UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

Commission File Number 1-7724

(Exact name of registrant as specified in its charter)

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 12 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.  Yes x  No o

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.

Large accelerated filer  x               Accelerated filer  o               Non-accelerated filer  o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)

Yes o  No x

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date:

TABLE OF CONTENTS

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SNAP-ON INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

(Amounts in millions, except per share data)

(Unaudited)

See notes to Condensed Consolidated Financial Statements

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SNAP-ON INCORPORATED

CONDENSED CONSOLIDATED BALANCE SHEETS

(Amounts in millions, except share data)

(Unaudited)

See notes to Condensed Consolidated Financial Statements

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SNAP-ON INCORPORATED

CONDENSED CONSOLIDATED BALANCE SHEETS

(Amounts in millions, except share data)

(Unaudited)

See notes to Condensed Consolidated Financial Statements

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SNAP-ON INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in millions)

(Unaudited)

See notes to Condensed Consolidated Financial Statements

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SNAP-ON INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1.  Condensed Consolidated Financial Statements

These financial statements should be read in conjunction with, and have been prepared in conformity with, the accounting principles reflected in the consolidated financial statements and related notes included in Snap-on Incorporated’s (“Snap-on” or “the company”) 2006 Annual Report on Form 10-K for the fiscal year ended December 30, 2006.

The condensed consolidated financial statements include the accounts of Snap-on, its majority-owned subsidiaries and Snap-on Credit LLC (“SOC”), a 50%-owned joint venture with The CIT Group, Inc. (“CIT”).  The condensed consolidated financial statements do not include the accounts of the company’s independent franchisees.  All intercompany accounts and transactions have been eliminated.  Certain prior year amounts have been reclassified on the Condensed Consolidated Statements of Cash Flows to conform to the current year presentation, and the Condensed Consolidated Statements of Earnings have been restated to reflect the company’s June 29, 2007, sale of its Sun Electric Systems (“SES”) business as “Discontinued Operations.”  See Note 17 for information on the sale of SES.

In the opinion of management, all adjustments (consisting of normal recurring adjustments) necessary for the fair presentation of the statement of financial condition and results of operations for the three and nine month periods ended September 29, 2007, and September 30, 2006, have been made.  The interim results of operations are not necessarily indicative of the results to be expected for the full fiscal year.

2.  New Accounting Standards

Effective December 30, 2006, the last day of the 2006 fiscal year, Snap-on adopted the recognition provisions of Statement of Financial Accounting Standards (“SFAS”) No. 158, “Employers’ Accounting for Defined Benefit Pension and Postretirement Plans: an amendment of FASB Statements No. 87, 88, 106, and 132(R).”  SFAS No. 158 requires an employer to measure the funded status of a plan as of the date of its year-end statement of financial position, and also requires an employer to initially apply the requirement to measure plan assets and benefit obligations as of the date of the employer’s fiscal year-end statement of financial position for fiscal years ending after December 15, 2008.  As the company uses the last day of its fiscal year end as the measurement date for its plans, the adoption of the measurement provisions of SFAS No. 158 will not have a material impact on the company’s consolidated financial position and results of operations.  Retrospective application of the recognition and fiscal year-end measurement date provisions of SFAS No. 158 is not permitted.  See Notes 11 and 12 for information on pension and postretirement plans.

Effective December 31, 2006, the first day of fiscal 2007, Snap-on adopted Financial Accounting Standards Board (“FASB”) Interpretation No. 48 (“FIN No. 48”), “Accounting for Uncertainty in Income Taxes: an Interpretation of FASB Statement No. 109.”  See Note 8 for information on income taxes.

Effective December 31, 2006, Snap-on adopted SFAS No. 156, “Accounting for Servicing of Financial Assets,” to simplify accounting for separately recognized servicing assets and servicing liabilities.  The adoption of SFAS No. 156 did not have a material impact on the company’s consolidated financial position and results of operations.

The FASB released SFAS No. 157, “Fair Value Measurements,” to define fair value, establish a framework for measuring fair value in accordance with generally accepted accounting principles, and expand disclosures about fair value measurements.  SFAS No. 157 will be effective for Snap-on as of December 30, 2007, the beginning of the company’s fiscal-2008 year.  The company is currently evaluating the impact of adopting SFAS No. 157.

The FASB released SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities.” SFAS No. 159 allows companies to choose to elect, at specified dates, to measure eligible financial instruments at fair value.  Companies shall report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date, and recognize upfront costs and fees related to those items in earnings as incurred.

