UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
FORM 10-KANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OFTHE SECURITIES EXCHANGE ACT OF 1934

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|------------------------------------------ | ----------------------------
|FOR THE FISCAL YEAR ENDEDDecember 31, 2006 | COMMISSION FILE NUMBER1-1553

THE BLACK & DECKER
CORPORATION(Exact
name of registrant as specified in its charter)

|                                 |                                                  
|-------------------------------- | -------------------------------------------------
|Maryland(State of Incorporation) | 52-0248090(I.R.S. Employer Identification Number)

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|--------------------------------------------------------- | ---------------
|Towson, Maryland(Address of
 principal executive offices) | 21286(Zip Code)

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|--------------------------------------------------- | ------------
|Registrants telephone number,
including area code: | 410-716-3900

Securities registered pursuant to
Section 12(b) of the Act:

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|--------------------------------------------------------- | -----------------------------------------------------------------
|Title of each classCommon Stock,
par value $.50 per share | Name of each exchange on which registered
New York Stock Exchange

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|----------------------------------------------------------- | ----
|Securities registered pursuant to
Section 12(g) of the Act: | None

Indicate by check mark if the
registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.YesX  No

Indicate by check mark if the registrant is not required to
 file reports pursuant to Section 13 or Section 15(d) of the Act.Yes  No X

Indicate by check mark whether the
registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter
period that the registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.YesX  No

Indicate by check mark if disclosure
of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and
will not be contained, to the best of registrants knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.

Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.
See definition of accelerated filer and large accelerated filer in Rule 12b-2
of the Exchange Act. (check one):
Large accelerated filer X    Accelerated filer     
Non-accelerated filer

Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Act).Yes  No X

The aggregate market value of the
voting stock held by non-affiliates of the registrant as of June 30, 2006, was $6.18
billion.

The number of shares of Common Stock
outstanding as of January 26, 2007, was 65,600,202.

The exhibit index as required by Item
601(a) of Regulation S-K is included in Item 15 of Part IV of this report.Documents
Incorporated by Reference: Portions of the registrants definitive Proxy Statement
for the 2007 Annual Meeting of Stockholders are incorporated by reference in Part III of
this Report.

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PART I

ITEM 1. BUSINESS

(a) General Development
of Business

The Black & Decker Corporation
(collectively with its subsidiaries, the Corporation), incorporated in Maryland in 1910,
is a leading global manufacturer and marketer of power tools and accessories, hardware and
home improvement products, and technology-based fastening systems. With products and
services marketed in over 100 countries, the Corporation enjoys worldwide recognition of
its strong brand names and a superior reputation for quality, design, innovation, and
value.

The Corporation is one of the
worlds leading producers of power tools, power tool accessories, and residential
security hardware, and the Corporations product lines hold leading market share
positions in these industries. The Corporation is also a major global supplier of
engineered fastening and assembly systems. The Corporation is one of the leading producers
of faucets in North America. These assertions are based on total volume of sales of
products compared to the total market for those products and are supported by market
research studies sponsored by the Corporation as well as independent industry statistics
available through various trade organizations and periodicals, internally generated market
data, and other sources.

During the first quarter of 2006, the
Corporation acquired Vector Products, Inc. (Vector). The addition of Vector to the
Corporations Power Tools and Accessories segment allows the Corporation to offer
customers a broader range of products.

During the fourth quarter of 2004,
the Corporation acquired the Porter-Cable and Delta Tools Group from Pentair, Inc. The
Porter-Cable and Delta Tools Group (also referred to herein as the Tools
Group) included the Porter-Cable, Delta, DeVilbiss Air Power Company, Oldham Saw,
and FLEX businesses. The Corporation sold the FLEX business in November 2005.

In November 2005, the Corporation
completed the sale of DOM security hardware. In January 2004, the Corporation completed
the sale of two European security hardware businesses, Corbin and NEMEF. The divested
businesses are reflected as discontinued operations in the Consolidated Financial
Statements included in Item 8 of Part II of this report, and as such, operating results,
assets and liabilities, and cash flows of the discontinued European security hardware
business have been reported separately from the continuing operations of the Corporation.
For additional information about the discontinued European security hardware business, see
the discussion in Note 3 of Notes to Consolidated Financial Statements included in Item 8
of Part II of this report.

# (b) Financial
Information About Business Segments

The Corporation operates in three
reportable business segments: Power Tools and Accessories, including consumer and
industrial power tools and accessories, lawn and garden tools, electric cleaning,
automotive, and lighting products, and product service; Hardware and Home Improvement,
including security hardware and plumbing products; and Fastening and Assembly Systems. For
additional information about these segments, see Note 18 of Notes to Consolidated
Financial Statements included in Item 8 of Part II, and Managements Discussion and
Analysis of Financial Condition and Results of Operations included in Item 7 of Part II of
this report.

# (c) Narrative
Description of the Business

The following is a brief description
of each of the Corporations reportable business segments.

# POWER TOOLS AND
ACCESSORIES

The Power Tools and Accessories
segment has worldwide responsibility for the manufacture and sale of consumer (home use)
and industrial corded and cordless electric power tools and equipment, lawn and garden
tools, consumer portable power products, home products, accessories and attachments for
power tools, and product service. In addition, the Power Tools and Accessories segment has
responsibility for the sale of security hardware to customers in Mexico, Central America,
the Caribbean, and South America; for the sale of plumbing products to customers outside
of the United States and Canada; and for sales of household products, principally in
Europe and Brazil.

Power tools and equipment include
drills, screwdrivers, impact wrenches and drivers, hammers, wet/dry vacuums, lights,
radio/chargers, saws, grinders, band saws, plate joiners, jointers, lathes, dust
management systems, routers, planers, sanders, benchtop and stationary machinery, air
tools, building instruments, air compressors, generators, laser products, jobsite security
systems, and WORKMATE® project centers and related products. Lawn and garden tools
include hedge trimmers, string trimmers, lawn mowers, edgers, pruners, shears, shrubbers,
blower/vacuums, power sprayers, pressure washers, and related

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accessories. Consumer
portable power products include inverters, jump-starters, vehicle battery chargers,
rechargeable spotlights, and other related products. Home products include stick, canister
and hand-held vacuums; flexible flashlights; and wet scrubbers. Power tool accessories
include drill bits, hammer bits, router bits, hacksaws and blades, circular saw blades,
jig and reciprocating saw blades, screwdriver bits and quick-change systems, bonded and
other abrasives, and worksite tool belts and bags. Product service provides replacement
parts and repair and maintenance of power tools, equipment, and lawn and garden tools.

Power tools, lawn and garden tools,
portable power products, home products, and accessories are marketed around the world
under the BLACK & DECKER name as well as other trademarks, and trade names, including,
without limitation, BLACK & DECKER; ORANGE AND BLACK COLOR SCHEME; POWERFUL SOLUTIONS;
FIRESTORM; GELMAX COMFORT GRIP; MOUSE; BULLSEYE; PIVOT DRIVER; STORMSTATION; WORKMATE;
BLACK & DECKER XT; VERSAPAK; SMARTDRIVER; QUANTUM PRO; CYCLONE; NAVIGATOR; DRAGSTER;
SANDSTORM; PROJECTMATE; PIVOTPLUS; QUICK CLAMP; SIGHT LINE; CROSSFIRE; CROSSHAIR;
360o; QUATTRO; DECORMATE; LASERCROSS; AUTOWRENCH; SHOPMASTER BY DELTA; DEWALT;
YELLOW AND BLACK COLOR SCHEME; GUARANTEED TOUGH; XRP; SITELOCK; PORTER-CABLE; GRAY AND
BLACK COLOR SCHEME; TIGER SAW; PORTA-BAND; POWERBACK; EASY AIR; JOB BOSS; DELTA; THE DELTA
TRIANGLE LOGO; UNISAW; BIESEMEYER; BLACK AND WHITE COLOR SCHEME; DAPC; EMGLO; AFS
AUTOMATIC FEED SPOOL; GROOM N EDGE; HEDGE HOG; GRASS HOG; EDGE HOG; LEAF HOG;
LAWN HOG; STRIMMER; REFLEX; VAC N MULCH; EXCELL; ALLIGATOR; TRIM N
EDGE; HDL; TOUGH TRUCK; FLEX TUBE; VECTOR; ELECTROMATE; SIMPLE START; DUSTBUSTER;
SNAKELIGHT; SCUMBUSTER; STEAMBUSTER; CYCLOPRO; SWEEP & COLLECT; CLICK & GO;
B&D; BULLET; QUANTUM PRO; PIRANHA; SCORPION; QUICK CONNECT; PILOT POINT; RAPID LOAD;
ROCK CARBIDE; TOUGH CASE; MAX LIFE; RAZOR; OLDHAM; DEWALT SERVICENET; DROP BOX EXPRESS;
and GUARANTEED REPAIR COST (GRC).

The composition of the
Corporations sales by product groups for 2006, 2005, and 2004 is included in Note 18
of Notes to Consolidated Financial Statements included in Item 8 of Part II of this
report. Within each product group shown, there existed no individual product that
accounted for greater than 10% of the Corporations consolidated sales for 2006,
2005, or 2004.

The Corporations product
service program supports its power tools and lawn and garden tools. Replacement parts and
product repair services are available through a network of company-operated service
centers, which are identified and listed in product information material generally
included in product packaging. At December 31, 2006, there were approximately 125 such
service centers, of which roughly three-quarters were located in the United States. The
remainder was located around the world, primarily in Canada and Asia. These
company-operated service centers are supplemented by several hundred authorized service
centers operated by independent local owners. The Corporation also operates reconditioning
centers in which power tools, lawn and garden tools, and electric cleaning and lighting
products are reconditioned and then re-sold through numerous company-operated factory
outlets and service centers and various independent distributors.

Most of the Corporations
consumer power tools, lawn and garden tools, and electric cleaning, automotive, and
lighting products sold in the United States carry a two-year warranty, pursuant to which
the consumer can return defective products during the two years following the purchase in
exchange for a replacement product or repair at no cost to the consumer. Most of the
Corporations industrial power tools sold in the United States carry a one-year
service warranty and a three-year warranty for manufacturing defects. Products sold
outside of the United States generally have varying warranty arrangements, depending upon
local market conditions and laws and regulations.

The Corporations product
offerings in the Power Tools and Accessories segment are sold primarily to retailers,
wholesalers, distributors, and jobbers, although some discontinued or reconditioned power
tools, lawn and garden tools, consumer portable power products, and electric cleaning and
lighting products are sold through company-operated service centers and factory outlets
directly to end users. Sales to two of the segments customers, The Home Depot and
Lowes Home Improvement Warehouse, accounted for greater than 10% of the
Corporations consolidated sales for 2006, 2005, and 2004. For additional information
regarding sales to The Home Depot and Lowes Home Improvement Warehouse, see Note 18
of Notes to Consolidated Financial Statements included in Item 8 of Part II of this
report.

The principal materials used in the
manufacturing of products in the Power Tools and Accessories segment are batteries,
copper, aluminum, steel, certain electronic components, engines, and plastics. These
materials are used in various forms. For example, aluminum or steel may be used in the
form of wire, sheet, bar, and strip stock.

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The materials used in the various
manufacturing processes are purchased on the open market, and the majority are available
through multiple sources and are in adequate supply. The Corporation has experienced no
significant work stoppages to date as a result of shortages of materials.

The Corporation has certain long-term
commitments for the purchase of various component parts and raw materials and believes
that it is unlikely that any of these agreements would be terminated prematurely.
Alternate sources of supply at competitive prices are available for most items for which
long-term commitments exist. Because the Corporation is a leading producer of power tools
and accessories, in a limited number of instances, the magnitude of the Corporations
purchases of certain items is of such significance that a change in the Corporations
established supply relationship may cause disruption in the marketplace and/or a temporary
price imbalance. While the Corporation believes that the termination of any of these
commitments would not have a material adverse effect on the operating results of the Power
Tools and Accessories segment over the long term, the termination of a limited number of
these commitments would have an adverse effect over the short term. In this regard, the
Corporation defines long term as a period of time in excess of 12 months and short term as
a period of time under 12 months.

Principal manufacturing and assembly
facilities of the power tools, lawn and garden tools, electric cleaning and lighting
products, and accessories businesses in the United States are located in Jackson,
Tennessee; Decatur, Arkansas; Shelbyville, Kentucky; and Tampa, Florida. The principal
distribution facilities in the United States, other than those located at the
manufacturing and assembly facilities listed above, are located in Fort Mill, South
Carolina, and Rialto, California.

Principal manufacturing and assembly
facilities of the power tools, lawn and garden tools, electric cleaning and lighting
products, and accessories businesses outside of the United States are located in Suzhou,
China; Usti nad Labem, Czech Republic; Buchlberg,Germany; Perugia, Italy;
Spennymoor, England; Reynosa, Mexico; and Uberaba, Brazil. In addition to the principal
facilities described above, the manufacture and assembly of products for the Power Tools
and Accessories segment also occurs at the facility of its 50%-owned joint venture located
in Shen Zhen, China. The principal distribution facilities outside of the United States,
other than those located at the manufacturing facilities listed above, consist of a
central-European distribution center in Tongeren, Belgium, and facilities in Aarschot,
Belgium; Northampton, England; Dubai, United Arab Emirates; and Brockville, Canada.

For additional information with
respect to these and other properties owned or leased by the Corporation, see Item 2,
Properties.

The Corporation holds various patents
and licenses on many of its products and processes in the Power Tools and Accessories
segment. Although these patents and licenses are important, the Corporation is not
materially dependent on such patents or licenses with respect to its operations.

The Corporation holds various
trademarks that are employed in its businesses and operates under various trade names,
some of which are stated previously. The Corporation believes that these trademarks and
trade names are important to the marketing and distribution of its products.

A significant portion of the
Corporations sales in the Power Tools and Accessories segment is derived from the
do-it-yourself and home modernization markets, which generally are not seasonal in nature.
However, sales of certain consumer and industrial power tools tend to be higher during
the period immediately preceding the Christmas gift-giving season, while the sales of most
lawn and garden tools are at their peak during the late winter and early spring period.
Most of the Corporations other product lines within this segment generally are not
seasonal in nature, but are influenced by other general economic trends.

The Corporation is one of the
worlds leaders in the manufacturing and marketing of portable power tools, electric
lawn and garden tools, and accessories. Worldwide, the markets in which the Corporation
sells these products are highly competitive on the basis of price, quality, and after-sale
service. A number of competing domestic and foreign companies are strong, well-established
manufacturers that compete on a global basis. Some of these companies manufacture products
that are competitive with a number of the Corporations product lines. Other
competitors restrict their operations to fewer categories, and some offer only a narrow
range of competitive products. Competition from certain of these manufacturers has been
intense in recent years and is expected to continue.

# HARDWARE AND HOME
IMPROVEMENT

The Hardware and Home Improvement
segment has worldwide responsibility for the manufacture and sale of security hardware
products (except for the sale of security hardware in Mexico, Central America, the
Caribbean, and South America). It also has responsibility for the manufacture of plumbing
products and for the sale of plumbing products to customers in the United States and
Canada. Security hardware products consist of residential and light commercial door
locksets,

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electronic keyless entry systems, exit devices, keying systems, tubular and
mortise door locksets, general hardware, decorative hardware, lamps, and brass ornaments.
General hardware includes door hinges, cabinet hinges, door stops, kick plates, and house
numbers. Decorative hardware includes cabinet hardware, switchplates, door pulls, and push
plates. Plumbing products consist of a variety of conventional and decorative lavatory,
kitchen, and tub and shower faucets, bath and kitchen accessories, and replacement parts.

Security hardware products are
marketed under a variety of trademarks and trade names, including, without limitation,
KWIKSET SECURITY; KWIKSET MAXIMUM SECURITY; KWIKSET ULTRAMAX; SIGNATURES; KWIKSET; BEAUTY
OF STRENGTH; BLACK & DECKER; TYLO; POLO; AVALON; ASHFIELD; SMARTSCAN; SMARTKEY;
SMARTCODE; VENETIAN BRONZE; POWERBOLT; KWIK INSTALL; GEO; SAFE-LOCK BY BLACK & DECKER;
BALDWIN; THE ESTATE COLLECTION; THE IMAGES COLLECTION; ARCHETYPES; LIFETIME FINISH;
TIMELESS CRAFTSMANSHIP; LOGAN; SPRINGFIELD; HAMILTON; BLAKELY; MANCHESTER; CANTERBURY;
MADISON; STONEGATE; EDINBURGH; KENSINGTON; BRISTOL; TREMONT; PEYTON; PASADENA; RICHLAND;
WEISER; WEISER LOCK; COLLECTIONS BY WEISER LOCK; WELCOME HOME SERIES; ELEMENTS SERIES;
BASICS BY WEISER LOCK; BRILLIANCE LIFETIME ANTI-TARNISH FINISH; POWERBOLT; POWERBOLT
KEYLESS ACCESS SYSTEM; WEISERBOLT; and ENTRYSETS. Plumbing products are marketed under the
trademarks and trade names PRICE PFISTER; CLASSIC SERIES BY PRICE PFISTER; PRICE PFISTER
PROFESSIONAL SERIES; BACH; SOLO; CONTEMPRA; MARIELLE; CARMEL; PARISA; SAVANNAH; CATALINA;
GEORGETOWN; TREVISO; AVALON; and ASHFIELD.

The composition of the
Corporations sales by product groups for 2006, 2005, and 2004 is included in Note 18
of Notes to Consolidated Financial Statements included in Item 8 of Part II of this
report. Within each product group shown, there existed no individual product that
accounted for greater than 10% of the Corporations consolidated sales for 2006,
2005, or 2004.

Most of the Corporations
security hardware products sold in the United States carry a warranty, pursuant to which
the consumer can return defective product during the warranty term in exchange for a
replacement product at no cost to the consumer. Warranty terms vary by product and carry
a lifetime warranty with respect to mechanical operations and range from a
5-year to a lifetime warranty with respect to finish. Products sold outside of the United
States for residential use generally have similar warranty arrangements. Such arrangements
vary, however, depending upon local market conditions and laws and regulations. Most of
the Corporations plumbing products sold in the United States carry a lifetime
warranty with respect to function and finish, pursuant to which the consumer can return
defective product in exchange for a replacement product or repair at no cost to the
consumer.

The Corporations product
offerings in the Hardware and Home Improvement segment are sold primarily to retailers,
wholesalers, distributors, and jobbers. Certain security hardware products are sold to
commercial, institutional, and industrial customers. Sales to two of the segments
customers, The Home Depot and Lowes Home Improvement Warehouse, accounted for
greater than 10% of the Corporations consolidated sales for 2006, 2005, and 2004.
For additional information regarding sales to The Home Depot and Lowes Home
Improvement Warehouse, see Note 18 of Notes to Consolidated Financial Statements included
in Item 8 of Part II of this report.

The principal materials used in the
manufacturing of products in the Hardware and Home Improvement segment are zamak, brass,
aluminum, steel, and ceramics. The materials used in the various manufacturing processes
are purchased on the open market, and the majority are available through multiple sources
and are in adequate supply. The Corporation has experienced no significant work stoppages
to date as a result of shortages of materials.

The Corporation has certain long-term
commitments for the purchase of various finished goods, component parts, and raw materials
and believes that it is unlikely that any of these agreements would be terminated
prematurely. Alternate sources of supply at competitive prices are available for most
items for which long-term commitments exist. Because the Corporation is a leading producer
of residential security hardware and faucets, in a limited number of instances, the
magnitude of the Corporations purchases of certain items is of such significance
that a change in the Corporations established supply relationship may cause
disruption in the marketplace and/or a temporary price imbalance. While the Corporation
believes that the termination of any of these commitments would not have a material
adverse effect on the operating results of the Hardware and Home Improvement segment over
the long term, the termination of a limited number of these commitments would have an
adverse effect over the short term. In this regard, the Corporation defines long term as a
period of time in excess

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of 12 months and short term as a period of time under 12 months.

From time to time, the Corporation
enters into commodity hedges on certain raw materials used in the manufacturing process to
reduce the risk of market price fluctuations. As of December 31, 2006, the amount of
commodity hedges outstanding was not material.

Principal manufacturing and assembly
facilities of the Hardware and Home Improvement segment in the United States are located
in Denison, Texas; and Reading, Pennsylvania.

Principal manufacturing and assembly
facilities of the Hardware and Home Improvement segment outside of the United States are
located in Mexicali and Nogales, Mexico. The principal distribution facilities in the
United States, other than those located at the manufacturing and assembly facilities
listed above, are located in Mira Loma, California; and Charlotte, North Carolina.

For additional information with
respect to these and other properties owned or leased by the Corporation, see Item 2,
Properties.

The Corporation holds various patents
and licenses on many of its products and processes in the Hardware and Home Improvement
segment. Although these patents and licenses are important, the Corporation is not
materially dependent on such patents or licenses with respect to its operations.

The Corporation holds various
trademarks that are employed in its businesses and operates under various trade names,
some of which are stated above. The Corporation believes that these trademarks and trade
names are important to the marketing and distribution of its products.

A significant portion of the
Corporations sales in the Hardware and Home Improvement segment is derived from the
do-it-yourself and home modernization markets, which generally are not seasonal in nature,
but are influenced by trends in the residential and commercial construction markets and
other general economic trends.

The Corporation is one of the
worlds leading producers of residential security hardware and is one of the leading
producers of faucets in North America. Worldwide, the markets in which the Corporation
sells these products are highly competitive on the basis of price, quality, and after-sale
service. A number of competing domestic and foreign companies are strong, well-established
manufacturers that compete on a global basis. Some of these companies manufacture products
that are competitive with a number of the Corporations product lines. Other
competitors restrict their operations to fewer categories, and some offer only a narrow
range of competitive products. Competition from certain of these manufacturers has been
intense in recent years and is expected to continue.

# FASTENING AND ASSEMBLY
SYSTEMS

The Corporations Fastening and
Assembly Systems segment has worldwide responsibility for the development, manufacture and
sale of an extensive line of metal and plastic fasteners and engineered fastening systems
for commercial applications, including blind riveting, stud welding, specialty screws,
prevailing torque nuts and assemblies, insert systems, metal and plastic fasteners, and
self-piercing riveting systems. The fastening and assembly systems products are marketed
under a variety of trademarks and trade names, including, without limitation, EMHART
TEKNOLOGIES; EMHART FASTENING TEKNOLOGIES; EMHART; AUTOSET; DODGE; DRIL-KWICK; F-SERIES;
GRIPCO; GRIPCO ASSEMBLIES; HELI-COIL; JACK NUT; KALEI; MASTERFIX; NPR; NUT-FAST;
PARKER-KALON; PLASTIFAST; PLASTI-KWICK; POINT & SET; POP; POP-LOK; POPMATIC; POPNUT;
POP-SERT; POWERLINK; PROSET; SMARTSET; SWS; TUCKER; ULTRA-GRIP; ULTRASERT; WARREN;
WELDFAST; and WELL-NUT. The Fastening and Assembly Systems segment provides
platform-management and engineering services in addition to the manufacture and sale of
the products previously described.

The composition of the
Corporations sales by product groups for 2006, 2005, and 2004 is included in Note 18
of Notes to Consolidated Financial Statements included in Item 8 of Part II of this
report. Within each product group shown, there existed no individual product that
accounted for greater than 10% of the Corporations consolidated sales for 2006,
2005, or 2004.

The principal markets for these
products include the automotive, transportation, electronics, aerospace, machine tool, and
appliance industries. Substantial sales are made to automotive manufacturers worldwide.

Products are marketed directly to
customers and also through distributors and representatives. These products face
competition from many manufacturers in several countries. Product quality, performance,
reliability, price, delivery, and technical and application engineering services are the
primary competitive factors. There is little seasonal variation in sales.

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The Corporation owns a number of
United States and foreign patents, trademarks, and license rights relating to the
fastening and assembly systems business. While the Corporation considers those patents,
trademarks, and license rights to be valuable, it is not materially dependent upon such
patents or license rights with respect to its operations.

Principal manufacturing facilities of
the Fastening and Assembly Systems segment in the United States are located in Danbury,
Connecticut; Montpelier, Indiana; Campbellsville and Hopkinsville, Kentucky; and
Chesterfield, Michigan. Principal manufacturing and assembly facilities outside of the
United States are located in Birmingham, England; Giessen, Germany; and Toyohashi, Japan.
For additional information with respect to these and other properties owned or leased by
the Corporation, see Item 2, Properties.

The raw materials used in the
fastening and assembly systems business consist primarily of ferrous and nonferrous metals
in the form of wire, bar stock, and strip and sheet metals; plastics; and rubber. These
materials are readily available from a number of suppliers.

# OTHER INFORMATION

The Corporations product
development program for the Power Tools and Accessories segment is coordinated from the
Corporations headquarters in Towson, Maryland. Additionally, product
development activities are performed at facilities within the United States in Fort
Lauderdale, Florida, Hampstead, Maryland, and Jackson, Tennessee, and at facilities in
Maltby and Spennymoor, England; Brockville, Canada; Perugia, Italy; Suzhou, China;
Buchlberg and Idstein, Germany; Mooroolbark, Australia; Uberaba, Brazil; and Reynosa,
Mexico.

Product development activities for
the Hardware and Home Improvement segment are performed at facilities in Lake Forest,
California, and Reading, Pennsylvania.

Product development activities for
the Fastening and Assembly Systems segment are performed at facilities within the United
States in Danbury and Shelton, Connecticut; Montpelier, Indiana; Campbellsville, Kentucky;
Chesterfield and Farmington Hills, Michigan; and at facilities in Birmingham, England;
Maastricht, Netherlands; Giessen, Germany; and Toyohashi, Japan.

Costs associated with development of
new products and changes to existing products are charged to operations as incurred. See
Note 1 of Notes to Consolidated Financial Statements included in Item 8 of Part II of
this report for amounts of expenditures for product development activities.

As of December 31, 2006, the
Corporation employed approximately 25,500 persons inits operations worldwide.
Approximately 500 employees in the United States are covered by collective bargaining
agreements. During 2006, no collective bargaining agreements were negotiated. One
agreement is scheduled for negotiation during 2007. Also, the Corporation has
government-mandated collective bargaining arrangements or union contracts with employees
in other countries. The Corporations operations have not been affected significantly
by work stoppages and, in the opinion of management, employee relations are good. As more
fully described under the caption Restructuring and Integration Actions in
Managements Discussion and Analysis of Financial Condition and Results of
Operations, the Corporation is committed to continuous productivity improvement and
continues to evaluate opportunities to reduce fixed costs, simplify or improve processes,
and eliminate excess capacity. As a consequence, the Corporation may, from time to time,
transfer production from one manufacturing facility to another, outsource certain
production, or close certain manufacturing facilities. Such production transfers,
outsourcing, and/or facility closures may result in a deterioration of employee relations
at the impacted locations or elsewhere in the Corporation.

The Corporations operations are
subject to foreign, federal, state, and local environmental laws and regulations. Many
foreign, federal, state, and local governments also have enacted laws and regulations that
govern the labeling and packaging of products and limit the sale of products containing
certain materials deemed to be environmentally sensitive. These laws and regulations not
only limit the acceptable methods for the discharge of pollutants and the disposal of
products and components that contain certain substances, but also require that products be
designed in a manner to permit easy recycling or proper disposal of environmentally
sensitive components such as nickel cadmium batteries. The Corporation seeks to comply
fully with these laws and regulations. Although compliance involves continuing costs, the
ongoing costs of compliance with existing environmental laws and regulations have not had,
nor are they expected to have, a material adverse effect upon the Corporations
capital expenditures or financial position.

Pursuant to authority granted under
the Comprehensive Environmental Response, Compensation and Liability Act of 1980 (CERCLA),
the United States Environmental Protection Agency (EPA) has issued a National Priority
List (NPL) of sites at which action is to be taken to mitigate the risk of release of
hazardous substances into the environ-

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ment. The Corporation is engaged in continuing
activities with regard to various sites on the NPL and other sites covered under analogous
state environmental laws. As of December 31, 2006, the Corporation had been identified as
a potentially responsible party (PRP) in connection with approximately 25 sites being
investigated by federal or state agencies under CERCLA or analogous state environmental
laws. The Corporation also is engaged in site investigations and remedial activities to
address environmental contamination from past operations at current and former
manufacturing facilities in the United States and abroad.

