deere annual report 2008

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GROWINGA BUSINESS AS GREAT AS OUR PRODUCTS

Deere & Company Annual Report 2008


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From left: Sam Allen, Dave Everitt, Jim Field, Jim Israel, Bob Lane,Jim Jenkins, Mike Mack, H.J. Markley and Mark von Pentz. Shownwith Deeres largest combine, the 9870 STS, an industry leader inproductivity, ease of operation and grain quality.

John Deere Expands Leadership inWater TechnologiesWith 70% of the worlds fresh-water consumption related toagriculture, water management is an area of vital importance as wellas exciting growth potential to John Deere. In 2008, the companyestablished a leadership position in the eld with acquisitions of

two successful water-management providers, Plastro IrrigationSystems and T-Systems International. Those moves build on the earlieracquisition of Roberts Irrigation Products in 2006.

Precision agriculture is a key to helping meet the worlds demand forincreased productivity from agriculture, said Mike McGrady,John Deere Water Technologies president.

Senior Management Team

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John Deere aspires to distinctively serve customers, those linkedto the land, through a great business. During scal year 2008,the company made further progress in the pursuit of thisaspiration, which continues to guide our actions.

Earnings reached record levels for afth straight year. Wecontinued to bring advanced new products to our customersand introduced the power and value of the John Deere brandto a growing global audience. For the rst time, over half of our agricultural equipment sales came from outside the UnitedStates and Canada. Growth in developing areas such as Brazil,

Russia and Central Europe was especially impressive.In all, 2008 was a year of signicant achievement. Net incomereached $2.05 billion on total net sales and revenues of $28.4billion. Agricultural equipment sales rose 37 percent, or by morethan $4 billion, as those operations had their best year ever.Earnings per share increased 18 percent with net income up13 percent.

As a result of our success generating pro t while carefullymanaging assets, the company is producing strong levels of economic pro t, or Shareholder Value Added (SVA). This measure,which has been driving everyday operations in our companysince 2001, reects our determination to invest in products,projects and businesses that consistently yield returns in excessof an underlying cost of capital. SVA increased last year to $1.7billion. In each of the lastve years, it has been more than twiceas high as in any year prior to the period.

Relentless SVA Focus

Such a relentless focus on SVA has helped the company achieverecord results even with some of our key markets in a depressedcondition. The U.S. economic slump, as an example, slowedconstruction and forestry (C&F) and commercial and consumerequipment (C&CE) sales last year. Yet both divisions remainedsolidly pro table and delivered further SVA.

In spite of the severe downturn in housing construction, the

C&F division saw a sales decline of only 4 percent last yearwith an operating margin of almost 10 percent. Such steadinesis due to an improved ability to match factory production withretail orders and purge unnecessary costs. C&F also has foundgreat success delivering a powerful value proposition tocustomers based on responsive service, machine productivityand low operating costs.

Also of vital importance, our credit operation in 2008 extendeits worldwide reach and remained a reliable pro t source.John Deere Credit has continued to provide an uninterrupted

ow of

nancing to creditworthy customers, while bene

tingfrom a portfolio of high quality loans and leases.

Powerful Trends

As weve noted in previous annual reports, powerful demographtrends should bring great bene ts to John Deere. The worldspopulation continues to grow, adding literally thousands of nemouths to feed by the hour. Combined with improved livingstandards, this has led to greater worldwide demand for foodand for energy, including biofuels such as ethanol. Globalconsumption of wheat, corn and soybeans has increased byapproximately 20 percent in this decade alone. Related trendspointing to increased demand for shelter and infrastructure,support a healthy outlook for our other businesses. Althougheconomic uncertainties may moderate the impact of thesedevelopments today, we have continued condence thatJohn Deere will reap signicant gains from them over time.

Growth Through Innovation

Our primary growth metric is to achieve average, sustainableSVA gains of 7 percent a year over the business cycle. Thats achallenging goal, inevitably requiring higher sales and anunwavering focus on innovation. Long a company strength,innovation is critical to pro tably expanding our markets andmeeting customer needs for advanced equipment. Innovation

so important that we target at least 30 percent of future SVA

Net Sales and Revenues (MM)

2006 2007 2008

Operating Pro t (MM)

2006 2007 2008

Net Income (MM)

2006 2007 2008

Robert W. LaneChairman and Chief Executive Of cer

Chairmans Message

Sound Execution DrivingStrong Results

$22,148 $24,082 $28,438 $2,426 $2,871 $3,420 $1,694 $1,822 $2,053


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New to the market for 2009, the 7760 cottonpicker extends John Deeres leadership incotton harvesting. As the rst machine thatbuilds round modules on the go, the innovativemodel offers non-stop harvesting and higher-quality cotton, reducing the need for othercotton equipment in the eld.

Successfully introduced in 2008, the 5055E is aversatile member of an innovative 45-105 hputility tractor line. The open-station 5E seriesprovides exceptional value through highdurability and performance at an economicalprice.

growth to come from products, processes or geographies newto Deere. To help direct these efforts, we have identied keyareas, or innovation spheres, that have ample growth potentialand relevance to our operations. Two of these watermanagement and renewable energy are already the basis of successful John Deere businesses and are helping the companybuild a competitive advantage in those areas.

Pro tably extending the John Deere brand to a wider worldwidecustomer base remains a top growth priority, as well as an areaof considerable achievement. Last year, Deere sales outside theUnited States and Canada surpassed $10 billion for thersttime. Sales in the emerging markets of Brazil, Russia, India, andChina continued their strong growth and are now more thanthree times the level of 2006. While some of these countrieshave been hurt by the recent global economic slowdown, theyshould continue to be an attractive source of John Deere salesand market-share growth.

In support of our growth initiatives, the company in 2008invested $1.4 billion in capital projects and acquisitions.Included were farm-machinery factory expansions in Brazil andthe United States, which will help meet the world's growingdemand for advanced tractors and combines. We alsoimplemented plans for construction-equipment joint venturesin China and India. In addition, Deere made a pair of water-management acquisitions, which build on our 2006 purchase of Roberts Irrigation. We also made further investments in windenergy, an area that is healthy for both the environment andrural economies. The company, as well, continued to make asignicant nancial commitment to new engine technology inresponse to increasingly demanding environmental standards.

Operating Excellence

Rigorous asset management lies at the heart of our strategy toachieve more consistent returns, add to our comparativeadvantage, and weather tough economic times. Tradereceivables and inventories ended the year at their lowest point

as a percent of sales in recent times and asset turns againedged higher. Much of our success managing assets andexecuting the John Deere strategy comes from the adoptionof robust, common operating processes and practices at unitsacross the enterprise. These apply to a range of activities, fromproduct development and order ful llment, to managingday-to-day factory operations. Following rigorous processeseverywhere helps address the growing scope and scale of ouroperations and helps achieve increased levels of consistency,simplicity, ef ciency and quality. Many of our approaches areunique to Deere and hard to copy.

With respect to quality improvement, the company isaggressively implementing the Deere Product Quality System(DPQS), a set of world-class manufacturing practices designeto meet rising customer expectations for increased productreliability. Product lines responsible for most of the companysales received advanced quality certication through 2008.DPQS is expected to make a major impact on the companysability to further serve customers and reduce expense as theeffort advances quality to a still-higher level.

Proud Record of Citizenship

As a leading corporate citizen, Deere takes its responsibilities

seriously. In this regard, employee safety has always been oneof John Deeres top priorities. In 2008, our facilities remainedamong the safest in the world with employee injury-frequencyrates in line with the company's historic lows.

As an environmental leader noted primarily for advancedequipment designed to treat the environment with increasingcare, the company also has made sustainability an integral parof its operations. A case in point is the new biomass energysystem that went into operation during the year at our Germancombine factory. It enables the facility to provide for much of own heating and cooling needs, while reducing greenhouse gaemissions. Further in 2008, Deere announced plans to reducegreenhouse gas emissions from its global operations as part of

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Primed to set the standard for speed andproductivity, the John Deere 764 HSD is theindustrys rst articulated, tracked, high-speeddozer. New for 2009, it can handle nish gradingat twice the speed of other machines and notdamage surfaced areas while in transit.

John Deere expanded its advanced familyof zero-turn-radius mowers in 2008 withthe Z-Trak Estate series. The successful lineoffers the power, precision and durability of aprofessional landscape mower, plus the ease of use, comfort and control appreciated by time-strapped homeowners.

participation in the U.S. Environmental Protection AgencysClimate Leaders program.

In addition, the company and the John Deere Foundation havecontinued to support worthy organizations and causes, mostoften involved with community betterment, education, andsolutions for world hunger. In 2008, the foundation continuedits sponsorship of water-pump sales to small farmers in Africaand also made a substantial grant for micronancing supportto farmers there. In a year of major natural disasters, thefoundation contributed to relief efforts in China, Mexicoand the United States.

