U NITED
      STATES SECURITIES AND EXCHANGE COMMISSION


Washington,
      D.C. 20549


**FORM
      10-K**


(Mark
      One)


x
            ANNUAL
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                ACT OF
                1934





**For
      the fiscal year ended December 31, 2006**


or


o
            TRANSITION
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                ACT OF
                1934




For
      the
      transition period from ________ to________





**Commission
      File No. 1-985**





**INGERSOLL-RAND
      COMPANY LIMITED**


(Exact
      name of registrant as specified in its charter)





**Bermuda**
              *(State
                or other jurisdiction of*
              *incorporation
                or organization)*
            
            **75-2993910**
              *(I.R.S.
                Employer*
              *Identification
                No.)***Clarendon
                House**
              **2
                Church Street**
              **Hamilton
                HM 11, Bermuda**
              *(Address
                of principal executive offices)*


Registrant’s
      telephone number, including area code: **(441)
      295-2838**





Securities
      registered pursuant to Section 12(b) of the Act:




**Title
                of each
                class**
            **Name
                of each exchange on which
                registered**Class
                A Common Shares,
              Par
                Value $1.00 per Share
            New
                York Stock
                Exchange


****  ****        &a
      mp;# 160;


Securities
      registered pursuant to Section 12(g) of the Act: None





Indicate
      by check mark if the registrant is a well-known seasoned issuer, as defined
      in
      Rule 405 of the Securities Act.


YES x NO o





Indicate
      by check mark if the registrant is not required to file reports pursuant to
      Section 13 or Section 15(d) of the Act.


YES oNO x





Indicate
      by check mark whether the registrant (1) has filed all reports required to
      be
      filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
      the
      preceding 12 months (or for such shorter period that the registrant was required
      to file such reports), and (2) has been subject to such filing requirements
      for
      the past 90 days.  YES xNO o





Indicate
      by check mark if disclosure of delinquent filers pursuant to Item 405 of
      Regulation S-K is not contained herein, and will not be contained, to the best
      of registrant's knowledge, in definitive proxy or information statements
      incorporated by reference in Part III of this Form 10-K or any amendment to
      this
      Form 10-K o





Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, or a non-accelerated filer. See definition of “accelerated
      filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
      one):




Large
      accelerated filer x Accelerated
      filer o         
 Non-accelerated
      filer  o




Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act).


YES oNO x




The
      aggregate market value of common stock held by nonaffiliates on June 30, 2006
      was ** approximately
      $13,896,126,182 based on the closing price of such stock on the New York Stock
      Exchange.





The
      number of Class A Common Shares outstanding as of February 21, 2007
      wa s
      307,801,047.





**DOCUMENTS
      INCORPORATED BY REFERENCE**





Portions
      of the registrant’s proxy statement to be filed within 120 days of the close of
      the registrant’s fiscal year in connection with the registrant’s Annual General
      Meeting of Shareholders to be held June 6, 2007 are incorporated by reference
      into Part III of this Form 10-K.








**INGERSOLL-RAND
                  COMPANY LIMITED****Form
                  10-K****For
                  the Fiscal Year Ended December 31,
                  2006**
  TABLE
          OF
          CONTENTS
  Page**Part
                    I**
                Item
                    1. Business
                3Item
                    1A. Risk Factors
                9Item
                    1B. Unresolved Staff Comments
                13Item
                    2. Properties
                13Item
                    3. Legal Proceedings
                15Item
                    4. Submission of Matters to a Vote of Security Holders
                15**Part
                    II**
                Item
                    5. Market for Registrant's Common Equity, Related Stockholder
                    Matters and
                    Issuer Purchases of Equity Securities
                17Item
                    6. Selected Financial Data
                19Item
                    7. Management's Discussion and Analysis of Financial Condition
                    and Results
                    of Operations
                20Item
                    7A. Quantitative and Qualitative Disclosure About Market
                    Risk
                40Item
                    8. Financial Statements and Supplementary Data
                41Item
                    9. Changes in and Disagreements with Independent Accountants
                    on Accounting
                    and Financial Disclosure
                42Item
                    9A. Controls and Procedures
                42Item
                    9B. Other Information
                43**Part
                    III**
                Item
                    14. Principal Accountant Fees and Services
                44**Part
                    IV**
                Item
                    15. Exhibits and Financial Statements Schedules
                45Signatures
                52


2




**PART
      I**




Item
      1.   **BUSINESS**





**Overview**




Ingersoll-Rand
      Company Limited, a Bermuda company ( we,
      our, IR-Limited
      or the Company), is a
      leading
      provider of climate control, compact vehicle, construction, industrial and
      security products. In
      each
      of these markets, we offer a
      diverse product portfolio that includes well-recognized industrial and
      commercial brands.





Through
      our business segments, we design, manufacture, sell and service:





·
            climate
                control technologies, including transport temperature control units
                and
                refrigerated display merchandisers;


·
            compact
                vehicle technologies, including skid-steer loaders, golf vehicles
                and
                utility vehicles;


·
            construction
                technologies, including road construction and repair
                equipment;


·
            industrial
                technologies, including compressed air systems and tools;
                and


·
            security
                technologies, including mechanical and electronic security
                products.





Ingersoll-Rand
      Company (IR-New Jersey) was organized in 1905 under the laws of the State of
      New
      Jersey as a consolidation of Ingersoll-Sergeant Drill Company and the Rand
      Drill
      Company, whose businesses were established in the early 1870’s.





IR-Limited
      is the successor to IR-New
      Jersey following a corporate reorganization (the reorganization) that became
      effective on December 31, 2001. We
      believe that the reorganization has enabled us to begin
      to realize a variety of financial and strategic benefits, including
      to:





·
            help
                enhance business growth;


·
            create
                a more favorable corporate structure for expansion of our current
                business;


·
            improve
                expected cash flow for use in investing in the development of
                higher-growth product lines and
                businesses;


·
            improve
                expected cash flow for use in reducing the amount of our
                debt;


·
            reduce
                our worldwide effective tax rate;


·
            enable
                us to implement our business strategy more effectively;
                and


·
            expand
                our investor base as our shares may become more attractive to non-U.S.
                investors.





To
      consummate the reorganization, IR Merger Corporation, a New Jersey corporation,
      merged into IR-New Jersey, with IR-New Jersey as the surviving company. Upon
      the
      merger, IR-New Jersey became a wholly owned, indirect subsidiary of IR-Limited,
      and the outstanding shares of IR-New Jersey common stock were automatically
      cancelled in exchange for the issue of our Class A common shares. The number
      of
      Class B common shares issued had an aggregate value equal to the fair market
      value of the shares of the subsidiaries transferred (the transferred shares)
      and
      the amount of debt issued to us based on the market value of IR-New Jersey
      common stock at the effective time of the merger. Prior to the reorganization,
      neither IR-Limited nor IR-Merger Corporation had any significant assets or
      capitalization or engaged in any business or other activities other than in
      connection with formation and the merger and related reorganization
      transactions. IR-Limited and its subsidiaries continue to conduct the businesses
      previously conducted by IR-New Jersey and its subsidiaries. The reorganization
      has been accounted for as a reorganization of entities under common control
      and
      accordingly did not result in any changes to the consolidated amounts of assets,
      liabilities and shareholders’ equity.




3





**Business
      Segments**




*Climate
      Control Technologies*


Climate
      Control Technologies provides solutions for customers to transport, preserve,
      store and display temperature-sensitive products by engaging in the design,
      manufacture, sale and service of transport temperature control units, HVAC
      systems, refrigerated display merchandisers, beverage coolers, auxiliary power
      units and walk-in storage coolers and freezers. This segment includes the Thermo
      King and Hussmann brands.





*Compact
      Vehicle Technologies*


Compact
      Vehicle Technologies is engaged in the design, manufacture, sale and service
      of
      skid-steer loaders, all-wheel steer loaders, compact track loaders, compact
      excavators, attachments, golf vehicles and utility vehicles. This segment
      includes the Bobcat and Club Car brands.





*Construction
      Technologies*


Construction
      Technologies is engaged in the design, manufacture, sale and service of road
      construction and repair equipment, portable power products, general-purpose
      construction equipment, attachments and portable light towers and compressors.
      This segment is comprised of the Utility Equipment, Road Development and
      Attachments businesses.





*Industrial
      Technologies*


Industrial
      Technologies is focused on providing solutions to enhance customers’ industrial
      and energy efficiency, mainly by engaging in the design, manufacture, sale
      and
      service of compressed air systems, tools, fluid and material handling and energy
      generation systems. This segment includes the Air Solutions and Productivity
      Solutions businesses.





*Security
      Technologies*


Security
      Technologies is engaged in the design, manufacture, sale and service of
      mechanical and electronic security products, biometric access control systems,
      and security and scheduling software. Security Technologies includes the
      Schlage, LCN, Von Duprin and CISA brands.





**Competitive
      Conditions**




The
      Company's products are sold in highly competitive markets throughout the world
      and compete against products produced by both U.S. and non-U.S. corporations.
      The principal methods of competition in these markets relate to price, quality,
      service and technology. The Company believes that it is one of the leading
      manufacturers in the world of air compression systems, construction equipment,
      transport temperature control products, refrigerated display merchandisers,
      refrigeration systems and controls, air tools, golf vehicles and utility
      vehicles. In addition, the Company believes it is a leading supplier in U.S.
      markets for architectural hardware products, mechanical locks, and electronic
      and biometric access-control technologies.





**Distribution**




The
      Company's products are distributed by a number of methods, which the Company
      believes are appropriate to the type of product. Sales are made in the U.S.
      through branch sales offices and through distributors and dealers across the
      United States. Non-U.S. sales are made through numerous subsidiary sales and
      service companies with a supporting chain of distributors in over 100
      countries.




4




**Products**Principal
                  products of the Company include the following:Air
                  balancers
              
              Golf
                  vehiclesAir
                  compressors & accessories
              
              HoistsAir
                  dryers
              
              Hydraulic
                  breakersAir
                  logic controls
              
              Lubrication
                  equipmentAir
                  motors
              
              MicroturbinesAir
                  and electric tools
              
              Material
                  handling equipmentAsphalt
                  compactors
              
              Paving
                  equipmentAsphalt
                  pavers
              
              Piston
                  pumpsAutomated
                  dispensing systems
              
              Pneumatic
                  breakersAutomatic
                  doors
              
              Pneumatic
                  cylindersAuxiliary
                  power unit
              
              Pneumatic
                  valvesBiometric
                  access control systems
              
              Portable
                  compressorsCompact
                  excavators
              
              Portable
                  generatorsCompact
                  track loaders
              
              Portable
                  light towersCompact
                  track-loader-backhoes
              
              Portable
                  security productsDiaphragm
                  pumps
              
              Refrigerated
                  display casesDoor
                  closers and controls
              
              Refrigeration
                  systemsDoor
                  locks, latches and locksets
              
              Road-building
                  machineryDoors
                  and door frames (steel)
              
              Rough-terrain
                  material handlersElectrical
                  security products
              
              Skid-steer
                  loadersElectronic
                  access-control systems
              
              Soil
                  compactorsEngine-starting
                  systems
              
              Spray-coating
                  systemsExit
                  devices
              
              Telescopic
                  material handlersExtrusion
                  pump systems
              
              Transport
                  temperature control systemsFastener-tightening
                  systems
              
              Utility
                  vehiclesFluid-handling
                  equipment
              
              Winches


These
      products are sold primarily under the Company’s name and also under other names
      including ABG®, Blaw-Knox®, Bobcat®, Bricard®, CISA®, Club Car®, Hussmann®,
      Koxka®, LCN®, Montabert®, Schlage®, Thermo King®, and Von Duprin®.





**Working
      Capital**




The
      products manufactured by the Company must usually be readily available to meet
      rapid delivery requirements. Such working capital requirements are not, however,
      in the opinion of management, materially different from those experienced by
      the
      Company's major competitors.





**Customers**




No
      material part of the Company's business is dependent upon a single customer
      or a
      small group of customers. Therefore, the loss of any one customer would not
      have
      a material adverse effect on the Company's operations.





**Operations
      by Geographic Area**




More
      than
      40% of our 2006 net revenues were derived outside the United States. Sales
      outside of the United States are made in more than 100 countries. Therefore,
      the
      attendant risks of manufacturing or selling in a particular country, such as
      nationalization and establishment of common markets, would not be expected
      to
      have a significant effect on the Company's non-U.S. operations. Additional
      information concerning the Company’s operating segments is contained in Note 16,
      Business Segment Information, to the consolidated financial statements contained
      in this Annual Report on Form 10-K.




5





**Raw
      Materials**




The
      Company manufactures many of the components included in its products. The
      principal raw materials required for the manufacture of the Company's products
      are purchased from numerous suppliers. Although higher prices for some raw
      materials important to some of the Company’s businesses, particularly steel and
      non-ferrous metals, have caused pricing pressures, the Company believes that
      available sources of supply will generally be sufficient for its needs for
      the
      foreseeable future.





**Backlog**




The
      Company’s approximate backlog of orders, believed to be firm, at December 31,
      2006 and 2005, were as follows:




*Dollar
                  amounts in millions*
              
              2006
              
              2005Climate
                  Control Technologies
              
              $
              435.8
              
              $
              331.0Compact
                  Vehicle Technologies
              
              
              234.3
              
              
              162.6Construction
                  Technologies
              
              
              175.6
              
              
              129.7Industrial
                  Technologies
              
              
              244.0
              
              
              178.6Security
                  Technologies
              
              
              182.8
              
              
              140.0Total
              
              $
              1,272.5
              
              $
              941.9




These
      backlog figures are based on orders received. While the major portion of the
      Company's products are built in advance of order and either shipped or assembled
      from stock, orders for specialized machinery or specific customer application
      are submitted with extensive lead times and are often subject to revision,
      deferral, cancellation or termination. The Company expects to ship substantially
      all of the backlog during 2007.





**Research
      and Development**




The
      Company maintains extensive research and development facilities for
      experimenting, testing and developing high quality products. The Company spent
      $175.5 million in 2006, $162.4 million in 2005 and $149.2 million in 2004 on
      research and development expenditures, including qualifying engineering costs.
      The Company also incurs engineering costs, which are not considered research
      and
      development expenditures.





**Patents
      and Licenses**




The
      Company owns numerous patents and patent applications and is licensed under
      others. While it considers that in the aggregate its patents and licenses are
      valuable, it does not believe that its business is materially dependent on
      its
      patents or licenses or any group of them. In the Company's opinion, engineering
      and production skills, and experience are more responsible for its market
      position than patents or licenses.





**Environmental
      and Asbestos Matters**




The
      Company continues to be dedicated to an environmental program to reduce the
      utilization and generation of hazardous materials during the manufacturing
      process and to remediate identified environmental concerns. As to the latter,
      the Company currently is engaged in site investigations and remediation
      activities to address environmental cleanup from past operations at current
      and
      former manufacturing facilities.




6





During
      2006, the Company spent approximately $5 **** million
      on capital projects for pollution abatement and control, and an additional
      $9.4
      million for environmental remediation expenditures at sites presently or
      formerly owned or leased by the Company. The Company believes that these
      expenditure levels will continue and may increase over time. Given the evolving
      nature of environmental laws, regulations and technology, the ultimate cost
      of
      future compliance is uncertain.





The
      Company is a party to environmental lawsuits and claims, and has received
      notices of potential violations of environmental laws and regulations from
      the
      Environmental Protection Agency and similar state authorities. It is identified
      as a potentially responsible party (PRP) for cleanup costs associated with
      off-site waste disposal at federal Superfund and state remediation sites. For
      all sites there are other PRPs and, in most instances, the Company's involvement
      is minimal.





In
      estimating its liability, the Company has assumed it will not bear the entire
      cost of remediation of any site to the exclusion of other PRPs who may be
      jointly and severally liable. The ability of other PRPs to participate has
      been
      taken into account, based generally on the parties’ financial condition and
      probable contributions on a per site basis. Additional lawsuits and claims
      involving environmental matters are likely to arise from time to time in the
      future.





Although
      uncertainties regarding environmental technology, U.S. federal and state laws
      and regulations and individual site information make estimating the liability
      difficult, management believes that the total liability for the cost of
      remediation and environmental lawsuits and claims will not have a material
      effect on the financial condition, results of operations, liquidity or cash
      flows of the Company for any year. It should be noted that when the Company
      estimates its liability for environmental matters, such estimates are based
      on
      current technologies, and the Company does not discount its liability or assume
      any insurance recoveries.





Certain
      wholly owned subsidiaries of the Company are named as defendants in
      asbestos-related lawsuits in state and federal courts. In virtually all of
      the
      suits, a large number of other companies have also been named as defendants.
      The
      vast majority of those claims have been filed against IR-New Jersey and
      generally allege injury caused by exposure to asbestos contained in certain
      of
      IR-New Jersey’s products. Although IR-New Jersey was neither a producer nor a
      manufacturer of asbestos, some of its formerly manufactured products utilized
      asbestos-containing components, such as gaskets purchased from third-party
      suppliers.





All
      asbestos-related claims resolved to date have been dismissed or settled. For
      the
      years ended December 31, 2006, 2005 and 2004, total costs for settlement and
      defense of asbestos claims after insurance recoveries and net of tax were
      approximately $31.6 million, $16.8 million and $16.5 million, respectively.
      The
      increase in asbestos-related costs in 2006 compared with 2005 and 2004 is
      primarily attributable to revised estimates for future recoveries to be received
      from the Company’s insurance carriers, as well as declining levels of insurance
      coverage available for cost recoveries. With the assistance of independent
      advisors, the Company performs a thorough analysis, updated periodically, of
      its
      actual and anticipated future asbestos liabilities projected seven years in
      the
      future. Based upon such analysis, the Company believes that its reserves and
      insurance are adequate to cover its asbestos liabilities, and that these
      asbestos liabilities are not likely to have a material adverse effect on its
      financial position, results of operations, liquidity or cash flows.




7





Legislation
      recently under consideration in Congress concerns pending and future
      asbestos-related personal injury claims. Whether and when such legislation
      will
      become law, and the final provisions of such legislation, are unknown.
      Consequently, the Company cannot predict with any reasonable degree of certainty
      what effect, if any, such legislation would have upon the Company’s financial
      position, results of operations or cash flows. See also the discussion under
      Note 15, Commitments and Contingencies, to the consolidated financial statements
      contained in this Annual Report on Form 10-K.





**Employees**




There
      are
      approximately 43,000 employees of the Company throughout the world, of whom
      approximately 48% work in the United States. The Company believes relations
      with
      its employees are good.





**Available
      Information**




The
      Company files annual, quarterly, and current reports, proxy statements, and
      other documents with the Securities and Exchange Commission (SEC) under the
      Securities Exchange Act of 1934. The public may read and copy any materials
      filed with the SEC at the SEC’s Public Reference Room at 405 Fifth Street, N.W.,
      Washington, D.C. 20549. The public may obtain information on the operation
      of
      the Public Reference Room by calling the SEC at 1-800-SEC-0330. Also, the SEC
      maintains an Internet website that contains reports, proxy and information
      statements, and other information regarding issuers that file electronically
      with the SEC. The public can obtain any documents that are filed by the Company
      at http://www.sec.gov.





In
      addition, this Annual Report on Form 10-K, as well as the Company’s quarterly
      reports on Form 10-Q, current reports on Form 8-K and any amendments to all
      of
      the foregoing reports, are made available free of charge on the Company’s
      Internet website ( http://www.ingersollrand.com )
      as soon
      as reasonably practicable after such reports are electronically filed with
      or
      furnished to the SEC. The Board of Directors of the Company has also adopted
      and
      posted in the Investor Relations section of its website the Company’s Corporate
      Governance Guidelines and charters for each of the Board’s standing committees.
      A copy of the above filings will also be provided free of charge upon written
      request to the Company.





**Certifications**




*New
      York Stock Exchange Annual Chief Executive Officer
      Certification*


The
      Company’s Chief Executive Officer submitted to the New York Stock Exchange
      (“NYSE”) the Annual CEO Certification as the Company’s compliance with the
      NYSE’s corporate governance listing standards required by Section 303A.12 of the
      NYSE’s listing standards.





*Sarbanes-Oxley
      Act Section 302 Certification*


The
      certifications of the Chief Executive Officer and Chief Financial Officer of
      the
      Company pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 have been
      filed as exhibits to this Annual Report on Form 10-K.





8




Item
      1A .  **RISK
      FACTORS**





*The
      following are certain risk factors that could affect our business, financial
      condition, results of operations, and cash flows. These risk factors should
      be
      considered in connection with evaluating the forward-looking statements
      contained in this Annual Report on Form 10-K because these factors could cause
      the actual results and conditions to differ materially from those projected
      in
      forward-looking statements. Before you invest in our publicly traded securities,
      you should know that making such an investment involves some risks, including
      the risks described below. If any of the risks actually occur, our business,
      financial condition or results of operations could be negatively affected.
      In
      that case, the trading price of our Class A common shares could decline, and
      you
      may lose all or part of your investment.*





**Risks
      Relating to Our Businesses**





***Currency
      exchange rate, commodity price and interest rate fluctuations may adversely
      affect our results.***




We
      are
      exposed to a variety of market risks, including the effects of changes in
      non-U.S. currency exchange rates, commodity prices and interest rates. See
      Part II Item 7A. Quantitative and Qualitative Disclosures About Market
      Risk.




More
      than
      40% of our 2006 net revenues were derived outside the U.S., and we expect sales
      to non-U.S. customers to continue to represent a significant portion of our
      consolidated net revenues. Therefore, in the case where we manufacture our
      products in the U.S. and the U.S. dollar strengthens in relation to the
      currencies of the countries where we sell those products, such as the euro
      and
      Asian currencies, our U.S. dollar reported revenue and income will decrease.
      Although we enter into currency exchange contracts to reduce our risk related
      to
      currency exchange fluctuations, changes in the relative values of currencies
      occur from time to time and may, in some instances, have a significant effect
      on
      our results of operations. Furthermore, the reporting
      currency for our
      financial statements is the U.S. dollar. We have assets, liabilities, revenues
      and expenses denominated in currencies other than the U.S. dollar. To prepare
      our consolidated financial statements, we must translate those assets,
      liabilities, revenues and expenses into U.S. dollars at the applicable exchange
      rates. Consequently, increases and decreases in the value of the U.S. dollar
      versus other currencies will affect the amount of these items in our
      consolidated financial statements, even if their value has not changed in their
      original currency. Because we do not hedge against all of our currency exposure,
      our business will continue to be susceptible to currency
      fluctuations.




We
      are a
      large buyer of steel and non-ferrous metals, as well as other commodities
      required for the manufacture of our products. Volatility in the prices of these
      commodities could increase the costs of our products and services. We may not
      be
      able to pass on these costs to our customers and this could have a material
      adverse effect on our results of operations and cash flows. On
      a
      limited basis, we purchase
      commodity derivatives which reduce the volatility of the commodity prices for
      supplier contracts where fixed pricing is not available.





***Material
      adverse legal judgments, fines, penalties or settlements could adversely affect
      our financial health.***





We
      estimate that our available cash and our cash flow from operations will be
      adequate to fund our operations for the foreseeable future. In making this
      estimate, we have not assumed the need to make any material payments in
      connection with any pending litigation or investigations. As required by U.S.
      generally accepted accounting principles, we establish reserves based on our
      assessment of contingencies. Subsequent developments in legal proceedings,
      including current or future asbestos-related litigation, may affect our
      assessment and estimates of the loss contingency recorded as a reserve requiring
      us to make additional material payments, which could result in an adverse effect
      on our results of operations.




9




Such
      an
      outcome could have important consequences. For example, it could:




·
            increase
                our vulnerability to general adverse economic and industry conditions;




·
            limit
                our flexibility in planning for, or reacting to, changes in our businesses
                and the industries in which we operate;





·
            restrict
                our ability to exploit business opportunities;
                and





**·**
            make
                it more difficult for us to satisfy our payment obligations with
                respect
                to our outstanding indebtedness.





***Significant
      shortages in the raw materials we use in our businesses could increase our
      operating costs.***





We
      rely
      on suppliers to secure raw materials, particularly steel and non-ferrous metals,
      required for the manufacture of our products. A disruption in deliveries from
      our suppliers or decreased availability of raw materials or commodities could
      have an adverse effect on our ability to meet our commitments to customers
      or
      increase our operating costs. We believe that available sources of supply will
      generally be sufficient for our needs for the foreseeable future. Nonetheless,
      the unavailability of some raw materials may have an adverse effect on our
      results of operations or financial condition.





Due
      to
      the instability of market prices, the Company is exposed to large fluctuations
      for the price of petroleum-based fuel. Higher energy costs increase our
      operating costs and the cost of shipping our products to customers around the
      world. Consequently, sharp price increases, the imposition of taxes or an
      interruption of supply, could cause the Company to lose the ability to
      effectively manage the risk of rising fuel prices and our operating income
      could
      be further affected.





***Our
      global operations subject us to economic risks.***





Our
      global operations are dependent upon products manufactured, purchased and sold
      in the U.S. and internationally, including China, Brazil, Africa and Eastern
      Europe. These activities are subject to risks that are inherent in operating
      globally, including the following:





·
            countries
                could change regulations or impose currency restrictions and other
                restraints;





·
            in
                some countries, there is a risk that the government may expropriate
                assets;





·
            some
                countries impose burdensome tariffs and
                quotas;





·
            national
                and international conflict, including terrorist acts, could significantly
                impact our financial condition and results of operations;
                and




***·***
            economic
                downturns, political instability and war or civil disturbances may
                disrupt
                production and distribution logistics or limit sales in individual
                markets.




10




***Implementing
      our acquisition strategy involves risks and our failure to successfully
      implement this strategy could have a material adverse effect on our
      business.***




One
      of
      our key strategies is to grow our business by selectively pursuing bolt-on
      acquisitions. Since 2000, we have completed approximately 65 acquisitions,
      and
      we are continuing to actively pursue additional bolt-on acquisition
      opportunities. Although we have been successful with this strategy in the past,
      we may not be able to grow our business in the future through acquisitions
      for a
      number of reasons, including:




·
            encountering
                difficulties identifying and executing
                acquisitions;




·
            increased
                competition for targets, which may increase acquisition
                costs;




·
            consolidation
                in our industries reducing the number of acquisition targets;
                and




·
            competition
                laws and regulations preventing us from making certain
                acquisitions.




In
      addition, there are potential risks associated with growing our business through
      acquisitions, including the failure to successfully integrate and realize the
      expected benefits of an acquisition. For example, with any past or future
      acquisition, there is the possibility that:




·
            the
                business culture of the acquired business may not match well with
                our
                culture;




·
            technological
                and product synergies, economies of scale and cost reductions may
                not
                occur as expected;




·
            management
                may be distracted from overseeing existing operations by the need
                to
                integrate acquired businesses;




·
            we
                may acquire or assume unexpected
                liabilities;




·
            unforeseen
                difficulties may arise in integrating operations and
                systems;




·
            we
                may fail to retain and assimilate employees of the acquired business;
                and




·
            we
                may experience problems in retaining customers and integrating customer
                bases.




Failure
      to continue implementing our acquisition strategy, including successfully
      integrating acquired businesses, could have a material adverse effect on our
      business, financial condition and results of operations.




***Our
      reputation and our ability to do business may be impaired by improper conduct
      by
      any of our employees or agents.***




We
      do
      business in many parts of the world that have experienced governmental
      corruption. Our corporate policy requires strict compliance with the U.S. Foreign
      Corrupt Practices Act and
      with local laws prohibiting payments to government officials for the purpose
      of
      obtaining or keeping business or otherwise obtaining favorable treatment.
      Improper actions by our employees or agents could subject us to civil or
      criminal penalties, including substantial monetary fines, as well as
      disgorgement, and could damage our reputation and, therefore, our ability to
      do
      business.




11





**Risks
      Relating to Our Reorganization as a Bermuda Company**




The
      reorganization exposed us or our shareholders to the risks described
      below.  In addition, we cannot be assured that the anticipated benefits of
      the reorganization will be realized.




***Changes
      in tax laws, adverse determinations by taxing authorities and changes in our
      status under U.S. tax laws could increase our tax burden and affect our
      operating results, as well as subject our shareholders to additional taxes.***




While
      our
      U.S. operations are subject to U.S. tax, we believe that our non-U.S. operations
      are generally not subject to U.S. tax other than withholding taxes. The
      realization of this or any other tax benefit of the reorganization could be
      impacted by changes in tax laws, tax treaties or tax regulations or the
      interpretation or enforcement thereof by the Internal Revenue Service or any
      other tax authority. We believe that o ur
      risks
      have been diminished by the enactment of the American Jobs Creation Act of
      2004.
      The American Jobs Creation Act includes a provision that denies tax benefits
      to
      companies that have reincorporated after March 4, 2003. We completed our
      reincorporation in Bermuda on December 31, 2001, and therefore our transaction
      is grandfathered by the American Jobs Creation Act. In
      addition, we believe that neither we nor IR-New Jersey will incur significant
      U.S. federal income or withholding taxes as a result of the transfer of the
      transferred shares. However, we cannot give any assurances that anticipated
      tax
      costs with respect to the transferred shares will ultimately  be
      borne
      out and that the Internal Revenue Service will not contest our determination
      in
      the course of its audit. The inability to realize any of these benefits could
      have a material impact on our operating results.




A
      non-U.S. corporation, such as the Company, will constitute a "controlled foreign
      corporation" or "CFC" for U.S. federal income tax purposes if certain ownership
      criteria are met. Although we believe that we and our non-U.S. subsidiaries
      currently are not CFCs, the U.S. Internal Revenue Service or a court may not
      concur with our conclusions. If the IRS or a court determined that we were
      a
      CFC, then each of our U.S. shareholders who own (directly, indirectly, or
      constructively) 10% or more of the total combined voting power of all classes
      of
      our stock on the last day of our taxable year (a "10% U.S. Voting Shareholder")
      would be required to include in gross income for U.S. federal income tax
      purposes its pro rata share of our “subpart F income" (and the subpart F income
      of any our subsidiaries determined to be a CFC) for the period during which
      we
      (and our non-U.S. subsidiaries) were a CFC. In addition, gain on the sale of
      our
      shares realized by such a shareholder may be treated as ordinary income to
      the
      extent of the shareholder's proportionate share of our and our CFC subsidiaries'
      undistributed earnings and profits accumulated during the shareholder's holding
      period of the shares while we are a CFC.




***Legislation
      regarding non-U.S. chartered companies could adversely affect us and our
      subsidiaries.***




The
      U.S.
      federal government and various other states and municipalities have proposed
      or
      may propose legislation intended to deny government contracts to U.S. companies
      that reincorporate outside of the U.S. For instance, The
      Homeland Security Appropriations Act, signed into law October 18, 2004, includes
      a provision that prohibits reincorporated companies from entering into contracts
      with the Department of Homeland Security for funds available under the Homeland
      Security Appropriations Act. In addition, the
      State
      of California adopted legislation intended to limit the eligibility of certain
      Bermuda and other non-U.S. chartered companies to participate in certain state
      contracts and the State of North Carolina enacted a bill that provides a
      preference for North Carolina or U.S. products and services. Generally, these
      types of legislation relate to direct sales and distribution, while we typically
      sell our products through distributors. However, we are unable to predict with
      any level of certainty the likelihood or final form of these types of
      legislation, the nature of regulations that may be promulgated thereunder,
      or
      the impact such enactments and increased regulatory scrutiny may have on our
      business. We cannot provide any assurance that the impact on us of any adopted
      or proposed legislation in this area will not be materially adverse to our
      operations.




12




***Bermuda
      law differs from the laws in effect in the United States and may afford less
      protection to holders of our securities.***




We
      are
      organized under the laws of Bermuda. It may not be possible to enforce court
      judgments in Bermuda that are obtained in the U.S. against us or our directors
      or officers in Bermuda based on the civil liability provisions of the U.S.
      federal or state securities laws. We have been advised that the U.S. and Bermuda
      do not currently have a treaty providing for the reciprocal recognition and
      enforcement of judgments in civil and commercial matters. Therefore, a final
      judgment for the payment of money rendered by any U.S. federal or state court
      based on civil liability, whether or not based solely on U.S. federal or state
      securities laws, would not automatically be enforceable in Bermuda.





In
      addition, as a result of Bermuda law, it would be difficult for a holder of
      our
      securities to effect service of process within the United States. However,
      we
      have irrevocably agreed that we may be served with process with respect to
      actions based on offers and sales of securities made in the United States by
      having Ingersoll-Rand Company, 155 Chestnut Ridge Road, Montvale, New Jersey
      07645, be our U.S. agent appointed for that purpose.





Bermuda
      companies are governed by the Companies Act 1981 of Bermuda, which differs
      in
      some material respects from laws generally applicable to U.S. corporations
      and
      shareholders, including, among others, differences relating to interested
      director and officer transactions, shareholder lawsuits and indemnification.
      Under Bermuda law, the duties of directors and officers of a Bermuda company
      are
      generally owed to the company only. Shareholders of Bermuda companies do not
      generally have rights to take action against directors or officers of the
      company, and may only do so in limited circumstances. Under Bermuda law, a
      company may also agree to indemnify directors and officers for any personal
      liability, not involving fraud or dishonesty, incurred in relation to the
      company. Thus, our shareholders may have more difficulty protecting their
      interests than would holders of securities of a corporation incorporated in
      a
      jurisdiction of the U.S.





Item
      1B.   **UNRESOLVED
      STAFF COMMENTS**





None.





Item
      2.   **PROPERTIES**





Manufacturing
      and assembly operations are conducted in 39 plants in the United States; 31
      plants in Europe; 16 plants in Asia; 8 plants in Latin America; and 2 plants
      in
      Canada. The Company also maintains various warehouses, offices and repair
      centers throughout the world.





Substantially
      all plant facilities are owned by the Company and the remainder are under
      long-term lease arrangements. The Company believes that its plants and equipment
      have been well maintained and are generally in good condition.





Facilities
      under long-term lease arrangements are included below and are not significant
      to
      each operating segment's total number of plants or square footage.





13




Climate
      Control Technologies’ manufacturing locations are as follows:




**Number
                  of**
                **Plants**
              
              **Approximate****Square
                  Footage**United
                  States
              
              
              10
              
              
              3,874,000Non
                  - U.S.
              
              
              15
              
              
              2,513,000**Total**
              
              
              25
              
              
              6,387,000


Compact
      Vehicle Technologies’ manufacturing facilities are as follows:


**Number
                  of**
                **Plants**
              
              **Approximate****Square
                  Footage**United
                  States
              
              
              3
              
              
              1,395,000Non
                  - U.S.
              
              
              2
              
              
              254,000**Total**
              
              
              5
              
              
              1,649,000




Construction
      Technologies’ manufacturing facilities are as follows:


**Number
                  of**
                **Plants**
              
              **Approximate****Square
                  Footage**United
                  States
              
              
              6
              
              
              662,000Non
                  - U.S.
              
              
              5
              
              
              568,000**Total**
              
              
              11
              
              
              1,230,000




Industrial
      Technologies’ manufacturing facilities are as follows:


**Number
                  of**
                **Plants**
              
              **Approximate****Square
                  Footage**United
                  States
              
              
              9
              
              
              1,359,000Non
                  - U.S.
              
              
              13
              
              
              1,090,000**Total**
              
              
              22
              
              
              2,449,000





Security
      Technologies’ **** manufacturing
      facilities are as follows:


**Number
                  of**
                **Plants**
              
              **Approximate**
                **Square
                  Footage**United
                  States
              
              
              11
              
              
              1,728,000Non
                  - U.S.
              