To minimize the Corporations
potential liability with respect to these sites, management has undertaken, when
appropriate, active participation in steering committees established at the sites and has
agreed to remediation through consent orders with the appropriate government agencies. Due
to uncertainty as to the Corporations involvement in some of the sites, uncertainty
over the remedial measures to be adopted, and the fact that imposition of joint and
several liability with the right of contribution is possible under CERCLA and other laws
and regulations, the liability of the Corporation with respect to any site at which
remedial measures have not been completed cannot be established with certainty. On the
basis of periodic reviews conducted with respect to these sites, however, the Corporation
has established appropriate liability accruals. The Corporations estimate of the
costs associated with environmental exposures is accrued if, in managements
judgment, the likelihood of a loss is probable and the amount of the loss can be
reasonably estimated. As of December 31, 2006, the Corporations aggregate probable
exposure with respect to environmental liabilities, for which accruals have been
established in the consolidated financial statements, was $76.4 million. In the opinion of
management, the amount accrued for probable exposure for aggregate environmental
liabilities is adequate and, accordingly, the ultimate resolution of these matters is not
expected to have a material adverse effect on the Corporations consolidated
financial statements. As of December 31, 2006, the Corporation had no known probable but
inestimable exposures relating to environmental matters that are expected to have a
material adverse effect on the Corporation. There can be no assurance, however, that
unanticipated events will not require the Corporation to increase the amount it has
accrued for any environmental matter or accrue for an environmental matter that has not
been previously accrued because it was not considered probable. While it is possible that
the increase or establishment of an accrual could have a material adverse effect on the
financial results for any particular fiscal quarter or year, in the opinion of management
there exists no known potential exposures that would have a material adverse effect on the
financial condition or on the financial results of the Corporation beyond any such fiscal
quarter or year.

# (d) Financial
Information About Geographic Areas

Reference is made to Note 18 of Notes
to Consolidated Financial Statements, entitled Business Segments and Geographic
Information, included in Item 8 of Part II of this report.

# (e) Available Information

The Corporation files annual,
quarterly, and current reports, proxy statements, and other documents with the Securities
and Exchange Commission (SEC) under the Securities Exchange Act of 1934 (the Exchange
Act). The public may read and copy any materials that the Corporation files with the SEC
at the SECs Public Reference Room at 100 F Street, NE, Washington, DC 20549. The
public may obtain information on the operation of the Public Reference Room by calling the
SEC at 1-800-SEC-0330. Also, the SEC maintains an Internet website that contains reports,
proxy and information statements, and other information regarding issuers, including the
Corporation, that file electronically with the SEC. The public can obtain any documents
that the Corporation files with the SEC at http://www.sec.gov.

The Corporation also makes available
free of charge on or through its Internet website (http://www.bdk.com) the
Corporations Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current
Reports on Form 8-K, and, if applicable, amendments to those reports filed or furnished
pursuant to Section 13(a) of the Exchange Act as soon as reasonably practicable after the
Corporation electronically files such material with, or furnishes it to, the SEC.

Black & Decker's Corporate Governance Policies and Procedures
Statement is available free
of charge on or through its Internet
website (http://www.bdk.com) or in print by calling (800) 992-3042 or (410)
716-2914. The Statement contains charters of the standing committees of the Board of
Directors, the Code of Ethics and Standards of Conduct, and the Code of Ethics for Senior
Financial Officers.

In April 2006, the Corporation
submitted to the New York Stock Exchange the CEO certification required by Section
303A.12(a) of the New York Stock Exchange Listed Company Manual.

7

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# (f) Executive
Officers and Other Senior Officers of the Corporation

The current Executive Officers
and Other Senior Officers of the Corporation, their ages, current offices or positions,
and their business experience during the past five years are set forth below.

 NOLAN D.
ARCHIBALD  63    Chairman,
President, and    Chief Executive Officer,
   January 1990  present.

  BRUCE W. BROOKS  42   Vice
President of the Corporation and President 
   Construction Tools, Industrial
Products Group,    Power
Tools and Accessories,   May 2005  present;   Vice
President and General Manager 
   Construction Tools, Industrial Products Group,   Power
Tools and Accessories,   October 2004  May 2005;   Vice
President Marketing  DEWALT Professional   Products, Power Tools and Accessories
Group,    July
2003  October 2004;    Vice
President Marketing    Black & Decker Consumer Products,   Power Tools and
Accessories Group,    July 2000  July 2003.

  JAMES T. CAUDILL  39   Group Vice
President of the Corporation and    President 
Hardware and Home Improvement,   July 2006
  present;   Vice
President of the Corporation and President 
   Hardware and Home Improvement,   May
2005  July 2006;   Vice
President and General Manager    Accessories, Industrial Products Group,    Power Tools
and Accessories Group,   October
2004  May 2005;   Vice
President  Accessories,    DEWALT Professional Products,   Power Tools and
Accessories Group,   November
2001  October 2004.

 CHARLES E. FENTON  58   Senior Vice President and General Counsel,
   December 1996
 present.

 LES H. IRELAND  42   Vice
President of the Corporation and    President Europe/Middle East/Africa,   Power Tools
and Accessories,    January 2005  present;   Vice
President of the Corporation and    Managing DirectorCommercial Operations,    Europe,
Black & Decker Consumer Group,   Power Tools and Accessories Group,    November 2001 
January 2005.

  THOMAS D. KOOS  43
   Group
Vice President of the Corporation and   President  Consumer Products Group,
   Power Tools
and Accessories,
   March 2004  present;   Vice
President of the Corporation and President    Black & Decker Consumer Products,   Power
Tools and Accessories Group,
   January
2001  March 2004.

  MICHAEL D. MANGAN  50
   Senior
Vice President and Chief Financial Officer,   January 2000  present.

 PAUL
F. MCBRIDE  51   Senior Vice President  Human Resources
   and
Corporate Initiatives,   March 2004  present;
   Executive
Vice President of the Corporation    and President  Power Tools and    Accessories Group,
   April 1999  March 2004.

  CHRISTINA M. MCMULLEN  51   Vice President and Controller, 
  April 2000  present.

  JAMES R. RASKIN  46   Vice
President of the Corporation and    Vice President  Business Development,   
July 2006  present;   Vice President  Business Development,   
May 2002  July 2006;    Vice President  Marketing,   Consumer Products Group,   
September 2001  May 2002.

  STEPHEN F. REEVES  47
   Vice
President of the Corporation and   Vice President  Global Finance,
   Power Tools
and Accessories,   March
2004  present;   Vice
President of the Corporation and    Vice President Finance, Power Tools    and
Accessories Group,    April 2000  March 2004.

8

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  MARK M. ROTHLEITNER  48   Vice
President  Investor Relations and Treasurer,   January 2000  present.

  ROBERT I. ROWAN  46   Vice President
of the Corporation and President     Power Tools and Accessories, Consumer   Products
Group, Power Tools and Accessories,   February
2006  present;    Vice President and General Manager,   Consumer Power Tools and
Accessories,   Power Tools and Accessories,   July 2003  February 2006;
   Vice President
 Outdoor Products,   Consumer Products
Group, Power Tools   and Accessories Group,   September 2001  July 2003.

  EDWARD J. SCANLON  52
   Vice
President of the Corporation and    President  Commercial Operations, North and   South America, Power
Tools and Accessories,   March 2004  present;
   Vice
President of the Corporation and 
   President  Commercial Operations,
   North America, Power Tools and    Accessories Group,
   May 1999  March 2004.

  JOHN W. SCHIECH  48
   Group
Vice President of the Corporation   and President  Industrial Products Group,
   Power Tools
and Accessories,
   March 2004  present;
   Vice
President of the Corporation and President    DEWALT Professional Products, Power
Tools   and
Accessories Group,   January 2001  March 2004.

 NATALIE A.
SHIELDS  50   Vice
President and Corporate Secretary,    April 2006  present;   International
Tax and Trade Counsel,   June 1993  April 2006.

 BEN S. SIHOTA
 48   Vice
President of the Corporation and President     Asia Pacific, Power
Tools and Accessories,    February 2006  present;    President
 Asia, Power Tools and Accessories,    September 2000  February 2006.

# 

 MICHAEL A. TYLL
 50   Group
Vice President of the Corporation and    President Fastening and Assembly Systems,   April
2006  present;   President  Automotive Division,   Fastening and Assembly Systems,   January 2001  April 2006.

# (g) Forward-Looking
Statements

The Private Securities Litigation
Reform Act of 1995 (the Reform Act) provides a safe harbor for forward-looking statements
made by or on behalf of the Corporation. The Corporation and its representatives may, from
time to time, make written or verbal forward-looking statements, including statements
contained in the Corporations filings with the Securities and Exchange Commission
and in its reports to stockholders. Generally, the inclusion of the words
believe, expect, intend, estimate,
anticipate, will, and similar expressions identify statements that
constitute forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 and that are
intended to come within the safe harbor protection provided by those sections. All
statements addressing operating performance, events, or developments that the Corporation
expects or anticipates will occur in the future, including statements relating to sales
growth, earnings or earnings per share growth, and market share, as well as statements
expressing optimism or pessimism about future operating results, are forward-looking
statements within the meaning of the Reform Act. The forward-looking statements are and
will be based upon managements then-current views and assumptions regarding future
events and operating performance, and are applicable only as of the dates of such
statements. The Corporation undertakes no obligation to update or revise any
forward-looking statements, whether as a result of new information, future events, or
otherwise.

By their nature, all forward-looking
statements involve risks and uncertainties, including without limitations the risks
described under the caption Risk Factors that could materially harm the
Corporations business, financial condition, and results of operations. You are
cautioned not to place undue reliance on the Corporations forward-looking
statements.

9

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# ITEM 1A. RISK FACTORS

Many of the factors that affect our
business and operations involve risk and uncertainty. The factors described below are some
of the risks that could materially harm our business, financial condition, and results of
operations.

 Our business depends
on the strength of the economies in various parts of the world, particularly in the United
States and Europe.We conduct business in various parts of the world, primarily in the
United States and Europe and, to a lesser extent, in Mexico, Central America, the
Caribbean, South America, Canada, Asia and Australia. As a result of this worldwide
exposure, our net revenue and profitability could be harmed as a result of economic
conditions in our major markets, including, but not limited to, recession, inflation and
deflation, general weakness in retail, automotive and construction markets, and changes in
consumer purchasing power.

 Changes in customer
preferences, the inability to maintain mutually beneficial relationships with large
customers, and the inability to penetrate new channels of distribution could adversely
affect our business.We have a number of major customers, including two large
customers that, in the aggregate, constituted approximately 33% of our consolidated sales
in 2006. The loss of either of these large customers, a material negative change in our
relationship with these large customers or other major customers, or changes in consumer
preferences or loyalties could have an adverse effect on our business. Our major customers
are volume purchasers, a few of which are much larger than us and have strong bargaining
power with suppliers. This limits our ability to recover cost increases through higher
selling prices. Changes in purchasing patterns by major customers could negatively impact
manufacturing volumes and inventory levels. Further, our inability to continue to
penetrate new channels of distribution may have a negative impact on our future results.

 The inability to
obtain raw materials, component parts, and/or finished goods in a timely and
cost-effective manner from suppliers would adversely affect our ability to manufacture and
market our products.We purchase raw materials and component parts from suppliers to
be used in the manufacturing of our products. In addition, we purchase certain finished
goods from suppliers. In a limited number of circumstances, the magnitude of our purchases
of certain items is of such significance that a change in our established supply
relationships may cause disruption in the marketplace, a temporary price imbalance, or
both. Changes in our relationships with suppliers or increases in the costs of purchased
raw materials, component parts or finished goods could result in manufacturing
interruptions, delays, inefficiencies or our inability to market products. In addition,
our profit margins would decrease if prices of purchased raw materials, component parts,
or finished goods increase and we are unable to pass on those increases to our customers.

 We face significant
global competition.The markets in which we sell products are highly competitive on
the basis of price, quality, and after-sale service. A number of competing domestic and
foreign companies are strong, well-established manufacturers that compete globally with
us. Some of our major customers sell their own private label brands that
compete directly with our products. Price reductions taken by us in response to customer
and competitive pressures, as well as price reductions and promotional actions taken to
drive demand that may not result in anticipated sales levels, could also negatively impact
our business. Competition has been intense in recent years and is expected to continue. If
we are unable to maintain a competitive advantage, loss of market share, revenue, or
profitability may result.

 Low demand for new
products and the inability to develop and introduce new products at favorable margins
could adversely impact our performance and prospects for future growth.Our
competitive advantage is due in part to our ability to develop and introduce new products
in a timely manner at favorable margins. The uncertainties associated with developing and
introducing new products, such as market demand and costs of development and production,
may impede the successful development and introduction of new products on a consistent
basis. Market acceptance of the new products introduced in 2006 and scheduled for
introduction in 2007 may not meet sales expectations due to various factors, such as our
failure to accurately predict market demand and evolving industry standards, to resolve
technical challenges in a timely and cost-effective manner, and to achieve manufacturing
efficiencies. Our investments in productive capacity and commitments to fund advertising
and product promotions in connection with these new products could be excessive if those
expectations are not met.

 Price increases
could impact the demand for our products from customers and end-users.We have
recently increased the prices of our products for our U.S. power tools and accessories
business and hardware and home improvement business. An adverse reaction by our customers
or end-users to these price increases could negatively impact our anticipated sales,
profitability, manufacturing volumes, and/or inventory levels.

10

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 The inability to
generate sufficient cash flows to support operations and other activities could prevent
future growth and success.Our inability to generate sufficient cash flows to support
capital expansion, business acquisition plans, share repurchases and general operating
activities could negatively affect our operations and prevent our expansion into existing
and new markets. Our ability to generate cash flows is dependent in part upon obtaining
necessary financing at favorable interest rates. Interest rate fluctuations and other
capital market conditions may prevent us from doing so.

 Our success depends
on our ability to improve productivity and streamline operations to control or reduce
costs.We are committed to continuous productivity improvement and continue to
evaluate opportunities to reduce fixed costs, simplify or improve processes, and eliminate
excess capacity. We have also undertaken restructuring and integration actions as
described in Note 20 of Notes to Consolidated Financial Statements and in
Managements Discussion and Analysis of Financial Condition and Results of
Operations. The ultimate savings realized from restructuring and integration actions
may be mitigated by many factors, including economic weakness, competitive pressures, and
decisions to increase costs in areas such as promotion or research and development above
levels that were otherwise assumed. Our failure to achieve projected levels of
efficiencies and cost reduction measures and to avoid delays in or unanticipated
inefficiencies resulting from manufacturing and administrative reorganization actions in
progress or contemplated would adversely affect our results of operations.

 The inability to
successfully integrate the operations of acquired businesses or to identify new
acquisition opportunities could negatively impact our prospect for future growth and
profitability.We expend significant resources on identifying opportunities to acquire
new lines of business and companies that could contribute to our success and expansion
into existing and new markets. Our inability to successfully identify acquisition
opportunities, integrate the operations of acquired businesses, or realize the anticipated
cost savings, synergies and other benefits related to the acquisition of those businesses
could have a material adverse effect on our business, financial condition and future
growth. Acquisitions may also have a material adverse effect on our operating results due
to large write-offs, contingent liabilities, substantial depreciation, or other adverse
tax or audit consequences.

 Failures of our
infrastructure could have a material adverse effect on our business.We are heavily
dependent on our infrastructure. Significant problems with our infrastructure, such as
manufacturing failures, telephone or information technology (IT) system failure, computer
viruses or other third-party tampering with IT systems, could halt or delay manufacturing
and hinder our ability to ship in a timely manner or otherwise routinely conduct business.
Any of these events could result in the loss of customers, a decrease in revenue, or the
incurrence of significant costs to eliminate the problem or failure.

 Our products could
be subject to product liability claims and litigation.We manufacture products that
create exposure to product liability claims and litigation. If our products are not
properly manufactured or designed, personal injuries or property damage could result,
which could subject us to claims for damages. The costs associated with defending product
liability claims and payment of damages could be substantial. Our reputation could also be
adversely affected by such claims, whether or not successful.

 Our products could
be recalled.The Consumer Product Safety Commission or other applicable regulatory
bodies may require the recall, repair or replacement of our products if those products are
found not to be in compliance with applicable standards or regulations. A recall could
increase costs and adversely impact our reputation.

 We may have
additional tax liabilities.We are subject to income taxes in the United States and
numerous foreign jurisdictions. Significant judgment is required in determining our
worldwide provision for income taxes. In the ordinary course of our business, there are
many transactions and calculations where the ultimate tax determination is uncertain. We
are regularly under audit by tax authorities. Although we believe our tax estimates are
reasonable, the final outcome of tax audits and any related litigation could be materially
different than that which is reflected in historical income tax provisions and accruals.
Based on the status of a given tax audit or related litigation, a material effect on our
income tax provision or net income may result in the period or periods from initial
recognition in our reported financial results to the final closure of that tax audit or
settlement of related litigation when the ultimate tax and related cash flow is known with
certainty.

 We are subject to
current environmental and other laws and regulations.We are subject to environmental
laws in each jurisdiction in which we conduct business. Some of our products incorporate
substances that are regulated in some jurisdictions in which we conduct manufacturing
operations. We could be subject to liability if we do not comply with these regulations.
In addition, we are currently and may, in the future, be held responsible for remedial
investigations and clean-up costs resulting from the discharge of hazardous substances
into the environment, including

11

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sites that have never been owned or operated by us but at
which we have been identified as a potentially responsible party under federal and state
environmental laws and regulations. Changes in environmental and other laws and
regulations in both domestic and foreign jurisdictions could adversely affect our
operations due to increased costs of compliance and potential liability for
non-compliance.

 If our goodwill or
indefinite-lived intangible assets become impaired, we may be required to record a
significant charge to earnings.Under United States generally accepted accounting
principles, goodwill and indefinite-lived intangible assets are not amortized but are
reviewed for impairment on an annual basis or more frequently whenever events or changes
in circumstances indicate that their carrying value may not be recoverable. We may be
required to record a significant charge to earnings in our financial statements during the
period in which any impairment of our goodwill or indefinite-lived intangible assets is
determined, resulting in an impact on our results of operations.

 Changes in accounting may affect our reported earnings.For many aspects of our business, United States generally accepted
accounting principles, including pronouncements, implementation guidelines, and
interpretations, are highly complex and require subjective judgments. Changes in these
accounting principles, including their interpretation and application, could significantly
change our reported earnings, adding significant volatility to our reported results
without a comparable underlying change in our cash flows.

 We are exposed to
adverse changes in currency exchange rates, raw material commodity prices or interest
rates, both in absolute terms and relative to competitors risk profiles.We have
a number of manufacturing sites throughout the world and sell our products in more than
100 countries. As a result, we are exposed to movements in the exchange rates of various
currencies against the United States dollar and against the currencies of countries in
which we have manufacturing facilities. We believe our most significant foreign currency
exposures are the euro, pound sterling and Chinese renminbi. A decrease in the value of
the euro and pound sterling relative to the U.S. dollar could adversely affect our results
of operations. An increase in the value of the Chinese renminbi relative to the U.S.
dollar could adversely affect our results of operations. We utilize materials in the
manufacturing of our products that include certain components and raw materials that are
subject to commodity price volatility. We believe our most significant commodity-related
exposures are to steel, resins, copper, aluminum, and zinc. An increase in the market
prices of these items could adversely affect our results of operations. We have
outstanding variable-rate and fixed-rate borrowings. To meet our cash requirements, we may
incur additional borrowings in the future under our existing or future borrowing
facilities. An increase in interest rates could adversely affect our results of
operations.

We operate a global business that exposes us to additional risks. Our sales outside of the United States accounted for
approximately 36% of our consolidated net revenue in 2006. We continue to expand into
foreign markets. The future growth and profitability of our foreign operations are subject
to a variety of risks and uncertainties, such as tariffs, nationalization, exchange
controls, interest rate fluctuations, civil unrest, governmental changes, limitations on
foreign investment in local business and other political, economic and regulatory risks
inherent in conducting business internationally. Over the past several years, such factors
have become increasingly important as a result of our higher percentage of manufacturing
in China, Mexico and the Czech Republic and purchases of products and components from
foreign countries.

 Catastrophic events
may disrupt our business.Unforeseen events, including war, terrorism and other
international conflicts, public health issues, and natural disasters such as earthquakes,
hurricanes or other adverse weather and climate conditions, whether occurring in the
United States or abroad, could disrupt our operations, disrupt the operations of our
suppliers or customers, or result in political or economic instability. These events could
reduce demand for our products and make it difficult or impossible for us to manufacture
our products, deliver products to customers, or to receive products from suppliers.

The foregoing list is not exhaustive.
There can be no assurance that we have correctly identified and appropriately assessed all
factors affecting our business or that the publicly available and other information with
respect to these matters is complete and correct. Additional risks and uncertainties not
presently known to us or that we currently believe to be immaterial also may adversely
impact our business. Should any risks or uncertainties develop into actual events, these
developments could have material adverse effects on our business, financial condition, and
results of operations.

# ITEM 2. PROPERTIES

The Corporation operates 41
manufacturing facilities around the world, including 25 located outside of the United
States in 9 foreign countries. The major properties associated with each business segment
are listed in Narrative Description of the Business in Item 1(c) of Part I
of this report.

12

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The following are the
Corporations major leased facilities:

In the United States: Lake Forest,
Mira Loma, and Rialto, California; Charlotte, North Carolina; Jackson, Tennessee; Tampa,
Florida; Chesterfield, Michigan; and Towson, Maryland.

Outside of the United States:
Tongeren and Aarschot, Belgium; Reynosa and Mexicali, Mexico; Brockville, Canada; Usti nad
Labem, Czech Republic; and Suzhou, China.

Additional property both owned and
leased by the Corporation in Towson, Maryland, is used for administrative offices.
Subsidiaries of the Corporation lease certain locations primarily for smaller
manufacturing and/or assembly operations, service operations, sales and administrative
offices, and for warehousing and distribution centers. The Corporation also owns a
manufacturing plant located on leased land in Suzhou, China.

As more fully described in Item 7 of
Part II of this report under the caption Restructuring and Integration
Actions, the Corporation is committed to continuous productivity improvement and
continues to evaluate opportunities to reduce fixed costs, simplify or improve processes,
and eliminate excess capacity. The Corporation will continue to evaluate its worldwide
manufacturing cost structure to identify opportunities to improve capacity utilization and
lower product costs and will take appropriate action as deemed necessary.

Management believes that its owned
and leased facilities are suitable and adequate to meet the Corporations anticipated
needs.

# ITEM 3. LEGAL PROCEEDINGS

The Corporation is involved in
various lawsuits in the ordinary course of business. These lawsuits primarily involve
claims for damages arising out of the use of the Corporations products and
allegations of patent and trademark infringement. The Corporation also is involved in
litigation and administrative proceedings involving employment matters and commercial
disputes. Some of these lawsuits include claims for punitive as well as compensatory
damages. The Corporation, using current product sales data and historical trends,
actuarially calculates the estimate of its exposure for product liability. The Corporation
is insured for product liability claims for amounts in excess of established deductibles
and accrues for the estimated liability as described above up to the limits of the
deductibles. All other claims and lawsuits are handled on a case-by-case basis.

As previously noted under Item 1(c)
of Part I of this report, the Corporation also is party to litigation and administrative
proceedings with respect to claims involving the discharge of hazardous substances into
the environment. Some of these assert claims for damages and liability for remedial
investigations and clean-up costs with respect to sites that have never been owned or
operated by the Corporation but at which the Corporation has been identified as a PRP.
Others involve current and former manufacturing facilities.

The EPA and the Santa Ana Regional
Water Quality Board (the Water Quality Board) have each initiated
administrative proceedings against the Corporation and certain of the Corporations
current or former affiliates alleging that the Corporation and numerous other defendants
are responsible to investigate and remediate alleged groundwater contamination in and
adjacent to a 160-acre property located in Rialto, California. The cities of Colton and
Rialto, as well as the West Valley Water District and the Fontana Water Company, a private
company, also have initiated lawsuits against the Corporation and certain of the
Corporations former or current affiliates in the Federal District Court for
California, Central District alleging similar claims that the Corporation is liable under
CERCLA, the Resource Conservation and Recovery Act, and state law for the discharge or
release of hazardous substances into the environment and the contamination caused by those
alleged releases. All defendants have crossclaims against one another in the federal
litigation. The administrative proceedings and the lawsuits generally allege that West
Coast Loading Corporation (WCLC), a defunct company that operated in Rialto
between 1952 and 1957, and an as yet undefined number of other defendants are responsible
for the release of perchlorate and solvents into the groundwater basin that supplies
drinking water to the referenced three municipal water suppliers and one private water
company in California and that the Corporation and certain of the Corporations
current or former affiliates are liable as a successor of WCLC. Judgment has
been entered in favor of all defendants, including the Corporation and certain of the
Corporations current and former affiliates, in the federal lawsuit brought by the
City of Colton as to Coltons federal claims. The remaining state claims and the
crossclaims in that lawsuit have been dismissed by the court on jurisdictional grounds.
The City of Colton and several co-defendants have appealed the dismissal of these claims.
The City of Colton also has re-filed its claims in California state court and filed a new
federal action arising out of CERCLA, the Resource Conservation and Recovery Act, and state law. Certain
defendants have crossclaimed against other defendants in the new federal action and have
asserted claims against The United States Department of Defense, Environmental Protection Agency and the City of Rialto. The Corporation believes that neither the

13

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facts nor the law
support an allegation that the Corporation is responsible for the contamination and is
vigorously contesting these claims.

The Corporations estimate of
costs associated with product liability claims, environmental matters, and other legal
proceedings is accrued if, in managements judgment, the likelihood of a loss is
probable and the amount of the loss can be reasonably estimated. These accrued liabilities
are not discounted.

In the opinion of management, amounts
accrued for exposures relating to product liability claims, environmental matters, and
other legal proceedings are adequate and, accordingly, the ultimate resolution of these
matters is not expected to have a material adverse effect on the Corporations
consolidated financial statements. As of December 31, 2006, the Corporation had no known
probable but inestimable exposures relating to product liability claims, environmental
matters, or other legal proceedings that are expected to have a material adverse effect on
the Corporation. There can be no assurance, however, that unanticipated events will not
require the Corporation to increase the amount it has accrued for any matter or accrue for
a matter that has not been previously accrued because it was not considered probable.
While it is possible that the increase or establishment of an accrual could have a
material adverse effect on the financial results for any particular fiscal quarter or
year, in the opinion of management there exists no known potential exposures that would
have a material adverse effect on the financial condition or on the financial results of
the Corporation beyond any such fiscal quarter or year.

# ITEM 4. SUBMISSION OF
MATTERS TO A VOTE OF SECURITY HOLDERS

Not applicable.

14

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# PART II

# ITEM 5. MARKET FOR
REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES

# (a) Market Information

The Corporations Common Stock
is listed on the New York Stock Exchange.

The following table sets forth, for the
periods indicated, the high and low sale prices of the Common Stock as reported in the
consolidated reporting system for the New York Stock Exchange Composite Transactions:

|2006               
|-------------------
|                   
|January to March   
|April to June      
|July to September  
|October to December
|                   

# (b) Holders of the
Corporations Capital Stock

As of January 26, 2007, there were
11,369 holders of record of the Corporations Common Stock.

# (c) Dividends

The Corporation has paid consecutive
quarterly dividends on its Common Stock since 1937. Future dividends will depend upon the
Corporations earnings, financial condition, and other factors. The Credit Facility,
as more fully described in Note 8 of Notes to Consolidated Financial Statements included
in Item 8 of Part II of this report, does not restrict the Corporations ability to
pay regular dividends in the ordinary course of business on the Common Stock.

Quarterly dividends per common share
for the most recent two years are as follows:

|2006               
|-------------------
|                   
|January to March   
|April to June      
|July to September  
|October to December
|                   
|                   
|                   

# Common Stock:

150,000,000 shares authorized, $.50
par value, 66,734,843 and 77,357,370 outstanding as of December 31, 2006 and 2005,
respectively.

# Preferred Stock:

5,000,000 shares authorized, without
par value, no shares outstanding as of December 31, 2006 and 2005.

# (d) Annual Meeting of
Stockholders

The 2007 Annual Meeting of
Stockholders of the Corporation is scheduled to be held on April 19, 2007, at 9:00 a.m. at
the Sheraton Baltimore North Hotel, 903 Dulaney Valley Road, Towson, Maryland 21204.

