OVERVIEW
The Corporation is a global manufacturer and marketer of power tools and accessories, hardware and home improvement products, and technology-based fastening systems. As more fully described in Note 6 of Notes to Consolidated Financial Statements, the Corporation operates in three reportable business segments-Power Tools and Accessories, Hardware and Home Improvement, and Fastening and Assembly Systems-with these business segments comprising approximately 73%, 16%, and 11%, respectively, of the Corporation's sales for the nine-month period ended September 27, 2009.

The Corporation markets its products and services in over 100 countries. During 2008, approximately 55%, 25%, and 20% of its sales were made to customers in the United States, in Europe (including the United Kingdom and Middle East), and in other geographic regions, respectively. The Power Tools and Accessories and Hardware and Home Improvement segments are subject to general economic conditions in the countries in which they operate as well as to the strength of the retail economies. The Fastening and Assembly Systems segment is also subject to general economic conditions in the countries in which it operates as well as to automotive and industrial demand.

As described in Note 16 of Notes to Consolidated Financial Statements, on November 2, 2009, the Corporation announced that it had entered into a definitive merger agreement to create Stanley Black & Decker in an all-stock transaction. Under the terms of the transaction, which has been approved by the Boards of Directors of both the Corporation and The Stanley Works, the Corporation's shareholders will receive a fixed ratio of 1.275 shares of The Stanley Works common stock for each share of the Corporation's common stock that they own. Consummation of the transaction, which is subject to customary closing conditions, including obtaining certain regulatory approvals as well as shareholder approval from the shareholders of both the Corporation and The Stanley Works, is expected to occur in the first half of 2010.

An overview of certain aspects of the Corporation's performance during the three- and nine-month periods ended September 27, 2009, follows:

· The Corporation continued to face a difficult demand environment during 2009 due to the impact of the global recession. Sales for the three-month period ended September 27, 2009, decreased by 23% from the corresponding 2008 period to $1.2 billion. This reduction was the result of a 21% decline in unit volume and a 3% unfavorable impact from foreign currency attributable to the effects of a stronger U.S. dollar, partially offset by 1% of favorable price. That unit volume decline was experienced across all business segments and throughout all geographic regions. Sales for the nine-month period ended September 27, 2009, decreased by 26%, from the corresponding 2008 periods to $3.5 billion. This reduction was the result of a 23% decline in unit volume and a 4% unfavorable impact from foreign currency attributable to the effects of a stronger U.S. dollar, partially offset by 1% of favorable price. That unit volume decline was experienced across all business segments and throughout all geographic regions. The Corporation expects that continued weakness in economic conditions will result in a sales decline of approximately 23% in 2009, as compared to 2008, including a 3% unfavorable impact from foreign currency.

· Operating income as a percentage of sales for the three- and nine-month periods ended September 27, 2009, decreased by approximately 10 basis points and 230 basis points, respectively, from the corresponding periods in 2008. Of the 10 basis point decline for the three-month period ended September 27, 2009, an increase in selling, general, and administrative expenses contributed approximately 180 basis points but was substantially offset by an increase in gross margin of approximately 70 basis points and a decrease of $15.6 million in restructuring and exit costs that contributed a favorable 100 basis points. Of the 230 basis point decline for the nine-month period ended September 27, 2009, a reduction in gross margin contributed approximately 120 basis points and an increase in selling, general, and administrative expenses contributed approximately 150 basis points, both of which were partially offset by a $22.0 million reduction in restructuring and exit costs that contributed a favorable 40 basis points. Gross margin as a percentage of sales increased in the three-month period ended September 27, 2009, as compared to the corresponding period in 2008, as a result of the favorable effects of commodity deflation, restructuring and cost reduction initiatives, and pricing, which were partially offset by the unfavorable effects of lower volumes, including the deleveraging of fixed costs. Gross margin as a percentage of sales declined in the nine-month period ended September 27, 2009, as compared to the corresponding period in 2008, as a result of the unfavorable effects of lower volumes, including the de-leveraging of fixed costs, commodity inflation, and unfavorable mix, which were partially offset by the favorable effects of pricing, restructuring and cost reduction initiatives, productivity gains, and a favorable comparison to prior year inventory write-downs. Despite a 17% and 22% reduction in selling, general, and administrative expenses in the three- and nine-month periods ended September 27, 2009 from the corresponding 2008 levels, selling, general, and administrative expenses as a percentage of sales increased in the three- and nine-month periods ended September 27, 2009, over the 2008 levels, due to the de-leveraging of expenses over a lower sales base.

