also affect subsequent tax years.

The Company strongly disagrees with the view of the IRS and filed a protest with the IRS in the third quarter of 2007. The Company has and intends to continue to vigorously contest these proposed adjustments. The Company, in consultation with its outside advisors, carefully considered many factors in determining the terms of the intercompany debt, including the obligor's ability to service the debt and the availability of equivalent financing from unrelated parties, two factors prominently cited by the IRS in denying debt treatment. The Company believes that its characterization of that obligation as debt for tax purposes was supported by the relevant facts and legal authorities at the time of its creation. The subsequent financial results of the relevant companies, including the actual cash flow generated by operations and the production of significant additional cash flow from dispositions have confirmed the ability to service this debt. Although the outcome of this matter cannot be predicted with certainty, based upon an analysis of the strength of its position, the Company believes that it is adequately reserved for this matter. As the Company moves forward to resolve this matter with the IRS, it is reasonably possible that the reserves established may be adjusted within the next 12 months. However, the Company does not expect that the ultimate resolution will have a material adverse impact on its future results of operations or financial position. See Note 19 to the consolidated financial statements for a further discussion of tax matters.

During 2007, we repurchased 39.7 million Class A common shares at a cost $1,999.9 million under our existing $4 billion share repurchase program. This repurchase program was originally authorized by the Board of Directors in December 2006 to repurchase up to $2 billion and subsequently expanded to $4 billion in May 2007.

Significant Events in 2006

During 2006, we completed our original $2 billion share repurchase program by repurchasing 27.7 million Class A common shares at a cost of $1,096.3 million. This share repurchase program was originally authorized by the Board of Directors in August 2004 and subsequently expanded in August 2005. In December 2006, the Board of Directors authorized a new share repurchase program to repurchase up to $2 billion worth of Class A common shares. No amounts were repurchased under the December 2006 authorization as of December 31, 2006.

On October 6, 2006, we received a notice from the IRS containing proposed adjustments to our tax filings in connection with an audit of the 1998 through 2000 tax years. The principal proposed adjustments consist of the disallowance of certain capital losses taken in our tax returns in 1999 and 2000. The disallowance would result in additional taxes and penalties of approximately $155 million, plus interest through October 6, 2006, of approximately $62 million. As a result, in the third quarter of 2006, we added approximately $27 million ($0.08 per dilutive share) to previously established reserves. In order to reduce the potential interest expense associated with this matter, we made a payment to the IRS of $217 million in the third quarter of 2007. See Note 19 to the consolidated financial statements for a further discussion of tax matters.

Results of Operations

                                                    % of                      % of                      % of
Dollar amounts in millions,
except per share data                 2008        Revenues       2007       Revenues       2006       Revenues
Net revenues                      $  13,227.4                $  8,763.1                $  8,033.7
Cost of goods sold                   (9,748.1 )      73.7%     (6,272.0 )      71.6%     (5,768.4 )      71.8%
Selling and administrative
expenses                             (2,343.1 )      17.7%     (1,433.3 )      16.3%     (1,266.8 )      15.8%
Asset impairment                     (3,710.0 )                      -                         -
Operating income (loss)              (2,573.8 )     -19.5%      1,057.8        12.1%        998.5        12.4%
Interest expense                       (245.4 )                  (136.2 )                  (133.6 )
Other, net                               43.2                      15.9                      (7.3 )
Earnings (loss) before income
taxes                                (2,776.0 )                   937.5                     857.6
(Provision) benefit for income
taxes                                   208.6                    (204.4 )                   (92.6 )
Earnings (loss) from continuing
operations                           (2,567.4 )                   733.1                     765.0
Discontinued operations, net of
tax                                     (57.4 )                 3,233.6                     267.5
Net earnings (loss)               $  (2,624.8 )              $  3,966.7                $  1,032.5

Diluted earnings (loss) per
common share:
Continuing operations             $     (8.54 )              $     2.48                $     2.37
Discontinued operations                 (0.19 )                   10.95                      0.83
Net earnings (loss)               $     (8.73 )              $    13.43                $     3.20

The discussions that follow describe the significant factors contributing to the changes in our results of operations for the periods presented. Included in the review are certain non-GAAP financial measures. We believe that it is meaningful to provide the relative impact of integration and restructuring charges, non-recurring cost related to the acquisition of Trane and impairment charges in order to present a better understanding of our results on a period to period comparative basis. The adjusted information is intended to be more indicative of our core operating results.

Net Revenues

Net revenues for the year ended December 31, 2008 increased by 51%, or $4,464.3
million, compared with the same period of 2007, which primarily resulted from
the following:



                         Volume/product mix         -4.5 %
                         Pricing                     2.5 %
                         Currency exchange rates     2.0 %
                         Acquisitions               51.0 %
                         Total                      51.0 %

The acquisition of Trane on June 5, 2008 increased revenues by $4,401.3 million during the year. Excluding the results of Trane, revenues increased by 0.7%, or $63.0 million. Softening overall demand in many major end-markets was the primary driver of the volume reduction. However, we continue to make progress in increasing recurring revenues, which improved by 6% over prior year and accounted for 19% of net revenues in 2008.

Net revenues for the year ended December 31, 2007 increased by 9%, or $729.4 million, compared with the same period of 2006, which primarily resulted from the following:

                         Volume/product mix         4.0 %
                         Pricing                    2.0 %
                         Acquisitions               2.5 %
                         Currency exchange rates    0.5 %
                         Total                      9.0 %

Revenues increased significantly in the European, Asian and Latin American regions as volumes, product mix and pricing all improved during 2007. North American revenues increased moderately compared to 2006. These increases occurred in each of our business segments. Recurring revenues continue to be a source of growth as they improved by 9% over the prior year and accounted for 18% of net revenues in 2007.