              
              22
              
              
              2,338,000**Total**
              
              
              33
              
              
              4,066,000
  14





Item
      3.   **LEGAL
      PROCEEDINGS**





In
      the
      normal course of business, the Company is involved in a variety of lawsuits,
      claims and legal proceedings, including commercial and contract disputes,
      employment matters, product liability claims, environmental liabilities and
      intellectual property disputes.  In the opinion of the Company, pending
      legal matters are not expected to have a material adverse effect on the results
      of operations, financial condition, liquidity or cash flows.





As
      previously reported, on November 10, 2004, the SEC issued an Order directing
      that a number of public companies, including the Company, provide information
      relating to their participation in transactions under the United Nations’ Oil
      For Food Program.  Upon receipt of the Order, the Company undertook a
      thorough review of its participation in the Program, provided the SEC with
      information responsive to the Order and provided additional information
      requested by the SEC. The Company will continue to cooperate fully with the
      SEC
      in this matter.





See
      also
      the discussion under Part II, Item 7, Management’s Discussion and Analysis of
      Financial Condition and Results of Operations, Environmental and Asbestos
      Matters and also Note 15, Commitments and Contingencies, to the consolidated
      financial statements contained in this Annual Report on Form 10-K.





Item
      4.   **SUBMISSION
      OF MATTERS TO A VOTE OF SECURITY HOLDERS**





No
      matters were submitted to a vote of the Company’s security holders during the
      last quarter of its fiscal year ended December 31, 2006.





15


**Executive
                  Officers of the Registrant**The
                  following information is included in accordance with the provision
                  of Part
                  III, Item 10.
  **Date
                  of Service as**
              
              **Principal
                  Occupation and****Name
                  and Age**
              
              **an
                  Executive Officer**
              
              **Other
                  Information for Past Five Years**Herbert
                  L. Henkel (58)
              
              4/5/1999
              
              Chairman
                  of Board and Chief Executive Officer, President and DirectorTimothy
                  R. McLevish (51)
              
              5/1/2002
              
              Senior
                  Vice President and Chief Financial Officer (since June 2002); (MeadCorporation,
                  Vice President, Chief Financial Officer, 1999-2002)Marcia
                  J. Avedon (45)
              
              2/7/2007
              
              Senior
                  Vice President, Human Resources and Communication (since
                  February
                2007);
                  (Merck & Co., Inc., Senior Vice President, Human Resources 2003-2006;
                Vice
                  President, Talent Management & Organizational Effectiveness 2002-2003;
                Honeywell
                  International, Vice President, Corporate Human Resources, 2001-2002)James
                  R. Bolch (49)
              
              10/16/2005
              
              Senior
                  Vice President and President, Industrial Technologies Sector (since
                October
                  2005); (Schindler Elevator Corporation, Executive Vice
                  President,
                Service
                  Business 2004-2005; United Technologies Corporation UTC
                Power,
                  Vice President Operations,
                  2001-2003)William
                  Gauld (53)
              
              10/2/2006
              
              Senior
                  Vice President, Enterprise Services (since October 2006);
                  (Principal,The
                  W Group, 2005-2006; Pearson, plc, Chief Information Officer,
                  2001-2005)Michael
                  W. Lamach (43)
              
              2/16/2004
              
              Senior
                  Vice President and President, Security Technologies (since February2004);
                  (Johnson Controls, Inc., Group Vice President and
                  ManagingDirector
                  Europe/Asia 2003-2004; Group Vice President and GeneralAsia
                  2002-2003; Group Vice President and General Manager,
                  CustomerBusiness
                  Units, 1999-2002)Patricia
                  Nachtigal (60)
              
              11/2/1988
              
              Director
                  (since January 1, 2002); Senior Vice President and General CounselRichard
                  F. Pedtke (58)
              
              5/1/2005
              
              Senior
                  Vice President and President, Compact Vehicle Technologies
                  (sinceMay
                  2005); (President, ESA, Climate Control, 2003-2005; President,Thermo
                  King International, 2000-2003)Steven
                  R. Shawley (54)
              
              8/1/2005
              
              Senior
                  Vice President and President, Climate Control Technologies (sinceAugust
                  2005); (President Climate Control Americas, 2003-2005; President,Thermo
                  King North America 2002-2003, Vice President and Controller,1998-2002)Christopher
                  P. Vasiloff (55)
              
              11/1/2001
              
              Senior
                  Vice President and President, Construction Technologies
                  (sinceNovember
                  2001); (President, Portable Power, Infrastructure Sector,2000-2001)Richard
                  W. Randall (56)
              
              10/1/2002
              
              Vice
                  President and Controller (since October 2002); (President,
                  EngineeredSolutions,
                  Industrial Solutions Sector, April 2002-September 2002;Vice
                  President, Finance and Sector Controller, Industrial Solutions
                  Sector2001-2002;
                  Vice President and Controller, Bearings and Components,Industrial
                  Productivity Sector, 1999-2001)
  No
        family
        relationship exists between any of the above-listed executive officers of
        the
        Company. All officers are elected to hold
        office for one year or until their successors are elected and
        qualified.


16


**PART
      II**





Item
              5.
            **MARKET
                FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
                PURCHASES OF EQUITY
                SECURITIES**





Information
      regarding the principal market for the Company's common shares and related
      shareholder matters are as follows:





Quarterly
      share prices and dividends for the Class A common shares are shown in the
      following tabulation. The common shares are listed on the New York Stock
      Exchange.


Common
                  shares2006
              
              
              High
              
              
              Low
              
              
              DividendFirst
                  quarter
              
              $
              43.65
              
              $
              38.15
              
              $
              0.16Second
                  quarter
              
              
              47.63
              
              
              39.47
              
              
              0.16Third
                  quarter
              
              
              43.25
              
              
              35.29
              
              
              0.18Fourth
                  quarter
              
              
              41.21
              
              
              36.71
              
              
              0.182005First
                  quarter
              
              $
              43.66
              
              $
              36.53
              
              $
              0.125Second
                  quarter
              
              
              41.18
              
              
              35.40
              
              
              0.125Third
                  quarter
              
              
              41.50
              
              
              35.96
              
              
              0.160Fourth
                  quarter
              
              
              41.23
              
              
              36.35
              
              
              0.160


The
      Bank
      of New York (Church Street Station, P.O. Box 11258, New York, NY 10286-1258,
      (800) 524-4458) is the transfer agent, registrar and dividend reinvestment
      agent.





Future
      dividends on our Class A common shares, if any, will be at the discretion of
      our
      Board of Directors and will depend on, among other things, our results of
      operations, cash requirements and surplus, financial condition, contractual
      restrictions and other factors that the Board of Directors may deem relevant,
      as
      well as our ability to pay dividends in compliance with the Bermuda Companies
      Act. This Act regulates the payment of dividends and the making of distributions
      from contributed surplus. We may not declare or pay a dividend, or make a
      distribution out of contributed surplus, if there are reasonable grounds for
      believing that: (i) we are, or would be after the payment, unable to pay our
      liabilities as they become due; or (ii) the realizable value of our assets
      would
      thereby be less than the aggregate of our liabilities and issued share capital
      and share premium accounts.





The
      approximate number of record holders of Class A common shares as of February
      21,
      2007 was 7,221.





Information
      regarding equity compensation plans required to be disclosed pursuant to this
      Item is included elsewhere in this Annual Report on Form 10-K.





Shares
      of
      IR-Limited owned by its subsidiary are treated as treasury stock and are
      recorded at cost. During 2006, the Company purchased 27.7 million Class A common
      shares at a cost of $1,096.3 million, which completed the Company’s share
      repurchases under the $2 billion plan that was authorized by the Board of
      Directors in August 2004 and 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 purchased under
      the
      December 2006 authorization as of December 31, 2006.




17





Total
      share repurchases for the three months ended December 31, 2006 are as
      follows:


Total
                  number of
              
              Approximate
                dollar
                value
                  of sharesshares
                    purchased
              
              stillTotal
                  number
              
              
              
              as
                  part of the
              
              available
                  to beof
                    shares
              
              Average
              
              publicly
                  announced
              
              purchased
                    underpurchased
              
              price
                  paid
              
              program
              
              the
                  programPeriod
              
              (000's)
              
              per
                  share
              
              (000's)
              
              ($000's)10/01/2006
                  - 10/31/2006
              
              
              2,595.6
              
              $
              39.40
              
              
              2,595.6
              
              $
              -11/01/2006
                  - 11/30/2006
              
              
              -
              
              
              -
              
              
              -
              
              
              -12/01/2006
                  - 12/31/2006
              
              
              -
              
              
              -
              
              
              -
              
              
              -Total
              
              
              2,595.6
              
              
              
              
              
              2,595.6




*Performance
      Graph*


The
      following graph compares for the five years ended December 31, 2006, the
      cumulative total shareholder return on our Class A common shares with the
      cumulative total return on the Standard & Poor’s 500 Stock Index and the
      Standard & Poor’s 500 Industrial Machinery Index. The graph assumes that
      $100 had been invested in our Class A common shares, the Standard & Poor’s
      500 Stock Index and the Standard & Poor’s Industrial Machinery Index on
      December 31, 2000 and assumes the reinvestment of dividends.










18


Item
      6.   **SELECTED
      FINANCIAL DATA**





In
      millions, except per share amounts:


At
                  and for the years ended December 31,
              
              2006
              
              2005
              
              2004
              
              2003
              
              2002Net
                  revenues
              
              $
              11,409.3
              
              $
              10,546.9
              
              $
              9,393.6
              
              $
              8,249.3
              
              $
              7,583.0Earnings
                  from continuing operations
              
              
              1,068.3
              
              
              1,053.1
              
              
              829.8
              
              
              532.8
              
              
              322.4Total
                  assets
              
              
              12,145.9
              
              
              11,756.4
              
              
              11,414.6
              
              
              10,664.9
              
              
              10,809.6Long-term
                  debt
              
              
              905.2
              
              
              1,184.3
              
              
              1,267.6
              
              
              1,518.4
              
              
              2,091.4Shareholders'
                  equity
              
              
              5,404.8
              
              
              5,762.0
              
              
              5,733.8
              
              
              4,493.3
              
              
              3,478.2Basic
                  earnings per common share: *Continuing
                  operations
              
              $
              3.34
              
              $
              3.12
              
              $
              2.40
              
              $
              1.56
              
              $
              0.96Discontinued
                  operations
              
              
              (0.11
              )
              
              -
              
              
              1.12
              
              
              0.32
              
              
              0.41Diluted
                  earnings per common share: *Continuing
                  operations
              
              $
              3.31
              
              $
              3.09
              
              $
              2.36
              
              $
              1.55
              
              $
              0.95Discontinued
                  operations
              
              
              (0.11
              )
              
              -
              
              
              1.11
              
              
              0.32
              
              
              0.41Dividends
                  per common share*
              
              $
              0.68
              
              $
              0.57
              
              $
              0.44
              
              $
              0.36
              
              $
              0.34
  *These
                  amounts have been restated to reflect a two-for-one stock split
                  that
                  occurred in August 2005.


19


Item
              7.
            **MANAGEMENT’S
                DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
                OPERATIONS**





*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 (we, our or the Company) is a leading innovation and solutions
      provider with strong brands and leading positions within its markets. Our
      business segments consist of Climate Control Technologies, Compact Vehicle
      Technologies, Construction Technologies, Industrial Technologies and Security
      Technologies. The Company generates 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
      Bobcat®, Club Car®, Hussmann®, Ingersoll Rand®, Schlage® and Thermo
      King®.





We
      seek
      to drive shareholder value by achieving:





·
            Dramatic
                Growth, by developing innovative products and solutions that improve
                our
                customers’ operations, expanding highly profitable recurring revenues and
                executing low-risk, high-return bolt-on
                acquisitions;





·
            Operational
                Excellence, by fostering a culture of continuous improvement and
                cost
                control; and





·
            Dual
                Citizenship, by encouraging our employees’ active collaboration with
                colleagues across business units and geographic regions to achieve
                superior business results.





To
      achieve these goals and to become a more diversified company with strong growth
      prospects, we have transformed our product portfolio by divesting cyclical,
      low-growth, and asset-intensive businesses over the last few years. We continue
      to focus on increasing our recurring revenue stream, which includes revenues
      from parts, service, used equipment, rentals and attachments. We also intend
      to
      continuously improve the efficiencies, capabilities, and products and services
      of our high-potential businesses. We expect to use our strong operating cash
      flow for bolt-on acquisitions, share buybacks, capital expenditures and dividend
      enhancements.





At
      December 31, 2006, 2005 and 2004, employment was approximately 43,000, 40,000
      and 36,000, respectively. The net increase during 2006 was primarily
      attributable to the acquisitions made during 2006.





***Trends
      and Economic Conditions***


We
      are a
      global corporation with worldwide operations. More than 40% of our 2006 net
      revenues were derived outside the United States. 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.
      However, 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 the consolidated operating results. Given
      the broad range of products manufactured and geographic markets served,
      management uses a variety of factors to predict the outlook for the Company.
      The
      Company monitors key competitors and customers 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.




20





Our
      revenues for full-year 2006 increased by approximately 8% versus full-year
      2005.
      Improved markets, new product introductions, product mix and pricing
      improvements drove this growth. The Company has been able to increase prices
      and
      add surcharges to help mitigate the impact of cost inflation during the year
      ended December 31, 2006. We also expect to see continued high material costs
      in
      2007, which we plan to offset by increased productivity and pricing actions.
      The
      Company generated positive cash flows from operations during 2006 and expects
      to
      continue to produce positive annual operating cash flows for the foreseeable
      future.





The
      Company’s major end markets for commercial construction, general industrial,
      refrigerated trucks and supermarkets remained firm during 2006. However, there
      was a deterioration in the North American market for compact equipment, as
      well
      as a reduction in security sales related to residential
      construction.





***Significant
      events in 2007***


On
      February 27, 2007, the Company agreed to sell its Road Development business
      unit
      to AB Volvo (publ) for cash proceeds of approximately $1.3 billion, subject
      to
      post closing adjustments. The sale, which is subject to government regulatory
      approvals and other customary closing conditions, is targeted to close in the
      second quarter of 2007. The Company’s Road Development business unit
      manufactures and sells asphalt paving equipment, compaction equipment, milling
      machines, and construction-related material handling equipment and has been
      reported as part of the Company’s Construction Technologies sector.




The
      Road
      Development business unit had net revenues of approximately $700 million for
      the
      year ended December 31, 2006. The Company expects to record a gain on the
      transaction when the sale is consummated.





***Significant
      Events in 2006***


In
      January 2006, the Company completed the acquisition of an 80% share of Shenzhen
      Bocom Systems Engineering Co. Ltd. (Bocom). Bocom is the largest independent
      security-systems integration company in China. The business supplies
      security-systems design, engineering, installation and integration, including
      expertise in video monitoring solutions for city and highway traffic, airports,
      government buildings and general surveillance. Bocom generated revenues of
      approximately $24 million for the year ended December 31, 2006.





In
      October 2006, the Company completed the acquisition of Geith International,
      a
      leading provider of a wide range of attachments for the construction,
      excavation, demolition and scrap handling industries. For its fiscal year end
      March 31, 2006, Geith generated revenues of approximately $54 million.





During
      2006, the Company purchased 27.7 million Class A common shares at a cost of
      $1,096.3 million, which completed the Company’s share repurchases under the $2
      billion plan that was authorized by the Board of Directors in August 2004 and
      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 purchased under the December 2006 authorization
      as of December 31, 2006.




21





On
      October 6, 2006, the Company 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 1998 through 2000 tax years. The principal proposed
      adjustments consist of the disallowance of certain capital losses taken in
      the
      Company's 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 previously reported,
      in
      the third quarter of 2006 the Company added approximately $27 million ($0.08
      per
      dilutive share) to its previously established reserves.





***Significant
      Events in 2005***


In
      January, the Company completed the acquisition of the remaining 70% interest
      in
      Italy-based CISA S.p.A. (CISA) for approximately $267 million in cash and the
      assumption of approximately $244 million of debt. CISA manufactures an array
      of
      security products, including electronic locking systems, cylinders, door
      closers, and emergency exit hardware, and also markets safes and padlocks.
      In
      April, the Company acquired the remaining 20% interest in Shanghai
      Ingersoll-Rand Compressor Company Limited (SIRC), a joint venture established
      in
      1987, for approximately $26 million. SIRC manufactures a wide range of air
      compressors and components for the Company and provides a network of
      company-owned distribution centers located in most major cities in China to
      sell, install and service the Company’s products. In May, the Company acquired
      Security One Systems, a security systems integrator located in Florida, for
      approximately $31 million. Security One provides security design solutions
      including access control, closed circuit TV, video surveillance and alarm
      monitoring. In August, the Company established a joint venture with Taiwan
      Fu
      Hsing Industrial Company Ltd. (Taiwan Fu Hsing), a leading manufacturer of
      mechanical locks based in Taiwan, for approximately $72 million. The Company
      has
      a majority interest in Taiwan Fu Hsing’s mechanical door lock manufacturing
      subsidiaries in China and Malaysia, as well as a minority equity interest in
      Taiwan Fu Hsing. The Company also made several other bolt-on acquisitions during
      the year.





On
      August
      3, 2005, the Company’s Board of Directors declared a two-for-one stock split
      effected in the form of a stock distribution to shareholders on September 1,
      2005. The Board also declared a 28% increase in the quarterly dividend of the
      Company’s Class A common shares to 16 cents per share and expanded the Company’s
      share repurchase program, which was established in August 2004, to $2 billion.
      During 2005, the Company repurchased 19.4 million Class A common shares at
      a
      cost of $763.6 million.





During
      the second quarter of 2005, the Company issued $300 million aggregate principal
      amount of its 4.75% Senior Notes due in 2015. The notes are unconditionally
      guaranteed by IR-New Jersey.





***Significant
      Events in 2004***


On
      August
      25, 2004, the Company agreed to sell its Dresser-Rand business unit
      (Dresser-Rand) to a fund managed by First Reserve Corporation, a private-equity
      firm, for cash proceeds of approximately $1.2 billion. The sale was completed
      on
      October 29, 2004. Dresser-Rand is included in “discontinued operations, net of
      tax,” for all periods. The Company recorded an after-tax gain of $282.5 million
      on the disposition.





On
      February 19, 2004, the Company agreed to sell its Drilling Solutions business
      unit (Drilling Solutions) to Atlas Copco AB, for approximately $225 million.
      The
      sale of the U.S. and most international operations was completed on June 30,
      2004. The sale of Drilling Solutions assets held by Ingersoll-Rand (India)
      Limited, which was subject to approval by the Indian company’s shareholders, was
      completed in the third quarter of 2004. The Company recorded an after-tax gain
      of $38.6 million on the disposition, which is included in “discontinued
      operations, net of tax” for 2004.




22





During
      2004, the Company recorded approximately $29.5 million of after-tax income
      for
      claims filed under the Continued Dumping and Subsidy Offset Act of 2000 on
      behalf of a subsidiary included in the Engineered Solutions business (Engineered
      Solutions), which was sold in 2003. The antidumping duty is levied when the
      U.S.
      Department of Commerce determines that imported products are being sold in
      the
      United States at less than fair value causing material injury to a United States
      industry. These amounts are reflected in Discontinued operations, net of
      tax.





During
      2004, a subsidiary of the Company repurchased approximately 5.3 million Class
      A
      commons shares at a cost of $355.9 million. On August 4, 2004, the Company’s
      board of directors authorized the repurchase of up to 10 million shares of
      the
      Company’s Class A common shares. Approximately 2.0 million of the above
      mentioned 5.3 million shares were repurchased under this program, while the
      remainder was repurchased under a plan approved in 1997. The Company’s board of
      directors also authorized on August 4, 2004, an increase of the quarterly
      dividend from 19 cents to 25 cents per Class A common share, effective for
      dividends paid beginning September 1, 2004.





The
      Company made discretionary cash contributions of $140.0 million to its pension
      plans during the year ended December 31, 2004, as well as $30.1 million in
      required employer contributions. This includes $20.0 million of discretionary
      contributions to the Dresser-Rand pension plan.





**Results
      of Operations**


*Dollar
                  amounts in millions,*
              
              
              
              %
                  of
              
              
              
              %
                  of
              
              
              
              %
                  of*Except
                  per share data*
              
              2006
              
              Revenues
              
              2005
              
              Revenues
              
              2004
              
              RevenuesNet
                  revenues
              
              $
              11,409.3
              
              
              
              
              $
              10,546.9
              
              
              
              
              $
              9,393.6Cost
                  of goods sold
              
              
              8,424.2
              
              
              73.9%
              
              
              7,744.1
              
              
              73.4%
              
              
              6,854.0
              
              
              73.0%Selling
                  and administrative expenses
              
              
              1,544.3
              
              
              13.5%
              
              
              1,441.0
              
              
              13.7%
              
              
              1,419.3
              
              
              15.1%Operating
                  income
              
              
              1,440.8
              
              
              12.6%
              
              
              1,361.8
              
              
              12.9%
              
              
              1,120.3
              
              
              11.9%Interest
                  expense
              
              
              (131.8
              )
              
              
              
              
              (144.3
              )
              
              
              
              
              (153.1
              )Other
                  income, net
              
              
              5.9
              
              
              
              
              
              53.0
              
              
              
              
              
              17.0Minority
                  interests
              
              
              (14.9
              )
              
              
              
              
              (12.7
              )
              
              
              
              
              (16.0
              )Earnings
                  before income taxes
              
              
              1,300.0
              
              
              
              
              
              1,257.8
              
              
              
              
              
              968.2Provision
                  for income taxes
              
              
              231.7
              
              
              
              
              
              204.7
              
              
              
              
              
              138.4Earnings
                  from continuing operations
              
              
              1,068.3
              
              
              
              
              
              1,053.1
              
              
              
              
              
              829.8Discontinued
                  operations, net of tax
              
              
              (35.8
              )
              
              
              
              
              1.1
              
              
              
              
              
              388.9Net
                  earnings
              
              $
              1,032.5
              
              
              
              
              $
              1,054.2
              
              
              
              
              $
              1,218.7Diluted
                  earnings per common share:Continuing
                  operations
              
              $
              3.31
              
              
              
              
              $
              3.09
              
              
              
              
              $
              2.36Discontinued
                  operations
              
              
              (0.11
              )
              
              
              
              
              -
              
              
              
              
              
              1.11Net
                  earnings
              
              $
              3.20
              
              
              
              
              $
              3.09
              
              
              
              
              $
              3.47
  23




***Revenues***


2006
      vs. 2005: Net
      revenues increased by 8.2% in 2006, or $862.4 million, compared with 2005,
      which
      primarily resulted from improved end markets and new product introductions
      (5%),
      improved pricing (2%), as well as acquisitions (1%), primarily in our Industrial
      Technologies, Construction Technologies and Security Technologies segments.
      Increased sales volumes were most prevalent in our Climate Control Technologies,
      Construction Technologies and Industrial Technologies segments. The Company
      continues to make progress in increasing recurring revenues, which improved
      by
      11% over the year ended December 31, 2005.




2005
      vs. 2004 :
      Net
      revenues increased by 12.3% in 2005, or $1,153.3 million, compared with 2004,
      which primarily resulted from improved end markets, new product introductions
      and product mix (7%), acquisitions (4%), mainly in our Security Technologies
      and
      Climate Control Technologies segments, as well as improved pricing in all our
      segments. Increased sales volumes were most prevalent in our Compact Vehicle
      Technologies, Construction Technologies and Industrial Technologies segments.




***Cost
      of Goods Sold***


2006
      vs. 2005 :
      Cost of
      goods sold as a percentage of net revenues in 2006, increased to 73.9% compared
      with 73.4% in 2005, as higher material costs were mostly offset by productivity
      improvements in 2006.





2005
      vs. 2004 :
      Cost of
      goods sold as a percentage of net revenues in 2005, increased to 73.4% compared
      with 73.0% in 2004, as higher material costs were mostly offset by cost benefits
      from higher volumes and productivity improvements.





***Selling
      and Administrative Expenses***


2006
      vs. 2005 :
      Selling
      and administrative expenses as a percentage of net revenues in 2006, decreased
      slightly compared with 2005, mainly due to increased revenues in 2006. In
      addition, 2006 selling and administrative expenses were favorably impacted
      by a
      change in estimate of the Company’s allowance for doubtful accounts reserve
      during the first quarter of 2006, which resulted in a $20.5 million decrease
      in
      selling and administrative expenses. The change in estimate was made in light
      of
      various business and economic factors, including a significant change in the
      Company’s business portfolio and historical and expected write-off experience.
      In addition, the Company purchased a new insurance policy, which limits its
      bad
      debt exposure. This benefit was more than offset by $23.2 million of additional
      share-based compensation costs, which includes $16.2 million associated with
      stock options from the adoption of Statement of Financial Accounting Standard
      No. 123(R).




2005
      vs. 2004 :
      Selling
      and administrative expenses were 13.7% of net revenues in 2005, compared with
      15.1% for 2004. The decrease in the ratio is mainly due to higher revenues
      in
      2005. Selling and administrative expenses during 2005 were favorably impacted
      by
      lower share-based liability costs ($46 million), as well as the favorable
      settlement of certain product-related litigation, an adjustment to the allowance
      for doubtful accounts estimate and lower employee benefit costs. Acquisitions
      increased the 2005 selling and administrative expenses ($64 million). Expenses
      for 2004 included higher product and litigation expenses, offset by a gain
      on
      sale of corporate real estate.





***Operating
      Income***


2006
      vs. 2005 :
      Operating income increased by $79.0 million in 2006, compared with 2005. 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 investments in
      new
      product development and productivity programs. The Company also recorded
      expenses of $7.6 million for employee severance and termination benefits in
      the
      fourth quarter of 2006.





2005
      vs. 2004 :
      Operating income increased by $241.5 million in 2005, compared with 2004. The
      increase in operating income was mainly attributable to increased revenues
      and
      improved cost ratios for cost of goods sold and selling and administrative
      expenses as previously discussed. Productivity improvements also favorably
      impacted operating income for 2005.





24




***Interest
      Expense***


2006
      vs. 2005 :
      Interest expense decreased by $12.5 million in 2006, compared with 2005. The
      decrease was mainly attributable to lower average interest rates and lower
      year-over-year average debt levels resulting from the timing of borrowing and
      repayments in 2006.





2005
      vs. 2004 :
      Interest expense decreased by $8.8 million in 2005, compared with 2004. The
      benefits of lower average interest rates were partially offset by higher
      year-over-year average debt levels resulting from the issuance of $300 million
      of debt in the second quarter of 2005.





***Other
      Income, Net***


2006
      vs. 2005 : **** Other
      income, net, decreased by $47.1 million in 2006, compared with 2005, mainly
      due
      to unfavorable foreign exchange losses ($21.4 million), decreased interest
      income ($13.3 million) and lower earnings from equity investments ($4.1
      million), partially offset by a reduction of a product liability reserve ($8.7
      million). Other income, net in 2005 included income from a reduction of a
      liability for a business previously divested ($10.4 million).





2005
      vs. 2004 : **** Other
      income, net, increased by $36.0 million in 2005, compared with 2004, mainly
      due
      to increased interest income ($17.3 million), increased income from currency
      exchange gains ($11.7 million) and income from a reduction of a liability for
      a
      business previously divested ($10.4 million). These increases were partially
      offset by lower earnings from equity investments ($4.5 million).





***Minority
      Interests***


2006
      vs. 2005 :
      Minority interests expense increased by $2.2 million in 2006, compared with
      2005. This increase resulted from increased earnings of majority-owned
      subsidiaries purchased in 2005.





2005
      vs. 2004 :
      Minority interests decreased by $3.3 million in 2005, compared with 2004. This
      decrease resulted from the buyout of the minority interests of several
      consolidated subsidiaries, partially offset by new minority interests of
      majority-owned consolidated subsidiaries purchased in 2005.




***Provision
      for Income Taxes***


2006
      vs. 2005:  The
      effective tax rate for 2006 was 17.8%, compared with 16.3% for 2005. The
      increase in the effective rate during 2006 primarily relates to the $27 million
      charge the Company recorded in the third quarter of 2006 associated with the
      notice received from the IRS as described under “Significant Events of
      2006.”





2005
      vs. 2004: The
      effective tax rate for 2005 was 16.3%, compared with 14.3% for 2004. The
      increase in the tax provision and effective rate over 2004 relates to an
      increase in earnings, especially in higher tax rate jurisdictions.




25




***Discontinued
      Operations***




The
      Company has continued its transition to become a more diversified company with
      strong growth prospects by divesting cyclical, low-growth, asset intensive
      businesses. The components of discontinued operations for 2006, 2005 and 2004
      are as follows:




*In
                millions*
            
            2006
            
            2005
            
            2004Net
                revenues
            
            $
            -
            
            $
            -
            
            $
            882.0Retained
                (costs) income, net of tax
            
            $
            (36.5
            )
            $
            (34.1
            )
            $
            54.0Net
                gain on disposals, net of tax
            
            
            0.7
            
            
            35.2
            
            
            334.9Total
                discontinued operations, net of tax
            
            $
            (35.8
            )
            $
            1.1
            
            $
            388.9




*2006*


Retained
      costs for discontinued operations mainly include costs related to postretirement
      benefits and product and legal costs (mostly asbestos-related) from previously
      sold businesses. Net gain on disposals represents additional gains from
      previously sold businesses.





*2005*


Discontinued
      operations for the year ended December 31, 2005, amounted to income of $1.1
      million, net of tax benefits of $48.2 million. This total includes net after
      tax
      gains of $35.2 million, mainly due to divested businesses, primarily
      Ingersoll-Dresser Pump Company (IDP) ($12.0 million), Dresser-Rand ($10.3
      million) and Waterjet ($12.2 million), primarily from the resolution of tax
      matters regarding these divestitures. The after-tax loss from retained costs
      of
      discontinued operations amounted to $34.1 million. These costs mainly include
      costs related to postretirement benefits and product and legal costs (mostly
      asbestos-related) from previously sold businesses.





*2004*


Discontinued
      operations for the year ended December 31, 2004, amounted to income of $388.9
      million, net of tax provisions of $343.5 million. This total includes net after
      tax gains on disposals of $334.9 million, primarily comprised of gains from
      the
      sales of Dresser-Rand ($282.5 million) and Drilling Solutions ($38.6 million).
      After-tax income from discontinued operations amounted to $54.0 million. This
      income includes profits from divested businesses, primarily Dresser-Rand ($45.0
      million) and Engineered Solutions ($20.9 million), which includes an antidumping
      subsidy net of tax of $29.5 million. This income is partially offset by retained
      costs related to IDP ($14.9 million), which mostly include product liability
      costs primarily related to asbestos liability claims and employee benefit
      costs.





**Review
      of Business Segments**




The
      Company classifies its business into five reportable segments based on industry
      and market focus: Climate Control Technologies, Compact Vehicle Technologies,
      Construction Technologies, Industrial Technologies and Security Technologies.
      The segment discussions that follow describe the significant factors
      contributing to the changes in results for each segment included in continuing
      operations.





***Climate
      Control Technologies***


Climate
      Control Technologies provides solutions for customers to transport, preserve,
      store and display temperature-sensitive products by engaging in the design,
      manufacture, sale and service of transport temperature control units, HVAC
      systems, refrigerated display merchandisers, beverage coolers, auxiliary power
      units and walk-in storage coolers and freezers. This segment includes the Thermo
      King and Hussmann brands.


*Dollar
                  amounts in millions*
              
              2006
              
              %
                  change
              
              2005
              
              %
                  change
              
              2004Net
                  revenues
              
              $
              3,171.0
              
              
              11.1%
              
              $
              2,853.6
              
              
              2.1%
              
              $
              2,793.7Operating
                  income
              
              
              356.0
              
              
              13.0%
              
              
              315.1
              
              
              1.9%
              
              
              309.1Operating
                  margin
              
              
              11.2
              %
              
              
              
              
              11.0
              %
              
              
              
              
              11.1
              %
  26




2006
      vs. 2005: Net
      revenues increased by 11.1% in 2006, or $317.4 million, compared with 2005,
      which mainly resulted from higher volumes and product mix (9%) and improved
      product pricing (2%). Operating income increased during the year due to higher
      volumes and product mix ($71 million) and improved product pricing ($46
      million), partially offset by higher material costs ($70 million) and
      investments in new product development and productivity programs ($10 million).





Revenues
      from North American operations for the year ended 2006 increased by
      approximately 13% compared with 2005, due to growth across all of our
      businesses. Revenues were bolstered by the Tripac® auxiliary power unit and
      increased display case sales and stationary refrigeration services revenue.
      Non-U.S. revenues for the year ended 2006 increased 9% compared with 2005,
      as
      the increase in the sales of display cases and refrigerated trailers in Europe
      more than offset the decline in refrigerated cases and the bus air conditioning
      market in Asia Pacific.





2005
      vs. 2004: Net
      revenues increased by 2.1% in 2005, or $59.9 million, compared with 2004, which
      primarily resulted from acquisitions (2%) and improved product pricing (2%),
      partially offset by lower volumes and product mix (2%). Operating income
      increased slightly due to improved product pricing ($42 million) and increased
      productivity ($15 million), offset by higher material costs ($51 million) and
      product mix .





Net
      revenue increases by Climate Control Americas (4%) and Climate Control Asia
      Pacific (11%), more than offset a decline in Climate Control Europe (3%). Net
      revenues and operating income benefited from strong worldwide market conditions
      for the truck & trailer, aftermarket and container business lines. The
      retail business declined in the Americas and Europe, but strengthened in Asia
      Pacific.





***Compact
      Vehicle Technologies***


Compact
      Vehicle Technologies is engaged in the design, manufacture, sale and service
      of
      skid-steer loaders, all-wheel steer loaders, compact track loaders, compact
      excavators, attachments, golf vehicles and utility vehicles. This segment
      includes the Bobcat and Club Car brands.


*Dollar
                  amounts in millions*
              
              2006
              
              %
                  change
              
              2005
              
              %
                  change
              
              2004Net
                  revenues
              
              $
              2,641.2
              
              
              -1.5%
              
              $
              2,681.1
              
              
              18.5%
              
              $
              2,261.7Operating
                  income
              
              
              358.0
              
              
              -13.8%
              
              
              415.2
              
              
              25.1%
              
              
              332.0Operating
                  margin
              
              
              13.6
              %
              
              
              
              
              15.5
              %
              
              
              
              
              14.7
              %


2006
      vs. 2005: Net
      revenues decreased by 1.5% in 2006, or $39.9 million, compared with 2005, mainly
      due to lower volumes and product mix (4%), partially offset by improved pricing
      (2%). Operating income for the year ended 2006 decreased due to lower volumes
      and product mix ($47 million), higher material costs ($34 million), higher
      product related costs ($17 million) and investments in new product development
      and productivity programs ($15 million), partially offset by improved product
      pricing ($32 million) and increased productivity ($28 million).





Bobcat
      revenues for the year ended 2006 decreased 5% compared with 2005, mainly due
      to
      a deterioration in the North American markets for compact equipment and a
      related decline in shipments to third party dealers as they reduced their
      inventory levels. In addition, the year ended 2005 results benefited from
      equipment and attachment sales related to Gulf Coast hurricane clean up efforts.
      Club Car revenues for the year ended 2006 increased by 11% compared with 2005,
      mainly due to higher sales of golf cars and transport and utility vehicles,
      as
      well as significant growth in the aftermarket and international markets.




27





2005
      vs. 2004 :
      Net
      revenues increased by 18.5% in 2005, or $419.4 million, compared with 2004,
      mainly due to higher volumes and product mix (17%) and improved pricing (2%).
      Operating income for the year ended 2005 increased significantly, due to higher
      volumes and product mix ($106 million) and improved pricing ($51 million).
      Operating income and margins were negatively impacted by higher material costs
      ($53 million), investments in productivity improvements ($8 million) and
      currency translation ($9 million).





