The financial and business analysis below provides information which the Company believes is relevant to an assessment and understanding of its consolidated financial position, results of operations and cash flows. This financial and business analysis should be read in conjunction with the consolidated financial statements and related notes.

The following discussion contains statements reflecting the Company's views about its future performance that constitute "forward-looking statements" under the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on current expectations, estimates, forecasts and projections about the industry and markets in which the Company operates and management's beliefs and assumptions. Any statements contained herein (including without limitation statements to the effect that The Stanley Works or its management "believes", "expects", "anticipates", "plans" and similar expressions) that are not statements of historical fact should be considered forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict. There are a number of important factors that could cause actual results to differ materially from those indicated by such forward-looking statements. These factors include, without limitation, those set forth, or incorporated by reference, below under the heading "Cautionary Statements". The Company does not intend to update publicly any forward-looking statements whether as a result of new information, future events or otherwise.

OVERVIEW

The Company is a diversified worldwide supplier of tools and engineered solutions for professional, industrial, construction, and do-it-yourself ("DIY") use, as well as engineered solutions and security solutions for industrial and commercial applications. Its operations are classified into three business segments: Construction & DIY ("CDIY"), Industrial and Security. The CDIY segment manufactures and markets hand tools, storage systems, and fasteners, as these products are principally utilized in construction and do-it-yourself projects. These products are sold primarily to professional end users and distributed through retailers (including home centers, mass merchants, hardware stores, and retail lumber yards). The Industrial segment manufactures and markets professional mechanics tools and storage systems, plumbing, heating, air conditioning and roofing tools, assembly tools and systems, hydraulic tools and specialty tools (Stanley supply and services). These products are sold to industrial customers and distributed primarily through third party distributors as well as direct sales forces. The Security segment is a provider of access and security solutions primarily for retailers, educational, financial and healthcare institutions, as well as commercial, governmental and industrial customers. The Company provides an extensive suite of mechanical and electronic security integration systems, software, related installation, maintenance, and a variety of security services including security monitoring services, electronic integration systems, software, related installation and maintenance services, automatic doors, door closers, exit devices, hardware and locking mechanisms.

For several years, the Company has pursued a diversification strategy to enable profitable growth. The strategy involves industry, geographic and customer diversification, as exemplified by the expansion of security solution product offerings, the growing proportion of sales outside the U.S., and the deliberate reduction of the Company's dependence on sales to U.S. home centers and mass merchants. Execution of this strategy has entailed approximately $2.5 billion of acquisitions since the beginning of 2002, several divestitures, and increased brand investments. Additionally, the strategy reflects management's vision to build a growth platform in security while expanding the valuable branded tools platform. Over the past several years, the Company has generated strong free cash flow and received substantial proceeds from divestitures that enabled a transformation of the business portfolio. Refer to the "Business Overview" section of Management's Discussion and Analysis of Financial Condition and Results of Operations in the Company's Annual Report on Form 10-K for the fiscal year ended December 29, 2007 for additional strategic discussion.

Key developments in 2008 pursuant to this diversification and profitable growth strategy include the following.

• In June 2008 the Company announced the pending sale of the CST/berger laser leveling and measuring business for $205 million in cash. This operation had 2007 revenues of $80 million. The transaction is expected to close in the third quarter and will generate a pre-tax book gain estimated at $138 million, and approximately $155 million in net after-tax cash proceeds. The Company also announced plans to exit several other small, non-strategic businesses with approximately $60 million in annual revenues. As a result, CST/berger, along with two other small businesses, is reported in discontinued operations effective in the second quarter of 2008 and prior periods have been recast for comparability.

• In June, 2008 the Company recognized $9 million of restructuring and asset impairment charges due to the decision to exit the consumer metal storage business which has a high concentration of sales with certain CDIY customers. This Canadian-based business remains classified in continuing operations but will be reclassified to discontinued operations later in 2008 following its shut-down and prior periods will then be recasted for comparability.

