UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

For the quarterly period ended December 31, 2008

OR

For the transition period from                        to                      

Commission File number 1-4982

PARKER-HANNIFIN CORPORATION

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code: (216) 896-3000

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  ¨

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (check one):

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

Yes  ¨    No  x

Number of Common Shares outstanding at December 31, 2008 160,666,772

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

PARKER-HANNIFIN CORPORATION

CONSOLIDATED STATEMENT OF INCOME

(Dollars in thousands, except per share amounts)

(Unaudited)

See accompanying notes to consolidated financial statements.

- 2 -

PARKER-HANNIFIN CORPORATION

CONSOLIDATED BALANCE SHEET

(Dollars in thousands)

See accompanying notes to consolidated financial statements.

- 3 -

PARKER-HANNIFIN CORPORATION

CONSOLIDATED STATEMENT OF CASH FLOWS

(Dollars in thousands)

(Unaudited)

See accompanying notes to consolidated financial statements.

- 4 -

PARKER-HANNIFIN CORPORATION

BUSINESS SEGMENT INFORMATION

(Dollars in thousands)

(Unaudited)

The Company operates in three reportable business segments: Industrial, Aerospace and Climate & Industrial Controls. The Industrial Segment is the largest and includes a significant portion of international operations.

Industrial - This segment produces a broad range of motion-control and fluid systems and components used in all kinds of manufacturing, packaging, processing, transportation, mobile construction, agricultural and military machinery and equipment. Sales are made directly to major original equipment manufacturers (OEMs) and through a broad distribution network to smaller OEMs and the aftermarket.

Aerospace - This segment designs and manufactures products and provides aftermarket support for commercial, business jet, military and general aviation aircraft, missile and spacecraft markets. The Aerospace Segment provides a full

range of systems and components for hydraulic, pneumatic and fuel applications.

Climate & Industrial Controls - This segment manufactures motion-control systems and components for use primarily in the refrigeration and air conditioning and transportation industries.

- 5 -

PARKER-HANNIFIN CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Dollars in thousands, except per share amounts

In the opinion of the management of the Company, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the financial position as of December 31, 2008, the results of operations for the three and six months ended December 31, 2008 and 2007 and cash flows for the six months then ended. These financial statements should be read in conjunction with the consolidated financial statements and related notes included in the Company’s 2008 Annual Report on Form 10-K. Interim period results are not necessarily indicative of the results to be expected for the full fiscal year.

In December 2007, the Financial Accounting Standards Board (FASB) issued FASB Statement No. 141 (revised 2007), “Business Combinations” (Statement No. 141R). Statement No. 141R changes the accounting for business combinations both during the period of acquisition and in subsequent periods. Acquisition costs will generally be expensed as incurred; noncontrolling interests will be valued at fair value at the acquisition date; in-process research and development will be recorded at fair value as an indefinite-lived asset at the acquisition date; restructuring costs associated with a business combination will generally be expensed subsequent to the acquisition date; and changes in deferred tax asset valuation allowances and income tax uncertainties after the acquisition date generally will affect income tax expense. Statement No. 141R is effective for fiscal years beginning after December 15, 2008. Generally, the effect of Statement No. 141R on the Company’s financial position or results of operations will depend on future acquisitions.

In December 2007, the FASB issued FASB Statement No. 160, “Noncontrolling Interests in Consolidated Financial Statements – an amendment of ARB 51.” Statement No. 160 requires the recognition of a noncontrolling interest as equity in the consolidated financial statements and separate from the parent’s equity. The amount of net income attributable to the noncontrolling interest will be included in consolidated net income on the face of the income statement. Statement No. 160 is effective for fiscal years beginning after December 15, 2008. The Company has not yet determined the effect on the Company’s financial position or results of operations of complying with the provisions of Statement No. 160.