Bobcat’s
      revenue growth reflect higher volumes driven by improved markets, new products
      and attachments introduced during the year and an increase in aftermarket parts
      sales. Club Car’s business also had improvements in volume and pricing, with
      growth in golf and utility vehicles due to increased market share and new
      product launches.





***Construction
      Technologies***


Construction
      Technologies is engaged in the design, manufacture, sale and service of road
      construction and repair equipment, portable power products, general-purpose
      construction equipment, attachments and portable light towers and compressors.
      This segment is comprised of the Utility Equipment, Road Development and
      Attachments businesses.




*Dollar
                  amounts in millions*
              
              2006
              
              %
                  change
              
              2005
              
              %
                  change
              
              2004Net
                  revenues
              
              $
              1,362.3
              
              
              16.6%
              
              $
              1,168.6
              
              
              16.0%
              
              $
              1,007.1Operating
                  income
              
              
              148.0
              
              
              42.6%
              
              
              103.8
              
              
              -1.3%
              
              
              105.2Operating
                  margin
              
              
              10.9
              %
              
              
              
              
              8.9
              %
              
              
              
              
              10.4
              %





2006
      vs. 2005: Net
      revenues increased by 16.6% in 2006, or $193.7 million, compared with 2005,
      primarily due to higher volumes and product mix (14%), improved product pricing
      (2%) and acquisitions (1%). Operating income for the year ended 2006 increased
      due to higher volumes and product mix ($36 million) and improved product pricing
      ($21 million) and increased productivity ($21 million). These increases in
      operating income were partially offset by increases in product related costs
      ($13 million), investments in new product development and productivity programs
      ($13 million) and higher material costs ($10 million).





Road
      Development revenues for the year ended 2006 increased 8% compared with 2005,
      due to the strength in the international markets, offset by declines in the
      U.S.
      compaction market. The Utility Equipment and Attachments businesses had combined
      revenue growth for the year ended 2006 of 28% compared with 2005, due to
      acquisitions and growth in all major geographic regions.





2005
      vs. 2004 :  Net
      revenues increased by 16.0% in 2005, or $161.5 million, compared with 2004,
      mainly due to higher volumes and product mix (12%) and improved product pricing
      (3%). Operating income benefited from higher volumes and product mix ($20
      million) and improved pricing ($34 million). However, higher material costs
      ($42
      million), investments in productivity programs and new product development
      ($7
      million) and manufacturing inefficiencies more than offset these gains and
      reduced operating income for the segment.




All
      businesses in the segment had significant revenue growth in 2005, despite a
      decline in the Road Development business experienced at the end of the year
      due
      to the curtailment of construction investment by the Chinese government. The
      product line also experienced operating margin pressure from high material
      costs
      and manufacturing inefficiencies throughout the year. Utility Equipment
      continued to show significant growth as it launched new products, expanded
      distribution and was in position to assist during the hurricane
      season.




28




***Industrial
      Technologies***


Industrial
      Technologies is focused on providing solutions to enhance customers’ industrial
      and energy efficiency, mainly by engaging in the design, manufacture, sale
      and
      service of compressed air systems, tools, fluid and material handling and energy
      generation systems. This segment includes the Air Solutions and Productivity
      Solutions businesses.


*Dollar
                  amounts in millions*
              
              2006
              
              %
                  change
              
              2005
              
              %
                  change
              
              2004Net
                  revenues
              
              $
              1,949.8
              
              
              11.8%
              
              $
              1,743.9
              
              
              12.3%
              
              $
              1,552.8Operating
                  income
              
              
              262.0
              
              
              16.5%
              
              
              224.9
              
              
              24.6%
              
              
              180.5Operating
                  margin
              
              
              13.4
              %
              
              
              
              
              12.9
              %
              
              
              
              
              11.6
              %





2006
      vs. 2005: Net
      revenues increased by 11.8% in 2006, or $205.9 million, compared with 2005,
      mainly due to higher volumes and product mix (9%), improved product pricing
      (2%)
      and acquisitions (1%). Operating income for the year ended 2006 was higher
      due
      to increased productivity ($36 million), improved product pricing ($31 million)
      and higher volumes and product mix ($23 million). These gains were partially
      offset by higher material costs ($40 million), investments in new product
      development and productivity programs ($8 million) and additional costs
      associated with a labor dispute in India ($5 million).





Air
      Solutions revenues for the year ended 2006 increased 13% compared with 2005,
      driven by continued strength in worldwide industrial markets, supported by
      higher revenues in all major geographic regions and growth in recurring
      revenues. Productivity Solutions revenues for the year ended 2006 increased
      by
      9% compared with 2005, as a result of new product growth and increased recurring
      revenues, as well as strong international growth.





2005
      vs. 2004: Net
      revenues increased by 12.3% in 2005, or $191.1 million, compared with 2004,
      mainly due to higher volumes and product mix (10%) and product pricing (2%).
      Operating income for 2005 increased significantly due to higher volumes and
      product mix ($37 million), improved product pricing ($29 million) and
      productivity improvements ($12 million). Investments in productivity ($11
      million) and higher material costs ($5 million) partially offset some of the
      operating income gains.





Net
      revenues and operating income increased substantially for all businesses in
      the
      segment, mainly due to new product launches and increased recurring revenues.
      Net revenue increases by Air Solutions (14%) and Productivity Solutions (9%)
      were also generated by geographic expansion, contributing to higher net revenues
      in all regions.





***Security
      Technologies***


Security
      Technologies is engaged in the design, manufacture, sale and service of
      mechanical and electronic security products, biometric access control systems,
      and security and scheduling software. Security Technologies includes the
      Schlage, LCN, Von Duprin and CISA brands.


*Dollar
                  amounts in millions*
              
              2006
              
              %
                  change
              
              2005
              
              %
                  change
              
              2004Net
                  revenues
              
              $
              2,285.0
              
              
              8.8%
              
              $
              2,099.7
              
              
              18.1%
              
              $
              1,778.3Operating
                  income
              
              
              400.2
              
              
              5.1%
              
              
              380.7
              
              
              24.9%
              
              
              304.8Operating
                  margin
              
              
              17.5
              %
              
              
              
              
              18.1
              %
              
              
              
              
              17.1
              %





2006
      vs. 2005: Net
      revenues increased by 8.8% in 2006, or $185.3 million, compared with 2005,
      mainly due to higher volumes and product mix (4%), acquisitions (3%) and
      improved product pricing (2%). Operating income for the year ended 2006
      increased due to improved product pricing ($55 million), increased productivity
      ($29 million), favorable currency movement and higher volumes and product mix.
      These gains were partially offset by higher material costs ($47 million) and
      investments in new product development and productivity programs ($32
      million).




29





Net
      revenues grew in all major geographic regions during 2006. North American
      revenues increased 4% due to strong commercial market gains. Revenues in Europe
      increased 12% due to the acquisitions made in 2005, as well as increased pricing
      and higher volumes. Asia Pacific revenues were up sharply, primarily due to
      bolt-on acquisitions.





2005
      vs. 2004 :
      Net
      revenues increased by 18.1% in 2005, or $321.4 million, compared with 2004,
      mainly due to acquisitions during the year (16%) and improved product pricing
      (3%). Operating income also improved during 2005. Improved pricing ($54
      million), productivity improvements ($29 million) and acquisitions ($23 million)
      all had favorable impacts on operating income. Operating income was negatively
      impacted by higher material costs ($29 million), unfavorable product mix and
      volumes ($19 million) and productivity investment costs ($18 million). The
      2004
      operating income was also negatively impacted by one-time costs ($28 million)
      related to a product warranty issue, a plant closing and the discontinuance
      of a
      plumbing fixture product line, and legal expenses.





Net
      revenues in the segment benefited from strong growth in the electronic controls
      and integrated solutions businesses in 2005. Increases in North American
      revenues (6%) were the result of strong construction markets, especially
      commercial, and recurring revenues. Non-U.S. revenues were helped by the 2005
      acquisitions, which increased the breadth of products and customer base in
      Europe and Asia Pacific.





**Employee
      Benefit Plans**




***Pensions***


Net
      pension cost is based on the weighted-average assumptions used at the end of
      the
      previous year to calculate the pension benefit obligation, adjusted for any
      curtailment and settlement gains or losses. Net periodic pension cost for 2006,
      2005 and 2004 was as follows:


*In
                  millions*
              
              2006
              
              2005
              
              2004Net
                  periodic pension cost
              
              $
              32.7
              
              $
              32.4
              
              $
              26.5Curtailment/settlement
                  losses
              
              
              -
              
              
              4.0
              
              
              41.1
              *Net
                  periodic pension cost after curtailments/settlements
              
              $
              32.7
              
              $
              36.4
              
              $
              67.6


*The
      curtailment and settlement losses in 2004 are associated primarily with the
      sale
      of Dresser-Rand and Drilling Solutions





30




Net
      pension cost for 2007 is projected to be approximately $21.7 million. The
      assumptions expected to be used to calculate the 2007 net periodic pension
      cost
      are as follows:


Discount
                  rate:U.S.
                  plans
              
              
              5.50%Non-U.S.
                  plans
              
              
              5.00%Rate
                  of compensation increase:U.S.
                  plans
              
              
              4.00%Non-U.S.
                  plans
              
              
              4.25%Expected
                  return on plan assets:U.S.
                  plans
              
              
              8.50%Non-U.S.
                  plans
              
              
              7.25%




The
      Company’s pension plans for U.S. non-collectively bargained employees provide
      benefits on a final average pay formula. The Company’s collectively bargained
      pension plans principally provide benefits based on a flat benefit formula.
      Non-U.S. plans usually provide benefits based on an earnings and years of
      service formula. Additional supplemental benefit plans are maintained by the
      Company for officers and other key employees. Pension benefit payments are
      expected to be paid as follows: $192.1 million in 2007, $192.0 million in 2008,
      $200.6 million in 2009, $227.3 million in 2010, $204.4 million in 2011 and
      $1,089.7 million for the years 2012 to 2016.





The
      Company’s investment objectives in managing its defined benefit plan assets are
      to ensure that present and future benefit obligations to all participants and
      beneficiaries are met as they become due; to provide a total return that, over
      the long term, minimizes the present value of required Company contributions,
      at
      the appropriate levels of risk; and to meet any statutory requirements, laws
      and
      local regulatory agencies’ requirements. Key investment management decisions
      reviewed regularly are asset allocations, investment manager performance,
      investment advisors and trustees. An asset/liability modeling (ALM) study is
      used as the basis for global asset allocation decisions and updated
      approximately every five years or as required. As of December 31, 2006, the
      Company’s strategic global asset allocation for its pension plans was 60% in
      equity securities and 40% in debt securities and cash. The Company sets upper
      limits and lower limits of plus or minus 5%. The asset allocations are reviewed
      at least quarterly and appropriate adjustments are made. Based on its most
      recent ALM study, the Company in 2007 has begun to adjust its strategic global
      asset allocation for its pension plans to be approximately 40% in equity
      securities and 60% in debt securities, real estate and cash.





The
      Company made contributions to its pension plans of $31.7 million in 2006, $119.4
      million in 2005, and $170.1 million in 2004. The Company currently projects
      that
      it will be required to contribute approximately $24 million to its plans
      worldwide in 2007. The Company’s policy allows it to fund an amount, which could
      be in excess of the pension cost expensed, subject to the limitations imposed
      by
      current tax regulations.





The
      Company anticipates funding the plans in 2007 in accordance with contributions
      required by funding regulations or the laws of each jurisdiction.





As
      of
      December 31, 2006, the Company has a net liability on its balance sheet of
      $218.4 million, which consists of long-term prepaid pension costs of $119.3
      million and current and non-current pension benefits liabilities of $337.7
      million. It is the Company’s objective to contribute to its pension plans to
      ensure adequate funds are available in the plans to make benefit payments to
      plan participants when required. However, certain plans are not or cannot be
      funded due to either legal or tax requirements in certain jurisdictions. As
      of
      December 31, 2006, approximately seven percent of the Company’s projected
      benefit obligation relates to plans that are unfunded.





In
      2006,
      the Company adopted Statement of Financial Accounting Standard No. 158,
“Employers’ Accounting for Defined Benefit Pension and Other Postretirement
      Plans - an amendment of FASB Statements No. 87, 88, 106 and 132(R)” (SFAS 158),
      which requires the Company to record the funded status of its pension plans
      on
      its balance sheet effective December 31, 2006. Refer to Note 9 in the Company’s
      financial statements and the Liquidity and Capital Resources section for further
      details of the impact of SFAS 158.





31




***Postretirement
      Benefits Other Than Pensions***


Net
      periodic postretirement benefit cost is based on the weighted-average
      assumptions used at the end of the previous year to calculate the postretirement
      benefit obligation, adjusted for any curtailment and settlement gains or losses,
      if any. Net periodic postretirement cost for 2006, 2005 and 2004 was as follows:


*In
                  millions*
              
              2006
              
              2005
              
              2004Net
                  periodic postretirement benefit cost
              
              $
              79.2
              
              $
              74.0
              
              $
              76.9




Net
      periodic postretirement benefit cost for 2007 is projected to be approximately
      $84.5 million. The assumptions expected to be used to calculate the 2007 net
      periodic postretirement benefit cost are the same as were used at the end of
      2006 to calculate the postretirement benefit obligation.





The
      Company funds postretirement benefit costs principally on a pay-as-you-go basis.
      Benefit payments for postretirement benefits, which are net of expected plan
      participant contributions and Medicare Part D subsidy, are expected to be paid
      as follows: $72.0 million in 2007, $75.0 million in 2008, $76.1 million in
      2009,
      $77.1 million in 2010, $79.1 million in 2011 and $380.7 million for the years
      2012 to 2016.





In
      2006,
      the Company adopted SFAS 158, which requires the Company to record the funded
      status of its postretirement plans on its balance sheet effective December
      31,
      2006. Refer to Note 8 in the Company’s financial statements and the Liquidity
      and Capital Resources section for further details of the impact of SFAS
      158.





**Liquidity
      and Capital Resources**




The
      following table contains several key measures to gauge the Company’s financial
      condition and liquidity:


*Dollar
                  amounts in millions*
              
              2006
              
              2005
              
              2004Cash
                  and cash equivalents
              
              $
              362.3
              
              $
              880.6
              
              $
              1,703.1Marketable
                  securities
              
              
              0.7
              
              
              156.5
              
              
              0.6Working
                  capital
              
              
              482.3
              
              
              1,048.5
              
              
              1,732.8Total
                  debt
              
              
              1,984.6
              
              
              2,117.0
              
              
              1,880.4Total
                  stockholders' equity
              
              
              5,404.8
              
              
              5,762.0
              
              
              5,733.8Debt-to-total
                  capital ratio
              
              
              26.6
              %
              
              26.7
              %
              
              24.3
              %Operating
                  cash flow from continuing operations
              
              
              1,008.8
              
              
              873.2
              
              
              770.2Average
                  days outstanding in receivables
              
              
              63.0
              
              
              56.5
              
              
              55.6Inventory
                  turnover
              
              
              6.4
              
              
              6.9
              
              
              6.5Capital
                  expenditures
              
              
              212.3
              
              
              141.8
              
              
              125.6





32




***Overview
      of Cash Flows and Liquidity***


*Operating
      Activities*


2006
      vs. 2005: The
      Company’s primary source of liquidity is operating cash flows. Net cash provided
      by operating activities from continuing operations increased to $1,008.8 million
      in 2006 compared with $873.2 in 2005. The change was primarily due to the
      increases in accrued liabilities during the period offset by increases in
      accounts receivable and inventories.





2005
      vs. 2004: Net cash
      provided by operating activities from continuing operations increased to $873.2
      million in 2005 compared with $770.2 million 2004. This change was mainly due
      to
      higher earnings from continuing operations of $1,053.1 million compared with
      $829.8 million in 2004, and an increase in deferred income taxes, partially
      offset by decreases in other current and noncurrent liabilities.





*Investing
      Activities*


2006
      vs. 2005: Net cash
      used in investing activities from continuing operations in 2006 was $161.2
      million, compared with $771.7 million in 2005. The change in investing
      activities was primarily attributable to lower cash payments for business
      acquisitions and an increase in net proceeds from the sale and purchase of
      marketable securities. For the years ended December 31, 2006 and 2005, cash
      used
      to purchase businesses was $121.5 million and $514.7 million, respectively.
      The
      Company had net proceeds from the sale of marketable securities of $155.8
      million for the year ended December 31, 2006, compared with an outflow of $153.2
      million from the net purchase of marketable securities for the year ended
      December 31, 2005.





2005
      vs. 2004: Net cash
      used in investing activities from continuing operations in 2005 was $771.7
      million compared with net cash provided by investing activities of $1,312.2
      million in 2004. The decrease was primarily attributable to the cash used for
      the acquisitions of CISA S.p.A. and Taiwan Fu Hsing Industrial Company Ltd.
      in
      2005 and the significant decrease in proceeds received for business
      divestitures, compared with 2004.





*Financing
      Activities*


2006
      vs. 2005: Net cash
      used in financing activities from continuing operations in 2006 was $1,358.7
      million compared with $875.7 million in 2005. The increase reflects the 2006
      repurchases of approximately 27.7 million Class A common shares at a cost of
      $1,096.3 million, compared with 19.4 million Class A common shares at a cost
      of
      $763.6 million during 2005.





2005
      vs. 2004: Net cash
      used in financing activities from continuing operations in 2005 was $875.7
      million compared with $807.2 million in 2004. The increase reflects the 2005
      repurchase of approximately 19.4 million Class A common shares for $763.6
      million, partially offset by the higher debt repayments in 2004 and the issuance
      of $300 million of debt during 2005. Also during 2005, the Company repurchased
      the preferred shares of two subsidiaries for $73.6 million, from unrelated
      third
      party holders of the shares. The Company has fully consolidated these
      subsidiaries since their initial purchase.





Certain
      prior year amounts have been reclassified to conform to the current year
      presentation. The Company has revised its December 31, 2004 consolidated
      statement of cash flows to separately disclose the effects of discontinued
      operations by cash flow activity. The Company had previously reported these
      amounts on a combined basis. The Company also reclassified its presentation
      of
      capitalized software on its December 31, 2005 consolidated balance sheet from
      intangible assets to property, plant and equipment to better depict the nature
      and intent of the investment. Concurrently, the Company reclassified its
      consolidated statement of cash flow for the years ended December 31, 2005 and
      2004, respectively, in order to show capitalized software purchases as an
      investing activity rather than an operating activity to be consistent with
      the
      Company’s balance sheet presentation.




33





*Other
      Liquidity Measures*


At
      December 31, 2006 the Company’s debt levels declined slightly from those at
      December 31, 2005. During 2006, the Company repaid $513.7 million of long-term
      debt, consisting primarily of $502.6 million associated with long-term debt
      maturing in the second quarter. These payments were partially offset by net
      short-term borrowings of $369.2 million, primarily consisting of commercial
      paper issuances in the second half of 2006.





Capital
      expenditures were $212.3 million, $141.8 million and $125.6 million for 2006,
      2005 and 2004, respectively. The Company’s investments continue to improve
      manufacturing productivity, reduce costs and provide environmental enhancements
      and advanced technologies for existing facilities. The capital expenditure
      program for 2007 is estimated to be approximately $220-$260 million, including
      amounts approved in prior periods. Many of these projects are subject to review
      and cancellation at the option of the Company without incurring substantial
      charges. There are no planned projects, either individually or in the aggregate,
      that represent a material commitment for the Company.





***Capitalization***


In
      addition to operating cash flow, the Company maintains significant availability
      under its commercial paper program. The Company’s ability to borrow at a
      cost-effective rate under the commercial paper program is contingent upon
      maintaining an investment-grade credit rating. As of December 31, 2006, the
      Company’s credit ratings were as follows:




Short-term
              
              Long-termMoody's
              
              
              P-2
              
              
              A3Standard
                  and Poor's
              
              
              A-2
              
              
              A-Fitch
              
              
              F2
              
              
              A-


*T* *he
      credit ratings set forth above are not a recommendation to buy, sell or hold
      securities and may be subject to revision or withdrawal by the assigning rating
      organization. Each rating should be evaluated independently of any other
      rating.*





The
      Company’s debt-to-total capital ratio at December 31, 2006 remained consistent
      with 2005, as increased profits were more than offset by the reduction of
      shareholders’ equity as a result of the Company’s adoption of SFAS 158 for its
      pension and postretirement plans. SFAS 158 requires the Company to record the
      funded status of its pension and postretirement plans on its balance sheet
      effective December 31, 2006. The adoption of SFAS 158 resulted in a decrease
      of
      total assets of $476.0 million and shareholders’ equity of $472.8 million (net
      of tax of $268.2 million) and an increase of total liabilities of $265.0
      million. Refer to Notes 8 and 9 in the Company’s financial statements for
      further details of the impact of SFAS 158.





The
      Company has additional short-term borrowing alternatives, should the need arise.
      At December 31, 2006, the Company’s committed revolving credit lines consisted
      of two five-year lines totaling $2.0 billion of which $750 million expires
      in
      June 2009 and $1.25 billion expires in August 2010. These lines were unused
      and
      provide support for the Company’s commercial paper program and indirectly
      provide support for other financing instruments, such as letters of credit
      and
      comfort letters, as required in the normal course of business. The Company
      compensates banks for these lines with fees equal to a weighted average of
      .0775% per annum. Available non-U.S. lines of credit were $786.9  million,
      of which $612.0 million were unused at December 31, 2006. These lines provide
      support for bank guarantees, letters of credit and other working capital
      purposes.




34





In
      2007,
      the Company has debt retirements of $626.8 million, which includes $549.1
      million in bonds that may require early repayment at the option of the holders.
      The Company believes that its cash generation, large unused capacity under
      its
      committed borrowing facilities and the ability to obtain additional external
      financing, if necessary, provide sufficient capacity to cover all cash
      requirements for capital expenditures, dividends, debt repayments, and operating
      lease and purchase obligations in 2007.





In
      August
      2005, the Company’s Board of Directors declared a two-for-one stock split
      effected in the form of a stock distribution to shareholders on September 1,
      2005. All references to the number of shares outstanding, per share amounts,
      and
      stock option data of the Company’s common shares were restated in 2005 to
      reflect the effect of the stock split. Shareholders’ equity reflects the stock
      split by reclassifying from “Retained earnings” to “Class A common shares” an
      amount equal to the par value of the additional shares from the split as of
      the
      distribution date. The Board also authorized in August 2005, an increase of
      the
      quarterly dividend on the Company’s Class A common shares from 12.5 cents to 16
      cents per share. In August 2006, the Board authorized an increase of the
      quarterly dividend on the Company’s Class A common shares from 16 cents to 18
      cents per share.





**Contractual
      Obligations**




The
      following table summarizes the Company’s contractual cash obligations by
      required payment periods, in millions:


Paymentsdue
                    by period
              
              Long-term
                  debt
              
              Interest
                  payments on
                  long-term debt
              
              Purchase
                  obligations
              
              Operating
                  leases
              
              Total
                    contractualcash
                  obligationsLess
                  than 1 year
              
              $
              626.8*
              
              $
              97.3
              
              $
              643.2
              
              $
              57.7
              
              $
              1,425.01
                  -
                  3 years
              
              
              148.5
              
              
              105.5
              
              
              45.0
              
              
              75.0
              
              
              374.03
                  -
                  5 years
              
              
              20.9
              
              
              99.2
              
              
              6.6
              
              
              32.1
              
              
              158.8More
                  than 5 years
              
              
              735.8
              
              
              431.6
              
              
              -
              
              
              20.6
              
              
              1,188.0Total
              
              $
              1,532.0
              
              $
              733.6
              
              $
              694.8
              
              $
              185.4
              
              $
              3,145.8


*Includes
      $549.1 million of debt redeemable at the option of the holder. The scheduled
      maturities of these bonds range between 2027 and 2028.





Future
      expected obligations under the Company’s pension and postretirement benefit
      plans and repayments of short-term borrowings have not been included in the
      contractual cash obligations table above.





The
      Company’s pension plan policy allows it to fund an amount, which could be in
      excess of the pension cost expensed, subject to the limitations imposed by
      current tax regulations. The Company anticipates funding the plans in 2007
      in
      accordance with contributions required by funding regulations or
      laws of each
      jurisdiction. The
      Company currently projects that it will be required to contribute approximately
      $24 million to its pension plans worldwide in 2007. Postretirement benefit
      plans, excluding pensions, are not required to be funded in advance and are
      principally funded on a pay-as-you-go basis. The Company currently projects
      that
      it will make payments, net of plan participants’ contributions and Medicare Part
      D subsidy, of approximately $72 million in 2007 for its postretirement benefit
      plans.





The
      short-term borrowings outstanding at December 31, 2006, were $452.6 million
      compared with $76.1 million at December 31, 2005.





For
      financial market risk impacting the Company, see Item 7A. Quantitative and
      Qualitative Disclosure About Market Risk.




35





**Environmental
      and Asbestos Matters**




The
      Company continues to be dedicated to an environmental program to reduce the
      utilization and generation of hazardous materials during the manufacturing
      process and to remediate identified environmental concerns. As to the latter,
      the Company currently is engaged in site investigations and remediation
      activities to address environmental cleanup from past operations at current
      and
      former manufacturing facilities.





During
      2006, the Company spent approximately $5 million on capital projects for
      pollution abatement and control, and an additional $9.4 million for
      environmental remediation expenditures at sites presently or formerly owned
      or
      leased by the Company. The Company believes that these expenditure levels will
      continue and may increase over time. Given the evolving nature of environmental
      laws, regulations and technology, the ultimate cost of future compliance is
      uncertain.





The
      Company is a party to environmental lawsuits and claims, and has received
      notices of potential violations of environmental laws and regulations from
      the
      Environmental Protection Agency and similar state authorities. It is identified
      as a potentially responsible party (PRP) for cleanup costs associated with
      off-site waste disposal at federal Superfund and state remediation sites. For
      all sites there are other PRPs and, in most instances, the Company's involvement
      is minimal.





In
      estimating its liability, the Company has assumed it will not bear the entire
      cost of remediation of any site to the exclusion of other PRPs who may be
      jointly and severally liable. The ability of other PRPs to participate has
      been
      taken into account, based generally on the parties’ financial condition and
      probable contributions on a per site basis. Additional lawsuits and claims
      involving environmental matters are likely to arise from time to time in the
      future.





Although
      uncertainties regarding environmental technology, U.S. federal and state laws
      and regulations and individual site information make estimating the liability
      difficult, management believes that the total liability for the cost of
      remediation and environmental lawsuits and claims will not have a material
      effect on the financial condition, results of operations, liquidity or cash
      flows of the Company for any year. It should be noted that when the Company
      estimates its liability for environmental matters, such estimates are based
      on
      current technologies, and the Company does not discount its liability or assume
      any insurance recoveries.





Certain
      wholly owned subsidiaries of the Company are named as defendants in
      asbestos-related lawsuits in state and federal courts. In virtually all of
      the
      suits, a large number of other companies have also been named as defendants.
      The
      vast majority of those claims have been filed against IR-New Jersey and allege
      injury caused by exposure to asbestos contained in certain of IR-New Jersey’s
      products. Although IR-New Jersey was neither a producer nor a manufacturer
      of
      asbestos, some of its formerly manufactured products utilized
      asbestos-containing components, such as gaskets purchased from third-party
      suppliers.





All
      asbestos-related claims resolved to date have been dismissed or settled. For
      the
      years ended December 31, 2006, 2005 and 2004, total costs for settlement and
      defense of asbestos claims after insurance recoveries and net of tax were
      approximately $31.6 million, $16.8 million and $16.5 million, respectively.
      The
      increase in asbestos-related costs in 2006 compared with 2005 and 2004 is
      primarily attributable to revised estimates for future recoveries to be received
      from the Company’s insurance carriers, as well as declining levels of insurance
      coverage available for cost recoveries. With the assistance of independent
      advisors, the Company performs a thorough analysis, updated periodically, of
      its
      actual and anticipated future asbestos liabilities projected seven years in
      the
      future. Based upon such analysis, the Company believes that its reserves and
      insurance are adequate to cover its asbestos liabilities, and that these
      asbestos liabilities are not likely to have a material adverse effect on its
      financial position, results of operations, liquidity or cash flows.




36





Legislation
      recently under consideration in Congress concerns pending and future
      asbestos-related personal injury claims. Whether and when such legislation
      will
      become law, and the final provisions of such legislation, are unknown.
      Consequently, the Company cannot predict with any reasonable degree of certainty
      what effect, if any, such legislation would have upon the Company’s financial
      position, results of operations or cash flows. See also the discussion under
      Note 15, Commitments and Contingencies, to the consolidated financial statements
      contained in this Annual Report on Form 10-K .





**Guarantees**




As
      part
      of its reorganization in 2001, the Company has fully and unconditionally
      guaranteed payment of all of the issued public debt securities of IR-New Jersey.
      No other subsidiary of the Company guarantees these securities.





IR-New
      Jersey has unconditionally guaranteed payment of the principal, premium, if
      any,
      and interest on the Company’s 4.75% Senior Notes due in 2015 in aggregate
      principal amount of $300 million. The guarantee is unsecured and provided on
      an
      unsubordinated basis. The guarantee ranks equally in right of payment with
      all
      of the existing and future unsecured and unsubordinated debt of IR-New
      Jersey.





**Critical
      Accounting Policies**




The
      notes
      to the financial statements include a summary of significant accounting policies
      and methods used in the preparation of the consolidated financial statements
      and
      the following summarizes what the Company believes are the critical accounting
      policies and methods used by the Company:





·
            Allowance
                for doubtful accounts - The Company has provided an allowance for
                doubtful
                accounts receivable using a Company policy formula based upon its
                knowledge of its end markets, customer base and
                products.





In
      the
      first quarter of 2006, the Company changed its estimate of the allowance for
      doubtful accounts in light of various business and economic factors, including
      a
      significant change in its business portfolio and historical and expected
      write-off experience. In addition, the Company signed a new insurance policy
      which limits its bad debt exposure. As a result, the Company reduced its
      allowance by $20.5 million, or $17.1 million after-tax, which increased first
      quarter 2006 diluted earnings per share by $0.05.





·
            Goodwill
                and other intangible assets - The Company has significant goodwill
                and
                other intangible assets on its balance sheet related to acquisitions.
                The
                valuation and classification of these assets and the assignment of
                amortization lives involves significant judgments and the use of
                estimates. The testing of these intangibles under established accounting
                guidelines for impairment also requires significant use of judgment
                and
                assumptions, particularly as it relates to the determination of fair
                market value. The Company’s goodwill and other intangible assets are
                tested and reviewed annually for impairment or when there is a significant
                change in circumstances. The Company believes that its use of estimates
                and assumptions are reasonable and comply with generally accepted
                accounting principles. Changes in business conditions could potentially
                require future adjustments to these valuations.




37




·
            Long-lived
                assets - Long-lived assets are reviewed for impairment whenever events
                or
                changes in circumstances indicate that the carrying amount of an
                asset may
                not be recoverable. Assets are grouped with other assets and liabilities
                at the lowest level for which identifiable cash flows can be generated.
                An
                impairment in the carrying value of an asset would be recognized
                whenever
                anticipated future undiscounted cash flows from an asset are less
                than its
                carrying value. The impairment is measured as the amount by which
                the
                carrying value exceeds the fair value of the asset as determined
                by an
                estimate of discounted cash flows.





·
            Loss
                contingencies - Liabilities are recorded for various contingencies
                arising
                in the normal course of business, including litigation and administrative
                proceedings, environmental and asbestos matters and product liability,
                product warranty, worker’s compensation and other claims. The Company has
                recorded reserves in the financial statements related to these matters,
                which are developed using input derived from actuarial estimates
                and
                historical and anticipated experience data depending on the nature
                of the
                reserve, and in certain instances with consultation of legal counsel,
                internal and external consultants and engineers. Subject to the
                uncertainties inherent in estimating future costs for these types
                of
                liabilities, the Company believes its estimated reserves are reasonable
                and does not believe the final determination of the liabilities with
                respect to these matters would have a material effect on the financial
                condition, results of operations, liquidity or cash flows of the
                Company
                for any year.





·
            Revenue
                Recognition - Revenue is generally recognized and earned when all
                of the
                following criteria are satisfied: (a) persuasive evidence of a sales
                arrangement exists; (b) price is fixed or determinable; (c) collectibility
                is reasonably assured; and (d) delivery has occurred or service has
                been
                rendered. Delivery generally occurs when the title and the risks
                and
                rewards of ownership have substantially transferred to the customer.
                Revenue from maintenance contracts or extended warranties is recognized
                on
                a straight-line basis over the life of the contract, unless another
                method
                is more representative of the costs incurred. The Company enters
                into
                agreements that contain multiple elements, such as equipment, installation
                and service revenue. For multiple-element arrangements, the Company
                recognizes revenue for delivered elements when the delivered item
                has
                stand-alone value to the customer, fair values or undelivered elements
                are
                known, customer acceptance has occurred, and there are only customary
                refund or return rights related to the delivered elements.





·
            Income
                taxes - Deferred tax assets and liabilities are determined based
                on
                temporary differences between financial reporting and tax bases of
                assets
                and liabilities, applying enacted tax rates expected to be in effect
                for
                the year in which the differences are expected to reverse. The Company
                recognizes future tax benefits, such as net operating losses and
                non-U.S.
                tax credits, to the extent that realizing these benefits is considered
                in
                its judgment to be more likely than not. The Company regularly reviews
                the
                recoverability of its deferred tax assets considering its historic
                profitability, projected future taxable income, timing of the reversals
                of
                existing temporary differences and the feasibility of its tax planning
                strategies. Where appropriate, the Company records a valuation allowance
                with respect to a future tax
                benefit.





The
      provision for income taxes involves a significant amount of management judgment
      regarding interpretation of relevant facts and laws in the jurisdictions in
      which the Company operates. Future changes in applicable laws, projected levels
      of taxable income, and tax planning could change the effective tax rate and
      tax
      balances recorded by the Company. In addition, U.S. and non-U.S. tax authorities
      periodically review income tax returns filed by the Company and can raise issues
      regarding its filing positions, timing and amount of income or deductions,
      and
      the allocation of income among the jurisdictions in which the Company operates.
      A significant period of time may elapse between the filing of an income tax
      return and the ultimate resolution of an issue raised by a revenue authority
      with respect to that return. The Company believes that it has adequately
      provided for any reasonably foreseeable resolution of these matters. The Company
      will adjust its estimate if significant events so dictate. To the extent that
      the ultimate results differ from the original or adjusted estimates of the
      Company, the effect will be recorded in the provision for income taxes in the
      period that the matter is finally resolved.