• On July 18, 2008 the Company completed the previously announced acquisitions of Sonitrol Corporation, for $278 million in cash, and Xmark Corporation, for $48 million in cash. Sonitrol, with annual revenue totaling approximately $110 million, provides security monitoring services, access control and fire detection systems to commercial customers in North America via two monitoring centers and a national multi-channel distribution network. Sonitrol will complement the product offering of the pre-existing security integration businesses including HSM acquired in early 2007. Sonitrol is expected to reduce diluted earnings per share by 2 cents in 2008, contribute 4 cents in 2009, and increase accretion by an incremental 5 cents in each of the next several years thereafter as the impact of intangible asset amortization subsides. Xmark, headquarterd in Canada, markets and sells radio frequency identification ("RFID")-based systems used to identify, locate and protect people and assets. Xmark revenues exceed $30 million annually and it will enhance the Company's personal security business. Xmark will have only a minor impact on results of operations in 2008, and will be nominally accretive in 2009. Both acquisitions will be reported in the Security segment.

RESULTS OF OPERATIONS

Below is a summary of consolidated operating results for the three and six months ending June 28, 2008, followed by an overview of performance by business segment. The terms "organic" and "core" are utilized to describe results aside from the impact of acquisitions during their initial 12 months of ownership. This ensures appropriate comparability to operating results in the prior period.

Net Sales: Net sales from continuing operations were $1.154 billion in the second quarter of 2008 as compared to $1.096 billion in the second quarter of 2007, representing an increase of $58 million or 5%. Acquisitions, primarily InnerSpace industrial storage, contributed 1% of net sales. Organic unit volume declined 3% which was largely offset by favorable pricing. Foreign currency translation generated a 4% increase in sales, as major currencies in all regions strengthened relative to the US dollar. The U.S. CDIY segment continues to be adversely impacted by the contraction in the residential construction market, and the U.S. economic downturn also affected the automotive repair tools business. The hardware business within the security segment had lower sales due to the loss of a major customer (this impact will anniversary in the fourth quarter of 2008). Partially offsetting these unit volume declines were healthy growth performances in convergent security and Europe.

Year-to-date net sales from continuing operations were $2.228 billion in 2008, a $94 million or 4% increase, versus $2.134 billion for the first half of 2007. Acquisition growth contributed 1% of the increase, attributable to the InnerSpace industrial storage business and several small security segment acquisitions. Foreign currency provided a 5% increase, pricing 2%, while volume decreased 4%

compared to the prior year. The businesses contributing to the first half sales performance are mainly the same as those discussed above pertaining to the second quarter.

Gross Profit: Gross profit from continuing operations was $442 million, or 38.3% of net sales, in the second quarter of 2008, an increase of $20 million over $422 million of gross profit, or 38.6% of net sales, in the prior year. Acquisitions contributed $8 million of the increase. The favorable impacts of customer price increases, foreign currency translation, and productivity were partially offset by cost inflation and lower unit volumes. The pace of energy and commodity cost inflation, particularly steel, has accelerated dramatically in June and July to date. As a result, the Company's estimate of the full year 2008 inflation is approximately $150 million, which management plans to partially mitigate through rapid deployment of various customer pricing actions that should recover approximately 90% of this impact.

On a year-to-date basis, gross profit from continuing operations was $848 million, or 38.1% of net sales, in 2008, compared to $809 million, or 37.9% of net sales, for the corresponding 2007 period. Acquisitions, primarily HSM and InnerSpace, contributed $17 million of the total $39 million gross profit improvement. The factors affecting the year-to-date performance are the same as those discussed pertaining to the second quarter. Successful execution of productivity projects and customer pricing increases collectively more than offset nearly $50 million of year-to-date cost inflation.

SG&A expenses: Selling, general and administrative ("SG&A") expenses from continuing operations, inclusive of the provision for doubtful accounts were $283 million, or 24.5% of net sales, in the second quarter of 2008, compared to $263 million, or 24.0% of net sales, in the prior year. First half SG&A was $558 million, or 25.1% of net sales, compared to $518 million, or 24.3% of net sales, in 2007. The increase in SG&A primarily reflects the impact of unfavorable foreign currency, along with acquisitions which contributed $5 million and $10 million to the quarter, and year-to-date, respectively. The SG&A increase also reflects strategic investments in emerging markets and various Stanley Fulfillment System initiatives.

Interest and Other-net: Net interest expense from continuing operations in the second quarter of 2008 was $18 million compared to $20 million in 2007. Year-to-date net interest expense from continuing operations was $36 million in 2008 compared to $40 million over the first half of 2007. The reduction was mainly due to lower interest rates applicable to the Company's commercial paper program, partially offset by increased borrowings in 2008, and increased interest income earned on higher foreign cash balances in the current year.