· Interest expense (net of interest income) increased over the corresponding 2008 periods by $8.9 million and $16.4 million for the three- and nine-month periods ended September 27, 2009, respectively, primarily as a result of the early April 2009 issuance of $350.0 million of 8.95% senior notes due 2014 and of the effects of lower interest rate spreads earned on the Corporation's foreign currency hedging activities.

· The Corporation's effective tax rate was 18.0% and 21.6% for the three-month periods ended September 27, 2009, and September 28, 2008, respectively, and 23.9% and 21.9% for the nine-month periods ended September 27, 2009, and September 28, 2008, respectively. The Corporation's effective tax rate for the three-month period ended September 27, 2009, was lower than the comparable 2008 period as the impact of favorable adjustments associated with new facts regarding certain income tax matters and the favorable resolution of certain tax audits in the 2009 period had a greater impact on the effective rate than the impact of a favorable resolution of tax matters that occurred during the comparable 2008 period. While the Corporation's effective tax rate for the nine-month periods ended September 27, 2009 and 2008, benefited from favorable adjustments associated with new facts regarding certain income tax matters and the favorable resolution of certain tax audits, the Corporation's effective tax rate for the nine-month period ended September 27, 2009, increased over that of the comparable 2008 period primarily as a result of the leveraging effect of the interest component on reserves for uncertain tax positions, included as a component of tax expense, on lower earnings before income taxes in the 2009 period.

· Net earnings were $55.4 million, or $.91 per share on a diluted basis, for the three-month period ended September 27, 2009, as compared to net earnings of $85.8 million, or $1.41 per share on a diluted basis, for the corresponding period in 2008. For the nine-month period ended September 27, 2009, net earnings were $98.6 million, or $1.62 per share on a diluted basis, as compared to $249.9 million, or $4.04 per share on a diluted basis, for the corresponding period in 2008.

The preceding information is an overview of certain information for the three- and nine-month periods ended September 27, 2009, and should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations in its entirety.

In the discussion and analysis of financial condition and results of operations that follows, the Corporation generally attempts to list contributing factors in order of significance to the point being addressed.

RESULTS OF OPERATIONS

Sales
The following chart sets forth an analysis of the consolidated changes in sales
for the three- and nine-month periods ended September 27, 2009 and September 28,
2008:

                                                       Analysis of Changes in Sales
                                                   Three Months Ended                                   Nine Months Ended
                                         September 27,              September 28,             September 27,             September 28,
(Dollars in Millions)                             2009                       2008                      2009                      2008
Total sales                            $       1,208.7            $       1,570.8           $       3,473.8           $       4,708.3
Unit volume                                        (21 )%                      (6 )%                    (23 )%                     (7 )%
Price                                                1 %                       (1 )%                      1 %                      (1 )%
Currency                                            (3 )%                       3 %                      (4 )%                      4 %
Change in total sales                              (23 )%                      (4 )%                    (26 )%                     (4 )%

Total consolidated sales for the three- and nine-month periods ended September 27, 2009, decreased by 23% and 26%, respectively, from the corresponding 2008 periods. Unit volume declined 21% and 23% for the three- and nine-month periods ended September 27, 2009, respectively. The unit volume decline was experienced across all business segments and throughout all geographic regions. Pricing actions had a 1% favorable impact on sales for both the three- and nine-month periods ended September 27, 2009. The effects of a stronger U.S. dollar, as compared to most other currencies, particularly the euro, Canadian dollar, Brazilian real, British pound, and Mexican peso, resulted in a 3% and 4% decrease in consolidated sales for the three- and nine-month periods ended September 27, 2009, respectively.