Success Through Teamwork

Through the aligned efforts of a dedicated workforce morethan 50,000 strong worldwide, John Deere is establishing aperformance-based culture that is making quite an impact onour results. Deeres team-enrichment initiative supports thisemphasis on employee teaming and collaboration. By promotinga more global and inclusive work environment, team enrichmenthelps the company strengthen its competitive advantagethrough the attraction and retention of highly talentedemployees from all backgrounds.

The Challenge Ahead

John Deere, like many companies, faces considerable marketuncertainty and what will likely be a challenging year ahead.This, however, is the kind of situation weve been facing, andadapting to, for some time in certain markets. Our unrelentingfocus on holding down costs and keeping factory production inline with the retail marketplace while continuing to make vitalgrowth investments is designed to help the company keep itsbalance in unsteady times and maximize performance in allconditions.

In addition, by expanding our global footprint and entering newbusinesses, we are establishing a more resilient, broader-basedbusiness lineup. We bene t, too, from a solid balance sheet.

Our equipment operations are nearly debt-free on a net basisand the credit business has maintained a prudent use of leverage. Were condent these kinds of actions put John Deerin a good position to compete successfully in todays historicavolatilenancial environment.

Perhaps more than anything else, talented people, tethered to tradition of integrity, give Deere a proven competitive edge. Odedicated workforce and corps of capable dealers worldwide asecond to none in their commitment and market knowledge.What's more, they are unsurpassed in their ability to provideexpert support to an increasingly sophisticated and intelligentproduct line.

Skilled Management Team

The depth and breadth of Deere's skilled management teamis notable. John Deere leaders throughout the world are drivento compete and win. Through their relentless contributions,we strongly believe our actions to build and grow a sustainablgreat business will meet with success.

Opportunities for meaningful improvement still abound.However, there is no doubt John Deere has what it takes toproduce impressive results and enduring performance welinto the future. As a result, humans willourish around theglobe, and we take great satisfaction in such a worthy outcomof our work.

To those we are privileged to serve, we say thanks for yourcontinued condence and support.

On behalf of the John Deere team, December 18, 200

Robert W. Lane


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DEERE ENTERPRISE SHAREHOLDER VALUE ADDED - SVA (MM)

2008 Highlights

ENTERPRISE HIGHLIGHTSSVA shows further increase rising to record $1.7 billion supported bystrong global farm economy and higher performance by the companysagricultural equipment operations.

All company businesses including construction and forestry, commercial

and consumer equipment, and nancial services remain pro table andcontribute to SVA in spite of economic slowdown.

An outcome of improved earnings and strong SVA generation, cash ow fromoperations remains healthy, at $1.9 billion.

Providing the basis for future growth, capital spending is $1.1 billion; sharerepurchases and dividends total $2.1 billion.

2006 2007 2008

FINANCIAL SERVICES - SVA (MM)

2006 2007 2008

FINANCIAL SERVICES HIGHLIGHTSIn demanding market conditions, nancial services achieve net incomof $337 million, helped by average-portfolio growth and strong crediquality at John Deere Credit.

Farm Plan revolving credit and sales nance for ag producers continues to attract new customers; portfolio growth exceeds 20%.

Commissions of John Deere Risk Protection which provides cropinsurance nearly double, to $139 million, extending record of rapidgrowth.

Showing continued commitment to wind-energy market, John DeereRenewables adds 202 wind turbines (385 megawatts) with relatedinvestment of $324 million.

$948 $1,314 $1,702

$79 $90 $59

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2006 2007 2008

EQUIPMENT OPERATIONS - SVA (MM)

AGRICULTURAL EQUIPMENT HIGHLIGHTS Strong global farm economy propels division performance to record level;operating pro t surges 54% on 37% rise in sales.

Driven by increased global demand, especially in Western Europe, Brazil andRussia, more than half of agricultural division sales are made outside U.S. andCanada.

Broad, versatile line of utility tractors (45-105 hp) highlight advancedproducts debuting during year.

In response to long-term growth in global demand, capacity expansions areannounced for tractors, in Waterloo, Iowa, and Montenegro, Brazil, and primarilyfor harvesting equipment, in East Moline, Illinois, and Horizontina, Brazil.

AGRICULTURAL EQUIPMENT - SVA (MM)

2006 2007 2008

CONSTRUCTION & FORESTRY HIGHLIGHTSCost control and rigorous asset management keep division solidlypro table, and SVA-positive, in face of weak U.S. market C&F sal

decline just 4% with operating margin near 10%.Joint venture in China marks Deere's entry into the fast-growing Asiaconstruction equipment market; division also announces agreement iprinciple to form equipment manufacturing joint venture with AshokLeyland in India.

Demonstrating commitment to growing remanufacturing business,C&F acquires former joint venture ReGen Technologies and merges toperation with John Deere Reman.

CONSTRUCTION & FORESTRY - SVA (MM)

2006 2007 2008

COMMERCIAL & CONSUMER EQUIPMENT - SVA

2006 2007 2008

COMMERCIAL & CONSUMER EQUIPMENT HIGHLIGHTS

Hurt by U.S. economic slump, operating pro

t declines to $237 million; sales edge 2% higher, helped by success of advanced new products and full-yearsales of a landscapes acquisition.

Premium riding lawn equipment expanded with the introduction of additionalzero-turn-radius consumer mowers.

Expanding companys presence in Europe, division holds largest-ever newproduct introduction in Mannheim, Germany.

Industry- rst comprehensive turf seed product line for golf coursesintroduced; features improved seedling vigor and disease resistance.

EQUIPMENT OPERATIONS HIGHLIGHTSSVA for the equipment operations increases by more than $400 milliosupported by stronger contribution from agricultural equipment.

Continued focus on rigorous asset management keeps tradereceivables and inventories at lean, ef cient levels in relation to salesAsset turns hit 2.4 times more than twice as high as 2001.

Returns stay healthy operating return on assets tops 27% (withinventories at standard cost) while operating margins remain at 11%.

$869 $1,224 $1,643

$356 $869 $1,485

$9 $91 $9

$504 $264 $149


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Commercial & Consumer Equipment

$MM unless indicated 06 07 08

Net Sales 3877 4333 4413

Op Profit 221 304 237

Avg AssetsWith Inventories @ Std Cost 1767 1860 2010With Inventories @ LIFO 1581 1672 1837

OROA % @ LIFO 14.0 18.2 12.9

Asset Turns (Std Cost) 2.19 2.33 2.20Op Margin % x 5.70 x 7.02 x 5.37

OROA % @ Standard Cost 12.5 16.3 11.8

$MM 06 07 08

Avg Assets @ Std Cost 1767 1860 2010

Op Profit 221 304 237Cost of Assets -212 -213 -228

SVA 9 91 9

Deere Equipment Operations, to create and grow SVA, are targeting an operatingreturn on average operating assets (OROA) of 20% at mid-cycle sales volumesin any given year and other ambitious returns at other points in the cycle. (For purposes of this calculation, operating assets are average identifiable assets duringthe year with inventories valued at standard cost.)

Agricultural Equipment


Net Sales 10232 12121 16572

Op Profit 882 1443 2224


OROA % @ LIFO 24.2 35.8 41.5



$MM 06 07 08



SVA 356 869 1485

Deere Financial Services, to create and grow SVA, are targeting an after-tax return on average equity of approximately 13%. The Financial ServicesSVA metric is calculated on a pretax basis, with certain adjustments.Operating profit is adjusted for changes in the allowance for doubtfulreceivables and for discontinued operations, while the actual allowance isadded to the equity base. These adjustments are made to reflect actualwrite-offs in both income and equity.

Financial Services


Net Income 584 364 337

Avg Equity 2466 2524 2355

ROE % 23.7 14.4 14.3

$MM 06 07 08

Op Profit 521 553 493

Change in Allowancefor Doubtful Receivables 15 17 (4)

SVA Income 536 570 489Avg Equity Continuing Operations 2424 2524 2355

Avg Allowancefor Doubtful Receivables 148 167 183

SVA Avg Equity 2572 2691 2538

SVA Income 536 570 489Cost of Equity -457 -480 -430

SVA 79 90 59

SVA: FOCUSING ON GROWTH& SUSTAINABLE PERFORMANCE

Shareholder Value Added (SVA) essentially, the differencebetween operating profit and pretax cost of capital is a metricused by John Deere to evaluate business results and measuresustainable performance.

In arriving at SVA, each equipment segment is assessed apretax cost of assets 12% of average identifiable operatingassets with inventory at standard cost (believed to more closelyapproximate the current cost of inventory and the companysrelated investment).

Financial-services businesses are assessed a cost of equity of approximately 18% pretax.

The amount of SVA is determined by deducting the asset orequity charge from operating profit.

Additional information on these metrics and their relationship to amounts presented in accordance with U.S. GAAP can be found at our Web site, www.JohnDeere.com.Note: Some totals may vary due to rounding.

DEERE EQUIPMENT OPERATIONS


Net Sales 19884 21489 25803

Op Profit 1905 2318 2927

Avg AssetsWith Inventories @ Std Cost 8634 9205 10812

With Inventories @ LIFO 7546 8092 9652OROA % @ LIFO 25.2 28.6 30.3

Asset Turns (Std Cost) 2.30 2.33 2.39Op Margin % x 9.58 x 10.79 x11.34


$MM 06 07 08

Avg Assets @ Std Cost 8634 9205 10812Op Profit 1905 2318 2927Cost of Assets -1036 -1094 -1284

SVA 869 1224 1643

Construction & Forestry


Net Sales 5775 5035 4818

Op Profit 802 571 466


OROA % @ LIFO 34.7 24.0 19.0



$MM 06 07 08



SVA 504 264 149


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DEERE & COMPANY 2008 FINANCIAL REVIEW

CONTENTS PAGES

Managements Discussion and Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10-19

Reports of Management and Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21-24

Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25-48

Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49

5-YEAR CUMULATIVE TOTAL RETURNDEERE COMPARED TO S&P 500 INDEX AND S&P 500 CONSTRUCTION & FARM MACHINERY INDEX

Deere & Company S&P Construct ion & Farm Machinery S&P 500

At October 31

The graph compares the cumulative total returns of Deere & Company, the S&P 500 Construction & Farm Machinery Index, and the S&P 500 Stock Index over ave-year period.It assumes $100 was invested on October 31, 2003, and that dividends are reinvested. Deere & Company stock price at October 31, 2008, was $38.56.The Standard & Poors 500 Construction & Farm Machinery Index is made up of Deere, Caterpillar, Inc., Cummins Inc., The Manitowoc Company, Inc., PACCAR Inc., and Terex Corporation.The stock performance shown in the graph is not intended to forecast and does not necessarily indicate future price performance.

2003 2004 2005 2006 2007 2008

$300

$250

$200

$150

$100

$50

2003 2004 2005 2006 2007 2008

Deere & Company 100.00 100.20 103.58 148.27 274.06 138.49S&P Con & Farm Mach 100.00 112.62 132.33 168.18 247.33 119.30S&P 500 100.00 109.42 118.96 138.40 158.56 101.32


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10

MANAGEMENTS DISCUSSION AND ANALYSIS

RESULTS OF OPERATIONS FOR THE YEARS ENDEDOCTOBER 31, 2008, 2007 AND 2006

OVERVIEW

OrganizationThe companys Equipment Operations generate revenues andcash primarily from the sale of equipment to John Deere dealers

and distributors. The Equipment Operations manufacture anddistribute a full line of agricultural equipment; a variety of commercial, consumer and landscapes equipment and products;and a broad range of equipment for construction and forestry.The companys Financial Services primarily provide creditservices, which mainly nance sales and leases of equipmentby John Deere dealers and trade receivables purchased fromthe Equipment Operations. In addition, Financial Servicesoffer certain crop risk mitigation products and invest in windenergy generation. The information in the following discussionis presented in a format that includes information grouped asconsolidated, Equipment Operations and Financial Services.The company also views its operations as consisting of two

geographic areas, the U.S. and Canada, and outside theU.S. and Canada.Trends and Economic ConditionsDemand for productive agricultural machinery has continued tobe strong due in large part to the nancial health of the farmsector. Industry sales of farm machinery in the U.S. and Canadain 2009 are expected to be up about 5 percent for the year, ledby an increase in large tractors and combines. Industry sales inWestern Europe are forecast to be down 5 to 10 percent.Sales in South American markets are expected to be down 10 to20 percent in 2009. The companys agricultural equipment netsales were up 37 percent for 2008 and are forecast to be upapproximately 5 percent in 2009. The companys commercialand consumer equipment net sales were up 2 percent in 2008,including an increase of about 6 percent from a landscapesacquisition in May 2007. Commercial and consumer equipmentsales are forecast to be down about 6 percent in 2009, re ectingthe U.S. housing decline and recessionary economic conditions.U.S. markets for construction and forestry equipment are forecastto remain under pressure in 2009 due to further deterioration inthe housing sector, declines in nonresidential construction andnegative economic growth. The companys construction andforestry net sales decreased 4 percent in 2008 and are forecast tobe down approximately 12 percent in 2009. Net income for thecompanys credit operations in 2009 is expected to decrease to

approximately $300 million.Items of concern include the sharp downturn in globaleconomic activity and the turmoil in nancial markets.Signi cant uctuations in currency translation rates could alsoimpact the companys results. The volatility in the price of many commodities used in the companys products are aconcern. Escalating prices driven by global demand impactedthe results of the companys equipment operations during 2008.The availability of certain components that could impact thecompanys ability to meet production schedules continues tobe monitored. The availability and price of food may prompt

changes in renewable fuel standards that could affect commoditprices. Producing engines that continue to meet high performancestandards, yet also comply with increasingly stringent emissionregulations is one of the companys major priorities.

In spite of the present economic situation, the companyremains encouraged by its growth prospects and believes thattrends favorable to its businesses remain intact. These trends

include increasing global demand for farm commodities andrenewable fuels, as well as a growing need over time for housing and infrastructure.2008 COMPARED WITH 2007

CONSOLIDATED RESULTSWorldwide net income in 2008 was $2,053 million, or $4.70per share diluted ($4.76 basic), compared with $1,822 million,or $4.00 per share diluted ($4.05 basic), in 2007. Net salesand revenues increased 18 percent to $28,438 million in 2008,compared with $24,082 million in 2007. Net sales of theEquipment Operations increased 20 percent in 2008 to $25,803million from $21,489 million last year. This included a positive

effect for currency translation of 4 percent and price changes o2 percent. Net sales in the U.S. and Canada increased 9 percentin 2008. Net sales outside the U.S. and Canada increased by40 percent, which included a positive effect of 10 percent for currency translation.

Worldwide Equipment Operations had an operatingpro t of $2,927 million in 2008, compared with $2,318 millionin 2007. Higher operating pro t was primarily due to thefavorable impact of higher shipment volumes and improvedprice realization. Partially offsetting these factors were increaseraw material costs, higher selling, administrative and generalexpenses, increased research and development costs andexpenses to close a facility in Canada (see Note 3).

The Equipment Operations net income was $1,676 millionin 2008, compared with $1,429 million in 2007. The sameoperating factors mentioned above as well as a higher effectivetax rate this year affected these results.

Net income of the companys Financial Servicesoperations in 2008 decreased to $337 million, compared with$364 million in 2007. The decrease was primarily a resultof increased selling, administrative and general expenses, anincrease in average leverage and a higher provision for creditlosses, partially offset by growth in the average credit portfolioAdditional information is presented in the following discussionof the credit operations.

The cost of sales to net sales ratio for 2008 was 75.9 percencompared with 75.6 percent last year. The increase was primarilydue to higher raw material costs, partially offset by higher saleand production volumes and improved price realization.

Other income increased this year primarily fromincreased crop insurance commissions. Research and develop-ment costs increased primarily due to increased spending insupport of new products, Tier 4 emission requirements and theeffect of currency translation. Selling, administrative and generexpenses increased primarily due to growth and acquisitions, theffect of currency translation and the provision for credit losses


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11

Other operating expenses were higher primarily as a result of higher expenses related to wind energy entities, expenses fromcrop insurance, depreciation on operating lease equipment andforeign exchange losses.