38





·
            Employee
                benefit plans - The Company provides a range of benefits to eligible
                employees and retired employees, including pensions, postretirement
                and
                postemployment health-care benefits. Determining the cost associated
                with
                such benefits is dependent on various actuarial assumptions, including
                discount rates, expected return on plan assets, compensation increases,
                employee mortality and turnover rates, and health-care cost trend
                rates.
                Independent actuaries perform the required calculations to determine
                expense in accordance with U.S. generally accepted accounting principles.
                Actual results may differ from the actuarial assumptions and are
                generally
                accumulated and amortized into earnings over future periods. Effective
                December 31, 2006, these effects are generally recognized in shareholders’
                equity on an annual basis, due to the adoption of SFAS 158. The Company
                reviews its actuarial assumptions at each measurement date and makes
                modifications to the assumptions based on current rates and trends,
                if
                appropriate. The discount rate, the rate of compensation increase
                and the
                expected long-term rates of return on plan assets are determined
                as of the
                measurement date. The discount rate reflects a rate at which pension
                benefits could be effectively settled. It is established and based
                primarily on the yields of high-quality fixed-income investments
                available
                and expected to be available during the life of the plans, a study
                based
                on the Citigroup Pension Liability index, and a review of the current
                yields reported by Moody’s on AA corporate bonds. The rate of compensation
                increase is dependent on expected future compensation levels. The
                expected
                long-term rates of return are projected to be the rates of return
                to be
                earned over the period until the benefits are paid, which should
                reflect
                the rates of return on present investments, and on reinvestments
                over the
                period. The expected long-term rate of return on plan assets is based
                on
                what is achievable given the plan’s investment policy and the types of
                assets held. Historical assets return trends for the larger plans
                are
                reviewed over fifteen, ten and five-year periods. The actual rates
                of
                return for plan assets over the last ten and fifteen-year periods
                have
                exceeded the expected rates of return used. The Company believes
                that the
                assumptions utilized in recording its obligations under its plans
                are
                reasonable based on input from its actuaries, outside investment
                advisors,
                and information as to assumptions used by plan
                sponsors.





Changes
      in any of the assumptions can have an impact on the net periodic pension cost
      or
      postretirement cost. Estimated sensitivities to the net periodic pension cost
      of
      a 0.25% rate decrease in the three basic assumptions are as follows: the
      discount rate would increase expense by approximately $5.7 million, the rate
      of
      compensation increase would decrease expense by approximately $4.7 million,
      and
      the estimated return on assets assumption would increase expense by
      approximately $6.9 million. A 0.25% rate decrease in the discount rate for
      postretirement benefits would increase net periodic postretirement benefit
      cost
      by $1.6 million and a 1.0% increase in the health care cost trend rate would
      increase the cost by approximately $6.3 million.





In
      2006,
      the Company adopted SFAS 158, which requires the Company to record the funded
      status of its pension and other postretirement plans on its balance sheet
      effective December 31, 2006. Refer to Notes 8 and 9 in the Company’s financial
      statements and the Liquidity and Capital Resources section for further details
      of the impact of SFAS 158.





The
      preparation of all financial statements includes the use of estimates and
      assumptions that affect a number of amounts included in the Company’s financial
      statements. If actual amounts are ultimately different from previous estimates,
      the revisions are included in the Company’s results for the period in which the
      actual amounts become known. Historically, the aggregate differences, if any,
      between the Company’s estimates and actual amounts in any year have not had a
      significant impact on the consolidated financial statements.




39





**New
      Accounting Standards**




In
      September 2006, the Securities and Exchange Commission (SEC) issued Staff
      Accounting Bulletin No. 108, “Considering the Effects of Prior Year
      Misstatements when Quantifying Misstatements in Current Year Financial
      Statements” (SAB 108). SAB 108 provides interpretive guidance on how the effects
      of the carryover or reversal of prior year misstatements should be considered
      in
      quantifying a current year misstatement. The SEC staff believes that registrants
      should quantify errors using both a balance sheet and an income statement
      approach and evaluate whether either approach results in quantifying a
      misstatement that, when all relevant quantitative and qualitative factors are
      considered, is material. SAB 108 is effective for the Company for the fiscal
      year ended December 31, 2006. SAB 108 did not have a material impact on the
      Company’s financial statements.





In
      June
      2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in
      Income Taxes - an interpretation of FASB Statement 109” (FIN 48), which
      prescribes a recognition threshold and measurement process for recording in
      the
      financial statements uncertain tax positions taken or expected to be taken
      in a
      tax return. Additionally, FIN 48 provides guidance on the derecognition,
      classification, accounting in interim periods and disclosure requirements for
      uncertain tax positions. The provisions of FIN 48 are effective for the Company
      for the fiscal year beginning on January 1, 2007. The Company is still assessing
      the impact of FIN 48 on its consolidated financial statements.





In
      September 2006, the FASB issued Statement of Financial Accounting Standard
      No.
      157, “Fair Value Measurements” (SFAS 157). SFAS 157 establishes a framework for
      measuring fair value that is based on the assumptions market participants would
      use when pricing an asset or liability and establishes a fair value hierarchy
      that prioritizes the information to develop those assumptions. Additionally,
      the
      standard expands the disclosures about fair value measurements to include
      disclosing the fair value measurements of assets or liabilities within each
      level of the fair value hierarchy. SFAS 157 is effective for the Company
      starting on January 1, 2008. The Company is currently evaluating the impact
      on
      its financial statements of adopting SFAS 157.





In
      February 2007, the FASB issued Statement of Financial Accounting Standard No.
      159, “The Fair Value Option for Financial Assets and Financial Liabilities”
(SFAS 159). SFAS 159 permits companies the option, at specified election dates,
      to measure financial assets and liabilities at their current fair value, with
      the corresponding changes in fair value from period to period recognized in
      the
      income statement. Additionally, SFAS 159 establishes presentation and disclosure
      requirements designed to facilitate comparisons between companies that choose
      different measurement attributes for similar assets and liabilities. SFAS 159
      is
      effective for the Company starting on January 1, 2008. The Company is currently
      evaluating the impact on its financial statements of adopting SFAS
      159.





Item
      7A.   **QUANTITATIVE
      AND QUALITATIVE DISCLOSURE**  **ABOUT
      MARKET**  **RISK**





The
      Company is exposed to fluctuations in the price of major raw materials used
      in
      the manufacturing process, currency fluctuations and interest rate changes.
      From
      time to time, the Company enters into agreements to reduce its raw material,
      currency and interest rate risks. To minimize the risk of counter party
      non-performance, those agreements are made only through major financial
      institutions with significant experience in such financial
      instruments.




40





The
      Company experiences currency exposures in the normal course of business. To
      mitigate the risk from currency exchange rate fluctuations, the Company will
      generally enter into forward currency exchange contracts for the purchase or
      sale of a currency to hedge this exposure.





The
      Company evaluates its exposure to changes in currency exchange rates using
      a
      sensitivity analysis. The sensitivity analysis is a measurement of the potential
      loss in fair value based on a percentage increase or decrease in exchange rates
      against the U.S. dollar. Based on the firmly committed currency derivative
      instruments in place at December 31, 2006, a hypothetical change in fair value
      of those financial instruments assuming a 10% increase in exchange rates against
      the U.S. dollar would result in an unrealized loss of approximately $32.5
      million, as compared with $16.0 million at December 31, 2005. These amounts
      would be offset by changes in the fair value of underlying currency
      transactions.





The
      Company entered into two total return swaps (the Swaps) which are derivative
      instruments used to hedge the Company's exposure to changes in its share-based
      compensation expense. The Swaps are benchmarked to the Company’s Class A common
      share price and therefore, are exposed to the variations in the market price
      of
      our Class A common shares. Assuming a 10% decrease in our share price at
      December 31, 2006, the Swaps would have an unrealized loss of approximately
      $3.3
      million. This
      amount would be offset by changes in the fair value of underlying share-based
      compensation expense.





From
      time
      to time the Company participates in the debt markets through the issuance of
      commercial paper, which, by its terms, has a maturity of less than a year.
      In
      managing its portfolio the Company issues and reissues commercial paper, thus
      exposing it to interest rate risk in a market environment of rising interest
      rates.




Item
      8.  **FINANCIAL
      STATEMENTS AND SUPPLEMENTARY DATA**





(a)
              The
                  following consolidated financial statements and the report thereon
                  of
                  PricewaterhouseCoopers LLP dated March 1, 2007, are presented following
                  Item 15 of this Annual Report on Form
                  10-K.


Consolidated
                  Financial Statements:Report
                  of independent registered public accounting firmConsolidated
                  balance sheets at December 31, 2006 and 2005For
                  the years ended December 31, 2006, 2005 and 2004:Consolidated
                  statements of incomeConsolidated
                  statements of shareholders’ equityConsolidated
                  statements of cash flowsNotes
                  to consolidated financial statementsFinancial
                  Statement Schedule:Consolidated
                  schedule for the years ended December 31, 2006, 2005 and
                  2004:Schedule
                  II —
                  Valuation and Qualifying Accounts




41




(b)
              The
                  unaudited quarterly financial data for the two years ended December
                  31, is
                  as follows:




*In
                  millions, except per share amounts*
  Basic
              
              DilutedCost
                  of
              
              
              
              
              
              earnings
              
              earningsNet
              
              goods
              
              Operating
              
              Net
              
              per
                  common
              
              per
                  common2006
              
              revenues
              
              sold
              
              income
              
              earnings
              
              share*
              
              share*First
                  quarter
              
              $
              2,711.0
              
              $
              1,998.0
              
              $
              341.1
              
              $
              253.2
              
              $
              0.77
              
              $
              0.76Second
                  quarter
              
              
              3,041.9
              
              
              2,215.4
              
              
              416.5
              
              
              313.5
              
              
              0.96
              
              
              0.95Third
                  quarter
              
              
              2,765.9
              
              
              2,043.8
              
              
              357.7
              
              
              243.8
              
              
              0.77
              
              
              0.76Fourth
                  quarter
              
              
              2,890.5
              
              
              2,167.0
              
              
              325.5
              
              
              222.0
              
              
              0.72
              
              
              0.72Year
                  2006
              
              $
              11,409.3
              
              $
              8,424.2
              
              $
              1,440.8
              
              $
              1,032.5
              
              $
              3.23
              
              $
              3.202005First
                  quarter
              
              $
              2,458.8
              
              $
              1,810.6
              
              $
              297.0
              
              $
              223.0
              
              $
              0.64
              
              $
              0.64Second
                  quarter
              
              
              2,759.5
              
              
              2,019.1
              
              
              379.1
              
              
              285.4
              
              
              0.84
              
              
              0.83Third
                  quarter
              
              
              2,615.3
              
              
              1,920.7
              
              
              340.0
              
              
              254.2
              
              
              0.76
              
              
              0.75Fourth
                  quarter
              
              
              2,713.3
              
              
              1,993.7
              
              
              345.7
              
              
              291.6
              
              
              0.88
              
              
              0.87Year
                  2005
              
              $
              10,546.9
              
              $
              7,744.1
              
              $
              1,361.8
              
              $
              1,054.2
              
              $
              3.12
              
              $
              3.09


*The
      amounts have been restated to reflect a two-for-one stock split that occurred
      in
      August 2005.





Item
      9.   **CHANGES
      IN AND DISAGREEMENTS WITH INDEPENDENT ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
      DISCLOSURE**





None.





Item
      9A **** ****  **CONTROLS
      AND PROCEDURES**





***Disclosure
      Controls and Procedures***


The
      Company’s management, including its Chief Executive Officer and Chief Financial
      Officer, have conducted an evaluation of the effectiveness of disclosure
      controls and procedures (as such term is defined in Rules 13a-15(e) and
      15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange
      Act)), as of the end of the period covered by this Annual Report on Form 10-K.
      Based on that evaluation, the Chief Executive Officer and Chief Financial
      Officer concluded as of December 31, 2006, that the disclosure controls and
      procedures are effective in ensuring that all material information required
      to
      be filed in this Annual Report on Form 10-K has been recorded, processed,
      summarized and reported when required and the information is accumulated and
      communicated, as appropriate, to allow timely decisions regarding required
      disclosure.




***Management’s
      Report on Internal Control Over Financial Reporting***


The
      Company’s management is responsible for establishing and maintaining adequate
      internal control over financial reporting as such term is defined under Exchange
      Act Rules 13a-15(f) and 15d-15(f). Internal control over financial reporting
      is
      a process designed to provide reasonable assurance regarding the reliability
      of
      financial reporting and the preparation of financial statements for external
      purposes in accordance with generally accepted accounting principles.




Because
      of its inherent limitations, internal control over financial reporting may
      not
      prevent or detect misstatements. Also, projections of any evaluation of
      effectiveness to future periods are subject to the risk that controls may become
      inadequate because of changes in conditions, or that the degree of compliance
      with the policies and procedures may deteriorate.




42





Management
      has assessed the effectiveness of internal control over financial reporting
      as
      of December 31, 2006. In making its assessment, management has utilized the
      criteria set forth by the Committee of Sponsoring Organizations (COSO) of the
      Treadway Commission in *Internal
      Control - Integrated Framework.* Management concluded that based on its assessment, the Company’s internal
      control over financial reporting was effective as of December 31, 2006.
      Management’s assessment of the effectiveness of internal control over financial
      reporting as of December 31, 2006 has been audited by PricewaterhouseCoopers
      LLP, an independent registered public accounting firm, as stated in their
      report.





***Changes
      in Internal Control Over Financial Reporting***


There
      has
      been no change in the Company's internal controls over financial reporting
      during the quarter ended December 31, 2006 that has materially affected, or
      is
      reasonably likely to materially affect, the Company's internal control over
      financial reporting.





Item
      9B. ****  **OTHER
      INFORMATION**





None.


43


**PART
      III**





The
      information called for by Part III (Items 10, 11, 12, and 13) of Form 10-K
      will
      be included in the Company’s Proxy Statement for the Company’s 2007 Annual
      General Meeting of Shareholders, which the Company intends to file within 120
      days after the close of its fiscal year ended December 31, 2006 and is hereby
      incorporated by reference to such Proxy Statement, except that the information
      as to the Company’s executive officers which follows Item 4 in this Annual
      Report on Form 10-K, is incorporated by reference into Items 10 and 12,
      respectively, of this Report.





Item
      14. ****  **PRINCIPAL
      ACCOUNTANT FEES AND SERVICES**





The
      information required by this item is incorporated herein by reference to the
      information contained under the caption “Audit and Non-Audit Fees” in our 2007
      Proxy Statement.





In
      early
      2005, our registered public accounting firm, PricewaterhouseCoopers LLP (PwC),
      informed the Securities Exchange Commission (the SEC), the Public Company
      Accounting Oversight Board and our Audit Committee that certain non-audit work
      that PwC previously performed in China and Taiwan has raised questions regarding
      PwC’s independence with respect to its performance of audit services for
      us.





During
      the fiscal years 2004, 2003, 2002 and 2001, certain PwC affiliates, in
      connection with the preparation of local tax returns, made payments to local
      tax
      authorities with respect to individual employee tax liabilities. As a result,
      PwC’s non-U.S. affiliates had temporary custody of small amounts of our
      corporate funds. The fees we paid to PwC’s non-U.S. affiliates in China and
      Taiwan for the preparation of these tax returns, including the services
      mentioned above, were $433, $14,765, $24,849 and $18,767 for the years 2004,
      2003, 2002 and 2001, respectively. These services were discontinued in
      2004.





Our
      Audit
      Committee has reviewed the facts surrounding these services provided by PwC.
      PwC
      has informed the Audit Committee that it does not believe that the performance
      of the tax services described above has impaired PwC’s independence. In light of
      the de minimis fees paid to PwC, the ministerial nature of the actions performed
      and the fact that the services have been discontinued, neither our Audit
      Committee nor PwC believes that PwC’s independence was impaired by the
      performance of these services.




44


**PART
      IV**





Item
      15.  **EXHIBITS
      AND FINANCIAL STATEMENTS SCHEDULE**





(a)
                1. and 2.
            Financial
                statements and financial statement
                schedule


See
                Item 8.





3.
            Exhibits


The
                exhibits listed on the accompanying index to exhibits are filed as
                part of
                this Annual Report on Form 10-K.




45


**INGERSOLL-RAND
      COMPANY LIMITED**


**INDEX
      TO EXHIBITS**


**(Item
      15(a))**





**Description**





2
            Agreement
                and Plan of Merger, dated as of October 31, 2001, among Ingersoll-Rand
                Company Limited, Ingersoll-Rand Company and IR Merger Corporation.
                Incorporated by reference to Amendment No. 1 to Form S-4. Registration
                Statement No, 333-71642, filed October 30,
                2001.




2.1
            Stock
                and Asset Purchase Agreement, dated as of October 16, 2002, between
                Ingersoll-Rand Company Limited, on behalf of itself and certain of
                its
                subsidiaries and The Timken Company, on behalf of itself and certain
                of
                its subsidiaries. Incorporated by reference to Form 8-K dated October
                16,
                2002.





2.2
            Amendment
                to the Stock and Asset Purchase Agreement, dated as of February 18,
                2003,
                amending the Stock Purchase Agreement, dated as of October 16, 2002,
                between Ingersoll-Rand Company Limited, on behalf of itself and certain
                of
                its subsidiaries and The Timken Company, on behalf of itself and
                certain
                of its subsidiaries. Incorporated by reference to Form Schedule 13D,
                filed
                March 5, 2003 by Ingersoll-Rand
                Company.





2.3
            Equity
                Purchase Agreement between FRC Acquisition LLC, on behalf of itself
                and
                the other buyers named therein, and Ingersoll-Rand Company Limited,
                on
                behalf of itself and the other sellers named therein, dated August
                25,
                2004, in connection with the divestiture of Dresser-Rand. Incorporated
                by
                reference to Form 8-K dated August 25,
                2004.





2.4
            Pricing
                Agreement, dated as of May 24, 2005 among Ingersoll-Rand Company
                Limited,
                Banc of America Securities, LLC, Deutsche Bank Securities Inc. and
                Ingersoll-Rand Company. Incorporated by reference to Form 8-K for
                Ingersoll-Rand Company Limited, dated May 24, 2005, filed May 27,
                2005.





2.5
            Asset
                and Stock Purchase Agreement, dated as of February 27, 2007, among
                Ingersoll-Rand Company limited, on behalf of itself and the other
                sellers
                named therein, and AB Volvo (publ), on behalf of itself and the other
                buyers named therein. Incorporated by reference to Form 8-K for
                Ingersoll-Rand Company Limited dated February 27, 2007, filed February
                28,
                2007.





3.1
              Memorandumof
                  Association of Ingersoll-Rand Company Limited. Incorporated by
                  reference
                  to Amendment No. 1 to Form S-4 Registration Statement No. 333-71642,
                  filed
                  October 30, 2001.





3.2
            Amended
                and Restated Bye-Laws of Ingersoll-Rand Company Limited, dated June
                1,
                2005. Incorporated by reference to Form 10-Q for the quarter ended
                June
                30, 2005, of Ingersoll-Rand Company Limited, filed August 5,
                2005.





4.1
            Certificate
                of Designation, Preferences and Rights of Series A Preference Shares
                of
                Ingersoll-Rand Company Limited. Incorporated by reference to Amendment
                No.
                1 to Form S-4 Registration Statement No. 333-71642, filed October
                30,
                2001.





4.2
              Rights
                  Agreement between Ingersoll-Rand Company Limited and The Bank of
                  New York,
                  as Rights Agent. Incorporated by reference to Amendment No. 1 to
                  Form S-4
                  Registration Statement No. 333-71642, filed October 30,
                  2001.




46




4.3
            Voting
                Agreement between Ingersoll-Rand Company Limited and Ingersoll-Rand
                Company. Incorporated by reference to Amendment No. 1 to Form S-4
                Registration Statement No. 333-71642, filed October 30,
                2001.




4.4
            Indenture
                dated as of August 1, 1986, between Ingersoll-Rand Company and The
                Bank of
                New York, as Trustee, as supplemented by first, second and third
                supplemental indentures. Incorporated by reference to Ingersoll-Rand
                Company’s Form S-3 Registration Statement No. 333-39474 as filed March 18,
                1991 and to Form S-3 Registration Statement No. 333-50902 as filed
                November 29, 2000.





4.5
            Fourth
                Supplemental Indenture, dated as of December 31, 2001, among
                Ingersoll-Rand Company Limited, Ingersoll-Rand Company and The Bank
                of New
                York, as trustee. Incorporated by reference to Form 10-K of Ingersoll-Rand
                Company Limited for the year ended December 31, 2001, filed March
                13,
                2002.





4.6
            Credit
                Agreement dated as of August 12, 2005, among Ingersoll-Rand Company
                and
                Ingersoll-Rand Company Limited, the banks listed therein, and Citicorp
                USA, Inc., as Syndication Agent, and Bank of America, N.A., Deutsche
                Bank
                Securities Inc., The Bank of Tokyo-Mitsubishi, Ltd., New York Branch
                and
                UBS Securities LLC, as Documentation Agents, and JPMorgan Chase Bank,
                N.A., as Administrative Agent, and J.P. Morgan Securities Inc. and
                Citigroup Global Markets Inc., as Lead Arrangers and Bookrunners.
                Incorporated by reference to Form 10-K of Ingersoll-Rand Company
                Limited
                for the year ended December 31, 2006, filed March 1,
                2006.




4.7
            Credit
                Agreement, dated as of June 25, 2004, among Ingersoll-Rand Company
                and
                Ingersoll-Rand Company Limited, the banks listed therein, The JPMorgan
                Chase Bank, as Administrative Agent, Citibank N.A., and Deutsche
                Bank
                Securities Inc., as Co-Syndication Agents, and The Bank of
                Tokyo-Mitsubishi, Ltd, as Documentation Agent, and J.P. Morgan Securities
                Inc., as Lead Arranger and Bookrunner. Incorporated by reference
                to Form
                10-K of Ingersoll-Rand Company Limited for the year ended December
                31,
                2004, filed March 16, 2005.





4.8
              Ingersoll-Rand
                  Company Limited and its subsidiaries are parties to several long-term
                  debt
                  instruments under which in each case the total amount of securities
                  authorized does not exceed 10% of the total assets of Ingersoll-Rand
                  Company Limited and its subsidiaries on a consolidated basis. Pursuant
                  to
                  paragraph 4(iii) of Item 601(b) of Regulation S-K, Ingersoll-Rand
                  Company
                  Limited agrees to furnish a copy of such instruments to the Securities
                  and
                  Exchange Commission upon
                  request.





4.9
            Indenture
                dated as of May 24, 2005 among Ingersoll-Rand Company Limited,
                Ingersoll-Rand Company and Wells Fargo Bank, N.A., as trustee.
                Incorporated by reference to Form 8-K for Ingersoll-Rand Company
                Limited,
                dated May 24, 2005, filed May 27, 2005.





10.1
            Management
                Incentive Unit Plan of Ingersoll-Rand Company. Amendment to the Management
                Incentive Unit Plan, effective January 1, 1982. Amendment to the
                Management Incentive Unit Plan, effective January 1, 1987. Amendment
                to
                the Management Incentive Unit Plan, effective June 3, 1987. Incorporated
                by reference to Form 10-K of Ingersoll-Rand Company for the year
                ended
                December 31, 1993, filed March 30,
                1994.




47




10.2
            Reorganization
                Amendment to Management Incentive Unit Plan, dated December 31, 2001.
                Incorporated by reference to Form 10-K of Ingersoll-Rand Company
                Limited
                for the year ended December 31, 2001, filed March 13,
                2002.





10.3
            Amended
                and Restated Director Deferred Compensation and Stock Award Plan.
                Incorporated by reference to Form 10-K of Ingersoll-Rand Company
                for the
                year ended December 31, 2000, filed March 20,
                2001.





10.4
            First
                Amendment to Director Deferred Compensation and Stock Award Plan.
                Incorporated by reference to Form 10-K of Ingersoll-Rand Company
                Limited
                for the year ended December 31, 2001, filed March 13,
                2002.





10.5
            Second
                Amendment to Director Deferred Compensation and Stock Award Plan.
                Incorporated by reference to Form 10-K of Ingersoll-Rand Company
                Limited
                for the year ended December 31, 2003, filed February 27,
                2004.





10.6
            Third
                Amendment to Director Deferred Compensation and Stock Award Plan,
                dated
                December 31, 2004. Incorporated by reference to Form 8-K of Ingersoll-Rand
                Company Limited, dated December 31, 2004, filed January 6,
                2005.





10.7
            Fourth
                Amendment to Director Deferred Compensation and Stock Award Plan,
                dated
                March 10, 2005. Incorporated by reference to Form 10-K of Ingersoll-Rand
                Company Limited for the year ended December 31, 2004, filed March
                16,
                2005.





10.8
            Director
                Deferred Compensation and Stock Award Plan II, dated December 31,
                2004.
                Incorporated by reference to Form 8-K of Ingersoll-Rand Company Limited,
                dated December 31, 2004, filed January 6,
                2005.





10.9
            First
                Amendment to Director Deferred Compensation and Stock Award Plan
                II, dated
                March 10, 2005.Incorporated
                by reference to Form 10-K of Ingersoll-Rand Company Limited for the
                year
                ended December 31, 2004, filed March 16, 2005.





10.10
                Description
                    of Annual Incentive Arrangements for Chairman, President, Sector
                    Presidents and other Staff Officers of Ingersoll-Rand Company
                    Limited.
                    Incorporated by reference to Form 10-K of Ingersoll-Rand Company
                    Limited
                    for the year ended December 31, 2006, filed March 1,
                    2006.





10.11
            Description
                of Performance Share Program for Chairman, President and Chief Executive
                Officer and the other Participants of Ingersoll-Rand Company Limited.
                Incorporated by reference to Form 10-K of Ingersoll-Rand Company
                Limited
                for the year ended December 31, 2006, filed March 1,
                2006.




10.12
                  Form
                      of
                      Change in Control Agreement with Tier 1 Officers of Ingersoll-Rand
                      Company
                      Limited, dated as of December 1, 2006. Incorporated by reference
                      to
                      Exhibit 99.1 in Form 8-K of Ingersoll-Rand Company Limited,
                      dated November
                      30, 2006, filed December 4,
                      2006.





10.13
            Form
                of Change in Control Agreement with Tier 2 Officers of Ingersoll-Rand
                Company Limited, dated as of December 1, 2006. Incorporated by reference
                to Exhibit 99.2 in Form 8-K of Ingersoll-Rand Company Limited, dated
                November 30, 2006, filed December 4,
                2006.




48


10.14
            Executive
                Supplementary Retirement Agreement for selected executive officers
                of
                Ingersoll- Rand Company. Incorporated by reference to Form 10-K of
                Ingersoll-Rand Company for the year ended December 31, 1993, filed
                March
                30, 1994.





10.15
            Executive
                Supplementary Retirement Agreement for selected executive officers
                of
                Ingersoll-Rand Company. Incorporated by reference to Form 10-K for
                the
                year ended December 31, 1996, filed March 26,
                1997.





10.16
            Forms
                of insurance and related letter agreements with certain executive
                officers
                of Ingersoll-Rand Company. Incorporated by reference to Form 10-K
                of
                Ingersoll-Rand Company for the year ended December 31, 1993, filed
                March
                30, 1994.





10.17
            Amended
                and Restated Supplemental Pension Plan, dated January 1, 2003.
                Incorporated by reference to Form 10-K of Ingersoll-Rand Company
                Limited
                for the year ended December 31, 2002, filed March 5,
                2003.





10.18
            First
                Amendment to the Amended and Restated Supplemental Pension Plan,
                dated
                January 1, 2003. Incorporated by reference to Form 10-K of Ingersoll-Rand
                Company Limited for the year ended December 31, 2003, filed February
                27,
                2004.





10.19
            Amended
                and Restated Supplemental Employee Savings Plan, dated January 1,
                2003.
                Incorporated by reference to Form 10-K of Ingersoll-Rand Company
                Limited
                for the year ended December 31, 2002, filed March 5,
                2003.





10.20
            First
                Amendment to the Amended and Restated Supplemental Employee Savings
                Plan,
                datedJanuary
                1, 2003. Incorporated by reference to Form 10-K of Ingersoll-Rand
                Company
                Limited for the year ended December 31, 2003, filed February 27,
                2004.





10.21
            Incentive
                Stock Plan of 1995. Incorporated by reference to the Notice of 1995
                Annual
                Meeting of Shareholders and Proxy Statement dated March 15, 1995.
                See
                Appendix A of the Proxy Statement dated March 15,
                1995.





10.22
            Reorganization
                Amendment to Incentive Stock Plan of 1995, dated December 21, 2001.
                Incorporated by reference to Form 10-K of Ingersoll-Rand Company
                Limited
                for the year ended December 31, 2001, filed March 13,
                2002.





10.23
            Senior
                Executive Performance Plan. Incorporatedby
                reference to the Notice of 2000 Annual Meeting of Shareholders and
                Proxy
                Statement of Ingersoll-Rand Company, dated March 7, 2000. See Appendix
                A
                of the Proxy Statement, dated March 7,
                2000.





10.24
              Amended
                  and Restated Elected Officers Supplemental Plan, dated December
                  31, 2004.
                  Incorporated by reference to Form 10-K of Ingersoll-Rand Company
                  Limited
                  for the year ended December 31, 2004, filed March 16,
                  2005.





10.25
              Amendment,
                  dated February 1, 2006, to Amended and Restated Elected Officers
                  Supplemental Plan, dated December 31, 2004. Incorporated by reference
                  to
                  Form 10-K of Ingersoll-Rand Company Limited for the year ended
                  December
                  31, 2006, filed March 1,
                  2006.




49




10.26
              Elected
                  Officers Supplemental Plan II, dated February 1, 2006. Incorporated
                  by
                  reference to Form 10-K of Ingersoll-Rand Company Limited for the
                  year
                  ended December 31, 2006, filed March 1, 2006.





10.27
            Amended
                and Restated Executive Deferred Compensation Plan. Incorporated by
                reference to Form 10-K of Ingersoll-Rand Company for the year ended
                December 31, 2000, filed March 20, 2001.





10.28
            First
                Amendment to Executive Deferred Compensation Plan, dated December
                31,
                2001. Incorporated by reference to Form 10-K of Ingersoll-Rand Company
                Limited for the year ended December 31, 2001, filed March 13,
                2002.





10.29
            Second
                Amendment to Executive Deferred Compensation Plan, dated February
                24,
                2004. Incorporated by reference to Form 10-K of Ingersoll-Rand Company
                Limited for the year ended December 31, 2003, filed February 27,
                2004.





10.30
            Third
                Amendment to Executive Deferred Compensation Plan, dated December
                31,
                2004. Incorporated by reference to Form 8-K of Ingersoll-Rand Company
                Limited dated December 31, 2004, filed January 6,
                2005.





10.31
            Fourth
                Amendment to Executive Deferred Compensation Plan, dated March 10,
                2005.
                Incorporated by reference to Form 10-K of Ingersoll-Rand Company
                Limited
                for the year ended December 31, 2004, filed March 16,
                2005.





10.32
            Executive
                Deferred Compensation Plan II, dated December 31, 2004. Incorporated
                by
                reference to Form 8-K of Ingersoll-Rand Company Limited dated December
                31,
                2004, filed January 6, 2005.





10.33
            First
                Amendment to Executive Deferred Compensation Plan II, dated March
                10,
                2005. Incorporated by reference to Form 10-K of Ingersoll-Rand Company
                Limited for the year ended December 31, 2004, filed March 16,
                2005.




10.34
              
              Amended
                  and Restated Incentive Stock Plan of 1998. Incorporated by reference
                  to
                  Ingersoll-Rand Company Limited’s Form S-8 Registration Statement, filed
                  December 1, 2005.





10.35
            Amendment
                to the Ingersoll-Rand Company Limited Amended and Restated Incentive
                Stock
                Plan of 1998, dated December 7, 2005. Incorporated by reference to
                Form
                8-K of Ingersoll-Rand Company Limited, dated December 7, 2005, filed
                December 9, 2005.





10.36
            Composite
                Employment Agreement with Chief Executive Officer.****Incorporated
                by reference to Form 10-K of Ingersoll-Rand Company for the year
                ended
                December 31, 1999, filed March 30,
                2000.





10.37
            Employment
                Agreement with Timothy McLevish, Senior Vice President and Chief
                Financial
                Officer. Incorporated by reference to Form 10-K of Ingersoll-Rand
                Company
                Limited for the year ended December 31, 2002, filed March 5,
                2003.





10.38
            Employment
                Agreement with Michael Lamach, Senior Vice President. Incorporated
                by
                reference to Form 10-K of Ingersoll-Rand Company Limitedfor the year ended December 31, 2003, filed February 27,
                2004.





50




10.39
            Addendum,
                dated June 3, 2005, to Employment Agreement with Timothy R. McLevish.
                Incorporated by reference to Form 8-K of Ingersoll-Rand Company Limited,
                dated June 1, 2005, filed June 6,
                2005.





10.40
            Employment
                Agreement with James R. Bolch, Senior Vice President. Incorporated
                by
                reference to Form 10-K of Ingersoll-Rand Company Limited for the
                year
                ended December 31, 2006, filed March 1,
                2006.





10.41
            Addendum,
                dated December 8, 2005, to Employment Agreement with James R. Bolch.
                Incorporated by reference to Form 10-K of Ingersoll-Rand Company
                Limited
                for the year ended December 31, 2006, filed March 1,
                2006.





10.42
            Amended
                and Restated Estate Enhancement Program, dated June 1, 1998, and
                the
                related form agreements. Incorporated by reference to Form 10-Q of
                Ingersoll-Rand Company Limited for the quarter ended March 31, 2006,
                filed
                May 5, 2006.





10.43
            First
                Amendment to the Amended and Restated Estate Enhancement Program,
                dated
                December 31, 2001. Incorporated by reference to Form 10-Q of
                Ingersoll-Rand Company Limited for the quarter ended March 31, 2006,
                filed
                May 5, 2006.





10.44
            Employment
                Agreement with William Gauld, Senior Vice President, dated September
                7,
                2006. Filed herewith.





10.45
            Employment
                Agreement with Marcia J. Avedon, Senior Vice President, dated January
                8,
                2007. Filed herewith.





12
                Computations
                    of Ratios of Earnings to Fixed Charges. Filed
                    herewith.


14
            
            Ingersoll-Rand
                Company Limited Code of Ethics. Incorporated by reference to Form
                10-K of
                Ingersoll-Rand Company Limited for the year ended December 31, 2006,
                filed
                March 1, 2006.





21
            List
                of Subsidiaries of Ingersoll-Rand Company Limited. Filed
                herewith.





23
            Consent
                of Independent Registered Public Accounting Firm. Filed
                herewith.





31.1
            Certification
                of Chief Executive Officer Pursuant to Rule 13a-14(a) or Rule 15d-14(a),
                as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
                Filed herewith.





31.2
            Certification
                of Chief Financial Officer Pursuant to Rule 13a-14(a) or Rule 15d-14(a),
                as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
                Filed herewith.





32
            Certifications
                of Chief Executive Officer and Chief Financial Officer Pursuant to
                Rule
                13a-14(b) or Rule 15d-14(b) and 18 U.S.C. Section 1350, as Adopted
                Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Filed
                herewith.





51




**SIGNATURES**





Pursuant
      to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
      1934, the registrant has duly caused this report to be signed on its behalf
      by
      the undersigned, thereunto duly authorized.




**INGERSOLL
                RAND COMPANY LIMITED**
              (Registrant)By:
            /S/ Herbert
              L. Henkel(Herbert
                L. Henkel)
              Chief
                  Executive Officer
                Date: March
                  1,
                  2007




Pursuant
        to the requirement of the Securities Exchange Act of 1934, this report has
        been
        signed by the following persons
        on behalf of the registrant and in the capacities and on the dates
        indicated.