Earnings
A summary of the Corporation's consolidated gross margin, selling, general, and
administrative expenses, restructuring and exit costs, and operating income-all
expressed as a percentage of sales-follows:

                                     - 26 -
--------------------------------------------------------------------------------
  Table of Contents


                                                       Three Months Ended                              Nine Months Ended
                                              September 27,            September 28,          September 27,         September 28,
(Percentage of sales)                                  2009                     2008                   2009                  2008
Gross margin                                           33.1 %                   32.4 %                 32.0 %                33.2 %
Selling, general, and administrative
   expenses                                            25.6 %                   23.8 %                 26.3 %                24.8 %
Restructuring and exit costs                              - %                    1.0 %                   .3 %                  .7 %
Operating income                                        7.5 %                    7.6 %                  5.4 %                 7.7 %

The Corporation reported consolidated operating income of $90.7 million, or 7.5% of sales, for the three months ended September 27, 2009, as compared to operating income of $119.9 million, or 7.6% of sales, for the corresponding period in 2008. Operating income for the nine months ended September 27, 2009, was $187.5 million, or 5.4% of sales, as compared to operating income of $362.2 million, or 7.7% of sales, for the corresponding period in 2008.

Consolidated gross margin as a percentage of sales increased by 70 basis points from the 2008 level to 33.1% for the three-month period ended September 27, 2009 as a result of the favorable effects of commodity deflation, restructuring and cost reduction initiatives, and pricing, which were offset by the unfavorable effects of lower volumes, including the de-leveraging of fixed costs. Consolidated gross margin as a percentage of sales declined by 120 basis points from the 2008 level to 32.0% for the nine-month period ended September 27, 2009 as a result of the unfavorable effects of lower volumes, including the de-leveraging of fixed costs, commodity inflation and unfavorable mix, which were partially offset by the favorable effects of pricing, restructuring benefits, productivity gains, and a favorable comparison to prior year inventory write-downs.

Consolidated selling, general, and administrative expenses as a percentage of sales increased by 180 basis points and 150 basis points over the 2008 levels to 25.6% and 26.3% for the three- and nine-month periods ended September 27, 2009, respectively. Those increases in selling, general, and administrative expenses as a percentage of sales were primarily due to the de-leveraging of expenses over a lower sales base. Selling, general, and administrative expenses for the three- and nine-month periods ended September 27, 2009, declined from the 2008 levels by $63.8 million to $309.6 million and by $253.6 million to $913.9 million, respectively. Those declines were due to several factors, including:
(i) cost reduction initiatives and restructuring savings; (ii) decreases in variable selling expenses due to lower sales volumes; and (iii) the favorable effects of foreign currency translation.

In the first quarter of 2009, the Corporation recognized restructuring and exit costs of $11.9 million, related to actions in its Power Tools and Accessories, Hardware and Home Improvement, and Fastening and Assembly Systems segments. As more fully described in Note 14 of Notes to Consolidated Financial Statements, these restructuring charges primarily reflect actions to reduce the Corporation's selling, general, and administrative expenses and to improve its manufacturing cost base.

Consolidated net interest expense (interest expense less interest income) for the three months ended September 27, 2009, and September 28, 2008, was $22.3 million and $13.4 million, respectively. Consolidated net interest expense (interest expense less interest income) for the nine months ended September 27, 2009, and September 28, 2008, was $61.1 million and $44.7 million, respectively. The increase in net interest expense for both the three- and nine-month periods ended September 27, 2009, was primarily the result of the early April 2009 issuance of $350.0 million of 8.95% senior notes due 2014 and of the effects of lower interest rate spreads earned on the Corporation's foreign currency hedging activities.

Other expense (income) was $.8 million and $(3.0) million for the three months ended September 27, 2009, and September 28, 2008, respectively and was $(3.2) million and $(2.6) million for the nine months ended September 27, 2009, and September 28, 2008, respectively. Other expense (income) for the nine-month period ended September 27, 2009, includes the benefit of a $6.0 million insurance settlement related to an environmental matter. Other expense (income) for the three- and nine-month periods ended September 28, 2008, benefited from a gain on the sale of a non-operating asset.