15

---



# (e) Performance Graph

|(1) | Assumes $100 invested at the close of business on December 31, 2001 in Black
          & Decker common stock, Standard & Poors (S&P) 500 Index, and
          the Peer Group.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | The cumulative total return assumes reinvestment of dividends.
|--- | --------------------------------------------------------------

|(3) | The Peer Group consists of the companies in the following indices within the
          Standard & Poors Super Composite 1,500: Household Appliances,
          Housewares & Specialties, Industrial Machinery, and Building Products. A
          list of the companies in the Peer Group will be furnished upon request addressed
          to the Corporate Secretary at 701 East Joppa Road, Towson, Maryland 21286.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | Total return is weighted according to market capitalization of each company at
          the beginning or each year.
|--- | --------------------------------------------------------------------------------------------------------------------

# (f) Issuer Purchases of Equity Securities

|PERIOD (a)                                  | TOTAL NUMBER
OF SHARESPURCHASED | AVERAGEPRICE
PAIDPER SHARE | TOTAL NUMBEROF SHARESPURCHASED
ASPART OF PUBLICLYANNOUNCED PLANS(b) | MAXIMUM NUMBEROF SHARESTHAT MAY
YETBE PURCHASEDUNDER THE PLANS
|------------------------------------------- | ------------------------------- | -------------------------- | ------------------------------------------------------------------- | --------------------------------------------------------------
|                                           
|October 2, 2006 through October 29, 2006    |                                 |                            |                                                                     |                                                              
|October 30, 2006 through November 26, 2006  |                                 |                            |                                                                     |                                                              
|November 27, 2006 through December 31, 2006 |                                 |                            |                                                                     | 1,625,00                                                      
|                                           
|Total                                       |                                 |                            |                                                                     | 1,625,00                                                      
|                                           

|(a) | The periods represent the Corporations monthly fiscal calendar.
|--- | ----------------------------------------------------------------

|(b) | All purchases by the Corporation of its common stock were made under the
          repurchase plan publicly announced on July 20, 2006, when the Corporation
          announced it had authorization from its Board of Directors to repurchase
          8,000,000 shares. In addition, the maximum number of shares that may yet be purchased under the plans noted above,
includes 3,000,000 shares authorized by the Board of Directors on October 26, 2006. On February 8, 2007, the Corporation
announced it had authorization from its Board of Directors to repurchase an additional 3,000,000 shares.
 There is no expiration
          date or current intent to terminate the repurchase plans.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

16

---



# ITEM 6. SELECTED
FINANCIAL DATA

# FIVE-YEAR SUMMARY (a)

|2006                                             
|-------------------------------------------------
|                                                 
|Sales                                            
|Net earnings from continuing operations          
|(Loss) earnings from discontinued operations (b) 
|Net earnings                                     
|Basic earnings per share:                        
|Continuing operations                            
|Discontinued operations                          
|Net earnings per common share - basic            
|Diluted earnings per share:                      
|Continuing operations                            
|Discontinued operations                          
|Net earnings per common share - assuming dilution
|Total assets                                     
|Long-term debt                                   
|Redeemable preferred stock of subsidiary (d)     
|Cash dividends per common share                  
|                                                 

|(a) | As more fully disclosed in Note 1 of Notes to Consolidated Financial Statements,
          the Corporation adopted SFAS No. 123R effective January 1, 2006 using the
          modified retrospective method of adoption whereby the Corporation restated all
          prior periods presented based on the amounts previously recognized under SFAS
          No. 123 for purposes of pro forma disclosures. The amounts in this five-year
          summary reflect the restated amounts upon adoption of SFAS No. 123R.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(b) | (Loss) earnings from discontinued operations represent the earnings, net of
          applicable income taxes, of the Corporations discontinued European
          security hardware business. Loss from discontinued operations for the year ended
          December 31, 2005, includes a loss on sale of discontinued operations of $.1
          million. Earnings from discontinued operations for the year ended December 31,
          2004, include a gain on sale of discontinued of operations of $12.7 million.
          That gain was net of a $24.4 million goodwill impairment charge associated with
          the DOM security hardware business. The earnings of the discontinued operations
          do not reflect any expense for interest allocated by or management fees charged
          by the Corporation. For additional information about the discontinued European
          security hardware business, see Note 3 of Notes to Consolidated Financial
          Statements included in Item 8 of Part II of this report.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(c) | Earnings from continuing operations for 2003 and 2002 include a restructuring
          charge of $20.6 million and $46.6 million before taxes, respectively ($14.9
          million and $29.2 million after taxes, respectively). Those 2003 and 2002
          pre-tax charges were net of reversals of $13.2 million and $11.0 million,
          respectively, representing reversals of previously provided restructuring
          reserves as well as the excess proceeds received on the sale of long-lived
          assets, written down as part of restructuring actions, over their adjusted
          carrying values. In addition, earnings from continuing operations for 2003
          include a restructuring charge of $11.0 million before taxes ($7.2 million after
          taxes) associated with the closure of a manufacturing facility in its Hardware
          and Home Improvement segment as a result of the acquisition of the Baldwin and
          Weiser businesses.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(d) | As of December 31, 2004, redeemable preferred stock of subsidiary was included
          in other current liabilities. As of December 31, 2002 and 2003, redeemable
          preferred stock of subsidiary was included in other long-term liabilities.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

17

---



# ITEM 7.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

# 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 18 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 74%, 16%, and 10%, respectively, of the Corporations sales in 2006. As
more fully disclosed in Note 2 of Notes to Consolidated Financial Statements, on March 1,
2006, the Corporation acquired Vector. Vector, a designer and
marketer of consumer portable power products, is included in the Power Tools and
Accessories segment.

The Corporation markets its products
and services in over 100 countries. During 2006, approximately 64%, 21%, and 15% 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 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.

An overview of certain aspects of the
Corporations performance during the year ended December 31, 2006, follows:


Sales for 2006 were $6,447.3 million, which represented a 1% decline from 2005 sales of
$6,523.7 million.

 Excluding incremental sales of the acquired Vector business,
sales for 2006 declined by 3% from the 2005 level. That decline was driven by lower sales
in the United States due, in part, to weak demand in the face of slowing residential
construction and actions taken by certain major customers late in 2006 to reduce inventory
levels. The Corporation expects that continued weakness in key sectors of the U.S. economy
in 2007, including significantly lower housing starts, will result in a sales decrease in
the first six months of 2007, as compared to the corresponding 2006 period.

 Operating income as a
percentage of sales for 2006 decreased by approximately 70 basis points from the 2005
level to 11.5%. A principal factor in that decline was rising commodity costs, which
increased cost of goods sold in 2006 by approximately $95 million over the 2005 level and
are expected to increase cost of goods sold by approximately $120 million in 2007 over the
2006 level.

 Interest expense (net of
interest income) rose by $28.4 million in 2006 over the 2005 level, primarily as a result
of higher prevailing U.S. interest rates, including the impact on the Corporations
foreign currency hedging activities, and higher borrowing levels.

 Net earnings from continuing
operations were $486.1 million, or $6.55 per diluted share, for the year ended December
31, 2006, as compared to $532.2 million, or $6.54 per diluted share, in 2005. Net earnings
from continuing operations for the year ended December 31, 2005, included two unusual
items: (i) $55.0 million of pre-tax income ($35.8 million after tax) associated with a
favorable settlement of environmental and product liability coverage litigation with an insurer; and (ii)
$51.2 million of incremental tax expense associated with the repatriation of foreign
earnings under the American Jobs Creation Act of 2004.

 Diluted earnings per share of
$6.55 for the year ended December 31, 2006, benefited from lower weighted-average shares
outstanding, principally as a result of share repurchases. During 2006, the Corporation
repurchased approximately 11.8 million shares of its common stock at a cost of $896.0
million. Shares used in computing annual diluted earnings per share declined by 9%, from
81.4 million for 2005 to 74.2 million for 2006.

 The acquisition of Vector on March
1, 2006, not only broadened the Corporations product offerings in its Power Tools
and Accessories segment but also contributed 2% in incremental sales growth to the year
ended December 31, 2006.

The preceding information is an
overview of certain aspects of the Corporations performance during the year ended
December 31, 2006, 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. Also, the Corporation has attempted to differentiate between sales of its
existing businesses and sales of acquired businesses. That differentiation
includes sales of businesses where year-to-year comparability exists in the category of
existing or legacy

18

---



businesses. For example, in 2006, the sales of Vector are included in
sales of acquired businesses.

# Sales

The following chart provides an
analysis of the consolidated changes in sales for the years ended December 31, 2006, 2005,
and 2004.

|                          
|--------------------------
|(DOLLARS IN MILLIONS)     
|                          
|Total sales               
|                          
|Unit volume - existing (a)
|Unit volume - acquired (b)
|Price                     
|Currency                  
|                          
|Change in total sales     
|                          
|                          

|(a) | Represents change in unit volume for businesses where year-to-year comparability
          exists; however, includes unit volume in 2005 of the European FLEX power tools
          business sold in November 2005.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(b) | Represents change in unit volume for businesses that were acquired and were not
          included in prior period results.
|--- | ---------------------------------------------------------------------------------------------------------------------------

Total consolidated sales for the year
ended December 31, 2006, were $6,447.3 million, which represented a 1% decrease from 2005
sales of $6,523.7 million. Excluding the incremental effects of the Vector acquisition,
unit volume declined by 2% from the 2005 level. That 2% decline was driven by lower sales
in the United States due, in part, to weak demand in the face of slowing residential
construction and actions taken by certain major customers late in 2006 to reduce inventory
levels. Vector, a consumer portable power business acquired on March 1, 2006, contributed
2% to 2006 consolidated sales. Pricing actions had a 1% negative impact on sales in 2006,
as compared to 2005. The effects of foreign currency did not have a material effect on
sales in 2006, as compared to 2005.

Total consolidated sales for the year
ended December 31, 2005, were $6,523.7 million, which represented a 21% increase over 2004
sales of $5,398.4 million. Excluding the incremental effects of the MasterFix business for
the first three months of 2005 and of the Porter-Cable and Delta Tools Group for the first
nine months of 2005, total unit volume increased by 7% during the year ended December 31,
2005. That 7% increase was primarily driven by growth in the Corporations
industrial power tools and plumbing products businesses in the United States. Unit
volume of acquired businesses contributed 14% to the sales growth for 2005 over the 2004
levels. Pricing actions had a 1% negative effect on sales for 2005, as compared to 2004.
The effects of a weaker U.S. dollar as compared to other currencies, particularly the
Canadian dollar, Brazilian real, and euro, caused the Corporations consolidated
sales for 2005 to increase by 1% over the 2004 levels.

# Earnings

The Corporation
reported consolidated operating income of $740.4 million on sales of $6,447.3 million in
2006, as compared to operating income of $794.9 million on sales of $6,523.7 million in
2005 and to operating income of $613.2 million on sales of $5,398.4 million in 2004.

Consolidated gross margin as a
percentage of sales for 2006 was 34.8%, as compared to 35.5% for 2005. That decrease in
gross margin was primarily a result of significant commodity inflation, coupled with the
negative effects both of pricing actions and of lower sales and production volumes over
which to leverage fixed costs, which offset the positive effects that resulted from
restructuring and productivity initiatives as well as favorable product mix.

Consolidated gross margin as a
percentage of sales for 2005 was 35.5%, as compared to 36.4% for 2004. The Corporation
estimates that the Porter-Cable and Delta Tools Group acquisition had an approximate 150
basis point negative impact on consolidated gross margin as a percentage of sales for the
year ended December 31, 2005. In addition to favorable product mix, the results of
restructuring and other productivity initiatives, the leverage of fixed costs over a
higher sales base, and foreign currency effects favorably impacted gross margin as a
percentage of sales in the Corporations legacy businesses. These positive factors
were partially offset by increased raw material costs, the negative effects of pricing
actions, higher pension expense, and transition costs associated with integration of
lockset operations in the Hardware and Home Improvement segment.

Consolidated selling, general, and
administrative expenses as a percentage of sales were 23.3% in both 2006 and 2005 and
25.1% in 2004. Consolidated selling, general, and administrative expenses in 2006
decreased by $21.1 million from the 2005 level. That decrease resulted from
declines in certain sales-related expenses due, in part, to lower sales volume as well as from declines in
certain employee-related expenses, including performance-based incentive compensation,
which offset incremental expenses of the acquired Vector business and the unfavorable
effect of foreign currency translation.

Consolidated selling, general, and
administrative expenses in 2005 increased by $169.9 million over the 2004 level. The
effects of acquired businesses and foreign currency translation accounted for
approximately two-thirds of that increase, with the remainder principally resulting from

19

---



additional sales-related expenses associated with the higher level of sales experienced
during 2005. The reduction in selling, general, and administrative expenses as a
percentage of sales during 2005 as compared to the 2004 level was principally due to the
impact of the Porter-Cable and Delta Tools Group acquisition  due to the lower
expenses of that business  and the leverage of expenses over a higher sales base in
the Corporations legacy businesses.

Consolidated net interest expense
(interest expense less interest income) was $73.8 million in 2006, as compared to $45.4
million in 2005 and $22.1 million in 2004. The increase in net interest expense in 2006,
as compared to 2005, was primarily the result of higher prevailing U.S. interest rates,
including the impact on the Corporations foreign currency hedging activities, and
higher borrowing levels. The higher net interest expense in 2005, as compared
to 2004, was primarily the result of both higher borrowing levels and higher interest
rates, including the effects of higher prevailing U.S. interest rates on the
Corporations foreign currency hedging activities.

Other expense (income) was $2.2 million in 2006, as compared to $(51.6) million in 2005 and $2.8 million in 2004. As more fully
described in Note 21 of Notes to Consolidated Financial Statements, the Corporation
received a payment of $55.0 million in 2005 relating to the settlement of environmental
and product liability coverage litigation with an insurer.

Consolidated income tax expense of
$178.3 million, $268.9 million, and $157.6 million was recognized on the
Corporations earnings from continuing operations before income taxes of $664.4
million, $801.1 million, and $588.3 million, for 2006, 2005, and 2004, respectively. The
Corporations effective tax rate was 26.8% for 2006, as compared to an effective tax
rate of 33.6% for 2005 and 26.8% for 2004. While the effective tax rate in 2006
approximates that in 2004, the 2005 effective tax rate reflects incremental tax expense of
$51.2 million associated with the repatriation of foreign earnings under the American Jobs
Creation Act of 2004 and the tax effects  $19.2 million  of the $55.0 million
of income recognized upon settlement of environmental and product liability coverage
litigation with an insurer during 2005. Absent those items, the 2005 effective tax rate
would also approximate the effective tax rates in 2006 and 2004. A further analysis of
taxes on earnings is included in Note 12 of Notes to Consolidated Financial Statements.

The Corporation reported net earnings
from continuing operations of $486.1 million, or $6.55 per share on a diluted basis, for
the year ended December 31, 2006, as compared to net earnings from continuing operations
of $532.2 million, or $6.54 per share on a diluted basis, for the year ended December 31,
2005, and $430.7 million, or $5.31 per share on a diluted basis, for the year ended
December 31, 2004.

The Corporation reported a net loss
of $.1 million from discontinued operations in 2005, as compared to net earnings from
discontinued operations of $14.9 million in 2004. As more fully described in Note 3 of
Notes to Consolidated Financial Statements, net earnings from discontinued operations for
the years ended December 31, 2005 and 2004, reflected a $.1 million loss and a $12.7
million gain, respectively, on the sales of discontinued operations. The $.1 million loss
recognized in 2005 related to the sale of the discontinued DOM business. The $12.7 million
gain recognized during 2004 consisted of a $37.1 million gain on the sale of two
discontinued businesses (NEMEF and Corbin) in early 2004, partially offset by a $24.4
million goodwill impairment charge associated with the discontinued DOM business. The
Corporation reported net earnings of $486.1 million, $532.1 million, and $445.6 million,
or $6.55, $6.54, and $5.49 per share on a diluted basis, for the years ended December 31,
2006, 2005, and 2004, respectively.

In addition to the matters previously
noted, diluted earnings per share for 2006 benefited from lower weighted-average shares
outstanding. Shares used in computing diluted earnings per share for 2005 of 81.4 million,
declined by 9% to 74.2 million shares for 2006, principally as a result of share
repurchases. Shares used in computing diluted earnings per share for 2004 of 81.1 million
approximated the 2005 level.

# Business Segments

As more fully described in Note 18 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 profit for the
Power Tools and Accessories segment, determined on the basis described in Note 18 of Notes
to Consolidated Financial Statements, were as follows (in millions of dollars):

|2006                           
|-------------------------------
|                               
|Sales to unaffiliated customers
|Segment profit                 
|                               

20

---



Sales to unaffiliated customers in
the Power Tools and Accessories segment during 2006 decreased 2% from the 2005 level.
Sales of the acquired Vector business resulted in a 2% increase in sales during 2006. That
increase was offset by a four-percentage-point decline in sales of the legacy Power Tools
and Accessories businesses that was primarily attributable to lower sales in the United
States, partially offset by higher sales outside of the United States.

Sales in North America decreased at a
mid-single-digit rate during 2006 as compared to the prior years level. Sales of the
Corporations industrial power tools and accessories business in the United States
decreased at a mid-single-digit rate primarily as a result of lower sales of equipment
(due largely to lower sales of generators and compressors), construction tools, and
woodworking tools. The U.S. industrial power tools and accessories business was
adversely impacted by weak demand in the face of slowing residential construction and
actions taken by certain major customers late in 2006 to reduce inventory levels. Sales of
the consumer power tools and accessories business in the United States decreased at a low
single-digit rate primarily as a result of lower consumer power tool and pressure washer
sales, which were partially offset by the sales of the acquired Vector business. Excluding the sales
of the acquired Vector business, sales of the consumer power tools and accessories
business declined at a low double-digit rate from the 2005 level with sales down across
most channels and product lines. Actions taken by major retailers to reduce
inventory levels also negatively impacted the U.S. consumer power tools and accessories
business in 2006. In Canada, sales decreased at a low single-digit rate, as a double-digit
rate of decline in sales of consumer power tools and accessories was partially offset by a
mid-single-digit rate of increase in sales of industrial power tools and accessories.

Sales of the European power tools and
accessories business during 2006 increased at a low single-digit rate over the level
experienced in 2005. A mid-single-digit rate of increase of organic sales was partially
offset by the sales decline that resulted from the divestiture of the FLEX business in
late 2005. While sales grew in 2006 across most markets, marked growth was experienced in
the Middle East and Africa region as well as in Eastern Europe. Sales of the European
industrial power tools and accessories business increased at a low single-digit rate in
2006. That increase was the result of a double-digit rate of increase in legacy sales of
the industrial power tools and accessories business in Europe which was partially offset
by the effects of the FLEX divestiture. Sales of the Corporations consumer power
tools and accessories business in Europe increased at a low single-digit rate during 2006.

Sales in other geographic areas
increased at a double-digit rate in 2006 over the 2005 level. That increase resulted from
a double-digit rate of increase in Latin America and a mid-single-digit rate of increase
in Asia.

Segment profit as a percentage of
sales for the Power Tools and Accessories segment was 12.0% for 2006, as compared to 13.2%
for the corresponding 2005 period. The incremental effect of the Vector acquisition on
segment profit as a percentage of sales for 2006 was not material. Gross margin as a
percentage of sales for 2006 declined in comparison to the corresponding 2005 period
primarily due to negative pricing actions, lower sales and production volume over which to
absorb fixed costs, and commodity inflation. Those negative factors were mitigated by the
benefits of restructuring and productivity initiatives as well as favorable mix. Selling,
general, and administrative expenses as a percentage of sales for 2006 increased, as compared to the corresponding 2005 period, due principally to
the de-leveraging of fixed and semi-fixed costs over a lower sales base.

Sales to unaffiliated customers in
the Power Tools and Accessories segment during 2005 increased 26% over the 2004 level. The
incremental effect of the acquired Porter-Cable and Delta Tools Group for the first nine
months of 2005 accounted for 19 percentage points of the 26% increase in 2005, while sales
of the legacy Power Tools and Accessories businesses, including the acquired Porter-Cable
and Delta Tools Group for the final three months of 2005, accounted for the remaining 7
percentage points of growth.

Sales in North America increased 36%
during 2005 over the prior years level. Of this increase, 27 percentage points were
due to the incremental sales of the acquired Porter-Cable and Delta Tools Group for the
first nine months of 2005 and the remaining 9 percentage points were due to the legacy
power tools and accessories business. Sales of the Corporations legacy industrial
power tools and accessories business in North America increased at a double-digit rate
over the 2004 levels. Sales of the Corporations legacy consumer power tools and
accessories business increased at a mid-single-digit rate as a result of higher sales of
consumer power tools and accessories, lawn and garden products, and cleaning and lighting
products.

21

---



Sales in Europe during 2005 increased
at a mid-single-digit rate over the 2004 levels due to the incremental effect of the
acquired Porter-Cable and Delta Tools Group. Excluding the incremental effect of the
acquired Porter-Cable and Delta Tools Group, sales in Europe increased slightly over the
2004 level. Sales of the Corporations legacy industrial power tools and accessories
business in Europe during 2005 increased at a low single-digit rate as compared to 2004 as
weaker economic conditions in the United Kingdom mitigated growth in other regions. Sales
of the Corporations legacy consumer power tools and accessories businesses in Europe
during 2005 approximated sales in the prior year. In November 2005, the Corporation sold
the FLEX business, the major European component of the Porter-Cable and Delta Tools Group.

Sales in other geographic areas
increased at a double-digit rate during 2005 over the 2004 levels. That increase resulted
from a double-digit rate of increase in Latin America and Asia, which was partially offset
by a double-digit rate of decline in Australia.

Segment profit as a percentage of
sales for the Power Tools and Accessories segment was 13.2% for 2005, as compared to 12.7%
in 2004. That increase in segment profit as a percentage of sales resulted from a
reduction in selling, general, and administrative expenses as a percentage of sales
partially offset by a lower gross margin as a percentage of sales. The reduction in
selling, general, and administrative expenses as a percentage of sales was attributable to
both the impact of the Porter-Cable and Delta Tools Group acquisition  due to the
lower expenses of this business  and the leverage of expenses over a higher sales
base in the Corporations legacy businesses. Gross margin as a percentage of sales
declined during 2005 as compared to 2004 as the impact of the lower-margin Porter-Cable
and Delta Tools Group offset improvements in gross margin as a percentage of sales in the
Corporations legacy businesses. Gross margin improved in the legacy businesses in
2005 due to favorable product mix, productivity gains, foreign currency effects,
restructuring savings, and absorption benefits, which offset the negative effects of
pricing actions and raw material inflation. Due to the ongoing integration of the acquired
Porter-Cable and Delta Tools Group into its legacy businesses, it is difficult to
precisely determine the individual profit contributions of the acquired Porter-Cable and
Delta Tools Group and of the legacy businesses. The Corporation estimates that the
Porter-Cable and Delta Tools Group acquisition had an approximate 60 basis point negative
impact on segment profit as a percentage of sales for 2005.

# HARDWARE AND HOME
IMPROVEMENT

Segment sales and profit for the
Hardware and Home Improvement segment, determined on the basis described in Note 18 of
Notes to Consolidated Financial Statements, were as follows (in millions of dollars):

|2006                           
|-------------------------------
|                               
|Sales to unaffiliated customers
|Segment profit                 
|                               

Sales to unaffiliated customers in
the Hardware and Home Improvement segment during 2006 decreased 2% from the 2005 level,
due primarily to a mid-single-digit rate of decline in sales of plumbing products. Despite
a double-digit rate of decline in U.S. housing starts in 2006, sales of security hardware products
approximated the 2005 level. Sales of Kwikset products grew at a low
single-digit rate, as higher retail sales and the effects of a price increase during the
fourth quarter of 2006 offset weakness in the wholesale channel. That growth in Kwikset
sales offset a low single-digit rate of decline in sales of Weiser and Baldwin products.

Segment profit as a percentage of
sales in the Hardware and Home Improvement segment decreased from 14.1% in 2005 to 13.5%
in 2006. The decline in segment profit as a percentage of sales in 2006 was attributable to a decline
in gross margin, as the favorable effects of restructuring/integration and productivity
initiatives, coupled with price increases instituted by the segment, were insufficient to
offset the negative effects of significant commodity inflation, particularly with respect
to copper and zinc, and lower sales and production volumes. Selling, general, and administrative expenses
as a percentage of sales decreased in 2006, as compared to 2005, as a result of cost reduction initiatives.

Sales to unaffiliated customers in
the Hardware and Home Improvement segment increased 5% during 2005 over the 2004 level.
During 2005, sales of plumbing products increased at a double-digit rate over the 2004
level due to increased listings at a significant customer and strong sales at other
retailers. Sales of security hardware products in 2005 increased slightly over the 2004
level, as a mid-single-digit rate of increase in sales of the Kwikset business in North
America was substantially offset by a mid-single-digit rate of decline in sales of the
Baldwin and Weiser businesses.

22

---



Segment profit as a percentage of
sales for the Hardware and Home Improvement segment was 14.1% for 2005 and 15.1% for 2004.
The decline in segment profit as a percentage of sales in 2005 was attributable to a
decline in gross margin, which was primarily due to the negative effects of pricing
actions, higher raw material costs, and transition costs associated with the integration of lockset operations, including the closure of a manufacturing site. Gross margin for
2005 was also negatively impacted by the write-down of property and equipment. Selling,
general, and administrative expenses as a percentage of sales decreased slightly in 2005,
as compared to the 2004 level, due to the leverage of expenses over a higher sales base in
the Kwikset and Price Pfister businesses, which was partially offset by increased
distribution and transportation costs.

# FASTENING AND ASSEMBLY
SYSTEMS

Segment sales and profit for the
Fastening and Assembly Systems segment, determined on the basis described in Note 18 of
Notes to Consolidated Financial Statements, were as follows (in millions of dollars):

|2006                           
|-------------------------------
|                               
|Sales to unaffiliated customers
|Segment profit                 
|                               

Sales to unaffiliated customers in
the Fastening and Assembly Systems segment increased 1% in 2006 over the 2005 level. Sales
of the North American businesses declined at a mid-single-digit rate, reflecting both weak
industrial sales and weak automotive sales in the face of production cuts by automotive
customers. Sales in the European industrial business rose at a low single-digit rate while
sales in the European automotive business approximated the prior year level. In Asia,
sales grew at a double-digit rate, reflecting strong sales in both Japan and China.

Segment profit as a percentage of
sales for the Fastening and Assembly Systems segment increased slightly from 14.3% in 2005
to 14.4% in 2006. The segment reduced selling, general, and administrative expenses as a
percentage of sales, despite higher research and development expenditures, due to spending
controls in 2006. However, that favorability was offset by a decline in gross margin,
primarily as a result of commodity inflation and the unfavorable effects of foreign
currency.

Sales to unaffiliated customers in
the Fastening and Assembly Systems segment increased by 7% in 2005 over the 2004 level,
with the incremental sales of the MasterFix business for the first three months of 2005
accounting for 1 percentage point of that increase. Sales in the automotive channel in
North America increased at a mid-single-digit rate over the level experienced in 2004.
Sales in the industrial channel in North America decreased at a low single-digit rate, as
compared to 2004. Sales in Europe increased at a double-digit rate, as compared to 2004.
Sales in the European industrial business increased at a high single-digit rate of growth
 due in part, to incremental sales of the acquired MasterFix business  during
2005 over the 2004 level. Sales in the European automotive business increased at a
double-digit rate during 2005 over the 2004 level. Sales in Asia during 2005 increased at
a double-digit rate, as compared to 2004.

Segment profit as a percentage of
sales for the Fastening and Assembly Systems segment increased from 13.6% in 2004 to 14.3%
in 2005. The increase in segment profit as a percentage of sales was attributable to the
positive effects of pricing actions and the leverage of expenses over a higher sales base,
partially offset by higher commodity costs.

# OTHER SEGMENT-RELATED
MATTERS

As indicated in the first table of
Note 18 of Notes to Consolidated Financial Statements, segment profit (loss), associated
with Corporate, Adjustments, and Eliminations was $(65.1) million, $(81.2) million, and
$(100.7) million for the years ended December 31, 2006, 2005, and 2004, respectively.
Corporate expenses for the year ended December 31, 2006, declined from the prior
years level as the positive effects of certain lower employee-related expenses not
allocated directly to the reportable business segments (including performance-based
incentives), as well as higher Corporate expense allocations charged directly to the
Corporations business segments, were partially offset by the negative effects of
higher pension and environmental expenses.

Corporate expenses for the year ended
December 31, 2005, declined from the prior years level as the positive effects of
increased allocations of Corporate expenses to the reportable business segments to reflect
the impact of acquired businesses, lower expenses associated with intercompany
eliminations, and a lower level of expenses directly related to the reportable business
segments offset the negative effects of increased pension, postretirement benefits, and
environmental expenses.

As more fully described in Note 18 of
Notes to Consolidated Financial Statements, in determining segment profit, expenses
relating to pension and other postretirement benefits are based solely

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upon estimated
service costs. Expense recognized by the Corporation in 2006 relating to its pension and
other postretirement benefits plans increased by approximately $13 million over the 2005
levels. Expense recognized by the Corporation in 2005 relating to its pension and other
postretirement benefits plans increased by approximately $19 million over the 2004 levels.
The adjustment to businesses postretirement benefit expense booked in consolidation
as identified in the second table included in Note 18 of Notes to Consolidated Financial
Statements was expense of $25.2 million in 2006, as compared to expense of $13.8 million
for 2005 and income of $.8 million for 2004. That increase in expense resulted from the
higher level of pension and other postretirement benefit expenses in 2006  excluding
higher service costs reflected in segment profit of the Corporations reportable
business segments  not allocated to the reportable business segments.

Income (expenses) directly related to
reportable business segments booked in consolidation, and, thus, excluded from segment
profit for the reportable business segments, were $(.2) million, $3.3 million, and $(10.0)
million for the years ended December 31, 2006, 2005 and 2004, respectively. The $.2
million of segment-related expense excluded from segment profit in 2006 principally
related to an increase in reserves for certain matters associated with the Power Tools and
Accessories segment. However, that increase was substantially offset by the reversal of
certain performance-based expenses included in the allocation of Corporate expenses to
each of the reportable business segments. The $3.3 million of segment-related income
excluded from segment profit in 2005 principally related to a reduction in reserves for
certain legal matters associated with the Power Tools and Accessories and Hardware and
Home Improvement segments. The $10.0 million of segment-related expense excluded from
segment profit in 2004 principally related to restructuring-related expenses associated
with the Hardware and Home Improvement and Power Tools and Accessories segments.

