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 July 2008, the Company completed the sale of the CST/berger laser leveling and measuring business for $204 million in cash. The transaction generated a pre-tax book gain of $128 million, and $152 million in net after-tax cash proceeds. CST/berger had 2007 revenues of $80 million. The Company also announced plans to exit several other small, non-strategic businesses with approximately $50 million in annual revenues. As a result, CST/berger, along with two other small businesses, is reported in discontinued operations and prior periods have been recast for comparability.

• On July 18, 2008, the Company completed the acquisitions of Sonitrol Corporation ("Sonitrol"), for $281 million in cash, and Xmark Corporation ("Xmark"), for $47 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 and monitoring businesses, including HSM acquired in early 2007. Xmark, headquartered in Canada, markets and sells radio frequency identification ("RFID")-based systems used to identify, locate and protect people and assets. Xmark annual revenues exceed $30 million and it will enhance the Company's personal security business. Both acquisitions are reported in the Security segment.

• On October 1, 2008 (in the fiscal fourth quarter), the Company completed the acquisition of Générale de Protection ("GdP") for $166 million (118 million euros) in cash. GdP, headquartered in Vitrolles, France, is a leading provider of audio and video security monitoring services, primarily for small and mid-sized businesses located in France and Belgium. GdP, with 2007 revenues totaling approximately $87 million (64 million euros) represents Stanley's first significant expansion of its electronic security platform in continental Europe. GdP is expected to have no effect on 2008 earnings from continuing operations and have a modest accretive impact in 2009.

RESULTS OF OPERATIONS

Below is a summary of consolidated operating results for the three and nine months ending September 27, 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 $1.120 billion in the third quarter of 2008 as compared to $1.106 billion in the third quarter of 2007, representing an increase of $14 million or 1%. Acquisitions, primarily Sonitrol and Xmark, contributed 3% of net sales. Foreign currency translation generated a 2% increase in sales, as most major currencies in all regions strengthened relative to the U.S. dollar compared to prior year, but weakened versus levels in the second quarter of 2008. Aside from acquisitions and currency, sales declined 4% attributable to a 7% unit volume decline which was offset partially by favorable pricing of 3%. Nearly 2% of the unit volume decline pertained to the previously disclosed loss of a major customer in the hardware business within the security segment (this impact will anniversary in the fourth quarter of 2008). Approximately half of the total unit volume decline occurred in the CDIY segment, as North America continued to be adversely impacted by the contraction in residential construction markets while demand in other regions, particularly Europe, further softened in the third quarter. The remaining unit volume decline was predominantly in the industrial segment, most significantly in the North American automotive repair business reflecting the deepening U.S. economic downturn. The European economy also weakened in the third quarter unfavorably affecting all of the Company's industrial segment businesses. This was partially offset by growth in the U.S. engineered storage and hydraulic tool businesses.

Year-to-date net sales from continuing operations were $3.348 billion in 2008, a $108 million or 3% increase, versus $3.240 billion for the first nine months of 2007. Acquisition growth contributed 2% of the increase, attributable to Sonitrol, Xmark, and several small security segment acquisitions. Foreign currency provided a 4% increase, pricing 3%, while volume decreased 5% compared to the prior year. The businesses contributing to the first nine months sales performance are mainly the same as those discussed above pertaining to the third quarter. However in the first six months of 2008, Europe achieved healthy growth which subsided in the third quarter.

Gross Profit: Gross profit from continuing operations was $431 million, or 38.5% of net sales, in the third quarter of 2008, as compared with $422 million of gross profit, or 38.1% of net sales, in the prior year. Acquisitions contributed $19 million to gross profit. Core gross margin represented 38.1% of sales consistent with the prior year as the favorable impacts of customer price increases and productivity were offset primarily by cost inflation and lower unit volumes. The pace of energy and commodity cost inflation, particularly steel, which accelerated dramatically this summer, stabilized to some extent later in the third quarter. As a result, the Company's estimate of full year 2008 inflation remains at approximately $150 million, which management plans to partially mitigate through various customer pricing actions that are expected to recover nearly 90% of this impact.

On a year-to-date basis, gross profit from continuing operations was $1.279 billion, or 38.2% of net sales, in 2008, compared to $1.230 billion, or 38.0% of net sales, for the corresponding 2007 period. The increase in gross profit was attributable to acquisitions, primarily Sonitrol and Xmark. The factors affecting the year-to-date performance are the same as those discussed pertaining to the third quarter. Successful execution of productivity projects and customer pricing increases collectively more than offset nearly $100 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 $275 million, or 24.6% of net sales, in the third quarter of 2008, compared to $252 million, or 22.8% of net sales, in the prior year. On a year-to-date basis, SG&A was $833 million, or 24.9% of net sales, versus $770 million, or 23.8% of net sales, in 2007. Acquisitions contributed $11 million and $22 million of the SG&A increase in the quarter, and year-to-date, respectively. The remaining increase in SG&A primarily reflects foreign currency impact, inflation and strategic investments in emerging markets, offset partially by cost reduction actions.