Consolidated income tax expense of $12.2 million and $31.0 million was recognized on the Corporation's earnings before income taxes of $67.6 million and $129.6 million for the three- and nine-month periods ended September 27, 2009, respectively. The Corporation's effective tax rate was 18.0% and 21.6% for the three-month periods ended September 27, 2009, and September 28, 2008, respectively, and 23.9% and 21.9% for the nine-month periods ended September 27, 2009, and September 28, 2008, respectively. The Corporation's effective tax rate for the three-month period ended September 27, 2009, was lower than the comparable 2008 period as the impact of favorable adjustments associated with new facts regarding certain income tax matters and the favorable resolution of certain tax audits in the 2009 period had a greater impact on the effective rate than the impact of the favorable resolution of tax matters that occurred during the comparable 2008 period. While the Corporation's effective tax rate for the nine-month period ended September 27, 2009, benefited from favorable adjustments associated with new facts regarding certain income tax matters and the favorable resolution of certain tax audits, the Corporation's effective tax rate for the nine-month period ended September 27, 2009, increased over the rate of the comparable 2008 period primarily as a result of the leveraging effect of the interest component on reserves for uncertain tax positions, included as a component of tax expense, on lower earnings before income taxes in the 2009 period.

The Corporation reported net earnings of $55.4 million, or $.91 per share on a diluted basis, for the three-month period ended September 27, 2009, as compared to net earnings of $85.8 million, or $1.41 per share on a diluted basis, for the corresponding period in 2008. Net earnings for the three-month period ended September 28, 2008, included the effects of an after-tax restructuring charge of $12.6 million ($15.6 million before taxes). The Corporation reported net earnings of $98.6 million, or $1.62 per share on a diluted basis, for the nine-month period ended September 27, 2009, as compared to net earnings of $249.9 million, or $4.04 per share on a diluted basis, for the corresponding period in 2008. Net earnings for the nine-month periods ended September 27, 2009, and September 28, 2008, included the effects of an after-tax restructuring charge of $8.4 million ($11.9 million before taxes) and $24.8 million ($33.9 million before taxes), respectively.

BUSINESS SEGMENTS
As more fully described in Note 6 of Notes to Consolidated Financial Statements, the Corporation operates in three reportable business segments: Power Tools and Accessories, Hardware and Home Improvement, and Fastening and Assembly Systems.

Power Tools and Accessories
Segment sales and segment profit for the Power Tools and Accessories segment,
determined on the basis described in Note 6 of Notes to Consolidated Financial
Statements, were as follows (dollars in millions):

                                                  Three Months Ended                                 Nine Months Ended
                                         September 27,             September 28,            September 27,            September 28,
                                                  2009                      2008                     2009                     2008
Sales to unaffiliated customers        $         869.5           $       1,094.4          $       2,561.7          $       3,259.8
Segment profit                                    65.8                      83.0                    154.5                    258.5

Sales to unaffiliated customers in the Power Tools and Accessories segment during the third quarter of 2009 decreased by 21% from the corresponding period in 2008.

During the third quarter of 2009, sales in North America decreased 23% from the prior year's level primarily due to continued weak demand in the United States as a result of sharp declines in residential and commercial construction activity. Sales of industrial power tools and accessories in the United States decreased 23% as a result of a continued decline in construction activity, with sales down in all key channels. Sales of consumer power tools and accessories in the United States decreased 20% from the 2008 level. That decrease was principally attributable to continued weak demand in the core tools category as well as to lower sales in the automotive and electric product category. In Canada, sales decreased approximately 30% from the prior year's level, with a 31% decline in sales of industrial power tools and accessories and a 25% decline in sales of consumer power tools and accessories.

In Europe, sales decreased 23% during the third quarter of 2009 from the prior year's level, with declines experienced in all major markets. The sales decline was particularly severe in Eastern Europe. During the third quarter of 2009, European sales of industrial power tools and accessories declined by 24% and sales of consumer power tools and accessories declined by 22% from the prior year's levels.

Sales in other geographic areas decreased at a mid-single-digit rate during the third quarter of 2009 from the prior year's level. In Latin America, sales declined at a mid-single-digit rate, as sales declines in the Caribbean, Central America, and Mexico, which were adversely affected by the economic downturn in the United States, were partially offset by sales growth in other parts of the region, including Brazil and Argentina. Sales in Asia/Pacific increased at a mid-single-digit rate, with gains in India and Australia more than offsetting declines in most other countries.