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SNAP-ON INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

SFAS No. 159 applies to fiscal years beginning after November 15, 2007, with early adoption permitted for companies that have also elected to apply the provisions of SFAS No. 157, “Fair Value Measurements.” Companies are prohibited from retrospectively applying SFAS No. 159 unless they choose to early adopt both SFAS No. 157 and SFAS No. 159.  SFAS No. 159 also applies to eligible items existing at November 15, 2007 (or early adoption date). Snap-on is currently evaluating the impact of adopting SFAS No. 159.

In June 2007, the FASB ratified Emerging Issues Task Force (“EITF”) Issue No. 06-11, “Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards.”  EITF 06-11 specifies how companies should recognize the income tax benefit received on dividends that are (i) paid to employees holding equity-classified nonvested shares, equity-classified nonvested share units, or equity-classified outstanding share options; and (ii) charged to retained earnings under SFAS No. 123 (R), “Share-Based Payment.”   EITF 06-11 is effective for Snap-on beginning in fiscal 2008.  The company does not believe the adoption of EITF 06-11 will have a material impact on the company’s consolidated financial statements.

3.  Acquisitions

On November 28, 2006, Snap-on acquired the ProQuest Business Solutions business and certain net assets (collectively, “Snap-on Business Solutions” or “Business Solutions,” and formerly ProQuest Business Solutions) from ProQuest Company for an initial purchase price of $516 million of cash and the assumption of approximately $19 million of debt. Subsequent to the November 28, 2006, closing date, the purchase price for Business Solutions increased by $5.1 million to $521.1 million, primarily reflecting a higher level of working capital received by Snap-on at closing.  The preliminary purchase price allocations are based upon the preliminary estimated fair values of the assets and liabilities acquired, and are subject to change upon the finalization of various income tax and contingent liability matters prior to the expiration of the purchase accounting allocation period in the fourth quarter of 2007.

4.  Accounts Receivable

Accounts receivable include trade accounts, installment and other receivables, including the current portion of franchisee-financing receivables.  The components of Snap-on’s current accounts receivable were as follows:

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

The long-term portion of accounts receivable is classified in “Other assets” on the accompanying Condensed Consolidated Balance Sheets and is comprised of installment and other receivables, including franchisee-financing receivables, with payment terms that are due beyond one year.  The components of Snap-on’s long-term accounts receivable were as follows:

5.  Inventories

Inventories by major classification were as follows:

Inventories accounted for using the first-in, first-out (“FIFO”) method as of September 29, 2007, and December 30, 2006, approximated 65% and 62% of total inventories.  The company accounts for its non-U.S. inventory on the FIFO method.  As of September 29, 2007, approximately 31% of the company’s U.S. inventory was accounted for using the FIFO method and 69% was accounted for using the last-in, first-out (“LIFO”) method.  LIFO inventory liquidations resulted in a reduction of “Cost of goods sold” on the accompanying Condensed Consolidated Statements of Earnings of $0.4 million for the three month period ended September 30, 2006, and $0.2 million and $1.8 million for the nine month periods ended September 29, 2007 and September 30, 2006.  There was no LIFO inventory liquidation in the three month period ended September 29, 2007.

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SNAP-ON INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

6.  Acquired Intangible Assets

As of December 30, 2006, the $192.9 million preliminary purchase price allocation for the intangible assets acquired from the Business Solutions acquisition consisted of $164.6 million in customer-relationship intangible assets with a 16 year weighted-average life and $28.3 million of developed technology with a five year weighted-average life.  As a result of the resolution of certain open items in the third quarter of 2007, Snap-on reduced the initial preliminary purchase price allocation for the intangible assets acquired by $32.8 million to $160.1 million. As of September 29, 2007, and based on exchange rates in effect at the date of the acquisition, the intangible assets acquired consist of $139.4 million of customer-relationship intangible assets and $20.7 million of developed technology.  Snap-on is amortizing the $139.4 million of customer-relationship intangible assets on an accelerated basis over a 16 year weighted-average life and is amortizing the $20.7 million of developed technology on a straight-line basis over a five year weighted-average life.

Disclosures related to other intangible assets are as follows:

The weighted-average amortization periods related to other intangible assets are as follows:

The weighted-average amortization period for all amortizable intangibles on a combined basis is 16 years.

