THE STANLEY WORKS AND SUBSIDIARIES
NOTES TO (UNAUDITED) CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2007

A.    Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (hereafter referred to as ‘‘generally accepted accounting principles’’) for interim financial statements and with the instructions to Form 10-Q and Article 10 of Regulation S-X and do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation of the results of operations for the interim periods have been included and are of a normal, recurring nature. Certain prior year amounts have been reclassified to conform to the current year’s presentation. For further information, refer to the consolidated financial statements and footnotes included in The Stanley Works and Subsidiaries’ (collectively, the ‘‘Company’’) Form 10-K for the year ended December 30, 2006.

B.    New Accounting Standards

The Company adopted Financial Accounting Standards Board (‘‘FASB’’) Interpretation No. 48, ‘‘Accounting for Uncertainty in Income Taxes – an Interpretation of SFAS No. 109’’, (‘‘FIN 48’’), as of the beginning of its 2007 fiscal year. This Interpretation clarifies the accounting for uncertainty in income taxes. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken on a tax return. Under FIN 48, the Company first assesses whether it is more likely than not that an individual tax position will be sustained upon examination based on its technical merits. If the tax position is more likely than not to be sustained, under the presumption the taxing authority has all relevant information, it is recognized. The recognized tax position is measured as the largest benefit that is greater than 50 percent likely of being realized upon ultimate settlement. Previously recognized tax positions that no longer meet the more likely than not recognition threshold are derecognized in the period in which that threshold is no longer met. Accordingly the unit of account under this standard is the individual tax position and not a higher level such as the aggregate of the various positions that are encompassed by the total tax return filing. As a result of the implementation of FIN 48, the Company recognized a $13.5 million increase in its tax liabilities, and a corresponding reduction to the 2007 beginning balance of retained earnings.

In February 2007, the FASB issued Statement of Financial Accounting Standard (‘‘SFAS’’) No. 159, ‘‘The Fair Value Option for Financial Assets and Liabilities, Including an amendment of FASB Statement No. 115’’, (‘‘SFAS 159’’). This Statement permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. SFAS 159 is effective as of the beginning of fiscal 2008. The Company has not yet assessed the effect, if any, that adoption of SFAS 159 will have on its results of operations and financial position.

In September 2006, the FASB issued SFAS No. 157, ‘‘Fair Value Measurements’’, (‘‘SFAS 157’’). This Statement is effective for financial statements issued for fiscal years beginning after November 15, 2007. SFAS 157 provides a common fair value hierarchy for companies to follow in determining fair value measurements in the preparation of financial statements and expands disclosure requirements relating to how such fair value measurements were developed. SFAS 157 clarifies the principle that fair value should be based on the assumptions that the marketplace would use when pricing an asset or liability, rather than company specific data. The Company is currently assessing the impact that SFAS 157 will have on its results of operations and financial position.

In March 2006, the FASB issued SFAS No. 156, ‘‘Accounting for Servicing of Financial Assets – an amendment of FASB Statement No. 140’’, (‘‘SFAS 156’’). The provisions of SFAS 156 are effective for fiscal years beginning after September 15, 2006. This statement was issued to simplify the accounting

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for servicing rights and to reduce the volatility that results from using different measurement attributes. The adoption of SFAS 156 did not impact the Company’s results of operations and financial position.

In February 2006, the FASB issued SFAS No. 155 ‘‘Accounting for Certain Hybrid Financial Instruments, an amendment of FASB Statements No. 133 and 140’’, (‘‘SFAS 155’’). SFAS 155 clarifies certain issues relating to embedded derivatives and beneficial interests in securitized financial assets. The provisions of SFAS 155 are effective for all financial instruments acquired or issued for fiscal years beginning after September 15, 2006. The adoption of SFAS 155 did not impact the Company’s results of operations and financial position.