In March 2008, the FASB issued FASB Statement No. 161, “Disclosures about Derivative Instruments and Hedging Activities.” Statement No. 161 establishes guidelines to report how derivative and hedging activities affect an entity’s financial position, financial performance, and cash flows. Statement No. 161 is effective for fiscal years beginning after November 15, 2008. The Company has not yet determined the effect, if any, that Statement No. 161 will have on the Company’s disclosures regarding derivatives and hedging activities.

In December 2008, the FASB issued FASB Staff Position (FSP) 132(R)-1, “Employers’ Disclosures about Postretirement Benefit Plan Assets.” FSP 132(R)-1 requires detailed disclosures regarding the investment strategies, fair value measurements, and concentrations of risk of plan assets of a defined benefit pension or other postretirement plan. FSP 132(R)-1 is effective for fiscal years ending after December 15, 2009. The Company has not yet determined the effect, if any, that FSP 132(R)-1 will have on the Company’s retirement benefits disclosures.

- 6 -

In the ordinary course of business, the Company warrants its products against defect in design, materials and workmanship over various time periods. The warranty accrual as of December 31, 2008 and June 30, 2008 is immaterial to the financial position of the Company and the change in the accrual for the current quarter and first six months of fiscal 2009 is immaterial to the Company’s results of operations and cash flows.

The following table presents a reconciliation of the numerator and denominator of basic and diluted earnings per share for the three and six months ended December 31, 2008 and 2007.

For the three months ended December 31, 2008 and 2007, 9,904,439 and 95,680 common shares subject to equity-based awards, respectively, were excluded from the computation of diluted earnings per share because the effect of their exercise would be anti-dilutive. For the six months ended December 31, 2008 and 2007, 4,694,129 and 1,378,664 common shares subject to equity-based awards, respectively, were excluded from the computation of diluted earnings per share because the effect of their exercise would be anti-dilutive.

The Company has a program to repurchase its common shares. Under the program, the Company is authorized to repurchase an amount of common shares each fiscal year equal to the greater of 7.5 million shares or five percent of the shares outstanding as of the end of the prior fiscal year. Repurchases are funded primarily from operating cash flows, and the shares are initially held as treasury stock. During the three-month period ended December 31, 2008, the Company repurchased 512,700 shares of its common stock at an average price of $39.01 per share. Fiscal year-to-date, the Company repurchased 7,220,724 shares at an average price of $60.10 per share.

- 7 -

The Company’s primary item of other comprehensive income (loss) is foreign currency translation adjustments. Comprehensive income for the periods ended December 31, 2008 and 2007 was as follows:

- 8 -

During the first six months of fiscal 2009, the Company recorded a $11,733 charge ($7,249 after-tax) for the costs to structure its businesses in light of current and anticipated customer demand. The Company believes the realignment actions will positively impact future results of operations but will have no material effect on liquidity and sources and uses of capital. The majority of the charge was recorded in the second quarter of fiscal 2009 and primarily consists of severance costs. The business realignment costs are presented primarily in the Cost of sales caption in the Consolidated Statement of Income for the six months ended December 31, 2008.

During the first six months of fiscal 2008, the Company recorded a charge of $4,005 ($2,474 after-tax) for business realignment costs. The majority of the charge was recorded in the second quarter of fiscal 2008 and primarily consisted of severance costs and costs to relocate machinery and equipment. The business realignment costs are presented primarily in the Cost of sales caption in the Consolidated Statement of Income for the six months ended December 31, 2007.

The changes in the carrying amount of goodwill for the six months ended December 31, 2008 are as follows:

“Goodwill adjustments” primarily represent final adjustments to the purchase price allocation during the twelve-month period subsequent to the acquisition date and generally involves the valuation of property, plant and equipment and intangible assets. The fiscal 2009 purchase price allocations are preliminary and may require subsequent adjustment.

Intangible assets are amortized on the straight-line method over their legal or estimated useful lives. The following summarizes the gross carrying value and accumulated amortization for each major category of intangible assets:

- 9 -

Total intangible amortization expense for the six months ended December 31, 2008 was $47,514. The estimated amortization expense for the five years ending June 30, 2009 through 2013 is $99,334, $105,667, $100,078, $88,875 and $81,257, respectively.

Net periodic pension cost recognized included the following components:

As of December 31, 2008, the Company had gross unrecognized tax benefits of $112,924. The total amount of unrecognized benefits that, if recognized, would affect the effective tax rate was $80,301. The accrued interest related to the gross unrecognized tax benefits, excluded from the amounts above, was $9,907.

The Company and its subsidiaries file income tax returns in the United States and various state and foreign jurisdictions. In the normal course of business, the Company’s tax returns are subject to examination by taxing authorities throughout the world. The Company is no longer subject to examinations of its federal income tax returns by the Internal Revenue Service (IRS) for fiscal years through 2001, except for certain refund claims outstanding. All significant state and local and foreign tax returns have been examined for fiscal years through 2001. The Company believes that it is reasonably possible that within the next 12 months the IRS examination for fiscal years 2002 and 2005 will be settled. However, the Company does not anticipate that within the next 12 months the total unrecognized tax benefits will significantly change due to the settlement of examinations and the expiration of statute of limitations.

- 10 -

On July 1, 2008, the Company adopted the provisions of FASB Statement No. 157, “Fair Value Measurements.” Statement No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. Statement No. 157 indicates that among other things, a fair value measurement assumes that the transaction to sell an asset or transfer a liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. FASB Staff Position 157-2 delays the effective date of the application of Statement No. 157 to fiscal years beginning after November 15, 2008 for all nonfinancial assets and nonfinancial liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis. The adoption of Statement No. 157 had no effect on the Company’s financial position or results of operations.

A summary of financial assets and liabilities that were measured at fair value on a recurring basis at December 31, 2008 follows:

Available for sale securities are measured at fair value using quoted market prices. The fair value of derivatives is calculated through a model that utilizes market observable inputs including both spot and forward prices for the same underlying currencies. The Company has established nonqualified deferred compensation programs which permit officers, directors and certain management employees to defer a portion of their compensation, on a pre-tax basis, until their termination of employment. Changes in the value of the compensation deferred under these programs are recognized based on the fair value of the participants accounts based on their investment elections.

On July 1, 2008, the Company adopted the provisions of FASB Statement No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities.” Statement No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value. The Company did not elect to measure any financial assets or financial liabilities at fair value that were otherwise not required to be measured at fair value under other accounting standards.

- 11 -

During the first six months of fiscal 2009, the Company completed nine acquisitions including the acquisitions of Legris SA and Origa Group. Legris SA is a manufacturer of fluid circuit components and systems for pneumatic, hydraulic, and chemical processing applications. Origa Group is a manufacturer of rodless pneumatic actuators, electric actuators, filter regulator lubricators, pneumatic cylinders and valves used in the transportation, semiconductor and packaging and conveying markets. Aggregate annual revenues for the nine acquisitions completed during the first six months of fiscal 2009, for their most recent fiscal year prior to acquisition, were approximately $532 million. The results of operations for all acquisitions are included as of the respective dates of acquisition. The Company primarily used cash on hand and proceeds from commercial paper borrowings to fund the acquisitions.

The Company is involved in various litigation arising in the normal course of business, including proceedings based on product liability claims, workers’ compensation claims and alleged violations of various environmental laws. The Company is self-insured in the United States for health care, workers’ compensation, general liability and product liability up to predetermined amounts, above which, subject to certain limitations, third party insurance applies. Management regularly reviews the probable outcome of these proceedings, the expenses expected to be incurred, the availability and limits of the insurance coverage, and the established accruals for liabilities. While the outcome of pending proceedings cannot be predicted with certainty, management believes that any liabilities that may result from these proceedings will not have a material adverse effect on the Company’s liquidity, financial condition or results of operations.

On April 27, 2007, a grand jury in the Southern District of Florida issued a subpoena to the Company’s subsidiary, Parker ITR, requiring the production of documents, in particular documents related to communications with competitors and customers related to Parker ITR’s marine oil and gas hose business. The Company and Parker ITR substantially complied with this subpoena. On August 2, 2007, the Japan Fair Trade Commission (JFTC) requested that Parker ITR submit a report to the JFTC on specific topics related to its investigation of marine hose suppliers. Parker ITR did so. The JFTC issued a final order and Parker ITR complied with that order. The European Commission issued Requests for Information to the Company and Parker ITR, the first such request was dated May 15, 2007. The Company and Parker ITR submitted responses to these requests. The Company and Parker ITR continue to cooperate with the European Commission. It is anticipated that the European Commission will announce its initial decision during the third quarter of fiscal 2009. Brazilian and Korean competition authorities initiated investigations (the Brazilian investigation commenced on November 14, 2007 and the Korean investigation commenced on January 17, 2008) related to the marine hose supply activities of Parker ITR. The Company and Parker ITR are cooperating with the Brazilian and Korean authorities. At the current stage of these regulatory investigations, the Company is unable to reasonably estimate the potential loss or range of loss, if any, arising from such investigations.

- 12 -

In addition, four class action lawsuits were filed in the Southern District of Florida: Shipyard Supply LLC v. Bridgestone Corporation, et al, filed May 17, 2007; Expro Gulf Limited v. Bridgestone Corporation, et al., filed June 6, 2007; Bayside Rubber & Products, Inc. v. Trelleborg Industrie S.A., et al., filed June 25, 2007; Bayside Rubber & Products, Inc. v. Caleca, et al., filed July 12, 2007; and one in the Southern District of New York: Weeks Marine, Inc. v. Bridgestone Corporation, et al., filed July 27, 2007. On September 12, 2008, the plaintiffs filed an amended consolidated class action complaint that alleges that the defendants, for a period of approximately 21 years, conspired with competitors in unreasonable restraint of trade to artificially raise, fix, maintain or stabilize prices, rig bids and allocate markets and customers for marine oil and gas hose in the United States. Plaintiffs generally seek treble damages, a permanent injunction, attorneys’ fees, and pre-judgment and post-judgment interest. Currently pending before the court are motions to approve the settlement agreement between the Company, Parker ITR and the plaintiffs and to grant plaintiffs motion for class certification. As of December 31, 2008, the Company has a reserve of $16.1 million for known and potential civil damages.

- 13 -

PARKER-HANNIFIN CORPORATION

FORM 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FOR THE THREE AND SIX MONTHS ENDED DECEMBER 31, 2008

AND COMPARABLE PERIODS ENDED DECEMBER 31, 2007

OVERVIEW

The Company is a leading worldwide diversified manufacturer of motion and control technologies and systems, providing precision engineered solutions for a wide variety of mobile, industrial and aerospace markets.

The Company’s order rates provide a near-term perspective of the Company’s outlook particularly when viewed in the context of prior and future order rates. The Company publishes its order rates on a quarterly basis. The lead time between the time an order is received and revenue is realized generally ranges from one day to 12 weeks for mobile and industrial orders and from one day to 18 months for aerospace orders. The Company believes the leading economic indicators of these markets that have a strong correlation to the Company’s future order rates are as follows:

ISM and PMI indexes above 50 indicate that the manufacturing economy is expanding, resulting in the expectation that the Company’s order rates in the mobile and industrial markets in the respective geographic areas should be positive year-over-year. ISM and PMI indexes below 50 would indicate the opposite effect. The ISM index at the end of December 2008 was 32.4 and the PMI for the Eurozone countries at the end of December 2008 was 33.9. The ISM index and the PMI index for the Eurozone countries have both decreased significantly during the second quarter of fiscal 2009 and the Company’s order rates during the second quarter of fiscal 2009 have reflected this decline. At this time, the Company is unable to determine if the downward trend in order rates will continue and if so, for how long and at what rate of decline. With respect to the aerospace market, aircraft miles flown and revenue passenger miles have declined slightly from the comparable fiscal 2008 levels. The Company anticipates that Department of Defense spending in fiscal 2009 will be about 4 percent higher than the 2008 level. Housing starts in December 2008 were approximately 45 percent lower than housing starts in December 2007. The Company does not anticipate housing starts to improve in the foreseeable future.

The Company also believes that there is a high correlation between changes in interest rates throughout the world and worldwide industrial manufacturing activity. Increases in interest rates typically have a negative impact on industrial production thereby lowering future order rates while decreases in interest rates typically have the opposite effect. In recent months, the world’s leading central banks, including the U.S. Federal Reserve, the European Federal Reserve and the Bank of England, have reduced their official interest rates. The U.S. Federal Reserve reduced their federal funds rate during the second quarter of fiscal 2009 to an unprecedented level of 0 to 0.25 percent. The recent interest rate cuts have not had the same impact on worldwide industrial manufacturing activity as most interest rate cuts due primarily to a lack of liquidity and credit availability.

- 14 -

The Company remains focused on maintaining its financial strength through the current worldwide economic situation and has in place a number of strategic financial performance initiatives relating to growth and margin improvement in order to meet this challenge, including strategic procurement, strategic pricing, lean enterprise, product innovation, global diversification and business realignments. In the second quarter of fiscal 2009, the Company implemented several initiatives to reduce costs in response to the continued deterioration in worldwide economic conditions and resultant decline in order rates. The Company has also developed contingency plans to further control costs if economic conditions continue to deteriorate.

Despite the current economic conditions, the financial condition of the Company remains strong. The Company continues to generate substantial cash flows from operations, has a debt to debt-equity ratio of 38.8 percent and has the ability to borrow needed funds at affordable interest rates.

The Company’s major opportunities for growth are as follows:

Many acquisition opportunities remain available to the Company within its target markets. During the first six months of fiscal 2009, the Company completed nine acquisitions whose aggregate incremental annual revenues were approximately $532 million. Acquisitions will continue to be considered from time to time to the extent there is a strong strategic fit, while at the same time, maintaining the Company’s strong financial position. The Company will also continue to assess the strategic fit of its existing businesses and initiate efforts to divest businesses that are not considered to be a good long-term fit for the Company. Future business divestitures could have a negative effect on the Company’s results of operations.

The discussion below is structured to separately discuss the Consolidated Statement of Income, Results by Business Segment, Balance Sheet and Statement of Cash Flows.

CONSOLIDATED STATEMENT OF INCOME

- 15 -

Net sales for the current-year quarter declined 5.0 percent from the prior-year quarter reflecting lower sales in the Industrial International and the Climate & Industrial Controls Segments more than offsetting an increase in sales in the Aerospace Segment. Net sales for the first six months of fiscal 2009 increased 2.4 percent from the comparable prior period net sales amounts reflecting higher volume primarily in the Industrial North American and Aerospace Segments. Acquisitions made in the last 12 months contributed approximately $179 million and $304 million in sales in the current-year quarter and first six months of fiscal 2009, respectively. The effect of currency rate changes decreased net sales by approximately $170 million and $120 million in the current-year quarter and first six months of fiscal 2009, respectively.

Gross profit margin decreased for the current-year quarter and first six months of fiscal 2009 primarily due to a combination of the lower sales volume, resulting in manufacturing inefficiencies, and unfavorable product mix.

Selling, general and administrative expenses increased for the current-year quarter and first six months of fiscal 2009 primarily due to current-year acquisitions partially offset by lower legal expenses.

Interest expense for the current-year quarter and first six months of fiscal 2009 increased primarily due to higher average debt outstanding. The increase in borrowings primarily related to the funding of current-year acquisitions and the repurchase of the Company’s common shares.

Other expense (income), net for the first six months of fiscal 2009 included a $7.7 million expense related to an investment and a $1.2 million expense related to a litigation settlement.

Effective tax rate for the current-year quarter and first six months of fiscal 2009 was lower than the prior-year quarter and first six months of fiscal 2008 due primarily to the tax benefit from the research and development tax credit as well as lower taxable income.

RESULTS BY BUSINESS SEGMENT

Industrial Segment

- 16 -

The Industrial Segment operations experienced the following percentage changes in net sales in the current-year compared to the equivalent prior-year period:

The above presentation reconciles the percentage changes in net sales of the Industrial operations reported in accordance with U.S. GAAP to percentage changes in net sales adjusted to remove the effects of acquisitions made within the prior four fiscal quarters as well as the effects of currency exchange rates. The effects of acquisitions and currency exchange rates are removed to allow investors and the Company to meaningfully evaluate the percentage changes in net sales on a comparable basis from period to period.

Excluding the effects of acquisitions and currency exchange rates, the decrease in Industrial North American sales for the current-year quarter and first six months of fiscal 2009 reflects lower demand experienced from distributors and lower end-user demand experienced in a number of the markets of the Industrial North American businesses, most notably in the light and heavy-duty truck, semiconductor and automotive markets. For the current-year quarter and first six months of fiscal 2009, higher end-user demand was experienced in agriculture equipment, mining and turf care markets. The decrease in Industrial International sales for the current-year quarter and first six months of fiscal 2009 is primarily attributed to lower volume across most markets in all regions with the largest decline in volume experienced by the European businesses.

The decrease in both Industrial North American and Industrial International margins for the current-year quarter and first six months of fiscal 2009 is primarily due to lower volume, resulting in manufacturing inefficiencies, and unfavorable product mix. Acquisitions, not yet fully integrated, negatively impacted both Industrial North American and Industrial International margins in the current-year quarter and first six months of fiscal 2009.

The decrease in backlog from the prior-year quarter and the June 30, 2008 amount of $1,743.8 million is due primarily to lower order rates experienced in both the Industrial North American and Industrial International businesses. The Company anticipates Industrial North American sales for fiscal 2009 to decline between 8.8 percent to 8.4 percent from the fiscal 2008 level and Industrial International sales for fiscal 2009 to decline between 17.3 percent to 16.9 percent from the fiscal 2008 level. Industrial North

- 17 -

American operating margins in fiscal 2009 are expected to range from 11.5 percent to 12.3 percent and Industrial International operating margins are expected to range from 12.2 percent to 13.0 percent. The Company expects to continue to take the actions necessary to structure appropriately the Industrial Segment operations to operate in their current economic environment. Such actions may include the necessity to record additional business realignment charges in fiscal 2009.

Aerospace Segment

The increase in net sales in the current-year quarter and first six months of fiscal 2009 in the Aerospace Segment is primarily due to an increase in commercial and military original equipment manufacturer (OEM) and commercial aftermarket volume. The higher margins in the current-year quarter and first six months of fiscal 2009 were primarily due to a larger concentration of sales occurring in the higher margin commercial aftermarket businesses. Margins in the current-year quarter benefited from lower product development costs. Margins for the first six months of fiscal 2008 were adversely affected by higher contract reserves related to certain programs.

The increase in backlog from the prior-year quarter is primarily due to higher order rates in the commercial OEM businesses partially offset by lower order rates in the military aftermarket businesses. Backlog remained essentially unchanged from the June 30, 2008 amount of $1,737.4 million. For fiscal 2009, sales are expected to increase from 3.2 percent to 3.6 percent from the fiscal 2008 level and operating margins are expected to range from 13.3 percent to 13.9 percent. Lower commercial aftermarket volume in future product mix and higher than currently expected new product development costs could result in lower margins.

Climate & Industrial Controls Segment

The decrease in net sales in the Climate & Industrial Controls Segment in the current-year quarter and first six months of fiscal 2009 is primarily due to lower end-user demand experienced across most markets, most notably in the residential air conditioning and automotive markets. Margins in the current-year quarter and first six months of fiscal 2009 were lower primarily due to the lower sales volume and the incurrence of business realignment charges.

- 18 -

The decrease in backlog from the prior-year quarter and the June 30, 2008 amount of $170.1 million is primarily due to lower orders in most markets, most notably in the heavy-duty truck and automotive markets. For fiscal 2009, sales are expected to decline from 17.3 percent to 16.9 percent from the fiscal 2008 level and operating margins are expected to range from 0.8 percent to 1.4 percent. The Company expects to continue to take the actions necessary to structure appropriately the Climate & Industrial Controls Segment operations. Such actions may include the necessity to record additional business realignment charges in fiscal 2009.

Corporate and Other

Corporate general and administrative expenses were $42.4 million in the current-year quarter compared to $40.0 million in the prior-year quarter and were $82.7 million for the first six months of fiscal 2009 compared to $85.3 million for the first six months of fiscal 2008. As a percent of sales, corporate general and administrative expenses for the current-year quarter increased to 1.6 percent compared to 1.4 percent for the prior-year quarter and decreased to 1.4 percent for the first six months of fiscal 2009 compared to 1.5 percent for the first six months of fiscal 2008. The lower expense for the first six months of fiscal 2009 is primarily due to lower legal fees.

Other expense (in the Business Segment Results) included the following:

- 19 -

BALANCE SHEET

Accounts receivable are primarily receivables due from customers for sales of product ($1,452.3 million at December 31, 2008 and $1,820.8 million at June 30, 2008). Accounts receivable decreased primarily due to the reduced sales volume experienced by the Industrial and Climate & Industrial Controls segments. Days sales outstanding relating to trade accounts receivable was 50 days at December 31, 2008 and June 30, 2008.

Inventories increased primarily as a result of current-year acquisitions. Days supply of inventory (DSI) increased to 73 days from 61 days at June 30, 2008. The increase in DSI was primarily due to lower than anticipated customer demand across most markets within the Industrial and Climate & Industrial Controls segments.

Other assets decreased primarily as a result of decreases in assets related to deferred compensation plans.

Notes payable increased since June 30, 2008 primarily due to additional commercial paper borrowings to finance current-year acquisition activity, share repurchases and working capital needs.

Accounts payable, trade decreased primarily due to reduced purchasing and production levels.

Accrued payrolls and other compensation decreased primarily due to lower incentive compensation.

Accrued domestic and foreign taxes decreased primarily due to the payment of estimated income taxes during the second quarter.

Due to the strengthening of the U.S. dollar, foreign currency translation adjustments resulted in a decrease in Shareholders’ equity of $630.0 million. The translation adjustments primarily decreased the balances of Accounts receivable, Inventories, Plant and equipment, Goodwill and Intangible assets, net.

The decrease in working capital was primarily due to the increase in commercial paper borrowings.

- 20 -

STATEMENT OF CASH FLOWS

Cash flows from operating activities decreased primarily due to lower net income. In addition, the Company settled payments from a current-year acquisition after the acquisition closing date resulting in an increase in cash used by Other accrued liabilities.

Cash flow used in investing activities increased due to greater acquisition activity and capital spending over the prior year.

Cash flow from financing activities increased due to proceeds from commercial paper borrowings and less cash required for share repurchases. Additional commercial paper borrowings were used primarily to finance fiscal 2009 acquisitions. Also, the Company repurchased a comparable number of its common shares as the prior-year, but the average price per share was lower in the current-year resulting in a lower amount of cash required to complete the repurchases.

The Company’s goal is to maintain no less than an “A” rating on senior debt to ensure availability and reasonable cost of external funds. As a means of achieving this objective, the Company has established a financial goal of maintaining a ratio of debt to debt-equity of no more than 37 percent. While the debt to debt-equity ratio is above the Company’s goal as of December 31, 2008, neither the Company’s credit ratings nor availability to external funds have been adversely affected. The Company expects to meet this financial goal in the future.