**Signature**
            
            **Title**
            
            **Date**Chairman,
                President, Chief/S/
                Herbert L. Henkel
            
            Executive
                Officer and Director(Herbert
                L. Henkel)
            
            (Principal
                Executive Officer)
            
            March
                1, 2007Senior
                Vice President and/S/
                Timothy R. McLevish
            
            Chief
                Financial Officer(Timothy
                R. McLevish)
            
            (Principal
                Financial Officer)
            
            March
                1, 2007/S/
                Richard W. Randall
            
            Vice
                President and Controller(Richard
                W. Randall)
            
            (Principal
                Accounting Officer)
            
            March
                1, 2007/S/
                Ann C. Berzin(Ann
                C. Berzin)
            
            Director
            
            March
                1, 2007/S/
                Peter C. Godsoe(Peter
                C. Godsoe)
            
            Director
            
            March
                1, 2007/S/
                Constance Horner(Constance
                Horner)
            
            Director
            
            March
                1, 2007/S/
                H. William Lichtenberger(H.
                William Lichtenberger)
            
            Director
            
            March
                1, 2007/S/
                Theodore E. Martin(Theodore
                E. Martin)
            
            Director
            
            March
                1, 2007/S/
                Patricia Nachtigal(Patricia
                Nachtigal)
            
            Director
            
            March
                1, 2007/S/
                Orin R. Smith(Orin
                R. Smith)
            
            Director
            
            March
                1, 2007/S/
                Richard J. Swift(Richard
                J. Swift)
            
            Director
            
            March
                1, 2007/S/
                Tony L. White(Tony
                L. White)
            
            Director
            
            March
                1, 2007




52




**INGERSOLL-RAND
        COMPANY LIMITED**
 **Index
        to Consolidated Financial Statements**
 
 PageReport
                  of Independent Registered Public Accounting Firm
              
              54Consolidated
                  Statements of Income
              
              56Consolidated
                  Balance Sheets
              
              57Consolidated
                  Statements of Shareholders' Equity
              
              58Consolidated
                  Statements of Cash Flows
              
              59Notes
                  to Consolidated Financial Statements
              
              60Schedule
                  II - Valuation and Qualifying Accounts
              
              98




53




**Report
      of Independent Registered Public Accounting Firm**





To **** the
      Board
      of Directors and Shareholders of Ingersoll-Rand Company Limited:





We
      have
      completed integrated audits of Ingersoll-Rand Company Limited’s (successor
      company to Ingersoll-Rand Company) consolidated financial statements and of
      its
      internal control over financial reporting as of December 31, 2006, in accordance
      with the standards of the Public Company Accounting Oversight Board (United
      States). Our opinions, based on our audits, are presented below.





Consolidated
      financial statements and financial statement schedule





In
      our
      opinion, the consolidated financial statements listed in the index appearing
      under Item 15(a)(1) present fairly, in all material respects, the financial
      position of Ingersoll-Rand Company Limited and its subsidiaries at December
      31,
      2006 and 2005, and the results of their operations and their cash flows for
      each
      of the three years in the period ended December 31, 2006 in conformity with
      accounting principles generally accepted in the United States of America. In
      addition, in our opinion, the financial statement schedule listed in the index
      appearing under Item 15(a)(2), presents fairly, in all material respects, the
      information set forth therein when read in conjunction with the related
      consolidated **** financial
      statements. These financial statements and financial statement schedule are
      the
      responsibility of the Company’s management. Our responsibility is to express an
      opinion on these financial statements and financial statement
      schedule **** based
      on
      our audits. We conducted our audits of these statements in accordance with
      the
      standards of the Public Company Accounting Oversight Board  (United
      States). Those standards require that we plan and perform the audit to obtain
      reasonable assurance about whether the financial statements are free of material
      misstatement. An audit of financial statements includes examining, on a test
      basis, evidence supporting the amounts and disclosures in the financial
      statements, assessing the accounting principles used and significant estimates
      made by management, and evaluating the overall financial statement presentation.
      We believe that our audits provide a reasonable basis for our
      opinion.





As
      discussed in Note 1 to the consolidated financial statements, the Company
      adopted Statement of Financial Accounting Standard No. 123(R), *Share-Based
      Payment* ,
      as of
      January 1, 2006, using the modified prospective method.





As
      discussed in Note 1 to the consolidated financial statements, the Company
      adopted Statement of Financial Accounting Standard No. 158, *Employers'
      Accounting for Defined Benefit Pension and Other Postretirement Plans - an
      Amendment to FASB Statements No. 87, 88, 106, and 132(R),* as of
      December 31, 2006.





Internal
      control over financial reporting





Also,
      in
      our opinion, management’s assessment, included in Management's Report on
      Internal Control Over Financial Reporting appearing under Item 9A, that the
      Company maintained effective internal control over financial reporting as of
      December 31, 2006 based on criteria established in *Internal
      Control - Integrated Framework* issued
      by the Committee of Sponsoring Organizations of the Treadway Commission (COSO),
      is fairly stated, in all material respects, based on those criteria.
      Furthermore, in our opinion, the Company maintained, in all material respects,
      effective internal control over financial reporting as of December 31, 2006,
      based on criteria established in *Internal
      Control - Integrated Framework* issued
      by the COSO. The Company’s management is responsible for maintaining effective
      internal control over financial reporting and for its assessment of the
      effectiveness of internal control over financial reporting. Our responsibility
      is to express opinions on management’s assessment and on the effectiveness
      of the Company’s internal control over financial reporting based on our audit.
      We conducted our audit of internal control over financial reporting in
      accordance with the standards of the Public Company Accounting Oversight Board
      (United States). Those standards require that we plan and perform the audit
      to
      obtain reasonable assurance about whether effective internal control over
      financial reporting was maintained in all material respects. An audit of
      internal control over financial reporting includes obtaining an understanding
      of
      internal control over financial reporting, evaluating management’s assessment,
      testing and evaluating the design and operating effectiveness of internal
      control, and performing such other procedures as we consider necessary in the
      circumstances. We believe that our audit provides a reasonable basis for our
      opinions.




54




A
      company’s internal control over financial reporting is a process designed to
      provide reasonable assurance regarding the reliability of financial reporting
      and the preparation of financial statements for external purposes in accordance
      with generally accepted accounting principles. A company’s internal control over
      financial reporting includes those policies and procedures that (i) pertain
      to the maintenance of records that, in reasonable detail, accurately and fairly
      reflect the transactions and dispositions of the assets of the company;
      (ii) provide reasonable assurance that transactions are recorded as
      necessary to permit preparation of financial statements in accordance with
      generally accepted accounting principles, and that receipts and expenditures
      of
      the company are being made only in accordance with authorizations of management
      and directors of the company; and (iii) provide reasonable assurance
      regarding prevention or timely detection of unauthorized acquisition, use,
      or
      disposition of the company’s assets that could have a material effect on the
      financial statements.





Because
      of its inherent limitations, internal control over financial reporting may
      not
      prevent or detect misstatements. Also, projections of any evaluation of
      effectiveness to future periods are subject to the risk that controls may become
      inadequate because of changes in conditions, or that the degree of compliance
      with the policies or procedures may deteriorate.





PricewaterhouseCoopers
      LLP


Florham
      Park, New Jersey


March
      1,
      2007





55




**Ingersoll-Rand
        Company Limited** **Consolidated
          Statements of Income** *In
            millions, except per share amounts*
  For
                  the years ended December 31,
              
              2006
              
              2005
              
              2004Net
                  revenues
              
              $
              11,409.3
              
              $
              10,546.9
              
              $
              9,393.6Cost
                  of goods sold
              
              
              8,424.2
              
              
              7,744.1
              
              
              6,854.0Selling
                  and administrative expenses
              
              
              1,544.3
              
              
              1,441.0
              
              
              1,419.3Operating
                  income
              
              
              1,440.8
              
              
              1,361.8
              
              
              1,120.3Interest
                  expense
              
              
              (131.8
              )
              
              (144.3
              )
              
              (153.1
              )Other
                  income, net
              
              
              5.9
              
              
              53.0
              
              
              17.0Minority
                  interests
              
              
              (14.9
              )
              
              (12.7
              )
              
              (16.0
              )Earnings
                  before income taxes
              
              
              1,300.0
              
              
              1,257.8
              
              
              968.2Provision
                  for income taxes
              
              
              231.7
              
              
              204.7
              
              
              138.4Earnings
                  from continuing operations
              
              
              1,068.3
              
              
              1,053.1
              
              
              829.8Discontinued
                  operations, net of tax
              
              
              (35.8
              )
              
              1.1
              
              
              388.9Net
                  earnings
              
              $
              1,032.5
              
              $
              1,054.2
              
              $
              1,218.7Basic
                  earnings per common share:Earnings
                  from continuing operations
              
              $
              3.34
              
              $
              3.12
              
              $
              2.40Discontinued
                  operations, net of tax
              
              
              (0.11
              )
              
              -
              
              
              1.12Net
                  earnings
              
              $
              3.23
              
              $
              3.12
              
              $
              3.52Diluted
                  earnings per common share:Earnings
                  from continuing operations
              
              $
              3.31
              
              $
              3.09
              
              $
              2.36Discontinued
                  operations, net of tax
              
              
              (0.11
              )
              
              -
              
              
              1.11Net
                  earnings
              
              $
              3.20
              
              $
              3.09
              
              $
              3.47




*See
      accompanying Notes to Consolidated Financial Statements.*





56





**Ingersoll-Rand
        Company Limited** **Consolidated
          Balance Sheets** *In
            millions*
  December
                  31,
              
              2006
              
              2005**ASSETS****Current
                  assets:**Cash
                  and cash equivalents
              
              $
              362.3
              
              $
              880.6Marketable
                  securities
              
              
              0.7
              
              
              156.5Accounts
                  and notes receivable, less allowance of$17.8
                  in 2006 and $47.6 in 2005
              
              
              1,996.2
              
              
              1,679.0Inventories
              
              
              1,320.3
              
              
              1,128.8Prepaid
                  expenses and deferred income taxes
              
              
              416.4
              
              
              403.3Total
                  current assets
              
              
              4,095.9
              
              
              4,248.2Property,
                  plant and equipment, net
              
              
              1,276.3
              
              
              1,157.5Goodwill
              
              
              4,604.8
              
              
              4,433.4Intangible
                  assets, net
              
              
              736.2
              
              
              717.0Other
                  assets
              
              
              1,432.7
              
              
              1,200.3Total
                  assets
              
              $
              12,145.9
              
              $
              11,756.4**LIABILITIES
                  AND EQUITY****Current
                  liabilities:**Accounts
                  payable
              
              $
              1,026.8
              
              $
              812.5Accrued
                  compensation and benefits
              
              
              383.8
              
              
              401.4Accrued
                  expenses and other current liabilities
              
              
              1,123.6
              
              
              1,053.1Loans
                  payable and current maturities of long-term debt
              
              
              1,079.4
              
              
              932.7Total
                  current liabilities
              
              
              3,613.6
              
              
              3,199.7Long-term
                  debt
              
              
              905.2
              
              
              1,184.3Postemployment
                  and other benefit liabilities
              
              
              1,428.8
              
              
              1,000.9Other
                  noncurrent liabilities
              
              
              793.5
              
              
              609.5Total
                  liabilities
              
              
              6,741.1
              
              
              5,994.4Commitments
                  and contingencies (Note 15)**Shareholders'
                  equity:**Class
                  A common shares, $1 par value (364,462,276 and360,740,316
                  shares issued at December 31, 2006 and2005,
                  respectively, and net of 57,699,279 and 30,032,378shares
                  owned by subsidiary at December 31, 2006 and2005,
                  respectively)
              
              
              306.8
              
              
              330.7Retained
                  earnings
              
              
              5,456.1
              
              
              5,558.9Accumulated
                  other comprehensive income (loss)
              
              
              (358.1
              )
              
              (127.6
              )Total
                  shareholders' equity
              
              
              5,404.8
              
              
              5,762.0Total
                  liabilities and shareholders' equity
              
              $
              12,145.9
              
              $
              11,756.4
  *See
        accompanying Notes to Consolidated Financial Statements.*
  57




**Ingersoll-Rand
        Company Limited** **Consolidated
          Statements of Shareholders' Equity**
 In millions, except per share amounts  Total
                shareholders'
              
              Common
                  stock
              
              Capital
                  in excess of par
              
              Retained
              
              Accumulated
                  other
                comprehensive
                income
              
              Comprehensiveequity
              
              Amount
              
              Shares
              
              value
              
              earnings
              
              (loss)
              
              incomeBalance
                  at December 31, 2003
              
              $
              4,493.3
              
              $
              174.5
              
              
              174.5
              
              $
              610.6
              
              $
              3,978.7
              
              $
              (270.5
              )Net
                  earnings
              
              
              1,218.7
              
              
              
              
              
              
              
              
              
              
              
              1,218.7
              
              
              
              
              $
              1,218.7Currency
                  translation
              
              
              168.7
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              168.7
              
              
              168.7Change
                  in fair value of derivatives qualifyingas
                  cash flow hedges, net of tax of $0.4
              
              
              3.1
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              3.1
              
              
              3.1Minimum
                  pension liability adjustment, net of tax of $103.7
              
              
              161.5
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              161.5
              
              
              161.5Total
                  comprehensive income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              $
              1,552.0Shares
                  issued under incentive stock plans
              
              
              213.5
              
              
              3.9
              
              
              3.9
              
              
              209.6Repurchase
                  of common shares by subsidiary
              
              
              (355.9
              )
              
              (5.3
              )
              
              (5.3
              )
              
              (350.6
              )Change
                  in fiscal year end of subsidiary, net of tax of $7.3
              
              
              (16.5
              )
              
              
              
              
              
              
              
              
              
              
              (16.5
              )Cash
                  dividends, declared and paid ($0.44 per share)
              
              
              (152.6
              )
              
              
              
              
              
              
              
              
              
              
              (152.6
              )Balance
                  at December 31, 2004
              
              
              5,733.8
              
              
              173.1
              
              
              173.1
              
              
              469.6
              
              
              5,028.3
              
              
              62.8Net
                  earnings
              
              
              1,054.2
              
              
              
              
              
              
              
              
              
              
              
              1,054.2
              
              
              
              
              $
              1,054.2Currency
                  translation
              
              
              (267.7
              )
              
              
              
              
              
              
              
              
              
              
              
              
              
              (267.7
              )
              
              (267.7
              )Change
                  in fair value of marketable securities andderivatives
                  qualifying as cash flow hedges,net
                  of tax of $0.3
              
              
              5.7
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              5.7
              
              
              5.7Minimum
                  pension liability adjustment, net of tax of $60.5
              
              
              71.6
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              71.6
              
              
              71.6Total
                  comprehensive income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              $
              863.8Shares
                  issued under incentive stock plans
              
              
              120.0
              
              
              2.3
              
              
              2.3
              
              
              117.7Repurchase
                  of common shares by subsidiary
              
              
              (763.6
              )
              
              (19.4
              )
              
              (19.4
              )
              
              (587.3
              )
              
              (156.9
              )Stock
                  split
              
              
              -
              
              
              174.7
              
              
              174.7
              
              
              
              
              
              (174.7
              )Cash
                  dividends, declared and paid ($0.57 per share)
              
              
              (192.0
              )
              
              
              
              
              
              
              
              
              
              
              (192.0
              )Balance
                  at December 31, 2005
              
              
              5,762.0
              
              
              330.7
              
              
              330.7
              
              
              -
              
              
              5,558.9
              
              
              (127.6
              )Net
                  earnings
              
              
              1,032.5
              
              
              
              
              
              
              
              
              
              
              
              1,032.5
              
              
              
              
              $
              1,032.5Currency
                  translation
              
              
              258.8
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              258.8
              
              
              258.8Change
                  in fair value of marketable securities andderivatives
                  qualifying as cash flow hedges,net
                  of tax of $0.8
              
              
              (7.3
              )
              
              
              
              
              
              
              
              
              
              
              
              
              
              (7.3
              )
              
              (7.3
              )Minimum
                  pension liability adjustment, net of tax of $3.2
              
              
              (9.2
              )
              
              
              
              
              
              
              
              
              
              
              
              
              
              (9.2
              )
              
              (9.2
              )Total
                  comprehensive income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              $
              1,274.8Adoption
                  of FASB Statement No. 158, net of tax of $268.2
              
              
              (472.8
              )
              
              
              
              
              
              
              
              
              
              
              
              
              
              (472.8
              )Shares
                  issued under incentive stock plans
              
              
              111.1
              
              
              3.8
              
              
              3.8
              
              
              107.3Repurchase
                  of common shares by subsidiary
              
              
              (1,096.3
              )
              
              (27.7
              )
              
              (27.7
              )
              
              (150.9
              )
              
              (917.7
              )Share-based
                  compensation
              
              
              43.6
              
              
              
              
              
              
              
              
              43.6Cash
                  dividends, declared and paid ($0.68 per share)
              
              
              (217.6
              )
              
              
              
              
              
              
              
              
              
              
              (217.6
              )Balance
                  at December 31, 2006
              
              $
              5,404.8
              
              $
              306.8
              
              
              306.8
              
              $
              -
              
              $
              5,456.1
              
              
              ($358.1
              )




*See
      accompanying Notes to Consolidated Financial Statements.*





58


**Ingersoll-Rand
        Company Limited** **Consolidated
          Statements of Cash Flows** *In
            millions*
  For
                  the years ended December 31,
              
              2006
              
              2005
              
              2004**Cash
                  flows from operating activities:**Net
                  earnings
              
              $
              1,032.5
              
              $
              1,054.2
              
              $
              1,218.7Loss
                  (income) from discontinued operations, net of tax
              
              
              35.8
              
              
              (1.1
              )
              
              (388.9
              )Adjustments
                  to arrive at net cash provided by operating activities:Depreciation
                  and amortization
              
              
              190.7
              
              
              195.7
              
              
              174.4Gain
                  on sale of businesses
              
              
              -
              
              
              (1.5
              )
              
              -Gain
                  on sale of property, plant and equipment
              
              
              (5.7
              )
              
              (2.4
              )
              
              (8.9
              )Minority

                  interests, net of dividends
              
              
              9.2
              
              
              (1.3
              )
              
              6.3Equity
                  earnings, net of dividends
              
              
              0.1
              
              
              0.4
              
              
              (8.6
              )Stock
                  settled share based compensation
              
              
              23.4
              
              
              -
              
              
              -Deferred
                  income taxes
              
              
              (59.3
              )
              
              64.0
              
              
              (59.2
              )Other
                  items
              
              
              (31.1
              )
              
              (42.0
              )
              
              (16.6
              )Changes
                  in other assets and liabilities(Increase)
                  decrease in:Accounts
                  and notes receivable
              
              
              (204.7
              )
              
              (128.5
              )
              
              (70.1
              )Inventories
              
              
              (116.1
              )
              
              0.6
              
              
              (174.8
              )Other
                  current and noncurrent assets
              
              
              (91.7
              )
              
              (189.1
              )
              
              (139.2
              )Increase
                  (decrease) in:Accounts
                  and notes payable
              
              
              169.2
              
              
              87.8
              
              
              91.5Other
                  current and noncurrent liabilities
              
              
              56.5
              
              
              (163.6
              )
              
              145.6Net
                  cash (used in) provided by continuing operating activities
              
              
              1,008.8
              
              
              873.2
              
              
              770.2Net
                  cash (used in) provided by discontinued operating
                  activities
              
              
              (36.6
              )
              
              (34.1
              )
              
              27.3**Cash
                  flows from investing activities:**Capital
                  expenditures
              
              
              (212.3
              )
              
              (141.8
              )
              
              (125.6
              )Proceeds
                  from sale of property, plant and equipment
              
              
              16.4
              
              
              19.0
              
              
              50.4Acquisitions,
                  net of cash acquired
              
              
              (121.5
              )
              
              (514.7
              )
              
              (33.7
              )Proceeds
                  from business dispositions
              
              
              -
              
              
              11.4
              
              
              1,413.2Proceeds
                  from sales and maturities of marketable securities
              
              
              155.8
              
              
              -
              
              
              0.3Purchase
                  of marketable securities
              
              
              -
              
              
              (153.2
              )
              
              -Cash
                  provided by equity companies, net
              
              
              0.4
              
              
              7.6
              
              
              7.6Net
                  cash (used in) provided by continuing investing activities
              
              
              (161.2
              )
              
              (771.7
              )
              
              1,312.2Net
                  cash (used in) provided by discontinued investing
                  activities
              
              
              -
              
              
              -
              
              
              (7.4
              )**Cash
                  flows from financing activities:**Increase
                  (decrease) in short-term borrowings
              
              
              369.2
              
              
              (40.2
              )
              
              (16.3
              )Proceeds
                  from long-term debt
              
              
              4.0
              
              
              301.7
              
              
              -Payments
                  of long-term debt
              
              
              (513.7
              )
              
              (198.8
              )
              
              (453.1
              )Net
                  change in debt
              
              
              (140.5
              )
              
              62.7
              
              
              (469.4
              )Redemption
                  of preferred stock of subsidiaries
              
              
              -
              
              
              (73.6
              )
              
              -Proceeds
                  from exercise of stock options
              
              
              95.7
              
              
              90.9
              
              
              170.7Dividends
                  paid
              
              
              (217.6
              )
              
              (192.1
              )
              
              (152.6
              )Repurchase
                  of common shares by subsidiary
              
              
              (1,096.3
              )
              
              (763.6
              )
              
              (355.9
              )Net
                  cash (used in) provided by continuing financing activities
              
              
              (1,358.7
              )
              
              (875.7
              )
              
              (807.2
              )Net
                  cash (used in) provided by discontinued financing
                  activities
              
              
              -
              
              
              -
              
              
              (1.0
              )**Effect
                  of change in fiscal year end of businesses**
              
              
              -
              
              
              -
              
              
              (23.8
              )**Effect
                  of exchange rate changes on cash and cash
                  equivalents**
              
              
              29.4
              
              
              (14.2
              )
              
              16.5Net
                  (decrease) increase in cash and cash equivalents
              
              
              (518.3
              )
              
              (822.5
              )
              
              1,286.8Cash
                  and cash equivalents - beginning of period
              
              
              880.6
              
              
              1,703.1
              
              
              416.3Cash
                  and cash equivalents - end of period
              
              $
              362.3
              
              $
              880.6
              
              $
              1,703.1**Cash
                  paid during the year for:**Interest,
                  net of amounts capitalized
              
              $
              105.2
              
              $
              131.2
              
              $
              124.2Income
                  taxes, net of refunds
              
              $
              195.3
              
              $
              270.0
              
              $
              170.8




*See
      accompanying Notes to Consolidated Financial Statements.*





59





**NOTE
      1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**




A
      summary
      of significant accounting policies used in the preparation of the accompanying
      financial statements follows:





**Basis
      of Presentation:** The
      consolidated financial statements of Ingersoll-Rand Company Limited, a Bermuda
      company (IR-Limited or the Company), have been prepared in accordance with
      generally accepted accounting principles in the United States. IR-Limited is
      the
      successor to Ingersoll-Rand Company, a New Jersey corporation (IR-New Jersey),
      following a corporate reorganization (the reorganization) that became effective
      on December 31, 2001. The reorganization was accomplished through a merger
      of a
      newly formed merger subsidiary of IR-Limited. IR-Limited and its subsidiaries
      continue to conduct the businesses previously conducted by IR-New Jersey and
      its
      subsidiaries. The reorganization has been accounted for as a reorganization
      of
      entities under common control and accordingly, did not result in any changes
      to
      the consolidated amounts of assets, liabilities and shareholders’
equity.





The
      results for Hussmann International, Inc. and its majority-owned affiliates
      had
      been on a 15-day lag for U.S. operations and a one-month lag for non-U.S.
      operations, since its acquisition in 2000. During the first quarter of 2004,
      these lags were eliminated, and the financial results were recorded on a current
      basis. The result of this action was a net loss of $16.5 million, which was
      recorded directly to retained earnings on the Consolidated Balance Sheet, and
      a
      resulting cash outflow of $23.8 million, which was shown as a separate line
      item
      on the Consolidated Statement of Cash Flows.





In
      September 2006, the Financial Accounting Standards Board (FASB) issued Statement
      of Financial Accounting Standard (SFAS) No. 158, “Employers’ Accounting for
      Defined Benefit Pension and Other Postretirement Plans - an amendment of FASB
      Statements No. 87, 88, 106 and 132(R)” (SFAS 158). SFAS 158 requires an entity
      to recognize in its balance sheet the funded status of its defined benefit
      pension and postretirement plans. The standard also requires an entity to
      recognize changes in the funded status within accumulated other comprehensive
      income, net of tax, to the extent such changes are not recognized in earnings
      as
      components of periodic net benefit cost. At December 31, 2006, the Company
      adopted the provisions of SFAS 158 for its postretirement and pension plans.
      The
      adoption of SFAS 158 resulted in a decrease of total assets of $476.0 million
      and shareholders’ equity of $472.8 million (net of tax of $268.2 million) and an
      increase of total liabilities of $265.0 million. Refer to Note 8 and 9 for
      further details of the impact of SFAS 158.





Effective
      January 1, 2006, the Company adopted Statement of Financial Accounting Standards
      No. 123 (revised 2004), “Share-Based Payment,” (SFAS 123(R)) using the modified
      prospective method of adoption. SFAS 123(R) requires companies to recognize
      compensation expense for an amount equal to the fair value of the share-based
      payment issued. Under the modified prospective method, financial statement
      amounts for prior periods have not been restated to reflect the fair value
      method of recognizing compensation cost relating to stock options. Refer
      to
      Note 11 for further details of the impact of SFAS 123(R).





**Use
      of Estimates:** In
      conformity with generally accepted accounting principles, management has used
      estimates and assumptions that affect the reported amounts of assets,
      liabilities, revenues and expenses, and the disclosure of contingent assets
      and
      liabilities. Some of the more significant estimates include accounting for
      doubtful accounts, useful lives of property, plant and equipment and intangible
      assets, purchase price allocation of acquired businesses, valuation of assets,
      including goodwill and other intangible assets, product warranties, sales
      allowances, taxes, environmental, product liability, asbestos and other
      contingencies. Actual results could differ from those estimates.




60




**Principles
      of Consolidation:** The
      Company’s consolidated financial statements include all wholly owned and
      majority-owned subsidiaries. Partially owned equity affiliates are accounted
      for
      under the equity method. The Company is also required to consolidate variable
      interest entities in which it bears a majority of the risk to the entities’
potential losses or stands to gain from a majority of the entities’ expected
      returns. Intercompany transactions and balances have been eliminated.





**Cash
      and Cash Equivalents:** The
      Company considers all highly liquid investments, consisting primarily of time
      deposits and commercial paper with maturities of three months or less when
      purchased, to be cash equivalents.





**Marketable
      Securities:** The
      Company invests in marketable securities and classifies the securities as
      available-for-sale under SFAS No. 115, “Accounting for Certain Investments in
      Debt and Equity Securities.” In accordance with SFAS 115, available-for-sale
      marketable securities are accounted for at market prices, with the unrealized
      gain or loss, less applicable deferred income taxes, recorded within accumulated
      other comprehensive income (loss).





**Inventories:** Inventories
      are stated at the lower of cost or market. Most U.S. manufactured inventories,
      excluding the Climate Control Technologies segment, are valued using the
      last-in, first-out (LIFO) method. All other inventories are valued using the
      first-in, first-out (FIFO) method. At December 31, 2006 and 2005, inventories
      on
      LIFO were approximately 40% of the company’s total inventory.





**Allowance
      for Doubtful Accounts** :
      The
      Company has provided an allowance for doubtful accounts receivable using a
      formula based upon company policy, derived from its knowledge of its end
      markets, customer base and products.





In
      the
      first quarter of 2006, the Company changed its estimate of the allowance for
      doubtful accounts in light of various business and economic factors, including
      a
      significant change in its business portfolio and historical and expected
      write-off experience. In addition, the Company signed a new insurance policy
      which limits its bad debt exposure. As a result, the Company reduced its
      allowance by $20.5 million, or $17.1 million after-tax, which increased first
      quarter 2006 diluted earnings per share by $0.05.





**Property,
      Plant and Equipment:** Property,
      plant and equipment are stated at cost, less accumulated depreciation. For
      assets placed in service prior to December 31, 1994, the Company principally
      uses accelerated depreciation methods. Assets placed in service subsequent
      to
      that date, excluding leasehold improvements, are depreciated using the
      straight-line method over the estimated useful life of the asset. Leasehold
      improvements are depreciated over the shorter of their economic useful life
      or
      their lease term. Useful lives range from 10 to 50 years for buildings and
      improvements and from 3 to 12 years for machinery and equipment.





Repair
      and maintenance costs that do not extend the useful life of the asset are
      charged against earnings as incurred. Major replacements and significant
      improvements are capitalized.





The
      Company assesses the recoverability of the carrying value of its property,
      plant
      and equipment whenever events or changes in circumstances indicate that the
      carrying amount of the asset may not be recoverable. Recoverability is measured
      by a comparison of the carrying amount of an asset to the future net
      undiscounted cash flows expected to be generated by the asset. If the
      undiscounted cash flows are less than the carrying amount of the asset, an
      impairment loss is recognized for the amount by which the carrying value of
      the
      asset exceeds the fair value of the assets.




61




**Goodwill
      and Intangible Assets:** The
      Company records goodwill as the excess of the purchase price over the fair
      value
      of net identifiable assets and liabilities of an acquired business.




Goodwill
      and other intangible assets with indefinite useful lives are not amortized,
      but
      instead are tested for impairment at least annually or whenever events or
      changes in circumstances indicate that the carrying amount of the asset may
      not
      be recoverable. The Company tests for impairment during the fourth quarter
      of
      its fiscal year using September 30th balances. Recoverability of goodwill is
      measured at the reporting unit level and determined using a two step process.
      The first step compares the carrying amount of the reporting unit to its
      estimated fair value. The fair value of each reporting unit is determined by
      an
      estimate of its discounted cash flows. To the extent that the carrying value
      of
      the reporting unit exceeds its estimated fair value, a second step is performed,
      wherein the reporting units carrying value of goodwill is compared to its
      implied fair value of goodwill. To the extent that the carrying value exceeds
      the fair value, impairment exists and an impairment loss must be recognized.





Recoverability
      of other intangible assets with indefinite useful lives is measured by a
      comparison of the carrying amount of the intangible assets to the fair value
      of
      the respective intangible assets. Any excess of the carrying value over the
      fair
      value is recognized as an impairment loss. Other intangible assets such as
      patents, customer-related intangible assets and other intangible assets with
      finite lives are amortized on a straight-line basis over their estimated
      economic lives. Recoverability of intangible assets with finite lives is
      assessed in the same manner as for property, plant and equipment.




**Income
      Taxes:** Deferred
      taxes are provided on temporary differences between assets and liabilities
      for
      financial reporting and tax purposes as measured by enacted tax rates expected
      to apply when temporary differences are settled or realized. A valuation
      allowance is established for deferred tax assets for which realization is not
      likely.





**Product
      Warranties:** Warranty
      accruals are recorded at the time of sale and are estimated based upon product
      warranty terms and historical experience. These accruals are adjusted for known
      or anticipated warranty claims as new information becomes
      available.





**Treasury
      Stock:** The
      Company repurchases its Class A common shares from time to time in the open
      market and in privately negotiated transactions based upon market conditions
      and
      the discretion of management. These long-term repurchase programs are authorized
      by the Board of Directors and serve in part to offset dilution from the
      Company’s incentive stock plan. These acquired Class A common shares owned by a
      subsidiary of the Company are recorded at cost and amounted to $2,215.8 million
      and $1,119.5 million at December 31, 2006 and 2005, respectively.





**Revenue
      Recognition:** Revenue
      is generally recognized and earned when all of the following criteria are
      satisfied: (a) persuasive evidence of a sales arrangement exists; (b) price
      is
      fixed or determinable; (c) collectibility is reasonably assured; and (d)
      delivery has occurred or service has been rendered. Delivery generally occurs
      when the title and the risks and rewards of ownership have substantially
      transferred to the customer. Revenue from maintenance contracts or extended
      warranties is recognized on a straight-line basis over the life of the contract,
      unless another method is more representative of the costs incurred. The Company
      enters into agreements that contain multiple elements, such as equipment,
      installation and service. For multiple-element arrangements, the Company
      recognizes revenue for delivered elements when the delivered item has
      stand-alone value to the customer, fair values or undelivered elements are
      known, customer acceptance has occurred, and there are only customary refund
      or
      return rights related to the delivered elements.




62




**Environmental
      Costs:** Environmental expenditures relating to current operations are expensed or
      capitalized as appropriate. Expenditures relating to existing conditions caused
      by past operations, which do not contribute to current or future revenues,
      are
      expensed. Costs to prepare environmental site evaluations and feasibility
      studies are accrued when the Company commits to perform them. Liabilities for
      remediation costs are recorded when they are probable and reasonably estimable,
      generally no later than the completion of feasibility studies or the Company's
      commitment to a plan of action. The assessment of this liability, which is
      calculated based on existing technology, does not reflect any offset for
      possible recoveries from insurance companies, and is not discounted.





**Research
      and Development Costs:** Research
      and development expenditures, including qualifying engineering costs, are
      expensed when incurred and amounted to $175.5 million, $162.4 million and $149.2
      million in 2006, 2005 and 2004, respectively. The Company also incurs
      engineering costs that are not considered research and development
      expenditures.





**Software
      Costs:** The
      Company follows the guidance outlined in Statement of Position 98-1, “Accounting
      for the Costs of Computer Software Developed or Obtained for Internal Use” for
      all software developed or obtained for internal use, which requires companies
      to
      capitalize certain internal-use software costs once specific criteria are met
      and subsequently amortize these costs over the software’s useful life, which
      ranges from 3 to 7 years.





In
      the
      fourth quarter of 2006, the Company adjusted its estimated useful life of
      certain of its capitalized software from 5 to 7 years due to the length of
      time
      that the Company expects to utilize these software platforms. The impact in
      the
      fourth quarter of 2006 for this adjustment was a reduction of amortization
      expense of $1.8 million.





**Employee
      Benefit Plans** :
      The
      Company provides a range of benefits to eligible employees and retired
      employees, including pensions, postretirement and post-employment health-care
      benefits. Determining the cost associated with such benefits is dependent on
      various actuarial assumptions, including discount rates, expected return on
      plan
      assets, compensation increases, employee mortality and turnover rates, and
      health-care cost trend rates. Independent actuaries perform the required
      calculations to determine expense in accordance with U.S. generally accepted
      accounting principles. Actual results may differ from the actuarial assumptions
      and are generally accumulated and amortized into earnings over future periods.
      Effective December 31, 2006, these amounts are generally recognized into
      shareholders’ equity on an annual basis, due to the adoption of SFAS 158. The
      Company reviews its actuarial assumptions at each measurement date, which is
      November 30 for its plans, and makes modifications to the assumptions based
      on
      current rates and trends, if appropriate.





**Loss
      Contingencies:** Liabilities
      are recorded for various contingencies arising in the normal course of business,
      including litigation and administrative proceedings, environmental matters,
      product liability, product warranty, worker’s compensation and other claims. The
      Company has recorded reserves in the financial statements related to these
      matters, which are developed using input derived from actuarial estimates and
      historical and anticipated experience data depending on the nature of the
      reserve, and in certain instances with consultation of legal counsel, internal
      and external consultants and engineers. Subject to the uncertainties inherent
      in
      estimating future costs for these types of liabilities, the Company believes
      its
      estimated reserves are reasonable and does not believe the final determination
      of the liabilities with respect to these matters would have a material effect
      on
      the financial condition, results of operations, liquidity or cash flows of
      the
      Company for any year.




63




**Derivative
      Financial Instruments:** The
      Company periodically enters into cash flow and other hedge transactions
      specifically to hedge its exposure to various risks related to interest rates,
      foreign exchange rates and securities pricing. The Company recognizes all
      derivatives on the consolidated balance sheet at their fair value as either
      assets or liabilities. For cash flow designated hedges, the effective portion
      of
      the changes in fair value of the derivative contract are recorded in other
      comprehensive income, net of taxes, and are recognized in the income statement
      at the time earnings are affected by the hedged transaction. For other hedge
      transactions, the changes in the fair value of the derivative contract are
      recognized in the income statement.