Segment profit as a percentage of sales for the Power Tools and Accessories segment was 7.6%, which was flat to the third quarter of 2008. As percentages of sales, an increase in gross margin of 110 basis points was offset by a 110 basis point increase in selling, general, and administrative expenses. The increase in gross margin as a percentage of sales was principally due to the favorable effects of pricing, restructuring and cost reduction initiatives, and component cost

deflation. The increase in selling, general, and administrative expenses as a percentage of sales resulted from the de-leveraging of expenses over lower sales, which more than offset the favorable effects of restructuring and cost reduction initiatives and reductions in variable selling expenses.

Sales to unaffiliated customers in the Power Tools and Accessories segment during the nine months ended September 27, 2009, decreased by 21% from the corresponding period in 2008.

During the nine months ended September 27, 2009, sales in North America decreased 22% from the prior year's level primarily due to continued weak demand in the United States as a result of depressed housing activity and decelerating commercial construction. Sales of industrial power tools and accessories in the United States decreased 27%, with lower sales in the independent channel and at retail. Sales of consumer power tools and accessories in the United States decreased at a mid-single-digit rate from the 2008 level. In Canada, sales decreased 28%, with a 31% decline in sales of industrial power tools and accessories and a double-digit rate of decline in consumer power tools and accessories.

Sales in Europe decreased 28% during the nine months ended September 27, 2009, from the level experienced in the corresponding 2008 period due to the impact of the global recession. Sales declined across all markets and in all key product lines. The sales decline was particularly severe in Eastern Europe, Scandinavia, and the United Kingdom, and the Central European and Iberian regions. During the nine months ended September 27, 2009, European sales of industrial power tools and accessories declined by 31% and sales of consumer power tools and accessories declined by 23% from the prior year's levels.

Sales in other geographic areas decreased at a high-single-digit rate during the nine months ended September 27, 2009, from the level experienced in the corresponding period in 2008. This decrease primarily resulted from a mid-single-digit rate of decline in Latin America, with double-digit rates of declines experienced in the Caribbean, Central America, and Mexico-areas more closely tied to the U.S. economy than others in the region. Sales in Asia/Pacific decreased at a high-single-digit rate.

Segment profit as a percentage of sales for the Power Tools and Accessories segment was 6.0% for the nine months ended September 27, 2009, as compared to 7.9% for the corresponding period in 2008. As percentages of sales, the decrease in segment profit resulted from a 60 basis point decrease in gross margin and a 130 basis point increase in selling, general, and administrative expenses. The decrease in gross margin as a percentage of sales was principally due to the unfavorable effects of commodity inflation (including the appreciation of the Chinese renminbi), lower volumes, including the de-leveraging of fixed costs, and unfavorable mix, which more than offset favorable price, a positive comparison to inventory write-downs in the prior year, and the benefit of restructuring and cost reduction initiatives. The increase in selling, general, and administrative expenses as a percentage of sales resulted from the de-leveraging of expenses over lower sales, which more than offset the favorable effects of restructuring and cost reduction initiatives and a reduction in variable selling expenses.

Hardware and Home Improvement
Segment sales and segment profit for the Hardware and Home Improvement segment,
determined on the basis described in Note 6 of Notes to Consolidated Financial
Statements, were as follows (in millions of dollars):

                                                   Three Months Ended                                 Nine Months Ended
                                         September 27,              September 28,            September 27,            September 28,
                                                  2009                       2008                     2009                     2008
Sales to unaffiliated customers        $         192.9            $         231.2          $         554.7          $         682.6
Segment profit                                    24.8                       26.1                     53.8                     63.9

Sales to unaffiliated customers in the Hardware and Home Improvement segment decreased by 17% during the third quarter of 2009 from the corresponding period in 2008. Sales of both locksets and plumbing products decreased at a double-digit rate during the third quarter of 2009 from the corresponding period in 2008. Locksets sales in the United States declined in the third quarter of 2009 due to sharply lower housing activity, with the decline more strongly felt with higher-price-point products. Sales of plumbing products in the United States decreased as sales in the new construction channel were down over 30%, reflecting decreased housing activity, and sales in the retail channel declined at a double-digit rate, reflecting lower consumer remodeling activity and cautious reorders by customers. Sales in other geographic regions declined by 24% from the prior year's level, principally due to weakness in Canada.

Segment profit as a percentage of sales for the Hardware and Home Improvement . . .