C.    Earnings Per Share

The following table reconciles the weighted-average shares outstanding used to calculate basic and diluted earnings per share for the three and six months ended June 30, 2007 and July 1, 2006:

			Second Quarter												Year to Date
			2007						2006						2007						2006
Numerator (in millions):
Net earnings – basic and diluted				$	85.3					$	74.7					$	152.9					$	112.4
Denominator (in thousands):
Basic earnings per share – weighted average shares					82,810						81,132						82,752						82,114
Dilutive effect of stock options and awards					1,732						1,846						1,853						1,877
Diluted earnings per share – weighted average shares					84,542						82,978						84,605						83,991
Earnings per share of common stock:
Basic				$	1.03					$	0.92					$	1.85					$	1.37
Diluted				$	1.01					$	0.90					$	1.81					$	1.34

The following weighted-average stock options and warrants to purchase the Company’s common stock were outstanding during the three and six months ended June 30, 2007 and July 1, 2006, but were not included in the computation of diluted shares outstanding because the effect would be anti-dilutive. As further detailed in Note M, Debt, Financial Instruments and Related Equity Issuances, in March 2007, the Company issued warrants to purchase up to 5.1 million shares of its common stock with a strike price of $87.12 which are anti-dilutive since the strike price of the warrants is greater than the market price of the Company’s common stock. The stock options are anti-dilutive primarily because remaining unrecognized compensation expense exceeds the amount by which the market price for the Company’s common stock exceeds the exercise price of the options that have not vested.

			Second Quarter												Year To Date
			2007						2006						2007						2006
Number of stock options (in thousands)					711						807						771						727
Number of stock warrants (in thousands)					5,093						—						2,910						—

The Company repurchased 1.8 million shares of its common stock for $106.9 million during the first half of 2007.

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D.    Comprehensive Income

Comprehensive income for the three and six months ended June 30, 2007 and July 1, 2006 is as follows (in millions):

			Second Quarter												Year to Date
			2007						2006						2007						2006
Net earnings				$	85.3					$	74.7					$	152.9					$	112.4
Other comprehensive gain, net of tax					24.7						26.8						36.9						36.5
Comprehensive income				$	110.0					$	101.5					$	189.8					$	148.9

Other comprehensive gain is primarily the impact of foreign currency translation.

E.    Inventories

The components of inventories at June 30, 2007 and December 30, 2006 are as follows (in millions):

			2007						2006
Finished products				$	421.3					$	427.4
Work in process					67.7						59.5
Raw materials					115.4						112.0
Total inventories				$	604.4					$	598.9

F.    Acquisitions, Goodwill and Other Intangible Assets

Acquisitions were accounted for as purchases in accordance with SFAS 141, ‘‘Business Combinations’’ and their results are included in the Company’s consolidated operating results from the respective acquisition dates.

2007 Acquisitions

The Company completed the acquisition of HSM Electronic Protection Services, Inc. (‘‘HSM’’) on January 16, 2007 for $543.5 million which was financed with debt and equity units as more fully described in Note M, Debt, Financial Instruments and Related Equity Issuances. HSM is a market leader in the North American commercial security monitoring industry, with annual revenues of approximately $200 million. HSM has a stable customer base, an extensive North American field network and the second largest market share in the U.S. commercial monitoring market. The acquisition will serve as a growth platform in the monitoring sector of the security industry. 

The Company also made four small acquisitions relating to its hydraulic, access technologies and security integration businesses for a combined purchase price of $27.4 million.

The total purchase price of $570.9 million (inclusive of $0.4 million of hold-back notes payable) for the 2007 acquisitions reflects transaction costs and is net of cash acquired. Amounts allocated to the assets acquired and liabilities assumed are based upon estimates of fair value.

The purchase price allocations for the 2007 acquisitions are preliminary with respect to finalization of intangible asset and fixed asset valuations, integration accruals, employee benefit valuations, acquisition date identified integration plans and other minor items.

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As of June 30, 2007, the preliminary allocation of the purchase price for the 2007 acquisitions was to the following major opening balance sheet categories (in millions):

			First Quarter 2007 Acquisitions						Adjustments During Second Quarter						As Adjusted First Quarter 2007 Acquisitions						Second Quarter Acquisitions						Total Acquisitions 6/30/2007
Current assets (primarily accounts receivable and inventories)				$	35.1					$	—					$	35.1					$	2.4					$	37.5
Property, plant and equipment					9.8						(3.2	)					6.6						0.5						7.1
Goodwill					276.7						55.6						332.3						15.1						347.4
Trade names					73.0						(67.4	)					5.6						—						5.6
Customer relationships					228.5						(16.0	)					212.5						10.5						223.0
Other intangible assets					—						—						—						0.1						0.1
Deferred tax assets and other					0.2						12.5						12.7						—						12.7
Total assets				$	623.3					$	(18.5	)				$	604.8					$	28.6					$	633.4
Current liabilities				$	56.5					$	0.3					$	56.8					$	1.4					$	58.2
Deferred tax liabilities					19.1						(18.8	)					0.3						4.4						4.7
Total liabilities				$	75.6					$	(18.5	)				$	57.1					$	5.8					$	62.9