Other-net expenses from continuing operations were $21 million in the second quarter of 2008 versus $24 million in 2007. Lower 2008 intangible asset amortization and currency losses were the primary drivers of this decline. Year-to-date Other-net expenses from continuing operations were $41 million in 2008, relatively consistent with $43 million in 2007.

Income Taxes: The Company's effective income tax rate from continuing operations was 26.4% in the second quarter of this year, compared with 26.0% in the prior year's quarter. The year-to-date effective income tax rate from continuing operations was 26.4% in 2008 versus 26.1% in 2007. The slight increase in the effective tax rate is mainly attributable to increased earnings in certain more highly taxed jurisdictions.

Discontinued Operations: Net earnings from discontinued operations amounted to $4 million for the second quarter of 2008, up from $3 million in 2007, due to the gain realized in April, 2008 on the sale of a European business. Net earnings from discontinued operations for the first half of 2008 totaled $7 million versus $5 million in the prior year. As discussed more fully in Note P, discontinued operations primarily reflects the operating results of the CST/berger business which was classified as held for sale in June 2008.

Business Segment Results

The Company's reportable segments are an aggregation of businesses that have similar products and services, among other factors. The Company utilizes segment profit, which is defined as net sales minus cost of sales and SG&A (aside from corporate overhead expense), and segment profit as a percentage of net sales to assess the profitability of each segment. Segment profit excludes the corporate overhead expense element of SG&A, interest income, interest expense, other-net (inclusive of intangible asset amortization expense), restructuring, and income tax expense. Corporate overhead is comprised of world headquarters facility expense, costs for the executive management team and for certain centralized functions that benefit the entire Company but are not directly attributable to the businesses, such as legal and corporate finance functions. The Company's operations are classified into three business segments: Construction & DIY, Industrial, and Security.

Construction & Do-It-Yourself ("CDIY"): CDIY sales of $452 million during the second quarter of 2008 represented a 4% increase from $433 million in the second quarter of 2007. The increase was driven by strength in Europe, which grew 20% in total (7% aside from currency translation), with pervasive world-wide pricing actions to mitigate inflation largely offsetting the adverse impact of lower U.S. unit volumes due to continued weakness in the relevant North American end user markets.

Year-to-date net sales from continuing operations were $858 million in 2008 as compared to $837 million in 2007, an increase of 2%. Favorable foreign currency translation and pricing contributed 5% and 2% of the increase, respectively, while unit volume declined 5%. Aside from the deterioration in U.S. markets, the year-to-date unit volume performance also reflects lower first quarter unit volume in Europe pertaining to the timing of promotional sales that occurred earlier in 2007.

Segment profit was $66 million for the second quarter of 2008, compared to $63 million, representing 14.6% of net sales in both periods. Pervasive customer pricing actions partially offset significant cost inflation. In addition, the decline in U.S. unit volume further pressured the profit rate relative to lower absorption of fixed costs. However, strength in Europe as well as benefits from productivity initiatives enabled the achievement of a profit rate consistent with the second quarter of 2007. On a year-to-date basis, segment profit was $113 million, or 13.2% of net sales, compared to $122 million, or 14.6% of net sales in 2007. The year-to-date performance reflects the same factors discussed relating to the second quarter, but was affected by a more severe unit volume decline in the first quarter as well as spending to develop emerging markets.

Industrial: Industrial sales of $338 million in the second quarter of 2008 increased 12% from $302 million in the prior year. The InnerSpace storage acquisition generated 2% of the higher sales. Favorable foreign currency translation contributed 8%, and pricing amounted to 2%, while unit volume was flat. The North American automotive-related businesses were adversely affected by the deteriorating U.S. economy. North American automotive repair tool sales were impacted by higher gasoline prices and credit pressures dampening end user demand, especially for higher-priced products such as toolboxes. These volume declines were offset by robust sales growth in the U.S.-based engineered storage and hydraulic tools businesses, along with gains in European businesses. The sales growth in engineered storage was driven by government spending, particularly by army and navy bases, and also strength with commercial customers. Hydraulic tools achieved sales gains driven by demand for metal shear products related to robust growth in metal scrap markets. In Europe, assembly technologies had strong gains from European auto manufacturers and the Facom business also achieved unit volume increases.

