Summary of SIMPSON MANUFACTURING CO INC /CA/

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

This document contains forward-looking statements, based on numerous assumptions and subject to risks and uncertainties. Although the Company believes that the forward-looking statements are reasonable, it does not and cannot give any assurance that its beliefs and expectations will prove to be correct. Many factors could significantly affect the Company's operations and cause the Company's actual results to be substantially different from the Company's expectations. See "Part II, Item 1A - Risk Factors." Actual results might differ materially from results suggested by any forward-looking statements in this report. The Company does not have an obligation to publicly update any forward-looking statements, whether as a result of the receipt of new information, the occurrence of future events or otherwise.

The following is a discussion and analysis of the consolidated financial condition and results of operations for the Company for the three and nine months ended September 30, 2008 and 2007. The following should be read in conjunction with the interim Condensed Consolidated Financial Statements and related Notes appearing elsewhere herein.

Results of Operations for the Three Months Ended September 30, 2008, Compared with the Three Months Ended September 30, 2007

Net sales increased 1.2% from $217.3 for the third quarter of 2007 to $219.8 million in the third quarter of 2008. Net income increased 3.2% from $22.6 million for the third quarter of 2007 to $23.4 million for the third quarter of 2008. Diluted net income per common share was $0.48 for the third quarter of 2008 as compared to $0.46 for the third quarter of 2007.

In the third quarter of 2008, sales declined throughout the United States, with the exception of the northeastern and midwestern regions of the country. California and the western states had the largest decrease in sales. Sales during the quarter in continental Europe increased significantly, partly as a result of the two acquisitions there in 2008. Sales in Canada also increased, while sales were down in the United Kingdom. Simpson Strong-Tie's third quarter sales decreased 2.1% from the same quarter last year, while Simpson Dura-Vent's sales increased 32.5%. Simpson Strong-Tie's sales to contractor distributors and dealer distributors had the largest percentage rate decrease and sales to home centers increased slightly. Reflecting the deterioration of construction markets and economic conditions generally, sales decreased across most of Simpson Strong-Tie's major product lines, particularly those used in new home construction. Sales of the Swan Secure product line, acquired in July 2007, increased significantly and Anchor Systems sales benefited from the acquisition of the Liebig companies in April 2008. Sales of Simpson Dura-Vent's pellet vent, chimney, special gas vent and relining products increased. The increase in special gas vent products and a significant component of the increase in relining products resulted from the acquisition of ProTech Systems, Inc. ("ProTech") in June 2008. Sales of its Direct-Vent and gas vent product lines decreased as a result of several factors, including the continuing weakness in new home construction. The Company expects the weakness in new home construction and limited credit availability to continue into, and possibly beyond, 2009.

Income from operations increased 4.7% from $35.5 million in the third quarter of 2007 to $37.2 million in the third quarter of 2008. Gross margins increased from 37.4% in the third quarter of 2007 to 40.8% in the third quarter of 2008. The increase in gross margins was primarily due to lower manufacturing and fixed overhead costs, partly offset by higher distribution costs. Depending on future economic conditions, the Company's margins could deteriorate as a result of higher manufacturing and fixed overhead costs. The steel market continues to be dynamic with a high degree of uncertainty. Steel prices have declined somewhat since July 2008, but the Company believes that they may increase again in the near future. Since December 31, 2007, the Company's total inventories have increased 15.3%, primarily as a result of higher cost of steel. If steel prices increase above current levels and the Company is not able to increase its prices sufficiently, the Company's margins could again deteriorate.

Research and development expense increased 13.5% from $5.0 million in the third quarter of 2007 to $5.7 million in the third quarter of 2008. This increase was primarily due to a $0.8 million increase in expenses related to additional personnel in the acquisitions during 2008. Selling expense increased 16.7% from $18.3 million in the third quarter of 2007 to $21.3 million in the third quarter of 2008. The increase resulted from a $3.0 million increase in expenses associated with additional sales and marketing personnel, including those at businesses acquired since July 2007 and those in Asia. General and administrative expense increased 11.2% from $23.0 million in the third quarter of 2007 to $25.6 million in the third quarter of 2008. The increase was primarily the result of increased professional service costs of $1.2 million, which included costs associated with potential acquisitions that were not pursued, an increase in the provision for bad debt of $0.8 million and higher amortization expense of $0.2 million, primarily related to intangible assets acquired since July 2007. The effective tax rate was 38.1% in the third quarter of 2008, down from 38.5% in the third quarter of 2007.