The primary adjustment made to the purchase price allocations during the second quarter of 2007 related to the revision of the HSM trade name from an indefinite life to a definite life currently estimated between 5 and 7 years.

The weighted average useful lives assigned to the amortizable assets identified above are: trade names – 7 years; customer relationships – 15 years; and other intangible assets – 2 years.

2006 Acquisitions

As described in further detail in Note F, Acquisitions, of the Notes to the Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the fiscal year ended December 30, 2006, the Company completed 8 acquisitions during 2006 for an aggregate purchase price of $549.6 million (inclusive of $2.4 million of hold-back note payables).

On January 1, 2006, the Company completed the acquisition of Facom S.A. (‘‘Facom’’) for $477.6 million which was financed with a combination of cash on hand and debt issuance. Facom, based in France, is a leading European manufacturer of hand and mechanics tools. Facom designs, manufactures and markets the majority of its tool product range to professional automotive and industrial end users with its well-known industrial tool brands: Facom^®, Virax^® and USAG^®.

As of July 31, 2006, the Company completed a tender offer to acquire approximately 67% of the outstanding shares of Besco Pneumatic Corporation (‘‘Besco’’), a leading manufacturer of pneumatic tools for $37.0 million in cash. During the first quarter 2007, the Company exercised an option to increase its ownership in a Besco subsidiary by acquiring a 20% third party interest for $1.0 million. Besco, which is headquartered in Taiwan and also has operations in China, possesses state-of-the-art research and development capabilities and efficient production facilities. The Company also made five bolt-on acquisitions and increased its investment in a previously consolidated joint venture during 2006 for a combined purchase price of $34.0 million.

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The total purchase price for the acquisitions noted above (inclusive of the $2.4 million hold-back note payables) reflects transaction costs and is net of cash acquired, and was allocated to the assets acquired and liabilities assumed based on their estimated fair values. As of June 30, 2007, the allocation of the purchase price for the 2006 acquisitions was to the following major opening balance sheet categories (in millions):

			12/30/2006						Adjustments						3/31/2007						Adjustments						6/30/2007
Current assets (primarily accounts receivable and inventories)				$	267.8					$	(0.5	)				$	267.3					$	(0.1	)				$	267.2
Property, plant and equipment					104.6						—						104.6						(0.6	)					104.0
Goodwill					292.6						(5.6	)					287.0						1.7						288.7
Trade names					175.4						—						175.4						—						175.4
Customer relationships					21.5						—						21.5						(2.8	)					18.7
Patents and technology					17.0						—						17.0						—						17.0
Other intangible assets					1.8						—						1.8						—						1.8
Other assets					8.3						—						8.3						—						8.3
Total assets				$	889.0					$	(6.1	)				$	882.9					$	(1.8	)				$	881.1
Current liabilities				$	213.5					$	—					$	213.5					$	(0.3	)				$	213.2
Deferred tax liabilities					27.9						1.9						29.8						(0.6	)					29.2
Other liabilities					98.4						(6.9	)					91.5						—						91.5
Total liabilities				$	339.8					$	(5.0	)				$	334.8					$	(0.9	)				$	333.9

Adjustments to reflect the fair value of the assets acquired and liabilities assumed are complete for the Facom, Automatic Doors, Automatic Entrances, Allan Brothers, and GDX Technologies acquisitions. The purchase price allocation for Besco is substantially complete, with minor adjustments for income taxes and other items to be finalized.

The weighted-average useful lives assigned to the amortizable assets identified above are: trade names – 7 years; customer relationships – 14 years; patents and technology – 15 years; and other intangible assets – 9 years. The amount allocated to the trade names includes $171.6 million associated with the Facom acquisition (Facom^®, Virax^®, and USAG^®) which have been determined to have indefinite lives.