The company has several de ned bene t pension plansand de ned bene t health care and life insurance plans.The companys postretirement bene t costs for these plans in

2008 were $277 million, compared with $415 million in 2007.The long-term expected return on plan assets, which isre ected in these costs, was an expected gain of 8.2 percentin 2008 and 8.3 percent in 2007, or $920 million in 2008 and$838 million in 2007. The actual return was a loss of $2,158million in 2008 and a gain of $1,503 million in 2007. In 2009,the expected return will be approximately 8.2 percent.The company expects postretirement bene t costs in 2009 tobe approximately the same as 2008. The company makes anyrequired contributions to the plan assets under applicableregulations and voluntary contributions from time to time basedon the companys liquidity and ability to make tax-deductiblecontributions. Total company contributions to the plans were$431 million in 2008 and $646 million in 2007, which includedirect bene t payments for unfunded plans. These contributionsalso included voluntary contributions to total plan assets of approximately $297 million in 2008 and $520 million in 2007.Total company contributions in 2009 are expected to beapproximately $168 million, which are primarily direct bene tpayments. The company has no signi cant contributions topension plan assets required in 2009 under applicable fundingregulations. See the following discussion of Critical AccountingPolicies for more information about postretirement bene tobligations.BUSINESS SEGMENT AND GEOGRAPHIC AREA RESULTS

The following discussion relates to operating results byreportable segment and geographic area. Operating pro t isincome before external interest expense, certain foreignexchange gains or losses, income taxes and corporate expenses.However, operating pro t of the credit segment includes theeffect of interest expense and foreign exchange gains or losses.Worldwide Agricultural Equipment OperationsThe agricultural equipment segment had an operating pro t of $2,224 million in 2008, compared with $1,443 million in 2007.Net sales increased 37 percent this year due to higher shipmentvolumes, the favorable effects of currency translation andimproved price realization. The increase in operating pro t wasprimarily due to higher shipment volumes and improved pricerealization, partially offset by higher raw material costs, increasedselling, administrative and general expenses, higher research anddevelopment costs and expenses to close a facility in Canada.Worldwide Commercial and Consumer Equipment OperationsThe commercial and consumer equipment segment had anoperating pro t of $237 million in 2008, compared with$304 million in 2007. Net sales increased 2 percent for the year,which included 6 percent from a landscapes operation acquiredin May 2007. The decline in operating pro t was primarily

due to higher selling, administrative and general expenses inthe landscapes operation, increased raw material costs andexpenses to close the previously mentioned Canadian facility.Partially offsetting these items were improved price realizationand a more favorable product mix.Worldwide Construction and Forestry OperationsThe construction and forestry segment had an operating pro tof $466 million in 2008, compared with $571 million in 2007.Net sales decreased 4 percent for the year re ecting the pressurfrom U.S. market conditions. The operating pro t was lower primarily due to lower shipment volumes and higher rawmaterial costs, partially offset by improved price realization.Worldwide Credit OperationsThe operating pro t of the credit operations was $478 millionin 2008, compared with $548 million in 2007. The decrease inoperating pro t was primarily due to higher selling, administrative and general expenses, an increase in average leverage, ahigher provision for credit losses and foreign exchange losses,partially offset by growth in the average credit portfolio and

increased commissions from crop insurance. Total revenuesof the credit operations, including intercompany revenues,increased 3 percent in 2008, primarily re ecting the larger portfolio. The average balance of receivables and leases nancwas 6 percent higher in 2008, compared with 2007. An increasin average borrowings, offset by lower average interest rates,resulted in approximately the same interest expense in both2008 and 2007. The credit operations ratio of earnings to xedcharges was 1.45 to 1 in 2008, compared with 1.55 to 1 in 2007Equipment Operations in U.S. and CanadaThe equipment operations in the U.S. and Canada had anoperating pro t of $1,831 million in 2008, compared with$1,539 million in 2007. The increase was primarily due tohigher shipment volumes and improved price realization,partially offset by higher raw material costs, increased selling,administrative and general expenses, higher research anddevelopment costs and expenses to close the previouslymentioned Canadian facility. Net sales increased 9 percent dueto higher volumes, improved price realization and the favorableeffects of currency translation. The physical volume increased4 percent excluding acquisitions, compared with 2007.Equipment Operations outside U.S. and CanadaThe equipment operations outside the U.S. and Canada hadan operating pro t of $1,096 million in 2008, compared with$779 million in 2007. The increase was primarily due to theeffects of higher shipment volumes and improved pricerealization, partially offset by increases in raw material costs,increased selling, administrative and general expenses and highresearch and development costs. Net sales were 40 percenthigher re ecting higher volumes, the effect of currencytranslation and improvements in price realization. The physicalvolume increased 27 percent excluding acquisitions, comparedwith 2007.


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MARKET CONDITIONS AND OUTLOOK Given the sudden, sharp downturn in global economic activity,and the ongoing turmoil in world nancial markets, the outlookfor the year ahead is highly uncertain and its impact on thecompanys operations is dif cult to assess. Subject to theeconomic uncertainties, company equipment sales are projectedto be about the same for the full year of 2009 and up about7 percent for the rst quarter, compared to the same periods in2008. Included in the forecast is a negative currency translationimpact of about 6 percent for both the full year and rst quarter.The companys net income is forecast to be about $1.9 billionfor 2009 and about $275 million for the rst quarter.Agricultural Equipment. Worldwide sales of the companysagricultural equipment are forecast to increase by about 5 percentfor full-year 2009. This includes a negative currency translationimpact of about 8 percent.

Farm machinery industry sales in the U.S. and Canadaare forecast to be up about 5 percent for the year, led by anincrease in large tractors and combines. The company expectsagricultural commodity prices to remain at healthy levels in2009, though below the previous year, while costs moderate for key inputs such as fuel and fertilizer. Sales of cotton equipment,small tractors, and equipment commonly used by livestockproducers are expected to be lower.

Industry sales in Western Europe are forecast to be down5 to 10 percent for the year. Sales are expected to be downmoderately in Central Europe and the CIS (Commonwealth of Independent States) countries, including Russia. While demandin these areas for highly productive farm equipment remainsgood, sales will depend on the availability and cost of credit.Sales in South American markets are expected to be down10 to 20 percent in 2009, with the decline related to credit

access in Brazil and drought conditions in Argentina.Commercial and Consumer Equipment. Re ecting the U.S.housing market decline and recessionary economic conditions,the companys commercial and consumer equipment sales areprojected to be down about 6 percent for the year. The segmentexpects sales gains from new products to partly offset theimpact of the economic decline.Construction and Forestry. U.S. markets for constructionand forestry equipment are forecast to remain under pressuredue to further deterioration in the already weakened housingsector, a steep decline in nonresidential construction, andnegative economic growth. The global economic slowdownis expected to lead to a lower level of forestry equipment sales

in both the U.S. and Europe. Subject to the economic uncer-tainties discussed earlier, the companys worldwide sales of construction and forestry equipment are forecast to declineby approximately 12 percent for the year. Despite the poor economic climate, company sales are expected to bene t frominnovative new products.Credit. Subject to the uncertainty associated with presenteconomic conditions, net income for 2009 for the companyscredit operations is forecast to be approximately $300 million.The forecast decrease from 2008 is primarily due to narrower nancing spreads related to the current funding environment.

SAFE HARBOR STATEMENTSafe Harbor Statement under the Private Securities Litigation RAct of 1995:Statements under Overview, Market Conditionsand Outlook and other statements herein that relate to futureoperating periods are subject to important risks and uncertaintiethat could cause actual results to differ materially. Some of thesrisks and uncertainties could affect particular lines of business,while others could affect all of the companys businesses.

Forward looking statements involve certain factors thatare subject to change, including for the companys agriculturalequipment segment the many interrelated factors that affectfarmers con dence. These factors include worldwide economiconditions, demand for agricultural products, world grain stockweather conditions, soil conditions, harvest yields, prices for commodities and livestock, crop and livestock productionexpenses, availability of transport for crops, the growth of non-food uses for some crops (including ethanol and bio-energyproduction), real estate values, available acreage for farming,the land ownership policies of various governments, changes ingovernment farm programs and policies (including those in theU.S. and Brazil), international reaction to such programs, globatrade agreements, animal diseases and their effects on poultryand beef consumption and prices (including avian u and bovinspongiform encephalopathy, commonly known as mad cowdisease), crop pests and diseases (including Asian rust), and thelevel of farm product exports (including concerns aboutgenetically modi ed organisms).

Factors affecting the outlook for the companys commerciaand consumer equipment segment include weather conditions,general economic conditions, customer pro tability, consumer con dence, consumer borrowing patterns, consumer purchasingpreferences, housing starts, infrastructure investment, spending

by municipalities and golf courses, and consumable input costsGeneral economic conditions, consumer spending patternsreal estate and housing prices, the number of housing starts andinterest rates are especially important to sales of the companysconstruction equipment. The levels of public and non-residentiaconstruction also impact the results of the companys construc-tion and forestry segment. Prices for pulp, lumber and structurapanels are important to sales of forestry equipment.