Connector Products - Simpson Strong-Tie

Simpson Strong-Tie's income from operations increased 0.6% from $35.1 million in the third quarter of 2007 to $35.3 million in the third quarter of 2008.

Net Sales

In the third quarter of 2008, Simpson Strong-Tie's net sales decreased 2.1% to $192.4 million from $196.6 million in the third quarter of 2007. Simpson Strong-Tie accounted for 87.5% of the Company's total net sales in the third quarter of 2008, a decrease from 90.5% in the third quarter of 2007. The decrease in net sales at Simpson Strong-Tie resulted primarily from a decrease in sales volume, although average prices increased 14.5% as compared to the third quarter of 2007. In the third quarter of 2008, Simpson Strong-Tie's sales declined throughout the United States, with the exception of the northeastern region of the country. California and the western states had the largest decrease in sales. Simpson Strong-Tie's sales during the quarter in continental Europe increased significantly, partly as a result of two acquisitions there in 2008. Sales in Canada also increased, while sales were down in the United Kingdom. Simpson Strong-Tie's sales to contractor distributors and dealer distributors had the largest percentage rate decrease and sales to home centers increased slightly. Reflecting the deterioration of construction markets and economic conditions generally, sales decreased across most of Simpson Strong-Tie's major product lines, particularly those used in new home construction. Sales of the Swan Secure product line, acquired in July 2007, increased significantly and Anchor Systems sales benefited from the acquisition of the Liebig companies in April 2008.

Gross Profit

Simpson Strong-Tie's gross profit increased 8.5% from $77.5 million in the third quarter of 2007 to $84.1 million in the third quarter of 2008. As a percentage of net sales, gross profit increased to 43.7% in the third quarter of 2008 from 39.4% in the third quarter of 2007. This increase was primarily due to lower manufacturing and fixed overhead costs, partly offset by higher distribution costs.

Research and Development and Engineering Expense

Simpson Strong-Tie's research and development expense increased 12.5% from $4.7 million in the third quarter of 2007 to $5.3 million in the third quarter of 2008. This increase was primarily due to a $0.7 million increase in expenses related to additional personnel, including those associated with the acquisitions made during 2008.

Selling Expense

Simpson Strong-Tie's selling expense increased 18.5% from $16.2 million in the third quarter of 2007 to $19.2 million in the third quarter of 2008. The increase was driven primarily by a $3.0 million increase in expenses associated with sales and marketing personnel, including those at businesses acquired since July 2007.

General and Administrative Expense

Simpson Strong-Tie's general and administrative expense increased 10.1% from $22.0 million in the third quarter of 2007 to $24.3 million in the third quarter of 2008. The increase was primarily due to increased professional service expenses of $0.6 million, which included costs associated with potential acquisitions that were not pursued and an increase in the provision for bad debt of $0.7 million.

European Operations

For its European operations, Simpson Strong-Tie recorded income from operations of $1.4 million in the third quarter of 2008 compared to income from operations of $2.0 million in the third quarter of 2007.

Other

Simpson Strong-Tie has adjusted production levels downward at various facilities in the United States, and as a result, has reduced its labor force at these facilities.

Venting Products - Simpson Dura-Vent

Simpson Dura-Vent's income from operations increased from $14 thousand in the third quarter of 2007 to $1.8 million in the third quarter of 2008.

Net Sales

In the third quarter of 2008, Simpson Dura-Vent's net sales increased 32.5% from $20.7 million in the third quarter of 2007 to $27.4 million in the third quarter of 2008. Simpson Dura-Vent accounted for 12.5% of the Company's total net sales in the third quarter of 2008, an increase from 9.5% in the third quarter of 2007. The increase in net sales at Simpson Dura-Vent resulted primarily from an increase in sales volume and from average price increases of 4.7% as compared to the third quarter of 2007. In the third quarter of 2008, Simpson Dura-Vent's sales increased throughout the United States, with significant increases in the northeastern region resulting from the acquisition of ProTech, while sales in California decreased as a result of the weakness in new home construction. Sales of pellet vent, chimney, special gas vent and relining products increased. The increase in special gas vent products and a significant component of the increase in relining products resulted from the acquisition of ProTech in June 2008. Sales of its Direct-Vent and gas vent product lines decreased as a result of several factors, including the continuing weakness in new home construction.

Gross Profit

Simpson Dura-Vent's gross profit increased from $3.2 million in the third quarter of 2007 to $5.6 million in the third quarter of 2008. This increase was primarily due to lower fixed overhead costs, offset by increased manufacturing and distribution costs.