# DISCONTINUED OPERATIONS

As more fully discussed in Note 3 of
Notes to Consolidated Financial Statements, the European security hardware business,
consisting of the NEMEF, Corbin, and DOM businesses, has been reflected as discontinued
operations in the Consolidated Financial Statements. As such, the operating results,
assets and liabilities, and cash flows of the discontinued European security hardware
business have been reported separately from the Corporations continuing operations.
In November 2005, the Corporation completed the sale of the DOM security hardware business
for an aggregate price of $17.2 million, net of cash transferred. In January 2004, the
Corporation completed the sale of two European security hardware businesses, NEMEF and
Corbin, for an aggregate price of $77.5 million, net of cash transferred.

Net (loss) earnings of the
discontinued European security hardware business were $(.1) million for the year ended
December 31, 2005, and $14.9 million ($.18 per share on a diluted basis) for the year
ended December 31, 2004.

# Restructuring and
Integration Actions

The Corporation is committed to
continuous productivity improvement and continues to evaluate opportunities to reduce
fixed costs, simplify or improve processes, and eliminate excess capacity. A tabular
summary of restructuring activity during the three years ended December 31, 2006, is
included in Note 20 of Notes to Consolidated Financial Statements.

In 2004, the Corporation recognized
$5.4 million of pre-tax restructuring and exit costs related to actions taken in its Power
Tools and Accessories segment. The restructuring actions taken in 2004 principally
reflected severance benefits. The $5.4 million charge recognized during 2004 was offset,
however, by the reversal of $4.0 million of severance accruals established as part of
previously provided restructuring reserves that were no longer required and $1.4 million
representing the excess of proceeds received on the sale of long-lived assets, written
down as part of restructuring actions, over their adjusted carrying values. Adjustments to the severance component of restructuring reserves previously
established related to: (i) actual attrition factors that differed from those initially
estimated; (ii) more cost-effective methods of severing employment that became probable,
typically based on negotiations with trade unions or local government institutions; and
(iii) amendments to the initial plan that were approved by the appropriate level of
management, based primarily on changes in market conditions that dictated a modification
to the intended course of action. During 2004, none of the adjustments to the severance
obligations recorded in connection with restructuring actions was individually
significant. Adjustments to the asset write-down component of restructuring reserves
previously established related to the receipt of proceeds in excess of adjusted carrying
values of fixed assets that were disposed of in connection with the restructuring actions.
Adjustments to the other charge component of restructuring reserves previously established
principally related to settlement of operating lease commitments at amounts less than
initially

24

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estimated or the Corporations ability to sublease certain facilities
exited as part of the restructuring actions.

During 2005, the Corporation
substantially completed the execution of the restructuring plan that was formulated in the
fourth quarter of 2001 and the closure of the manufacturing facility in its Hardware and
Home Improvement segment.

In addition to the recognition of
restructuring and exit costs, the Corporation also recognized related expenses,
incremental to the cost of the underlying restructuring actions, that do not qualify as
restructuring or exit costs under accounting principles generally accepted in the United
States (restructuring-related expenses). Those restructuring-related expenses included
items  directly related to the underlying restructuring actions  that
benefited on-going operations, such as costs associated with the transfer of equipment.
Operating results included approximately $10 million of restructuring-related expenses for
the year ended December 31, 2006, as compared to approximately $15 million of
restructuring-related expenses for both 2005 and 2004.

The Corporation realized benefits of
approximately $25 million and $35 million in 2006 and 2005, respectively, net of
restructuring-related expenses. Those benefits resulted in a reduction in cost of goods
sold of approximately $21 million and $33 million in 2006 and 2005, respectively, and a
reduction in selling, general, and administrative expenses of approximately $4 million and
$2 million in 2006 and 2005, respectively.

In addition to the previously
discussed restructuring actions, the Corporation also identified opportunities to
integrate businesses it has acquired, including the Porter-Cable and Delta Tools Group as
well as Vector.

Prior to the date of the acquisition
of the Porter-Cable and Delta Tools Group and during 2004, the Corporation identified
opportunities to restructure, as well as to integrate, these businesses into its existing
Power Tools and Accessories segment. Subsequent to the acquisition, the Corporation
approved restructuring/integration actions relating to the acquired business in the amount of $15.2
million. These actions principally reflected severance costs associated with
administrative and manufacturing actions related to the acquired businesses, including the
closure of three manufacturing facilities, and lease and other contractual obligations for
which no future benefit would be realized. Certain of these restructuring/integration actions
commenced in 2004 and the remainder commenced in 2005; all actions were substantially
completed in 2006.

Prior to the date of the acquisition
of Vector and during 2006, the Corporation identified opportunities to integrate that
business into its existing Power Tools and Accessories segment. Subsequent to the
acquisition, the Corporation approved restructuring/integration actions relating to the acquired
business in the amount of $1.3 million. These actions principally reflected severance
costs associated with administrative and distribution functions of the acquired business,
as well as the cost of lease and other contractual obligations for which no future benefit
would be realized. These actions are expected to be completed by mid-2007.

The Corporation expects that
incremental pre-tax savings associated with the integration of the Porter-Cable and Delta
Tools Group will benefit results by approximately $15 million in 2007, net of
integration-related expenses. The Corporation expects that principally all of those
incremental pre-tax savings will benefit gross margin. Ultimate savings realized from
restructuring/integration actions may be mitigated by such factors as economic weakness and competitive
pressures, as well as decisions to increase costs in areas such as promotion or research
and development above levels that were otherwise assumed.

# Hedging Activities

The Corporation has a number of
manufacturing sites throughout the world and sells its products in more than 100
countries. As a result, it is exposed to movements in the exchange rates of various
currencies against the United States dollar and against the currencies of countries in
which it manufactures. The major foreign currencies in which foreign currency risks exist
are the euro, pound sterling, Canadian dollar, Japanese yen, Chinese renminbi, Australian
dollar, Mexican peso, Czech koruna, and Brazilian real. Through its foreign currency
activities, the Corporation seeks to reduce the risk that cash flows resulting from the
sales of products manufactured in a currency different from that of the selling subsidiary
will be affected by changes in exchange rates.

From time to time, currencies may
strengthen or weaken in countries in which the Corporation sells or manufactures its
product. While the Corporation will take actions to mitigate the impacts of any future
currency movements, there is no assurance that such movements will not adversely affect
the Corporation.

Assets and liabilities of
subsidiaries located outside of the United States are translated at rates of exchange at
the balance sheet date as more fully explained in Note 1 of Notes to Consolidated
Financial Statements. The resulting translation

25

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adjustments are included in the
accumulated other comprehensive income (loss) component of stockholders equity.
During 2006, translation adjustments, recorded in the accumulated other comprehensive
income (loss) component of stockholders equity, increased stockholders equity
by $70.3 million, as compared to a decrease of $89.1 million in 2005.

The materials used in the
manufacturing of the Corporations products, which include certain components and raw
materials, are subject to price volatility. These component parts and raw materials are
principally subject to market risk associated with changes in the price of steel, resins,
copper, aluminum, and zinc. The materials used in the various manufacturing processes are
purchased on the open market, and the majority is available through multiple sources.
Rising commodity costs decreased operating income in 2006 by approximately $95 million
from the 2005 level and are expected to decrease operating income by approximately $120
million in 2007 from the 2006 level. While future movements in prices of raw materials and
component parts are uncertain, the Corporation uses a variety of methods, including
established supply arrangements, purchase of component parts and raw materials for future
delivery, and supplier price commitments, to address this risk. In addition, the
Corporation utilizes derivatives to manage its risk to changes in the prices of certain
commodities. As of December 31, 2006, the amount outstanding under commodity hedges was
not material.

As more fully described in Note 10 of
Notes to Consolidated Financial Statements, the Corporation seeks to issue debt
opportunistically, whether at fixed or variable rates, at the lowest possible costs. Based
upon its assessment of the future interest rate environment and its desired variable rate
debt to total debt ratio, the Corporation may elect to manage its interest rate risk
associated with changes in the fair value of its indebtedness, or the cash flows of its
indebtedness, through the use of interest rate swap agreements.

In order to meet its goal of fixing
or limiting interest costs, the Corporation maintains a portfolio of interest rate hedge
instruments. The variable rate debt to total debt ratio, after taking interest rate hedges
into account, was 42% at December 31, 2006, as compared to 64% at December 31, 2005, and
52% at December 31, 2004. At December 31, 2006, average debt maturity was 6.7 years, as
compared to 4.9 years at December 31, 2005, and 8.3 years at December 31, 2004. At
December 31, 2006, average long-term debt maturity was 8.0 years, as compared to 7.3 years
at December 31, 2005, and 8.3 years at December 31, 2004.

# INTEREST RATE SENSITIVITY

The following table provides
information as of December 31, 2006, about the Corporations derivative financial
instruments and other financial instruments that are sensitive to changes in interest
rates, including interest rate swaps and debt obligations. For debt obligations, the table
presents principal cash flows and related average interest rates by contractual maturity
dates. For interest rate swaps, the table presents notional principal amounts and
weighted-average interest rates by contractual maturity dates. Notional amounts are used
to calculate the contractual payments to be exchanged under the interest rate swaps.
Weighted-average variable rates are generally based on the London Interbank Offered Rate
(LIBOR) as of the reset dates. The cash flows of these instruments are denominated in a
variety of currencies. Unless otherwise indicated, the information is presented in U.S.
dollar equivalents, which is the Corporations reporting currency, as of December 31,
2006.

Principal Payments and
Interest Rate Detail by Contractual Maturity Dates

|(U.S. DOLLARS IN MILLIONS)                            | 2007 |  | 2008 |       | 2009 |   | 2010 |   | 2011 |      | THEREAFTER |   | TOTAL |  | FAIR VALUE
(ASSETS)/
LIABILITIES
|----------------------------------------------------- | ---- |  | ---- | ----- | ---- | - | ---- | - | ---- | ---- | ---------- | - | ----- |  | --------------------------------
|                                                     
|LIABILITIES                                           |      |  |      |       |      |   |      |   |      |      |            |   |       |  |                                 
|Short-term borrowingsVariable rate (other currencies) |      |  | $    | 258.9 |      | $ |     |   | $    |     |            | $ |      |  | $                               
|Average interest rate                                 |      |  |      | 5.43  | %    |   |      |   |      |      |            |   |       |  |                                 
|Long-term debt                                        |      | 
|Fixed rate (U.S. dollars)                             |      |  | $    | 150.2 |      | $ | .2   |   | $    | .1   |            | $ |      |  | $                               
|Average interest rate                                 |      |  |      | 6.55  | %    |   | 7.00 | % |      | 7.00 | %          |   |       |  |                                 
|INTEREST RATE DERIVATIVES                             |      | 
|Fixed to Variable Rate Interest                       |      | 
|Rate Swaps (U.S. dollars)                             |      |  | $    | 75.0  |      | $ |     |   | $    |     |            | $ |      |  | $                               
|Average pay rate (a)                                  |      | 
|Average receive rate                                  |      |  |      | 5.22  | %    |   |      |   |      |      |            |   |       |  |                                 
|                                                     

|(a) | The average pay rate for swaps in the notional principal amount of $250.0 million is based upon 3-month forward LIBOR (with swaps in the notional
principal amount of $75.0 million, $150.0 million, and $25.0 million maturing in 2007, 2011, and thereafter, respectively). The average pay rate for the remaining swaps
          is based upon 6-month forward LIBOR.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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# FOREIGN CURRENCY
EXCHANGE RATE SENSITIVITY

As discussed previously, the
Corporation is exposed to market risks arising from changes in foreign exchange rates. As
of December 31, 2006, the Corporation has hedged a portion of its 2007 estimated foreign
currency transactions using forward exchange contracts. The Corporation estimated the
effect on 2007 gross profits, based upon a recent estimate of foreign exchange exposures,
of a uniform 10% strengthening in the value of the United States dollar. The Corporation
estimated that this would have the effects of reducing gross profits for 2007 by
approximately $26 million. The Corporation also estimated the effects on 2007 gross
profits, based upon a recent estimate of foreign exchange exposures, of a uniform 10%
weakening in the value of the United States dollar. A uniform 10% weakening in the value
of the United States dollar would have the effect of increasing gross profits.

In addition to their direct effects,
changes in exchange rates also affect sales volumes and foreign currency sales prices as
competitors products become more or less attractive. The sensitivity analysis of the
effects of changes in foreign currency exchange rates previously described does not
reflect a potential change in sales levels or local currency prices nor does it reflect
higher exchange rates, as compared to those experienced during 2006, inherent in the
foreign exchange hedging portfolio at December 31, 2006.

# Critical Accounting
Policies

The Corporations accounting
policies are more fully described in Note 1 of Notes to Consolidated Financial Statements.
As disclosed in Note 1 of Notes to Consolidated Financial Statements, the preparation of
financial statements in conformity with accounting principles generally accepted in the
United States requires management to make estimates and assumptions about future events
that affect the amounts reported in the financial statements and accompanying notes.
Future events and their effects cannot be determined with absolute certainty. Therefore,
the determination of estimates requires the exercise of judgment. Actual results
inevitably will differ from those estimates, and such differences may be material to the
financial statements.

The Corporation believes that, of its
significant accounting policies, the following may involve a higher degree of judgment,
estimation, or complexity than other accounting policies.

As more fully described in Note 1 of
Notes to Consolidated Financial Statements, the Corporation performs goodwill impairment
tests on at least an annual basis and more frequently in certain circumstances. The
Corporation cannot predict the occurrence of certain events that might adversely affect
the reported value of goodwill that totaled $1,195.6 million at December 31, 2006. Such
events may include, but are not limited to, strategic decisions made in response to
economic and competitive conditions, the impact of the economic environment on the
Corporations customer base, or a material negative change in its relationships with
significant customers.

Pension and other postretirement
benefits costs and obligations are dependent on assumptions used in calculating such
amounts. These assumptions include discount rates, expected return on plan assets, rates
of salary increase, health care cost trend rates, mortality rates, and other factors.
These assumptions are updated on an annual basis prior to the beginning of each year. The
Corporation considers current market conditions, including interest rates, in making these
assumptions. The Corporation develops the discount rates by considering the yields
available on high-quality fixed income investments with maturities corresponding to the
related benefit obligation. The Corporations discount rate for United States defined
benefit pension plans was 6.00% and 5.75% at December 31, 2006 and 2005, respectively. As
discussed further in Note 13 of Notes to Consolidated Financial Statements, the
Corporation develops the expected return on plan assets by considering various factors,
which include its targeted asset allocation percentages, historic returns, and expected
future returns. The Corporations expected long-term rate of return assumption for
United States defined benefit plans for 2006 and 2007 is 8.75%.

The Corporation believes that the
assumptions used are appropriate; however, differences in actual experience or changes in
the assumptions may materially affect the Corporations financial position or results
of operations. In accordance with accounting principles generally accepted in the United
States, actual results that differ from the actuarial assumptions are accumulated and, if
in excess of a specified corridor, amortized over future periods and, therefore, generally
affect recognized expense and the recorded obligation in future periods. The expected
return on plan assets is determined using the expected rate of return and a calculated
value of assets referred to as the market-related value of assets. The Corporations
aggregate fair value of plan assets exceeded the market-related value of assets by
approximately $71.6 million as of the 2006 measurement date. Differences between assumed
and actual

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returns are amortized to the market-related value on a straight-line basis over
a five-year period. Also, gains and losses resulting from changes in assumptions and from
differences between assumptions and actual experience (except those differences being
amortized to the market-related value of assets) are amortized over the expected remaining
service period of active plan participants or, for retired participants, the average
remaining life expectancy, to the extent that such amounts exceed ten percent of the
greater of the market-related value of plan assets or the projected benefit obligation at
the beginning of the year. The Corporation expects that its pension and other
postretirement benefit costs in 2007 will approximate the costs recognized in 2006.

In September 2006, the Financial
Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards
(SFAS) No. 158,Employers Accounting for Defined Benefit Pension and Other
Postretirement Plans  an Amendment of FASB Statements No. 87, 88, 106, and
132(R). SFAS No 158 requires two major changes to accounting for defined benefit and
other postretirement plans, with two different effective dates. The first requirement of
SFAS No. 158, which the Corporation adopted as of December 31, 2006, requires the
recognition of the overfunded or underfunded status of a defined benefit postretirement
plan as an asset or a liability in the balance sheet, with changes in the funded status
recorded through comprehensive income in the year in which those changes occur. The impact
of the Corporations adoption of SFAS No. 158 is more fully described in Note 13 of
Notes to Consolidated Financial Statements.

The second requirement of SFAS No.
158, which is effective for the Corporation as of December 31, 2008, requires that the
funded status be measured as of an entitys year-end balance sheet date rather than
as of an earlier date as currently permitted. The Corporation currently uses a measurement
date of September 30 for the majority of its defined benefit pension and postretirement
plans.

As more fully described in Item 3 of
this report, the Corporation is subject to various legal proceedings and claims, including
those with respect to environmental matters, the outcomes of which are subject to
significant uncertainty. The Corporation evaluates, among other factors, the degree of
probability of an unfavorable outcome, the ability to make a reasonable estimate of the
amount of loss, and in certain instances, the ability of other parties to share costs.
Also, in accordance with accounting principles generally accepted in the United States,
when a range of probable loss exists, the Corporation accrues at the low end of the range
when no other more likely amount exists. Unanticipated events or changes in these factors
may require the Corporation to increase the amount it has accrued for any matter or accrue
for a matter that has not been previously accrued because it was not probable.

Further, as indicated in Note 21 of
Notes to Consolidated Financial Statements, insurance recoveries for environmental and
certain general liability claims have not been recognized until realized. Any insurance
recoveries, if realized in future periods, could have a favorable impact on the
Corporations financial condition or results of operations in the periods realized.

The Corporation is also subject to
income tax laws in many countries. Judgment is required in assessing the future tax
consequences of events that have been recognized in the Corporations financial
statements or tax returns. Additionally, the Corporation is subject to periodic
examinations by taxing authorities in many countries. The final outcome of these future
tax consequences, tax audits, and changes in regulatory tax laws and rates could
materially impact the Corporations financial statements. A discussion of a
significant tax matter that is the subject of current litigation between the Corporation
and the U.S. Internal Revenue Service is included under the caption Financial
Condition.

# Impact of New Accounting
Standards

As more fully described in Note 1 of
Notes to Consolidated Financial Statements, the Corporation has not yet fully adopted the
provisions of SFAS No. 158, Employers Accounting for Defined Benefit Pension and
Other Postretirement Plans  an Amendment of FASB Statements No. 87, 88, 106, and
132(R). Also, as more fully described in Note 1 of Notes to Consolidated Financial
Statements, the Corporation has not yet adopted the provisions of FASB Interpretation No.
48, Accounting for Uncertainty in Income Taxes  an interpretation of FASB
Statement No. 109, and SFAS No. 157, Fair Value Measurements.

# Financial Condition

Operating activities provided cash of
$622.7 million for the year ended December 31, 2006, as compared to $614.1 million for the
year ended December 31, 2005. Cash flow from operating activities for the year ended
December 31, 2005, included cash flow from discontinued operations of $4.7 million. The
increase in cash provided by operating activities in 2006, as compared to

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2005, was
primarily due to lower cash used for working capital, in particular trade receivables and
inventories (associated with the lower level of sales and lower production levels), which
was partially offset by a higher usage of cash associated with other current liabilities,
including higher income tax payments due, in part, to tax payments associated with
repatriating foreign earnings under the American Jobs Creation Act of 2004 (AJCA). That
improvement in cash used for working capital was partially offset by lower net earnings in
2006 as compared to 2005, including the effect of a $55 million pre-tax settlement with an
insurer in 2005.

As part of its capital management,
the Corporation reviews certain working capital metrics. For example, the Corporation
evaluates its trade receivables and inventory levels through the computation of days sales
outstanding and inventory turnover ratio, respectively. The number of days sales
outstanding as of December 31, 2006, increased moderately over the level as of December 31,
2005. Average inventory turns as of December 31, 2006, approximated inventory turns as of
December 31, 2005.

Investing activities used cash of
$241.0 million for the year ended December 31, 2006, as compared to $34.6 million for the
year ended December 31, 2005. This increase in cash used was primarily the result of
acquisition activity in 2006, as compared to divestiture activity in 2005. Cash used by
investing activities in 2006 included the purchase of Vector for $158.5 million, net of
cash acquired, which was partially offset by $16.1 million of cash received associated
with the final adjustment to the purchase price of the Porter-Cable and Delta Tools Group.
In 2005, cash proceeds from divestiture and acquisition activity totaled $61.2 million,
including $33.6 million associated with the sale of Flex, $17.2 million associated with
the sale of discontinued operations, and $10.4 million associated with a preliminary
adjustment to the purchase price of the Porter-Cable and Delta Tools Group. Capital
expenditures decreased $6.5 million during 2006 as compared to the 2005 period. The
Corporation anticipates that its capital spending in 2007 will approximate $120 million.

Financing activities used cash of
$1,124.9 million for the year ended December 31, 2006, as compared to $115.3 million for
the year ended December 31, 2005. Cash used by financing activities in 2006 included the
purchase by the Corporation of 11,753,700 shares of its common stock at an aggregate cost
of $896.0 million, a net decrease in short-term borrowings of $309.3 million, the
repayment of the 7.0% notes due February 1, 2006 of $154.6 million, and dividend payments
of $109.1 million. In 2006, the Corporation increased its dividend payment  on a per
share basis from $1.12 during 2005 to $1.52 during 2006. Sources of cash from financing
activities in 2006 included the issuance of $300.0 million of 5.75% Senior Notes due in
2016, and $48.2 million of proceeds received upon the issuance of common stock, including
certain related income tax benefits, under stock-based compensation plans.

Cash used by financing activities in
2005 included the purchase by the Corporation of 6,276,700 shares of its common stock at
an aggregate cost of $525.7 million, repayment of $136.0 million of preferred stock of a
subsidiary, and dividend payments of $88.6 million. Sources of cash from financing
activities in 2005 included a net increase in short term-term borrowings of $565.6 million
associated with the repatriation of foreign earnings under the AJCA and $69.9 million of
proceeds received upon the issuance of common stock, including certain related income tax
benefits, under stock-based compensation plans.

The Corporation carried out its share
repurchase program based upon the belief that its shares were undervalued and to manage
share growth resulting from option exercises. Subsequent to December 31, 2006, the Corporation repurchased
1,139,300 shares of its common stock at an aggregate cost of $90.7 million. In February
2007, the Board of Directors authorized the Corporation to repurchase an additional
3,000,000 shares of its common stock. After those share repurchases and that authorization,
the Corporation has remaining
authorization from its Board of Directors to repurchase an additional 5,175,795 shares of
its common stock. In addition, in February 2007, the Corporation announced that its Board of Directors declared a quarterly cash
dividend of $.42 per share of
the Corporation's outstanding common stock payable during the first quarter of 2007.  The $.42 dividend represents an 11% increase over the
$.38 quarterly dividend paid by the Corporation in 2006.
Future dividends will depend on the Corporation's earnings, financial condition, and other factors.

During 2003, the Corporation received
notices of proposed adjustments from the United States Internal Revenue Service (IRS) in
connection with audits of the tax years 1998 through 2000. The principal adjustment
proposed by the IRS consists of the disallowance of a capital loss deduction taken in the
Corporations tax returns and interest on the deficiency. Prior to receiving the
notices of proposed adjustments from the IRS, the Corporation filed a petition against the
IRS in the Federal

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District Court of Maryland (the Court) seeking refunds for a carryback
of a portion of the aforementioned capital loss deduction. The IRS subsequently filed a
counterclaim to the Corporations petition. In October 2004, the Court granted the
Corporations motion for summary judgment on its complaint against the IRS and
dismissed the IRS counterclaim. In its opinion, the Court ruled in the Corporations
favor that the capital losses cannot be disallowed by the IRS. In December 2004, the IRS
appealed the Courts decision in favor of the Corporation to the United States
Circuit Court of Appeals for the Fourth Circuit (the Fourth Circuit Court). In February
2006, the Fourth Circuit Court issued its decision, deciding two of three issues in the
Corporations favor and remanding the third issue for trial in the Court. The
Corporation intends to vigorously dispute the position taken by the IRS in this matter.
The Corporation has provided adequate reserves in the event that the IRS prevails in its
disallowance of the previously described capital loss and the imposition of related
interest. Should the IRS prevail in its disallowance of the capital loss deduction and the
imposition of related interest, it would result in a cash outflow by the Corporation of
approximately $170 million. If the Corporation prevails, it would result in the
Corporation receiving a refund of taxes previously paid of approximately $50 million, plus
interest.

The ongoing costs of compliance with
existing environmental laws and regulations have not had, and are not expected to have, a
material adverse effect on the Corporations capital expenditures or financial
position.

The Corporation will continue to have
cash requirements to support seasonal working capital needs and capital expenditures, to
pay interest, and to service debt. For amounts available at December 31, 2006, under the
Corporations revolving credit facilities and under short-term borrowing facilities,
see Note 8 of Notes to Consolidated Financial Statements. In order to meet its cash
requirements, the Corporation intends to use its existing cash, cash equivalents, and
internally generated funds, and to borrow under its existing and future unsecured
revolving credit facilities or under short-term borrowing facilities. The Corporation
believes that cash provided from these sources will be adequate to meet its cash
requirements over the next 12 months.

The following table provides a
summary of the Corporations contractual obligations by due date (in millions of
dollars). The Corporations short-term borrowings, long-term debt, and lease
commitments are more fully described in Notes 8, 9, and 19, respectively, of Notes to
Consolidated Financial Statements.

|                                       | PAYMENTS DUE BY PERIOD
|-------------------------------------- | ----------------------
|LESS THAN 1 YEAR                       | 1 TO 3 YEARS          
|                                      
|Short-term borrowings (a) (b) (c)      |                       
|Long-term debt (c)                     |                       
|Operating leases                       |                       
|Purchase obligations (d)               |                       
|                                      
|Total contractual cash obligations (e) |                       
|                                      

|(a) | As more fully described in Note 8 of Notes to Consolidated Financial Statements,
          the Corporation has a $1.0 billion commercial paper program as well as a
          supporting $1.0 billion credit facility that matures in October 2009. There was
          $251.4 million outstanding under the commercial paper program at December 31,
          2006. The Corporations average borrowing outstanding under these
          facilities during 2006 was $509.6 million.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(b) | As described in Note 8 of Notes to Consolidated Financial Statements, certain
          subsidiaries of the Corporation outside of the United States have uncommitted
          lines of credit of $504.6 million at December 31, 2006. These uncommitted lines
          of credit do not have termination dates and are reviewed periodically.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(c) | Payments due by period include contractually required interst payments.
|--- | -----------------------------------------------------------------------

|(d) | The Corporation enters into contractual arrangements that result in its
          obligation to make future payments, including purchase obligations. The
          Corporation enters into these arrangements in the ordinary course of business in
          order to ensure adequate levels of inventories, machinery and equipment, or
          services. Purchase obligations primarily consist of inventory purchase
          commitments, including raw materials, components, and sourced products,
          sponsorship arrangements, and arrangements for other services.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(e) | The Corporation anticipates that funding of its pension and postretirement
          benefit plans in 2007 will approximate $35 million. That amount principally
          represents contributions either required by regulations or laws or, with respect
          to unfunded plans, necessary to fund current benefits. The Corporation has not
          presented estimated pension and postretirement funding in the table above as the
          funding can vary from year to year based upon changes in the fair value of the
          plan assets and actuarial assumptions.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

30

---



# ITEM 7A. QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Information required under this Item
is contained in Item 7 of this report under the caption Hedging Activities
and in Item 8 of this report in Notes 1 and 10 of Notes to Consolidated Financial
Statements, and is incorporated herein by reference.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The following consolidated financial
statements of the Corporation and its subsidiaries are included herein as indicated below:

Consolidated Financial
Statements

Consolidated Statement of Earnings 
years ended December 31, 2006, 2005, and 2004.

|Consolidated |  | Balance Sheet  December 31, 2006 and 2005.
|------------ |  | -------------------------------------------

|Consolidated |  | Statement
of Stockholders Equity  years ended December 31, 2006, 2005, and 2004.
|------------ |  | ----------------------------------------------------------------------------------

|Consolidated |  | Statement of Cash Flows  years ended December 31, 2006, 2005, and 2004.
|------------ |  | ------------------------------------------------------------------------

Notes to Consolidated
Financial Statements.

Report of Independent Registered
Public Accounting Firm on Consolidated Financial Statements.