Pre-Acquisition Pro Forma Earnings

Net sales, net earnings and diluted earnings per share would have been the pro forma amounts below if the 2007 and 2006 acquired companies had been included in the Consolidated Statements of Operations for the entire reported periods in 2007 and 2006. Non-recurring expenses of the acquired companies, primarily relating to interest expense and historical intangible asset amortization have been eliminated, while the effects of the Company’s inventory step-up amortization, increased intangible asset amortization expense and expenses associated with the HSM acquisition financing have been included in the results below (in millions, except per share amounts):

			Q1 2007						Q2 2007						YTD 2007
Net sales			$1,071.1						$1,124.9						$2,196.0
Net earnings			$66.1						$85.6						$151.7
Diluted earnings per share			$0.78						$1.01						$1.79

			Q1 2006						Q2 2006						YTD 2006
Net sales				$	1,037.7					$	1,071.0					$	2,108.7
Net earnings				$	37.4					$	78.0					$	115.4
Diluted earnings per share				$	0.44					$	0.91					$	1.35

Operating results for the acquisitions during pre-acquisition periods are not necessarily indicative of future operating results.

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Goodwill

Changes in the carrying amount of goodwill by segment are as follows (in millions):

			Construction & DIY						Industrial						Security						Total
Balance as of December 30, 2006				$	235.8					$	319.0					$	545.4					$	1,100.2
Goodwill acquired during the year					—						2.4						345.0						347.4
Purchase accounting adjustments					2.0						(6.3	)					0.4						(3.9	)
Foreign currency translation/other					1.4						7.1						12.8						21.3
Balance as of June 30, 2007				$	239.2					$	322.2					$	903.6					$	1,465.0

G.    Restructuring and Asset Impairments

At June 30, 2007, the restructuring and asset impairment reserve balance was $36.7 million, which the Company expects to largely utilize by the end of 2007. A summary of the Company’s restructuring reserve activity from December 30, 2006 to June 30, 2007 is as follows (in millions):

			12/30/06						Acquisition Impact						Net Additions						Usage						Currency						6/30/07
Acquisitions
Severance				$	54.7					$	0.4					$	—					$	(25.7	)				$	0.6					$	30.0
Facility Closure					2.4						—						—						(0.6	)					0.1						1.9
Other					1.5						—						0.3						(0.7	)					0.1						1.2
2007 Actions					—						—						6.7						(5.1	)					—						1.6
Pre-2007 Actions					4.5						—						0.6						(3.2	)					0.1						2.0
				$	63.1					$	0.4					$	7.6					$	(35.3	)				$	0.9					$	36.7

2007 Actions:    During the first half of 2007, the Company initiated cost reduction initiatives in order to maintain its cost competitiveness and vitality. Severance charges of $6.4 million have been recorded relating to the reduction of approximately 300 employees. In addition to severance, $0.1 million was recorded for the closure of a merged office facility and $0.2 million for related asset impairments. Approximately $2.9 million of these charges pertained to the Construction and DIY segment; $0.8 million to the Industrial segment; $2.6 million to the Security segment; and $0.4 million to corporate overhead. Of these amounts, $5.1 million has been utilized to date, with $1.6 million of reserves remaining as of June 30, 2007.

Pre-2007 Actions:    During 2006 and 2005, the Company initiated $18.2 million of cost reduction actions in various businesses, of which $0.6 million was recorded in the first half of 2007, $13.0 million was recorded in 2006 and $4.6 million was recorded in 2005. These actions were comprised of the severance of approximately 950 employees and the exit of a leased facility. Of this amount, $17.1 million has been utilized to date with $1.2 million of accrual remaining as of June 30, 2007. In addition, $0.8 million of reserves remain relating to pre-2005 actions.

Acquisition Related:    During 2006, the Company completed a consultation process with the European Works Council regarding the reorganization of its Facom and Stanley hand tools activities in Europe (these ‘‘Initiatives’’). The Initiatives propose to, among other things, implement growth strategies and reduce costs by rationalizing manufacturing, logistics, sales and support organizations. This has resulted in the severance of approximately 450 employees, the closure of two legacy Facom factories in France, as well as four legacy Facom distribution centers located in the United Kingdom, Belgium, Germany and Switzerland. Cash expenditures to be incurred for these Initiatives are estimated at approximately $75 million, of which, $59.4 million has been recorded to the Facom purchase price allocation and $1.0 million as restructuring charges. As of June 30, 2007, $31.3 million has been utilized to date, partially offset by $0.8 million currency impact such that a $29.9 million accrual remains.

