The following discussions of financial condition and results of operations should be read together with "Selected Financial Data," the Company's Consolidated Financial Statements and other financial information included elsewhere in this report. This report contains forward-looking statements that involve risks and uncertainties. Actual results may differ materially from those indicated in the forward-looking statements. See Risk Factors in Item 1A for more information regarding forward-looking statements.

General

The Company is the world's largest designer and manufacturer of arc welding and cutting products, manufacturing a full line of arc welding equipment, consumable welding products and other welding and cutting products.

The Company is one of only a few worldwide broad line manufacturers of both arc welding equipment and consumable products. Welding products include arc welding power sources, wire feeding systems, robotic welding packages, fume extraction equipment, consumable electrodes and fluxes. The Company's welding product offering also includes regulators and torches used in oxy-fuel welding and cutting. In addition, the Company has a leading global position in the brazing and soldering alloys market.

The Company invests in the research and development of arc welding equipment and consumable products in order to continue its market leading product offering. The Company continues to invest in technologies that improve the quality and productivity of welding products. In addition, the Company continues to actively increase its patent application process in order to secure its technology advantage in the United States and other major international jurisdictions. The Company believes its significant investment in research and development and its highly trained technical sales force provide a competitive advantage in the marketplace.

The Company's products are sold in both domestic and international markets. In North America, products are sold principally through industrial distributors, retailers and also directly to users of welding products. Outside of North America, the Company has an international sales organization comprised of Company employees and agents who sell products from the Company's various manufacturing sites to distributors and product users.

The Company's major end user markets include:

• general metal fabrication,
• power generation and process industry,
• structural steel construction (buildings and bridges),
• heavy equipment fabrication (farming, mining and rail),
• shipbuilding,
• automotive,
• pipe mills and pipelines, and
• offshore oil and gas exploration and extraction.

The Company has, through wholly-owned subsidiaries or joint ventures, manufacturing facilities located in the United States, Australia, Brazil, Canada, Colombia, France, Germany, Indonesia, Italy, Mexico, the Netherlands, People's Republic of China, Poland, Portugal, Spain, Taiwan, Turkey, United Kingdom, Venezuela and Vietnam.

The Company's sales and distribution network, coupled with its manufacturing facilities, are reported as two separate reportable segments, North America and Europe, with all other operating segments combined and reported as Other Countries.

The principal raw materials essential to the Company's business are various chemicals, electronics, steel, engines, brass, copper and aluminum alloys, all of which are normally available for purchase in the open market.

The Company's facilities are subject to environmental regulations. To date, compliance with these environmental regulations has not had a material effect on the Company's earnings. The Company is ISO 9001 certified at nearly all facilities worldwide. In addition, the Company is ISO 14001 certified at all significant manufacturing facilities in the United States and is working to gain certification at its remaining United States facilities, as well as the remainder of its facilities worldwide.

Key Indicators

Key economic measures relevant to the Company include industrial production trends, steel consumption, purchasing manager indices, capacity utilization within durable goods manufacturers, and consumer confidence indicators. Key industries which provide a relative indication of demand drivers to the Company include steel, farm machinery and equipment, construction and transportation, fabricated metals, electrical equipment, ship and boat building, defense, truck manufacturing, energy and railroad equipment. Although these measures provide key information on trends relevant to the Company, the Company does not have available a more direct correlation of leading indicators which can provide a forward-looking view of demand levels in the markets which ultimately use the Company's welding products.

Key operating measures utilized by the operating units to manage the Company include orders, sales, inventory and fill-rates, all of which provide key indicators of business trends. These measures are reported on various cycles including daily, weekly and monthly depending on the needs established by operating management.

Key financial measures utilized by the Company's executive management and operating units in order to evaluate the results of its business and in understanding key variables impacting the current and future results of the Company include: sales; gross profit; selling, general and administrative expenses; earnings before interest and taxes; earnings before interest, taxes and bonus; operating cash flows; and capital expenditures, including applicable ratios such as return on invested capital and average operating working capital to sales. These measures are reviewed at monthly, quarterly and annual intervals and compared with historical periods, as well as objectives established by the Board of Directors of the Company.