General and Administrative Expense

Simpson Dura-Vent's general and administrative expense increased 50.7% from $0.9 million in the third quarter of 2007 to $1.4 million in the third quarter of 2008. This increase was primarily due to increased expenses associated with administrative personnel of $0.2 million, including personnel associated with ProTech, and increased professional fees of $0.1 million.

Administrative and All Other (Company)

Interest Income and Expense

Interest income is generated on the Company's cash and cash equivalents balances. Interest income decreased primarily as a result of lower interest rates. Interest expense includes interest, account maintenance fees and bank charges.

Results of Operations for the Nine Months Ended September 30, 2008, Compared with the Nine Months Ended September 30, 2007

Net sales decreased 5.4% to $606.7 million in the first nine months of 2008 as compared to net sales of $641.7 million for the first nine months of 2007. Net income decreased 23.7% to $52.1 million for the first nine months of 2008 as compared to net income of $68.3 million for the first nine months of 2007. Diluted net income per common share was $1.06 for the first nine months of 2008 as compared to $1.40 for the first nine months of 2007.

In the first nine months of 2008, sales declined throughout the United States, with the exception of the northeastern region of the country. California and the western states had the largest decrease in sales. Sales during the period in continental Europe and in Canada increased significantly, while sales were down in the United Kingdom. Simpson Strong-Tie's first nine months sales decreased 6.7% from the first nine months of last year, while Simpson Dura-Vent's sales increased 10.1%. Simpson Strong-Tie's sales to contractor distributors had the largest percentage rate

decrease and sales to dealer distributors and home centers also decreased. Reflecting the deterioration of construction markets and economic conditions generally, sales decreased across all of Simpson Strong-Tie's major product lines, particularly those used in new home construction. Sales of the Swan Secure product line accounted for approximately 4.8% of Simpson Strong-Tie's first nine months' sales in 2008 and Anchor Systems sales benefited from the acquisition of the Liebig companies. Sales of Simpson Dura-Vent's pellet vent, chimney, special gas vent and relining products increased. Sales of its Direct-Vent and gas vent product lines decreased as a result of several factors, including the continuing weakness in new home construction.

Income from operations decreased 21.5% to $83.0 million for the first nine months of 2008 from $105.7 million for the first nine months of 2007. Gross margins decreased from 38.4% for the first nine months of 2007 to 37.9% for the first nine months of 2008. The decrease in gross margins was due primarily to higher distribution costs, partly offset by lower manufacturing costs.

Selling expense increased 12.0% from $56.5 million in the first nine months of 2007 to $63.3 million in the first nine months of 2008. The increase was driven primarily by an $8.1 million increase in expenses associated with sales and marketing personnel, including those at businesses acquired since July 2007. This increase was partly offset by decreases in donations of $0.5 million, primarily related to the gift made in the second quarter of 2007 to Habitat for Humanity International, Inc., professional services expenses of $0.3 million and promotional expenses of $0.3 million. General and administrative expense decreased 2.5% to $67.2 million in the first nine months of 2008 from $69.0 million in the first nine months of 2007. The major components of the decrease were decreases in cash profit sharing of $11.3 million, resulting primarily from decreased operating profit, partly offset by increases in administrative personnel expenses of $6.5 million, including those at businesses acquired since July 2007, higher amortization expense of $1.3 million and increased legal and professional service expenses of $1.8 million. The effective tax rate was 38.9% in the first nine months of 2008, up from 37.9% in the first nine months of 2007. The increase in the effective tax rate was caused by many factors, including a decrease in tax-exempt interest income and the expiration of the federal research and development tax credit in 2008, which was renewed in the fourth quarter of 2008.

Connector Products - Simpson Strong-Tie

Simpson Strong-Tie's income from operations decreased 18.6% to $88.2 million in the first nine months of 2008 from $108.4 million in the first nine months of 2007.

Net Sales

In the first nine months of 2008, Simpson Strong-Tie's net sales decreased 6.7% to $552.3 million from $592.3 million in the first nine months of 2007. Simpson Strong-Tie accounted for 91.0% of the Company's total net sales in the first nine months of 2008, a decrease from 92.3% in the first nine months of 2007. The decrease in net sales at Simpson Strong-Tie resulted from a decrease in sales volume, primarily due to reduced construction activity, although average prices increased 5.5% as compared to the first nine months of 2007. In the first nine months of 2008, Simpson Strong-Tie's sales declined throughout the United States, with the exception of the northeastern region of the country. California and the western states had the largest decrease in sales. Sales during the period in Canada and in continental Europe increased significantly, while sales were down in the United Kingdom. Simpson Strong-Tie's sales to contractor distributors had the largest percentage rate decrease and sales to dealer distributors and home centers also decreased. Reflecting the deterioration of construction markets and economic conditions generally, sales decreased across all of Simpson Strong-Tie's major product lines, particularly those used in new home construction. Sales of the Swan Secure product line accounted for approximately 4.8% of Simpson Strong-Tie's first nine months' sales in 2008 and Anchor Systems sales benefited from the acquisition of the Liebig companies.