31

---



CONSOLIDATED STATEMENT
OF EARNINGSTHE BLACK & DECKER CORPORATION AND SUBSIDIARIES (DOLLARS IN MILLIONS
EXCEPT PER SHARE DATA)

|                                                         |  |  |  
|-------------------------------------------------------- |  |  | -
|YEAR ENDED DECEMBER 31,                                  |  |  |  
|                                                        
|SALES                                                    |  |  | $
|Cost of goods sold                                       |  |  |  
|Selling, general, and administrative expenses            |  |  |  
|                                                        
|OPERATING INCOME                                         |  |  |  
|Interest expense (net of interest income of              |  | 
|$29.6 for 2006, $36.5 for 2005, and $35.8 for 2004)      |  |  |  
|Other expense (income)                                   |  |  |  
|                                                        
|EARNINGS FROM CONTINUING OPERATIONS                      |  | 
|BEFORE INCOME TAXES                                      |  |  |  
|Income taxes                                             |  |  |  
|                                                        
|NET EARNINGS FROM CONTINUING OPERATIONS                  |  |  |  
|                                                        
|DISCONTINUED OPERATIONS (NET OF INCOME TAXES):           |  | 
|Earnings of discontinued operations (net of income taxes |  | 
|of $.5 for 2005 and $1.0 for 2004)                       |  |  |  
|(Loss) gain on sale of discontinued operations           |  | 
|(net of impairment charge of $24.4 in 2004)              |  |  |  
|                                                        
|NET (LOSS) EARNINGS FROM DISCONTINUED OPERATIONS         |  |  |  
|                                                        
|NET EARNINGS                                             |  |  | $
|                                                        
|                                                         |  |  |  
|BASIC EARNINGS PER COMMON SHARE                          |  | 
|Continuing operations                                    |  |  | $
|Discontinued operations                                  |  |  |  
|                                                        
|NET EARNINGS PER COMMON SHARE BASIC                     |  |  | $
|                                                        
|DILUTED EARNINGS PER COMMON SHARE                        |  | 
|Continuing operations                                    |  |  | $
|Discontinued operations                                  |  |  |  
|                                                        
|NET EARNINGS PER COMMON SHARE                           |  | 
|ASSUMING DILUTION                                        |  |  | $
|                                                        

See Notes to Consolidated
Financial Statements.

32

---



CONSOLIDATED BALANCE
SHEETTHE BLACK & DECKER CORPORATION AND SUBSIDIARIES (MILLIONS OF DOLLARS)

|                                                                        |  | 
|----------------------------------------------------------------------- |  | 
|DECEMBER 31,                                                            |  | 
|                                                                       
|ASSETS                                                                  |  | 
|Cash and cash equivalents                                               |  | 
|Trade receivables, less allowances of $44.5 for 2006 and $45.1 for 2005 |  | 
|Inventories                                                             |  | 
|Other current assets                                                    |  | 
|                                                                       
|TOTAL CURRENT ASSETS                                                    |  | 
|                                                                       
|PROPERTY, PLANT, AND EQUIPMENT                                          |  | 
|GOODWILL                                                                |  | 
|OTHER ASSETS                                                            |  | 
|                                                                       
|                                                                        |  | 
|                                                                       
|LIABILITIES AND STOCKHOLDERS' EQUITY                                    |  | 
|Short-term borrowings                                                   |  | 
|Current maturities of long-term debt                                    |  | 
|Trade accounts payable                                                  |  | 
|Other current liabilities                                               |  | 
|                                                                       
|TOTAL CURRENT LIABILITIES                                               |  | 
|                                                                       
|LONG-TERM DEBT                                                          |  | 
|DEFERRED INCOME TAXES                                                   |  | 
|POSTRETIREMENT BENEFITS                                                 |  | 
|OTHER LONG-TERM LIABILITIES                                             |  | 
|STOCKHOLDERS' EQUITY                                                    |  | 
|Common stock (outstanding: December 31, 2006 66,734,843 shares;        |  | 
|December 31, 2005 77,357,370 shares)                                   |  | 
|Capital in excess of par value                                          |  | 
|Retained earnings                                                       |  | 
|Accumulated other comprehensive income (loss)                           |  | 
|                                                                       
|TOTAL STOCKHOLDERS' EQUITY                                              |  | 
|                                                                       
|                                                                        |  | 
|                                                                       

See Notes to Consolidated
Financial Statements.

33

---



CONSOLIDATED STATEMENT
OF STOCKHOLDERS EQUITYTHE BLACK & DECKER CORPORATION AND SUBSIDIARIES(DOLLARS IN MILLIONS
EXCEPT PER SHARE DATA)

|                                      
|--------------------------------------
|                                      
|BALANCE AT DECEMBER 31, 2003          
|Comprehensive income (loss):          
|Net earnings                          
|Net gain on derivative instruments    
|(net of tax)                          
|Minimum pension liability             
|adjustment (net of tax)               
|Foreign currency translation          
|adjustments, less effect              
|of hedging activities                 
|(net of tax)                          
|Write-off of accumulated foreign      
|currency translation                  
|adjustments due to                    
|sale of businesses                    
|                                      
|Comprehensive income                  
|                                      
|Cash dividends on common stock        
|($.84 per share)                      
|Common stock issued under             
|stock-based plans (net of forfeitures)
|Purchase and retirement               
|of common stock                       
|                                      
|BALANCE AT DECEMBER 31, 2004          
|Comprehensive income (loss):          
|Net earnings                          
|Net gain on derivative instruments    
|(net of tax)                          
|Minimum pension liability             
|adjustment (net of tax)               
|Foreign currency translation          
|adjustments, less effect              
|of hedging activities                 
|(net of tax)                          
|Write-off of accumulated foreign      
|currency translation                  
|adjustments due to                    
|sale of businesses                    
|                                      
|Comprehensive income                  
|                                      
|Cash dividends on common stock        
|($1.12 per share)                     
|Common stock issued under             
|stock-based plans (net of forfeitures)
|Purchase and retirement               
|of common stock                       
|                                      
|BALANCE AT DECEMBER 31, 2005          
|Comprehensive income (loss):          
|Net earnings                          
|Net gain on derivative instruments    
|(net of tax)                          
|Minimum pension liability             
|adjustment (net of tax)               
|Foreign currency translation          
|adjustments, less effect              
|of hedging activities                 
|(net of tax)                          
|                                      
|Comprehensive income                  
|                                      
|Adoption of FASB Statement No. 158    
|(net of tax)                          
|Cash dividends on common stock        
|($1.52 per share)                     
|Common stock issued under             
|stock-based plans (net of forfeitures)
|Purchase and retirement               
|of common stock                       
|                                      
|BALANCE AT DECEMBER 31, 2006          
|                                      

See Notes to Consolidated
Financial Statements.

34 & 35

---



CONSOLIDATED STATEMENT OF CASH FLOWS
THE BLACK & DECKER CORPORATION AND SUBSIDIARIES (MILLIONS OF DOLLARS)

|                                                                                |  |  |  
|------------------------------------------------------------------------------- |  |  | -
|YEAR ENDED DECEMBER 31,                                                         |  |  |  
|                                                                               
|OPERATING ACTIVITIES                                                            |  | 
|Net earnings                                                                    |  |  | $
|Adjustments to reconcile net earnings to cash flow                              |  | 
|from operating activities of continuing operations:                             |  | 
|Earnings of discontinued operations                                             |  |  |  
|Loss (gain) on sale of discontinued operations (net of impairment charge)       |  |  |  
|Non-cash charges and credits:                                                   |  | 
|Depreciation and amortization                                                   |  |  |  
|Stock-based compensation                                                        |  |  |  
|Other                                                                           |  |  |  
|Changes in selected working capital items                                       |  | 
|(net of effects of businesses acquired or divested):                            |  | 
|Trade receivables                                                               |  |  |  
|Inventories                                                                     |  |  |  
|Trade accounts payable                                                          |  |  |  
|Other current liabilities                                                       |  |  |  
|Restructuring spending                                                          |  |  |  
|Other assets and liabilities                                                    |  |  |  
|                                                                               
|CASH FLOW FROM OPERATING ACTIVITIES                                             |  | 
|OF CONTINUING OPERATIONS                                                        |  |  |  
|                                                                               
|CASH FLOW FROM OPERATING ACTIVITIES                                             |  | 
|OF DISCONTINUED OPERATIONS                                                      |  |  |  
|                                                                               
|CASH FLOW FROM OPERATING ACTIVITIES                                             |  |  |  
|                                                                               
|INVESTING ACTIVITIES                                                            |  | 
|Capital expenditures                                                            |  |  |  
|Proceeds from disposal of assets                                                |  |  |  
|Purchase of business, net of cash acquired                                      |  |  |  
|Reduction in purchase price of previously acquired business                     |  |  |  
|Proceeds from sale of business, net of cash transferred                         |  |  |  
|Proceeds from sale of discontinued operations, net of cash transferred          |  |  |  
|Investing activities of discontinued operations                                 |  |  |  
|Cash inflow from hedging activities                                             |  |  |  
|Cash outflow from hedging activities                                            |  |  |  
|Other investing activities, net                                                 |  |  |  
|                                                                               
|CASH FLOW FROM INVESTING ACTIVITIES                                             |  |  |  
|                                                                               
|FINANCING ACTIVITIES                                                            |  | 
|Net(decrease) increase in short-term borrowings                                 |  |  |  
|Repayment of preferred stock of subsidiary                                      |  |  |  
|Proceeds from long-term debt (net of debt issue cost of $2.4 for 2006 and 2004) |  |  |  
|Payments on long-term debt                                                      |  |  |  
|Purchase of common stock                                                        |  |  |  
|Issuance of common stock                                                        |  |  |  
|Cash dividends                                                                  |  |  |  
|                                                                               
|CASH FLOW FROM FINANCING ACTIVITIES                                             |  |  |  
|Effect of exchange rate changes on cash                                         |  |  |  
|                                                                               
|(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS                                |  |  |  
|Cash and cash equivalents at beginning of year                                  |  |  |  
|                                                                               
|CASH AND CASH EQUIVALENTS AT END OF YEAR                                        |  |  | $
|                                                                               

See Notes to Consolidated Financial
Statements.

36

---



# NOTES TO CONSOLIDATED
FINANCIAL STATEMENTSTHE BLACK & DECKER
CORPORATION AND SUBSIDIARIES

# NOTE 1: SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES

Principles of  Consolidation:The Consolidated  Financial  Statements  include the accounts of the Corporation and its  subsidiaries.
Intercompany transactions have been eliminated.

Reclassifications:Certain prior years' amounts in the  Consolidated  Financial  Statements have been  reclassified to conform to the
presentation used in 2006.

Use of Estimates:The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results inevitably will differ from those estimates, and such
differences may be material to the financial statements.

Revenue Recognition:Revenue from sales of products is recognized when title passes, which occurs either
upon shipment or upon delivery based upon contractual terms. The Corporation recognizes
customer program costs, including customer incentives such as volume or trade discounts,
cooperative advertising and other sales related discounts, as a reduction to sales.

Foreign Currency Translation:The financial statements of subsidiaries located outside of the United
States, except those subsidiaries operating in highly inflationary economies, generally
are measured using the local currency as the functional currency. Assets, including
goodwill, and liabilities of these subsidiaries are translated at the rates of exchange at
the balance sheet date. The resultant translation adjustments are included in accumulated
other comprehensive income (loss), a separate component of stockholders equity.
Income and expense items are translated at average monthly rates of exchange. Gains and
losses from foreign currency transactions of these subsidiaries are included in net
earnings. For subsidiaries operating in highly inflationary economies, gains and losses
from balance sheet translation adjustments are included in net earnings.

Cash and Cash
Equivalents:Cash and cash equivalents include cash on hand, demand
deposits, and short-term investments with maturities of three months or less from the date
of acquisition.

Concentration of Credit:The Corporation sells products and services to customers in diversified
industries and geographic regions and, therefore, has no significant concentrations of
credit risk other than with two major customers. As of December 31, 2006, approximately
30% of the Corporations trade receivables were due from two large home improvement
retailers.

The Corporation continuously
evaluates the creditworthiness of its customers and generally does not require collateral.

Inventories:Inventories are stated at the lower of cost or market. The cost of United States
inventories is based primarily on the last-in, first-out (LIFO) method; all other
inventories are based on the first-in, first-out (FIFO) method.

Property and Depreciation:Property, plant, and equipment is stated at cost. Depreciation is computed generally
on the straight-line method. Estimated useful lives range from 10 years to 50 years for
buildings and 3 years to 15 years for machinery and equipment. The Corporation capitalizes
improvements that extend the useful life of an asset. Repair and maintenance costs are
expensed as incurred.

Goodwill and Other Intangible
Assets:Goodwill represents the excess of the cost of an acquired entity
over the net of the amounts assigned to assets acquired and liabilities assumed. The
Corporation accounts for goodwill in accordance with Statement of Financial Accounting
Standards (SFAS) No. 142, Goodwill and Other Intangible Assets. Under SFAS No. 142,
goodwill and intangible assets deemed to have indefinite lives are not amortized, but are
subject to an impairment test on an annual basis, or whenever events or changes in
circumstances indicate that the carrying value may not be recoverable. Other intangible
assets are amortized over their estimated useful lives.

The Corporation assesses the fair
value of its reporting units for its goodwill impairment tests based upon a discounted
cash flow methodology. Those estimated future cash flows  which are based upon
historical results and current projections  are discounted at a rate corresponding
to a market rate. If the carrying amount of the reporting unit exceeds the
estimated fair value determined through that discounted cash flow methodology, goodwill
impairment may be present. The Corporation would measure the goodwill

37

---



impairment loss
based upon the fair value of the underlying assets and liabilities of the reporting unit,
including any unrecognized intangible assets, and estimate the implied fair value of
goodwill. An impairment loss would be recognized to the extent that a reporting
units recorded goodwill exceeded the implied fair value of goodwill.

The Corporation performed its annual
impairment test in the fourth quarters of 2006, 2005, and 2004. No impairment was present
upon performing these impairment tests. The Corporation cannot predict the occurrence of
certain events that might adversely affect the reported value of goodwill. Such events may
include, but are not limited to, strategic decisions made in response to economic and
competitive conditions, the impact of the economic environment on the Corporations
customer base, or a material negative change in its relationships with significant
customers.

Product Development Costs:Costs associated with the development of new products and changes to
existing products are charged to operations as incurred. Product development costs were
$139.4 million in 2006, $133.8 million in 2005, and $118.6 million in 2004.

Shipping and Handling
Costs:Shipping and handling costs represent costs associated with shipping
products to customers and handling finished goods. Included in selling, general, and
administrative expenses are shipping and handling costs of $338.8 million in 2006, $339.2
million in 2005, and $278.1 million in 2004. Freight charged to customers is recorded as
revenue.

Advertising and Promotion:Advertising and promotion expense, which is expensed as incurred, was $182.4 million
in 2006, $193.6 million in 2005, and $174.9 million in 2004.

Product Warranties:Most of the Corporations products in the Power Tools and Accessories segment and
Hardware and Home Improvement segment carry a product warranty. That product warranty, in
the United States, generally provides that customers can return a defective product during
the specified warranty period following purchase in exchange for a replacement product or
repair at no cost to the consumer. Product warranty arrangements outside the United States
vary depending upon local market conditions and laws and regulations. The Corporation
accrues an estimate of its exposure to warranty claims based upon both current and
historical product sales data and warranty costs incurred.

Postretirement
Benefits:Pension plans, which cover substantially all of the
Corporations employees in North America (if hired before 2007), Europe, and the
United Kingdom (if hired before 2005), consist primarily of non-contributory defined
benefit plans. The defined benefit plans are funded in conformity with the funding
requirements of applicable government regulations. Generally, benefits are based on age,
years of service, and the level of compensation during the final years of employment.
Prior service costs for defined benefit plans generally are amortized over the estimated
remaining service periods of employees.

Certain employees are covered by
defined contribution plans. The Corporations contributions to these plans are based
on a percentage of employee compensation or employee contributions. These plans are funded
on a current basis.

In addition to pension benefits,
certain postretirement medical, dental, and life insurance benefits  are provided to most
United States retirees who retired before 1994. Most current United States employees are
eligible for postretirement medical and dental benefits from their date
of retirement to age 65. Retirees in other countries generally are covered by
government-sponsored programs.

The Corporation uses the corridor
approach in the valuation of defined benefit plans and other postretirement benefits. The
corridor approach defers all actuarial gains and losses resulting from variances between
actual results and economic estimates or actuarial assumptions. For defined benefit
pension plans, these unrecognized gains and losses are amortized when the net gains and
losses exceed 10% of the greater of the market-related value of plan assets or the
projected benefit obligation at the beginning of the year. For other postretirement
benefits, amortization occurs when the net gains and losses exceed 10% of the accumulated
postretirement benefit obligation at the beginning of the year. The amount in excess of
the corridor is amortized over the average remaining service period to retirement date of
active plan participants or, for retired participants, the average remaining life
expectancy.

In September 2006, the Financial
Accounting Standards Board (FASB) issued SFAS No. 158, Employers Accounting for Defined Benefit Pension and Other
Postretirement Plans  an Amendment of FASB Statements No. 87, 88, 106, and
132(R). SFAS No. 158 requires two major changes to accounting for defined benefit and
other postretirement plans, with two different effective dates. The first requirement of SFAS No. 158, which the Corpora-

38

---



tion adopted as of December 31, 2006, requires the
recognition of the overfunded or underfunded status of a defined benefit postretirement
plan as an asset or a liability in the balance sheet, with changes in the funded status
recorded through comprehensive income in the year in which those changes occur. The impact
of the adoption of SFAS No. 158 is more fully described in Note 13.

The second requirement of SFAS No.
158, which is effective for the Corporation as of December 31, 2008, requires that the
funded status be measured as of an entitys year-end balance sheet date rather than
as of an earlier date as currently permitted. The Corporation currently uses a measurement
date of September 30 for the majority of its defined benefit pension and postretirement
plans.

Stock-Based
Compensation:In December 2004, the FASB issued SFAS No. 123 (revised 2004)
(SFAS No. 123R), Share-Based Payment. This Statement revised SFAS No. 123 by
eliminating the option to account for employee stock options under Accounting Principles
Board Opinion No. 25 (APB No. 25) and requires companies to recognize the cost of employee
services in exchange for awards of equity instruments based on grant-date fair value of
those awards (the fair-value-based method). Stock-based compensation expense
is recognized on a straight-line basis over the requisite service period of the award,
which is generally the vesting period. The Corporation determines the fair value of its
stock options using the Black-Scholes option valuation model, which incorporates
assumptions such as expected option life, interest rate, volatility, and dividend yield.
The Corporation determines the fair value of its restricted stock based on the fair value
of its common stock at the date of grant.

SFAS No. 123R permitted public
companies to adopt its requirement using one of two methods. The Corporation adopted SFAS
No. 123R, effective January 1, 2006, under the modified retrospective method. The modified
retrospective method permits entities to restate all prior periods presented based on the
amounts previously recognized under SFAS No. 123 for purposes of pro forma disclosures.
All prior periods were adjusted to give effect to the fair-value-based method of
accounting for awards granted on or after January 1, 1995.

The impact of adopting SFAS No. 123R,
as compared to if the Corporation had continued to account for share-based compensation
under APB No. 25, decreased the captions noted below for the years ended December 31,
2006, 2005, and 2004, as follows:

|                                                        |      |     
|------------------------------------------------------- | ---- | ----
|(Dollars in Millions, Except Per Share Data)            | 2006 | 2005
|                                                       
|Earnings from continuing operations before income taxes |      |     
|Net earnings from continuing operations                 |      |     
|Net earnings                                            |      |     
|                                                       
|Basic earnings per share                                |      |     
|                                                       
|Diluted earnings per share                              |      |     
|                                                       

Prior to the adoption of SFAS No.
123R, the Corporation presented all tax benefits of deductions resulting from the exercise
of options or vesting of other stock-based arrangements as operating cash flows in the
Consolidated Statement of Cash Flows. SFAS No. 123R requires the cash flows resulting from
the tax benefits of tax deductions in excess of the compensation cost recognized for
share-based arrangements to be classified as financing cash flows. The Corporation has
recognized $9.7 million, $13.9 million, and $14.5 million as a financing cash flow, within
the caption Issuance of common stock, for the years ended December 31, 2006,
2005, and 2004, respectively, that would have been recognized as an operating cash flow
prior to the adoption of SFAS No. 123R.

The following balances as of December
31, 2003, have been restated to recognize stock-based compensation expense for fiscal
years 1995 to 2003, in million of dollars:

|                                   
|-----------------------------------
|                                   
|As previously reported             
|Adjustment for change in accounting
|                                   
|As adjusted                        
|                                   

Prior to the adoption of SFAS No.
123R net deferred tax assets as of December 31, 2005, were $116.2 million; an adjustment
of $25.8 million was recognized for the change in accounting which resulted in net
deferred tax assets of $142.0 million as of that date.

39

---



Derivative Financial
Instruments:The Corporation is exposed to market risks arising from
changes in interest rates. With products and services marketed in over 100 countries and
with manufacturing sites in 10 countries, the Corporation also is exposed to risks arising
from changes in foreign currency rates. The Corporation uses derivatives principally in
the management of interest rate and foreign currency exposure. It does not utilize
derivatives that contain leverage features. On the date on which the Corporation enters
into a derivative, the derivative is designated as a hedge of the identified exposure. The
Corporation formally documents all relationships between hedging instruments and hedged
items, as well as its risk-management objective and strategy for undertaking various hedge
transactions. In this documentation, the Corporation specifically identifies the asset,
liability, firm commitment, forecasted transaction, or net investment that has been
designated as the hedged item and states how the hedging instrument is expected to reduce
the risks related to the hedged item. The Corporation measures effectiveness of its
hedging relationships both at hedge inception and on an ongoing basis.

For each derivative instrument that
is designated and qualifies as a fair value hedge, the gain or loss on the derivative
instrument as well as the offsetting loss or gain on the hedged item attributable to the
hedged risk are recognized in current earnings during the period of the change in fair
values. For each derivative instrument that is designated and qualifies as a cash flow
hedge, the effective portion of the gain or loss on the derivative instrument is reported
as a component of accumulated other comprehensive income (loss) and reclassified into
earnings in the same period or periods during which the hedged transaction affects
earnings. The remaining gain or loss on the derivative instrument in excess of the
cumulative change in the present value of future cash flows of the hedged item, if any, is
recognized in current earnings during the period of change. For hedged forecasted
transactions, hedge accounting is discontinued if the forecasted transaction is no longer
probable of occurring, in which case previously deferred hedging gains or losses would be
recorded to earnings immediately. For derivatives that are designated and qualify as
hedges of net investments in subsidiaries located outside the United States, the gain or
loss (net of tax), is reported in accumulated other comprehensive income (loss) as part of
the cumulative translation adjustment to the extent the derivative is effective. For
derivative instruments not designated as hedging instruments, the gain or loss is
recognized in current earnings during the period of change.

Interest Rate Risk Management:The Corporation has designated each of its outstanding interest rate swap agreements
as fair value hedges of the underlying fixed rate obligation. The fair value of the
interest rate swap agreements is recorded in other current assets, other assets, other
current liabilities, or other long-term liabilities with a corresponding increase or
decrease in the fixed rate obligation. The changes in the fair value of the interest rate
swap agreements and the underlying fixed rate obligations are recorded as equal and
offsetting unrealized gains and losses in interest expense in the Consolidated Statement
of Earnings. The Corporation has structured all existing interest rate swap agreements to
be 100% effective. As a result, there is no current impact to earnings resulting from
hedge ineffectiveness. Gains or losses resulting from the early termination of interest
rate swaps are deferred as an increase or decrease to the carrying value of the related
debt and amortized as an adjustment to the yield of the related debt instrument over the
remaining period originally covered by the swap.

Foreign Currency Management:
The fair value of foreign currency-related derivatives are generally included in the
Consolidated Balance Sheet in other current assets and other current liabilities. The
earnings impact of cash flow hedges relating to forecasted purchases of inventory is
reported in cost of goods sold to match the underlying transaction being hedged. Realized
and unrealized gains and losses on these instruments are deferred in accumulated other
comprehensive income (loss) until the underlying transaction is recognized in earnings.

The earnings impact of cash flow
hedges relating to the variability in cash flows associated with foreign
currency-denominated assets and liabilities is reported in cost of goods sold, selling,
general, and administrative expenses, or other expense (income), depending on the nature
of the assets or liabilities being hedged. The amounts deferred in accumulated other
comprehensive income (loss) associated with these instruments generally relate to foreign
currency spot-rate to forward-rate differentials and are recognized in earnings over the
term of the hedge. The discount or premium relating to cash flow hedges associated with
foreign currency-denominated assets and liabilities is recognized in net interest expense
over the life of the hedge.

40

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New Accounting
Pronouncements:In June 2006, the FASB issued FASB Interpretation No. 48
(FIN 48), Accounting for Uncertainty in Income Taxes  an interpretation of FASB
Statement No. 109. FIN 48 provides guidance for the recognition, derecognition and
measurement in financial statements of tax positions taken in previously filed tax returns
or tax positions expected to be taken in tax returns. FIN 48 requires an entity to
recognize the financial statement impact of a tax position when it is more likely than not
that the position will be sustained upon examination. If the tax position meets the
more-likely-than-not recognition threshold, the tax effect is recognized at the largest
amount of the benefit that is greater than fifty percent likely of being realized upon
ultimate settlement. FIN 48 requires that a liability created for unrecognized tax
benefits shall be presented as a liability and not combined with deferred tax liabilities
or assets. The application of FIN 48 may also affect the tax bases of assets and
liabilities and therefore may change or create deferred tax liabilities or assets. The
Corporation believes that the adoption of FIN 48 will require the reclassification of
certain deferred tax liabilities or assets to a liability for tax uncertainties. FIN 48
permits an entity to recognize interest related to tax uncertainties as either income
taxes or interest expense. FIN 48 also permits an entity to recognize penalties related to
tax uncertainties as either income tax expense or within other expense classifications.
The Corporation has recognized interest and penalties, if any, related to tax
uncertainties as income tax expense and will continue this treatment upon adoption of FIN
48. The Corporation will be required to adopt FIN 48 as of January 1, 2007, with any
cumulative effect of the change in accounting principles recorded as an adjustment to
opening retained earnings. The Corporation is currently evaluating the impact of its
adoption of FIN 48 and has not yet determined the effect on its earnings or financial
position.

In September 2006, the FASB issued
SFAS No. 157, Fair Value Measurements. SFAS No. 157 defines fair value, establishes
a framework for measuring fair value, and expands disclosures about fair value
measurements. This statement clarifies how to measure fair value as permitted under other
accounting pronouncements but does not require any new fair value measurements. However,
for some entities, the application of this statement will change current practice. The
Corporation will be required to adopt SFAS No. 157 as of January 1, 2008. The Corporation
is currently evaluating the impact of SFAS No. 157 and has not yet determined the effect
on its earnings or financial position.

# NOTE 2: ACQUISITIONS

Effective March 1, 2006, the
Corporation acquired Vector Products, Inc. (Vector). The cash purchase price for the
transaction was $158.5 million, net of cash acquired of $.1 million and including
transaction costs of $.9 million. The addition of Vector to the Corporations Power
Tools and Accessories segment allows the Corporation to offer customers a broader range of
products.

The transaction has been accounted
for in accordance with SFAS No. 141, Business Combinations, and accordingly, the
financial position and results of operations have been included in the Corporations
Balance Sheet and Statement of Earnings since the date of acquisition.

The Corporation has not yet obtained
all information, including, but not limited to, finalization of independent appraisals,
required to complete the purchase price allocation related to the acquisition of Vector.
The final allocation will be completed in 2007. The initial purchase price allocation of
the acquired business, based on preliminary appraisal data and managements estimates
at the date of acquisition, in millions of dollars, is as follows:

|                                        
|----------------------------------------
|Accounts receivable                     
|Inventories                             
|Property and equipment                  
|Goodwill                                
|Intangible assets                       
|Other current and long-term assets      
|                                        
|Total assets acquired                   
|                                        
|Accounts payable and accrued liabilities
|Other liabilities                       
|                                        
|Total liabilities                       
|                                        
|Fair value of net assets acquired       
|                                        

The Corporation does not believe that
the goodwill and intangible assets recognized will be deductible for income tax purposes.

Prior to the date of the acquisition
of Vector and during 2006, the Corporation identified opportunities to integrate the
business into its existing Power Tools and Accessories segment. Subsequent to the
acquisition, the Corporation approved integration actions relating to the acquired
business in the amount of $1.3 million. These actions principally reflect severance costs
associated with administrative and distribution functions of the acquired business as well
as the cost of lease and other contractual obligations for which no future benefit will be
realized. During 2006, the Corporation utilized $.3 million of this reserve.

Effective after the close of business
on October 2, 2004, the Corporation acquired the Porter-Cable

41

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and Delta Tools Group from
Pentair, Inc. The Porter-Cable and Delta Tools Group included the Porter-Cable, Delta,
DeVilbiss Air Power Company, Oldham Saw, and FLEX businesses. The addition of the
Porter-Cable and Delta Tools Group to the Corporations Power Tools and Accessories
segment allowed the Corporation to offer customers a broader range of products. The cash
purchase price for the transaction was $767.7 million, net of cash acquired of $8.3
million and including transaction costs of $5.7 million. That $767.7 million purchase
price is net of purchase price reduction of $10.4 million and $16.1 million, received in
2005 and 2006, respectively.

This transaction has been accounted
for in accordance with SFAS No.141, Business Combinations, and accordingly, the
financial position and results of operations have been included in the Corporations
operations since the date of acquisition.

The purchase price allocation of the
acquired businesses, based upon independent appraisals and managements estimates at
the date of acquisition, in millions of dollars, is as follows:

|                                        
|----------------------------------------
|Accounts receivable                     
|Inventories                             
|Property and equipment                  
|Goodwill                                
|Intangible assets                       
|Other current and long-term assets      
|                                        
|Total assets acquired                   
|                                        
|Accounts payable and accrued liabilities
|Other liabilities                       
|                                        
|Total liabilities                       
|                                        
|Fair value of net assets acquired       
|                                        

Prior to the date of the acquisition
of the Porter-Cable and Delta Tools Group and during 2004, the Corporation identified
opportunities to restructure the acquired businesses as well as to integrate these
businesses into its existing Power Tools and Accessories segment. Subsequent to the
acquisition, the Corporation approved integration actions relating to the acquired
businesses. These actions principally reflect severance costs associated with
administrative and manufacturing actions related to the acquired businesses, including the
closure of three manufacturing facilities, as well as the cost of lease and other
contractual obligations for which no future benefit would be realized.

A summary of integration activity
relating to the Porter-Cable and Delta Tools Group during 2005 and 2006, in millions of
dollars, is set forth below:

|                                           
|-------------------------------------------
|                                           
|Integration reserve at December 31, 2004   
|Adjustments to previously provided reserves
|Utilization of reserves:                   
|Cash                                       
|                                           
|Integration reserve at December 31, 2005   
|Utilization of reserves:                   
|Cash                                       
|                                           
|Integration reserve at December 31, 2006   
|                                           

The Corporation substantially
completed these restructuring actions during 2006.

In November 2005, the Corporation
completed the sale of the FLEX business of the acquired Porter-Cable and Delta Tools
Group. The effect of the sale was not material to the Corporation.

# NOTE 3: DISCONTINUED
OPERATIONS

The Corporations former
European security hardware business is classified as discontinued operations. The European
security hardware business consisted of the NEMEF, Corbin, and DOM businesses. In November
2005, the Corporation completed the sale of the DOM security hardware business and
received cash proceeds, net of cash transferred, of $17.2 million. In January 2004, the
Corporation completed the sale of the NEMEF and Corbin businesses and received cash
proceeds, net of cash transferred, of $77.5 million.

During 2005, the Corporation
recognized a $.1 million loss on the sale of the DOM security hardware business. During
2004, the Corporation recognized a $12.7 million net gain on the sale of these
discontinued operations (the net gain on sale of discontinued operations).
That net gain consisted of a $37.1 million gain on the sale of the NEMEF and Corbin
businesses, less a $24.4 million goodwill impairment charge associated with the DOM
business. That goodwill impairment charge was determined as the excess of the carrying
value of goodwill associated with the DOM business over its implied fair value.

42

---



Sales and earnings before income
taxes of the discontinued operations for each year, in millions of dollars, were as
follows:

|                            
|----------------------------
|                            
|Sales                       
|Earnings before income taxes
|                            

The results of the discontinued
operations do not reflect any expense for interest allocated by or management fees charged
by the Corporation.

# NOTE 4: INVENTORIES

The classification of inventories at
the end of each year, in millions of dollars, was as follows:

|                                  | 2006
|--------------------------------- | ----
|                                 
|FIFO cost                         |     
|Raw materials and work-in-process |     
|Finished products                 |     
|                                 
|                                  |     
|Adjustment to arrive at           |     
|LIFO inventory value              |     
|                                 
|                                  |     
|                                 

The cost of United States inventories
stated under the LIFO method was approximately 54% and 58% of the value of total
inventories at December 31, 2006 and 2005, respectively.

# NOTE 5: PROPERTY, PLANT,
AND EQUIPMENT

Property, plant, and equipment at the
end of each year, in millions of dollars, consisted of the following:

|                                        | 2006
|--------------------------------------- | ----
|                                       
|Property, plant, and equipment at cost: |     
|Land and improvements                   |     
|Buildings                               |     
|Machinery and equipment                 |     
|                                       
|                                        |     
|Less accumulated depreciation           |     
|                                       
|                                        |     
|                                       

Depreciation expense was $146.2
million, $146.0 million and $140.8 million for the years ended December 31, 2006, 2005,
and 2004, respectively.

# NOTE 6: GOODWILL AND
OTHER IDENTIFIED INTANGIBLE ASSETS

The changes in the carrying amount of
goodwill by reportable business segment, in millions of dollars, were as follows:

|                                               
|-----------------------------------------------
|                                               
|Goodwill at January 1, 2005                    
|Activity associated with prior year acquisition
|Sale of business                               
|Currency translation adjustment                
|                                               
|Balance at December 31, 2005                   
|Acquisition                                    
|Activity associated with prior year acquisition
|Currency translation adjustment                
|                                               
|Balance at December 31, 2006                   
|                                               

43

---



The carrying amount of acquired
intangible assets included in other assets at the end of each year, in million of dollars,
was as follows:

|                                  | 2006
|--------------------------------- | ----
|                                 
|Customer relationships            |     
|(net of accumulated amortization  |     
|of $5.1 in 2006 and $1.4 in 2005) |     
|Technology and patents            |     
|(net of accumulated amortization  |     
|of $4.9 in 2006 and $2.8 in 2005) |     
|Trademarks and trade names        |     
|(net of accumulated amortization  |     
|of $1.9 in 2006 and $.4 in 2005)  |     
|                                 
|Total intangibles, net            |     
|                                 

Trademarks and trade names include
indefinite-lived assets of $193.9 million at December 31, 2006 and 2005, respectively.

Expense associated with the
amortization of intangible assets in 2006, 2005, and 2004 was $7.3 million, $3.5 million,
and $1.0 million, respectively. At December 31, 2006, the weighted-average amortization
periods were 15 years for customer relationships, 10 years for technology and patents, and
10 years for trademarks and trade names. The estimated future amortization expense for
identifiable intangible assets during each of the next five years is $7.7 million.

# NOTE 7: OTHER CURRENT
LIABILITIES

Other current liabilities at the end
of each year, in millions of dollars, included the following:

|                                       | 2006
|-------------------------------------- | ----
|                                      
|Trade discounts and allowances         |     
|Employee benefits                      |     
|Salaries and wages                     |     
|Advertising and promotion              |     
|Warranty                               |     
|Income taxes, including deferred taxes |     
|All other                              |     
|                                      
|                                       |     
|                                      

All other at December 31, 2006 and
2005, consisted primarily of accruals for foreign currency derivatives, environmental
exposures, interest, insurance, and taxes other than income taxes.

The following provides information
with respect to the Corporations warranty accrual, in millions of dollars:

|                                      | 2006
|------------------------------------- | ----
|                                     
|Warranty reserve at January 1         |     
|Accruals for warranties issued during |     
|the period and changes in estimates   |     
|related to pre-existing warranties    |     
|Settlements made                      |     
|Additions due to acquisition          |     
|Reduction due to sale of business     |     
|Currency translation adjustments      |     
|                                     
|Warranty reserve at December 31       |     
|                                     

In December 2000, a subsidiary of the
Corporation issued preferred shares to private investors, redeemable in December 2005.
Holders of the subsidiarys preferred shares were entitled to annual cash dividends
of $10.7 million. The $10.7 million dividends on those preferred shares were classified as
interest expense in 2004 and 2005. The preferred shares were redeemed in December 2005 via
a $136.0 million payment to the private investors and the relinquishment of a liquid asset
in the amount of $50.0 million that was previously included in other current assets.

# NOTE 8: SHORT-TERM
BORROWINGS

Short-term borrowings in the amounts
of $258.9 million and $566.9 million at December 31, 2006 and 2005, respectively,
consisted primarily of borrowings under the terms of the Corporations commercial
paper program, uncommitted lines of credit, or other short-term borrowing arrangements.
The weighted-average interest rate on short-term borrowings outstanding at
December 31, 2006 and 2005, was 5.43% and 4.56%, respectively.

In November 2002, the Corporation
entered into a $500 million agreement under which it may issue commercial paper at market
rates with maturities of up to 365 days from the date of issue. In September 2004, the
Corporation increased the maximum amount authorized for issuance under its commercial
paper program from $500 million to $1.0 billion. There was $251.4 million and $467.2
million outstanding under this agreement at December 31, 2006 and 2005, respectively.

In April 2001, the Corporation
entered into a $1.0 billion unsecured revolving credit facility that would have expired in
April 2006. In October 2004, the Corporation replaced its $1.0 billion unsecured revolving
credit facility (the Former Credit Facility) that would have expired in April 2006 with a
$1.0 billion unsecured revolving credit facility (the Credit Facility) that expires in
October 2009. The amount available for borrowing under the Credit Facility at December 31,
2006 and 2005, was $748.6 million and $532.8 million, respectively.

The average borrowings outstanding
under the Corporations Credit Facility and commercial paper program during 2006 and
2005 were $509.6 million and $213.8 million, respectively.

Under the Credit Facility, the
Corporation has the option of borrowing at LIBOR plus a specified percentage, or at other
variable rates set forth therein. The Credit Facility provides that the interest rate
margin over LIBOR, initially set at .375%, will increase (by a maximum amount of .625%) or
decrease (by a maximum amount of .115%) based

44

---



upon changes in the ratings of the
Corporations long-term senior unsecured debt.

In addition to interest payable on
the principal amount of indebtedness outstanding from time to time under the Credit
Facility, the Corporation is required to pay an annual facility fee, equal to .125%, of
the amount of the Credit Facilitys commitment, whether used or unused. The
Corporation is also required to pay a utilization fee, equal to .125%, applied to the
outstanding balance when borrowings under the Credit Facility exceed 50% of the Credit
Facility. The Credit Facility provides that both the facility fee and the utilization fee
will increase or decrease based upon changes in the ratings of the Corporations
long-term senior unsecured debt.

The Credit Facility includes various
customary covenants. Some of the covenants limit the ability of the Corporation and its
subsidiaries to pledge assets or incur liens on assets. Other financial covenants require
the Corporation to maintain a specified leverage ratio and interest coverage ratio. As of
December 31, 2006, the Corporation was in compliance with all terms and conditions of the
Credit Facility.

Under the Former Credit Facility, the
Corporation had the option of borrowing at LIBOR plus a specified percentage, or at other
variable rates set forth therein. The Former Credit Facility provided that the interest
rate margin over LIBOR, initially set at .475%, would increase or decrease based upon
changes in the ratings of the Corporations long-term senior unsecured debt. The
Former Credit Facility provided for an interest rate margin over LIBOR of .475% during
2004. In addition to the interest payable on the principal amount of indebtedness
outstanding from time to time under the Former Credit Facility, the Corporation was
required to pay an annual facility fee to each bank, equal to .150% and .125%,
respectively, of the amount of each banks commitment, whether used or unused. The
Corporation was also required to pay a utilization fee under the Former Credit Facility
equal to .125%, applied to the outstanding balance when borrowings exceeded 50% of the
facility. The Former Credit Facility provided that both the facility fee and the
utilization fee would increase or decrease based upon changes in the ratings of the
Corporations senior unsecured debt.

Under the terms of uncommitted lines
of credit at December 31, 2006, certain subsidiaries outside of the United States may
borrow up to an additional $504.6 million on such terms as may be mutually agreed. These
arrangements do not have termination dates and are reviewed periodically. No material
compensating balances are required or maintained.

# NOTE 9: LONG-TERM DEBT

The composition of long-term debt at
the end of each year, in millions of dollars, was as follows:

|                                                      | 2006
|----------------------------------------------------- | ----
|                                                     
|7.0% notes due 2006                                   |     
|6.55% notes due 2007                                  |     
|7.125% notes due 2011                                 |     
|(including discount of $1.4 in 2006 and $1.7 in 2005) |     
|4.75% notes due 2014                                  |     
|(including discount of $1.7 in 2006 and $2.0 in 2005) |     
|5.75% notes due 2016                                  |     
|(including discount of $1.2 in 2006)                  |     
|7.05% notes due 2028                                  |     
|Other loans due through 2009                          |     
|Fair value hedging adjustment                         |     
|Less current maturities of long-term debt             |     
|                                                     
|                                                      |     
|                                                     

As more fully described in Note 1, at
December 31, 2006 and 2005, the carrying amount of long-term debt and current maturities
thereof includes $24.2 million and $33.7 million, respectively, relating to outstanding or
terminated fixed-to-variable rate interest rate swaps agreements.

Indebtedness of subsidiaries in the
aggregate principal amounts of $341.5 million and $867.8 million were included in the
Consolidated Balance Sheet at December 31, 2006 and 2005, respectively, in short-term
borrowings, current maturities of long-term debt, and long-term debt.

Principal payments on long-term debt
obligations due over the next five years are as follows: $150.2 million in 2007, $.2
million in 2008, $.1 million in 2009, $  in 2010, and $400.0 million in 2011.
Interest payments on all indebtedness were $98.0 million in 2006, $94.3 million in 2005,
and $77.2 million in 2004.

# NOTE 10: DERIVATIVE
FINANCIAL INSTRUMENTS

The Corporation is exposed to market
risks arising from changes in interest rates. With products and services marketed in over
100 countries and with manufacturing sites in 10 countries, the Corporation also is
exposed to risks arising from changes in foreign exchange rates.

45

---



Credit Exposure:The
Corporation is exposed to credit-related losses in the event of non-performance by
counterparties to certain derivative financial instruments. The Corporation monitors the
creditworthiness of the counterparties and presently does not expect default by any of the
counterparties. The Corporation does not obtain collateral in connection with its
derivative financial instruments.

The credit exposure that results from
interest rate and foreign exchange contracts is the fair value of contracts with a
positive fair value as of the reporting date. Some derivatives are not subject to credit
exposures. The fair value of all financial instruments is summarized in Note 11.

Interest Rate Risk Management:The Corporation manages its interest rate risk, primarily through the use
of interest rate swap agreements, in order to achieve a cost-effective mix of fixed and
variable rate indebtedness. It seeks to issue debt opportunistically, whether at fixed or
variable rates, at the lowest possible costs. The Corporation may, based upon its
assessment of the future interest rate environment, elect to manage its interest rate risk
associated with changes in the fair value of its indebtedness, or the future cash flows
associated with its indebtedness, through the use of interest rate swaps.

The amounts exchanged by the
counterparties to interest rate swap agreements normally are based upon the notional
amounts and other terms, generally related to interest rates, of the derivatives. While
notional amounts of interest rate swaps form part of the basis for the amounts exchanged
by the counterparties, the notional amounts are not themselves exchanged and, therefore,
do not represent a measure of the Corporations exposure as an end user of derivative
financial instruments.

The Corporations portfolio of
interest rate swap instruments at December 31, 2006 and 2005, consisted of $400.0 million
notional and $525.0 million notional amounts of fixed-to-variable rate swaps with a
weighted-average fixed rate receipt of 5.11% and 5.33%, respectively. The basis of the
variable rate paid is LIBOR.

Credit exposure on the
Corporations interest rate derivatives at December 31, 2006 and 2005, was $4.7
million and $9.2 million, respectively. Deferred gains on the early termination of
interest rate swaps were $25.3 million and $29.7 million at December 31, 2006 and 2005.

Foreign Currency Management:The Corporation enters into various foreign currency contracts in managing
its foreign currency exchange risk. Generally, the foreign currency contracts have
maturity dates of less than twenty-four months. The contractual amounts of foreign
currency derivatives, principally forward exchange contracts and purchased options,
generally are exchanged by the counterparties. The Corporations foreign currency
derivatives are designated to, and generally are denominated in the currencies of, the
underlying exposures. To minimize the volatility of reported equity, the Corporation may
hedge, on a limited basis, a portion of its net investment in subsidiaries located outside
the United States through the use of foreign currency forward contracts and purchased
foreign currency options.

The Corporation seeks to minimize its
foreign currency cash flow risk and hedges its foreign currency transaction exposures
(that is, currency exposures related to assets and liabilities) as well as certain
forecasted foreign currency exposures. Hedges of forecasted foreign currency exposures
principally relate to the cash flow risk relating to the sales of products manufactured or
purchased in a currency different from that of the selling subsidiary. The Corporation
hedges its foreign currency cash flow risk through the use of forward exchange contracts
and, to a small extent, options. Some of the forward exchange contracts involve the
exchange of two foreign currencies according to the local needs of the subsidiaries. Some
natural hedges also are used to mitigate risks associated with transaction and forecasted
exposures. The Corporation also responds to foreign exchange movements through various
means, such as pricing actions, changes in cost structure, and changes in hedging
strategies.

The following table summarizes the
contractual amounts of forward exchange contracts as of December 31, 2006 and 2005, in
millions of dollars, including details by major currency as of December 31, 2006. Foreign
currency amounts were translated at current rates as of the reporting date. The
Buy amounts represent the United States dollar equivalent of commitments to
purchase currencies, and the Sell amounts represent the United States dollar
equivalent of commitments to sell currencies.

46

---



|AS OF DECEMBER 31, 2006 | BUY | SELL
|----------------------- | --- | ----
|                       
|United States dollar    |     |     
|Pound sterling          |     |     
|Euro                    |     |     
|Canadian dollar         |     |     
|Australian dollar       |     |     
|Czech koruna            |     |     
|Japanese yen            |     |     
|Swedish krona           |     |     
|Swiss franc             |     |     
|Norwegian krone         |     |     
|Danish krone            |     |     
|Other                   |     |     
|                       
|Total                   |     |     
|                       
|AS OF DECEMBER 31, 2005 |     |     
|                       
|Total                   |     |     
|                       

No options to buy or sell currencies
were outstanding at December 31, 2006.

Credit exposure on foreign currency
derivatives as of December 31, 2006 and 2005, was $32.7 million and $18.2 million,
respectively.

Hedge ineffectiveness and the portion
of derivative gains and losses excluded from the assessment of hedge effectiveness related
to the Corporations cash flow hedges that were recorded to earnings during 2006,
2005, and 2004 were not significant.

Amounts deferred in accumulated other
comprehensive income (loss) at December 31, 2006, that are expected to be reclassified
into earnings during 2007 represent an after-tax loss of $1.2 million. The amount expected
to be reclassified into earnings in the next twelve months includes unrealized gains and
losses related to open foreign currency contracts. Accordingly, the amount that is
ultimately reclassified into earnings may differ materially.

# NOTE 11: FAIR VALUE OF
FINANCIAL INSTRUMENTS

The fair value of a financial
instrument represents the amount at which the instrument could be exchanged in a current
transaction between willing parties, other than in a forced sale or liquidation.
Significant differences can arise between the fair value and carrying amount of financial
instruments that are recognized at historical cost amounts.

The following methods and assumptions
were used by the Corporation in estimating fair value disclosures for financial
instruments:

 Cash and cash equivalents,
trade receivables, certain other current assets, short-term borrowings, and current
maturities of long-term debt: The amounts reported in the Consolidated Balance Sheet
approximate fair value.

 Long-term debt: Publicly
traded debt is valued based on quoted market values. The fair value of other long-term
debt is estimated based on quoted market prices for the same or similar issues or on the
current rates offered to the Corporation for debt of the same remaining maturities.

 Interest rate hedges: The fair
value of interest rate hedges reflects the estimated amounts that the Corporation would
receive or pay to terminate the contracts at the reporting date.

 Foreign currency contracts:
The fair value of forward exchange contracts and options is estimated using prices
established by financial institutions for comparable instruments.

The following table sets forth, in
millions of dollars, the carrying amounts and fair values of the Corporations
financial instruments, except for those noted above for which carrying amounts approximate
fair values:

|ASSETS (LIABILITIES)   
AS OF DECEMBER 31, 2006 | CARRYING
  AMOUNT | FAIR
VALUE
|----------------------------------------------- | ----------------- | ----------
|                                               
|Non-derivatives:                                |                   |           
|Long-term debt                                  |                   |           
|                                               
|Derivatives relating to:                        |                   |           
|Debt                                            |                   |           
|Assets                                          |                   |           
|Liabilities                                     |                   |           
|Foreign Currency                                |                   |           
|Assets                                          |                   |           
|Liabilities                                     |                   |           
|                                               

|ASSETS (LIABILITIES)   
AS OF DECEMBER 31, 2005 | CARRYING
  AMOUNT | FAIR
VALUE
|----------------------------------------------- | ----------------- | ----------
|                                               
|Non-derivatives:                                |                   |           
|Long-term debt                                  |                   |           
|                                               
|Derivatives relating to:                        |                   |           
|Debt                                            |                   |           
|Assets                                          |                   |           
|Liabilities                                     |                   |           
|Foreign Currency                                |                   |           
|Assets                                          |                   |           
|Liabilities                                     |                   |           
|                                               

# NOTE 12: INCOME TAXES

Earnings from continuing operations
before income taxes for each year, in millions of dollars, were as follows:

|                | 2006
|--------------- | ----
|               
|United States   |     
|Other countries |     
|               
|                |     
|               

47

---



Significant components of income taxes (benefits) from continuing operations for each year, in millions of dollars, were as follows:

|                | 2006
|--------------- | ----
|               
|Current:        |     
|United States   |     
|Other countries |     
|               
|                |     
|               
|Deferred:       |     
|United States   |     
|Other countries |     
|               
|                |     
|               
|                |     
|               

Income tax expense recorded directly
as an adjustment to equity as a result of hedging activities was not significant in 2006,
2005, and 2004. Income tax benefits recorded directly as an adjustment to equity as a
result of employee stock options were $9.7 million, $13.9 million, and $12.1 million in
2006, 2005, and 2004, respectively.

Income tax payments were $221.7
million in 2006, $165.8 million in 2005, and $89.5 million in 2004.

Deferred tax (liabilities) assets at
the end of each year, in millions of dollars, were composed of the following:

|                                       | 2006
|-------------------------------------- | ----
|                                      
|Deferred tax liabilities:              |     
|Employee and postretirement benefits   |     
|Other                                  |     
|                                      
|Gross deferred tax liabilities         |     
|                                      
|Deferred tax assets:                   |     
|Tax loss carryforwards                 |     
|Tax credit and capital loss            |     
|carryforwards                          |     
|Postretirement benefits                |     
|Stock-based compensation               |     
|Other                                  |     
|                                      
|Gross deferred tax assets              |     
|                                      
|Deferred tax asset valuation allowance |     
|                                      
|Net deferred tax assets                |     
|                                      

Deferred income taxes are included in the
Consolidated Balance Sheet in other current assets, other assets, other current
liabilities, and deferred income taxes. Other deferred tax assets principally
relate to accrued liabilities that are not currently deductible.

During the year ended, December 31, 2006, the deferred tax asset
valuation allowance increased by $12.4 million. The increase was principally the result of tax losses generated by a
subsidiary that cannot be utilized in the consolidated United States tax return.

Tax loss carryforwards at December
31, 2006, consisted of net operating losses expiring from 2007 to 2026.

The American Jobs Creation Act of
2004 (AJCA) introduced a special one-time dividends received deduction on the
repatriation of certain foreign earnings to the United States, during a one-year period.
The deduction resulted in an approximate 5.25% federal income tax rate on eligible
repatriations of foreign earnings. During the fourth quarter of 2005, the
Corporations Chief Executive Officer and Board of Directors approved a domestic
reinvestment plan as required by the AJCA. During the fourth quarter of 2005, the
Corporation repatriated $888.3 million of previously unremitted foreign earnings and
recognized $51.2 million of tax expense related to the repatriation.

At December 31, 2006, unremitted
earnings of subsidiaries outside of the United States were approximately $1.5 billion, on
which no United States taxes had been provided. The Corporations intention is to
reinvest these earnings permanently or to repatriate the earnings only when possible to do
so at minimal additional tax cost. It is not practicable to estimate the amount of
additional taxes that might be payable upon repatriation of foreign earnings.

A reconciliation of income taxes at
the federal statutory rate to the Corporations income taxes for each year, both from
continuing operations, in millions of dollars, is as follows:

|                                   | 2006
|---------------------------------- | ----
|                                  
|Income taxes at federal            |     
|statutory rate                     |     
|Taxes associated with repatriation |     
|of foreign earnings                |     
|Lower effective taxes on           |     
|earnings in other countries        |     
|Other net                         |     
|                                  
|Income taxes                       |     
|                                  

# NOTE 13: POSTRETIREMENT
BENEFITS

As disclosed in Note 1 of Notes to
Consolidated Financial Statements, the Corporation adopted SFAS No. 158 effective December
31, 2006. The following table summarizes the impact of the adoption of SFAS No. 158 on the
Consolidated Balance Sheet at December 31, 2006, in millions of dollars:

|                                    
|------------------------------------
|                                    
|Prepaid pension costs               
|Other assets                        
|Pension liabilities                 
|Accumulated other comprehensive loss
|                                    

The following tables set forth the
funded status of the defined benefit pension and postretirement

48

---



plans, and amounts
recognized in the Consolidated Balance Sheet, in millions of dollars. As disclosed in Note
1, SFAS No. 158, adopted by the Corporation effective December 31, 2006, requires the
recognition of the overfunded or underfunded status of a defined benefit postretirement
plan as an asset or liability in the balance sheet, with changes in the funded status
recorded through other comprehensive income. Accordingly, the amounts presented in the
table below for 2006 and 2005 utilize different accounting methodologies. The Corporation
uses a measurement date of September 30 for the majority of its defined benefit pension
and postretirement plans. Defined postretirement benefits consist of several unfunded health care plans that provide certain postretirement medical,
dental, and life insurance benefits for most United States employees. The postretirement
medical benefits are contributory and include certain cost-sharing features, such as
deductibles and co-payments.

|                                                   
|---------------------------------------------------
|                                                   
|PENSION BENEFITS
PLANS IN THE  
UNITED STATES      
|                                                   
|CHANGE IN BENEFIT OBLIGATION                       
|Benefit obligation at beginning of year            
|Service cost                                       
|Interest cost                                      
|Plan participants' contributions                   
|Actuarial losses (gains)                           
|Foreign currency exchange rate changes             
|Benefits paid                                      
|Plan amendments                                    
|Curtailments                                       
|                                                   
|Benefit obligation at end of year                  
|                                                   
|CHANGE IN PLAN ASSETS                              
|Fair value of plan assets at beginning of year     
|Actual return on plan assets                       
|Expenses                                           
|Benefits paid                                      
|Employer contributions                             
|Contributions by plan participants                 
|Acquisitions                                       
|Effects of currency exchange rates                 
|                                                   
|Fair value of plan assets at end of year           
|                                                   
|Funded status                                      
|Contributions subsequent to measurement date       
|                                                   
|(Accrued) benefit cost at December 31, 2006        
|                                                   
|Unrecognized net actuarial loss                    
|Unrecognized prior service cost                    
|                                                   
|(Accrued) prepaid benefit cost at December 31, 2005
|                                                   
|AMOUNTS RECOGNIZED IN THE                          
|CONSOLIDATED BALANCE SHEET                         
|Noncurrent assets                                  
|Current liabilities                                
|Postretirement benefits                            
|                                                   
|Net amount recognized at December 31, 2006         
|                                                   
|Intangible asset                                   
|Accumulated other comprehensive loss               
|                                                   
|Net amount recognized at December 31, 2005         
|                                                   
|WEIGHTED-AVERAGE ASSUMPTIONS                       
|USED TO DETERMINE BENEFIT                          
|OBLIGATIONS AS OF MEASUREMENT                      
|DATE                                               
|Discount rate                                      
|Rate of compensation increase                      
|                                                   

49

---



The amounts recognized in accumulated
other comprehensive loss as of December 31, 2006, are as follows:

|                           
|---------------------------
|                           
|Prior service cost (credit)
|Net loss                   
|                           
|Total                      
|                           

The amounts in accumulated other
comprehensive loss as of December 31, 2006, that are expected to be recognized as
components of net periodic benefit cost (credit) during 2007 are as follows:

|                           
|---------------------------
|                           
|Prior service cost (credit)
|Net loss                   
|                           
|Total                      
|                           

The allocation, by asset category, of
assets of defined benefit pension plans in the United States at September 30, 2006 and
2005, respectively, were as follows:

|2006                   
|-----------------------
|                       
|Equity Securities      
|Fixed Income Securities
|Alternative Investments
|                       
|                       
|                       

At September 30, 2006, the
Corporations targeted allocation, by asset category, of assets of defined benefit
pension plans in the United States is equity securities  65% (comprised of 50% U.S. and 15%
non-U.S. equities); fixed income securities  30%; and alternative investments 
5%.