All of the companys businesses and its reported resultsare affected by general economic conditions in, and the politicaand social stability of, the global markets in which the companoperates, especially material changes in economic activity inthese markets; customer con dence in the general economic

conditions; capital market disruptions; signi cant changes incapital market liquidity, access to capital and associated fundincosts; changes in and the impact of governmental banking,monetary and scal policies and governmental programs inparticular jurisdictions or for the bene t of certain sectors;actions by rating agencies; customer access to capital for purchases of our products and borrowing and repaymentpractices, the number and size of customer loan delinquenciesand defaults, and the sub-prime credit market crises; changes inthe market values of investment assets; production, design andtechnological dif culties, including capacity and supplyconstraints and prices; the availability and prices of strategicall


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sourced materials, components and whole goods; delays or disruptions in the companys supply chain due to weather,natural disasters or nancial hardship of suppliers; start-up of new plants and new products; the success of new productinitiatives and customer acceptance of new products; oil andenergy prices and supplies; in ation and de ation rates, interestrates and foreign currency exchange rates, especially uctuations

in the value of the U.S. dollar; the availability and cost of freight; trade, monetary and scal policies of various countries,wars and other international con icts and the threat thereof;actions by the U.S. Federal Reserve Board and other centralbanks; actions by the U.S. Securities and Exchange Commission;actions by environmental, health and safety regulatory agencies,including those related to engine emissions (in particular Tier 4emission requirements), noise and the risk of global warming;actions by other regulatory bodies; actions of competitors in thevarious industries in which the company competes, particularlyprice discounting; dealer practices especially as to levels of newand used eld inventories; labor relations and regulations;changes to accounting standards; changes in tax rates andregulations; the effects of, or response to, terrorism; and changesin laws and regulations affecting the sectors in which thecompany operates. The spread of major epidemics (includingin uenza, SARS, fevers and other viruses) also could affectcompany results. Changes in weather patterns could impactcustomer operations and company results. Company results arealso affected by changes in the level of employee retirementbene ts, changes in market values of investment assets and thelevel of interest rates, which impact retirement bene t costs,and signi cant changes in health care costs. Other factors thatcould affect results are acquisitions and divestitures of businesses;the integration of new businesses; changes in company declareddividends and common stock issuances and repurchases.

With respect to the current global economic downturn,changes in governmental banking, monetary and scal policiesto restore liquidity and increase the availability of credit maynot be effective and could have a material impact on thecompanys customers and markets. Recent signi cant changesin market liquidity conditions could impact access to fundingand associated funding costs, which could reduce the companysearnings and cash ows. The companys investment managementoperations could be impaired by changes in the equity andbond markets, which would negatively affect earnings.

General economic conditions can affect the demandfor the companys equipment as well. Current negative

economic conditions and outlook have dampened demandfor certain equipment. Furthermore, governmental programsproviding assistance to certain industries or sectors couldnegatively impact the companys competitive position.

The current economic downturn and market volatilityhave adversely affected the nancial industry in whichJohn Deere Capital Corporation (Capital Corporation) operates.Capital Corporations liquidity and ongoing pro tability dependlargely on timely access to capital to meet future cash owrequirements and fund operations and the costs associated withengaging in diversi ed funding activities and to fund purchasesof the companys products. If current levels of market disruption

and volatility continue or worsen, funding could be unavailableor insuf cient. Additionally, under current market conditionscustomer con dence levels may result in declines in creditapplications and increases in delinquencies and default rates,which could materially impact Capital Corporations write-offsand provisions for credit losses.

The companys outlook is based upon assumptions

relating to the factors described above, which are sometimesbased upon estimates and data prepared by government agencieSuch estimates and data are often revised. The company,except as required by law, undertakes no obligation to updateor revise its outlook, whether as a result of new developmentsor otherwise. Further information concerning the company andits businesses, including factors that potentially could materiallaffect the companys nancial results, is included in other lingwith the U.S. Securities and Exchange Commission.2007 COMPARED WITH 2006

CONSOLIDATED RESULTSWorldwide net income in 2007 was $1,822 million, or $4.00

per share diluted ($4.05 basic), compared with $1,694 million,or $3.59 per share diluted ($3.63 basic), in 2006. Income fromcontinuing operations, which excludes the companys discon-tinued health care business (see Note 2), was also $1,822 millioor $4.00 per share diluted ($4.05 basic), in 2007, comparedwith $1,453 million, or $3.08 per share diluted ($3.11 basic),in 2006. Net sales and revenues from continuing operationsincreased 9 percent to $24,082 million in 2007, compared with$22,148 million in 2006. Net sales of the Equipment Operationsincreased 8 percent in 2007 to $21,489 million from $19,884million in 2006. This included a positive effect for currencytranslation and price changes of 5 percent. Net sales in theU.S. and Canada were at in 2007. Net sales outside theU.S. and Canada increased by 27 percent, which included apositive effect of 7 percent for currency translation.

Worldwide Equipment Operations had an operatingpro t of $2,318 million in 2007, compared with $1,905 millionin 2006. Higher operating pro t was primarily due to improvedprice realization and higher sales and production volumes.Partially offsetting these factors were higher selling, administratand general expenses, increased raw material costs and higher research and development costs.

The Equipment Operations net income was $1,429 millionin 2007, compared with $1,089 million in 2006. The sameoperating factors mentioned above along with the expenserelated to the repurchase of certain outstanding debt securities in2006 and lower effective tax rates in 2007 affected these result

Net income of the companys Financial Servicesoperations in 2007 decreased to $364 million, compared with$584 million in 2006, primarily due to the sale of the healthcare operations in 2006. Income from the Financial Servicescontinuing operations in 2007 was also $364 million, comparedwith $344 million in 2006. The increase was primarily a resultof growth in the credit portfolio, partially offset by increasedselling, administrative and general expenses and a higher provision for credit losses. Additional information is presentedin the following discussion of the credit operations.


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Over the last three years, operating activities haveprovided an aggregate of $5,682 million in cash. In addition,increases in borrowings were $3,397 million, proceeds frommaturities and sales of marketable securities exceeded purchasesby $1,244 million, proceeds from issuance of common stockwere $722 million and the proceeds from sales of businesseswere $559 million. The aggregate amount of these cash ows

was used mainly to fund repurchases of common stock of $4,495 million, purchases of property and equipment of $2,901million, receivable and lease acquisitions, which exceededcollections and the proceeds from sales of equipment onoperating leases by $3,168 million, pay dividends to stockholdersof $1,183 million and acquire businesses for $497 million.Cash and cash equivalents also decreased $47 million over thethree-year period.

Given the downturn in global economic activity and therecent signi cant changes in credit market liquidity, sources of funds for the company have been impacted. However, becauseof the funding sources that are available, the company expectsto have suf cient sources of liquidity to meet its funding needs.Sources of liquidity for the company include cash and cashequivalents, marketable securities, funds from operations, theissuance of commercial paper and term debt, the securitizationof retail notes (both public and private markets) and committedand uncommitted bank lines of credit. At October 31, 2008,$2.1 billion of commercial paper of John Deere Capital Corporation(Capital Corporation) was guaranteed by the Federal DepositInsurance Corporation (FDIC) under its Temporary LiquidityGuarantee Program (TLGP) (see Notes 18 and 29 of theconsolidated nancial statements). If the Capital Corporationissues certain maturities of commercial paper and senior unsecured debt following year end, that debt would also beguaranteed under the same program. The companys commercialpaper outstanding at October 31, 2008 and 2007 was approxi-mately $3.0 billion and $2.8 billion, respectively, while the totalcash and cash equivalents and marketable securities position was$3.2 billion and $3.9 billion, respectively.

Lines of Credit.The company also has access to bank linesof credit with various banks throughout the world. Some of thelines are available to both Deere & Company and CapitalCorporation. Worldwide lines of credit totaled $4,548 millionat October 31, 2008, $1,534 million of which were unused.For the purpose of computing unused credit lines, commercialpaper and short-term bank borrowings, excluding securedborrowings and the current portion of long-term borrowings,

were considered to constitute utilization. Included in the totalcredit lines at October 31, 2008 was a long-term credit facilityagreement of $3.75 billion, expiring in February 2012.The credit agreement requires the Capital Corporation tomaintain its consolidated ratio of earnings to xed charges at notless than 1.05 to 1 for each scal quarter and the ratio of senior debt, excluding securitization indebtedness, to capital base(total subordinated debt and stockholders equity excludingaccumulated other comprehensive income (loss)) at not morethan 11 to 1 at the end of any scal quarter. The creditagreement also requires the Equipment Operations to maintaina ratio of total debt to total capital (total debt and stockholders

equity excluding accumulated other comprehensive income (lossof 65 percent or less at the end of each scal quarter accordingto accounting principles generally accepted in the U.S. in effectat October 31, 2006. Under this provision, the companys excesequity capacity and retained earnings balance free of restrictionOctober 31, 2008 was $6,730 million. Alternatively under thisprovision, the Equipment Operations had the capacity to incur

additional debt of $12,499 million at October 31, 2008. All of these requirements of the credit agreement have been met duringthe periods included in the consolidated nancial statements.