Cost of Goods Sold

For the year ended December 31, 2008, cost of goods sold increased by $3,476.1 million compared to the same period in 2007. The increase was primarily related to the acquisition of Trane. In addition, cost of goods sold included $56.7 million of restructuring and integration costs compared to restructuring costs of $24.8 million in 2007. Cost of goods sold as a percentage of revenue increased to 73.7% compared with 71.6% for the same period of 2007. Excluding the results of Trane, cost of goods sold as a percentage of revenue would have been 72.7%. Higher material costs and unfavorable business and product mix more than offset price increases. In addition, decreased leverage due to lower volumes contributed to the year-over-year increase.

For the year ended December 31, 2007, cost of goods sold as a percentage of revenues decreased slightly to 71.6% compared with 71.8% for the same period of 2006. Increased leverage on higher revenues provided a benefit which was offset by unfavorable mix and higher material costs. Restructuring costs, which accounted for $24.8 million of the year-over-year increase, had a 0.3% impact on cost of goods sold as a percentage of revenue.

Selling and Administrative Expenses

For the year ended December 31, 2008, selling and administrative expense increased by $909.8 million compared to the same period in 2007. The increase was primarily related to the acquisition of Trane. In addition, selling and administrative expense included $34.2 million of restructuring and integration costs compared to $3.9 million of restructuring costs in 2006. Selling and administrative expense as a percentage of revenue increased to 17.7% compared with 16.3% for the same period of 2007. Excluding the results of Trane, selling and administrative expense as a percentage of revenue would have been 16.6%. Decreased leverage due to lower volumes more than offset expense reduction and price increases.

For the year ended December 31, 2007, selling and administrative expenses as a percentage of revenues increased to 16.3% compared with 15.8% for the same period of 2006. This increase was primarily due to increased costs of $23 million associated with the divestiture of Compact Equipment and the Road

Development business unit. In addition, share-based compensation expense of $20 million and the prior year adjustment of the allowance for doubtful accounts of $15 million also contributed to the increase. These additional costs were partially offset by better leverage from higher revenue.

Asset Impairment

During the fourth quarter of 2008, we tested goodwill and other indefinite-lived intangible assets for impairment. As a result of decreased global equity valuations, the tightening of industrial and retail end markets and a resulting decline in our 2009 projected financial performance, we incurred a non-cash pre-tax impairment charge of $3,710.0 million, $3,385.0 million after-tax.

The following table summarizes the impairment charges that were taken by sector during 2008:

                                                           Intangible       Marketable
In millions                                 Goodwill         Assets         Securities        Total
Air Conditioning Systems and Services     $  2,496.0     $      814.0     $         -      $  3,310.0
Climate Control Technologies                      -              40.0               -            40.0
Security Technologies                          344.0              6.0             10.0          360.0
Total                                     $  2,840.0     $      860.0     $       10.0     $  3,710.0

For a further discussion of impairment related matters, see Goodwill and Indefinite-Lived Intangible Assets under Critical Accounting Policies and Note 4 to the consolidated financial statements.

Operating Income (Loss)

Operating income for the year ended December 31, 2008 decreased by $3,631.6 million compared with the same period of 2007. The primary driver of the year-over-year decrease related to the $3,710.0 million asset impairment charge recognized in the fourth quarter of 2008. Results were further impacted by the acquisition of Trane in the second quarter of 2008 in addition to related restructuring and integration cost. Excluding these items, operating margins would have been 7.8%. Lower volumes, higher commodity costs and an unfavorable business and product mix were partially offset by expense reduction, productivity actions and improved pricing.

Operating income for the year ended December 31, 2007 increased by $59.3 million or 5.9%, compared with the same period of 2006. Excluding restructuring charges, operating income would have increased by 8.8% to $1,086.5 million. The increase in operating income was mainly attributable to increased revenues, productivity improvements, improved pricing and favorable volumes. These benefits were partially offset by higher material costs and an unfavorable product mix. However, these cost increases, coupled with the unfavorable product mix, held operating margins flat at 12.4% compared to the prior year.

Interest Expense

Interest expense for the year ended December 31, 2008 increased $109.2 million compared with the same period of 2007. The increase is primarily related to significantly higher debt levels used to help fund the acquisition of Trane in June 2008.

Interest expense for the year ended December 31, 2007 increased by $2.6 million compared with the same period of 2006. The increase was mainly attributable to higher year-over-year average debt levels due to the issuance and subsequent repayment of commercial paper during the year.

Other, Net

The year-over-year changes in Other, net primarily resulted from the following:



         In millions                           2008          2007          2006
         Interest income                    $    95.6     $    36.2     $    15.9
         Exchange gain (loss)                   (41.9 )        (2.8 )       (21.3 )
         Minority interests                     (20.0 )       (14.3 )       (14.9 )
         Earnings from equity investments         3.4           1.0          (0.1 )
         Other                                    6.1          (4.2 )        13.1
         Other, net                         $    43.2     $    15.9     $    (7.3 )

For the year ended December 31, 2008, Other, net increased by $27.3 million compared with the same period of 2007. The increase was a result of greater interest income generated by higher average cash balances prior to the acquisition of Trane in June 2008. The results were partially offset by currency . . .