Amortization expense was $4.3 million and $13.0 million for the three and nine month periods ended September 29, 2007, and $0.8 million and $1.6 million for the three and nine month periods ended September 30, 2006.  Based on current levels of amortizable intangible assets, estimated annual amortization expense is expected to be $17.5 million in 2007, $16.6 million in 2008, $16.3 million in 2009, $16.1 million in 2010, $15.9 million in 2011, and $15.6 million in 2012.

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SNAP-ON INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

Goodwill was $824.6 million and $776.1 million at September 29, 2007, and December 30, 2006.  The increase in goodwill from December 31, 2006, primarily resulted from purchase accounting adjustments related to the Business Solutions acquisition and $22.7 million of currency translation.  See Note 3 for additional information on the company’s acquisition of Business Solutions.

7.  Exit or Disposal Activities

Snap-on recorded costs associated with exit and disposal activities of $1.8 million and $16.5 million for the three and nine month periods ended September 29, 2007, and $4.3 million and $15.2 million for the three and nine month periods ended September 30, 2006.

Of the $1.8 million and $16.5 million of costs incurred during the three and nine month periods ended September 29, 2007, $0.2 million and $6.4 million qualified for accrual treatment.  Costs associated with exit and disposal activities in 2007 primarily related to headcount reductions from (i) the transfer of certain production activities from Sweden to lower-cost regions and emerging markets; (ii) the third quarter 2007 closure of the Johnson City, Tennessee, hand tool facility; (iii) the consolidation of multiple customer call centers in the United States; and (iv) various management realignment actions at other Snap-on facilities.

Snap-on’s exit and disposal accrual activity for 2007 was as follows:

Exit and disposal accrual usage of $2.3 million and $8.6 million during the three and nine month periods ended September 29, 2007, consisted primarily of severance and facility-related payments.  Since year-end 2006, Snap-on has reduced headcount by approximately 238 employees as part of its restructuring actions.  While the majority of the exit

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

and disposal accrual will be utilized in 2007, certain facility-related costs will extend beyond 2007 primarily due to longer-term lease obligations.

Snap-on expects to fund the remaining cash requirements of its exit and disposal activities with cash flows from operations and borrowings under the company’s existing credit facilities.  The estimated costs for the exit and disposal activities were based on management’s judgment under prevailing circumstances.

8. Income Taxes

The company adopted FIN No. 48, “Accounting for Uncertainty in Income Taxes,” on December 31, 2006, the beginning of the company’s 2007 fiscal year.  As of December 31, 2006, the company had unrecognized tax benefits of $23.5 million.  Snap-on did not record any cumulative effect adjustment to retained earnings as a result of adopting FIN No. 48.

Of the $23.5 million of unrecognized tax benefits, $21.0 million would impact the effective income tax rate if recognized. Interest and penalties, if any, related to unrecognized tax benefits are recorded in income tax expense.  As of December 31, 2006, the company had $2.2 million of accrued interest included in the $23.5 million of unrecognized tax benefits.

Snap-on believes it is reasonably possible that, within the next 12 months, $0.4 million of previously unrecognized tax benefits will be recorded as a result of the resolution of various tax positions.

With few exceptions, Snap-on is no longer subject to U.S. federal and state/local income tax examinations by tax authorities for years prior to 2003, and Snap-on is no longer subject to non-U.S. income tax examinations by tax authorities for years prior to 1998.

Snap-on’s effective tax rate on income from continuing operations was 34.5% in both the third quarters of 2007 and 2006.   Snap-on’s effective tax rate on income from continuing operations was 33.6% for the first nine months of 2007, as compared with 33.4% in the prior year.  The company’s nine month effective tax rate in 2007 was favorably impacted by the resolution of previously unrecognized tax benefits in certain non-U.S. tax jurisdictions.  For 2006, the lower nine month effective tax rate reflects both the mix of U.S. and non-U.S. earnings and the impact of a $38.0 million pretax litigation settlement charge recorded in the second quarter of 2006, which was tax effected at the higher U.S. tax rate.  Snap-on expects that its effective tax rate for the remainder of 2007 will approximate 34.5%, as the company does not believe any additional material adjustments will be made related to unrecognized tax benefits for the remainder of the year.  See Note 16 for information on the litigation settlement charge.