Year-to-date net sales from continuing operations were $671 million in 2008, up 10% or $61 million as compared to 2007. The InnerSpace acquisition contributed nearly 3% of the sales increase. Foreign currency generated a 7% favorable impact, while a 2% price increase was largely offset by a decline in organic unit volume. The factors resulting in the Industrial segment's six month performance are primarily the same items discussed pertaining to the second quarter results.

Industrial segment profit was $44 million, or 13.0% of net sales, for the second quarter of 2008, compared to $46 million, or 15.2% of net sales, in 2007. Year-to-date segment profit for the Industrial segment was $93 million, or 13.8% of net sales, for 2008, compared to $91 million, or 14.9% of net sales, for 2007. The segment profit rate decline pertained to: inflation, which has temporarily outpaced customer pricing increases but is dilutive to the rate even when recovered; unfavorable product mix in both the hydraulic tools and Mac Tools businesses; strategic investments in emerging markets for hydraulic tools, Proto and Facom; and consulting spending to drive complexity reduction pertaining to Stanley Fulfillment System initiatives.

Security: Security sales from continuing operations increased 1% to $364 million during the second quarter of 2008 from $361 million in the corresponding 2007 period. Acquisitions contributed 2% and favorable foreign currency provided 1% of the sales increase. Pricing increased nearly 3%, but was more than offset by a 5% unit volume decline primarily attributable to the previously disclosed loss of a major customer in the hardware business. Aside from the hardware business and acquisitions, sales increased 5% primarily due to pricing actions with customers and strength in convergent security (systems integration and monitoring), partially offset by softness in certain mechanical access large U.S. retail accounts as economic pressures slow the pace of new store openings. Convergent security benefited from strength in national accounts in the U.S., and robust sales growth in both Canada and Great Britain.

Year-to-date net sales from continuing operations were $699 million in 2008 as compared to $687 million in 2007, an increase of 2%. Acquisitions accounted for 3%; currency contributed almost 2%; pricing increased 2%; and volume declined 5%. The year-to-date sales performance is mainly related to the factors described in the analysis of the second quarter. Additionally, the access technologies business achieved unit volume growth in the first quarter driven by sales to hospitals, grocers and other non-national chain customers.

Security segment profit amounted to $66 million, or 18.1% of net sales, for the second quarter of 2008 as compared with $67 million, or 18.7% of net sales, in the prior year. On a year-to-date basis, segment profit was $119 million, or 17.0% of net sales, in 2008 compared to $113 million, or 16.5% of net sales, in the prior year period. The strong segment profit was enabled by the ongoing, successful reverse integration of the legacy systems integration business into HSM, yielding improved bidding and project management disciplines. In addition, productivity and customer pricing benefits offset surging cost inflation.

Restructuring Charges and Asset Impairments

At June 28, 2008, the Company's restructuring reserve balance was $26.5 million.
This will be substantially expended during 2008, aside from approximately
$7 million pertaining to the Facom acquisition for which the timing of payments
depends upon the actions of certain European governmental agencies. A summary of
the Company's restructuring reserve activity from December 29, 2007 to June 28,
2008 is as follows (in millions):


                                            Net
                          12/29/07       Additions       Usage      Currency       6/28/08

      Acquisitions
      Severance          $     18.8     $       0.1     $  (4.6 )   $     0.8     $    15.1
      Facility Closure          1.6               -        (0.5 )           -           1.1
      Other                     1.0               -        (0.3 )         0.3           1.0
      2008 Actions                -            20.2       (11.1 )           -           9.1
      Pre-2008 Actions          2.3               -        (2.2 )         0.1           0.2

                         $     23.7     $      20.3     $ (18.7 )   $     1.2     $    26.5

2008 Actions: During the first half of 2008, the Company initiated cost reduction initiatives in order to maintain its cost competitiveness. Severance and related charges of $14.0 million were recorded

during the first half relating to the reduction of approximately 500 employees. In addition to severance, $6.2 million was recorded for asset impairments primarily relating to the exit of a business. Of the $20.2 million in aggregate restructuring charges, a total of $9.1 million pertains to the planned closure of the consumer metal storage business. Approximately $11.6 million of the total charges pertained to the Construction and DIY segment; $3.3 million to the Industrial segment; and $5.3 million to the Security segment. Of these amounts, $11.1 million has been utilized to date, with $9.1 million of reserves remaining as of June 28, 2008.