Interest and Other-net: Net interest expense from continuing operations in the third quarter of 2008 was $18 million compared to $20 million in 2007. The decrease is primarily due to repayment of $150 million of debt that matured in November 2007 as well as increased interest income earned on higher foreign cash balances in the current year. Year-to-date net interest expense from continuing operations was $55 million in 2008 compared to $61 million over the first nine months of 2007. The reduction pertained to the same factors discussed in relation to the third quarter. Additionally, interest expense related to commercial paper declined as a result of lower borrowing costs in the current year.

Other-net expenses from continuing operations were $29 million in the third quarter of 2008 versus $25 million in 2007. Higher intangible asset amortization from the Sonitrol and Xmark acquisitions was the primary driver of this increase. Year-to-date other-net expenses from continuing operations were $70 million in 2008, relatively consistent with $68 million in 2007.

Income Taxes: The Company's effective income tax rate from continuing operations was 25.0% in the third quarter of this year, compared with 26.9% in the prior year's quarter. The year-to-date effective income tax rate from continuing operations was 25.9% in 2008 versus 26.4% in 2007. The lower effective tax rate in the current year is mainly attributable to a decrease in earnings in certain jurisdictions with higher tax rates.

Discontinued Operations: Net earnings from discontinued operations amounted to $86 million for the third quarter of 2008, up from $3 million in 2007, primarily due to the $84 million after-tax gain realized on the sale of CST/berger. Net earnings from discontinued operations for the first nine months of 2008 totaled $93 million versus $8 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 sold on July 25, 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.

Security: Security sales from continuing operations increased 7% to $395 million during the third quarter of 2008 from $371 million in the corresponding 2007 period. Acquisitions, primarily Sonitrol and Xmark, contributed 10% of the sales increase. Pricing increased nearly 3%, while unit volume declined 6% attributable primarily to the previously disclosed loss of a major customer in the hardware business.

Year-to-date net sales from continuing operations were $1.094 billion in 2008 as compared to $1.057 billion in 2007, an increase of 4%. Acquisitions accounted for 5%; currency contributed 1%; pricing increased 2%; and volume declined 5%. In addition to the factors described in the analysis of the third quarter, segment sales in the first nine months reflected growth in convergent security, which benefited from strength in national accounts in the U.S., and robust sales in both Canada and Great Britain.

Security segment profit amounted to $74 million, or 18.7% of net sales, for the third quarter of 2008 as compared with $68 million, or 18.5% of net sales, in the prior year. On a year-to-date basis, segment profit was $193 million, or 17.6% of net sales, in 2008 compared to $181 million, or 17.1% of net sales, in the prior year period. The Sonitrol acquisition was accretive to the segment profit rate. The strong segment profit was further enabled by the successful reverse integration of the legacy systems integration business into HSM. Additionally, productivity and customer pricing benefits largely offset cost inflation and the hardware volume impact.

Industrial: Industrial sales of $298 million in the third quarter of 2008 were flat with the prior year. Foreign currency translation provided a 4% increase, and favorable pricing 2%, which were offset by a 6% unit volume decrease. The North American automotive repair business was adversely affected by distributor attrition and the deteriorating U.S. economy. European sales volumes which had been positive in the first half of the year, declined in the third quarter as Facom and other businesses reflected the contraction of the European economy. These volume declines were partially offset by strong sales growth in U.S.-based engineered storage and to a lesser extent the hydraulic tools business. The sales growth in engineered storage was driven by government spending, particularly by army and navy bases, and also strength with commercial customers.

Year-to-date net sales from continuing operations were $969 million in 2008, up 7% or $61 million as compared to 2007. The InnerSpace acquisition contributed nearly 2% of the sales increase. Foreign currency generated a 6% favorable impact, customer pricing a 2% increase while organic unit volume declined 3%. The factors resulting in the Industrial segment's nine month performance are primarily the same as those discussed pertaining to the third quarter. However, in the first six months of 2008, Europe achieved healthy growth which subsided in the third quarter.

Industrial segment profit was $40 million, or 13.5% of net sales, for the third quarter of 2008, compared to $41 million, or 13.9% of net sales, in 2007. Industrial segment profit improved 50 basis points

sequentially over the second quarter but declined 40 basis points versus the prior year. Year-to-date segment profit for the Industrial segment was $133 million, or 13.7% of net sales, for 2008, flat compared with 2007 when it represented 14.6% of net sales. Customer pricing offset inflation in the third quarter; inflation had temporarily outpaced pricing in the first half. The segment profit rate was affected by volume declines as well as unfavorable product mix in both the hydraulic tools and Mac Tools businesses, partially offset by productivity improvements.

Construction & Do-It-Yourself ("CDIY"): CDIY sales of $427 million during the third quarter of 2008 represented a 2% decrease from $438 million in the third quarter of 2007. Unit volume declined 9%, and was partially offset by favorable pricing and foreign currency of 4% and 3% respectively. Volume was negatively impacted by the contraction in residential construction in both the Americas and Europe, as well as a decline in industrial markets served by fastening systems, reflecting increasingly weak macro-economic conditions. Fastening systems continued its planned shift toward more profitable business which resulted in additional volume pressure. Pervasive pricing actions were implemented in order to mitigate cost inflation across the entire segment.