9.  Short-term and Long-term Debt

Notes payable and long-term debt as of September 29, 2007, was $528.1 million; no commercial paper was outstanding at September 29, 2007.  As of December 30, 2006, notes payable and long-term debt was $549.2 million, including $314.9 million of commercial paper. On January 12, 2007, Snap-on sold $300 million in floating and fixed rate notes consisting of $150 million of floating rate notes that mature in their entirety on January 12, 2010, and $150 million of fixed rate notes that mature in their entirety on January 15, 2017.  Interest on the floating rate notes accrue at a floating rate equal to the three-month London Interbank offer rate plus 0.13% per year; interest is payable quarterly.  Interest on the fixed rate notes accrues at a rate of 5.50% per year; interest is payable semi-annually.  Snap-on used the proceeds from the sale of the notes, net of $1.5 million of transaction costs, to repay commercial paper obligations issued to finance the acquisition of Business Solutions.  On January 12, 2007, the company also terminated the $250 million bridge credit agreement that Snap-on established prior to its acquisition of Business Solutions.

Long-term debt of $501.6 million as of September 29, 2007, includes $200 million of unsecured 6.25% notes, $150 million of unsecured 5.50% notes, $150 million of unsecured floating rate notes, and $1.6 million of other long-term

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

debt.  Current maturities of long-term debt and notes payable to banks under uncommitted lines of credit were $16.5 million at September 29, 2007, and $28.6 million at December 30, 2006.  CIT and Snap-on have agreed to lend funds to support SOC’s working capital requirements on a 50/50 basis.  As of September 29, 2007, and December 30, 2006, SOC owed both Snap-on and CIT $4.6 million and $0.1 million each pursuant to this agreement.

On August 10, 2007, Snap-on entered into a five-year, $500 million multi-currency revolving credit facility that terminates on August 10, 2012. This $500 million facility replaces Snap-on’s previous $400 million multi-currency revolving credit facility that was set to terminate on July 27, 2009.  The $500 million revolving credit facility’s financial covenant requires that Snap-on maintain, as of each fiscal quarter end, a ratio of total debt to the sum of total debt plus shareholders’ equity of not greater than 0.60 to 1.00 or a ratio of total debt to earnings before interest, taxes, depreciation and amortization (“EBITDA”), for the preceding four fiscal quarters then ended, of not greater than 3.50 to 1.00. As of September 29, 2007, Snap-on was in compliance with all covenants of this revolving credit facility.

As of September 29, 2007, Snap-on also had $14.5 million of unused available debt capacity under its committed bank lines of credit.  The committed bank lines of credit consist of two $10 million lines of credit that expire on July 29, 2008, and August 31, 2008.  As of September 29, 2007, Snap-on had approximately $514.5 million of unused available debt capacity under the terms of its revolving credit facility and its committed bank lines of credit.

10.  Financial Instruments

Snap-on uses derivative instruments to manage well-defined interest rate and foreign currency exposures. Snap-on does not use derivative instruments for speculative or trading purposes.  The criteria used to determine if hedge accounting treatment is appropriate are (i) the designation of the hedge to an underlying exposure; (ii) whether or not overall risk is being reduced; and (iii) if there is a correlation between the value of the derivative instrument and the underlying obligation.  On the date a derivative contract is entered into, Snap-on designates the derivative as a fair value hedge, a cash flow hedge, a hedge of a net investment in a foreign operation, or a natural hedging instrument whose change in fair value is recognized as an economic hedge against changes in the values of the hedged item.

Foreign Currency Derivative Instruments:  Snap-on has operations in a number of countries that have transactions outside their functional currencies and, as a result, is exposed to changes in foreign currency exchange rates.  Snap-on also has intercompany loans to foreign subsidiaries denominated in foreign currencies. Snap-on manages most of these exposures on a consolidated basis, which allows for netting of certain exposures to take advantage of natural offsets.  Forward exchange contracts are used to hedge the net exposures.  Gains or losses on net foreign currency hedges are intended to offset losses or gains on the underlying net exposures in an effort to reduce the earnings volatility resulting from fluctuating foreign currency exchange rates.

At September 29, 2007, Snap-on had $132.9 million of net foreign exchange forward buy contracts outstanding comprised of buy contracts of $55.3 million in Swedish kronor, $24.2 million in euros, $22.8 million in British pounds, $19.7 million in Australian dollars, $6.3 million in Canadian dollars, $3.4 million in Singapore dollars and $5.2 million in other currencies, and sell contracts of $2.3 million in Hungarian forint and $1.7 million in other currencies.  At December 30, 2006, Snap-on had $80.1 million of net foreign exchange forward buy contracts outstanding comprised of buy contracts of $31.4 million in Swedish kronor, $23.1 million in euros, $17.8 million in British pounds, $10.9 million in Australian dollars, $2.3 million in Japanese yen, $2.1 million in Norwegian kroner, and $3.4 million in other currencies, and sell contracts of $7.0 million in Canadian dollars and $3.9 million in other currencies.