Results of Operations

The following table shows the Company's results of operations:

                                                                      Year Ended December 31,
                                              2008                              2007                              2006
                                    Amount         % of Sales         Amount         % of Sales         Amount         % of Sales

Net sales                         $ 2,479,131            100.0 %    $ 2,280,784            100.0 %    $ 1,971,915            100.0 %
Cost of goods sold                  1,758,980             71.0 %      1,633,218             71.6 %      1,419,638             72.0 %

Gross profit                          720,151             29.0 %        647,566             28.4 %        552,277             28.0 %
Selling, general &
administrative expenses               405,376             16.4 %        370,122             16.2 %        315,829             16.0 %
Rationalization and asset
impairment charges (gain)              19,371              0.8 %           (188 )           (0.0 )%         3,478              0.2 %

Operating income                      295,404             11.9 %        277,632             12.2 %        232,970             11.8 %
Interest income                         8,845              0.4 %          8,294              0.4 %          5,876              0.3 %
Equity earnings in affiliates           6,034              0.2 %          9,838              0.4 %          7,640              0.4 %
Other income                            1,681              0.1 %          2,823              0.1 %          1,839              0.1 %
Interest expense                      (12,155 )           (0.5 )%       (11,430 )           (0.5 )%       (10,153 )           (0.5 )%

Income before income taxes            299,809             12.1 %        287,157             12.6 %        238,172             12.1 %
Income taxes                           87,523              3.5 %         84,421              3.7 %         63,164              3.2 %

Net income                        $   212,286              8.6 %    $   202,736              8.9 %    $   175,008              8.9 %

2008 Compared to 2007

Net Sales: Net sales for 2008 increased 8.7% to $2,479,131 from $2,280,784 in 2007. The increase in Net sales reflects an $88,436 (3.9%) decrease due to volume, a $176,045 (7.7%) increase due to price, a $67,538 (3.0%) increase from acquisitions and a $43,200 (1.9%) favorable impact as a result of changes in foreign currency exchange rates. Net sales for the North American operations increased 3.6% to $1,451,333 in 2008 compared to $1,401,393 in 2007. This increase reflects a decrease of $68,860 (4.9%) due to volume, a $108,886 (7.8%) increase due to price and a $9,425 (0.7%) increase from acquisitions. Net sales for the European operations increased 13.0% to $576,945 in 2008 compared to $510,514 in 2007. This increase reflects a decrease of $1,723 (0.3%) due to volume, a $6,821 (1.3%) increase due to price, a $29,827 (5.8%) increase from acquisitions and a $31,506 (6.2%) favorable impact as a result of changes in foreign currency exchange rates. Net sales for Other Countries increased 22.2% to $450,853 in 2008 compared to $368,877 in 2007. This increase reflects a decrease of $17,853 (4.8%) due to volume, a $60,338 (16.4%) increase due to price, an $11,205 (3.0%) favorable impact as a result of changes in foreign currency exchange rates and a $28,286 (7.7%) increase from acquisitions.

Gross Profit: Gross profit increased 11.2% to $720,151 during 2008 compared to $647,566 in 2007. As a percentage of net sales, Gross profit increased to 29.0% in 2008 from 28.4% in 2007. This increase was primarily a result of favorable pricing leverage and improved operational effectiveness partially offset by volume decreases and the continuing shift in sales mix to traditionally lower margin geographies and businesses. Foreign currency exchange rates had a $10,621 favorable impact in 2008.

Sales volumes began to decline in the third quarter and the rate of decline accelerated in the fourth quarter. The Company expects declining sales volumes to pressure margins in 2009.

Selling, General & Administrative (SG&A) Expenses: SG&A expenses increased $35,254 (9.5%) in 2008 compared to 2007. The increase was primarily due to higher selling expenses of $10,543 resulting from increased sales activity, incremental selling, general and administrative expenses from acquisitions totaling $9,222, higher bonus expense of $5,706 and higher foreign currency transaction losses of $4,381. Foreign currency exchange rates had a $5,587 unfavorable impact.

Rationalization and Asset Impairment Charges (Gain): In 2008, the Company recorded $19,371 in rationalization and asset impairment charges. This total includes $2,447 ($1,698 after-tax) in rationalization charges related to workforce reductions expected to affect 67 employees in North America and 65 employees in Europe. The actions were taken to align the business to current market conditions. Asset impairment charges of $16,924 ($16,615 after-tax) include $15,582 (with no tax benefit) to write off goodwill and write down long-lived assets related to two businesses in China and $1,342 ($1,033 after-tax) to write down intangible assets in North America and Europe.

In 2007, the Company recorded a net gain of $188 ($107 after-tax) to rationalization charges due to a gain of $816 ($735 after-tax) related to the liquidation of the Harris Ireland Pension Plan offsetting other charges related to severance costs covering 66 employees at the Company's facility in Ireland.