Year-to-date net sales from continuing operations were $1.284 billion in 2008 as compared to $1.274 billion in 2007, an increase of 1%. Favorable foreign currency translation and pricing contributed 4% and 3% of the increase, respectively, while unit volume declined 6%. The most significant decrease was in North American markets due to the recessionary U.S. environment. Europe had essentially flat unit volume in the first half of 2008 but declined in the third quarter.

Segment profit was $54 million for the third quarter of 2008, compared to $72 million, representing 12.7% and 16.5% of net sales respectively. CDIY made progress on customer pricing actions and manufacturing productivity within the quarter, however cost inflation and lower sales volume pressures more than offset these benefits. On a year-to-date basis, segment profit was $167 million, or 13.0% of net sales, compared to $194 million, or 15.2% of net sales in 2007. The year-to-date performance reflects the same factors discussed relating to the third quarter in addition to spending to develop emerging markets.

Restructuring Charges and Asset Impairments

At September 27, 2008, the Company's restructuring reserve balance was
$25.4 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 September 27, 2008 is as follows (in millions):


                                            Net
                          12/29/07       Additions       Usage       Currency       9/27/08

      Acquisitions
      Severance          $     18.8     $       0.8     $  (6.0 )   $        -     $    13.6
      Facility Closure          1.6             1.4        (0.9 )            -           2.1
      Other                     1.0               -        (0.4 )            -           0.6
      2008 Actions                -            25.0       (15.1 )         (0.8 )         9.1
      Pre-2008 Actions          2.3               -        (2.3 )            -             -

                         $     23.7     $      27.2     $ (24.7 )   $     (0.8 )   $    25.4

2008 Actions: During the first nine months of 2008, the Company initiated cost reduction initiatives in order to maintain its cost competitiveness. Severance and related charges of $20.0 million were recorded during the first nine months relating to the reduction of approximately 700 employees. In addition to severance, $5.0 million was recorded for asset impairments primarily relating to the exit of a business. Approximately $10.9 million of the total charges pertained to the Construction and DIY segment; $6.2 million to the Industrial segment; and $7.9 million to the Security segment. Of these

amounts, $15.1 million has been utilized to date, with $9.1 million of reserves remaining as of September 27, 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. This entire amount has been utilized as of September 27, 2008.

Acquisition Related: During the third quarter of 2008, $2.0 million of reserves were established primarily relating to the Sonitrol acquisition. Of this amount, $0.6 million was for severance of approximately 100 employees and $1.4 million relates to the planned closure of 9 facilities. 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 September 27, 2008, $2.1 million has been utilized, leaving $0.9 million remaining. The Company also utilized $6.7 million of restructuring reserves during the first nine months of 2008 established for various other current year and prior year acquisitions. As of September 27, 2008, $16.3 million in accruals for restructuring remain, primarily relating to the Facom, HSM and Sonitrol acquisitions.

FINANCIAL CONDITION

Liquidity, Sources and Uses of Capital:

Operating and Investing Activities: Cash flow from operations was $166 million in the third quarter of 2008 compared to $130 million in 2007. The increase primarily relates to strong working capital performance, partially offset by lower earnings aside from the gain on the sale of CST/berger. Year-to-date cash flow from operations was $357 million compared to $326 million in the prior year. The $31 million year-to-date increase in cash flow from operations is mainly attributable to the same factors discussed pertaining to the third quarter along with lower restructuring payments in the current year.

Capital and software expenditures were $28 million in the third quarter of 2008 versus $12 million in 2007. On a year-to-date basis capital and software expenditures were $82 million representing a $27 million increase compared to the prior year. The increase primarily pertains to software investments as the Company is in the midst of North American systems implementations, along with physical security and other facility-related investments.

Free cash flow, as defined in the following table, was $138 million in the third quarter of 2008 compared to $118 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           $ 166     $ 130
           Less: capital and software expenditures               (28 )     (12 )

           Free cash flow                                      $ 138     $ 118

In the third quarter of 2008 the Company received $163 million in cash from the sale of the CST/berger business, net of taxes paid and transaction costs. Approximately $11 million in cash outflows for taxes due on the gain are expected to occur in the fourth quarter. On a year-to-date basis cash inflows from the sale of businesses were $166 million reflecting a small European divestiture in addition to CST/berger.

For the third quarter of 2008, acquisition spending totaled $336 million mainly due to cash paid for the Sonitrol and Xmark acquisitions, compared to $64 million in 2007, primarily for the InnerSpace

acquisition. Acquisitions entailed a $364 million cash outflow for the first three quarters of 2008 versus $633 million in 2007, which reflected the January 2007 acquisition of the HSM security monitoring business.

Financing Activities:

There were no repurchases of common stock during the third quarter of 2008 or 2007. 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 (for 1.7 million shares) 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 during the third quarter of 2008 amounted to $7 million, versus $4 million in the prior year, which reflected higher levels of stock option exercises. Proceeds from the issuance of common stock and warrants totaled $17 million for the first three quarters of 2008 and $90 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 outflow of . . .