**Currency
      Translation:** For the
      Company’s entities where the functional currency is other than the U.S. dollar,
      assets and liabilities have been translated at year-end exchange rates, and
      income and expenses translated using average exchange rates for the respective
      periods. Adjustments resulting from the process of translating an entity’s
      financial statements into the U.S. dollar have been recorded in accumulated
      other comprehensive income and are included in net earnings only upon sale
      or
      liquidation of the underlying investment.





Transactions
      that are denominated in a currency other than an entity’s functional currency
      are subject to changes in exchange rates with the resulting gains and losses
      recorded within net earnings. Net currency transaction gains (losses) which
      the
      Company records within Other income, net were $(19.3) million, $2.2 million
      and
      $(9.6) million in 2006, 2005 and 2004, respectively.





**Reclassifications:** Certain
      prior year amounts have been reclassified to conform to the current year
      presentation. The Company has revised its December 31, 2004 consolidated
      statement of cash flows to separately disclose the effects of discontinued
      operations by cash flow activity. The Company had previously reported these
      amounts on a combined basis. The Company also reclassified its presentation
      of
      capitalized software on its December 31, 2005 consolidated balance sheet from
      intangible assets to property, plant and equipment to better depict the nature
      and intent of the investment. Concurrently, the Company reclassified its
      consolidated statement of cash flow for the years ended December 31, 2005 and
      2004 in order to show capitalized software purchases as an investing activity
      rather than an operating activity to be consistent with the Company’s balance
      sheet presentation.





**New
      Accounting Standards:** In
      September 2006, the Securities and Exchange Commission (SEC) issued Staff
      Accounting Bulletin No. 108, “Considering the Effects of Prior Year
      Misstatements when Quantifying Misstatements in Current Year Financial
      Statements” (SAB 108). SAB 108 provides interpretive guidance on how the effects
      of the carryover or reversal of prior year misstatements should be considered
      in
      quantifying a current year misstatement. The SEC staff believes that registrants
      should quantify errors using both a balance sheet and an income statement
      approach and evaluate whether either approach results in quantifying a
      misstatement that, when all relevant quantitative and qualitative factors are
      considered, is material. SAB 108 is effective for the Company for the fiscal
      year ended December 31, 2006. SAB 108 did not have a material impact on the
      Company’s financial statements.





In
      June
      2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in
      Income Taxes - an interpretation of FASB Statement 109” (FIN 48), which
      prescribes a recognition threshold and measurement process for recording in
      the
      financial statements uncertain tax positions taken or expected to be taken
      in a
      tax return. Additionally, FIN 48 provides guidance on the derecognition,
      classification, accounting in interim periods and disclosure requirements for
      uncertain tax positions. The provisions of FIN 48 are effective for the
      Company’s fiscal year beginning January 1, 2007. The Company is still assessing
      the impact of FIN 48 on its consolidated financial statements.




64




In
      September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (SFAS
      157). SFAS 157 establishes a framework for measuring fair value that is based
      on
      the assumptions market participants would use when pricing an asset or liability
      and establishes a fair value hierarchy that prioritizes the information to
      develop those assumptions. Additionally, the standard expands the disclosures
      about fair value measurements to include disclosing the fair value measurements
      of assets or liabilities within each level of the fair value hierarchy. SFAS
      157
      is effective for the Company starting on January 1, 2008. The Company is
      currently evaluating the impact on its financial statements of adopting SFAS
      157.





In
      February 2007, the FASB issued Statement of Financial Accounting Standard No.
      159, “The Fair Value Option for Financial Assets and Financial Liabilities”
(SFAS 159). SFAS 159 permits companies the option, at specified election dates,
      to measure financial assets and liabilities at their current fair value, with
      the corresponding changes in fair value from period to period recognized in
      the
      income statement. Additionally, SFAS 159 establishes presentation and disclosure
      requirements designed to facilitate comparisons between companies that choose
      different measurement attributes for similar assets and liabilities. SFAS 159
      is
      effective for the Company starting on January 1, 2008. The Company is currently
      evaluating the impact on its financial statements of adopting SFAS
      159.





**NOTE
      2 - MARKETABLE SECURITIES**




At
      December 31, marketable securities were as follows:


2006
              
              2005*In
                  millions*
              
              Amortized
                  cost or cost
              
              Unrealized
                  losses
              
              Fair
                  value
              
              Amortized
                  cost or cost
              
              Unrealized
                  gains
              
              Fair
                  valueShort-term
                  marketable securities:Equity
                  securities
              
              $
              0.7
              
              $
              -
              
              $
              0.7
              
              $
              0.6
              
              $
              -
              
              $
              0.6Commercial
                  paper
              
              
              -
              
              
              -
              
              
              -
              
              
              4.5
              
              
              -
              
              
              4.5Municipal
                  bonds
              
              
              -
              
              
              -
              
              
              -
              
              
              151.4
              
              
              -
              
              
              151.4Total
              
              $
              0.7
              
              $
              -
              
              $
              0.7
              
              $
              156.5
              
              $
              -
              
              $
              156.5Long-term
                  marketable securities:Equity
                  securities
              
              $
              18.7
              
              $
              (4.4
              )
              $
              14.3
              
              $
              20.6
              
              $
              0.3
              
              $
              20.9Total
              
              $
              18.7
              
              $
              (4.4
              )
              $
              14.3
              
              $
              20.6
              
              $
              0.3
              
              $
              20.9





Long-term
      marketable securities are included within Other assets on the Consolidated
      Balance Sheet.





**NOTE
      3 - INVENTORIES**




At
      December 31, inventories were as follows:


*In
                  millions*
              
              2006
              
              2005Raw
                  materials and supplies
              
              $
              496.5
              
              $
              436.3Work-in-process
              
              
              220.1
              
              
              193.4Finished
                  goods
              
              
              762.3
              
              
              622.41,478.9
              
              
              1,252.1Less
                  - LIFO reserve
              
              
              158.6
              
              
              123.3Total
              
              $
              1,320.3
              
              $
              1,128.8




65




**NOTE
      4 - PROPERTY, PLANT AND EQUIPMENT**




At
      December 31, property, plant and equipment were as follows:


*In
                  millions*
              
              2006
              
              2005Land
              
              $
              72.3
              
              $
              66.6Buildings
              
              
              605.7
              
              
              536.7Machinery
                  and equipment
              
              
              1,555.4
              
              
              1,391.5Software
              
              
              215.1
              
              
              169.52,448.5
              
              
              2,164.3Accumulated
                  depreciation
              
              
              1,172.2
              
              
              1,006.8Total
              
              $
              1,276.3
              
              $
              1,157.5





Depreciation
      expense for 2006, 2005 and 2004 was $163.5 million, 164.2 million and $159.2
      million, which include amounts for software amortization of $33.7 million,
      $28.5
      million and $25.0 million, respectively. Capitalized interest on construction
      and other capital projects amounted to $5.8 million, $2.9 million and $2.2
      million in 2006, 2005 and 2004, respectively.





**NOTE
      5 - GOODWILL AND OTHER INTANGIBLE ASSETS**




The
      changes in the carrying amount of goodwill are as follows:


Climate
              
              CompactControl
              
              Vehicle
              
              Construction
              
              Industrial
              
              Security*In
                  millions*
              
              Technologies
              
              Technologies
              
              Technologies
              
              Technologies
              
              Technologies
              
              TotalBalance
                  at December 31, 2004
              
              $
              2,618.7
              
              $
              801.4
              
              $
              101.3
              
              $
              119.4
              
              $
              570.2
              
              $
              4,211.0Acquisitions
                  and adjustments*
              
              
              (35.7
              )
              
              (3.6
              )
              
              10.8
              
              
              23.0
              
              
              368.6
              
              
              363.1Dispositions
              
              
              (0.3
              )
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (0.3
              )Translation
              
              
              (68.5
              )
              
              (3.3
              )
              
              (0.4
              )
              
              (5.0
              )
              
              (63.2
              )
              
              (140.4
              )Balance
                  at December 31, 2005
              
              
              2,514.2
              
              
              794.5
              
              
              111.7
              
              
              137.4
              
              
              875.6
              
              
              4,433.4Acquisitions
                  and adjustments*
              
              
              (22.2
              )
              
              (1.0
              )
              
              40.9
              
              
              14.3
              
              
              17.9
              
              
              49.9Dispositions
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -Translation
              
              
              53.1
              
              
              4.4
              
              
              1.1
              
              
              5.5
              
              
              57.4
              
              
              121.5Balance
                  at December 31, 2006
              
              $
              2,545.1
              
              $
              797.9
              
              $
              153.7
              
              $
              157.2
              
              $
              950.9
              
              $
              4,604.8


*
      Includes
      current year adjustments related to final purchase price allocation adjustments.





The
      Company initially records as goodwill the excess of the purchase price over
      the
      preliminary fair value of the net assets acquired. Once the final valuation
      has
      been performed for each acquisition, there may be adjustments recorded to
      goodwill.





During
      2006, the Company made several bolt-on acquisitions for an aggregate purchase
      price of approximately $120 million, which resulted in additional goodwill
      of
      $75.3 million. In January 2005, the Company completed the acquisition of the
      remaining 70% interest in Italy-based CISA S.p.A for approximately $267 million
      in cash and the assumption of approximately $244 million of debt. The Company
      also made several other bolt-on acquisitions during 2005. The Company recorded
      approximately $405 million of goodwill associated with these businesses acquired
      during 2005.




66




The
      following table sets forth the gross amount and accumulated amortization of
      the
      Company’s intangible assets at December 31:


2006
              
              2005Gross
              
              Accumulated
              
              Gross
              
              Accumulated*In
                  millions*
              
              amount
              
              amortization
              
              amount
              
              amortizationCustomer
                  relationships
              
              $
              510.6
              
              $
              73.0
              
              $
              484.0
              
              $
              58.6Trademarks
              
              
              105.0
              
              
              10.0
              
              
              93.7
              
              
              5.3Patents
              
              
              38.4
              
              
              25.9
              
              
              36.6
              
              
              23.5Other
              
              
              50.6
              
              
              24.3
              
              
              55.4
              
              
              20.7Total
                  amortizable intangible assets
              
              
              704.6
              
              
              133.2
              
              
              669.7
              
              
              108.1Indefinite-lived
                  intangible assets
              
              
              164.8
              
              
              -
              
              
              155.4
              
              
              -Total
              
              $
              869.4
              
              $
              133.2
              
              $
              825.1
              
              $
              108.1
  Intangible
      asset amortization expense for 2006, 2005 and 2004 was $25.9 million, $30.1
      million and $14.5 million, respectively. Estimated amortization expense on
      existing intangible assets is approximately $20 million for each of the next
      five fiscal years.





**NOTE
      6 - DEBT AND CREDIT FACILITIES**




At
      December 31, loans payable and the current maturities of long-term debt
      consisted of the following:


*In
                  millions*
              
              2006
              
              2005Current maturities
                  of long-term debt
              
              $
              626.8
              
              $
              856.6Other
                  short-term borrowings
              
              
              452.6
              
              
              76.1Total
              
              $
              1,079.4
              
              $
              932.7





The
      weighted-average interest rate for total short-term debt at December 31, 2006
      and 2005, was 6.3% and 6.8%, respectively.





As
      of
      December 31, 2006, the Company had $378.0 million outstanding under its
      commercial paper program, which is included in Other short-term borrowings
      above.




67




At
      December 31, long-term debt consisted of:


*In
                  millions*
              
              2006
              
              20056.57%
                  Medium-term Note Due 2007
              
              $
              -
              
              $
              40.06.75%
                  Senior Notes Due 2008
              
              
              124.9
              
              
              124.84.75%
                  Senior Notes Due 2015
              
              
              299.0
              
              
              298.99.00%
                  Debentures Due 2021
              
              
              125.0
              
              
              125.07.20%
                  Debentures Due 2007-2025
              
              
              135.0
              
              
              142.56.48%
                  Debentures Due 2025
              
              
              149.7
              
              
              149.76.44%
                  Debentures Due 2027
              
              
              -
              
              
              200.0Medium-term
                  Notes Due 2023, at an average rate of 8.22%
              
              
              50.3
              
              
              50.3Other
                  loans and notes, at end-of-year average interest rates of
                  4.73%in
                  2006 and 3.06% in 2005, maturing in various amounts to
                  2016
              
              
              21.3
              
              
              53.1Total
              
              $
              905.2
              
              $
              1,184.3





The
      fair
      value of long-term debt, including current maturities of long-term debt, at
      December 31, 2006 and 2005, was $1,593.2 million and $2,191.5 million,
      respectively. The fair value of long-term debt was based upon quoted market
      values.





Long-term
      debt retirements are as follows: $626.8 million in 2007, $138.0 million in
      2008,
      $10.5 million in 2009, $10.5 million in 2010, $10.4 million in 2011 and $735.8
      million thereafter. Long-term debt retirements for 2007 include $549.1 million
      which only requires repayment at the option of the holder. If these options
      are
      not exercised, the final maturity dates of these instruments would range between
      2027 and 2028. During the second quarter of 2005, the Company issued $300
      million aggregate principal amount of its 4.75% Senior Notes due in 2015. The
      notes are unconditionally guaranteed by IR-New Jersey.





The
      Company's public debt has no financial covenants and its $2.0 billion revolving
      credit lines have a debt-to-total capital covenant of 65%. As of December 31,
      2006, the Company’s debt-to-total capital ratio was significantly beneath this
      limit.





At
      December 31, 2006, the Company’s committed revolving credit lines consisted of
      two five-year lines totaling $2.0 billion, of which $750 million expires in
      June
      2009 and $1.25 billion expires in August 2010. These lines were unused and
      provide support for the Company’s commercial paper program and indirectly
      provide support for other financing instruments, such as letters of credit
      and
      comfort letters, as required in the normal course of business. The Company
      compensates banks for unused lines with fees equal to a weighted average of
      .0775% per annum. Available non-U.S. lines of credit were $786.9 million, of
      which $612.0 million were unused at December 31, 2006. These lines provide
      support for bank guarantees, letters of credit and other working capital
      purposes.





Interest
      income, included in Other income, net, was $16.3 million, $29.6 million and
      $12.3 million for 2006, 2005 and 2004, respectively.





**NOTE
      7 - FINANCIAL INSTRUMENTS**




In
      the
      normal course of business, the Company from time to time uses various financial
      instruments, including derivative financial instruments, to manage risks
      associated with interest rate, currency, commodity price and share-based
      compensation exposures. Derivative instruments are not used for trading or
      speculative purposes. On the date a derivative contract is entered into, the
      Company designates the derivative instrument as either a hedge of a forecasted
      transaction (a cash flow hedge) or a hedge of recognized asset or liability
      (a
      cash flow or undesignated hedge). The Company formally documents
      its hedge relationships, including identification of the derivative
      instruments and the hedged items, as well as its risk management objectives
      and
      strategies for undertaking the hedge transaction. This process includes linking
      derivative instruments that are designated as hedges to specific assets,
      liabilities or forecasted transactions.




68




The
      Company also assesses both at the inception and at least quarterly thereafter,
      whether the derivatives used in hedging transactions are highly effective in
      offsetting the changes in the cash flows of the hedged item. Any ineffective
      portion of a derivative instrument’s change in fair value is recorded directly
      in Other income, net, in the period of change. There were no material
      adjustments as a result of ineffectiveness to the results of operations for
      the
      years ended December 31, 2006, 2005 and 2004. If the hedging relationship ceases
      to be highly effective, or it becomes probable that a forecasted transaction
      is
      no longer expected to occur, the hedging relationship will be undesignated
      and
      any future gains and losses on the derivative instrument would be recorded
      in
      Other income, net.





The
      fair
      market value of derivative financial instruments is determined through
      market-based valuations and may not be representative of the actual gains or
      losses that will be recorded when these instruments mature due to future
      fluctuations in the markets in which they are traded.





*Currency
      and Commodity Hedging Instruments*


The
      estimated fair value of currency hedges outstanding at December 31, 2006 and
      2005, was a projected loss of $1.6 million and projected gain of $1.6 million,
      respectively. The notional amount of the currency hedges was $559.2 million
      and
      $252.1 million at December 31, 2006 and 2005, respectively. At December 31,
      2006
      and 2005, $1.1 million and $3.4 million, net of tax, respectively, was included
      in accumulated other comprehensive income related to the fair value of currency
      hedges. The amount expected to be reclassified to earnings over the next twelve
      months is $1.1 million. The actual amounts that will be reclassified to earnings
      may vary from this amount as a result of changes in market conditions. At
      December 31, 2006, the maximum term of the Company’s currency hedges was 12
      months.





During
      2006, the Company did not purchase any commodity derivatives. However, it has
      used fixed-priced supplier agreements, when available, to replace matured
      commodity forward contracts. The estimated fair value of outstanding commodity
      contracts at December 31, 2005, was minimal. The notional amount of the
      outstanding commodity contracts was $0.7 million at December 31,
      2005.





*Other
      Hedging Instruments*


In
      August
      2006, the Company entered into two total return swaps (the Swaps) which are
      derivative instruments used to hedge the Company's exposure to changes in its
      share-based compensation expense. The aggregate notional amount of the Swaps
      is
      approximately $52.6 million, and the fair value of the Swaps was a gain of
      $2.1
      million as of December 31, 2006, which was recorded within Selling and
      administrative expenses.





In
      March
      2005, the Company entered into interest rate locks for the forecasted issuance
      of $300 million of Senior Notes due 2015. These interest rate locks met the
      criteria to be accounted for as cash flow hedges of a forecasted transaction.
      Consequently, the changes in fair value of the interest rate locks were deferred
      in accumulated other comprehensive income and will be recognized into interest
      expense over the life of the debt. At December 31, 2006, $9.5 million of
      deferred losses was included in accumulated other comprehensive income related
      to the interest rate locks and $0.9 million is expected to be reclassified
      to
      earnings over the next twelve months.




69




*Concentration
      of Credit Risk*


The
      counterparties to the Company's forward contracts consist of a number of highly
      rated major international financial institutions. The Company could be exposed
      to losses in the event of nonperformance by the counterparties. However, credit
      ratings and concentration of risk of these financial institutions are monitored
      on a continuous basis and present no significant credit risk to the Company.





*Fair
      Value of Financial Instruments*


The
      carrying value of cash and cash equivalents, accounts receivable, short-term
      borrowings and accounts payable are a reasonable estimate of their fair value
      due to the short-term nature of these instruments.





**NOTE
      8 - POSTRETIREMENT BENEFITS OTHER THAN PENSIONS**




The
      Company sponsors several postretirement plans that cover certain eligible
      employees. These plans provide for health-care benefits, and in some instances,
      life insurance benefits. Postretirement health plans generally are contributory
      and contributions are adjusted annually. Life insurance plans for retirees
      are
      primarily noncontributory. The Company funds the postretirement benefit costs
      principally on a pay-as-you-go basis.




The
      following table details information regarding the Company’s postretirement plans
      at December 31:


*In
                  millions*
              
              2006
              
              2005Change
                  in benefit obligations:Benefit
                  obligation at beginning of year
              
              $
              1,009.3
              
              $
              964.6Service
                  cost
              
              
              11.8
              
              
              9.3Interest
                  cost
              
              
              55.0
              
              
              54.9Plan
                  participants' contributions
              
              
              12.9
              
              
              10.2Actuarial
                  losses
              
              
              43.4
              
              
              52.4Benefits
                  paid, net of Medicare Part D subsidy *
              
              
              (97.0
              )
              
              (81.7
              )Other
              
              
              (0.2
              )
              
              (0.4
              )Benefit
                  obligations at end of year
              
              $
              1,035.2
              
              $
              1,009.3*
                  Amounts are net of Medicare Part D subsidy of $7.1 million in
                  2006Funded
                  status:Plan
                  assets less than benefit obligations
              
              $
              (1,035.2
              )
              $
              (1,009.3
              )Unrecognized:Prior
                  service gains
              
              
              -
              
              
              (26.4
              )Plan
                  net actuarial losses
              
              
              -
              
              
              295.4Net
                  amount recognized
              
              $
              (1,035.2
              )
              $
              (740.3
              )Amounts
                  included in the balance sheet:Accrued
                  compensation and benefits
              
              $
              (79.0
              )
              $
              (78.5
              )Postemployment
                  and other benefit liabilities
              
              
              (956.2
              )
              
              (661.8
              )Net
                  amount recognized
              
              $
              (1,035.2
              )
              $
              (740.3
              )




70




As
      explained further in Note 1, in 2006, the Company adopted SFAS 158, which
      requires the Company to record the funded status of its postretirement plans
      on
      its balance sheet effective December 31, 2006. The adoption of SFAS 158 for
      the
      Company’s postretirement plans other than pensions resulted in an increase of
      total liabilities of $300.4 million and a decrease of shareholders’ equity of
      $135.7 million (net of tax of $164.7 million).





The
      pretax amounts recognized in accumulated other comprehensive loss were as
      follows:


*In
                  millions*
              
              2006
              
              2005Prior
                  service gains
              
              $
              (21.8
              )
              
              -Plan
                  net actuarial losses
              
              
              322.2
              
              
              -Total
              
              $
              300.4
              
              
              -





The
      amounts expected to be recognized in net periodic postretirement benefits cost
      in 2007 for prior service gains and plan net actuarial losses are $4.2 million
      and $19.8 million, respectively.





The
      components of net periodic postretirement benefit cost for the years ended
      December 31, were as follows:


*In
                  millions*
              
              2006
              
              2005
              
              2004Service
                  cost
              
              $
              11.8
              
              $
              9.3
              
              $
              10.2Interest
                  cost
              
              
              55.0
              
              
              54.9
              
              
              57.3Net
                  amortization of prior service gains
              
              
              (4.2
              )
              
              (4.2
              )
              
              (7.2
              )Net
                  amortization of net actuarial losses
              
              
              16.6
              
              
              14.0
              
              
              16.6Net
                  periodic postretirement benefit cost
              
              $
              79.2
              
              $
              74.0
              
              $
              76.9





Assumptions:
              
              2006
              
              2005
              
              2004Weighted-average
                  discount rate assumption used to determine:Benefit
                  obligations at December 31
              
              
              5.50%
              
              
              5.50%
              
              
              5.75%Net
                  periodic benefit cost
              
              
              5.50%
              
              
              5.75%
              
              
              6.00%Assumed
                  health care cost trend rates at December 31:Current
                  year medical inflation
              
              
              11.00%
              
              
              11.00%
              
              
              11.00%Ultimate
                  inflation rate
              
              
              5.25%
              
              
              5.25%
              
              
              5.25%Year
                  that the rate reaches the ultimate trend rate
              
              
              2013
              
              
              2012
              
              
              2011




A
      1%
      change in the medical trend rate assumed for postretirement benefits would
      have
      the following effects at December 31, 2006:


*In
                  millions*
              
              1%
                  Increase
              
              1%
                  DecreaseEffect
                  on total of service and interest cost components
              
              $
              6.3
              
              $
              5.0Effect
                  on postretirement benefit obligation
              
              
              81.0
              
              
              68.4




Benefit
      payments for postretirement benefits, which are net of expected plan participant
      contributions and Medicare Part D subsidy, are expected to be paid as follows:
      $72.0 million in 2007, $75.0 million in 2008, $76.1 million in 2009, $77.1
      million in 2010, $79.1 million in 2011 and $380.7 million for the years 2012
      to
      2016.




71




**NOTE
      9 - PENSION PLANS**




The
      Company has noncontributory pension plans covering substantially all U.S.
      employees. In addition, certain non-U.S. employees in other countries are
      covered by pension plans. The Company’s pension plans for U.S. non-collectively
      bargained employees provided benefits on a modest final average pay formula.
      The
      Company’s U.S. collectively bargained pension plans principally provide benefits
      based on a flat benefit formula. Non-U.S. plans provide benefits based on
      earnings and years of service. The Company maintains additional other
      supplemental benefit plans for officers and other key employees.





The
      following table details information regarding the Company’s pension plans at
      December 31:


*In
                  millions*
              
              2006
              
              2005Change
                  in benefit obligations:Benefit
                  obligation at beginning of year
              
              $
              3,033.2
              
              $
              2,942.4Service
                  cost
              
              
              54.6
              
              
              52.9Interest
                  cost
              
              
              161.3
              
              
              161.3Employee
                  contributions
              
              
              2.8
              
              
              2.8Acquisitions
              
              
              -
              
              
              18.4Amendments
              
              
              19.8
              
              
              (2.0
              )Expenses
                  paid
              
              
              (3.6
              )
              
              (2.7
              )Actuarial
                  losses
              
              
              7.4
              
              
              121.7Benefits
                  paid
              
              
              (205.8
              )
              
              (208.0
              )Currency
                  exchange impact
              
              
              101.1
              
              
              (87.0
              )Curtailments
                  and settlements
              
              
              (7.6
              )
              
              (3.3
              )Other
              
              
              12.5
              
              
              36.7Benefit
                  obligation at end of year
              
              $
              3,175.7
              
              $
              3,033.2Change
                  in plan assets:Fair
                  value at beginning of year
              
              $
              2,727.0
              
              $
              2,647.5Actual
                  return on assets
              
              
              325.7
              
              
              232.3Company
                  contributions
              
              
              31.6
              
              
              119.4Employee
                  contributions
              
              
              2.8
              
              
              2.8Expenses
                  paid
              
              
              (3.6
              )
              
              (2.7
              )Benefits
                  paid
              
              
              (205.8
              )
              
              (208.0
              )Currency
                  exchange impact
              
              
              85.2
              
              
              (68.0
              )Settlements
              
              
              (8.0
              )
              
              (3.2
              )Other
              
              
              2.4
              
              
              6.9Fair
                  value of assets end of year
              
              $
              2,957.3
              
              $
              2,727.0




72




*In
                  millions*
              
              2006
              
              2005Funded
                  status:Plan
                  assets less than the benefit obligations
              
              $
              (218.4
              )
              $
              (306.2
              )Unrecognized:Net
                  transition asset
              
              
              -
              
              
              2.9Prior
                  service costs
              
              
              -
              
              
              53.5Plan
                  net actuarial losses
              
              
              -
              
              
              672.1Net
                  amount recognized
              
              $
              (218.4
              )
              $
              422.3Amounts
                  included in the balance sheet:Long-term
                  prepaid expenses in other assets
              
              $
              119.3
              
              $
              435.1Accrued
                  compensation and benefits
              
              
              (12.6
              )
              
              (20.4
              )Postemployment
                  and other benefit liabilities
              
              
              (325.1
              )
              
              (192.2
              )Pension
                  intangible included in other assets *
              
              
              -
              
              
              13.2Accumulated
                  other comprehensive income *
              
              
              -
              
              
              186.6Net
                  amount recognized
              
              $
              (218.4
              )
              $
              422.3


*
      Amounts
      represent the impact of recording additional minimum liabilities (AMLs). Upon
      the adoption of SFAS 158 AMLs are no longer required, as the funded status
      of
      the pension plans is recorded on the balance sheet.





As
      explained further in Note 1, the Company adopted SFAS 158, which requires the
      Company to record the funded status of its pension plans on its balance sheet
      effective December 31, 2006. The adoption of FAS 158 resulted in a decrease
      of
      total assets of $476.0 million, total liabilities of $35.4 million and total
      shareholders’ equity of $337.1 million (net of tax of $103.5 million).





The
      pretax amounts recognized in accumulated other comprehensive loss were as
      follows:


*In
                  millions*
              
              2006
              
              2005Net
                  transition asset
              
              $
              2.1
              
              
              -Prior
                  service costs
              
              
              63.0
              
              
              -Plan
                  net actuarial losses
              
              
              574.5
              
              
              -Total
              
              $
              639.6
              
              
              -
 Weighted-average
          assumptions used:
 Benefit
                  obligations at December 31,
              
              2006
              
              2005Discount
                  rate:U.S.
                  plans
              
              
              5.50%
              
              
              5.50%Non-U.S.
                  plans
              
              
              5.00%
              
              
              5.00%Rate
                  of compensation increase:U.S.
                  plans
              
              
              4.00%
              
              
              4.00%Non-U.S.
                  plans
              
              
              4.25%
              
              
              4.00%




73




The
      amounts expected to be recognized in net periodic pension cost during the year
      ended 2007 for the net transition asset, prior service costs and plan net
      actuarial losses are $0.9 million, $9.5 million and $18.4 million, respectively.
      The Company does not expect to receive any plan assets during 2007.





The
      accumulated benefit obligation for all defined benefit pension plans was
      $3,005.3 million and $2,868.6 million at December 31, 2006 and 2005,
      respectively. The projected benefit obligation, accumulated benefit obligation,
      and fair value of plan assets for pension plans with accumulated benefit
      obligations more than plan assets were $1,198.4 million, $1,101.5 million and
      $861.9 million respectively, as of December 31, 2006 and $1,053.4 million,
      $953.1 million and $746.6 million respectively, as of December 31,
      2005.





Pension
      benefit payments, are expected to be paid as follows: $192.1 million in 2007,
      $192.0 million in 2008, $200.6 million in 2009, $227.3 million in 2010, $204.4
      million in 2011 and $1,089.7 million for the years 2012 to 2016.





The
      components of the Company’s pension related costs for the years ended December
      31, include the following:


*In
                  millions*
              
              2006
              
              2005
              
              2004Service
                  cost
              
              $
              54.6
              
              $
              52.9
              
              $
              46.7Interest
                  cost
              
              
              161.3
              
              
              161.3
              
              
              173.0Expected
                  return on plan assets
              
              
              (218.9
              )
              
              (213.9
              )
              
              (221.1
              )Net
                  amortization of:Prior
                  service costs
              
              
              9.4
              
              
              8.8
              
              
              8.8Transition
                  amount
              
              
              0.9
              
              
              0.9
              
              
              0.9Plan
                  net actual losses
              
              
              25.4
              
              
              22.4
              
              
              18.2Net
                  periodic pension cost
              
              
              32.7
              
              
              32.4
              
              
              26.5Curtailment/settlement
                  losses
              
              
              -
              
              
              4.0
              
              
              41.1
              *Net
                  periodic pension cost after curtailments/settlements
              
              $
              32.7
              
              $
              36.4
              
              $
              67.6


*
      The
      curtailment and settlement losses in 2004 are associated primarily with the
      sale
      of Dresser-Rand and Drilling Solutions.




Pension
      expense for 2007 is projected to be approximately $21.7 million, utilizing
      the
      assumptions for calculating the pension benefit obligations at the end of
      2006.


Weighted-average
        assumptions used:
  Net
                  periodic pension cost for the year ended December 31,
              
              2006
              
              2005
              
              2004Discount
                  rate:U.S.
                  plans
              
              
              5.50%
              
              
              5.75%
              
              
              6.00%Non-U.S.
                  plans
              
              
              5.00%
              
              
              5.25%
              
              
              5.75%Rate
                  of compensation increase:U.S.
                  plans
              
              
              4.00%
              
              
              4.00%
              
              
              4.00%Non-U.S.
                  plans
              
              
              4.00%
              
              
              4.00%
              
              
              3.75%Expected
                  return on plan assets:U.S.
                  plans
              
              
              8.50%
              
              
              8.75%
              
              
              8.75%Non-U.S.
                  plans
              
              
              7.25%
              
              
              7.50%
              
              
              7.50%




74




The
      expected long-term rates of return on plan assets are determined as of the
      measurement date. The expected long-term rates of return are projected to be
      the
      rates of return to be earned over the period until the benefits are paid.
      Accordingly, the long-term rates of return should reflect the rates of return
      on
      present investments, expected contributions to be received during the current
      year and on reinvestments over the period. The rates of return utilized reflect
      the expected rates of return during the periods for which the payment of
      benefits is deferred. The expected long-term rate of return on plan assets
      is
      based on what is achievable given the plan’s investment policy and the types of
      assets held. Historical asset return trends for the larger plans are reviewed
      over fifteen, ten and five-year periods. The actual rate of return for plan
      assets over the last ten- and fifteen-year periods has exceeded the expected
      rate of return used. The Company reviews each plan and its historical returns
      and asset allocations to determine the appropriate expected long-term rate
      of
      return on plan assets to be used.





The
      Company’s pension plans weighted-average asset allocations at December 31, 2006
      and 2005, by asset category are as follows:


Asset
                  category
              
              2006
              
              2005Equity
                  securities
              
              
              62.0%
              
              
              58.4%Debt
                  securities
              
              
              33.1%
              
              
              33.5%Real
                  estate
              
              
              0.3%
              
              
              0.3%Other
                  (including cash)
              
              
              4.6%
              
              
              7.8%Total
              
              
              100.0%
              
              
              100.0%





The
      Company’s investment objectives in managing its defined benefit plan assets are
      to ensure that present and future benefit obligations to all participants and
      beneficiaries are met as they become due; to provide a total return that, over
      the long term, minimizes the present value of required company contributions,
      at
      the appropriate levels of risk; and meet any statutory requirements, laws and
      local regulatory agencies’ requirements. Key investment management decisions
      reviewed regularly are asset allocations, investment manager performance,
      investment advisors and trustees or custodians. An asset/liability modeling
      (ALM) study is used as the basis for global asset allocation decisions and
      updated approximately every five years or as required. As of December 31, 2006,
      the Company’s strategic global asset allocation for its pension plans was 60% in
      equity securities and 40% in debt securities and cash. The Company sets upper
      limits and lower limits of plus or minus 5%. The asset allocations are reviewed
      at least quarterly and any appropriate adjustments are made. Based on its most
      recent ALM study, the Company in 2007 has begun to adjust its strategic global
      asset allocation for its plans to be approximately 40% in equity securities
      and
      60% in debt securities, real estate and cash.





The
      Company made contributions to its pension plans of $31.7 million in 2006, $119.4
      million in 2005, and $170.1 million in 2004, respectively. The Company currently
      projects that it will be required to contribute approximately $24 million to
      its
      plans worldwide in 2007. The Company’s policy allows it to fund an amount, which
      could be in excess of the pension cost expensed, subject to the limitations
      imposed by current tax regulations.





The
      Company anticipates funding the plans in 2007 in accordance with contributions
      required by funding regulations or the laws of each jurisdiction.





Most
      of
      the Company’s U.S. employees are covered by savings and other defined
      contribution plans. Employer contributions are determined based on criteria
      specific to the individual plans and amounted to approximately $48.6 million,
      $46.8 million and $52.6 million in 2006, 2005 and 2004, respectively. The
      Company's contributions relating to non-U.S. defined contribution plans and
      other non-U.S. benefit plans were $8.8 million, $8.1 million and $11.1 million
      in 2006, 2005 and 2004, respectively.




75




**NOTE
      10 - SHAREHOLDERS’ EQUITY**




*Common
      Stock*


On
      August
      3, 2005, the Company’s Board of Directors declared a two-for-one stock split,
      effected in the form of a stock distribution on September 1, 2005. The Company
      retained the current par value of $1.00 per share for all common shares. All
      references in the financial statements and notes to the number of shares
      outstanding, per share amounts, and stock option data of the Company’s common
      shares were restated in 2005 to reflect the effect of the stock split.
      Shareholders’ equity reflects the stock split by reclassifying from “retained
      earnings” to “Class A common shares” an amount equal to the par value of the
      additional shares arising from the split as of the distribution
      date.





Also
      in
      August 2005, the Board of Directors of the Company expanded the Company’s
      existing share repurchase program to allow the repurchase of up to a total
      of $2
      billion worth of Class A common shares. The plan was established on August
      4,
      2004, and initially authorized the Company to repurchase up to 20 million Class
      A common shares. During 2006, the Company repurchased 27.7 million Class A
      common shares at a total cost of $1,096.3 million, which completed the Company’s
      share repurchases under the $2 billion plan. In December 2006, the Board of
      Directors authorized a new share repurchase program for the repurchase of up
      to
      $2 billion worth of Class A common shares. No amounts were purchased under
      the
      December 2006 authorization as of December 31, 2006.