Debt Ratings.To access public debt capital markets, thecompany relies on credit rating agencies to assign short-termand long-term credit ratings to the companys securities as anindicator of credit quality for xed income investors. A securityrating is not a recommendation by the rating agency to buy,sell or hold company securities. A credit rating agency maychange or withdraw company ratings based on its assessmentof the companys current and future ability to meet interest andprincipal repayment obligations. Each agencys rating shouldbe evaluated independently of any other rating. Lower creditratings generally result in higher borrowing costs and reducedaccess to debt capital markets. The senior long-term andshort-term debt ratings and outlook currently assigned tounsecured company securities by the rating agencies engagedby the company are as follows:

SeniorLong-Term Short-Term Outlook

Moodys InvestorsService, Inc. ......................... A2 Prime-1 Stabl

Standard & Poors .................. A A-1 Stabl

Trade accounts and notes receivable primarily arisefrom sales of goods to independent dealers. Trade receivablesincreased by $180 million in 2008 primarily due to the increasein sales and acquisitions of businesses. The ratio of tradeaccounts and notes receivable at October 31 to scal year net sales was 13 percent in 2008, compared with 14 percentin 2007. Total worldwide agricultural equipment receivablesincreased $205 million, commercial and consumer equipmentreceivables decreased $13 million and construction and forestryreceivables decreased $12 million. The collection period for trade receivables averages less than 12 months. The percentageof trade receivables outstanding for a period exceeding 12 monthwas 2 percent and 3 percent at October 31, 2008 and 2007,respectively.

Stockholders equity was $6,533 million at October 31,2008, compared with $7,156 million at October 31, 2007.The decrease of $623 million resulted primarily from an increasin treasury stock of $1,579 million, dividends declared of $456million, a decrease in the cumulative translation adjustment of $406 million, a decrease in the retirement bene ts adjustmentof $305 million and a charge of $48 million to retained earningfrom the adoption of FASB Interpretation No. 48, Accountingfor Uncertainty in Income Taxes (see Note 6). These items werepartially offset by net income of $2,053 million and an increasein common stock of $157 million.


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The cash ows from discontinued operations includedin the consolidated cash ows were not material except for the cash in ow from the sale of the health care operations(net of cash sold) of approximately $440 million included inthe proceeds from sales of businesses in 2006.EQUIPMENT OPERATIONSThe companys equipment businesses are capital intensive andare subject to seasonal variations in nancing requirements for inventories and certain receivables from dealers. The EquipmentOperations sell most of their trade receivables to the companyscredit operations. As a result, there are relatively small seasonalvariations in the nancing requirements of the EquipmentOperations. To the extent necessary, funds provided fromoperations are supplemented by external nancing sources.

Cash provided by operating activities of the EquipmentOperations during 2008, including intercompany cash ows,was $2,365 million primarily due to net income adjusted for non-cash provisions and an increase in accounts payable andaccrued expenses, partially offset by an increase in inventories.

Over the last three years, these operating activities,including intercompany cash ows, have provided an aggregateof $6,365 million in cash.

Trade receivables held by the Equipment Operationsdecreased by $15 million during 2008. The EquipmentOperations sell a signi cant portion of their trade receivablesto the credit operations (see previous consolidated discussion).

Inventories increased by $705 million in 2008 re ectingthe increase in sales and acquisitions of businesses. Most of theseinventories are valued on the last-in, rst-out (LIFO) method.The ratios of inventories on a rst-in, rst-out (FIFO) basis(see Note 15), which approximates current cost, to scal year cost of sales were 22 percent at both October 31, 2008 and 2007.

Total interest-bearing debt of the Equipment Operationswas $2,209 million at the end of 2008, compared with $2,103million at the end of 2007 and $2,252 million at the end of 2006.The ratio of total debt to total capital (total interest-bearingdebt and stockholders equity) at the end of 2008, 2007 and2006 was 25 percent, 23 percent and 23 percent, respectively.

Purchases of property and equipment for the EquipmentOperations in 2008 were $773 million, compared with $557million in 2007. Capital expenditures in 2009 are estimated tobe approximately $1 billion.FINANCIAL SERVICESThe Financial Services credit operations rely on their ability toraise substantial amounts of funds to nance their receivable and

lease portfolios. Their primary sources of funds for this purposeare a combination of commercial paper, term debt, securitizationof retail notes and equity capital.

Cash ows from the companys Financial Servicesoperating activities, including intercompany cash ows, were$940 million in 2008. Cash provided by nancing activitiestotaled $1,736 million in 2008, representing primarily a$1,264 million increase in external borrowings, an increasein borrowings from Deere & Company of $569 million and$495 million capital investment from Deere & Company,partially offset by the payment of $565 million of dividends

paid to Deere & Company. The cash provided by operatingand nancing activities was used primarily to increase receivabland leases. Cash used by investing activities totaled $1,832 milliin 2008, primarily due to the cost of receivables and equipmenton operating leases exceeding collections of receivables andthe proceeds from sales of equipment on operating leases by$1,517 million, and purchases of property and equipment

of $339 million. Cash and cash equivalents also increased$918 million.

Over the last three years, the Financial Services operatingactivities, including intercompany cash ows, have provided$2,583 million in cash. In addition, an increase in borrowings o$4,985 million, proceeds from sales of receivables of $458 millioand capital investment from Deere & Company of $644 millionprovided cash in ows. These amounts have been used mainly tofund receivable and lease acquisitions, which exceeded collectioand the proceeds from sales of equipment on operating leasesby $5,342 million, pay dividends to Deere & Company of $1,260 million and fund purchases of property and equipmentof $1,078 million. Cash and cash equivalents also increased$863 million over the three-year period.

Receivables and leases decreased by $136 million in 2008compared with 2007. Acquisition volumes of receivables andleases increased 16 percent in 2008, compared with 2007.The volumes of operating loans, wholesale notes, revolvingcharge accounts, trade receivables, nancing leases, operatingleases and retail notes increased approximately 58 percent,23 percent, 21 percent, 16 percent, 14 percent, 9 percent and6 percent, respectively. At October 31, 2008 and 2007, netreceivables and leases administered, which include receivablesadministered but not owned, were $22,281 million and$22,543 million, respectively.

Total external interest-bearing debt of the creditoperations was $20,210 million at the end of 2008, comparedwith $19,665 million at the end of 2007 and $17,453 million atthe end of 2006. Included in this debt are secured borrowingsof $1,682 million at the end of 2008, $2,344 million at the endof 2007 and $2,403 million at the end of 2006. Total externalborrowings have increased generally corresponding with thelevel of the receivable and lease portfolio, the level of cashand cash equivalents and the change in payables owed toDeere & Company. The credit operations ratio of totalinterest-bearing debt to total stockholders equity was 8.3 to 1at the end of 2008, 8.2 to 1 at the end of 2007 and 7.1 to 1 atthe end of 2006.

During 2008, the credit operations issued $6,320million and retired $4,565 million of long-term borrowings.The retirements included $850 million of 3.90% Notes due 2008and the remainder consisted primarily of medium-term notes.

Purchases of property and equipment for Financial Servicein 2008 were $339 million, compared with $465 million in 2007primarily related to investments in wind energy generation inboth years. Capital expenditures for 2009 are estimated to beapproximately $125 million, also primarily related to investmenin wind energy generation.


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OFF-BALANCE-SHEET ARRANGEMENTS

The companys credit operations offer crop insurance productsthrough a managing general agency agreement (Agreement) withinsurance companies (Insurance Carriers) rated Excellent byA.M. Best Company. The credit operations have guaranteedcertain obligations under the Agreement, including the obligationto pay the Insurance Carriers for any uncollected premiums.At October 31, 2008, the maximum exposure for uncollectedpremiums was approximately $60 million. Substantially all of the crop insurance risk under the Agreement has been mitigatedby a syndicate of private reinsurance companies. In the eventof a widespread catastrophic crop failure throughout theU.S. and the default of all the reinsurance companies on their obligations, the company would be required to reimburse theInsurance Carriers approximately $824 million at October 31,2008. The company believes the likelihood of this event issubstantially remote.

At October 31, 2008, the company had approximately$180 million of guarantees issued primarily to banks outside the

U.S. related to third-party receivables for the retail nancingof John Deere equipment. The company may recover a portionof any required payments incurred under these agreements fromrepossession of the equipment collateralizing the receivables.The maximum remaining term of the receivables guaranteed atOctober 31, 2008 was approximately seven years.AGGREGATE CONTRACTUAL OBLIGATIONS

The payment schedule for the companys contractual obligationsat October 31, 2008 in millions of dollars is as follows:

Less Morethan 2&3 4&5 than

Total 1 year years years 5 years

Debt*Equipment Operations ..$ 2,142 $ 218 $ 313 $ 1,611Financial Services**..... 20,009 7,555 6,372 $ 4,206 1,876

Total ....................... 22,151 7,773 6,685 4,206 3,487Interest on debt ............... 3,690 827 1,024 497 1,342Purchase obligations ........ 3,045 2,998 30 10 7Operating leases.............. 466 123 150 81 112Capital leases .................. 57 13 26 4 14

Total .............................. $29,409 $11,734 $ 7,915 $ 4,798 $ 4,962

* Principal payments.** Notes payable of $1,682 million classi ed as short-term on the balance sheet

related to the securitization of retail notes are included in this table based on theexpected payment schedule (see Note 18).

The table above does not include unrecognized tax bene tliabilities of approximately $236 million at October 31, 2008since the timing of future payments is not reasonably estimableat this time (see Note 6 to the consolidated nancial state-ments). For additional information regarding pension andother postretirement employee bene t obligations, short-termborrowings, long-term borrowings and lease obligations,see Notes 5, 18, 20 and 21, respectively.

CRITICAL ACCOUNTING POLICIES

The preparation of the companys consolidated nancialstatements in conformity with accounting principles generallyaccepted in the U.S. requires management to make estimatesand assumptions that affect reported amounts of assets, liabilitirevenues and expenses. Changes in these estimates and assumptions could have a signi cant effect on the nancial statementsThe accounting policies below are those management believes arthe most critical to the preparation of the companys nancialstatements and require the most dif cult, subjective or complexjudgments. The companys other accounting policies aredescribed in the Notes to the Consolidated Financial Statements

Sales IncentivesAt the time a sale to a dealer is recognized, the company recordan estimate of the future sales incentive costs for allowances an nancing programs that will be due when the dealer sells theequipment to a retail customer. The estimate is based onhistorical data, announced incentive programs, eld inventorylevels and settlement volumes. The nal cost of these programs

and the amount of accrual required for a speci c sale are fullydetermined when the dealer sells the equipment to the retailcustomer. This is due to numerous programs available at anyparticular time and new programs that may be announced afterthe company records the sale. Changes in the mix and types of programs affect these estimates, which are reviewed quarterly.

The sales incentive accruals at October 31, 2008, 2007and 2006 were $737 million, $711 million and $629 million,respectively. The increases in 2008 and 2007 were primarilydue to the increases in sales.

The estimation of the sales incentive accrual is impactedby many assumptions. One of the key assumptions is thehistorical percent of sales incentive costs to settlements fromdealers. Over the last ve scal years, this percent has variedby approximately plus or minus .8 percent, compared to theaverage sales incentive costs to settlements percent duringthat period. Holding other assumptions constant, if this costexperience percent were to increase or decrease 1.0 percent,the sales incentive accrual at October 31, 2008 would increaseor decrease by approximately $50 million.

Product WarrantiesAt the time a sale to a dealer is recognized, the companyrecords the estimated future warranty costs. The companygenerally determines its total warranty liability by applyinghistorical claims rate experience to the estimated amount of

equipment that has been sold and is still under warranty basedon dealer inventories and retail sales. The historical claims rateis primarily determined by a review of ve-year claims costsand consideration of current quality developments. Variances inclaims experience and the type of warranty programs affectthese estimates, which are reviewed quarterly.

The product warranty accruals, excluding extendedwarranty unamortized premiums, at October 31, 2008, 2007and 2006 were $586 million, $549 million and $507 million,respectively. The increases in 2008 and 2007 were primarilydue to increases in sales volume.


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Estimates used to determine the product warranty accrualsare signi cantly affected by the historical percent of warrantyclaims costs to sales. Over the last ve scal years, this lossexperience percent has varied by approximately plus or minus.03 percent, compared to the average warranty costs to salespercent during that period. Holding other assumptions constant,if this estimated cost experience percent were to increase or

decrease .05 percent, the warranty accrual at October 31, 2008would increase or decrease by approximately $15 million.

Postretirement Benefit ObligationsPension obligations and other postretirement employeebene t (OPEB) obligations are based on various assumptionsused by the companys actuaries in calculating these amounts.These assumptions include discount rates, health care cost trendrates, expected return on plan assets, compensation increases,retirement rates, mortality rates and other factors. Actual resultsthat differ from the assumptions and changes in assumptionsaffect future expenses and obligations.

The pension assets, net of pension liabilities, recognizedon the balance sheet at October 31, 2008, 2007 and 2006 were$683 million, $1,467 million and $1,945 million, respectively.The OPEB liabilities on these same dates were $2,535 million,$3,065 million and $1,985 million, respectively. The decreasein the pension net assets in 2008 was primarily due to thedecrease in market value of assets, partially offset by theincrease in the discount rates for the liabilities. The decreasein the OPEB liabilities in 2008 was primarily due to theincrease in discount rates. The decrease in the pension net assetsand the increase in the OPEB liabilities in 2007 were primarilydue to the adoption in 2007 of Financial Accounting StandardsBoard Statement No. 158, Employers Accounting for De nedBene t Pension and Other Postretirement Plans (see Note 5).This standard required unrecognized gains or losses relatingto postretirement bene t obligations to be recorded on theconsolidated balance sheet with a corresponding charge or credit to stockholders equity.

The effect of hypothetical changes to selected assumptionson the companys major U. S. retirement bene t plans wouldbe as follows in millions of dollars:

October 31, 2008 2009______________ _________Increase Increase

Percentage (Decrease) (Decrease)Assumptions Change PBO/APBO* Expense

PensionDiscount rate** ................... +/-.5 $ (268 )/290 $ (18)/19

Expected returnon assets ....................... +/-.5 (41)/41

OPEBDiscount rate** ................... +/-.5 (189)/206 (30 )/33Expected return

on assets ....................... +/-.5 (8)/8Health care cost

trend rate** .................... +/-1.0 405/(346) 108/(92)

* Projected bene t obligation (PBO) for pension plans and accumulated postretirementbene t obligation (APBO) for OPEB plans.

** Pretax impact on service cost, interest cost and amortization of gains or losses.

Allowance for Credit LossesThe allowance for credit losses represents an estimate of the losses expected from the companys receivable portfolio.The level of the allowance is based on many quantitativeand qualitative factors, including historical loss experienceby product category, portfolio duration, delinquency trends,economic conditions and credit risk quality. The adequacy

of the allowance is assessed quarterly. Different assumptions ochanges in economic conditions would result in changes to theallowance for credit losses and the provision for credit losses.

The total allowance for credit losses at October 31, 2008,2007 and 2006 was $226 million, $236 million and $217 millionrespectively. The decrease in 2008 was primarily due to foreigncurrency translation. The increase in 2007 was primarily due togrowth in the receivable portfolio.

The assumptions used in evaluating the companysexposure to credit losses involve estimates and signi cantjudgment. The historical loss experience on the receivableportfolio represents one of the key assumptions involved indetermining the allowance for credit losses. Over the last ve scal years, the average loss experience has uctuated between2 basis points and 18 basis points in any given scal year over the applicable prior period. Holding other estimates constant,a 10 basis point increase or decrease in estimated loss experienon the receivable portfolio would result in an increase or decrease of approximately $20 million to the allowance for credit losses at October 31, 2008.

Operating Lease Residual ValuesThe carrying value of equipment on operating leases is affectedby the estimated fair values of the equipment at the end of thelease (residual values). Upon termination of the lease, theequipment is either purchased by the lessee or sold to a third

party, in which case the company may record a gain or a lossfor the difference between the estimated residual value andthe sales price. The residual values are dependent on currenteconomic conditions and are reviewed quarterly. Changes inresidual value assumptions would affect the amount of depreciation expense and the amount of investment inequipment on operating leases.

The total operating lease residual values at October 31,2008, 2007 and 2006 were $1,055 million, $1,072 million and$917 million, respectively. The changes in 2008 and 2007 wereprimarily due to the levels of operating leases.

Estimates used in determining end of lease market valuesfor equipment on operating leases signi cantly impact theamount and timing of depreciation expense. If future marketvalues for this equipment were to decrease 5 percent fromthe companys present estimates, the total impact would beto increase the companys annual depreciation for equipmenton operating leases by approximately $20 million.


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Foreign Currency RiskIn the Equipment Operations, it is the companys practice tohedge signi cant currency exposures. Worldwide foreigncurrency exposures are reviewed quarterly. Based on theEquipment Operations anticipated and committed foreigncurrency cash in ows and out ows for the next twelve monthsand the foreign currency derivatives at year end, the company

estimates that a hypothetical 10 percent weakening of theU.S. dollar relative to other currencies through 2009 woulddecrease the 2009 expected net cash in ows by $31 million.At last year end, a hypothetical 10 percent weakening of theU.S. dollar under similar assumptions and calculations indicatedpotential $77 million adverse effect on the 2008 net cash in ow

In the Financial Services operations, the companyspolicy is to hedge the foreign currency risk if the currency of the borrowings does not match the currency of the receivableportfolio. As a result, a hypothetical 10 percent adverse changein the value of the U.S. dollar relative to all other foreigncurrencies would not have a material effect on the FinancialServices cash ows.

FINANCIAL INSTRUMENT RISK INFORMATION

The company is naturally exposed to various interest rate andforeign currency risks. As a result, the company enters intoderivative transactions to manage certain of these exposures thatarise in the normal course of business and not for the purpose of creating speculative positions or trading. The companys creditoperations manage the relationship of the types and amounts of their funding sources to their receivable and lease portfolio inan effort to diminish risk due to interest rate and foreigncurrency uctuations, while responding to favorable nancingopportunities. Accordingly, from time to time, these operationsenter into interest rate swap agreements to manage their interestrate exposure. The company also has foreign currency exposuresat some of its foreign and domestic operations related to buying,selling and nancing in currencies other than the local currencies.The company has entered into agreements related to themanagement of these currency transaction risks. The credit riskunder these interest rate and foreign currency agreements is notconsidered to be signi cant.

Interest Rate RiskQuarterly, the company uses a combination of cash ow modelsto assess the sensitivity of its nancial instruments with interestrate exposure to changes in market interest rates. The modelscalculate the effect of adjusting interest rates as follows. Cash owsfor nancing receivables are discounted at the current prevailingrate for each receivable portfolio. Cash ows for marketablesecurities are primarily discounted at the applicable benchmarkyield curve. Cash ows for unsecured borrowings are discountedat the applicable benchmark yield curve plus market creditspreads for similarly rated borrowers. Cash ows for securitizedborrowings are discounted at the swap yield curve plus a marketcredit spread for similarly rated borrowers. Cash ows for interestrate swaps are projected and discounted using forecasted ratesfrom the swap yield curve at the repricing dates. The net loss inthese nancial instruments fair values which would be causedby decreasing the interest rates by 10 percent from the marketrates at October 31, 2008 would have been approximately$87 million. The net loss from increasing the interest rates by10 percent at October 31, 2007 would have been approximately$22 million.


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MANAGEMENTS REPORT ON INTERNAL CONTROL OVERFINANCIAL REPORTING

The management of Deere & Company is responsible for establishing and maintaining adequate internal control over nancial reporting. Deere & Companys internal control systemwas designed to provide reasonable assurance regarding thepreparation and fair presentation of published nancial statementsin accordance with generally accepted accounting principles.

All internal control systems, no matter how well designed,

have inherent limitations. Therefore, even those systemsdetermined to be effective can provide only reasonable assurancewith respect to nancial statement preparation and presentationin accordance with generally accepted accounting principles.

Management assessed the effectiveness of the companysinternal control over nancial reporting as of October 31, 2008,using the criteria set forth in Internal Control IntegratedFramework issued by the Committee of Sponsoring Organizationsof the Treadway Commission. Based on that assessment,management believes that, as of October 31, 2008, the companysinternal control over nancial reporting was effective.

The companys independent registered public accounting rm has issued an audit report on the effectiveness of thecompanys internal control over nancial reporting. This reportappears below.

December 18, 2008

REPORT OF INDEPENDENTREGISTERED PUBLIC ACCOUNTING FIRM

Deere & Company:We have audited the accompanying consolidated balance sheetsof Deere & Company and subsidiaries (the Company) as of October 31, 2008 and 2007, and the related statements of consolidated income, changes in consolidated stockholdersequity, and consolidated cash ows for each of the three yearsin the period ended October 31, 2008. We also have audited

the Companys internal control over nancial reporting as of October 31, 2008, based on criteria established in InternalControl - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.The Companys management is responsible for these nancialstatements, for maintaining effective internal control over nancial reporting, and for its assessment of the effectivenessof internal control over nancial reporting, included in theaccompanying Managements Report on Internal Control over Financial Reporting. Our responsibility is to express an opinionon these nancial statements and an opinion on the Companysinternal control over nancial reporting based on our audits.

We conducted our audits in accordance with thestandards of the Public Company Accounting Oversight Board(United States). Those standards require that we plan andperform the audit to obtain reasonable assurance about whether the nancial statements are free of material misstatement andwhether effective internal control over nancial reportingwas maintained in all material respects. Our audits of the nancial statements included examining, on a test basis,evidence supporting the amounts and disclosures in the nancialstatements, assessing the accounting principles used andsigni cant estimates made by management, and evaluatingthe overall nancial statement presentation. Our audit of internal control over nancial reporting included obtainingan understanding of internal control over nancial reporting,

assessing the risk that a material weakness exists, and testingand evaluating the design and operating effectiveness of interncontrol based on the assessed risk. Our audits also includedperforming such other procedures as we considered necessaryin the circumstances. We believe that our audits provide areasonable basis for our opinions.

A companys internal control over nancial reporting is aprocess designed by, or under the supervision of, the companyprincipal executive and principal nancial of cers, or personsperforming similar functions, and effected by the companysboard of directors, management, and other personnel to providereasonable assurance regarding the reliability of nancialreporting and the preparation of nancial statements for externapurposes in accordance with generally accepted accountingprinciples. A companys internal control over nancial reportinincludes those policies and procedures that (1) pertain to themaintenance of records that, in reasonable detail, accurately anfairly re ect the transactions and dispositions of the assets of thcompany; (2) provide reasonable assurance that transactions arrecorded as necessary to permit preparation of nancial statemenin accordance with generally accepted accounting principles,and that receipts and expenditures of the company are beingmade only in accordance with authorizations of management anddirectors of the company; and (3) provide reasonable assuranceregarding prevention or timely detection of unauthorizedacquisition, use, or disposition of the companys assets thatcould have a material effect on the nancial statements.

Because of the inherent limitations of internal controlover nancial reporting, including the possibility of collusion oimproper management override of controls, material misstatemendue to error or fraud may not be prevented or detected on atimely basis. Also, projections of any evaluation of the effectivness of the internal control over nancial reporting to futureperiods are subject to the risk that the controls may becomeinadequate because of changes in conditions, or that the degreeof compliance with the policies or procedures may deteriorate.

In our opinion, the consolidated nancial statementsreferred to above present fairly, in all material respects, the nancial position of the Company as of October 31, 2008 and2007, and the results of their operations and their cash ows foeach of the three years in the period ended October 31, 2008,in conformity with accounting principles generally accepted inthe United States of America. Also in our opinion, the Companymaintained in all material respects, effective internal controlover nancial reporting as of October 31, 2008, based on thecriteria established in Internal Control Integrated Frameworkissued by the Committee of Sponsoring Organizations of theTreadway Commission.

As discussed in Notes 1 and 5 to the consolidated nancial statements, the Company adopted FinancialAccounting Standards Board (FASB) Statement No. 158,Employers Accounting for De ned Bene t Pension and OtherPostretirement Plans an amendment of FASB StatementsNo. 87, 88, 106, and 132(R), which changed its method of accounting for pension and other postretirement bene ts asof October 31, 2007.

Deloitte & Touche LLPChicago, IllinoisDecember 18, 2008


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STATEMENT OF CONSOLIDATED INCOMEFor the Years Ended October 31, 2008, 2007 and 2006(In millions of dollars and shares except per share amounts)

2008 2007 2006_______ _______ _______ Net Sales and RevenuesNet sales .................................................................................................................................................... $ 25,803.5 $ 21,489.1 $ 19,884.0Finance and interest income ....................................................................................................................... 2,068.4 2,054.8 1,776

Other income ............................................................................................................................................. 565.7 538.3 487.0________ ________ ________ Total ..................................................................................................................................................... 28,437.6 24,082.2 22,147.8________ ________ ________ Costs and ExpensesCost of sales .............................................................................................................................................. 19,574.8 16,252.8 15,362.0Research and development expenses .......................................................................................................... 943.1 816.8 725Selling, administrative and general expenses ............................................................................................... 2,960.2 2,620.8 2,32Interest expense ......................................................................................................................................... 1,137.0 1,151.2 1,017.5Other operating expenses ........................................................................................................................... 698.7 565.1 544.________ ________ ________

Total ..................................................................................................................................................... 25,313.8 21,406.7 19,974.0________ ________ ________ Income of Consolidated Group before Income Taxes .......................................................................... 3,123.8 2,675.5 2,173.8Provision for income taxes .......................................................................................................................... 1,111.2 883.0 741________ ________ ________ Income of Consolidated Group ............................................................................................................... 2,012.6 1,792.5 1,432.2

Equity in income of unconsolidated af liates ................................................................................................ 40.2 29.2 ________ ________ ________ Income from Continuing Operations ..................................................................................................... 2,052.8 1,821.7 1,453.2Income from Discontinued Operations ................................................................................................. 240.6________ ________ ________ Net Income ........................................................................................................................................

deere annual report 2008

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