Interest Income: Interest income increased to $8,845 in 2008 from $8,294 in 2007. The increase was a result of higher cash balances partially offset by lower interest rate investments in 2008 when compared to 2007.

Equity Earnings in Affiliates: Equity earnings in affiliates decreased to $6,034 in 2008 from $9,838 in 2007 as a result of lower earnings at the Company's joint venture investments in Turkey and Taiwan.

Interest Expense: Interest expense increased to $12,155 in 2008 from $11,430 in 2007 as a result of a lower level of amortization of the gain associated with previously terminated interest rate swap agreements and higher debt levels. See Note G to the Company's Consolidated Financial Statements for further discussion.

Income Taxes: Income taxes for 2008 were $87,523 on income before income taxes of $299,809, an effective rate of 29.2%, compared with income taxes of $84,421 on income before income taxes of $287,157, or an effective rate of 29.4% for 2007. The decrease in the effective tax rate for 2008 from 2007 was a result of additional utilization of foreign tax credits from the repatriation of higher-taxed earnings partially offset by non-deductible asset impairment charges in China. The effective rate for 2008 and 2007 was lower than the Company's statutory rate primarily because of the utilization of foreign tax credits, lower taxes on non-U.S. earnings and the utilization of foreign tax loss carryforwards, for which valuation allowances had been previously provided.

Net Income: Net income for 2008 was $212,286 compared to $202,736 in the prior year. Diluted earnings per share for 2008 were $4.93 compared to $4.67 per share in 2007. Foreign currency exchange rate movements had a $2,508 and a $3,419 favorable effect on net income for 2008 and 2007, respectively.

2007 Compared to 2006

Net Sales: Net sales for 2007 increased 15.7% to $2,280,784 from $1,971,915 in 2006. The increase in Net sales reflects a $134,000 (6.8%) increase due to volume, a $73,469 (3.8%) increase due to price, a $37,950 (1.9%) increase from acquisitions and a $63,450 (3.2%) favorable impact as a result of changes in foreign currency exchange rates. Net sales for the North American operations increased 7.3% to $1,401,393 in 2007 compared to $1,305,472 in 2006. This increase reflects an increase of $35,894 (2.7%) due to volume and $52,309 (4.0%) due to price. Net sales for the European operations increased 37.1% to $510,514 in 2007 compared to $372,308 in 2006. This increase reflects an increase of $57,070 (15.3%) due to volume, an $8,226 (2.2%) increase due to price, a $31,990 (8.6%) increase from acquisitions and a $40,920 (11.0%) favorable impact as a result of changes in foreign currency exchange rates. Net sales for Other Countries increased 25.4% to $368,877 in 2007 compared to $294,135 in 2006. This increase reflects an increase of $41,036 (14.0%) due to volume, a $12,934 (4.4%) increase due to price, a $14,896 (5.0%) favorable impact as a result of changes in foreign currency exchange rates and a $5,876 (2.0%) increase from acquisitions.

Gross Profit: Gross profit increased 17.3% to $647,566 during 2007 compared to $552,277 in 2006. As a percentage of net sales, Gross profit increased to 28.4% in 2007 from 28.0% in 2006. This increase was primarily a result of favorable leverage on increased volumes in North America and Europe, a reduction in product liability costs of $9,528 and a reduction in retirement benefit costs in the U.S. of $5,484. This increase was partially offset by the continuing shift in sales mix to traditionally lower margin geographies and businesses. Lower margin geographies were impacted by pricing pressures associated with market share growth, cost increases and start-up costs associated with continued capacity expansion. Foreign currency exchange rates had a $13,613 favorable impact in 2007.

The Company experienced increases in raw material prices, including metals and chemicals. In addition, energy costs trended higher resulting in higher operating costs including transportation and freight. The Company expects these costs to remain at relatively elevated levels as long as worldwide demand remains high. Although the Company believes a number of factors, including price increases, product mix, overhead absorption, and its continuing cost reduction efforts will offset increased costs, future margin levels will be dependent on the Company's ability to manage these cost increases.

Selling, General & Administrative (SG&A) Expenses: SG&A expenses increased $54,293 (17.2%) in 2007 compared to 2006. The increase was primarily due to an increase of $13,393 in general and administrative expense compared to 2006 which included the gain of $9,006 on the sale of the facility in Ireland. In addition, the increase included higher bonus expense of $11,606, higher selling expenses of $8,181 resulting from increased sales activity and higher incremental selling, general and administrative expenses from acquisitions totaling $6,216. Foreign currency exchange rates had an $8,786 unfavorable impact.