Gross Profit

Simpson Strong-Tie's gross profit decreased 6.3% to $224.4 million in the first nine months of 2008 from $239.6 million in the first nine months of 2007. As a percentage of net sales, gross profit increased from 40.5% in the first nine months of 2007 to 40.6% in the first nine months of 2008.

Selling Expense

Simpson Strong-Tie's selling expense increased 13.8% from $51.0 million in the first nine months of 2007 to $58.0 million in the first nine months of 2008. The increase was driven primarily by an $8.0 million increase in expenses associated with sales and marketing personnel, including those at businesses acquired since July 2007. This increase was partly offset by a decrease in donations of $0.5 million and a decrease in professional services of $0.2 million.

General and Administrative Expense

Simpson Strong-Tie's general and administrative expense decreased 5.0% to $62.7 million in the first nine months of 2008 from $66.0 million in the first nine months of 2007. The major components of the decrease were decreases in cash profit sharing of $11.4 million, resulting primarily from decreased operating profit, a reduction in depreciation expense of $0.9 million, and adjustments to the provision for doubtful accounts of $0.4 million. These decreases were partly offset by increases in personnel expenses of $5.2 million, including those at businesses acquired since July 2007, higher amortization expense of $1.2 million and increased legal and professional service expenses of $1.0 million.

European Operations

For its European operations, Simpson Strong-Tie recorded income from operations of $3.0 million in the first nine months of 2008 compared to income from operations of $4.7 million in the first nine months of 2007.

Venting Products - Simpson Dura-Vent

Simpson Dura-Vent's loss from operations increased from $2.7 million the first nine months of 2007 to $3.9 million in the first nine months of 2008.

Net Sales

In the first nine months of 2008, Simpson Dura-Vent's net sales increased 10.1% from $49.4 million in the first nine months of 2007 to $54.4 million in the first nine months of 2008. Simpson Dura-Vent accounted for 9.0% of the Company's total net sales in the first nine months of 2008, an increase from 7.7% in the first nine months of 2007. The increase in net sales at Simpson Dura-Vent resulted from an increase in sales volume and from price increases that averaged 3.2% as compared to the first nine months of 2007. In the first nine months of 2008, Simpson Dura-Vent's sales increased throughout the United States, primarily due to significant increases in sales in the northeastern region. Sales decreased significantly in California, while sales in the western states and south/southeast also decreased. Sales of Simpson Dura-Vent's pellet vent, chimney, special gas vent and relining products increased. Sales of its Direct-Vent and gas vent product lines decreased as a result of several factors, including the continuing weakness in new home construction.

Gross Profit

Simpson Dura-Vent's gross profit decreased 9.6 % to $5.6 million in the first nine months of 2008 from $6.2 million in the first nine months of 2007. This decrease was primarily due to higher fixed overhead and distribution costs, offset slightly be lower manufacturing costs.

General and Administrative Expense

Simpson Dura-Vent's general and administrative expense increased 23.3% from $2.8 million in the first nine months of 2007 to $3.4 million in the first nine months of 2008. This increase was primarily due to increased expenses associated with administrative personnel of $0.3 million, including personnel associated with ProTech, an increase in the provision for bad debt of $0.2 million and increased professional fees of $0.2 million.

Administrative and All Other (Company)

Interest Income and Expense

Critical Accounting Policies and Estimates

Allowance for Doubtful Accounts

In the quarter ended March 31, 2008, the Company revised its calculation for its allowance for doubtful accounts to better reflect its recent collection history. The Company assesses the collectibility of specific customer accounts that would be considered doubtful based upon the customer's financial condition, payment history, credit rating and other factors that the Company considers relevant, or accounts that the Company assigns for collection. The Company reserves for the portion of those outstanding balances that the Company believes it is not likely to collect based on historical collection experience. The Company also reserves 100% of the amount that it deems potentially uncollectible due to a customer's bankruptcy or deteriorating financial condition. If the financial condition of the Company's customers were to deteriorate, resulting in inability to make payments, additional allowances may be required.

Recently Issued Accounting Standards

On January 1, 2008, the Company adopted SFAS No. 157, "Fair Value Measurements," except as amended by FSP FAS 157-1, FSP FAS 157-2 and FSP FAS 157-3, SFAS No. 159, "The Fair Value Option for Financials Assets and Financial Liabilities," and SFAS No. 162, "The Hierarchy of Generally Accepted Accounting Principles." See Note 1 to the Company's Condensed Consolidated Financial Statements. The Company has not yet adopted the provisions of SFAS No. 141(R), "Business Combinations," SFAS No. 160, "Noncontrolling Interests in Consolidated Financial Statements-an amendment of Accounting Research Bulletin No. 51," SFAS No. 161, "Disclosures about Derivative Instruments and Hedging Activities-an amendment of FASB Statement No. 133," or FSP FAS 142-3, "Determination of the Useful Life of Intangible Assets."

Liquidity and Sources of Capital

As of September 30, 2008, working capital was $456.5 million as compared to $430.0 million at September 30, 2007, and $438.5 million at December 31, 2007. The increase in working capital from December 31, 2007, was primarily due to increases in net trade accounts receivable of $37.5 million and inventories of $33.3 million and a decrease in accrued profit sharing trust contributions of $1.0 million. Net trade accounts receivable increased 42.5% from December 31, 2007, while inventories increased 15.3% from December 31, 2007, primarily as a result of the higher costs of steel. The increase in net trade accounts receivable was the result of increased sales in the latter part of the third quarter of 2008 as compared to the latter part of the fourth quarter of 2007. Offsetting this increase in working capital were decreases in cash and cash equivalents of $22.3 million and increases in trade accounts payable, cash profit sharing and commissions payable, and income taxes payable of $18.9 million, $6.2 million, and $3.6 million, respectively. Assets held for sale decreased by $1.2 million due to the sale of the vacant warehouse in McKinney, Texas, in April 2008, partly offset by the addition of a property in Ireland that is held for sale. Other decreases to working capital were decreases in other current assets of $1.6 million. The balance of the change in working capital was due to the fluctuation of various other asset and liability accounts, none of which was individually material. The working capital change and changes in noncurrent assets and liabilities, combined with net income of $52.1 million and noncash expenses, primarily depreciation, amortization and stock-based compensation charges totaling $25.3 million, resulted in net cash provided by operating activities of $36.6 million. As of September 30, 2008, the Company had unused credit facilities available of $205.4 million.

The Company used $41.7 million in its investing activities, primarily for the Liebig, ProTech, Ahorn and Ventinox acquisitions and capital expenditures at various facilities throughout the United States and in Asia, offset by sales of assets, including the vacant factory in McKinney, Texas. The Company estimates its full year capital spending will total $15.0 million for 2008.

In April 2008, the Company's newly formed subsidiary, Simpson Strong-Tie Ireland Limited, purchased certain assets of Liebig International Ltd., an Irish company, Heinrich Liebig Stahld�belwerke GmbH, Liebig GmbH & Co. KG and Liebig International Verwaltungsgesellschaft GmbH, all German companies, Liebig Bolts Limited, an English company, and Liebig International Inc., a Virginia corporation (collectively "Liebig"). Liebig manufactures mechanical anchor products in Ireland and distributes them primarily throughout Europe through warehouses located in Germany and in the United Kingdom. The purchase price (subject to post-closing adjustments) was $18.3 million in cash.

In June 2008, the Company's subsidiary, Simpson Dura-Vent Company, Inc., purchased 100% of the equity of ProTech Systems, Inc. ("ProTech"). ProTech manufactures venting products in New York and distributes them throughout North America. The purchase price (subject to post-closing adjustment) was $7.5 million in cash, including $1.4 million to be paid in the future, plus an additional earn-out of up to $2.25 million if certain future performance targets are met. In July 2008, Simpson Dura-Vent also purchased certain assets to produce the Ventinox stainless steel chimney liner product line from American BOA Inc. ProTech had been the distributor of Ventinox products. The purchase price (subject to post-closing adjustment) was $1.5 million in cash.

In July 2008, Simpson Strong-Tie purchased 100% of the equity of Ahorn-Ger�te & Werkzeuge Vertriebs GmbH ("Ahorn"), a German company, and its subsidiaries in the Czech Republic and China. The acquisition will broaden Simpson Strong-Tie's collated fastener product line and add production capacity in both Europe and China. The purchase price (subject to post-closing adjustment) was $8.5 million in cash.

The Company's vacant facility in San Leandro, California, and a property in Ireland have been classified as assets held for sale. In September 2007, an environmental analysis of the San Leandro property indicated that it had contamination related to spilled fuel that would require an estimated $0.3 million to remediate. In June 2008, the Company performed additional analysis . . .