In connection with its acquisition of National, the Company recorded $8.0 million relating to severance costs for approximately 250 employees and $0.3 million facility closure costs to the purchase

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price allocation. In addition $0.2 million of facility closure costs were recorded as restructuring charges in 2006. As of June 30, 2007, $6.8 million has been utilized, with $1.7 million accrual remaining.

Additionally, $0.4 million of reserves were established for HSM in the first half of 2007. The Company utilized $1.3 million of restructuring reserves during the first half of 2007 established for various minor acquisition related actions. As of June 30, 2007, $1.5 million in accruals for these small actions remains.

H.    Commitments and Contingencies

The Company is involved in various legal proceedings relating to environmental issues, employment, product liability and workers’ compensation claims and other matters. The Company periodically reviews the status of these proceedings with both inside and outside counsel, as well as an actuary for risk insurance. Management believes that the ultimate disposition of these matters will not have a material adverse effect on operations or financial condition taken as a whole.

The Company’s policy is to accrue environmental investigatory and remediation costs for identified sites when it is probable that a liability has been incurred and the amount of loss can be reasonably estimated. As of June 30, 2007 and December 30, 2006, the Company had reserves of $29.8 million and $30.5 million, respectively, primarily for remediation activities associated with company-owned properties as well as for Superfund sites. The range of environmental remediation costs that is reasonably possible is $24.7 million to $56.6 million which is subject to change in the near term.

I.    Guarantees

The Company’s financial guarantees at June 30, 2007 are as follows (in millions):

			Term			Maximum Potential Payment						Liability Carrying Amount
Guarantees on the residual values of leased properties			Up to 6 years				$	72.9					$	—
Standby letters of credit			Generally 1 year					33.5						—
Guarantee on the external Employee Stock Ownership Plan (‘‘ESOP’’) borrowings			Through 2009					4.5						4.5
Commercial customer financing arrangements			Up to 5 years					21.3						19.3
Government guarantees on employees			Up to 3 years from date of hire					0.1						—
							$	132.3					$	23.8

The Company has guaranteed a portion of the residual value arising from its synthetic leases and U.S. master personal property lease programs. The lease guarantees aggregate $72.9 million while the fair value of the underlying assets is estimated at $104.7 million. The related assets would be available to satisfy the guarantee obligations and therefore it is unlikely the Company will incur any future loss associated with these lease guarantees. The Company has issued $33.5 million in standby letters of credit that primarily guarantee future payments which may be required under certain insurance programs.

The Company provides product and service warranties which vary across its businesses. The types of warranties offered generally range from one year to limited lifetime, while certain products carry no warranty. Further, the Company at times incurs discretionary costs to service its products in connection with product performance issues. Historical warranty and service claim experience forms the basis for warranty obligations recognized. Adjustments are recorded to the warranty liability as new information becomes available.

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The changes in the carrying amount of product and service warranties for the six months ended June 30, 2007 are as follows (in millions):

Balance December 30, 2006				$	66.9
Warranties and guarantees issued					11.1
Warranty payments					(10.6	)
Acquisitions and other					(5.2	)
Balance June 30, 2007				$	62.2

J.    Net Periodic Benefit Cost – Defined Benefit Plans

Following are the components of net periodic benefit cost for the three and six months ended June 30, 2007 and July 1, 2006 (in millions):

			Second Quarter
			Pension Benefits																								Other Benefits
			U.S. Plans												Non-U.S. Plans												U.S. Plans
			2007						2006						2007						2006						2007						2006
Service cost				$	0.7					$	1.1					$	1.2					$	2.4					$	0.3					$	0.3
Interest cost					2.3						2.1						3.9						4.0						0.4						0.3
Expected return on plan assets					(2.4	)					(1.9	)					(4.6	)					(4.2	)					—						—
Amortization of transition liability					—						—						—						—						—