Rationalization and Asset Impairment Charges (Gain): In 2007 and 2006, the Company recorded a net gain of $188 ($107 after-tax) and a charge of $3,478 ($3,478 after-tax) to rationalization charges, respectively. Charges in both years were primarily related to severance costs covering 66 employees at the Company's facility in Ireland. The net gain recorded in 2007 was due to a gain of $816 ($735 after-tax) related to the liquidation of the Harris Ireland Pension Plan offsetting other charges.

Interest Income: Interest income increased to $8,294 in 2007 from $5,876 in 2006. The increase was a result of increases in cash balances and interest rates in 2007 when compared to 2006.

Equity Earnings in Affiliates: Equity earnings in affiliates increased to $9,838 in 2007 from $7,640 in 2006 as a result of increased earnings at the Company's joint venture investments in Turkey and Taiwan.

Interest Expense: Interest expense increased to $11,430 in 2007 from $10,153 in 2006 as a result of higher interest rates and a lower level of amortization of the gain associated with previously terminated interest rate swap agreements partially offset by lower debt levels in 2007. See Note G to the Company's Consolidated Financial Statements for further discussion.

Income Taxes: Income taxes for 2007 were $84,421 on income before income taxes of $287,157, an effective rate of 29.4%, compared with income taxes of $63,164 on income before income taxes of $238,172, or an effective rate of 26.5% for 2006. The increase in the effective tax rate for 2007 from 2006 is a result of an increase in income before taxes in higher tax jurisdictions as well as a lower level of foreign tax credits utilized in 2007 when compared with 2006. The effective rate for 2007 and 2006 was lower than the Company's statutory rate primarily because of the utilization of foreign tax credits, lower taxes on non-U.S. earnings and the utilization of foreign tax loss carryforwards, for which valuation allowances have been previously provided.

Net Income: Net income for 2007 was $202,736 compared to $175,008 in 2006. Diluted earnings per share for 2007 were $4.67 compared to $4.07 per share in 2006. Foreign currency exchange rate movements had a $3,419 and a $1,783 favorable effect on net income for 2007 and 2006, respectively.

Liquidity and Capital Resources

The Company's cash flow from operations, while cyclical, has been reliable and consistent. The Company has relatively unrestricted access to capital markets. Operational cash flow is a key driver of liquidity, providing cash and access to capital markets. In assessing liquidity, the Company reviews working capital measurements to define areas of improvement. Management anticipates the Company will be able to satisfy cash requirements for its ongoing businesses for the foreseeable future primarily with cash generated by operations, existing cash balances and, if necessary, borrowings under its existing credit facilities.

The following table reflects changes in key cash flow measures:

                                          Year Ended December 31,                              Change
                                     2008           2007           2006          2008 vs. 2007        2007 vs. 2006

Cash provided by operating
activities:                       $  257,449      $ 249,832      $ 118,680      $         7,617      $       131,152
Cash used by investing
activities:                         (115,800 )      (79,705 )      (89,715 )            (36,095 )             10,010
Capital expenditures                 (72,426 )      (61,633 )      (76,002 )            (10,793 )             14,369
Acquisitions of businesses, net
of cash acquired                     (44,036 )      (18,773 )      (25,504 )            (25,263 )              6,731
Cash used by financing
activities:                          (67,741 )      (77,586 )      (17,729 )              9,845              (59,857 )
Amounts due banks, net                (5,551 )       (2,720 )          115               (2,831 )             (2,835 )
Payments on long-term
borrowings                            (1,033 )      (40,142 )       (3,147 )             39,109              (36,995 )
Proceeds from exercise of stock
options                                7,201          8,644         13,618               (1,443 )             (4,974 )
Tax benefit from exercise of
stock options                          3,728          4,289          5,243                 (561 )               (954 )
Purchase of shares for treasury      (42,337 )      (15,459 )         (126 )            (26,878 )            (15,333 )
Cash dividends paid to
shareholders                         (42,756 )      (37,744 )      (32,275 )             (5,012 )             (5,469 )
Increase in Cash and cash
equivalents                           66,950         97,170         12,205              (30,220 )             84,965

Cash and cash equivalents increased 30.8%, or $66,950, to $284,332 as of December 31, 2008, from $217,382 as of December 31, 2007. This compares to a $97,170 increase in cash and cash equivalents during 2007.