Pre-2008 Actions: During 2007 the Company initiated $11.8 million of cost reduction actions in various businesses. These actions were comprised of the severance of 525 employees and the exit of a leased facility. Of this amount, $11.8 million has been utilized to date with no accrual remaining as of June 28, 2008. In addition, $0.2 million of reserves remain relating to pre-2007 actions.

Acquisition Related: During 2007, $3.0 million of reserves were established for HSM in purchase accounting. Of this amount, $1.1 million was for severance of approximately 80 employees and $1.9 million related to the closure of 13 branch facilities. As of June 28, 2008, $1.4 million has been utilized, leaving $1.6 million remaining. The Company also utilized $4.8 million of restructuring reserves during the first half of 2008 established for various other current year and prior year acquisitions. As of June 28, 2008, $17.2 million in accruals for restructuring remain, primarily relating to the Facom acquisition.

FINANCIAL CONDITION

Liquidity, Sources and Uses of Capital:

Operating and Investing Activities: Cash flow from operations was $84 million in the second quarter of 2008 compared to $102 million in 2007. The decrease primarily relates to the termination of the Company's U.S. receivable securitization facility which resulted in a $17 million cash outflow in June 2008. Year-to-date cash flow from operations was $191 million, relatively consistent with $196 million in the prior year.

Capital and software expenditures were $29 million in the second quarter of 2008 versus $ $17 million in 2007. On a year-to-date basis capital and software expenditures were $54 million representing a $10 million increase compared to the prior year. The increase primarily pertains to software investments as the Company is in the midst of a North American systems implementation.

Free cash flow, as defined in the following table, was $55 million in the second quarter of 2008 compared to $85 million in the corresponding 2007 period. The Company believes free cash flow is an important measure of its liquidity, as well as its ability to fund future growth and provide a dividend to shareowners. Free cash flow does not include deductions for mandatory debt service, other borrowing activity, discretionary dividends on the Company's common stock and business acquisitions, among other items.

           (Millions of Dollars)                               2008      2007

           Net cash provided by operating activities           $  84     $ 102
           Less: capital and software expenditures               (29 )     (17 )

           Free cash flow                                      $  55     $  85

For the second quarter of 2008, acquisition spending totaled $27 million mainly for three small security segment businesses, compared to 2007 acquisition spending of $23 million, primarily for the Bed Check personal security business. Acquisitions entailed a $28 million cash outflow for the first half of 2008 versus $569 million in 2007, which reflected the January 2007 acquisition of the HSM monitoring business.

Financing Activities:

There were no repurchases of common stock during the second quarter of 2008, while the Company expended $100 million in the prior year to acquire nearly 1.7 million shares. On a year-to-date basis, common stock repurchase activity was $102 million (for 2.2 million shares) in 2008, down slightly from $107 million in 2007. The Company will continue to assess the possibility of repurchasing more of its outstanding common stock, based on a number of factors including the level of acquisition activity, the market price of the Company's common stock and the current financial condition of the Company.

Proceeds from the issuance of common stock and warrants during the second quarter of 2008 amounted to $7 million, versus $26 million in the prior year which reflected higher levels of stock option exercises. Such proceeds totaled $10 million for the first half of 2008 and $86 million for the corresponding 2007 period. The higher amount in 2007 is attributable to stock option exercises as well as $19 million of proceeds from warrants sold in connection with the March, 2007 equity units offering to finance the HSM acquisition.

Net proceeds from short-term borrowings amounted to a cash inflow of $53 million in the second quarter of 2008, relatively consistent with $48 million in 2007. Net proceeds from short-term borrowings totaled $173 million in the first half of 2008 versus $132 million in 2007, with over $100 million of proceeds in each year utilized to fund share repurchases. The remaining increase in net short-term borrowings in 2008 pertains to funding acquisitions and cash outflows pertaining to the termination of the U.S. receivable securitization facility. There were no long-term borrowings in 2008, while the $530 million of proceeds in the first quarter of 2007 represents the $330 million in five-year convertible notes and $200 million in three-year term notes issued to finance . . .