Effective
      December 31, 2001, IR-Limited became the successor to IR-New Jersey, following
      the reorganization. The reorganization was accomplished through a merger of
      a
      newly formed merger subsidiary into IR-New Jersey. Upon consummation of the
      merger the shares of IR-New Jersey common stock automatically became IR-Limited
      Class A common shares. As part of the reorganization, IR-New Jersey and certain
      of its subsidiaries, immediately prior to the merger, transferred shares of
      certain IR-New Jersey subsidiaries and issued certain debt in exchange for
      which
      IR-Limited issued 270,500,006 Class B common shares. The Class B common shares
      are non-voting and pay comparable dividends to the Class A common shares. The
      authorized share capital of IR-Limited is $1,175,010,000, consisting of (1)
      1,175,000,000 common shares, par value $1.00 per share, which common shares
      consist of (a) 600,000,000 Class A common shares and (b) 575,000,000 Class
      B
      common shares, and (2) 10,000,000 preference shares, par value $0.001 per share.
      Class A common shares (and associated preference share purchase rights) were
      issued to holders of IR-New Jersey common stock in the merger. No preference
      shares were outstanding at December 31, 2006 or 2005.





The
      Company has adopted a shareholder rights plan to protect shareholders from
      attempts to acquire control of the Company at an inadequate price. The plan
      will
      expire on December 22, 2008, unless redeemed or exchanged earlier by the
      Company, as provided in the rights plan. Under the rights plan, one preference
      share purchase right was distributed for each Class A common share. As a result
      of the two-for-one stock split in September 2005, the rights were adjusted
      so
      that each issued share of Class A common share now has associated with it
      one-half of a right. The rights only become exercisable, and will trade
      separately from the Class A common shares, 10 days after the first public
      announcement that any person or group has acquired at least 15% of the Company’s
      outstanding Class A common shares or on the 10 th day
      following the commencement or the announcement of an intention to commence
      a
      tender offer, which would result in that person or group acquiring a beneficial
      ownership of at least 15% of the outstanding Class A common shares. Each right
      entitles a holder to purchase one-thousandth of a share of Series A preferred
      stock at an exercise price of $200.




76




If
      any
      person or group acquires 15% or more of the Company’s Class A common shares, the
      rights not held by the 15% shareholder would become exercisable to purchase
      the
      Company’s Class A common shares at a 50% discount. The plan provides that, at
      any time after a person or group becomes an acquiring person and prior to the
      acquisition by that person or group of 50% or more of the outstanding Class
      A
      common shares, the Board may exchange the rights (other than the rights held
      by
      the acquiring person, which will have become void), at an exchange ratio of
      one
      Class A common share per two rights. The Company may elect to redeem the rights
      at $0.01 per right.





*Accumulated
      Other Comprehensive (Loss) Income*


The
      components of accumulated comprehensive loss are as follows:


*In
                    millions*
                
                2006
                
                2005Foreign
                    currency translation adjustment
                
                $
                263.9
                
                $
                5.1Fair
                    value of derivatives qualifyingas
                    cash flow hedges, net of tax
                
                
                (10.5
                )
                
                (6.7
                )Unrealized
                    gain (loss) on marketable securities,net
                    of tax
                
                
                (3.3
                )
                
                0.2Pension
                    and postretirement obligation adjustments, net of tax
                
                
                (608.2
                )
                
                (126.2
                )Accumulated
                    other comprehensive loss
                
                $
                (358.1
                )
                $
                (127.6
                )





**NOTE
      11 - SHARE-BASED COMPENSATION**




Effective
      January 1, 2006, the Company adopted SFAS No. 123 (revised 2004), “Share-Based
      Payment,” (SFAS 123(R)) using the modified prospective method of adoption. SFAS
      123(R) requires companies to recognize compensation expense for an amount equal
      to the fair value of the share-based award issued. Under the modified
      prospective method, financial statement amounts for prior periods have not
      been
      restated to reflect the fair value method of recognizing compensation cost
      relating to stock options.





Prior
      to
      the adoption, the Company had accounted for stock option plans under the
      recognition and measurement principles of Accounting Principles Board No. 25
      “Accounting for Stock Issued to Employees” (APB 25). Compensation expense was
      not recognized for employee stock options because they were granted with strike
      prices that were not less than the fair market value of the Company’s stock on
      the date of the grant. Compensation expense was recorded for other share-based
      payments primarily including stock appreciation rights (SARs), performance
      shares, deferred compensation and management incentive units awards. The
      Company’s Incentive Stock Plans authorize the Company to issue stock options and
      other share-based incentives. The total shares authorized by the shareholders
      was 60.0 million (after adjustment for the 2005 stock split), of which 17.2
      million remained available for future incentive awards at December 31, 2006.





*Stock
      Options*


On
      December 7, 2005, the Compensation Committee of the Company’s board of directors
      approved the acceleration of the vesting of all outstanding and unvested stock
      options under the Company’s stock plan for active employees, effective December
      31, 2005. As a result of the acceleration, 9.7 million stock options became
      exercisable, with exercise prices ranging from $19.53 to $39.85, and a
      weighted-average exercise price of $34.95. In addition to the acceleration
      of
      the vesting date, the terms and conditions of the stock option agreements
      governing the stock options were changed to prohibit transfers of any shares
      acquired through the exercise of these accelerated options until the earlier
      of
      (i) the original vesting date of the option or (ii) termination of employment,
      retirement, death or disability. The charge associated with the acceleration
      of
      vesting was approximately $1 million, which was recorded in the fourth quarter
      of 2005 and represents the intrinsic value for the estimated number of stock
      options that would have been forfeited had the acceleration not occurred. Stock
      options issued after January 1, 2006, generally vest ratably over a three-year
      period from their date of grant and expire at the end of 10 years.




77




The
      average fair value of stock options granted during the year ended December
      31,
      2006, was $10.42, using the Black-Scholes option-pricing model, with the
      following assumptions at the grant date:


Dividend
                  yield
              
              
              1.49%Volatility
              
              
              27.70%Risk-free
                  rate of return
              
              
              4.47%Expected
                  life
              
              
              4.42
                  years





The
      fair
      value of each of the Company’s stock option awards is expensed on a
      straight-line basis over the required service period, which is generally the
      three-year vesting period of the options. For options granted to retirement
      eligible employees, the Company recognized expense for the fair value of the
      options at the grant date. Expected volatility is based on the implied
      historical volatility from traded options on the Company’s stock. The risk-free
      rate of interest for periods within the contractual life of the stock option
      award is based on the yield curve of a zero-coupon U.S. Treasury bond on the
      date the award is granted with a maturity equal to the expected term of the
      award. The Company uses historical data to estimate forfeitures within its
      valuation model. The Company’s expected life of the stock option awards is
      derived from historical experience and represents the period of time that awards
      are expected to be outstanding.





Changes
      in options outstanding under the plans for the years 2004, 2005 and 2006 are
      as
      follows:


Shares
              
              Weighted-
              
              Aggregate
              
              Weighted-subject
              
              average
              
              intrinsic
              
              averageto
                  option
              
              exercise
                  price
              
              value
                  (millions)
              
              remaining
                  lifeDecember
                  31, 2003
              
              
              21,296,994
              
              $
              21.77Granted
              
              
              6,555,680
              
              
              32.24Exercised
              
              
              (7,847,656
              )
              
              21.85Cancelled
              
              
              (1,151,544
              )
              
              25.38December
                  31, 2004
              
              
              18,853,474
              
              
              25.19Granted
              
              
              6,091,600
              
              
              38.70Exercised
              
              
              (3,921,949
              )
              
              23.10Cancelled
              
              
              (1,140,649
              )
              
              33.77December
                  31, 2005
              
              
              19,882,476
              
              
              29.26Granted
              
              
              3,305,190
              
              
              39.33Exercised
              
              
              (3,707,839
              )
              
              25.77Cancelled
              
              
              (314,885
              )
              
              38.82Outstanding
                  December 31, 2006
              
              
              19,164,942
              
              $
              31.53
              
              $
              146.6
              
              
              6.2Exercisable
                  December 31, 2006
              
              
              16,109,612
              
              $
              30.03
              
              $
              146.6
              
              
              5.7




78




The
      following table summarizes information concerning currently outstanding and
      exercisable options:


Options
                  outstanding
              
              Options
                  exercisableRange
                  of exercise price
              
              Number
                      outstanding
                        at
                      December
                        31,
                      2006
              
              Weighted-
                      average
                      remaining
                      life
              
              Weighted-
                      average
                      exercise
                      price
              
              Number
                      exercisable
                        at
                      December
                        31,
                      2006
              
              Weighted-
                      average
                      remaining
                      life
              
              Weighted-
                      average
                      exercise
                      price$
              15.00
              
              -
              
              $
              20.00
              
              
              2,069,652
              
              
              5.5
              
              $
              19.50
              
              
              2,069,652
              
              
              5.5
              
              $
              19.5020.01
              
              -
              
              
              25.00
              
              
              3,009,224
              
              
              3.8
              
              
              21.54
              
              
              3,009,224
              
              
              3.8
              
              
              21.5425.01
              
              -
              
              
              30.00
              
              
              1,597,081
              
              
              2.4
              
              
              26.16
              
              
              1,597,081
              
              
              2.4
              
              
              26.1630.01
              
              -
              
              
              35.00
              
              
              4,401,706
              
              
              6.1
              
              
              32.26
              
              
              4,401,706
              
              
              6.1
              
              
              32.2635.01
              
              -
              
              
              40.00
              
              
              8,059,279
              
              
              8.1
              
              
              38.97
              
              
              5,031,949
              
              
              7.6
              
              
              38.7040.01
              
              -
              
              
              45.00
              
              
              28,000
              
              
              9.4
              
              
              41.80
              
              
              -
              
              
              -
              
              
              -$
              16.83
              
              -
              
              $
              43.16
              
              
              19,164,942
              
              
              6.2
              
              $
              31.53
              
              
              16,109,612
              
              
              5.7
              
              $
              30.03





At
      December 31, 2006, there was $15.3 million of total unrecognized compensation
      cost from stock option arrangements granted under the plan, which is related
      to
      unvested shares of non-retirement eligible employees. This compensation will
      be
      recognized over the required service period, which is generally the three-year
      vesting period. The aggregate intrinsic value of options exercised during the
      year ended December 31, 2006 and 2005 was $63.3 million and $69.5 million,
      respectively.





*SARs*


SARs
      generally vest ratably over a three-year period from the date of grant and
      expire at the end of ten years. Effective August 2, 2006, all exercised SARs
      are
      settled with the Company’s Class A common shares. Previously, exercised SARs
      were paid in cash. The following table summarizes the information for currently
      outstanding SARs:




Shares
              
              Weighted-
              
              Aggregate
              
              Weighted-subject
              
              average
              
              intrinsic
              
              averageto
                  exercise
              
              exercise
                  price
              
              value
                  (millions)
              
              remaining
                  lifeDecember
                  31, 2003
              
              
              1,779,804
              
              $
              21.72Granted
              
              
              627,340
              
              
              32.22Exercised
              
              
              (671,256
              )
              
              22.50Cancelled
              
              
              (126,090
              )
              
              26.12December
                  31, 2004
              
              
              1,609,798
              
              
              25.12Granted
              
              
              617,700
              
              
              38.69Exercised
              
              
              (345,556
              )
              
              23.15Cancelled
              
              
              (112,808
              )
              
              29.95December
                  31, 2005
              
              
              1,769,134
              
              
              30.05Granted
              
              
              395,020
              
              
              39.12Exercised
              
              
              (327,717
              )
              
              24.49Cancelled
              
              
              (142,683
              )
              
              32.18Outstanding
                  December 31, 2006
              
              
              1,693,754
              
              $
              33.11
              
              $
              10.2
              
              
              6.9Exercisable
                  December 31, 2006
              
              
              834,304
              
              $
              28.17
              
              $
              9.1
              
              
              5.6




79




*Performance
      Shares*


The
      Company has a performance share program for key employees. The
      program provides annual awards for the achievement of pre-established long-term
      strategic initiatives and annual financial performance of the Company. The
      annual target award level is expressed as a number of the Company’s Class A
      common shares and the award is paid in cash.





*Deferred
      Compensation*


The
      Company allows key employees and non-employee directors to defer a portion
      of
      their eligible compensation into a number of investment choices, including
      Class
      A common share equivalents. The portion deferred into Class A common share
      equivalents is currently subject to market fluctuations based on the Company’s
      share price. Effective
      August 2, 2006, the Compensation Committee eliminated the provision in the
      deferred compensation plans making plan participants eligible to receive a
      20%
      supplemental amount on deferrals invested for five years in the Company's Class
      A common share equivalents. In addition, effective August 2, 2006, the
      Compensation Committee vested the previously awarded, but unvested, portions
      of
      the 20% supplemental amount awarded under the deferred compensation
      plans .
      The
      Company reversed $0.4 million of expense in the third quarter of 2006 as a
      result of the changes to the deferred compensation plans.





*Other
      Plans*


The
      Company maintains a shareholder-approved Management Incentive Unit Award Plan.
      Under the plan, participating key employees were awarded incentive units. When
      dividends are paid on Class A common shares, phantom dividends are awarded
      to
      unit holders, one-half of which is paid in cash, the remaining half of which
      is
      credited to the participants’ account in the form of Class A common share
      equivalents. The value of the actual incentive units is never paid to
      participants, and only the fair value of accumulated common share equivalents
      is
      paid in cash upon the participants’ retirement. The number of common share
      equivalents credited to participants’ accounts at December 31, 2006 is 271,040.




80




Stock
      grants were issued prior to February 2000 as an incentive plan for certain
      key
      employees, with varying vesting periods. At December 31, 2006, there were
      272,678 stock grants outstanding, all of which were vested. Effective August
      2,
      2006, all remaining stock grants will be settled with the Company’s Class A
      common shares.





*Compensation
      Expense*


Share-based
      compensation expense is included in Selling and administrative expenses. The
      following table summarizes the expenses recognized:


*In
                  millions*
              
              2006
              
              2005
              
              2004Stock
                  options
              
              $
              16.2
              
              $
              1.0
              
              $
              -SARs
              
              
              5.6
              
              
              2.4
              
              
              9.1Performance
                  shares
              
              
              11.2
              
              
              6.8
              
              
              24.9Deferred
                  compensation
              
              
              (0.4
              )
              
              (0.9
              )
              
              10.9Other
              
              
              -
              
              
              0.1
              
              
              10.4Pre-tax
                  expense
              
              
              32.6
              
              
              9.4
              
              
              55.3Tax
                  benefit
              
              
              12.5
              
              
              3.6
              
              
              21.2After
                  tax expense
              
              $
              20.1
              
              $
              5.8
              
              $
              34.1




Compensation
      expense was recognized during the year ended December 31, 2006, for all
      share-based option awards granted since January 1, 2006, based on the grant
      date
      fair value in accordance with the provisions of SFAS 123(R). The Company
      recorded additional stock-option expense of $16.2 million in 2006 associated
      with the adoption of SFAS 123(R).





The
      following table illustrates the effect on net earnings and earnings per share
      had the Company applied the fair value recognition provisions of SFAS 123,
      “Accounting for Stock-Based Compensation,” for the year ended December 31, 2005
      and 2004:


*In
                  millions, except per share amounts*
              
              2005
              
              2004Net
                  earnings, as reported
              
              $
              1,054.2
              
              $
              1,218.7Add
                  (Deduct): Stock-based employee compensation(income)
                  expense included in reported netincome,
                  net of tax
              
              
              5.8
              
              
              34.1Deduct:
                  Total stock-based employee compensationexpense
                  determined under fair value basedmethod
                  for all awards, net of tax
              
              
              79.7
              
              
              63.9Pro
                  forma net earnings
              
              $
              980.3
              
              $
              1,188.9Basic
                  earnings per share:As
                  reported
              
              $
              3.12
              
              $
              3.52Pro
                  forma
              
              
              2.90
              
              
              3.43Diluted
                  earnings per share:As
                  reported
              
              $
              3.09
              
              $
              3.47Pro
                  forma
              
              
              2.87
              
              
              3.39


81


The
      average fair value of stock options granted during the years ended December
      31,
      2005 and 2004 was $12.67 and $11.39 respectively, using the Black-Scholes
      option-pricing model, with the following assumptions at the grant
      date:


2005
              
              2004Dividend
                  yield
              
              
              1.30%
              
              
              1.19%Volatility
              
              
              35.57%
              
              
              39.31%Risk-free
                  rate of return
              
              
              3.60%
              
              
              3.29%Expected
                  life
              
              
              5
                  years
              
              
              5
                  years





**NOTE
      12 - INCOME TAXES**




Earnings
      before income taxes for the years ended December 31, were taxed within the
      following jurisdictions:


*In
                  millions*
              
              2006
              
              2005
              
              2004United
                  States
              
              $
              303.9
              
              $
              337.2
              
              $
              199.9Non-U.S.
              
              
              996.1
              
              
              920.6
              
              
              768.3Total
              
              $
              1,300.0
              
              $
              1,257.8
              
              $
              968.2


The
      provision was as follows:


*In
                  millions*
              
              2006
              
              2005
              
              2004Current
                  tax expense:United
                  States
              
              $
              161.8
              
              $
              63.8
              
              $
              132.6Non-U.S.
              
              
              129.2
              
              
              76.9
              
              
              65.0Total
                  current
              
              
              291.0
              
              
              140.7
              
              
              197.6Deferred
                  tax (benefit) expense:United
                  States
              
              
              (111.7
              )
              
              23.7
              
              
              (78.9
              )Non-U.S.
              
              
              52.4
              
              
              40.3
              
              
              19.7Total
                  deferred
              
              
              (59.3
              )
              
              64.0
              
              
              (59.2
              )Total
                  provision for income taxes
              
              $
              231.7
              
              $
              204.7
              
              $
              138.4




82




The
      provision for income taxes differs from the amount of income taxes determined
      by
      applying the applicable U.S. statutory income tax rate to pretax income, as
      a
      result of the following differences:


Percent
                  of pretax income2006
              
              2005
              
              2004Statutory
                  U.S. rate
              
              
              35.0%
              
              
              35.0%
              
              
              35.0%Increase
                  (decrease) in rates resulting from:Non-U.S.
                  operations
              
              
              (19.3)
              
              
              (17.6)
              
              
              (19.0)Manufacturing
                  exemption / Extraterritorial income
              
              
              (0.3)
              
              
              (0.7)
              
              
              (2.4)State
                  and local income taxes, net of U.S. tax
              
              
              0.4
              
              
              0.7
              
              
              0.7Puerto
                  Rico - Sec 936 Credit
              
              
              -
              
              
              (0.9)
              
              
              (1.2)Other
              
              
              2.0
              
              
              (0.2)
              
              
              1.2Effective
                  tax rate
              
              
              17.8%
              
              
              16.3%
              
              
              14.3%





At
      December 31, a summary of the deferred tax accounts follows:


*In
                  millions*
              
              2006
              
              2005Current
                  deferred assets and (liabilities)Difference
                  between book and tax basesof
                  inventories and receivables
              
              $
              (6.7
              )
              $
              23.4Difference
                  between book and tax expense forother
                  employee-related benefits and allowances
              
              
              32.8
              
              
              70.6Other
                  reserves and valuation allowancesin
                  excess of tax deductions
              
              
              158.4
              
              
              233.3Other
                  differences between tax andfinancial
                  statement values
              
              
              72.0
              
              
              (14.8
              )Gross
                  current deferred net tax assets
              
              
              256.5
              
              
              312.5Noncurrent
                  deferred assets and (liabilities)Postretirement
                  and postemployment benefitsother
                  than pensions in excess of tax deductions
              
              
              452.7
              
              
              321.1Tax
                  benefit of operating losses and creditcarryforwards
              
              
              633.8
              
              
              484.1Other
                  reserves in excess of tax expense
              
              
              93.1
              
              
              77.7Tax
                  depreciation / amortization in excess ofbook
                  depreciation / amortization
              
              
              (428.6
              )
              
              (408.4
              )Pension
                  contributions in excess of book expense
              
              
              43.5
              
              
              (148.5
              )Gross
                  noncurrent deferred net tax assets
              
              
              794.5
              
              
              326.0Less:
                  deferred tax valuation allowances
              
              
              (184.9
              )
              
              (107.9
              )Total
                  net deferred tax assets
              
              $
              866.1
              
              $
              530.6





Included
      in Accrued expenses and other current liabilities on the Consolidated Balance
      Sheet are $389.0 million and $376.8 million of current income taxes payable
      at
      December 31, 2006 and 2005, respectively. Included in Prepaid expenses and
      deferred income taxes on the Consolidated Balance Sheet are $287.9 million
      and
      $309.3 million of current deferred tax assets at December 31, 2006 and 2005,
      respectively.




83




At
      December 31, 2006, net U.S and non-U.S. federal operating loss carryforwards
      of
      $1,232.8 million are available to offset taxable income in future years. The
      U.S. federal carryforwards will begin to expire in 2022, while a significant
      portion of the non-U.S. net operating losses generally have unlimited
      carryforward periods. The net operating loss carryforwards were incurred in
      various jurisdictions, predominantly the United States, the United Kingdom,
      Brazil, Germany and Switzerland. State net operating loss carryforwards at
      December 31, 2006 of $6,089.4 million are available to offset taxable income
      in
      future periods. The state carryforwards will expire in future years generally
      through 2026. A valuation allowance of $184.9 million has been recorded for
      certain state and non-U.S. carryforwards, which will likely not be realized.
      The
      change in the valuation allowance is predominantly attributable to increases
      in
      foreign net operating loss carryforwards and other foreign deferred tax assets.
      Approximately $11 million of the valuation allowance was acquired in prior
      year
      business combination transactions and any tax benefit, when realized, will
      reduce goodwill rather than the income tax provision.





At
      December 31, 2006, no deferred taxes have been provided for any portion of
      the
      $5.4 billion of undistributed earnings of the Company’s subsidiaries, since
      these earnings have been, and under current plans will continue to be,
      permanently reinvested in these subsidiaries, and it is not practicable to
      estimate the amount of additional taxes which may be payable upon distribution.





Tax
      incentives, in the form of tax holidays, have been granted in certain
      jurisdictions to encourage industrial development. The expiration of these
      tax
      holidays varies by country. The most significant tax holidays relate to the
      Company’s locations in China, which have generally received a 2-year full
      holiday followed by a 3-year 50% exemption, and the Company’s qualifying
      locations in Ireland, which were granted a 10% tax rate through 2010. The 2006
      benefit for all tax holidays was approximately $5.1 million, or $0.02 of income
      per dilutive share. The American Jobs Creation Act (the AJCA) replaced an export
      incentive with a deduction from U.S. domestic manufacturing income. This
      provision of the AJCA did not have a material impact on the Company's income
      tax
      provision for 2006 or 2005.





On
      October 6, 2006, the Company 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 1998 through 2000 tax years. The principal proposed
      adjustments consist of the disallowance of certain capital losses taken in
      the
      Company's 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. The Company disputes
      the
      IRS's position and intends to contest the proposed disallowance. The Company
      added approximately $27 million ($0.08 per dilutive share) to its previously
      established reserves, as a charge in the third quarter of 2006. After taking
      this charge into account, the Company believes that it has adequately reserved
      for the ultimate resolution of this issue. Should the IRS prevail in its
      disallowance of the capital losses and imposition of penalties and interest,
      it
      would result in a cash outflow of approximately $155 million, plus interest
      through the payment date. The issues raised in the notice are not related to
      the
      Company's reorganization in Bermuda, which was effective December 31,
      2001.





As
      part
      of the audit of the tax years 2000-2002, the Company is actively engaged in
      discussion with the Internal Revenue Service regarding issues related to its
      reincorporation in Bermuda in 2001. The Company has provided for reasonably
      foreseeable resolution of all tax disputes, **** but
      will
      adjust its estimate if significant events so dictate. In the event that the
      ultimate resolution of an issue differs materially from the original or adjusted
      estimate of the Company, the effect will be recorded in the provision for income
      taxes in the period that the matter is finally resolved.




84




**NOTE
      13** - **DISCONTINUED
      OPERATIONS**




The
      Company has continued its transition to become a more diversified company with
      strong growth prospects by divesting cyclical, low-growth, asset intensive
      businesses. The components of discontinued operations for 2006, 2005 and 2004
      are as follows:


*In
                  millions*
              
              2006
              
              2005
              
              2004Net
                  revenues
              
              $
              -
              
              $
              -
              
              $
              882.0Retained
                  (costs) income, net of tax
              
              $
              (36.5
              )
              $
              (34.1
              )
              $
              54.0Net
                  gain on disposals, net of tax
              
              
              0.7
              
              
              35.2
              
              
              334.9Total
                  discontinued operations, net of tax
              
              $
              (35.8
              )
              $
              1.1
              
              $
              388.9




*2006*


Retained
      costs for discontinued operations mainly include costs related to postretirement
      benefits and product and legal costs (mostly asbestos-related) from previously
      sold businesses. Net gain on disposals represents additional gains from
      previously sold businesses.





*2005*


Discontinued
      operations for the year ended December 31, 2005, amounted to income of $1.1
      million, net of tax benefits of $48.2 million. This total includes net after
      tax
      gains of $35.2 million, mainly due to divested businesses, primarily
      Ingersoll-Dresser Pump Company (IDP) ($12.0 million), Dresser-Rand ($10.3
      million) and Waterjet ($12.2 million), primarily from the resolution of tax
      matters regarding these divestitures. The after-tax loss from retained costs
      of
      discontinued operations amounted to $34.1 million. These costs mainly include
      costs related to postretirement benefits and product and legal costs (mostly
      asbestos-related) from previously sold businesses.





*2004*


Discontinued
      operations for the year ended December 31, 2004, amounted to income of $388.9
      million, net of tax provisions of $343.5 million. This total includes net after
      tax gains on disposals of $334.9 million, primarily comprised of gains from
      the
      sales of Dresser-Rand ($282.5 million) and Drilling Solutions ($38.6 million).
      After-tax income from discontinued operations amounted to $54.0 million. This
      income includes profits from divested businesses, primarily Dresser-Rand ($45.0
      million) and Engineered Solutions ($20.9 million), which includes an antidumping
      subsidy net of tax of $29.5 million. This income is partially offset by retained
      costs related to IDP ($14.9 million), which mostly include product liability
      costs primarily related to asbestos liability claims and employee benefit
      costs.




85




**NOTE
      14 - EARNINGS PER SHARE**




Basic
      earnings per share is computed by dividing net earnings by the weighted-average
      number of Class A common shares outstanding. Diluted earnings per share is
      based
      on the weighted-average number of Class A common shares outstanding, as well
      as
      potentially dilutive common shares, which in the Company’s case, includes shares
      issuable under share-based compensation plans. The following table details
      the
      weighted-average number of Class A common shares outstanding for basic and
      diluted earnings per share calculations at December 31:


*In
                  millions*
              
              2006
              
              2005
              
              2004Weighted-average
                  number of basic shares
              
              
              319.9
              
              
              337.6
              
              
              346.5Shares
                  issuable under incentive stock plans
              
              
              3.2
              
              
              3.7
              
              
              4.4Weighted-average
                  number of diluted shares
              
              
              323.1
              
              
              341.3
              
              
              350.9Anti-dilutive
                  shares
              
              
              3.2
              
              
              0.1
              
              
              -




**NOTE
      15 - COMMITMENTS AND CONTINGENCIES**




The
      Company is involved in various litigations, claims and administrative
      proceedings, including environmental and product liability matters. Amounts
      recorded for identified contingent liabilities are estimates, which are reviewed
      periodically and adjusted to reflect additional information when it becomes
      available. Subject to the uncertainties inherent in estimating future costs
      for
      contingent liabilities, management believes that the liability which may result
      from these legal matters would not have a material adverse effect on the
      financial condition, results of operations, liquidity or cash flows of the
      Company.





Environmental
      remediation costs are determined on a site-by-site basis and accruals are made
      when it is probable a liability exists and the cost can be estimated reasonably.
      The Company estimates the amount of recurring and non-recurring costs at each
      site using internal and external experts. In arriving at cost estimates the
      following factors are considered: the type of contaminant, the stage of the
      clean-up, applicable law and existing technology. These estimates, and the
      resultant accruals, are reviewed and updated quarterly to reflect changes in
      facts and law. The Company does not discount its liability or assume any
      insurance recoveries when environmental liabilities are recorded.





Certain
      wholly owned subsidiaries of the Company are named as defendants in
      asbestos-related lawsuits in state and federal courts. In virtually all of
      the
      suits, a large number of other companies have also been named as defendants.
      The
      vast majority of those claims have been filed against IR-New Jersey and
      generally allege injury caused by exposure to asbestos contained in certain
      of
      IR-New Jersey’s products. Although IR-New Jersey was neither a producer nor a
      manufacturer of asbestos, some of its formerly manufactured products utilized
      asbestos-containing components, such as gaskets purchased from third-party
      suppliers.





All
      asbestos-related claims resolved to date have been dismissed or settled. For
      the
      years ended December 31, 2006, 2005 and 2004, total costs for settlement and
      defense of asbestos claims after insurance recoveries and net of tax were
      approximately $31.6 million, $16.8 million and $16.5 million, respectively.
      The
      increase in asbestos-related costs in 2006 compared with 2005 and 2004 is
      primarily attributable to revised estimates for future recoveries to be received
      from the Company’s insurance carriers, as well as declining levels of insurance
      coverage available for cost recoveries. With the assistance of independent
      advisors, the Company performs a thorough analysis, updated periodically, of
      its
      actual and anticipated future asbestos liabilities projected seven years in
      the
      future. Based upon such analysis, the Company believes that its reserves and
      insurance are adequate to cover its asbestos liabilities, and that these
      asbestos liabilities are not likely to have a material adverse effect on its
      financial position, results of operations, liquidity or cash flows.





Legislation
      recently under consideration in Congress concerns pending and future
      asbestos-related personal injury claims. Whether and when such legislation
      will
      become law, and the final provisions of such legislation, are unknown.
      Consequently, the Company cannot predict with any reasonable degree of certainty
      what effect, if any, such legislation would have upon the Company’s financial
      position, results of operations or cash flows.




86




The
      Company sells products on a continuous basis under various arrangements through
      institutions that provide leasing and product financing alternatives to retail
      and wholesale customers. Under these arrangements, the Company is contingently
      liable for loan guarantees and residual values of equipment of approximately
      $18.8 million, including consideration of ultimate net loss provisions. The
      risk
      of loss to the Company is minimal, and historically, only immaterial losses
      have
      been incurred relating to these arrangements since the fair value of the
      underlying equipment that serves as collateral is generally in excess of the
      contingent liability. Management believes these guarantees will not adversely
      affect the consolidated financial statements.





The
      Company has remained contingently liable for approximately $13.8 million
      relating to performance bonds associated with prior sale of products of IDP,
      which the Company divested in 2000. The acquirer of IDP is the primary obligor
      under these performance bonds; however, should the acquirer default under these
      arrangements the Company would be required to satisfy these financial
      obligations. The Company estimates that $12.7 million of the obligation will
      expire during 2007. The remainder extends through 2008.





The
      Company is contingently liable for customs duties in certain non-U.S. countries
      which totaled $5.8 million at December 31, 2006. These amounts are not accrued
      as the Company intends on exporting the product to another country for final
      sale.





In
      connection with the disposition of certain businesses and facilities, the
      Company has indemnified the purchasers for the expected cost of remediation
      of
      environmental contamination, if any, existing on the date of disposition. Such
      expected costs are accrued when environmental assessments are made or
      remediation efforts are probable and the costs can be reasonably
      estimated.





The
      following represents the changes in the Company’s product warranty liability for
      2006 and 2005:


*In
                    millions*
                
                2006
                
                2005Balance
                    at beginning of year
                
                $
                183.5
                
                $
                190.5Reductions
                    for payments
                
                
                (99.8
                )
                
                (85.4
                )Accruals
                    for warranties issued during the current period
                
                
                108.0
                
                
                70.2Changes
                    for accruals related to preexisting warranties
                
                
                (2.0
                )
                
                11.9Acquisitions
                
                
                0.4
                
                
                1.1Translation
                
                
                5.1
                
                
                (4.8
                )Balance
                    at end of the year
                
                $
                195.2
                
                $
                183.5





Certain
      office and warehouse facilities, transportation vehicles and data processing
      equipment are leased. Total rental expense was $73.8 million in 2006, $61.9
      million in 2005 and $62.7 million in 2004. Minimum lease payments required
      under
      non-cancelable operating leases with terms in excess of one year for the next
      five years and thereafter, are as follows: $57.7 million in 2007, $43.7 million
      in 2008, $31.3 million in 2009, $18.3 million in 2010, $13.8 million in 2011
      and
      $20.6 million thereafter.





**NOTE
      16 - BUSINESS SEGMENT INFORMATION**




The
      accounting policies of the operating segments are the same as those described
      in
      the summary of significant accounting policies except that the operating
      segments’ results are prepared on a management basis that is consistent with the
      manner in which the Company disaggregates financial information for internal
      review and decision making. The Company evaluates performance based on operating
      income and operating margins. Intercompany sales between segments are considered
      immaterial.




87




The
      Company has divested various businesses over the past few years as it moves
      to
      being a leading global diversified industrial enterprise. During 2004, the
      Company sold its Drilling Solutions and Dresser-Rand businesses. The results
      of
      these divested businesses have been excluded from the previous reportable
      segments for business segment reporting and has been shown separately in
“Discontinued operations, net of tax” in the financial statements.





During
      the first quarter of 2005, the Company realigned its internal organization
      and
      operating segments to reflect its market focus and to promote greater
      transparency of results. The former Infrastructure segment was disaggregated
      into two segments - the Compact Vehicle Technologies segment and the
      Construction Technologies segment. The 2004 segment results have been restated
      to conform to this change.





Each
      reportable segment is based primarily on the types of products it generates.
      The
      operating segments have been aggregated based on the aggregation criteria and
      quantitative thresholds as required by SFAS No. 131, “Disclosures About Segments
      of an Enterprise and Related Information.” A description of the Company’s
      reportable segments is as follows:





Climate
      Control Technologies provides solutions to transport, preserve, store and
      display temperature-sensitive products by engaging in the design, manufacture,
      sale and service of transport temperature control units, HVAC systems,
      refrigerated display merchandisers, beverage coolers, auxiliary power units
      and
      walk-in storage coolers and freezers. The segment includes the Thermo King
      and
      Hussmann brands.





The
      Compact Vehicle Technologies segment is engaged in the design, manufacture,
      sale
      and service of skid-steer loaders, all-wheel steer loaders, compact track
      loaders, compact excavators, attachments, golf vehicles and utility vehicles.
      The segment includes the Bobcat and Club Car brands.





Construction
      Technologies is engaged in the design, manufacture, sale and service of road
      construction and repair equipment, portable power products, general-purpose
      construction equipment, attachments and portable light towers and compressors.
      The segment is comprised of the Utility Equipment, Road Development and
      Attachments businesses.





Industrial
      Technologies is focused on providing solutions to enhance customers’ industrial
      and energy efficiency, mainly by engaging in the design, manufacture, sale
      and
      service of compressed air systems, tools, fluid and material handling and energy
      generation systems. The segment includes the Air Solutions and Productivity
      Solutions businesses.





Security
      Technologies is engaged in the design, manufacture, sale and service of
      mechanical and electronic security products, biometric access control systems,
      and security and scheduling software. The segment includes the Schlage, LCN,
      Von
      Duprin and CISA brands.




88




A
      summary
      of operations by reportable segments for the years ended December 31, were
      as
      follows:





*Dollar
                  amounts in millions*
              
              2006
              
              2005
              
              2004**Climate
                  Control Technologies**Revenues
              
              $
              3,171.0
              
              $
              2,853.6
              
              $
              2,793.7Operating
                  income
              
              
              356.0
              
              
              315.1
              
              
              309.1Operating
                  income as a percentage of revenues
              
              
              11.2
              %
              
              11.0
              %
              
              11.1
              %Depreciation
                  and amortization
              
              
              52.1
              
              
              53.7
              
              
              59.2Capital
                  expenditures
              
              
              25.6
              
              
              10.4
              
              
              13.9**Compact
                  Vehicle Technologies**Revenues
              
              
              2,641.2
              
              
              2,681.1
              
              
              2,261.7Operating
                  income
              
              
              358.0
              
              
              415.2
              
              
              332.0Operating
                  income as a percentage of revenues
              
              
              13.6
              %
              
              15.5
              %
              
              14.7
              %Depreciation
                  and amortization
              
              
              28.0
              
              
              31.8
              
              
              28.1Capital
                  expenditures
              
              
              47.6
              
              
              41.8
              
              
              28.3**Construction
                  Technologies**Revenues
              
              
              1,362.3
              
              
              1,168.6
              
              
              1,007.1Operating
                  income
              
              
              148.0
              
              
              103.8
              
              
              105.2Operating
                  income as a percentage of revenues
              
              
              10.9
              %
              
              8.9
              %
              
              10.4
              %Depreciation
                  and amortization
              
              
              12.9
              
              
              14.3
              
              
              15.5Capital
                  expenditures
              
              
              18.5
              
              
              19.3
              
              
              11.3**Industrial
                  Technologies**Revenues
              
              
              1,949.8
              
              
              1,743.9
              
              
              1,552.8Operating
                  income
              
              
              262.0
              
              
              224.9
              
              
              180.5Operating
                  income as a percentage of revenues
              
              
              13.4
              %
              
              12.9
              %
              
              11.6
              %Depreciation
                  and amortization
              
              
              25.2
              
              
              19.6
              
              
              23.2Capital
                  expenditures
              
              
              51.7
              
              
              30.5
              
              
              12.4**Security
                  Technologies**Revenues
              
              
              2,285.0
              
              
              2,099.7
              
              
              1,778.3Operating
                  income
              
              
              400.2
              
              
              380.7
              
              
              304.8Operating
                  income as a percentage of revenues
              
              
              17.5
              %
              
              18.1
              %
              
              17.1
              %Depreciation
                  and amortization
              
              
              42.6
              
              
              44.6
              
              
              21.9Capital
                  expenditures
              
              
              43.6
              
              
              22.8
              
              
              12.0Total
                  revenues
              
              $
              11,409.3
              
              $
              10,546.9
              
              $
              9,393.6Operating
                  income from reportable segments
              
              
              1,524.2
              
              
              1,439.7
              
              
              1,231.6Unallocated
                  corporate expense
              
              
              (83.4
              )
              
              (77.9
              )
              
              (111.3
              )Total
                  operating income
              
              $
              1,440.8
              
              $
              1,361.8
              
              $
              1,120.3Total
                  operating income as a percentage of revenues
              
              
              12.6
              %
              
              12.9
              %
              
              11.9
              %Depreciation
                  and amortization from reportable segments
              
              
              160.8
              
              
              164.0
              
              
              147.9Unallocated
                  depreciation and amortization
              
              
              29.9
              
              
              31.7
              
              
              26.5Total
                  depreciation and amortization
              
              $
              190.7
              
              $
              195.7
              
              $
              174.4Capital
                  expenditures from reportable segments
              
              
              187.0
              
              
              124.8
              
              
              77.9Corporate
                  capital expenditures
              
              
              25.3
              
              
              17.0
              
              
              47.7Total
                  capital expenditures
              
              $
              212.3
              
              $
              141.8
              
              $
              125.6




89




Revenues
      by destination and long-lived assets by geographic area for the years ended
      December 31 were as follows:


*In
                  millions*
              
              2006
              
              2005
              
              2004**Revenues**United
                  States
              
              $
              6,438.7
              
              $
              6,305.7
              
              $
              5,775.1Non-U.S.
              
              
              4,970.6
              
              
              4,241.2
              
              
              3,618.5Total
              
              $
              11,409.3
              
              $
              10,546.9
              
              $
              9,393.6




*In
                  millions*
              
              2006
              
              2005**Long-lived
                  assets**United
                  States
              
              $
              1,159.9
              
              $
              1,376.2Non-U.S.
              
              
              623.8
              
              
              509.1Total
              
              $
              1,783.7
              
              $
              1,885.3


**NOTE
      17 - IR-NEW JERSEY**




As
      part
      of the reorganization, IR-Limited guaranteed all of the issued public debt
      securities of IR-New Jersey. The subsidiary issuer, IR-New Jersey, is 100%
      owned
      by the parent, IR-Limited, the guarantees are full and unconditional, and no
      other subsidiary of the Company guarantees the securities. The following
      condensed consolidated financial information for IR-Limited, IR-New Jersey,
      and
      all their other subsidiaries is included so that separate financial statements
      of IR-New Jersey are not required to be filed with the U.S. Securities and
      Exchange Commission.





As
      part
      of the reorganization of December 31, 2001, IR-Limited issued Class B common
      shares to IR-New Jersey in exchange for a $3.6 billion note and shares of
      certain IR-New Jersey subsidiaries. The note, which is due in 2011, has a fixed
      rate of interest of 11% per annum payable semi-annually and imposes certain
      restrictive covenants upon IR-New Jersey. The Class B common shares are
      non-voting and pay dividends comparable to the Class A common shares. In 2002,
      IR-Limited contributed the note to a wholly owned subsidiary, which subsequently
      transferred portions of the note to several other subsidiaries, all of which
      are
      included in the “Other Subsidiaries” below. Accordingly, the subsidiaries of
      IR-Limited remain creditors of IR-New Jersey.





IR-New
      Jersey has unconditionally guaranteed payment of the principal, premium, if
      any,
      and interest on the Company’s 4.75% Senior Notes due in 2015 in the aggregate
      principal amount of $300 million. The guarantee is unsecured and provided on
      an
      unsubordinated basis. The guarantee ranks equally in right of payment with
      all
      of the existing and future unsecured and unsubordinated debt of IR-New
      Jersey.





The
      condensed consolidating financial statements present IR-Limited and IR-New
      Jersey investments in their subsidiaries using the equity method of accounting.
      Intercompany investments in the non-voting Class B common shares are accounted
      for on the cost method and are reduced by intercompany dividends. In accordance
      with generally accepted accounting principles, the amounts related to the
      issuance of the Class B shares have been presented as contra accounts in
      Shareholders’ Equity since the Class B issuance on December 31, 2001. The notes
      payable continue to be reflected as a liability on the balance sheet of IR-New
      Jersey and are enforceable in accordance with their terms.





90


**Condensed
        Consolidating Income Statement**
 For
        the
        year ended December 31, 2006


IR
              
              IR
              
              Other
              
              Consolidating
              
              IR
                  Limited*In
                  millions*
              
              Limited
              
              New
                  Jersey
              
              Subsidiaries
              
              Adjustments
              
              ConsolidatedNet
                  revenues
              
              $
              -
              
              $
              1,582.4
              
              $
              9,826.9
              
              $
              -
              
              $
              11,409.3Cost
                  of goods sold
              
              
              -
              
              
              1,181.5
              
              
              7,242.7
              
              
              -
              
              
              8,424.2Selling
                  and administrative expenses
              
              
              16.3
              
              
              341.9
              
              
              1,186.1
              
              
              -
              
              
              1,544.3Operating
                  (loss) income
              
              
              (16.3
              )
              
              59.0
              
              
              1,398.1
              
              
              -
              
              
              1,440.8Equity
                  earnings in affiliates (net of tax)
              
              
              1,116.6
              
              
              607.4
              
              
              156.7
              
              
              (1,880.7
              )
              
              -Interest
                  expense
              
              
              (30.3
              )
              
              (75.1
              )
              
              (26.4
              )
              
              -
              
              
              (131.8
              )Intercompany
                  interest and fees
              
              
              (32.9
              )
              
              (645.0
              )
              
              677.9
              
              
              -
              
              
              -Other
                  income (expense), net
              
              
              (4.6
              )
              
              63.9
              
              
              (68.3
              )
              
              -
              
              
              (9.0
              )Earnings
                  (loss) before income taxes
              
              
              1,032.5
              
              
              10.2
              
              
              2,138.0
              
              
              (1,880.7
              )
              
              1,300.0(Benefit)
                  provision for income taxes
              
              
              -
              
              
              (177.5
              )
              
              409.2
              
              
              -
              
              
              231.7Earnings
                  (loss) from continuing operations
              
              
              1,032.5
              
              
              187.7
              
              
              1,728.8
              
              
              (1,880.7
              )
              
              1,068.3Discontinued
                  operations, net of tax
              
              
              -
              
              
              (31.0
              )
              
              (4.8
              )
              
              -
              
              
              (35.8
              )Net
                  earnings (loss)
              
              $
              1,032.5
              
              $
              156.7
              
              $
              1,724.0
              
              $
              (1,880.7
              )
              $
              1,032.5




**Condensed
        Consolidating Income Statement**
 For
        the
        year ended December 31, 2005
  IR
              
              IR
              
              Other
              
              Consolidating
              
              IR
                  Limited*In
                  millions*
              
              Limited
              
              New
                  Jersey
              
              Subsidiaries
              
              Adjustments
              
              ConsolidatedNet
                  revenues
              
              $
              -
              
              $
              1,638.3
              
              $
              8,908.6
              
              $
              -
              
              $
              10,546.9Cost
                  of goods sold
              
              
              -
              
              
              1,271.4
              
              
              6,472.7
              
              
              -
              
              
              7,744.1Selling
                  and administrative expenses
              
              
              1.2
              
              
              338.7
              
              
              1,101.1
              
              
              -
              
              
              1,441.0Operating
                  (loss) income
              
              
              (1.2
              )
              
              28.2
              
              
              1,334.8
              
              
              -
              
              
              1,361.8Equity
                  earnings in affiliates (net of tax)
              
              
              1,104.8
              
              
              487.1
              
              
              197.7
              
              
              (1,789.6
              )
              
              -Interest
                  expense
              
              
              (9.1
              )
              
              (104.7
              )
              
              (30.5
              )
              
              -
              
              
              (144.3
              )Intercompany
                  interest and fees
              
              
              (38.4
              )
              
              (425.8
              )
              
              464.2
              
              
              -
              
              
              -Other
                  income (expense), net
              
              
              (1.9
              )
              
              104.7
              
              
              (62.5
              )
              
              -
              
              
              40.3Earnings
                  (loss) before income taxes
              
              
              1,054.2
              
              
              89.5
              
              
              1,903.7
              
              
              (1,789.6
              )
              
              1,257.8(Benefit)
                  provision for income taxes
              
              
              -
              
              
              (112.7
              )
              
              317.4
              
              
              -
              
              
              204.7Earnings
                  (loss) from continuing operations
              
              
              1,054.2
              
              
              202.2
              
              
              1,586.3
              
              
              (1,789.6
              )
              
              1,053.1Discontinued
                  operations, net of tax
              
              
              -
              
              
              (4.5
              )
              
              5.6
              
              
              -
              
              
              1.1Net
                  earnings (loss)
              
              $
              1,054.2
              
              $
              197.7
              
              $
              1,591.9
              
              $
              (1,789.6
              )
              $
              1,054.2




91


**Condensed
        Consolidating Income Statement**
 For
        the
        year ended December 31, 2004


IR
              
              IR
              
              Other
              
              Consolidating
              
              IR
                  Limited*In
                  millions*
              
              Limited
              
              New
                  Jersey
              
              Subsidiaries
              
              Adjustments
              
              ConsolidatedNet
                  revenues
              
              $
              -
              
              $
              1,390.2
              
              $
              8,003.4
              
              $
              -
              
              $
              9,393.6Cost
                  of goods sold
              
              
              -
              
              
              1,071.5
              
              
              5,782.5
              
              
              -
              
              
              6,854.0Selling
                  and administrative expenses
              
              
              0.1
              
              
              354.5
              
              
              1,064.7
              
              
              -
              
              
              1,419.3Operating
                  income
              
              
              (0.1
              )
              
              (35.8
              )
              
              1,156.2
              
              
              -
              
              
              1,120.3Equity
                  earnings in affiliates (net of tax)
              
              
              1,231.6
              
              
              956.3
              
              
              576.2
              
              
              (2,764.1
              )
              
              -Interest
                  expense
              
              
              (0.2
              )
              
              (122.2
              )
              
              (30.7
              )
              
              -
              
              
              (153.1
              )Intercompany
                  interest and fees
              
              
              (7.5
              )
              
              (538.4
              )
              
              545.9
              
              
              -
              
              
              -Other
                  income (expense), net
              
              
              (5.1
              )
              
              87.3
              
              
              (81.2
              )
              
              -
              
              
              1.0Earnings
                  (loss) before income taxes
              
              
              1,218.7
              
              
              347.2
              
              
              2,166.4
              
              
              (2,764.1
              )
              
              968.2(Benefit)
                  provision for income taxes
              
              
              -
              
              
              (219.5
              )
              
              357.9
              
              
              -
              
              
              138.4Earnings
                  (loss) from continuing operations
              
              
              1,218.7
              
              
              566.7
              
              
              1,808.5
              
              
              (2,764.1
              )
              
              829.8Discontinued
                  operations, net of tax
              
              
              -
              
              
              9.5
              
              
              379.4
              
              
              -
              
              
              388.9Net
                  earnings (loss)
              
              $
              1,218.7
              
              $
              576.2
              
              $
              2,187.9
              
              $
              (2,764.1
              )
              $
              1,218.7




92




**Condensed
        Consolidating Balance Sheet** December
            31, 2006
  IR
              
              IR
              
              Other
              
              Consolidating
              
              IR
                  Limited*In
                  millions*
              
              Limited
              
              New
                  Jersey
              
              Subsidiaries
              
              Adjustments
              
              ConsolidatedCurrent
                  assets:Cash
                  and cash equivalents
              
              $
              1.7
              
              $
              81.6
              
              $
              279.0
              
              $
              -
              
              $
              362.3Marketable
                  securities
              
              
              -
              
              
              -
              
              
              0.7
              
              
              -
              
              
              0.7Accounts
                  and notes receivable, net
              
              
              0.3
              
              
              283.7
              
              
              1,712.2
              
              
              -
              
              
              1,996.2Inventories,
                  net
              
              
              -
              
              
              204.5
              
              
              1,115.8
              
              
              -
              
              
              1,320.3Prepaid
                  expenses and deferred income taxes
              
              
              0.4
              
              
              389.4
              
              
              26.6
              
              
              -
              
              
              416.4Accounts
                  and notes receivable affiliates
              
              
              921.4
              
              
              2,662.1
              
              
              26,537.6
              
              
              (30,121.1
              )
              
              -Total
                  current assets
              
              
              923.8
              
              
              3,621.3
              
              
              29,671.9
              
              
              (30,121.1
              )
              
              4,095.9Investment
                  in affiliates
              
              
              7,130.9
              
              
              11,565.2
              
              
              31,009.6
              
              
              (49,705.7
              )
              
              -Property,
                  plant and equipment, net
              
              
              -
              
              
              280.8
              
              
              995.5
              
              
              -
              
              
              1,276.3Intangible
                  assets, net
              
              
              -
              
              
              81.1
              
              
              5,259.9
              
              
              -
              
              
              5,341.0Other
                  assets
              
              
              1.7
              
              
              1,283.8
              
              
              147.2
              
              
              -
              
              
              1,432.7Total
                  assets
              
              $
              8,056.4
              
              $
              16,832.2
              
              $
              67,084.1
              
              $
              (79,826.8
              )
              $
              12,145.9Current
                  liabilities:Accounts
                  payable and accruals
              
              $
              6.3
              
              $
              487.7
              
              $
              2,040.2
              
              $
              -
              
              $
              2,534.2Loans
                  payable and current maturitiesof
                  long-term debt
              
              
              378.0
              
              
              596.8
              
              
              104.6
              
              
              -
              
              
              1,079.4Accounts
                  and note payable affiliates
              
              
              779.0
              
              
              7,035.7
              
              
              22,306.4
              
              
              (30,121.1
              )
              
              -Total
                  current liabilities
              
              
              1,163.3
              
              
              8,120.2
              
              
              24,451.2
              
              
              (30,121.1
              )
              
              3,613.6Long-term
                  debt
              
              
              299.0
              
              
              411.3
              
              
              194.9
              
              
              -
              
              
              905.2Note
                  payable affiliate
              
              
              950.0
              
              
              2,697.4
              
              
              -
              
              
              (3,647.4
              )
              
              -Other
                  noncurrent liabilities
              
              
              239.3
              
              
              1,847.5
              
              
              135.5
              
              
              -
              
              
              2,222.3Total
                  liabilities
              
              
              2,651.6
              
              
              13,076.4
              
              
              24,781.6
              
              
              (33,768.5
              )
              
              6,741.1Shareholders'
                  equity:Class
                  A common shares
              
              
              364.5
              
              
              -
              
              
              (57.7
              )
              
              -
              
              
              306.8Class
                  B common shares
              
              
              270.6
              
              
              -
              
              
              -
              
              
              (270.6
              )
              
              -Common
                  shares
              
              
              -
              
              
              -
              
              
              2,362.8
              
              
              (2,362.8
              )
              
              -Other
                  shareholders' equity
              
              
              9,403.3
              
              
              4,815.3
              
              
              43,957.1
              
              
              (52,719.6
              )
              
              5,456.1Accumulated
                  other comprehensive income (loss)
              
              
              (36.4
              )
              
              (627.9
              )
              
              205.7
              
              
              100.5
              
              
              (358.1
              )10,002.0
              
              
              4,187.4
              
              
              46,467.9
              
              
              (55,252.5
              )
              
              5,404.8Less:
                  Contra account
              
              
              (4,597.2
              )
              
              (431.6
              )
              
              (4,165.4
              )
              
              9,194.2
              
              
              -Total
                  shareholders' equity
              
              
              5,404.8
              
              
              3,755.8
              
              
              42,302.5
              
              
              (46,058.3
              )
              
              5,404.8Total
                  liabilities and equity
              
              $
              8,056.4
              
              $
              16,832.2
              
              $
              67,084.1
              
              $
              (79,826.8
              )
              $
              12,145.9




93




**Condensed
        Consolidating Balance Sheet** December
          31, 2005
  IR
              
              IR
              
              Other
              
              Consolidating
              
              IR
                  Limited*In
                  millions*
              
              Limited
              
              New
                  Jersey
              
              Subsidiaries
              
              Adjustments
              
              ConsolidatedCurrent
                  assets:Cash
                  and cash equivalents
              
              $
              25.5
              
              $
              207.1
              
              $
              648.0
              
              $
              -
              
              $
              880.6Marketable
                  securities
              
              
              -
              
              
              -
              
              
              156.5
              
              
              -
              
              
              156.5Accounts
                  and notes receivable, net
              
              
              1.3
              
              
              311.8
              
              
              1,365.9
              
              
              -
              
              
              1,679.0Inventories,
                  net
              
              
              -
              
              
              188.9
              
              
              939.9
              
              
              -
              
              
              1,128.8Prepaid
                  expenses and deferred income taxes
              
              
              -
              
              
              62.1
              
              
              341.2
              
              
              -
              
              
              403.3Accounts
                  and notes receivable affiliates
              
              
              299.6
              
              
              3,660.9
              
              
              22,687.9
              
              
              (26,648.4
              )
              
              -Total
                  current assets
              
              
              326.4
              
              
              4,430.8
              
              
              26,139.4
              
              
              (26,648.4
              )
              
              4,248.2Investment
                  in affiliates
              
              
              7,092.7
              
              
              11,440.6
              
              
              29,894.4
              
              
              (48,427.7
              )
              
              -Property,
                  plant and equipment, net
              
              
              -
              
              
              291.6
              
              
              865.9
              
              
              -
              
              
              1,157.5Intangible
                  assets, net
              
              
              -
              
              
              118.9
              
              
              5,031.5
              
              
              -
              
              
              5,150.4Other
                  assets
              
              
              1.9
              
              
              854.0
              
              
              344.4
              
              
              -
              
              
              1,200.3Total
                  assets
              
              $
              7,421.0
              
              $
              17,135.9
              
              $
              62,275.6
              
              $
              (75,076.1
              )
              $
              11,756.4Current
                  liabilities:Accounts
                  payable and accruals
              
              $
              5.8
              
              $
              561.2
              
              $
              1,700.0
              
              $
              -
              
              $
              2,267.0Loans
                  payable and current maturitiesof
                  long-term debt
              
              
              -
              
              
              849.4
              
              
              83.3
              
              
              -
              
              
              932.7Accounts
                  and note payable affiliates
              
              
              956.6
              
              
              5,870.1
              
              
              19,821.7
              
              
              (26,648.4
              )
              
              -Total
                  current liabilities
              
              
              962.4
              
              
              7,280.7
              
              
              21,605.0
              
              
              (26,648.4
              )
              
              3,199.7Long-term
                  debt
              
              
              298.9
              
              
              658.1
              
              
              227.3
              
              
              -
              
              
              1,184.3Note
                  payable affiliate
              
              
              300.0
              
              
              3,347.4
              
              
              -
              
              
              (3,647.4
              )
              
              -Other
                  noncurrent liabilities
              
              
              97.7
              
              
              1,389.0
              
              
              123.7
              
              
              -
              
              
              1,610.4Total
                  liabilities
              
              
              1,659.0
              
              
              12,675.2
              
              
              21,956.0
              
              
              (30,295.8
              )
              
              5,994.4Shareholders'
                  equity:Class
                  A common shares
              
              
              360.8
              
              
              -
              
              
              (30.1
              )
              
              -
              
              
              330.7Class
                  B common shares
              
              
              270.6
              
              
              -
              
              
              -
              
              
              (270.6
              )
              
              -Common
                  shares
              
              
              -
              
              
              -
              
              
              2,362.8
              
              
              (2,362.8
              )
              
              -Other
                  shareholders' equity
              
              
              9,740.2
              
              
              5,066.6
              
              
              42,376.2
              
              
              (51,624.1
              )
              
              5,558.9Accumulated
                  other comprehensive income (loss)
              
              
              193.9
              
              
              (158.7
              )
              
              (33.2
              )
              
              (129.6
              )
              
              (127.6
              )10,565.5
              
              
              4,907.9
              
              
              44,675.7
              
              
              (54,387.1
              )
              
              5,762.0Less:
                  Contra account
              
              
              (4,803.5
              )
              
              (447.2
              )
              
              (4,356.1
              )
              
              9,606.8
              
              
              -Total
                  shareholders' equity
              
              
              5,762.0
              
              
              4,460.7
              
              
              40,319.6
              
              
              (44,780.3
              )
              
              5,762.0Total
                  liabilities and equity
              
              $
              7,421.0
              
              $
              17,135.9
              
              $
              62,275.6
              
              $
              (75,076.1
              )
              $
              11,756.4




94


**Condensed
        Consolidating Statement of Cash Flows**
 For
        the
        year ended December 31, 2006


IR
              
              IR
              
              Other
              
              IR
                  Limited*In
                  millions*
              
              Limited
              
              New
                  Jersey
              
              Subsidiaries
              
              ConsolidatedNet
                  cash (used in) provided by continuing operating activities
              
              $
              (67.4
              )
              $
              (918.9
              )
              $
              1,995.1
              
              $
              1,008.8Net
                  cash (used in) provided by discontinued operating
                  activities
              
              
              -
              
              
              (31.2
              )
              
              (5.4
              )
              
              (36.6
              )Cash
                  flows from investing activities:Capital
                  expenditures
              
              
              -
              
              
              (52.8
              )
              
              (159.5
              )
              
              (212.3
              )Proceeds
                  from sale of property, plant and equipment
              
              
              -
              
              
              1.0
              
              
              15.4
              
              
              16.4Acquisitions,
                  net of cash
              
              
              -
              
              
              (11.8
              )
              
              (109.7
              )
              
              (121.5
              )Proceeds
                  from business dispositions
              
              
              -
              
              
              -
              
              
              -
              
              
              -Purchase
                  of marketable securities
              
              
              -
              
              
              -
              
              
              155.8
              
              
              155.8Cash
                  provided by equity companies, net
              
              
              -
              
              
              -
              
              
              0.4
              
              
              0.4Net
                  cash (used in) provided by continuing investing activities
              
              
              -
              
              
              (63.6
              )
              
              (97.6
              )
              
              (161.2
              )Net
                  cash (used in) provided by discontinued investing
                  activities
              
              
              -
              
              
              -
              
              
              -
              
              
              -Cash
                  flows from financing activities:Net
                  change in debt
              
              
              379.1
              
              
              (499.7
              )
              
              (19.9
              )
              
              (140.5
              )Net
                  inter-company (payments) proceeds
              
              
              (7.3
              )
              
              1,372.3
              
              
              (1,365.0
              )
              
              -Proceeds
                  from the exercise of stock options
              
              
              95.7
              
              
              -
              
              
              -
              
              
              95.7Dividends
                  (paid) received
              
              
              (423.9
              )
              
              15.6
              
              
              190.7
              
              
              (217.6
              )Repurchase
                  of common shares by subsidiary
              
              
              -
              
              
              -
              
              
              (1,096.3
              )
              
              (1,096.3
              )Net
                  cash (used in) provided by continuing financing activities
              
              
              43.6
              
              
              888.2
              
              
              (2,290.5
              )
              
              (1,358.7
              )Net
                  cash (used in) provided by discontinued financing
                  activities
              
              
              -
              
              
              -
              
              
              -
              
              
              -Effect
                  of exchange rate changes on cash andcash
                  equivalents
              
              
              -
              
              
              -
              
              
              29.4
              
              
              29.4Net
                  (decrease) increase in cash and cash equivalents
              
              
              (23.8
              )
              
              (125.5
              )
              
              (369.0
              )
              
              (518.3
              )Cash
                  and cash equivalents - beginning of period
              
              
              25.5
              
              
              207.1
              
              
              648.0
              
              
              880.6Cash
                  and cash equivalents - end of period
              
              $
              1.7
              
              $
              81.6
              
              $
              279.0
              
              $
              362.3




95


**Condensed
        Consolidating Statement of Cash Flows**
 For
        the
        year ended December 31, 2005


IR
              
              IR
              
              Other
              
              IR
                  Limited*In
                  millions*
              
              Limited
              
              New
                  Jersey
              
              Subsidiaries
              
              ConsolidatedNet
                  cash (used in) provided by continuing operating activities
              
              $
              (32.0
              )
              $
              (475.7
              )
              $
              1,380.9
              
              $
              873.2Net
                  cash (used in) provided by discontinued operating
                  activities
              
              
              -
              
              
              (18.5
              )
              
              (15.6
              )
              
              (34.1
              )Cash
                  flows from investing activities:Capital
                  expenditures
              
              
              -
              
              
              (49.4
              )
              
              (92.4
              )
              
              (141.8
              )Proceeds
                  from sale of property, plant and equipment
              
              
              -
              
              
              2.2
              
              
              16.8
              
              
              19.0Acquisitions,
                  net of cash
              
              
              -
              
              
              -
              
              
              (514.7
              )
              
              (514.7
              )Proceeds
                  from business dispositions
              
              
              -
              
              
              3.7
              
              
              7.7
              
              
              11.4Purchase
                  of marketable securities
              
              
              -
              
              
              -
              
              
              (153.2
              )
              
              (153.2
              )Cash
                  provided by equity companies
              
              
              -
              
              
              -
              
              
              7.6
              
              
              7.6Net
                  cash (used in) provided by continuing investing activities
              
              
              -
              
              
              (43.5
              )
              
              (728.2
              )
              
              (771.7
              )Net
                  cash (used in) provided by discontinued investing
                  activities
              
              
              -
              
              
              -
              
              
              -
              
              
              -Cash
                  flows from financing activities:Net
                  change in debt
              
              
              297.4
              
              
              (87.3
              )
              
              (147.4
              )
              
              62.7Net
                  inter-company (payments) proceeds
              
              
              (134.8
              )
              
              (25.2
              )
              
              160.0
              
              
              -Proceeds
                  from the exercise of stock options
              
              
              90.9
              
              
              -
              
              
              -
              
              
              90.9Dividends
                  (paid) received
              
              
              (359.2
              )
              
              13.2
              
              
              153.9
              
              
              (192.1
              )Redemption
                  of preferred stock of subsidiary
              
              
              (73.6
              )
              
              -
              
              
              -
              
              
              (73.6
              )Repurchase
                  of common shares by subsidiary
              
              
              -
              
              
              -
              
              
              (763.6
              )
              
              (763.6
              )Net
                  cash (used in) provided by continuing financing activities
              
              
              (179.3
              )
              
              (99.3
              )
              
              (597.1
              )
              
              (875.7
              )Net
                  cash (used in) provided by discontinued financing
                  activities
              
              
              -
              
              
              -
              
              
              -
              
              
              -Effect
                  of exchange rate changes on cash andcash
                  equivalents
              
              
              -
              
              
              -
              
              
              (14.2
              )
              
              (14.2
              )Net
                  (decrease) increase in cash and cash equivalents
              
              
              (211.3
              )
              
              (637.0
              )
              
              25.8
              
              
              (822.5
              )Cash
                  and cash equivalents - beginning of period
              
              
              236.8
              
              
              844.1
              
              
              622.2
              
              
              1,703.1Cash
                  and cash equivalents - end of period
              
              $
              25.5
              
              $
              207.1
              
              $
              648.0
              
              $
              880.6




96


**Condensed
        Consolidating Statement of Cash Flows** For
          the
          year ended December 31, 2004


IR
              
              IR
              
              Other
              
              IR
                  Limited*In
                  millions*
              
              Limited
              
              New
                  Jersey
              
              Subsidiaries
              
              ConsolidatedNet
                  cash (used in) provided by continuing operating activities
              
              $
              (14.5
              )
              $
              (574.2
              )
              $
              1,358.9
              
              $
              770.2Net
                  cash (used in) provided by discontinued operating
                  activities
              
              
              -
              
              
              (13.5
              )
              
              40.8
              
              
              27.3Cash
                  flows from investing activities:Capital
                  expenditures
              
              
              -
              
              
              (42.1
              )
              
              (83.5
              )
              
              (125.6
              )Proceeds
                  from sale of property, plant and equipment
              
              
              -
              
              
              17.7
              
              
              32.7
              
              
              50.4Acquisitions,
                  net of cash
              
              
              -
              
              
              -
              
              
              (33.7
              )
              
              (33.7
              )Proceeds
                  from the sale of marketable securities
              
              
              -
              
              
              -
              
              
              0.3
              
              
              0.3Proceeds
                  from business dispositions
              
              
              -
              
              
              189.0
              
              
              1,224.2
              
              
              1,413.2Cash
                  provided by equity companies
              
              
              -
              
              
              -
              
              
              7.6
              
              
              7.6Net
                  cash (used in) provided by continuing investing activities
              
              
              -
              
              
              164.6
              
              
              1,147.6
              
              
              1,312.2Net
                  cash (used in) provided by discontinued investing
                  activities
              
              
              -
              
              
              -
              
              
              (7.4
              )
              
              (7.4
              )Cash
                  flows from financing activities:Net
                  change in debt
              
              
              -
              
              
              (409.5
              )
              
              (59.9
              )
              
              (469.4
              )Net
                  inter-company (payments) proceeds
              
              
              191.4
              
              
              1,562.4
              
              
              (1,753.8
              )
              
              -Proceeds
                  from the exercise of stock options
              
              
              170.7
              
              
              -
              
              
              -
              
              
              170.7Dividends
                  (paid) received
              
              
              (271.3
              )
              
              10.2
              
              
              108.5
              
              
              (152.6
              )Repurchase
                  of common shares by subsidiary
              
              
              -
              
              
              -
              
              
              (355.9
              )
              
              (355.9
              )Net
                  cash (used in) provided by continuing financing activities
              
              
              90.8
              
              
              1,163.1
              
              
              (2,061.1
              )
              
              (807.2
              )Net
                  cash (used in) provided by discontinued financing
                  activities
              
              
              -
              
              
              -
              
              
              (1.0
              )
              
              (1.0
              )Effect
                  of change in fiscal year end of business
              
              
              -
              
              
              -
              
              
              (23.8
              )
              
              (23.8
              )Effect
                  of exchange rate changes on cash andcash
                  equivalents
              
              
              -
              
              
              -
              
              
              16.5
              
              
              16.5Net
                  increase in cash and cash equivalents
              
              
              76.3
              
              
              740.0
              
              
              470.5
              
              
              1,286.8Cash
                  and cash equivalents - beginning of period
              
              
              160.5
              
              
              104.1
              
              
              151.7
              
              
              416.3Cash
                  and cash equivalents - end of period
              
              $
              236.8
              
              $
              844.1
              
              $
              622.2
              
              $
              1,703.1




**NOTE
      18- SUBSEQUENT EVENTS (UNAUDITED)**




On
      February 27, 2007, the Company agreed to sell its Road Development business
      unit
      to AB Volvo (publ) for cash proceeds of approximately $1.3 billion, subject
      to
      post closing adjustments. The sale, which is subject to government regulatory
      approvals and other customary closing conditions, is targeted to close in the
      second quarter of 2007. The Company’s Road Development business unit
      manufactures and sells asphalt paving equipment, compaction equipment, milling
      machines, and construction-related material handling equipment and has been
      reported as part of the Company’s Construction Technologies sector.





The
      Road
      Development business unit had net revenues of approximately $700 million for
      the
      year ended December 31, 2006. The Company expects to record a gain on the
      transaction when the sale is consummated.





97





**SCHEDULE
        II**
  **INGERSOLL
        RAND COMPANY LIMITED** **VALUATION
          AND QUALIFYING ACCOUNTS** **FOR
            THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004** (Amounts
                in millions)
  **Allowances
                  for Doubtful Accounts:****Balance
                  December 31, 2003**
              
              $
              58.7Additions
                  charged to costs and expenses
              
              
              21.0Deductions
                  *
              
              
              (11.9
              )Business
                  acquisitions and divestitures, net
              
              
              (1.2
              )Currency
                  translation
              
              
              3.5**Balance
                  December 31, 2004**
              
              
              70.1Net
                  reductions in costs and expenses
              
              
              (4.3
              )Deductions
                  *
              
              
              (21.0
              )Business
                  acquisitions and divestitures, net
              
              
              5.1Currency
                  translation
              
              
              (2.3
              )**Balance
                  December 31, 2005**
              
              
              47.6Net
                  reductions in costs and expenses
              
              
              (16.3
              )Deductions
                  *
              
              
              (17.3
              )Business
                  acquisitions and divestitures, net
              
              
              1.6Currency
                  translation
              
              
              2.2**Balance
                  December 31, 2006**
              
              $
              17.8
  (*)
        "Deductions" include accounts and advances written off, less
        recoveries.


98




**SCHEDULE
        II**
  **INGERSOLL
        RAND COMPANY LIMITED** **VALUATION
          AND QUALIFYING ACCOUNTS** **FOR
            THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004** (Amounts
              in millions)
  **Reserve
                  for LIFO:****Balance
                  December 31, 2003**
              
              $
              69.4Additions
              
              
              40.8Reductions
              
              
              (7.2
              )**Balance
                  December 31, 2004**
              
              
              103.0Additions
              
              
              23.3Reductions
              
              
              (3.0
              )**Balance
                  December 31, 2005**
              
              
              123.3Additions
              
              
              36.0Reductions
              
              
              (0.7
              )**Balance
                  December 31, 2006**
              
              $
              158.6




99