Cash provided by operating activities for 2008 increased $7,617 from 2007. The increase was primarily related to an increase in net income excluding the non-cash asset impairment charges and a reduction in accounts receivable partially offset by an increase in inventory levels and a decrease in accounts payable. Average operating working capital to sales was 21.0% at December 31, 2008 compared to 23.5% at December 31, 2007. Days sales in inventory increased to 115.8 days at December 31, 2008 from 101.2 days at December 31, 2007. Accounts receivable days decreased to 55.0 days at December 31, 2008 from 56.9 days at December 31, 2007. Average days in accounts payable decreased to 32.1 days at December 31, 2008 from 36.2 days at December 31, 2007.

Cash used by investing activities increased by $36,095 for 2008 compared to 2007. Cash used in the acquisition of businesses in 2008 increased $25,263 from 2007. Capital expenditures during 2008 were $72,426, a $10,793 increase from 2007. The Company anticipates capital expenditures in 2009 in the range of $45,000 - $55,000. Anticipated capital expenditures reflect plans to improve operational effectiveness and the Company's continuing international expansion. Management critically evaluates all proposed capital expenditures and requires each project to increase efficiency, reduce costs, promote business growth, or to improve the overall safety and environmental conditions of the Company's facilities. Management does not currently anticipate any unusual future cash outlays relating to capital expenditures.

The Company has investments in Venezuela, which currently require the approval of a government agency to convert local currency to U.S. dollars at official government rates. Government approval for currency conversion to satisfy U.S. dollar liabilities to foreign suppliers, including payables to Lincoln affiliates, has lagged payment due dates from time to time in the past, resulting in higher cash balances and higher past due U.S. dollar payables within our Venezuelan subsidiary. If the Company had settled its Venezuelan subsidiary's U.S. dollar liabilities using unofficial, parallel currency exchange mechanisms as of December 31, 2008, it would have resulted in a currency exchange loss of approximately $808.

Cash used by financing activities for 2008 decreased $9,845 from 2007. The decrease was primarily due to the $40,000 repayment of the Company's Series A Senior Unsecured Notes upon maturity in 2007 partially offset by an increase of $26,878 in purchases of the Company's common stock in 2008 versus 2007.

The Company's debt levels increased from $129,815 at December 31, 2007, to $142,230 at December 31, 2008. Debt to total capitalization increased to 12.5% at December 31, 2008 from 10.7% at December 31, 2007.

The Company's Board of Directors authorized share repurchase programs for up to 15 million shares of the Company's common stock. During 2008, the Company purchased 740,569 shares of its common stock on the open market at a cost of $42,337 for a weighted average cost of $57.17 per share. Total shares purchased through the share repurchase programs were 11,206,983 shares at a cost of $274,188 for a weighted average cost of $24.47 per share through December 31, 2008.

A total of $42,756 in dividends was paid during 2008. In January 2009, the Company paid a quarterly cash dividend of $0.27 cents per share, or $11,444 to shareholders of record on December 31, 2008.

Rationalization and Asset Impairment

In the fourth quarter of 2008, the Company recorded rationalization charges of $2,447 (pre-tax) and asset impairment charges totaling $16,924 (pre-tax) that are recognized on the income statement under the caption "Rationalization and asset impairment charges (gain)."

The Company took various actions designed to align resources to current market conditions during the fourth quarter of 2008. The actions are expected to affect 65 employees in various European businesses and 67 employees in North American businesses. The implementation of these actions will be substantially completed by March 31, 2009. The Company expects the total cost of these actions to be $2,746 (pre-tax) of which $2,447 (pre-tax) was recorded at December 31, 2008. The costs relate primarily to employee severance costs that will be paid by the end of 2009.

The Company is taking additional cost cutting measures throughout its global operations, including a voluntary separation incentive program covering certain U.S.-based employees as announced on February 2, 2009. The Company expects to record a pre-tax rationalization charge between $10 million and $12 million in the first quarter of 2009.

In the fourth quarter of 2008, the Company determined that poor operating results and a dampened economic outlook indicated the potential for impairment at two of its businesses in China. Impairment testing determined that the carrying value of long-lived assets exceeded fair value at one of these businesses and the Company recorded a charge of $2,388 (pre-tax). In addition, the carrying value of goodwill at both of these businesses exceeded the implied value of goodwill and the Company recorded a charge of $13,194 (pre-tax).

The Company also tested indefinite-lived intangible assets and determined that the carrying value of certain intangible assets in Europe and North America exceeded fair value. As a result, the Company recorded charges of $524 (pre-tax) and $818 (pre-tax), respectively.

In 2005, the Company committed to a plan to rationalize manufacturing operations (the "Ireland Rationalization") at Harris Calorific Limited ("Harris Ireland"). . . .