The majority of Snap-on’s forward exchange contracts are not designated as hedges under SFAS No. 133.  The fair value changes of these contracts are reported in earnings as foreign exchange gain or loss, which is included in “Other income (expense) — net” on the accompanying Condensed Consolidated Statements of Earnings.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

Interest Rate Swap Agreements:  Snap-on enters into interest rate swap agreements to manage interest costs and risks associated with changing interest rates. Interest rate swap agreements are accounted for as either cash flow hedges or fair value hedges. The differentials paid or received on interest rate swap agreements are recognized as adjustments to interest expense.  For fair value hedges, the effective portion of the change in fair value of the derivative is recorded in “Long-term debt” on the accompanying Condensed Consolidated Balance Sheets, while any ineffective portion is recorded as an adjustment to “Interest Expense” on the accompanying Condensed Consolidated Statements of Earnings.  For cash flow hedges, the effective portion of the change in fair value of the derivative is recorded in “Accumulated other comprehensive income (loss),” on the accompanying Condensed Consolidated Balance Sheets, while any ineffective portion is recorded as an adjustment to interest expense.  The notional amount of interest rate swaps outstanding and designated as fair value hedges was $50 million at September 29, 2007, and at December 30, 2006.

Changes in the fair value of derivative financial instruments qualifying for hedge accounting are reflected as derivative assets or liabilities with the corresponding gains or losses reflected in earnings in the period of change.  An offsetting gain or loss is also reflected in earnings based upon the changes of the fair value of the debt instrument being hedged.  For all fair value hedges qualifying for hedge accounting, the net accumulated derivative loss at September 29, 2007, was $1.2 million.  At September 29, 2007, the maximum maturity date of any fair value hedge was four years.  During the third quarter of 2007, cash flow hedge and fair value hedge ineffectiveness was not material.

11.  Pension Plans

Snap-on’s net pension expense included the following components:

Snap-on expects to make contributions to its foreign pension plans throughout 2007 of approximately $13.0 million. Snap-on is not required to make a contribution to its domestic pension plans in 2007.  Depending on market and other conditions, Snap-on may elect to make discretionary cash contributions to its domestic pension plans.

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SNAP-ON INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

12.  Retiree Health Care

Snap-on’s net postretirement health care benefits expense included the following components:

13.  Stock-Based Compensation

The 2001 Incentive Stock and Awards Plan, as Amended (“2001 Plan”), which was approved by shareholders in 2001 and amended and approved by shareholders in 2006, provides for the grant of stock options, performance share awards and restricted stock awards.  As of September 29, 2007, the 2001 Plan had 3,424,519 shares available for future grants.

Snap-on recognized $4.9 million and $14.2 million of compensation cost for the three and nine month periods ended September 29, 2007, and $4.8 million and $11.7 million for the three and nine month periods ended September 30, 2006.  Cash received from option exercises during the three and nine month periods ended September 29, 2007, totaled $2.7 million and $38.1 million.  Cash received from option exercises during the three and nine month periods ended September 30, 2006, totaled $28.3 million and $74.3 million.  The tax benefit realized from the exercise of share-based payment arrangements was $0.5 million and $6.8 million for the three and nine month periods ended September 29, 2007, and $2.9 million and $9.2 million for the three and nine month periods ended September 30, 2006.

Stock Options

Stock options are granted with an exercise price equal to the market value of a share of common stock on the date of grant and have a contractual term of ten years.  Grants made prior to 2007 vest in two annual increments beginning on the first anniversary following the grant date of the award.  Beginning in 2007, all stock option grants vest over a three-year period, beginning on the first anniversary following the grant date of the award, with the exception of the 2007 grant to the company’s Chief Executive Officer, which vests in its entirety within one year of grant.