The allocation, by asset category, of
assets of defined benefit pension plans outside of the United States at September 30, 2006
and 2005, respectively, were as follows:

|2006                   
|-----------------------
|                       
|Equity Securities      
|Fixed Income Securities
|Real Estate            
|Other                  
|                       
|                       
|                       

At September 30, 2006, the
Corporations targeted allocation, by asset category, of assets of defined benefit
pension plans outside of the United States is equity securities  68%; fixed income
securities  25%; and real estate  7%.

To the extent that the actual
allocation of plan assets differs from the targeted allocation by more than 5% for any
category, plan assets are re-balanced within three months.

The Corporation establishes its
estimated long-term return on plan assets considering various factors, which include the
targeted asset allocation percentages, historic returns, and expected future returns.
Specifically, the factors are considered in the fourth quarter of the year preceding the
year for which those assumptions are applied.

50

---



The accumulated benefit obligation
related to all defined benefit pension plans and information related to unfunded and
underfunded defined benefit pension plans at the end of each year, in millions of dollars,
follows:

|                                                       |      | 
|------------------------------------------------------ | ---- | 
|                                                       |     
|2005                                                   | 2005
|                                                      
|All defined benefit plans:                             |      | 
|Accumulated benefit obligation                         |      | 
|Unfunded defined benefit plans:                        |      | 
|Projected benefit obligation                           |      | 
|Accumulated benefit obligation                         |      | 
|Defined benefit plans with an accumulated benefit      |      | 
|obligation in excess of the fair value of plan assets: |      | 
|Projected benefit obligation                           |      | 
|Accumulated benefit obligation                         |      | 
|Fair value of plan assets                              |      | 
|                                                      

The following table sets forth, in
millions of dollars, benefit payments, which reflect expected future service, as
appropriate, expected to be paid in the periods indicated.

|         
|---------
|         
|2007     
|2008     
|2009     
|2010     
|2011     
|2012-2016
|         

The net periodic cost (benefit)
related to the defined benefit pension plans included the following components, in
millions of dollars:

|                                  
|----------------------------------
|                                  
|2005                              
|                                  
|Service cost                      
|Interest cost                     
|Expected return on plan assets    
|Amortization of the unrecognized  
|transition obligation             
|Amortization of prior service cost
|Curtailment/settlement loss       
|Amortization of net actuarial loss
|                                  
|Net periodic cost                 
|                                  
|WEIGHTED-AVERAGE ASSUMPTIONS      
|USED IN DETERMINING NET           
|PERIODIC COST FOR YEAR:           
|Discount rate                     
|Expected return on plan assets    
|Rate of compensation increase     
|                                  

51

---



The net periodic cost related to the
defined benefit postretirement plans included the following components, in millions of
dollars:

|                                   | 2006
|---------------------------------- | ----
|                                  
|Service cost                       |     
|Interest cost                      |     
|Amortization of prior service cost |     
|Amortization of net actuarial loss |     
|Curtailment gain                   |     
|                                  
|Net periodic cost                  |     
|                                  
|Weighted-average discount rate     |     
|used in determining                |     
|net periodic cost for year         |     
|                                  

The health care cost trend rate used
to determine the postretirement benefit obligation was 9.25% for participants under 65 and
8.5% for participants 65 and older in 2006. This rate decreases gradually to an ultimate
rate of 5.0% in 2012, and remains at that level thereafter. The trend rate is a
significant factor in determining the amounts reported. A one-percentage-point change in
these assumed health care cost trend rates would have the following effects, in millions
of dollars:

|ONE-PERCENTAGE-POINT           | INCREASE | (DECREASE)
|------------------------------ | -------- | ----------
|                              
|Effect on total of service and |          |           
|interest cost components       |          |           
|Effect on postretirement       |          |           
|benefit obligation             |          |           
|                              

During the fourth quarter of 2005,
the Corporation adopted plan amendments for two of its non-qualified pension plans in the
United States to permit certain participants to elect to receive their benefits under the
plans in five equal annual installments or in the form of a lump sum payment, depending
upon the age of the participant at retirement. Those amendments increased the
Corporations liability for pension benefits by approximately $13.1 million. This
increase in the liability is being amortized as prior service cost over approximately 9
years.

During the fourth quarter of 2005,
the Corporation adopted a plan amendment to eliminate the prescription drug benefit
previously available to substantially all retirees under the Medicare supplemental plan,
which was replaced by a prescription drug benefit under Medicare (Medicare Part D). That
amendment reduced the Corporations liability for postretirement health benefits by
approximately $32.7 million. This reduction in the liability is being amortized as a prior
service credit over approximately 10 years.

In 2007, the Corporation expects to
make cash contributions of approximately $25.0 million to its defined benefit pension
plans. The amounts principally represent contributions required by funding regulations or
laws or those related to unfunded plans necessary to fund current benefits. In addition,
the Corporation expects to continue to make contributions in 2007 sufficient to fund
benefits paid under its other postretirement benefit plans during that year, net of
contributions by plan participants. The Corporation expects that such contributions will
be approximately $9.6 million in 2007.

Expense for defined contribution
plans amounted to $12.5 million, $12.7 million, and $11.8 million in 2006, 2005, and 2004,
respectively.

# NOTE 14: OTHER
LIABILITIES

At December 31, 2006 and 2005, other
long-term liabilities included a reserve of $271.2 million and $248.3 million,
respectively, associated with various tax matters in a number of jurisdictions.

# NOTE 15:
STOCKHOLDERS EQUITY

The Corporation repurchased
11,753,700, 6,276,700, and 66,100 shares of its common stock during 2006, 2005, and 2004
at an aggregate cost of $896.0 million, $525.7 million, and $3.6 million, respectively.

To reflect the repurchases during
2006 in its Consolidated Balance Sheet, the Corporation: (i) first, reduced its common stock by $5.9 million, representing the aggregate par
          value of the shares repurchased; (ii) next, reduced capital in excess of par
          value by $474.7 million  an amount which brought capital in excess of par
          value to zero; and (iii) last, charged the residual of $415.4 million to
          retained earnings.

SFAS No. 130, Reporting
Comprehensive Income, defines comprehensive income as non-stockholder changes in
equity. Accumulated other comprehensive income (loss) at the end of each year, in millions
of dollars, included the following components:

|                                                      | 2006
|----------------------------------------------------- | ----
|                                                     
|Foreign currency translation adjustment               |     
|Net (loss) gain on derivative instruments, net of tax |     
|Minimum pension liability adjustment, net of tax      |     
|                                                     
|                                                      |     
|                                                     

52

---



The Corporation has designated
certain intercompany loans and foreign currency derivative contracts as long-term
investments in certain foreign subsidiaries and foreign currency derivative contracts. Net
translation (loss) gain associated with these designated intercompany loans and foreign
currency derivative contracts in the amounts of $(.4) million and $6.5 million were
recorded in the foreign currency translation adjustment in 2006 and 2005, respectively.

Foreign currency translation
adjustments are not generally adjusted for income taxes as they relate to indefinite
investments in foreign subsidiaries. The minimum pension liability adjustments as of
December 31, 2006 and 2005, are net of taxes of $188.5 million and $168.3 million,
respectively.

# NOTE 16: EARNINGS PER
SHARE

The computations of basic and diluted
earnings per share for each year were as follows:

|2006                                            
|------------------------------------------------
|                                                
|Numerator:                                      
|Net earnings from continuing operations         
|Net (loss) earnings from discontinued operations
|                                                
|Net earnings                                    
|                                                
|Denominator:                                    
|Denominator for basic earnings per share       
|weighted-average shares                         
|Employee stock options and                      
|other stock-based plans                         
|                                                
|Denominator for diluted earnings per share     
|adjusted weighted-average shares and            
|assumed conversions                             
|                                                
|Basic earnings per share                        
|Continuing operations                           
|Discontinued operations                         
|                                                
|Basic earnings per share                        
|                                                
|Diluted earnings per share                      
|Continuing operations                           
|Discontinued operations                         
|                                                
|Diluted earnings per share                      
|                                                

The following options to purchase
shares of common stock were outstanding during each year, but were not included in the
computation of diluted earnings per share because the effect would be anti-dilutive. The
options indicated below were anti-dilutive because the related exercise price was greater
than the average market price of the common shares for the year.

|                                | 2006
|------------------------------- | ----
|                               
|Number of options (in millions) |     
|Weighted-average exercise price |     
|                               

# NOTE 17: STOCK-BASED
COMPENSATION

As disclosed in Note 1 of Notes to
Consolidated Financial Statements, the Corporation adopted SFAS No. 123R on January 1,
2006, under the modified retrospective method of adoption. The Corporation recognized
total stock-based compensation costs of $29.2 million, $30.1 million, and $34.4 million in
2006, 2005, and 2004, respectively. These amounts are reflected in the Consolidated
Statement of Earnings in selling, general, and administrative expenses. The total income
tax benefit for stock-based compensation arrangements was $10.2 million, $10.5 million,
and $12.1 million in 2006, 2005, and 2004, respectively.

The Corporation has three stock-based
employee compensation plans, which are described below. At December 31, 2006, unrecognized
stock-based compensation expense related to non-vested stock options, restricted stock,
and Performance Equity Plan stock awards totaled $54.9 million. The cost of these
non-vested awards is expected to be recognized over a weighted-average period of 2.7
years.

Stock Option
Plan: Under various stock option plans, options to purchase common stock
may be granted until 2013. Options are granted at fair market value at the date of grant,
generally become exercisable in four equal installments beginning one year from the date
of grant, and expire 10 years after the date of grant. The plans permit the issuance of
either incentive stock options or non-qualified stock options.

53

---



Under all stock option plans, there
were 2,310,493 shares of common stock reserved for future grants as of December 31, 2006.
Transactions are summarized as follows:

|                                 | STOCKOPTIONS | WEIGHTED-AVERAGEEXERCISEPRICE
|-------------------------------- | ------------ | -----------------------------
|                                
|Outstanding at December 31, 2003 |              |                              
|Granted                          |              |                              
|Exercised                        |              |                              
|Forfeited                        |              |                              
|                                
|Outstanding at December 31, 2004 |              |                              
|Granted                          |              |                              
|Exercised                        |              |                              
|Forfeited                        |              |                              
|                                
|Outstanding at December 31, 2005 |              |                              
|Granted                          |              |                              
|Exercised                        |              |                              
|Forfeited                        |              |                              
|                                
|Outstanding at December 31, 2006 |              |                              
|                                
|Options expected to vest at      |              |                              
|December 31, 2006                |              |                              
|                                
|Options exercisable at           |              |                              
|December 31, 2006                |              |                              
|                                

As of December 31, 2006, the
weighted-average remaining contractual term was 5.5 years, 5.4 years, and 4.3 years for
options outstanding, options expected to vest, and options exercisable, respectively. As
of December 31, 2006, the aggregate intrinsic value was $157.2 million, $157.1 million,
and $140.7 million for options outstanding, options expected to vest, and options
exercisable, respectively.

The preceding aggregate intrinsic
values represents the total pretax intrinsic value (the difference between the
Corporations closing stock price on the last trading day of 2006 and the exercise
price, multiplied by the number of in-the-money options) that would have been received by
the holders of those options specified in the table above had all option holders exercised
their options on December 31, 2006. These amounts will change based on the fair market
value of the Corporations stock.

Cash received from option exercises
in 2006, 2005, and 2004 was $38.5 million, $56.0 million and $171.6 million, respectively.

The total intrinsic value of options
exercised in 2006, 2005, and 2004 was $39.1 million, $52.7 million, and $95.6 million,
respectively. The actual tax benefit realized for the tax deduction from option exercises
totaled $13.4 million, $18.2 million, and $31.2 million in 2006, 2005 and 2004,
respectively.

The weighted-average grant-date fair
values of options granted during 2006, 2005 and 2004, were $25.52 per share, $26.12 per
share and $20.46 per share, respectively. The fair value of stock options is determined
using the Black-Scholes option valuation model, which incorporates assumptions surrounding
expected volatility, dividend yield, the risk-free interest rate, expected option life,
and the exercise price compared to the stock price on the grant date. In connection with
the adoption of SFAS No. 123R and the 2006 grant of employee stock options, the
Corporation evaluated the assumptions previously used for estimating the fair value of the
options granted. Based on this evaluation, including guidance provided by the Securities
and Exchange Commission in Staff Accounting Bulletin 107, the Corporation determined that
a combination of historical and implied volatility, rather than historical volatility
alone, provided a better indicator of future stock price trends. The volatility assumption
utilized in determining the fair value of stock options granted during 2006, was based
upon the average of historical and implied volatility. The Corporation determined the
estimated expected life of options based on a weighted-average of the average period of
time from grant date to exercise date, the average period of time from grant date to
cancellation date after vesting, and the mid-point of time to expiration for outstanding
vested options.

Options granted during 2006, 2005,
and 2004 were determined using the Black-Scholes option valuation model with the following
weighted-average assumptions:

|                       | 2006
|---------------------- | ----
|                      
|Expected life in years |     
|Interest rate          |     
|Volatility             |     
|Dividend yield         |     
|                      

The Corporation has a share
repurchase program that was implemented based on the belief that its shares were
undervalued and to manage share growth resulting from option exercises. At December 31,
2006, the Corporation has remaining authorization from its Board of Directors to repurchase
an additional 3,315,095 shares of its common stock.

54

---



Restricted Stock
Plan: In 2004, the Corporation adopted a restricted stock plan. A total of
1,000,000 shares of restricted stock were authorized under this plan. Under the restricted
stock plan, eligible employees are awarded restricted shares of the Corporations
common stock. Restrictions on awards generally expire from three to four years after
issuance, subject to continuous employment and certain other conditions. Transactions are
summarized as follows:

|                               
|-------------------------------
|                               
|Non-vested at December 31, 2003
|Granted                        
|Forfeited                      
|                               
|Non-vested at December 31, 2004
|Granted                        
|Forfeited                      
|Vested                         
|                               
|Non-vested at December 31, 2005
|Granted                        
|Forfeited                      
|Vested                         
|                               
|Non-vested at December 31, 2006
|                               

The fair value of the shares that
vested during 2006 was $1.1 million. The fair value of the shares that vested during 2005
was not significant.

As of December 31, 2006, 369,008
shares of common stock were reserved for future grants.

Performance Equity
Plan: The Corporation also has a Performance Equity Plan (PEP) under which
awards payable in the Corporations common stock are made. Vesting of the awards,
which can range from 0% to 150% of the initial award, is based on pre-established
financial performance measures during a two-year performance period. The fair value of the
shares that vested during 2006 and 2005 was $7.4 million and $12.7 million, respectively.
No shares vested during 2004. During 2006, 2005 and 2004, the Corporation granted 44,988,
41,189, and 61,035 performance shares under the PEP, respectively. At December 31, 2006
and 2005, there were 84,693 and 102,224 performance shares outstanding under the PEP,
respectively.

# NOTE 18: BUSINESS
SEGMENTS AND GEOGRAPHIC INFORMATION

The Corporation has elected to
organize its businesses based principally upon products and services. In certain instances
where a business does not have a local presence in a particular country or geographic
region, however, the Corporation has assigned responsibility for sales of that
businesss products to one of its other businesses with a presence in that country or
region.

The Corporation operates in three
reportable business segments: Power Tools and Accessories, Hardware and Home Improvement,
and Fastening and Assembly Systems. The Power Tools and Accessories segment has worldwide
responsibility for the manufacture and sale of consumer and industrial power tools and
accessories, lawn and garden tools, and electric cleaning, automotive, and lighting
products, as well as for product service. In addition, the Power Tools and Accessories
segment has responsibility for the sale of security hardware to customers in Mexico,
Central America, the Caribbean, and South America; for the sale of plumbing products to
customers outside the United States and Canada; and for sales of household products. On
March 1, 2006, the Corporation acquired Vector. On October 2, 2004, the Corporation
acquired the Porter-Cable and Delta Tools Group from Pentair, Inc. These acquired
businesses are included in the Power Tools and Accessories segment. The Hardware and Home
Improvement segment has worldwide responsibility for the manufacture and sale of security
hardware (except for the sale of security hardware in Mexico, Central America, the
Caribbean, and South America). The Hardware and Home Improvement segment also has
responsibility for the manufacture of plumbing products and for the sale of plumbing
products to customers in the United States and Canada. The Fastening and Assembly Systems
segment has worldwide responsibility for the manufacture and sale of fastening and
assembly systems.

Sales, segment profit, depreciation
and amortization, and capital expenditures set forth in the following tables exclude the
results of the discontinued European security hardware business, as more fully described
in Note 3.

55

---



Business Segments(MILLIONS OF DOLLARS)

|                                      |                           |                             |                              
|------------------------------------- | ------------------------- | --------------------------- | -----------------------------
|Year Ended December 31, 2006          | Power
Tools &
Accessories | Hardware
& Home
Improvement | Fastening
& Assembly 
Systems
|                                     
|Sales to unaffiliated customers       |                           |                             | $                            
|Segment profit (loss) (for Consoli-   |                           |                            
|dated, operating income)              |                           |                             |                              
|Depreciation and amortization         |                           |                             |                              
|Income from equity method investees   |                           |                             |                              
|Capital expenditures                  |                           |                             |                              
|Segment assets                        |                           |                            
|(for Consolidated, total assets)      |                           |                             |                              
|Investment in equity method investees |                           |                             |                              
|                                      |                           |                            
|Year Ended December 31, 2005          |                           |                            
|                                     
|Sales to unaffiliated customers       |                           |                             | $                            
|Segment profit (loss) (for Consoli-   |                           |                            
|dated, operating income)              |                           |                             |                              
|Depreciation and amortization         |                           |                             |                              
|Income from equity method investees   |                           |                             |                              
|Capital expenditures                  |                           |                             |                              
|Segment assets                        |                           |                            
|(for Consolidated, total assets)      |                           |                             |                              
|Investment in equity method investees |                           |                             |                              
|                                      |                           |                            
|Year Ended December 31, 2004          |                           |                            
|                                     
|Sales to unaffiliated customers       |                           |                             | $                            
|Segment profit (loss) (for Consoli-   |                           |                            
|dated, operating income)              |                           |                             |                              
|Depreciation and amortization         |                           |                             |                              
|Income from equity method investees   |                           |                             |                              
|Capital expenditures                  |                           |                             |                              
|Segment assets                        |                           |                            
|(for Consolidated, total assets)      |                           |                             |                              
|Investment in equity method investees |                           |                             |                              
|                                      |                           |                            
|                                     

56

---



The profitability measure employed by
the Corporation and its chief operating decision maker for making decisions about
allocating resources to segments and assessing segment performance is segment profit (for
the Corporation on a consolidated basis, operating income). In general, segments follow
the same accounting policies as those described in Note 1, except with respect to foreign
currency translation and except as further indicated below. The financial statements of a
segments operating units located outside of the United States, except those units
operating in highly inflationary economies, are generally measured using the local
currency as the functional currency. For these units located outside of the United States,
segment assets and elements of segment profit are translated using budgeted rates of
exchange. Budgeted rates of exchange are established annually and, once established, all
prior period segment data is restated to reflect the current years budgeted rates of
exchange. The amounts included in the preceding table under the captions Reportable
Business Segments, and Corporate, Adjustments, & Eliminations are
reflected at the Corporations budgeted rates of exchange for 2006. The amounts
included in the preceding table under the caption Currency Translation
Adjustments represent the difference between consolidated amounts determined using
those budgeted rates of exchange and those determined based upon the rates of exchange
applicable under accounting principles generally accepted in the United States.

Segment profit excludes interest
income and expense, non-operating income and expense, adjustments to eliminate
intercompany profit in inventory, and income tax expense. In determining segment profit,
expenses relating to pension and other postretirement benefits are based solely upon
estimated service costs. Corporate expenses, as well as certain centrally managed
expenses, including expenses related to share-based compensation, are allocated to each
reportable segment based upon budgeted amounts. While sales and transfers between segments
are accounted for at cost plus a reasonable profit, the effects of intersegment sales are
excluded from the computation of segment profit. Intercompany profit in inventory is
excluded from segment assets and is recognized as a reduction of cost of goods sold by the
selling segment when the related inventory is sold to an unaffiliated customer. Because
the Corporation compensates the management of its various businesses on, among other
factors, segment profit, the Corporation may elect to record certain segment-related
expense items of an unusual or non-recurring nature in consolidation rather than reflect
such items in segment profit. In addition, certain segment-related items of income or
expense may be recorded in consolidation in one period and transferred to the various
segments in a later period.

Segment assets exclude assets of
discontinued operations, pension and tax assets, intercompany profit in inventory,
intercompany receivables, and goodwill associated with the Corporations acquisition
of Emhart Corporation in 1989.

The reconciliation of segment profit
to consolidated earnings from continuing operations before income taxes for each year, in
millions of dollars, is as follows:

|                                                           | 2006 | 2005 | 2004
|---------------------------------------------------------- | ---- | ---- | ----
|                                                          
|Segment profit for total reportable business segments      |      |      | $   
|Items excluded from segment profit:                        |      |     
|Adjustment of budgeted foreign exchange rates to           |      |     
|actual rates                                               |      |      |     
|Depreciation of Corporate property                         |      |      |     
|Adjustment to businesses' postretirement benefit           |      |     
|expenses booked in consolidation                           |      |      |     
|Other adjustments booked in consolidation directly         |      |     
|related to reportable business segments                    |      |      |     
|Amounts allocated to businesses in arriving at segment     |      |     
|profit in excess of (less than) Corporate center operating |      |     
|expenses, eliminations, and other amounts identified above |      |      |     
|                                                          
|Operating income                                           |      |      |     
|Interest expense, net of interest income                   |      |      |     
|Other expense (income)                                     |      |      |     
|                                                          
|Earnings from continuing operations before income taxes    |      |      | $   
|                                                          

57

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The reconciliation of segment assets
to consolidated total assets at the end of each year, in millions of dollars, is as
follows:

|                                              | 2006
|--------------------------------------------- | ----
|                                             
|Segment assets for total                      |     
|reportable business segments                  |     
|Items excluded from segment assets:           |     
|Adjustment of budgeted foreign exchange rates |     
|to actual rates                               |     
|Goodwill                                      |     
|Pension assets                                |     
|Other Corporate assets                        |     
|                                             
|                                              |     
|                                             

Other Corporate assets principally
consist of cash and cash equivalents, tax assets, property, assets of discontinued
operations, and other assets.

Sales to The Home Depot, a customer
of the Power Tools and Accessories and Hardware and Home Improvement segments, accounted
for approximately $1.3 billion, $1.4 billion, and $1.0 billion of the Corporations
consolidated sales for the years ended December 31, 2006, 2005, and 2004, respectively.
Sales to Lowes Home Improvement Warehouse, a customer of the Power Tools and
Accessories and Hardware and Home Improvement segments, accounted approximately for $.9 billion,
$.9 billion, and $.7 billion of the Corporations consolidated sales for the
years ended December 31, 2006, 2005, and 2004, respectively.

The composition of the
Corporations sales by product group for each year, in millions of dollars, is set
forth below:

|                                                       | 2006
|------------------------------------------------------ | ----
|                                                      
|Consumer and industrial                                |     
|power tools and product service                        |     
|Lawn and garden products                               |     
|Consumer and industrial accessories                    |     
|Cleaning, automotive, lighting, and household products |     
|Security hardware                                      |     
|Plumbing products                                      |     
|Fastening and assembly systems                         |     
|                                                      
|                                                       |     
|                                                      

The Corporation markets its products
and services in over 100 countries and has manufacturing sites in 10 countries. Other than
in the United States, the Corporation does not conduct business in any country in which
its sales in that country exceed 10% of consolidated sales. Sales are attributed to
countries based on the location of customers. The composition of the Corporations
sales to unaffiliated customers between those in the United States and those in other
locations for each year, in millions of dollars, is set forth below:

|              | 2006
|------------- | ----
|             
|United States |     
|Canada        |     
|             
|North America |     
|Europe        |     
|Other         |     
|             
|              |     
|             

The composition of the
Corporations property, plant, and equipment between those in the United States and
those in other countries as of the end of each year, in millions of dollars, is set forth
below:

|                | 2006
|--------------- | ----
|               
|United States   |     
|Mexico          |     
|Other countries |     
|               
|                |     
|               
|                |     

# NOTE 19: LEASES

The Corporation leases certain
service centers, offices, warehouses, manufacturing facilities, and equipment. Generally,
the leases carry renewal provisions and require the Corporation to pay maintenance costs.
Rental payments may be adjusted for increases in taxes and insurance above specified
amounts. Rental expense for 2006, 2005, and 2004 amounted to $101.3 million, $99.7
million, and $92.6 million, respectively. Capital leases were immaterial in amount. Future
minimum payments under non-cancelable operating leases with initial or remaining terms of
more than one year as of December 31, 2006, in millions of dollars, were as follows:

|           | 
|---------- | 
|          
|2007       | 
|2008       | 
|2009       | 
|2010       | 
|2011       | 
|Thereafter | 
|          
|           | 
|          

58

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# NOTE 20: RESTRUCTURING
ACTIONS

A summary of restructuring activity
during the three years ended December 31, 2006, in millions of dollars, is set forth
below:

|                                           
|-------------------------------------------
|                                           
|Restructuring reserve at December 31, 2003 
|Reserves established in 2004               
|Reversal of reserves                       
|Proceeds received in excess of the adjusted
|carrying value of long-lived assets        
|Utilization of reserves:                   
|Cash                                       
|Non-cash                                   
|Foreign currency translation               
|                                           
|Restructuring reserve at December 31, 2004 
|Utilization of reserves:                   
|Cash                                       
|Foreign currency translation               
|                                           
|Restructuring reserve at December 31, 2005 
|Reserves established in 2006               
|Reversal of reserves                       
|Utilization of reserves:                   
|Cash                                       
|Non-cash                                   
|Foreign currency translation               
|                                           
|Restructuring reserve at December 31, 2006 
|                                           

In 2004, the Corporation recognized
$5.4 million of pre-tax restructuring and exit costs related to actions taken in its Power
Tools and Accessories segment. The restructuring actions taken in 2004 principally
reflected severance benefits. The $5.4 million charge recognized during 2004 was offset,
however, by the reversal of $4.0 million of severance accruals established as part of
previously provided restructuring reserves that were no longer required and $1.4 million
representing the excess of proceeds received on the sale of long-lived assets, written
down as part of restructuring actions, over their adjusted carrying values.

During 2006, 2005, and 2004, the
Corporation paid severance and other exit costs of $1.7 million, $13.6 million, and $25.0
million, respectively.

The Corporation anticipates that
actions covered by the $3.2 million restructuring accrual at December 31, 2006, will be
completed in 2007.

The amounts reflected in the column
titled Write-down to fair value less costs to sell of certain long-lived
assets, as included within this Note, relating to reserves established during the
three years ended December 31, 2006, represent adjustments to the carrying value of those
long-lived assets.

# NOTE 21: OTHER EXPENSE
(INCOME)

Other expense (income) was $2.2
million in 2006, $(51.6) million in 2005, and $2.8 million in 2004. During 2005, the
Corporation received a payment of $55.0 million relating to the settlement of
environmental and product liability coverage litigation with an insurer.

# NOTE 22: LITIGATION AND
CONTINGENT LIABILITIES

The Corporation is involved in
various lawsuits in the ordinary course of business. These lawsuits primarily involve
claims for damages arising out of the use of the Corporations products and
allegations of patent and trademark infringement. The Corporation also is involved in
litigation and administrative proceedings involving employment matters and commercial
disputes. Some of these lawsuits include claims for punitive as well as compensatory
damages. The Corporation, using current product sales data and historical trends,
actuarially calculates the estimate of its exposure for product liability. The
Corporation is insured for product liability claims for amounts in excess of established
deductibles and accrues for the estimated liability up to the limits of the deductibles.
All other claims and lawsuits are handled on a case-by-case basis.

The Corporation also is party to
litigation and administrative proceedings with respect to claims involving the discharge
of hazardous substances into the environment. Some of these assert claims for damages and
liability for remedial investigations and clean-up costs with respect to sites that have
never been owned or operated

59

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by the Corporation but at which the Corporation has been
identified as a potentially responsible party. Other matters involve current and former manufacturing facilities.

The Environmental Protection Agency
(EPA) and the Santa Ana Regional Water Quality Board (the Water Quality Board) have each
initiated administrative proceedings against the Corporation and certain of the
Corporations current or former affiliates alleging that the Corporation and numerous
other defendants are responsible to investigate and remediate alleged groundwater
contamination in and adjacent to a 160-acre property located in Rialto, California. The
cities of Colton and Rialto, as well as the West Valley Water District and the Fontana
Water Company, a private company, also have initiated lawsuits against the Corporation and
certain of the Corporations former or current affiliates in the Federal District
Court for California, Central District alleging similar claims that the Corporation is
liable under the Comprehensive Environmental Response, Compensation and Liability Act of
1980, the Resource Conservation and Recovery Act, and state law for the discharge or
release of hazardous substances into the environment and the contamination caused by those
alleged releases. All defendants have crossclaims against one another in the federal
litigation. The administrative proceedings and the lawsuits generally allege that West
Coast Loading Corporation (WCLC), a defunct company that operated in Rialto between 1952
and 1957, and an as yet undefined number of other defendants are responsible for the
release of perchlorate and solvents into the groundwater basin that supplies drinking
water to the referenced three municipal water suppliers and one private water company in
California and that the Corporation and certain of the Corporations current or
former affiliates are liable as a successor of WCLC. Judgment has
been entered in favor of all defendants, including the Corporation and certain of the
Corporations current and former affiliates, in the federal lawsuit brought by the
City of Colton as to Coltons federal claims. The remaining state claims and the
crossclaims in that lawsuit have been dismissed by the court on jurisdictional grounds. The City of Colton
and several co-defendants have appealed the dismissal of these claims. The City of Colton
also has re-filed its claims in California state court and filed a new federal action
arising out of the Comprehensive Environmental Response, Compensation and Liability Act of
1980, the Resource Conservation and Recovery Act, and state law. Certain defendants have
crossclaimed against other defendants in the new federal action and have asserted claims
against The United States Department of Defense, Environmental Protection Agency and the
City of Rialto. The Corporation believes that neither the facts nor the law support an
allegation that the Corporation is responsible for the contamination and is vigorously
contesting these claims.

For sites never operated by the
Corporation, the Corporation makes an assessment of the costs involved based on
environmental studies, prior experience at similar sites, and the experience of other
named parties. The Corporation also considers the ability of other parties to share costs,
the percentage of the Corporations exposure relative to all other parties, and the
effects of inflation on these estimated costs. For matters associated with properties
currently operated by the Corporation, the Corporation makes an assessment as to whether
an investigation and remediation would be required under applicable federal and state
laws. For matters associated with properties previously sold or operated by the
Corporation, the Corporation considers any applicable terms of sale and applicable federal
and state laws to determine if it has any remaining liability. If it is determined that
the Corporation has potential liability for properties currently owned or previously sold,
an estimate is made of the total costs of investigation and remediation and other
potential costs associated with the site.

As of December 31, 2006, the
Corporations aggregate probable exposure with respect to environmental liabilities,
for which accruals have been established in the consolidated financial statements, was
$76.4 million. These accruals are reflected in other current liabilities and other
long-term liabilities in the Consolidated Balance Sheet.

During 2003, the Corporation received
notices of proposed adjustments from the United States Internal Revenue Service (IRS) in
connection with audits of the tax years 1998 through 2000. The principal adjustment
proposed by the IRS consists of the disallowance of a capital loss deduction taken in the
Corporations tax returns and interest on the deficiency. Prior to receiving the
notices of proposed adjustments from the IRS, the Corporation filed a petition against the
IRS in the Federal District Court of Maryland (the Court) seeking refunds for a carryback
of a portion of the aforementioned capital loss deduction. The IRS subsequently filed a
counterclaim to the Corporations petition. In October 2004, the Court granted the
Corporations motion for summary judgment on its

60

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complaint against the IRS and
dismissed the IRS counterclaim. In its opinion, the Court ruled in the Corporations
favor that the capital losses cannot be disallowed by the IRS. In December 2004, the IRS
appealed the Courts decision in favor of the Corporation to the United States
Circuit Court of Appeals for the Fourth Circuit (the Fourth Circuit Court). In February 2006,
the Fourth Circuit Court decided two of three issues in the Corporations favor and
remanded the third issue for trial in the Court. The Corporation vigorously disputes the
position taken by the IRS in this matter. The Corporation has provided adequate reserves
in the event that the IRS prevails in its disallowance of the previously described capital
loss and the imposition of related interest. Should the IRS prevail in its disallowance of
the capital loss deduction and imposition of related interest, it would result in a cash
outflow by the Corporation of approximately $170 million. If the Corporation prevails, it
would result in the Corporation receiving a refund of taxes previously paid of
approximately $50 million, plus interest.

The Corporations estimate of
the costs associated with product liability claims, environmental exposures, income tax
matters, and other legal proceedings is accrued if, in managements judgment, the
likelihood of a loss is probable and the amount of the loss can be reasonably estimated.

These accrued liabilities are not
discounted. Insurance recoveries for environmental and certain general liability claims
have not been recognized until realized.

In the opinion of management, amounts
accrued for exposures relating to product liability claims, environmental matters, income
tax matters, and other legal proceedings are adequate and, accordingly, the ultimate
resolution of these matters is not expected to have a material adverse effect on the
Corporations consolidated financial statements. As of December 31, 2006, the
Corporation had no known probable but inestimable exposures relating to product liability
claims, environmental matters, income tax matters, or other legal proceedings that are
expected to have a material adverse effect on the Corporation. There can be no assurance,
however, that unanticipated events will not require the Corporation to increase the amount
it has accrued for any matter or accrue for a matter that has not been previously accrued
because it was not considered probable. While it is possible that the increase or
establishment of an accrual could have a material adverse effect on the financial results
for any particular fiscal quarter or year, in the opinion of management there exists no
known potential exposure that would have a material adverse effect on the financial
condition or on the financial results of the Corporation beyond any such fiscal quarter or
year.

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NOTE 23: QUARTERLY
RESULTS (UNAUDITED)

|(DOLLARS IN MILLIONS EXCEPT PER SHARE DATA) YEAR ENDED DECEMBER 31, 2006 | FIRSTQUARTER | SECONDQUARTER | THIRDQUARTER | FOURTHQUARTER
|------------------------------------------------------------------------ | ------------ | ------------- | ------------ | -------------
|                                                                        
|Sales                                                                    |              |               | $            | 1,528.       
|Gross margin                                                             |              |               |              | 543.         
|Net earnings                                                             |              |               |              | 113.         
|                                                                        
|Net earnings per common sharebasic                                      |              |               | $            | 1.4          
|                                                                        
|Net earnings per common sharediluted                                    |              |               | $            | 1.4          
|                                                                        

|YEAR ENDED DECEMBER 31, 2005                                       | FIRSTQUARTER | SECONDQUARTER | THIRDQUARTER | FOURTHQUARTER
|------------------------------------------------------------------ | ------------ | ------------- | ------------ | -------------
|                                                                  
|Sales                                                              |              |               | $            | 1,519.       
|Gross margin                                                       |              |               |              | 535.         
|Net earnings from continuing operations                            |              |               |              | 144.         
|Net earnings                                                       |              |               |              | 144.         
|                                                                  
|Net earnings from continuing operations per common share - basic   |              |               | $            | 1.7          
|Net earnings per common sharebasic                                |              |               |              | 1.8          
|                                                                  
|Net earnings from continuing operations per common share - diluted |              |               | $            | 1.7          
|Net earnings per common sharediluted                              |              |               |              | 1.7          
|                                                                  

As more fully described in Note 1,
the Corporation adopted SFAS No. 123R effective January 1, 2006, using the modified
retrospective method of adoption whereby the Corporation restated all prior periods
presented based on the amounts previously recognized under SFAS No. 123 for purposes of
pro forma disclosures. The above quarterly results for 2005 reflect the restated amounts
upon adoption of SFAS No. 123R.

As more fully described in Note 21,
net earnings for the first quarter of 2005 included a $55.0 million ($35.8 million
after-tax) favorable settlement of environmental and product liability coverage litigation
with an insurer. As more fully described in Note 3, net earnings for the fourth quarter of
2005 included a $.1 million loss on the sale of discontinued operations. As more fully
described in Note 12, net earnings for the fourth quarter of 2005 included $51.2 million
of incremental tax expense resulting from the repatriation of $888.3 million of foreign
earnings associated with the AJCA.

Earnings per common share are
computed independently for each of the quarters presented. Therefore, the sum of the
quarters may not be equal to the full year earnings per share.

62

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REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON CONSOLIDATED FINANCIAL STATEMENTS

# To the Stockholders
and Board of Directorsof The Black &
Decker Corporation:

We have audited the accompanying
consolidated balance sheet of The Black & Decker Corporation and Subsidiaries as of
December 31, 2006 and 2005, and the related consolidated statements of earnings,
stockholders equity, and cash flows for each of the three years in the period ended
December 31, 2006. Our audits also included the financial statement schedule listed in the
Index at Item 15(a). These financial statements and schedule are the responsibility of the
Corporations management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.

We conducted our audits in accordance
with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis for our
opinion.

In our opinion, the consolidated
financial statements referred to above present fairly, in all material respects, the
consolidated financial position of The Black & Decker Corporation and Subsidiaries at
December 31, 2006 and 2005, and the consolidated results of their operations and their
cash flows for each of the three years in the period ended December 31, 2006, in
conformity with U.S. generally accepted accounting principles. Also, in our opinion, the
related financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the information set
forth therein.

As discussed in Note 1, the
accompanying financial statements have been restated for the adoption of Statement of
Financial Accounting Standards No. 123(R), Share-based Payment, using the
modified retrospective method. Also, as discussed in Note 1, the Corporation adopted the
provisions of Statement of Financial Accounting Standards No. 158, Employers
Accounting for Defined Benefit Pension and Other Postretirement Plans, as of
December 31, 2006.

We also have audited, in accordance
with the standards of the Public Company Accounting Oversight Board (United States), the
effectiveness of The Black & Decker Corporation and Subsidiaries internal
control over financial reporting as of December 31, 2006, based on criteria established in
Internal ControlIntegrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission and our report dated February 14, 2007 expressed
an unqualified opinion thereon.

/s/ ERNST & YOUNG LLP

Baltimore, MarylandFebruary 14, 2007

63

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# ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

Not applicable.

# ITEM 9A. CONTROLS AND
PROCEDURES

# EVALUATION OF DISCLOSURE
CONTROLS AND PROCEDURES

Under the supervision and with the
participation of Corporations management, including the Chief Executive Officer and
Chief Financial Officer, the Corporation evaluated the effectiveness of the design and
operation of the Corporations disclosure controls and procedures as of December 31,
2006. Based upon that evaluation, the Corporations Chief Executive Officer and Chief
Financial Officer concluded that the Corporations disclosure controls and procedures
are effective.

# MANAGEMENTS REPORT
ON INTERNAL CONTROL OVER FINANCIAL REPORTING

The Corporations management is
responsible for establishing and maintaining adequate internal control over financial
reporting. Under the supervision and with the participation of Corporations
management, including the Chief Executive Officer and Chief Financial Officer, the
Corporation evaluated the effectiveness of the design and operation of its internal
control over financial reporting based on the framework in Internal Control 
Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission. Based on that evaluation, the Corporations Chief Executive
Officer and Chief Financial Officer concluded that the Corporations internal control
over financial reporting was effective as of December 31, 2006.

Ernst & Young LLP, the
Corporations independent registered public accounting firm, audited
managements assessment of the effectiveness of internal control over financial
reporting and, based on that audit, issued the report set forth on the following page.

# CHANGES IN INTERNAL
CONTROL OVER FINANCIAL REPORTING

There were no changes in the
Corporations internal controls over financial reporting during the quarterly period
ended December 31, 2006, that have materially affected, or are reasonably likely to
materially affect, the Corporations internal control over financial reporting.

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# REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM ON
INTERNAL CONTROL OVER FINANCIAL REPORTING

# To the Stockholders
and Board of Directorsof The Black &
Decker Corporation:

We have audited managements
assessment, included in Managements Report on Internal Control Over Financial
Reporting, that The Black & Decker Corporation and Subsidiaries maintained effective internal control
over financial reporting as of December 31, 2006, based on criteria established in
Internal ControlIntegrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (the COSO criteria). The Black & Decker
Corporations management is responsible for maintaining effective internal control
over financial reporting and for its assessment of the effectiveness of internal control
over financial reporting. Our responsibility is to express an opinion on managements
assessment and an opinion on the effectiveness of the companys internal control over
financial reporting based on our audit.

We conducted our audit in accordance
with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about
whether effective internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over financial
reporting, evaluating managements assessment, testing and evaluating the design and
operating effectiveness of internal control, and performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.

A companys internal control
over financial reporting is a process designed to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles. A
companys internal control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are being made
only in accordance with authorizations of management and directors of the company; and (3)
provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the companys assets that could have a material
effect on the financial statements.

Because of its inherent limitations,
internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk
that controls may become inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.

In our opinion, managements
assessment that The Black & Decker Corporation and Subsidiaries maintained effective internal control
over financial reporting as of December 31, 2006, is fairly stated, in all material
respects, based on the COSO criteria. Also, in our opinion, The Black & Decker
Corporation and Subsidiaries maintained, in all material respects, effective internal control over
financial reporting as of December 31, 2006, based on the COSO criteria.

We have also audited, in accordance
with the standards of the Public Company Accounting Oversight Board (United States), the
consolidated balance sheet of The Black & Decker Corporation and Subsidiaries as of
December 31, 2006 and 2005, and the related consolidated statements of earnings,
stockholders equity, and cash flows for each of the three years in the period ended
December 31, 2006, and our report dated February 14, 2007 expressed an unqualified opinion
thereon.

/s/ ERNST & YOUNG LLP

Baltimore, MarylandFebruary 14, 2007

65

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# PART III

# ITEM 10. DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

Information required under this Item
with respect to Directors is contained in the Corporations Proxy Statement for the
Annual Meeting of Stockholders to be held April 19, 2007, under the captions
Election of Directors, Corporate Governance, and Section
16(a) Beneficial Ownership Reporting Compliance and is incorporated herein by
reference.

Information required under this Item
with respect to Executive Officers of the Corporation is included in Item 1 of Part I of
this report.

# ITEM 11. EXECUTIVE
COMPENSATION

Information required under this Item
is contained in the Corporations Proxy Statement for the Annual Meeting of
Stockholders to be held April 19, 2007, under the captions Corporate
Governance and Executive Compensation and is incorporated herein by
reference.

# ITEM 12. SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

Information required under this Item
is contained in the Corporations Proxy Statement for the Annual Meeting of
Stockholders to be held April 19, 2007, under the captions Voting Securities,
Security Ownership by Management, and Equity Compensation Plan
Information and is incorporated herein by reference.

# ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

Information required under this Item
is contained in the Corporations Proxy Statement for the Annual Meeting of
Stockholders to be held April 19, 2007, under the caption Corporate Governance
and is incorporated herein by reference.

# ITEM 14. PRINCIPAL
ACCOUNTING FEES AND SERVICES

Information required under this Item
is contained in the Corporations Proxy Statement for the Annual Meeting of
Stockholders to be held April 19, 2007, under the caption Ratification of the
Selection of the Independent Registered Public Accounting Firm and is incorporated
herein by reference.

66

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# PART IV

# ITEM 15. EXHIBITS AND
FINANCIAL STATEMENT SCHEDULES

# (a) List of Financial Statements,
Financial Statement Schedules, and Exhibits

# (1) LIST OF FINANCIAL
STATEMENTS

The following consolidated financial
statements of the Corporation and its subsidiaries are included in Item 8 of Part II
of this report:

Consolidated Statement of Earnings
 years ended December 31, 2006, 2005, and 2004.

Consolidated Balance Sheet 
December 31, 2006 and 2005.

Consolidated Statement of
Stockholders Equity  years ended December 31, 2006, 2005, and 2004.

Consolidated Statement of Cash Flows
 years ended December 31, 2006, 2005, and 2004.

Notes to Consolidated
Financial Statements.

Report of Independent Registered
Public Accounting Firm on Consolidated Financial Statements.

(2)
LIST OF FINANCIAL STATEMENT SCHEDULES

The following financial statement
schedules of the Corporation and its subsidiaries are included herein:

Schedule II  Valuation and
Qualifying Accounts and Reserves.

All other schedules for which
provision is made in the applicable accounting regulations of the Commission are not
required under the related instructions or are inapplicable and, therefore, have been
omitted.

# (3) LIST OF EXHIBITS

The following exhibits are either
included in this report or incorporated herein by reference as indicated below:

# Exhibit 3(a)

Articles of Restatement of the
Charter of the Corporation, included in the Corporations Quarterly Report on Form
10-Q for the quarter ended June 29, 1997, are incorporated herein by reference.

# Exhibit 3(b)

Bylaws of the Corporation, as
amended, included in the Corporations Current Report on Form 8-K filed with the
Commission on April 28, 2005, are incorporated herein by reference.

# Exhibit 4(a)

Indenture dated as of March 24, 1993,
by and between the Corporation and Security Trust Company, National Association, as
Trustee, included in the Corporations Current Report on Form 8-K filed with the
Commission on March 26, 1993, is incorporated herein by reference.

# Exhibit 4(b)

Indenture dated as of June 26, 1998,
by and among Black & Decker Holdings Inc., as Issuer, the Corporation, as Guarantor,
and The First National Bank of Chicago, as Trustee, included in the Corporations
Quarterly Report on Form 10-Q for the quarter ended June 28, 1998, is incorporated herein
by reference.

# Exhibit 4(c)(1)

Credit Agreement, dated as of October
29, 2004, among the Corporation, Black & Decker Holdings, Inc., as Initial Borrowers,
the initial lenders named therein, as Initial Lenders, Citibank, N.A., as Administrative
Agent, JPMorgan Chase Bank, as Syndication Agent, and Bank of America, N.A., BNP Paribas
and Commerzbank AG, as Co-Documentation Agents, included in the Corporations Current
Report on Form 8-K filed with the Commission on November 4, 2004, is incorporated herein
by reference.

# Exhibit 4(c)(2)

Amendment, dated June 16, 2006, to
the Credit Agreement, dated as of October 29, 2004, among the Corporation, Black &
Decker Luxembourg S.ar.L, Black & Decker Luxembourg Finance S.C.A., the banks,
financial institutions and other institutional lenders and issuing banks listed on the
signature pages thereof, and Citibank, N.A., as administrative agent, included in the
Corporations Quarterly Report on Form 10-Q for the quarter ended July 2, 2006, is
incorporated herein by reference.

# Exhibit 4(d)

Indenture  between the  Corporation  and The Bank of New York,  as Trustee,  dated as of June 5, 2001,  included in the  Corporation's
Registration Statement on Form S-4 (Reg. No. 333-64790), is incorporated herein by reference.

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# Exhibit 4(e)

Indenture, dated as of October 18,
2004, between the Corporation and The Bank of New York, as Trustee, included in the
Corporations Current Report on Form 8-K filed with the Commission on October 20,
2004, is incorporated herein by reference.

# Exhibit 4(f)

Indenture, dated as of November 16,
2006, between the Corporation and The Bank of New York, as Trustee.

# Exhibit 4(g)

First Supplemental Indenture, dated as
of November 16, 2006, between the Corporation and The Bank of New York, as Trustee.

The Corporation agrees to furnish a
copy of any other documents with respect to long-term debt instruments of the Corporation
and its subsidiaries upon request.

# Exhibit 10(a)

The Black & Decker Corporation
Deferred Compensation Plan for Non-Employee Directors, as amended, included in the
Corporations Annual Report on Form 10-K for the year ended December 31, 2005, is
incorporated herein by reference.

# Exhibit 10(b)

The Black & Decker Non-Employee
Directors Stock Plan, as amended and restated, included in the Corporations Annual
Report on Form 10-K for the year ended December 31, 2005, is incorporated herein by
reference.

# Exhibit 10(c)

The Black & Decker 1989 Stock
Option Plan, as amended, included in the Corporations Quarterly Report on Form 10-Q
for the quarter ended March 30, 1997, is incorporated herein by reference.

# Exhibit 10(d)

The Black & Decker 1992 Stock
Option Plan, as amended, included in the Corporations Annual Report on Form 10-K for
the year ended December 31, 2005, is incorporated herein by reference.

# Exhibit 10(e)

The Black & Decker 1995 Stock
Option Plan for Non-Employee Directors, as amended, included in the Corporations
Annual Report on Form 10-K for the year ended December 31, 1998, is incorporated herein by
reference.

# Exhibit 10(f)

The Black & Decker 1996 Stock
Option Plan, as amended, included in the Corporations Annual Report on Form 10-K for
the year ended December 31, 2005, is incorporated herein by reference.

# Exhibit 10(g)

The Black & Decker 2003 Stock
Option Plan, as amended.

# Exhibit 10(h)

The Black & Decker Corporation
2004 Restricted Stock Plan, included as Exhibit B to the Proxy Statement, dated March 16,
2004, for the 2004 Annual Meeting of Stockholders of the Registrant, is incorporated
herein by reference.

# Exhibit 10(i)

The Black & Decker Performance
Equity Plan, as amended, included in the Corporations Annual Report on Form 10-K for
the year ended December 31, 2005, is incorporated herein by reference.

# Exhibit 10(j)

Form of Restricted Share Agreement
relating to The Black & Decker Corporation 2004 Restricted Stock Plan, included in the
Corporations Current Report on Form 8-K filed with the Commission on April 28, 2005,
is incorporated herein by reference.

# Exhibit 10(k)

Form of Nonqualified Stock Option
Agreement with executive officers relating to the Corporations stock option plans,
included in the Corporations Current Report on Form 8-K filed with the Commission on
April 28, 2005, is incorporated herein by reference.

# Exhibit 10(l)

The Black & Decker Executive
Annual Incentive Plan, as amended and restated, included in the Corporations Annual
Report on Form 10-K for the year ended December 31, 2005, is incorporated herein by
reference.

# Exhibit 10(m)

The Black & Decker Management
Annual Incentive Plan, as amended, included in the Corporations Annual Report on
Form 10-K for the year ended December 31, 2005, is incorporated herein by reference.

# Exhibit 10(n)(1)

The Black & Decker Supplemental
Pension Plan, as amended and restated, included in the Corporations Annual Report on
Form 10-K for the year ended December 31, 2005, is incorporated herein by reference.

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# Exhibit 10(n)(2)

First Amendment to The Black &
Decker Supplemental Pension Plan, included in the Corporations Quarterly Report on
10-Q for the quarter ended April 2, 2006, is incorporated herein by reference.

# Exhibit 10(o)

The Black & Decker Supplemental
Retirement Savings Plan, as amended and restated, included in the Corporations
Annual Report on Form 10-K for the year ended December 31, 2005, is incorporated herein by
reference.

# Exhibit 10(p)

The Black & Decker Supplemental
Executive Retirement Plan, as amended and restated, included in the Corporations
Annual Report on Form 10-K for the year ended December 31, 2005, is incorporated herein by
reference.

# Exhibit 10(q)

The Black & Decker Executive Life
Insurance Program, as amended, included in the Corporations Quarterly Report on Form
10-Q for the quarter ended April 4, 1993, is incorporated herein by reference.

# Exhibit 10(r)

The Black & Decker Executive
Salary Continuance Plan, as amended and restated, included in the Corporations
Annual Report on Form 10-K for the year ended December 31, 2005, is incorporated herein by
reference.

# Exhibit 10(s)

Description of the Corporations
policy and procedures for relocation of existing employees (individual transfers),
included in the Corporations Annual Report on Form 10-K for the year ended December
31, 1991, is incorporated herein by reference.

# Exhibit 10(t)

Description of the Corporations
policy and procedures for relocation of new employees, included in the Corporations
Annual Report on Form 10-K for the year ended December 31, 1991, is incorporated herein by
reference.

# Exhibit 10(u)

Description of certain incidental
benefits provided to executive officers of the Corporation, included in the
Corporations Annual Report on Form 10-K for the year ended December 31, 1997, is
incorporated herein by reference.

# Exhibit 10(v)

Form of Severance Benefits Agreement
by and between the Corporation and approximately 17 of its key employees, included in the
Corporations Annual Report on Form 10-K for the year ended December 31, 2005, is
incorporated herein by reference.

# Exhibit 10(w)

Amended and Restated Employment
Agreement, dated as of February 9, 2006, by and between the Corporation and Nolan D.
Archibald, included in the Corporations Annual Report on Form 10-K for the year
ended December 31, 2005, is incorporated herein by reference.

# Exhibit 10(x)

Severance Benefits Agreement, dated
February 10, 2006, by and between the Corporation and John W. Schiech, included in the
Corporations Annual Report on Form 10-K for the year ended December 31, 2005, is
incorporated herein by reference.

# Exhibit 10(y)

Severance Benefits Agreement, dated
February 10, 2006, by and between the Corporation and Charles E. Fenton, included in the
Corporations Annual Report on Form 10-K for the year ended December 31, 2005, is
incorporated herein by reference.

# Exhibit 10(z)

Severance Benefits Agreement, dated
February 10, 2006, by and between the Corporation and Michael D. Mangan, included in the
Corporations Annual Report on Form 10-K for the year ended December 31, 2005, is
incorporated herein by reference.

# Exhibit 10(aa)

Severance Benefits Agreement, dated
February 10, 2006, by and between the Corporation and Paul F. McBride.

# Exhibit 10(bb)

Severance Benefits Agreement, dated February
10, 2006, by and between the Corporation and Thomas D. Koos, included in the
Corporations Annual Report on Form 10-K for the year ended December 31, 2005, is
incorporated herein by reference.

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# Exhibit 10(cc)

The Black & Decker Corporation
Corporate Governance Policies and Procedures Statement, as amended, included in the
Corporations Current Report on Form 8-K filed with the Commission on April 21, 2006,
is incorporated herein by reference.

Items 10(a) through 10(cc) constitute
management contracts and compensatory plans and arrangements required to be filed as
exhibits under Item 14(c) of this Report.

# Exhibit 21

List of Subsidiaries.

# Exhibit 23

Consent of Independent Registered
Public Accounting Firm.

# Exhibit 24

Powers of Attorney.

# Exhibit 31.1

Chief Executive Officers
Certification Pursuant to Rule 13a-14(a)/15d-14(a) and pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.

# Exhibit 31.2

Chief Financial Officers
Certification Pursuant to Rule 13a-14(a)/15-d-14(a) and pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.

# Exhibit 32.1

Chief Executive Officers
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.

# Exhibit 32.2

Chief Financial Officers
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.

All other items are not
applicable or none.

# (b) Exhibits

The exhibits required by Item 601 of
Regulation S-K are filed herewith.

# (c) Financial Statement
Schedules and Other Financial Statements

The Financial Statement Schedule
required by Regulation S-X is filed herewith.

SCHEDULE
IIVALUATION AND QUALIFYING ACCOUNTS AND RESERVESTHE BLACK & DECKER
CORPORATION AND SUBSIDIARIES(MILLIONS OF DOLLARS)

|DESCRIPTION                                      | BALANCEATBEGINNINGOF PERIOD | ADDITIONSCHARGED TO COSTS ANDEXPENSES | DEDUCTIONS | OTHERCHARGESADD(DEDUCT) | BALANCEAT ENDOF PERIOD
|------------------------------------------------ | --------------------------- | ------------------------------------- | ---------- | ----------------------- | ----------------------
|                                                
|Year Ended December 31, 2006                     |                             |                                       |            |                         |                       
|Reserve for doubtful accounts and cash discounts |                             |                                       | $          | 45                      | .1                    
|                                                
|Year Ended December 31, 2005                     |                             |                                      
|Reserve for doubtful accounts and cash discounts |                             |                                       | $          | 52                      | .1                    
|                                                
|Year Ended December 31, 2004                     |                             |                                      
|Reserve for doubtful accounts and cash discounts |                             |                                       | $          | 47                      | .4                    
|                                                

(a)    
          Accounts written off during the year and cash discounts taken by customers.

(b)    
          Primarily includes currency translation adjustments and amounts associated with
          acquired and divested businesses.

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Pursuant to the requirements of
Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized.

|                         |                                                                                                                                                                                                        
|------------------------ | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|DATE:  February 14, 2007 | THE BLACK  &  DECKER CORPORATION
By    /s/ NOLAN D. ARCHIBALD                   
              
            Nolan D. Archibald
            Chairman,
President, and             Chief Executive Officer

Pursuant to the requirements of the
Securities Exchange Act of 1934, this report has been signed below on February 14, 2007,
by the following persons on behalf of the registrant and in the capacities indicated.

|SIGNATURE                                                                                                                                                                                                                                                                          | TITLE                                                                                                                              | DATE                                               
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------
|                                                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                                                  
|Principal Executive Officer/s/ NOLAN D. ARCHIBALD
                   Nolan D. Archibald

Principal Financial Officer/s/ MICHAEL D. MANGAN                  
Michael D. Mangan 
Principal Accounting Officer/s/ CHRISTINA M. MCMULLEN        
               
Christina M. McMullen | Chairman, President, and Chief Executive Officer

Senior Vice President and Chief Financial Officer

Vice President and Controller | February 14, 2007February 14, 2007February 14, 2007

---

This report has been signed by the
following directors, constituting a majority of the Board of Directors, by Nolan D.
Archibald, Attorney-in-Fact.

| |                                                                                                 
| | ------------------------------------------------------------------------------------------------
| | Nolan D. Archibald  
Barbara L. Bowles   
George W. Buckley   
M. Anthony Burns    
Kim B. Clark

|                                                                                         |                         
|---------------------------------------------------------------------------------------- | ------------------------
|By    /s/ NOLAN D. ARCHIBALD
            Nolan D. Archibald
            Attorney-in-Fact | DATE:  February
14, 2007

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