The fair value of each stock option award is estimated on the date of grant using the Black-Scholes valuation model.  The company uses historical data regarding stock option exercise behaviors for different participating groups to estimate the expected term of options granted (based on the period of time that options granted are expected to be outstanding). Expected volatility is based on the historical volatility of the company’s stock for the length of time corresponding to the expected term of the option.  The expected dividend yield is based on the company’s historical dividend payments. The risk-free interest rate is based on the U.S. treasury yield on the grant date for the expected term of the option.  The following weighted-average assumptions were used in calculating the fair value of stock options granted during the nine month periods ended September 29, 2007, and September 30, 2006, using the Black-Scholes valuation model.  No stock options were granted in the three month periods ended September 29, 2007, and September 30, 2006.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

A summary of stock option activity as of and for the nine month period ended September 29, 2007, is presented below:

* Weighted-average

The weighted-average grant-date fair value of options granted during the nine month periods ended September 29, 2007, and September 30, 2006, was $12.17 and $10.57.  The intrinsic value of options exercised during the nine month periods ended September 29, 2007, and September 30, 2006, was $18.6 million and $23.8 million.  The fair value of stock options vested during the nine month periods ended September 29, 2007, and September 30, 2006, was $4.2 million and $3.8 million.

As of September 29, 2007, there was $6.1 million of unrecognized compensation cost related to non-vested stock option compensation arrangements granted under the 2001 Plan.  That cost is expected to be recognized as a charge to earnings over a weighted-average period of 1.9 years.

Performance Awards

Performance awards granted in 2007 under the 2001 Plan are earned and expensed using the fair value of the performance award, determined by using the Black-Scholes valuation model, over a contractual term of three years based on the company’s performance.  Vesting of the performance awards will be dependent upon performance relative to pre-defined goals for revenue growth and return on assets for the years 2007 through 2009.  Based on Snap-on’s performance relative to these goals, the recipient can earn up to 100% of the performance awards.  For performance achieved above a certain level, the recipient may earn additional cash units, not to exceed 50% of the number of performance awards initially awarded.  Each additional cash unit also represents the right to receive cash of $50.22, which was the fair market value of a share of common stock on the date of grant.

Performance awards granted in 2006 are earned and expensed using the fair value of the performance award, determined by using the Black-Scholes valuation model, over a contractual term of three years based on the company’s performance.  Vesting of the performance awards will be dependent upon performance relative to pre-defined goals for revenue growth and return on assets for the years 2006 through 2008.  Based on Snap-on’s performance relative to these goals, the recipient can earn up to 100% of the performance awards.  For performance achieved above a certain level, the recipient may earn

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

additional cash units, not to exceed 50% of the number of performance awards initially awarded.  Each additional cash unit also represents the right to receive cash of $39.35, which was the fair market value of a share of common stock on the date of grant.

Performance awards granted in 2005 are earned and expensed using the fair value of the performance award, determined by using the Black-Scholes valuation model over a contractual term of three years based on the company’s performance.  Vesting of the performance awards will be dependent upon performance relative to pre-defined goals for revenue growth and return on assets for the years 2005 through 2007.  Based on Snap-on’s performance relative to these goals, the recipient can earn up to 100% of the performance awards with an equal number of cash units that represent the right to receive cash of $31.73 per unit.  For performance achieved above a certain level, the recipient may earn additional cash units, not to exceed 100% of the number of performance awards initially awarded.  Each additional cash unit also represents the right to receive cash of $31.73, which was the fair market value of a share of common stock on the date of grant.

The fair value of each performance award is estimated on the date of grant using the Black-Scholes valuation model.  The company uses the vesting period of the performance awards as the expected term of the awards granted.  Expected volatility is based on the historical volatility of the company’s stock for the length of time corresponding to the expected term of the performance award.  The risk-free interest rate is based on the U.S. treasury yield on the grant date for the length of time corresponding to the expected term of the performance award.  The following weighted-average assumptions were used in calculating the fair value of performance awards granted during the nine month periods ended September 29, 2007, and September 30, 2006, using the Black-Scholes valuation model.  No performance awards were granted in the three month periods ended September 29, 2007, and September 30, 2006.

The weighted-average grant-date fair value of performance awards granted during the nine month periods ended September 29, 2007, and September 30, 2006, was $50.22 and $35.74.  As performance share awards generally vest only at the end of the performance-award period, no shares vested or were paid out during the three and nine month periods ended September 29, 2007, and the three month period ended September 30, 2006.  During the first quarter of 2006, 0.1 million shares were paid out for the vesting of performance awards granted in 2004.

A summary of the status of the company’s non-vested performance share awards as of September 29, 2007, and changes during the nine month period ended September 29, 2007, are as follows: