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                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-K/A
                                 AMENDMENT NO. 1

(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
    OF 1934
For the Fiscal Year Ended September 30, 2003

                                       OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
    ACT OF 1934

For the transition period from _____ to _____

                         Commission File Number 2-30905

                               HMI INDUSTRIES INC.
             (Exact name of registrant as specified in its charter)

            DELAWARE                                     36-1202810
-------------------------------              ---------------------------------
(State or other jurisdiction of              (IRS Employer Identification No.)
 Incorporation or organization)

6000 Lombardo Center, Suite 500, Seven Hills, Ohio                   44131
--------------------------------------------------                 ---------
    (Address of principal executive offices)                       (Zip Code)

Registrant's telephone number, including area code: (216) 986-8008

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

                                 Title of class
                               -------------------
                      Common Stock, $1 par value per share

Indicate by check mark whether 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, and (2) has been subject to such filing requirements
for the past ninety (90) days.
Yes [ ] No [X]

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. [X]

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12B-2 of the Exchange Act). Yes [ ] No [X]

The aggregate market value of voting and non-voting common equity held by
non-affiliates of the registrant, computed by reference to the average bid and
asked price on the OTC Bulletin Board, as of March 31, 2003 was $1,731,782.

The number of shares outstanding of the registrant's common stock was 6,745,609
as of September 30, 2004.

                       Documents Incorporated by Reference
                       -----------------------------------
                                      None

Index to Exhibits is found on page 43.         This report consists of 82 pages.
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INTRODUCTORY NOTE

RESTATEMENT OF PRIOR FINANCIAL INFORMATION

This Amendment No. 1 on Form 10-K/A is being filed to primarily restate certain
amounts associated with our Distributor Development Program (See Note 2 to our
Consolidated Financial Statements for a discussion of the restatement
adjustments and the changes resulting from the restatement) and to revise
disclosure and presentation of our consolidated financial statements for the
years ended September 30, 2003, 2002, and 2001.

The restatement resulted in: (1) entries to correct our accounting for our
Distributor Development Program, (2) entries to correct our accounting for the
loss on impairment associated with certain tooling assets, (3) related effects
of the Distributor Development Program correction on our deferred tax assets,
and (4) expanded disclosure in Item 1 "Business" (Products and Distribution,
Major Customers), Item 6 "Selected Financial Data", Item 7 "Management's
Discussion and Analysis" (Results of Operations, Liquidity), Item 8 "Financial
Statements and Supplementary Data", Item 9A "Controls and Procedures", Item 13
"Certain Relationships and Related Parties", Item 15 "Exhibits, Financial
Statement Schedules and Exhibit Index", and the Notes to our Consolidated
Financial Statements. The cumulative effect of the adjustments on our statement
of operations was a $12,010 reduction in our net earnings over the period from
January 1, 2001 through September 30, 2003.

As discussed in detail under the heading "Accrued Distributor Development
Liabilities" we believe that these non-cash changes to our previously issued
financial statements do not result in a material increase in the amount of our
future obligations or our future cash needs. The restatement adjustments had no
effect on our previously reported cash balances, and had no effect on our cash
flows. They did however, because of the cumulative effect to our net earnings,
result in violations of our debt covenants for the period ended September 30,
2003, which have been waived and the credit facility extended through December
31, 2004. See the more complete discussion of the effects of the restatement
adjustments on our debt covenant compliance within the Liquidity and Capital
Resources section of Management's Discussion and Analysis.

AMENDED ITEMS

We hereby amend the following items, financial statements, exhibits or other
portions of our Annual Report on Form 10-K for the year ended September 30,
2003, as set forth herein. Each item of the financial statements and disclosures
that was affected by the restatement has been amended and restated. Accordingly,
this Form 10-K/A should be read in conjunction with our filings made subsequent
to the filing of the original Form 10-K. Consequently, all other information not
affected by the restatement is unchanged and reflects the disclosures made at
the time of the original filing of the Form 10-K on February 23, 2004.

The amended items are as follows:

      -     ITEM 1. BUSINESS ~ The information set forth under the caption
            "Business" is amended to read in its entirety as set forth at pages
            4 through 11.

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      -     ITEM 6. SELECTED FINANCIAL DATA ~ The selected financial information
            for the five years ended September 30, 2003 is amended to read in
            its entirety as set forth at pages 15 through 16.

      -     ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
            AND RESULTS OF OPERATIONS ~ The information set forth under the
            caption "Management's Discussion and Analysis" is amended to read in
            its entirety as set forth at pages 16 through 29.

      -     ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ~ Our
            consolidated financial statements and supplementary data and the
            report of independent accountants thereon are amended to read in
            their entirety as set forth at pages 29 and 48 through 80.

      -     ITEM 9A. CONTROLS AND PROCEDURES ~ The information set forth under
            the caption "Controls and Procedures" is amended to read in its
            entirety as set forth at pages 29 through 31.

      -     ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ~ The
            information set forth under the caption "Certain Relationships and
            Related Transactions" is amended to read in its entirety as set
            forth at pages 41 through 43.

      -     ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND EXHIBIT INDEX ~
            The exhibits, financial statement schedules and reports on Form 8-K
            information is amended to read in its entirety as set forth at pages
            43 through 45. The list of exhibits set forth in, and incorporated
            by reference from, the Exhibit Index, is amended to include the
            following exhibits, filed within this report.

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TABLE OF CONTENTS

<TABLE>
<S>                                                                                                                   <C>
INTRODUCTORY NOTE................................................................................................      1

PART I...........................................................................................................      4

   ITEM 1.  BUSINESS.............................................................................................      4
   ITEM 2.  PROPERTIES...........................................................................................     11
   ITEM 3.  LEGAL PROCEEDINGS....................................................................................     12
   ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..................................................     12

PART II..........................................................................................................     13

   ITEM 5.  MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
   EQUITY SECURITIES.............................................................................................     13
   ITEM 6.  SELECTED FINANCIAL DATA..............................................................................     15
   ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS................     16
   ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK...........................................     29
   ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA..........................................................     29
   ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.................     29
   ITEM 9A.  CONTROLS AND PROCEDURES.............................................................................     29

PART III.........................................................................................................     31

   ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT......................................................     31
   ITEM 11.  EXECUTIVE COMPENSATION..............................................................................     34
   ITEM 12.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT ....................................     38
   ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS......................................................     41

PART IV..........................................................................................................     43

   ITEM 15.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.....................................     43

SIGNATURES.......................................................................................................     46
</TABLE>

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PART I

(DOLLARS IN THOUSANDS)

ITEM 1. BUSINESS

In this document, the words "HMI," "the Company," "we," "our," "ours," and "us"
or any derivation thereof, refer only to HMI Industries Inc., and its direct or
indirect subsidiaries and not any other person or entity.

GENERAL DEVELOPMENT OF THE BUSINESS

We are a manufacturer of high quality indoor air filtration systems whose
products are sold exclusively through a worldwide direct sales channel. We
provide our direct sellers an opportunity, through our quality products and
educational programs, to achieve their individual objectives. Our products, a
high filtration portable surface cleaner and portable room air cleaner are sold
under the trade names Filter Queen(R), Princess(R), Majestic(R), Empress(R), and
Defender(R) (portable room air cleaner only), and our central vacuum cleaning
system is sold under the trade names Vacu-Queen(R) and Majestic II(R).

Although we were known as Health-Mor Inc. until 1995, when our name was changed
to HMI Industries Inc., we continue to distribute our products under the
Health-Mor brand name. HMI was reorganized in 1968 in Delaware, succeeding an
Illinois corporation formed originally in 1928.

From 1998 through 2002 we positioned ourselves to invest in new infrastructure
and pursue additional core growth opportunities by:

      a)    directing the financial turnaround of the company while increasing
            product awareness and brand recognition to strengthen and grow the
            top line,

      b)    divesting all non-core businesses,

      c)    streamlining processes and lowering costs,

      d)    successfully completing a $2,000 private offering of our common
            stock,

      e)    creating a U.S. program to aid in the retention of Distributors and
            help with the development of their professional careers and
            independent businesses (see U.S. MARKET below for additional
            information),

      f)    creating and developing Health-Mor at Home(TM), a direct to consumer
            outbound sales force designed to assist consumers in locations where
            Distributors are no longer located,

      g)    more fully automating our assembly and distribution by moving all
            production areas to a new and more efficient facility in
            Strongsville, Ohio, as well as relocating our sales, marketing and
            executive personnel to our new corporate world headquarters at 6000
            Lombardo Center, Seven Hills, Ohio, and

      h)    obtaining approval for our manufacturing facility as both a Medical
            Class II facility by the Food and Drug Administration ("FDA") and as
            a Foreign Trade Zone. The FDA Medical Class II recognition is the
            medical equivalent to the ISO 9001 standards. The Foreign Trade Zone
            status provides dollar saving benefits on such things as duty
            exemption on re-exports, duty elimination on waste and scrap, no
            duty on rejected or defective parts, duty deferral, no duty on
            domestic content or value added and relief from local taxes.

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During Fiscal 2003 we continued to strengthen our core business for the future
by implementing our proven U.S. Edge Success Program into the international
markets, and by adding additional sales leadership within our Asian and European
markets to assist with the training and development of the Edge Success Program.
In addition we continue to build our After-market-sales (AMS) program and
improve lead generations for our network as it learns to work within the new
Federal Do Not Call legislation. See the U.S. MARKETS, MARKETS OUTSIDE THE U.S.,
and MARKETING AND ADVERTISING sections below for additional information.

FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS

Our operations consist of a single operating segment. See Note 1 of the Notes to
the Consolidated Financial Statements for further information.

NARRATIVE DESCRIPTION OF BUSINESS

Consumers have become increasingly aware of the potential health concerns posed
by indoor air quality, as noted in the below quoted publications:

      -     According to the U.S. Environmental Protection Agency ("EPA"), most
            people spend as much as 90% of their time indoors and over half of
            that time in their own homes. The EPA has suggested that air levels
            of many pollutants inside one's own home may be two to five times,
            and sometimes 100 times, higher than outdoor levels. In addition,
            studies by the EPA consistently rank indoor air pollution among the
            top five environmental risks to public health.

      -     According to the March 2003 edition of the Fort Worth Star Telegram:
            "...what many people don't know is that indoor air pollutants and
            allergens play a bigger role in asthma than outdoor air pollution."

      -     Health Magazine suggests two methods to help clear potentially
            harmful particles from our air are to "Get a good filter" and
            "Upgrade your vacuum."

      -     In October 2003 CertifiedAllergy.com advises "Avoid reservoirs of
            allergens...proper filtration is extremely important to breathe
            healthier air."

      -     In September 2003 John Kirkwood, President and Chief Executive
            Officer of the American Lung Association, stated that, "Exposure to
            particle pollution has been linked with deaths from heart and lung
            disease and with lung cancer. Particle pollution can also aggravate
            lung health problems such as asthma and chronic bronchitis causing
            those who suffer from those diseases to use more medication and
            visit their doctor more often."

We regard ourselves as a leader in the management of indoor air quality by
offering a complete solution that keeps indoor air cleaner and safer to breathe.
In his 2002 study, Dr. Peter Dingle, Doctor of Environmental Toxicology at
Murdoch University states that, "Filter Queen significantly reduced symptoms in
asthmatic children and reduced their need for medication." We believe that
people with and without respiratory problems will notice the benefits of cleaner
indoor air that can be derived from using our products.

      Products and Distribution

Our principal products include a high filtration portable surface cleaner that
is marketed as a healthier alternative to the typical vacuum cleaner and a
portable room air cleaner that helps to remove particles, gases and odors from
the air. The two products are sold together as a complete Filter Queen Indoor
Air Quality System(TM) throughout the world.

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Filter Queen(R) uses a patented multi-filtration system consisting of
Cellupure(R), MEDIPure(R), and Enviropure(R) filter cones and cartridges. The
Filter Queen Indoor Air Quality System(TM) is designed and proven to reduce
airborne particles and allergens such as dust, smoke, pollen, mold spores,
animal dander, dust mites, and harmful fibers that may lead to allergic
reactions. Independent tests confirm that the Filter Queen Indoor Air Quality
System(TM), when used with the above named filters and cartridges, removes
99.98% of particles at .01 micron, which is better than HEPA (high efficiency
particulate arrestance technologies), the industry standard.

We believe that we offer a superior warranty in the U.S. for our high filtration
portable surface cleaner compared with all other U.S. manufacturers and sellers
of vacuum cleaners. We warrant our surface cleaner for a two-year period from
the date of purchase and offer a lifetime service benefit for the replacement of
the surface cleaner's motor at a price not to exceed $99 USD (not in thousands).

We also support a five-year optional extended warranty on the portable surface
cleaner offered by our U.S. Distributors to the end user as a sales promotion
during an in home product demonstration. As an enticement to the end user to buy
our product during that demonstration the five year optional extended warranty
is offered to them at no cost; accordingly no revenue for this optional warranty
is recognized by HMI. Our warranty reserve is recorded to provide for the above
extended warranties. We do not allocate a portion of the product revenue to the
extended warranty as there is no objective and reliable evidence associated with
the fair value of the warranty, as we are not in the business of separately
selling extended warranties on our products. In addition, a general right of
return relative to the delivered product does not exist.

Outside the U.S. we offer a two-year warranty for our high filtration portable
surface cleaner. The portable room air cleaner is warranted for renewable
one-year periods so long as the main air filter is replaced annually. A
five-year warranty is offered for our built-in vacuum system.

Our distribution system consists of approximately 340 Distributors and Importers
who sell our products. Our independent authorized Distributors and Importers
sell our products in more than 25 countries worldwide.

Each Distributor and Importer has a defined territory in which he or she
maintains the exclusive right to sell our company's products. Each Distributor
and Importer sells the products to consumers through an in-home presentation
given by a sales associate who, in some parts of the world, has been trained and
certified by independent HMI trainers as an "Indoor Air Quality Specialist."
Distributors are granted the right to market our products using the
demonstration method and utilizing our trademarks. These same Distributors and
Importers are responsible for providing service and replacement parts and
supplies to the end-consumers in their territories, which provides them with
another source of revenue and potential referral network.

U.S. MARKET. In the United States, we primarily sell our high filtration
portable surface cleaner and portable room air cleaner through Distributors who
sell our products to end consumers through sales associates.

To aid in the retention of Distributors and help with the development of their
professional careers and independent businesses, we developed an award winning
unique training and development program called "The Edge Success Program" (the
"Edge"). The Edge is an innovative, highly

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structured multi-step program that provides business training from the earliest
level of a new recruit to the most senior level of a Premier Master Distributor.
The program provides incentives at each level to promote the development and
retention of quality Distributors and sales associates. Personal and
professional training includes: sales and recruiting seminars, a business
management correspondence course, and a week-long educational and training
course called the Business Management Institute ("BMI") redesigned in
conjunction with Cleveland State University in Cleveland, Ohio. BMI addresses
everything from sales techniques; lead generation; personal finances; moral,
legal and ethical standards; human resource compliance issues; business
ownership; and more. Every Distributor that opens a Filter Queen(R) office must
attend BMI. The results prove that offices operated by BMI graduates are more
successful in terms of unit sales and associate retention than those operated
before the inception of the program. The reward for working your way through The
Edge and selling 30,000 Filter Queen(R) units is $1 million. In May of 2003 we
recognized our first millionaire at our national convention. In May of 2001 we
received the distinguished Education for Life Award from the Direct Selling
Association for our unique and outstanding education program, The Edge Success
Program. The Direct Selling Association recognizes companies in the direct
selling industry that go beyond just sales training. Other companies who
received this honor in the past include Tupperware, Avon and Mary Kay.

In an effort to improve our customer service to end-consumers, in fiscal 2001 we
created Health-Mor at Home(TM) ("HMAH"). HMAH is a revenue generating inside
sales organization selling replacement parts to Filter Queen(R) owners
throughout the United States who no longer have an authorized Distributor in
their area.

The implementation of several FQ@Home Service Center businesses in late fiscal
2003 and into fiscal 2004 will serve to complement our HMAH program. FQ@Home
Service Centers, focused aftermarket businesses aimed at generating repeat
business, are being set-up in territories with a high concentration of customers
and no Distributor. These Service Centers will provide convenient proactive
in-home replacement of parts and accessories for existing Filter Queen(R)
customers.

MARKETS OUTSIDE THE U.S. Success in exporting has occurred for us mostly in the
last twenty years. To sell our products in a foreign market, we usually engage
the services of a single Importer to represent our products in each country. We
have less contact with the direct sales networks employed by Importers because
we have fewer field staff outside the U.S. to support such sales networks. Since
each country poses its own unique set of challenges (among others, currency
fluctuations, differing political and economic systems, unique business and
legal environments, inconsistent duty and tax requirements and even civil unrest
and war), it can be very difficult to penetrate a new market without the help of
an individual from that market. As a consequence, we are dependent on our
Importers to address those challenges.

In fiscal 2002 a reorganization of the management for our international market
resulted in the planned introduction of the most successful U.S. programs. For
example in fiscal 2003, The Edge Success Program, BMI, the "System" selling
strategy, and the new power nozzle (formally sold only as an option) were
introduced, with great anticipation, to some of our largest foreign markets in
parts of Asia, Europe and the Middle East.

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      Marketing and Advertising

Traditionally, we have relied on our Distributors to market and sell our
products to consumers. A portion of the sales of our products by our
Distributors and their sales associates is dependent on telemarketing as a tool
for developing sales leads and arranging in-home demonstrations of our products
with end-consumers who purchase these products. Regulatory efforts in Europe and
the U.S. have focused on imposing more restrictions on telemarketing. In October
2003 the National Do Not Call registry became active, limiting the number of
potential consumers reachable by telephone. There can be no assurance that such
regulations will not further restrict telemarketing, and thereby make it
increasingly difficult to sell our products with the aid of telemarketing.
Because of these increased regulations and the high relative cost of
telemarketing, many of the Distributors have been developing alternative methods
to generate leads for in-home demonstrations. We have assisted our Distributors
by creating a National Exhibit Booth Program that encourages Distributors to
participate in local exhibits, tradeshows, home shows, shopping malls and fairs.
As part of this program we developed a National Sweepstakes Program titled "Live
Better Sweepstakes." The Sweepstakes winner will take home an automotive vehicle
valued at $25 or $25 in cash. To promote the sweepstakes program, we created a
portable display booth containing banners, product display pedestals, entry
forms, drop boxes, posters and a "smoke machine" which demonstrates the air
cleaning ability of the Defender(R). The entry forms contain a signature line
that allows Distributors to contact the customer by telephone for the duration
of the contest period. In addition, this program promotes brand awareness in the
Distributor community.

Additionally, in October 2003 we launched a national mail lead generation
program in order to generate leads and provide opportunities for our
distribution network to demonstrate and sell our products. This program offers
consumers the chance to win prizes and an opportunity to view a Filter Queen(R)
presentation. We are sponsoring the Grand Prize of $10 and the second through
fourth prizes. The Distributor is responsible for the fifth and sixth place
prizes. When the customer calls, the Distributor sets an appointment to verify
the winning card, delivers the prize, and has the opportunity to make a
presentation of the Filter Queen Indoor Air Quality System(TM).

Furthermore, in fiscal 2002 we developed an alliance, which we continue today,
with a medical doctor to write a book on the dangers of indoor air pollution. In
his book, Every Breath You Take, Dr. Bill Loughridge explains how to reduce the
negative affects of indoor air pollution. In the "solutions" section of the
book, Dr. Loughridge recommends Filter Queen(R) as the best cleaning system to
help maintain a healthy environment. The book was published in May 2002 and is
available through Ingram Books or HMAH. Filter Queen(R) Distributors have
purchased the book to educate their sales associates and consumers. Many
Distributors give the book away free just for seeing a demonstration. To date
nearly six thousand books have been distributed.

      Raw Material

We assemble finished units from parts purchased from various suppliers. The raw
materials used by our manufacturing operations are purchased from a number of
suppliers and substantially all such materials are readily available.

      Patents and Trademarks

We have numerous United States and foreign patents, patent and trademark
applications, registered trademarks, and trade names that are used in our
business. We generally own the trademarks under which our products are marketed
and have registered our trademarks and will continue to register and protect
them as they are developed or acquired. Trademarks are

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registered for varying finite periods but are usually renewable for an unlimited
number of periods so long as they are still in use. Patents are registered for
finite periods and are not renewable. In the case of trademarks used which are
owned by others, we have entered into long-term license agreements to use the
trademarks. We also believe that certain of the trademarks and trade names are
of material importance to the businesses/products to which they relate and may
be of material importance to our company as a whole. Although protection of our
patents and related technologies are important components of our business
strategy, none of the individual patents is believed to be material to our
company. The remaining duration of the patents and trademarks varies.

      Seasonality

Historically we experience lower product sales in our fiscal fourth quarter, as
compared to the first three fiscal quarters, resulting from fluctuations in our
European product sales as the European importers adjust their inventory volumes
in July/August for the standard European holiday month of August. European net
product sales approximated 11.8%, 14.6%, and 19.8% for the fiscal fourth
quarters in 2003, 2002, and 2001, respectively, as compared to the average of
the first three fiscal quarters in 2003, 2002, and 2001 of 20.5%, 19.0%, and
23.2%, respectively.

      Major Customers and Dependence on Independent Distributors

We are subject to risks specific to the individual customers with whom we do
business. In fiscal 2003 no individual customer accounted for more than 10% of
our product sales. In fiscal 2002 one international customer in Japan accounted
for more than 10% of our product sales. This international customer's product
sales were 11.9% of our total product sales. In fiscal 2001 three international
customers, one each in Canada, Japan and Portugal, accounted for more than 10%
each of our product sales with individual total product sales of 13.1%, 11.2%,
and 10.2%, respectively.

Our revenues, and the stability of such revenues, are dependent on our
relationships with third-party distributors and their sales persons and their
level of satisfaction with our products and us. The Distributors and Importers
are independent third parties who are not our employees and are not directly
under our control. There can be no assurance that the current relationships with
Distributors and Importers will continue on acceptable terms and conditions to
us, nor can there be any assurance that additional distributorship arrangements
with third parties will be obtained on acceptable terms. Moreover, there can be
no assurance that the Distributors and Importers will devote sufficient time and
resources to our products to enable the products to be successfully marketed.
Failure of some or all of our products to be successfully and efficiently
distributed could have a material adverse effect on our financial condition and
results of operations.

In addition, our business could be adversely affected by a variety of
uncontrollable and changing factors, including but not limited to: difficulty in
protecting our intellectual property rights in a particular foreign
jurisdiction; recessions in economies where our products are sold; longer
payment cycles for and greater difficulties collecting accounts receivable;
export controls, tariffs and other trade protection measures; social, economic
and political instability; and changes in United States and foreign countries
laws and policies affecting trade.

      Backlog

We operate monthly with a minimal backlog (backlog at September 30, 2003, 2002,
and 2001 was $-0-, $6, and $-0-, respectively).

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      Competition

We experience strong competition in the sale of our high filtration portable
surface cleaners, central vacuum systems, and portable room air cleaners. Not
only do we compete for consumer sales but also for Distributors and Importers to
sell our products. Participants in the vacuum and indoor air cleaner industries
compete primarily on price, quality, brand name recognition, product
availability, and product performance, including the perceived amount of
particles removed by a vacuum cleaner or air filter. Economy or disposable
vacuums and indoor air filters are sold through a variety of channels including
department stores, discount houses, appliance stores, and catalogs, generally at
substantially lower prices than our products. According to the latest survey
from the Vacuum Dealers Trade Association, 75% of vacuum sales were through
retail store outlets while direct-selling companies like HMI sold 25%. We
believe that our high filtration portable surface cleaner is superior to other
vacuum cleaners because of its outstanding performance and warranty, as
described in greater detail above under "Products and Distribution."

Our high filtration portable surface cleaner (The Majestic(R)) and central
vacuum system (Vacu-Queen(R)) compete with many significant vacuum cleaner
manufacturers and with regional and private label manufacturers, including other
direct selling companies, such as Rainbow, Tristar, Kirby, Miracle Mate,
Electrolux, and Water-Matic, and companies that sell through retail outlets such
as Miele, Eureka, Hoover, Kenmore, and Royal. We also manufacture and distribute
a portable room air cleaner (The Defender(R)) recognized as a Class II Medical
Device by the FDA. There are basically two types of air cleaners. The
Defender(R) is a mechanical filter that forces dirty air through a series of
filters releasing only cleaner, fresher air. The second type is an electrostatic
precipitator that emits an electronic charge into the air. Many electronic
filters also produce ozone, a proven respiratory irritant.

The portable room air cleaner market is primarily a retail and catalog business.
HMI's Defender(R) competes directly with air cleaners like: Alpine, Honeywell,
Bionaire, Hunter, Holmes, Hoover, and Sharper Image. The October 2003 issue of
Consumer Reports states that, "Air cleaners like these are a type of electronic
precipitator: They impart an electrical charge to particles that stick to
oppositely charged collectors. Sharper Image, Honeywell, and Hoover
precipitators are quiet and cost little to run. However, our tests show that
they are not effective." Many of our competitors have greater financial,
marketing, and manufacturing resources and better brand name recognition than
us, and sell their products through broader and more extensive distribution
channels. According to a recent U.S. Air Cleaner Market Report, published by
Riedel Marketing, nearly 70% of air cleaner owners purchased through traditional
retail establishments while just 5% of those who own an air cleaner purchased
from a salesperson that came to their home.

      Research and Development

Our ongoing research and development program involves creating new products and
redesigning existing products to reduce manufacturing costs and to increase
product quality and efficiencies. In fiscal year 2003, 2002, and 2001, we
invested $74, $273, and $351, respectively, in new product development. We
anticipate expending $55 on the redesigning of products in fiscal year 2004.


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      Environmental

To our knowledge, we are in compliance with all applicable Federal, State, and
local laws relating to the protection of the environment.

While we anticipate no current expenses for environmental issues, there can be
no assurance that we will not receive claims for environmental conditions in the
future, nor any assurance that any such claims, if received, would not have a
material adverse impact on our financial condition and results of operations.

      Employees

We employed 115 full-time and 14 part-time employees at January 31, 2004. None
of our employees are parties to a collective bargaining agreement, and we
believe our relationships with all our employees to be good.

FINANCIAL INFORMATION ABOUT GEOGRAPHIC AREAS

Sales to international customers represented 35.8%, 43.1%, and 49.7% of net
product sales for the years ending September 30, 2003, 2002, and 2001,
respectively.

AVAILABLE INFORMATION

Our principal executive offices are located at 6000 Lombardo Center, Suite 500,
Seven Hills, Ohio 44131, and its telephone number is (216) 986-8008.

We regularly file reports with the Securities Exchange Commission (SEC). These
reports include, but are not limited to, Annual Reports on Form 10-K, Quarterly
Reports on Form 10-Q, current reports on Form 8-K, and security transaction
reports on Forms 3, 4, or 5. The public may read and copy any materials that we
file with the SEC at the SEC's Public Reference Room located at 450 Fifth Street
NW, 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. The SEC also
maintains electronic versions of our reports on its website at
http://www.sec.gov.

We make our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, current
reports on Form 8-K, and other reports filed or furnished with the SEC available
to the public, free of charge, through our website at www.filterqueen.com. These
reports are provided through our website as soon as reasonably practicable after
we file or furnish these reports with the SEC.

ITEM 2. PROPERTIES

The following table sets forth the location, character, and size (in thousands
of square feet) of the real estate we used in our operations at January 31,
2004:

<TABLE>
<CAPTION>
                                                                                                         Square
        Location                                       Character                                          Feet
        --------                                       ---------                                          ----
<S>                                     <C>                                                              <C>
United States of America~
  Strongsville, Ohio                    Leased office, manufacturing, and warehouse space                 73.0
  Seven Hills, Ohio                     Leased office space                                               15.7
</TABLE>

                                       11
<PAGE>

ITEM 3. LEGAL PROCEEDINGS

Bliss Technologies, Inc. ("Bliss"), the company formed from the 1998 sale of the
subsidiary of HMI, filed for bankruptcy in January 2000 in the United States
Bankruptcy Court, Eastern District of Michigan. In a separate action filed in
2002, the Official Committee of Unsecured Creditors of Bliss alleges a
fraudulent conveyance claim against us asserting that the sale of Bliss in 1998
was a fraudulent transfer insofar as we received more for Bliss than it was
worth and that Bliss was insolvent from its inception. Former directors of
Bliss, Mark Kirk and Carl Young, are also named as defendants in the action.
Claims pending against them allege that in their capacity as Bliss directors
they breached fiduciary duties to Bliss creditors. The complaint seeks damages
in an unspecified sum. The claims against us and the claims against Mr. Kirk and
Mr. Young are being vigorously defended. We believe that we will resolve this
matter in a manner that will not have a material adverse effect on our
consolidated financial position, results of operations, or cash flows.

CONET Industries, Inc., Royal Queen Club International Limited, Chang-whan Chang
and Young-so Song ("Plaintiffs") filed a complaint against HMI on or about
February 18, 2001, in the Seoul, Korea District Court. It was served by
Registered Mail upon HMI at our corporate offices in Seven Hills, Ohio, on or
around April 10, 2002. The complaint was filed as a result of lawsuits by us
against Mr. Song, a former HMI Distributor in Korea, and Royal Queen Club
concerning Mr. Song's CYVAC product. In our lawsuits, we sought and were granted
preliminary injunctions against Plaintiffs that prohibited Plaintiffs from
manufacturing and selling the old model CYVAC for 311 days and the new model
CYVAC for 209 days, until the Seoul High Court issued a declaration of
suspension of the injunctions. Despite the fact that Plaintiffs had been
enjoined by the Courts, Plaintiffs allege that we should compensate them for
actual damages for sale discontinuance, supplemental managerial costs and new
mold fabrication costs due to the interruption in the manufacturing and
marketing of each product during that period. Plaintiffs also claim that we
tortuously interfered with Plaintiffs' business advantages, caused irreparable
harm to Plaintiffs' normal business activities, and damaged Plaintiffs'
reputation and standing. Chang-whan Chang and Young-so Song allege that they
have been critically damaged personally due to the accusations, improper
provisional seizure, and criminal allegations alleged by us, which they assert
resulted in disturbance to business, reputation, and credit. All matters are
pending. The Plaintiffs originally alleged damages in excess of U.S. $21,894.
After several hearings the court ruled in our favor and against the Plaintiffs
on all counts. We have been notified that the Plaintiffs have appealed this
decision in accordance with Korean law. We believe that we will resolve this
matter in a manner that will not have a material adverse effect on our
consolidated financial position, results of operations, or cash flows.

Claims arising in the ordinary course of business are also pending against us.
Although these are in various stages of the litigation process, we believe that
none of these matters will have a material adverse effect on our consolidated
financial position, results of operations, or cash flows. Included in the
accompanying Consolidated Balance Sheets at September 30, 2003, and 2002, were
accruals of $15 and $15, respectively, relating to various claims.

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

Not applicable.

                                       12
<PAGE>

PART II

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

Our common stock is traded in the over-the-counter market on the OTC Bulletin
Board under the symbol "HMII.OB". As of January 31, 2004, there were 222
stockholders of record.

A summary of the quarterly high and low bid price of our common stock on the OTC
Bulletin Board for the years ended September 30, 2003, and 2002, are as follows:

2003

<TABLE>
<CAPTION>
                High [1]                 Low [1]
                --------                 -------
<S>             <C>                      <C>
1st Quarter       $ 0.70                  $ 0.18
2nd Quarter       $ 0.65                  $ 0.41
3rd Quarter       $ 0.65                  $ 0.51
4th Quarter       $ 1.05                  $ 0.55
</TABLE>

2002

<TABLE>
<CAPTION>
                High [1]                  Low [1]
                --------                  -------
<C>             <C>                       <C>
1st Quarter       $ 1.01                   $ 0.70
2nd Quarter       $ 0.80                   $ 0.51
3rd Quarter       $ 0.83                   $ 0.58
4th Quarter       $ 0.65                   $ 0.46
</TABLE>

[1] The bid price for our common stock was received from Nasdaq Trading & Market
Services. Such over-the-counter market quotations reflect inter-dealer prices,
without retail mark-up, mark-down or commission, and may not necessarily
represent actual transactions.

The declaration and payment of quarterly dividends is at the discretion of the
Board of Directors, which may raise, lower, or omit the dividend in any quarter.
No dividends were declared in 2003 or 2002 as the credit agreement with our
lender presently prohibits us from declaring or paying any dividends.

Securities Authorized for Issuance Under Equity Compensation Plans. Information
about HMI equity compensation plans at September 30, 2003, was as follows
(shares in thousands):

<TABLE>
<CAPTION>
                                                                                                Number of shares
                                               Number of shares to                             remaining available
                                                  be issued upon        Weighted average       for future issuance
                                                   exercise of          exercise price of         under equity
               Plan Category                   outstanding options     outstanding options     compensation plans
               -------------                   -------------------     -------------------     ------------------
<S>                                            <C>                     <C>                     <C>
Equity compensation plans approved by
shareholders (a)                                       1,024                  $1.21                       -(b)
                                                       -----                  -----                    ----
Equity compensation plans not approved by
shareholders (c)                                         135                  $5.91                       -
                                                       -----                  -----                    ----
Total                                                  1,159                  $1.76                       -
</TABLE>

(a)   These options were issued under the 1992 Omnibus Long-Term Compensation
      Plan. See "Notes to Consolidated Financial Statements, Note 5 - Long-Term
      Compensation Plan."

                                       13
<PAGE>

(b)   The 1992 Omnibus Long-Term Compensation Plan (the "Plan") does not contain
      any restriction on the number of shares that can be issued pursuant to an
      award under the Plan except for Incentive Stock Options ("ISO"), which are
      limited to 2,500 shares, as adjusted for stock splits. No new ISO grants
      may be made under the Plan because the Plan was adopted more than ten
      years ago. Regulations of the Internal Revenue Service which determine
      whether or not on option is an ISO require that the Plan under which an
      ISO is granted must have been adopted within the prior ten years. The
      number of shares available for grant each year is equal to 5% of the
      Company's outstanding Common Stock on December 31 of the prior year. To
      the extent that the number of awards in any year is less than 5%, this
      unused amount may be carried over to future years. Awards which have
      lapsed or been forfeited may also be reissued in future years. The maximum
      number of awards that can be made in any year, including carryovers and
      lapsed and forfeited awards, is equal to 10% of the Company's outstanding
      Common Stock on December 31 of the prior year.

(c)   Awards of non-qualified stock options were made to two outside consultants
      in connection with their services to HMI. The option price was the fair
      market value on the date of grant. One option for 100 shares expires ten
      years from the date of grant (2006), while the other option for 35 shares
      expires five years from the date of grant (2005).

                                       14
<PAGE>

ITEM 6. SELECTED FINANCIAL DATA

The following table sets forth our selected historical financial data for each
of the last five fiscal years and reflects the restatement adjustments, for the
years ended September 30, 2003, 2002, and 2001, described in the introductory
note to this annual report as well as in Note 2 to our Consolidated Financial
Statements included in this annual report. Such data should also be read in
conjunction with "Management's Discussion and Analysis" and our audited
Consolidated Financial Statements included in this annual report. Please read
Note 2 of the Consolidated Financial Statements for additional information about
the restatements.

In thousands except per share amounts, stock prices and ratios

<TABLE>
<CAPTION>
                                             Restated        Restated      Restated
                                               2003            2002          2001          2000         1999
                                            ----------      ----------    ----------     ---------    ---------
<S>                                         <C>             <C>           <C>            <C>          <C>
Net product sales                           $   30,170      $   34,524    $   31,527     $  34,621    $  36,927
Cost of product sold and SG&A expenses      $   35,334(o)   $   35,889    $   32,676     $  33,515    $  38,447
Loss on impairment of asset                 $    1,711(1)   $        -    $        -     $       -    $   2,665
Other (income) expense, net                 $     (105)     $      430    $      272     $      (6)   $     (60)
(Loss) income from continuing operations
  before taxes and cumulative effect of
  accounting change                         $   (6,770)     $   (1,795)   $   (1,421)    $   1,112    $  (4,125)
(Loss) income margin from continuing
  operations before taxes and cumulative
  effect of accounting change                    (22.4%)          (5.2%)        (4.5%)         3.2%       (11.2%)
Provision (benefit) for income taxes        $       18      $       38    $    3,672(2)  $    (353)   $     116
Income tax rate                                   (0.3%)          (2.1%)      (258.4%)       (31.7%)       (2.8%)
(Loss) income from continuing operations
   before cumulative effect of
   accounting change                        $   (6,788)     $   (1,833)   $   (5,093)    $   1,465    $  (4,241)
(Loss) income margin from continuing
  operations before cumulative effect of
  accounting change                              (22.5%)          (5.3%)       (16.2%)         4.2%       (11.4%)
Cumulative effect of accounting change      $   (5,451)(3)  $        -    $    4,943(4)  $       -    $       -
Gain (loss) on disposals                    $        -      $        -    $        -     $     425    $    (375)
Net (loss) income                           $  (12,239)     $   (1,833)   $  (10,036)    $   1,890    $  (4,616)
Net (loss) income margin                         (40.6%)          (5.3%)       (31.8%)         5.5%       (12.4%)

Per Share Data - Basic and Diluted:
(Loss) income from continuing operations
   before cumulative effect of
   accounting change                        $    (1.01)     $    (0.27)   $    (0.76)    $    0.24    $   (0.81)
Cumulative effect of accounting change      $    (0.81)     $        -    $    (0.74)    $       -    $       -
Gain (loss) on disposals                    $        -      $        -    $        -     $    0.07    $   (0.07)
Net (loss) income                           $    (1.82)     $    (0.27)   $    (1.50)    $    0.31    $   (0.88)

Weighted Average Number of Common
  Shares Outstanding:
   Basic                                         6,744           6,719         6,691         6,113        5,263
   Diluted                                       6,744           6,719         6,691         6,140        5,263

Total Assets                                $   10,668      $   17,430    $   16,979     $  20,843    $  17,465
Long-Term Debt                              $       11      $       33    $       75     $      71    $       -
Stockholders' Equity                        $   (8,754)     $    2,577    $    4,419     $  14,394    $  10,326
Working Capital                             $    1,444      $      992    $      580     $    4137    $     987

Ratio of Current Assets to Current
  Liabilities                                     1.22            1.16          1.09          1.67         1.15
(Loss) Income as a Percent of Average
  Stockholders'(Deficit) Equity                 (396.1%)         (52.4%)      (106.7%)        15.3%       (37.8%)
Stock High(a)                                   1 1/20           1 1/5       1 11/16         1 3/4        2 1/4
Stock Low(a)                                     13/50           25/49         11/16           1/2            1
</TABLE>

                                       15
<PAGE>

(o) This amount includes a $905 write-off, recorded during the second quarter,
relating to cumulative translation adjustments associated with the liquidation
of our Canadian subsidiary. In addition it includes a $300 reserve for obsolete
inventory associated with impaired tooling. See Note 1 for further information.

(1) During the fourth quarter of fiscal 2003, we performed an analysis on the
potential impairment of certain tooling assets, and related patents and
trademarks, approximating $1,711. We concluded from our analysis, which was
based upon the held and used model that the tooling assets were fully impaired
and accordingly recorded an impairment charge of $1,711 as of September 30,
2003.

(2) In the second quarter of fiscal 2001, we concluded that a full valuation
allowance for our deferred tax assets was required. Accordingly, we recorded a
non-cash charge in the second quarter of fiscal 2001 of $6,118 to increase our
valuation allowance for our deferred tax assets. See Note 6 for further
information.

(3) As of October 1, 2002, a full impairment of the goodwill recorded on HMI's
books was recorded through a non-cash charge of $5,451. Such charge is
non-operational in nature. See Note 1 for further information.

(4) In the second quarter of fiscal 2001 a non-cash charge of $4,943 was
recorded on HMI's books to reflect the adoption of the Emerging Issues Task
Force EITF 01-9, Accounting for consideration Given by a Vendor to a Customer
relative to our distributor development program.

(a)Represents closing price of stock

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (DOLLARS IN THOUSANDS)

RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS

Item 7 of Management's Discussion and Analysis has been revised to reflect the
restatement of our Consolidated Financial Statements for the years ended
September 30, 2003, 2002 and 2001. Refer to the Introductory Note to this Form
10-K/A - "Restatement of Prior Financial Information" and Note 2 of our
Consolidated Financial Statements for a further discussion of the restatement
adjustments and changes resulting from the restatement.

      Accrued Distributor Development Liabilities

As discussed in Note 2 to the Consolidated Financial Statements, EITF 01-9,
"Accounting for Consideration Given by a Vendor to a Customer" was issued in
2001. We did not consider the implications of this accounting pronouncement to
our $1,000 award associated with our Distributor Development Program, otherwise
known as our Edge Success Program. Accordingly, we have restated our revenues to
properly reflect the accrual for this award as a reduction of revenues, not as a
selling and administrative expense. We have determined that for purposes of EITF
01-9 it is not possible to reasonably estimate such a liability. We have
therefore accrued such awards assuming a maximum accrual rate. In other words,
for each qualifying sale, we have recorded a liability by reducing revenue. Such
a liability will only be derecognized (i.e. the accrual eliminated) when (i) the
award is paid out or (ii) when a distributor is no longer eligible for the
award. For the years ended September 30, 2003, 2002 and 2001, this adjustment
(i) decreased sales by $4,369, $2,589 and $1,009, respectively, and (ii)
decreased selling, general and administrative expenses by $713, $191 and $79,
respectively. In addition, in the second quarter of fiscal 2001, $4,943 was
recorded which represented the cumulative effect of the adoption of EITF 01-9
since the inception of the Program in 1997.

                                       16
<PAGE>

      Tooling Assets

In 2003, we performed an analysis on the potential impairment of certain tooling
assets. We concluded from our analysis, which was based upon the held and used
model, that the tooling assets were fully impaired and accordingly we recorded
an impairment charge of $1,613 as of September 30, 2003. We inadvertently
omitted impairment charges of $98 for patents and trademarks relating to these
tooling assets and have reflected such additional impairment in the restated
2003 consolidated financial statements.

      Deferred Tax Asset

In 2003, we provided a full valuation allowance on our deferred tax assets. As a
result of the restatement related to the Distributor Development Program, our
recorded income in 2001 changed to a loss and caused a significant cumulative
loss for financial statement purposes. Accordingly, we determined that the
impairment of our deferred tax assets should be reflected in the second quarter
of fiscal 2001, when we first reflected the adoption of EITF 01-9. As a result,
we reversed the original impairment recorded in fiscal 2003.

      Summary of Restatement Adjustments

The following table summarizes the effects of the restatement adjustments on
certain of our previously issued financial statements by type of adjustment and
by the affected captions in our Statement of Operations. The various adjustments
recorded to prior years as part of the restatement have no effect on our cash
flows.

Summary of Restatement Adjustments by Type

<TABLE>
<CAPTION>
                                                                                   YEAR ENDED SEPTEMBER 30,
                                                                              2003            2002         2001
                                                                            --------       ---------     --------
<S>                                                                         <C>            <C>           <C>
(Increase) decrease to net loss-
 DISTRIBUTOR DEVELOPMENT LIABILITIES:
    Revenues                                                                $ (4,369)      $  (2,589)    $ (1,009)
    Selling, general and administrative  expenses                                713             191           79
    Interest expense                                                               -               -           15
    Cumulative effect of accounting change                                         -               -       (4,943)

  TOOLING ASSET IMPAIRMENT
    Loss on impairment of asset                                                  (98)              -            -

  DEFERRED TAX ADJUSTMENT
    Provision for income taxes                                                 4,038             227       (4,265)
                                                                            --------       ---------     --------
Total effect of restatement on net loss                                     $    284       $  (2,171)    $(10,123)
                                                                            ========       =========     ========
</TABLE>

                                       17
<PAGE>

CRITICAL ACCOUNTING POLICIES

Our discussion and analysis of our financial condition and results of operations
are based upon the consolidated financial statements, which have been prepared
in accordance with accounting principles generally accepted in the United States
of America. The preparation of these consolidated financial statements required
us to make estimates and judgments that affect the reported amount of assets and
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities at the date of the consolidated condensed financial statements.
Actual results may differ from these estimated under different assumptions or
conditions.

Critical accounting policies are defined as those that are reflective of
significant judgment and uncertainties, and potentially may result in materially
different outcomes under different assumptions and conditions. We believe that
the critical accounting policies are limited to those that are described below.

      Allowance for Doubtful Accounts

At September 30, 2003, our bad debt reserve was $194. We maintain an allowance
for doubtful accounts for estimated losses resulting from the inability of our
customers to make required payments. Quarterly, we evaluate the collectability
of our accounts receivable based on a combination of factors. In cases where we
are aware of circumstances that may impair a specific customer's ability to meet
its financial obligations to us, we record a specific allowance against amounts
due to us, and thereby reduce the net recognized receivable to the amount we
reasonably believe will be collected. For all other customers, we recognize
allowances for doubtful accounts based on the length of time the receivables are
past due, industry and geographic concentrations, the current business
environment, and our historical experience, including payment patterns. If the
financial condition of our customers deteriorates or if economic conditions
worsen, additional allowances may be required in the future, which could have an
adverse impact on our future operating results.

      Sales Return and Allowance

We record a provision for estimated sales returns and allowances on product
sales in the same period as the related revenues are recorded. These estimates
are based on historical sales returns and other known factors. If future returns
do not reflect the historical data we use to calculate these estimates,
additional allowances may be required.

      Excess and Obsolescence Reserves

Quarterly we evaluate our inventory to determine excess or slow moving items
based on current order activity and projections of future demand. For those
items identified, we estimate their market value or net sales value based on
current trends. An allowance is created for those items having a net sales value
less than cost. If actual market conditions are less favorable than those
projected by management, additional inventory write-downs may be necessary.

      Goodwill and Other Intangible Assets

Pursuant to FAS 142 "Goodwill and Other Intangible Assets" we ceased amortizing
goodwill in the period beginning October 1, 2002. Prior to the adoption of SFAS
No. 142, we amortized goodwill on a straight-line basis over 40 years. Other
intangible assets are amortized on a straight-line basis over their useful
lives, ranging from ten to seventeen years.

FAS 142 primarily addresses the accounting for goodwill and intangible assets
subsequent to their initial recognition. The provisions of FAS 142 prohibit the
amortization of goodwill and indefinite-lived intangible assets, require that
goodwill and indefinite-lived intangible assets be tested annually for
impairment (and in interim periods if certain events occur indicating that the

                                       18
<PAGE>

carrying value of goodwill and/or indefinite-lived intangible assets may be
impaired), require that reporting units be identified for the purpose of
assessing potential impairments of goodwill, and remove the forty-year
limitation on the amortization period of intangible assets that have finite
lives.

During the first quarter of fiscal 2003 we completed the first step of the
two-step implementation process by obtaining a valuation of HMI for comparison
to the carrying value and began the process of measuring the amount of the
impairment (step two). Management does not believe that the market value of
common stock fairly reflects the value of HMI, because of, among other things,
the absence of liquidity, and the absence of analyst coverage. Accordingly, the
valuation experts employed by us utilized the market value of the common stock
as of October 1, 2002, but also weighted the valuation for comparable values of
peer companies, recent sales of similar types of companies, and a discounted
cash flow methodology. Based on the assumptions used in any of the three
valuations referred to above and depending on the weighting used for each
valuation, results of the valuation could be significantly changed. However, for
accounting purposes we believe that the weighting methodology used is reasonable
and results in an accurate and fair value of HMI.

During the second quarter of fiscal 2003 we completed our initial impairment
test for October 1, 2002, resulting in a full impairment of the goodwill
recorded on HMI's books through a non-cash charge of $5,451. Such charge is
non-operational in nature and is reflected as a Cumulative Effect of Accounting
Change in the accompanying Consolidated Statements of Operations.

      Valuation of Long-Lived Assets

As of the beginning of fiscal 2003 we adopted Statement of Financial Accounting
Standards ("FAS") No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets". The adoption of this accounting standard did not have a
material impact on our operating results and financial position. We assess
potential impairments to our long-lived assets when there is evidence that
events or changes in circumstances indicate that the carrying amount of an asset
may not be recovered. An impairment loss is recognized when the carrying amount
of the long-lived asset is not recoverable and exceeds its fair value. The
carrying amount of a long-lived asset is not recoverable if it exceeds the sum
of the undiscounted cash flows expected to result from the use and eventual
disposition of the asset. Any required impairment loss is measured as the amount
by which the carrying amount of a long-lived asset exceeds its fair value and is
recorded as a reduction in the carrying value of the related asset and a charge
to operating results.

During the fourth quarter of fiscal 2003 we performed an analysis on the
potential impairment on certain tooling assets, and related patents and
trademarks, approximating $1,711 which related to a potential new product. An
additional $98 for patents and trademarks was added to this impairment charge as
part of our restatement. See Note 2 to the Consolidated Financial Statements.
Based upon our analysis, we concluded that the tooling assets were fully
impaired as of September 30, 2003; this conclusion was based upon the held and
used model which includes significant assumptions regarding future cash flows
and utilizes a model of weighted probability cash flow projections over the
estimated life of the product. Scrap value for these assets was determined to be
nominal; accordingly a $1,711 impairment of this asset was recorded as of
September 30, 2003, to write the assets down to their net realizable value. This
product will not have any additional resources devoted to its refinement and
completion, nor will the product be marketed or sold as an ongoing part of our
product portfolio. As a result the impairment is not expected to have an impact
on future revenue or net income. Different assumptions or different

                                       19
<PAGE>

weightings of the projected cash flows could significantly impact our conclusion
concerning the impairment of such assets.

      Income Taxes

In determining income (loss) for financial statement purposes, we must make
certain estimates and judgments. These estimates and judgments occur in the
calculation of certain tax liabilities and in the determination of the
recoverability of certain of the deferred tax assets, which arise from temporary
differences between the tax and financial statement recognition of revenue and
expense. SFAS 109 also requires that the deferred tax assets be reduced by a
valuation allowance, if based on the weight of available evidence, it is more
likely than not that some portion or all of the recorded deferred tax assets
will not be realized in future periods.

In evaluating our ability to recover our deferred tax assets we consider all
available positive and negative evidence including our past operating results,
the existence of cumulative losses in the most recent three fiscal years, and
our forecast of future taxable income. In determining future taxable income, we
are responsible for assumptions utilized including the amount of state and
federal pre-tax operating income, the reversal of temporary differences, and the
implementation of feasible and prudent tax planning strategies. These
assumptions require significant judgment about the forecasts of future taxable
income and are consistent with the plans and estimates we are using to manage
our business.

Periodically and when indicators suggest we assess the realizability of our
domestic deferred tax assets, giving consideration to our actual historical
results supplemented by future expected results. SFAS No. 109, "Accounting for
Income Taxes" considers a historic pattern of losses as significant negative
evidence that tax assets will not be realized and this consideration is not
outweighed by any prospective view of management that sufficient taxable income
will ultimately be available to realize the tax benefits. Given the history of
losses and the results in 2003, we concluded that under the "more likely than
not" criteria of SFAS No. 109 a full valuation allowance is still required
against the net U.S. deferred tax assets at September 30, 2003.

The valuation allowance has been subject to periodic review and can be partially
or totally reversed either when income is generated that utilizes the loss or
when sufficient positive evidence emerges (i.e. A sustained positive trend of
U.S. income for financial accounting purposes.) Our income tax expense recorded
in the future will be reduced to the extent of offsetting decreases in our
valuation allowance.

      Warranty Reserves

Our policy is to record a provision for the expected cost of warranty-related
claims at the time of the sale and adjust the provision to reflect actual
experience quarterly. The amount of warranty liability accrued reflects
management's best estimate of the expected future cost of honoring our
obligations under the warranty plans. Historically, the cost of fulfilling our
warranty obligations has principally involved replacements parts, labor and
sometimes travel. Our estimates are based on historical experience, the number
of units involved, and the extent of features/components included in product
models. If future returns and warranty settlements do not reflect the historical
data we use to calculate these estimates, additional allowances may be required.

RESULTS OF OPERATIONS - 2003 COMPARED WITH 2002

PRODUCT SALES- Product sales, less returns and allowances, of $34,539 for the
year ended September 30, 2003, were $2,574 or 6.9% lower when compared to the
prior year sales of $37,113. The decrease in sales was primarily attributable to
reduced international sales, largely

                                       20
<PAGE>

Asia, and the cessation of the National Advertising Campaign ("NAC"), offset by
increased revenues in the Americas distributor network of $2,466.

The largest decline in Asia was principally attributable to lower sales to
Japan. Our Japanese importer has struggled all year to realign his inventory
levels in anticipation of the launch of our 75th Anniversary Majestic(R) (our
portable surface cleaner), which is currently planned to occur in Japan in
fiscal 2004. The reduced sales to Japan also reflect Defender(R) (our portable
room air cleaner) sales that were made in the prior year with the intent of
selling them with the Majestic(R) as a system similar to how our products are
marketed in the U.S.; however, this program was not as successful as
anticipated, resulting in lower Defender(R) sales while the importer sells
through this inventory. To assist Japan with their continued inventory
realignment as well as the development and execution of training and sales
programs, we created a new sales position within HMI that will provide
experienced dedicated sales support to this region.

The NAC, a thirty-minute television infomercial which began airing in July 2001,
was designed to increase brand awareness, generate sales leads, and open new
territories. In August 2002 we stopped broadcasting the infomercial as
anticipated profits for this program were not being achieved, and the
infomercial had exceeded the industry standard expected life cycle of twelve
months. NAC sales accounted for $1,495 of total revenue in fiscal 2002.

The increase in the Americas distribution network was due to the growth of
several of our key master distributors who have grown their business through
effective recruiting, retention, and the opening of new offices.

Product sales after returns and allowances were not materially impacted by
changing prices.

DISTRIBUTOR DEVELOPMENT PROGRAM- The reduction to product sales associated with
the Distributor Development Program for the year ended September 30, 2003 was
$4,369 compared to $2,589 in fiscal 2002, a $1,780 increase. This increase was
primarily a result of making the international market part of the Program during
the first quarter of fiscal 2003 which accounts for approximately $1,350 of the
$1,780 increase in sales reduction. See Note 2 to our Consolidated Financial
Statements for a further discussion of the accounting pertaining to this
program.

GROSS MARGIN, EXCLUSIVE OF DISTRIBUTOR DEVELOPMENT PROGRAM- The gross margin,
exclusive of distributor development program costs, for the year ended September
30, 2003, was $13,514 or 39.1% of sales as compared to $15,815 or 42.6% of sales
in 2002, a decrease of $2,301. Approximately $1,256 of the decrease in gross
margin was associated with the cessation of the NAC. The balance of the decrease
was primarily the result of an unfavorable volume variance due to lower
international sales, increased Defender(R) warranty costs of $167 largely
associated with certain international markets that utilize peak demand
electricity transmission and control systems, and an additional charge of $299
related to obsolete inventory associated with impaired tooling, of which the
unfavorable international sales volume variance was the largest.

SELLING, GENERAL, AND ADMINISTRATIVE ("SG&A")- SG&A expenses of $13,404 for the
year ended September 30, 2003, were favorable to fiscal 2002 expenses of $14,591
by $1,187. The reduced level of expense was driven by the absence of advertising
and administrative costs associated with our aforementioned NAC of approximately
$2,334, costs associated with the Form 13D that was filed by a group led by our
current Chairman, Kirk W. Foley, with the Securities and Exchange Commission in
the prior year of $435, and reduced outside consulting expenses of $235. These
decreases were partially offset by increased costs of $1,223 associated with the

                                       21
<PAGE>

training, development, and retention of our Americas and International networks
as well as expenses approximating $871 associated with certain growth
initiatives in the Americas division.

LOSS ON IMPAIRMENT OF ASSET- During the fourth quarter of fiscal 2003, we
performed an analysis on the potential impairment of certain tooling assets, and
related patents and trademarks. We concluded from our analysis, which was based
upon the held and used model that the tooling assets were fully impaired and
accordingly recorded an impairment charge of $1,711 as of September 30, 2003, as
the scrap value for these assets was determined to be nominal.

LOSS ON LIQUIDATION OF SUBSIDIARY- During the second quarter of fiscal 2003,
after reviewing possible future options for our Canadian subsidiary, we chose to
liquidate the entity and therefore recorded a loss on disposal of $905 for
cumulative translation adjustments associated with this subsidiary.

INTEREST EXPENSE- Interest expense for fiscal year 2003 was $53 or $33 lower
than the fiscal 2002 amount of $86 due primarily to lower interest expense
associated with our line of credit whose balance was on average lower than the
prior year. It was also impacted by reduced interest expense on our capital
lease obligations which reflects lower outstanding balances compared to those in
fiscal 2002.

OTHER (INCOME) EXPENSE, NET- The increase of $502 in other (income) expense,
net, from $344 of expense in fiscal 2002 to $158 of income for the year ended
September 30, 2003, largely resulted from the absence of goodwill amortization
associated with the adoption of SFAS No. 142 (see Note 1 to the Consolidated
Financial Statements).

INCOME TAXES- The effective income tax rate for the year ended September 30,
2003, was (0.3%) compared to (2.1%) in fiscal 2002. This difference was driven
by pre-tax earnings as the tax expense recorded was not material in either year
as a result of a full valuation allowance against our deferred tax assets.

CUMULATIVE EFFECT OF ACCOUNTING CHANGE- On October 1, 2002, we adopted SFAS 142.
Under SFAS 142, goodwill impairment is deemed to exist if the net book value of
a reporting unit exceeds its estimated fair value. During the second quarter of
fiscal 2003, we completed our initial impairment test as of October 1, 2002, and
recorded a non-cash charge of $5,451 to fully eliminate the carrying value of
our goodwill (See Note 1 to the Consolidated Financial Statements). There was no
tax effect related to this item, as this charge is a permanent difference for
income tax purposes.

INFLATION AND PRICING- While inflation or changing prices have not had, and we
do not expect them to have, a material impact upon operating results, there can
be no assurances that our business will not be affected by inflation or changing
prices in the future.

RESULTS OF OPERATIONS - 2002 COMPARED WITH 2001

PRODUCT SALES- Product sales, less returns and allowances, of $37,113 for the
year ended September 30, 2002, were $4,577 or 14.1% higher when compared to the
prior year sales of $32,536. The increase in sales was primarily attributable to
increased revenues in the Americas and Asia offset by decreased sales in Canada
and Europe. The Americas, backed by a stronger distribution network and our
National Advertising Campaign ("NAC"), was the largest contributor to this sales
increase.

The opening of additional offices by several key Distributors within our
existing Americas' network, as well as the switch of Distributors from a
competitor in the second quarter of fiscal

                                       22
<PAGE>

2001, led to increased Majestic(R) (portable floor care cleaner) and Defender(R)
(portable air room cleaner) sales in the Americas. Further contributing to the
Americas revenue growth were sales from the NAC and Health-Mor at Home(TM). The
NAC, a thirty-minute infomercial which began airing in July 2001, was designed
to increase brand awareness, generate sales leads, and open new territories. In
August 2002, we stopped broadcasting the infomercial as anticipated profits for
this program were not being met, and the infomercial had exceeded the industry
standard expected life cycle of twelve months. Health-Mor at Home(TM) created in
October 2001 is a direct to consumer outbound sales force designed to assist
consumers in locations where Distributors are no longer located.

Defender(R) sales to Japan and Korea drove the year-to-date Asian revenue
increase. They were sold to Distributors that had the intention of selling the
Majestic(R) and Defender(R) together as a system rather than as stand-alone
products, similar to how the products are marketed in the United States.

The lack of consumer financing options and Distributor development programs led
to a decline in Canadian sales over the course of fiscal 2002. This decline
prompted HMI and the Canadian Importer to meet with the key Distributors in that
territory after which it was decided that the Canadian network would adopt the
Americas Edge Success Program effective June 2002. "The Edge Success Program"
(the "Edge"), developed to aid in the retention of Distributors and help with
the development of their professional careers and independent businesses, is an
innovative, highly structured multi-step program that provides business training
from the earliest level of a new recruit to the most senior level of a Premier
Master Distributor and provides incentives at each level to promote the
development and retention of quality Distributors and sales associates. Business
and management training includes a business management correspondence course and
a training seminar, the Business Management Institute, designed in conjunction
with Baldwin Wallace College in Ohio, and addresses everything from in-home
demonstration techniques to generation of sales leads, personnel training,
compliance matters, ownership and operation of a distributorship, and more.

The sales decline in Europe was primarily due to lower sales to Portugal and
Belgium of which Portugal was the largest. Due to the relocation of some of
Portugal's best Distributors to Brazil and the closing of non-performing
offices, the distribution network in Portugal was going through a period of
reorganization.

Product sales were not materially impacted by changing prices.

DISTRIBUTOR DEVELOPMENT PROGRAM- The reduction to product sales associated with
the Distributor Development Program for the year ended September 30, 2002 was
$2,589 compared to $1,009 in fiscal 2001, a $1,580 increase. Increased sales
volume in the U.S. distribution network accounted for approximately $5,474 of
the higher sales reduction, offset by $2,359 in termination gains resulting from
the high routine turnover of sales associates found in the vacuum cleaner direct
selling business. See Note 2 to our Consolidated Financial Statements for a
further discussion of the accounting pertaining to this program.

GROSS MARGIN, EXCLUSIVE OF DISTRIBUTOR DEVELOPMENT PROGRAM- The gross margin,
exclusive of distributor development program costs, for the year ended September
30, 2002, was $15,815 or 42.6% of sales as compared to $13,166 or 40.5% of sales
in 2001. This increase in the gross margin of $2,649 was principally
attributable to the higher sales volume and improved product mix, in part driven
by a higher proportion of Defender(R) versus Majestic(R) sales, over the prior

                                       23
<PAGE>

year, partially offset by unfavorable plant spending largely associated with
increased salaries and depreciation.

SELLING, GENERAL, AND ADMINISTRATIVE- SG&A expenses for the year ended September
30, 2002, of $14,591 were unfavorable to the fiscal 2001 expenses of $13,306 by
$1,285. The increase in SG&A expenses was largely attributable to the $1,382 of
expenses associated with our aforementioned NAC initiative and non-recurring
expenses of $435 relating to the Schedule 13D that was filed with the Securities
Exchange Commission on October 19, 2001, and later amended on December 24, 2001.
Increased sales commissions and certain accrued benefit expenses, which followed
the increased level of sales and earnings, also impacted it. Offsetting these
increases were reduced professional fees of $346 relating to non-recurring
expenses, incurred during fiscal 2001 associated with the evaluation of
potential growth opportunities, as well as the costs associated with certain
career development programs and activities and reduced outside consulting.

INTEREST EXPENSE- Interest expense for fiscal year 2002 and 2001 was $86 and is
primarily associated with interest from our credit facility.

OTHER EXPENSE (INCOME)- The increase in other expense (income), net, from $186
in fiscal 2001 to $344 for the year ended September 30, 2002, primarily resulted
from a franchise tax refund received in 2001 from a former legally dissolved
subsidiary as well as a decrease of other income associated with the cessation
of the financing of end user purchase contracts by HMI.

INCOME TAXES- The effective income tax rate for the year ended September 30,
2002, was (2.1%) compared to (258.4%) in fiscal 2001. This difference was driven
by the recording, in 2001, of a full valuation allowances against the deferred
tax assets. In addition, the prior year provision was also impacted by IRS
audits and settlements that were not required in the current year tax provision.

The effective rate for fiscal 2001 was primarily attributable to the reversal of
income tax reserves and the recording, during the second fiscal quarter of 2001,
of full valuation allowances against the deferred tax assets. During the second
quarter of fiscal 2001, the Internal Revenue Service informed us that
examinations for fiscal years 1994 through 1997 were completed. As the
examinations resulted in minimal impact to the financial statements, we recorded
a benefit of $445 for the reversal of income tax reserves associated with these
fiscal tax years. The effective rate absent the reversal of these income tax
reserves would have been (289.7%).

The valuation allowance in 2001 increased from $849 to $7,496 due to the
recording of full allowances against domestic net deferred tax assets in
addition to the allowance previously set up for Canadian deferred tax assets.
Periodically, and when indicators suggest, we assess the realizability of our
domestic deferred tax assets, giving consideration to our actual historical
results supplemented by future expected results. SFAS No. 109, "Accounting for
Income Taxes" considers a historic pattern of losses as significant negative
evidence that tax assets will not be realized and this consideration is not
outweighed by any prospective view of management that sufficient taxable income
will ultimately be available to realize the tax benefits. Given the three years
of cumulative losses including the results in 2001, our retained deficit and a
market capitalization that is less than our book value, we concluded that under
the "more likely than not" criteria of SFAS No. 109 a full valuation allowance
was required against the net U.S. deferred tax assets at September 30, 2001. The
valuation allowance will be subject to periodic review and can be partially or
totally reversed either when income is generated that utilizes the loss or when
sufficient positive evidence emerges (i.e. a sustained positive trend of U.S.
income for financial

                                       24
<PAGE>

accounting purposes.) Our income tax expense recorded in the future will be
reduced to the extent of offsetting decreases in our valuation allowance.

LIQUIDITY AND CAPITAL RESOURCES

OPERATING ACTIVITIES- Cash flows from operating activities provided net cash of
$954 for the year ended September 30, 2003, which reflects a net loss of $12,239
offset by non-cash charges of $12,783 and an increase in operating assets and
liabilities of $410.

Non-cash charges consist primarily of $5,451 related to the cumulative effect of
accounting change from our adoption of SFAS 142, $3,969 resulting from the new
accounting associated with our distributor development program, $1,711
associated with the impairment of certain tools and molds, $905 associated with
the loss on the liquidation of our Canadian subsidiary, and $744 in depreciation
and amortization expense.

The increase in operating assets and liabilities principally relates to
increases in accrued expenses and other liabilities of $536 associated with
sales contests and other distributor programs, the distributor development
program liability of $200 related to the short term amount to be paid in fiscal
2004 to our first Edge Program achiever, and accounts payable of $186.

Offsetting the increase in liabilities was a $518 increase in inventories. Both
finished goods and raw materials were driving factors in the increase in
inventories. Increases in safety stock, primarily demonstration supplies, and
lower than anticipated sales in our international markets accounted for the
increase in finished goods. Lower international sales in our third and fourth
quarters as well as the purchase of printed materials for the international
promotion of our Edge Success Program lead to increased raw materials. This
increase was offset by a $300 increase in the obsolescence reserve for raw
materials associated with impaired tooling assets.

INVESTING ACTIVITIES- Capital expenditures of $176 represent the entire net cash
used in investing activities for the year ended September 30, 2003. These
expenditures mainly relate to tooling associated with new products, office
furniture, and new office computer hardware.

FINANCING ACTIVITIES- Net cash used in financing activities was $311, which
included $302 for payment of long-term debt and $9 for net repayments under the
credit facility.

Our $3,000 credit facility agreement includes various covenants that limit our
ability to incur additional indebtedness, restricts paying dividends and limits
capital expenditures, and requires we maintain a minimum net worth. As of
September 30, 2003, we were not in compliance with our interest coverage ratio,
and net worth covenants; however, we obtained a waiver on these covenants which
was effective until the February 20, 2004 amendment of the credit facility. We
were required to maintain an interest coverage ratio of greater than or equal to
5.0 to 1.0 interest to earnings before interest, taxes, depreciation and
amortization ("EBITDA") and a net worth of at least $7,400, calculated quarterly
and increasing by 50% of net income annually.

                                       25
<PAGE>

On February 20, 2004, an amendment of our credit facility agreement was executed
with our lender. The expiration date was extended to October 15, 2004. The
amended agreement carried the same interest rate and similar covenants as the
previous amended loan agreement, with the exception of the interest coverage
ratio which was amended to exclude non-cash expenses from the 5.0 to 1.0 ratio,
including but not limited to, the impairment of tooling assets and associated
inventory, and the tangible net worth covenant in which the minimum amount was
reset to $2,400.

The cumulative effect of the adjustments on our statement of operations
associated with the restatement of our financial statements was a $12,010
reduction in our net earnings over the period from January 1, 2001 through
September 30, 2003. Such an earnings reduction caused us to be in default of our
$2,400 tangible net worth covenant. In addition we have violated our financial
reporting requirements to the bank as the restatement process has delayed any
subsequent filings of our public statements with the Securities and Exchange
Commission since our first fiscal quarter of 2003. Our credit agreement
covenants require that our statements be filed quarterly with the bank within 45
days of the end of each quarter.

On October 15, 2004, an amendment of our $3,000 credit facility agreement was
executed with our lender. The bank has agreed to extend the maturity date of the
loan until December 31, 2004. In addition the bank provided a waiver for the
aforementioned covenant and financial reporting violations. The amended
agreement carries an interest rate of prime plus one percent and covenants
similar to the previous amended loan agreement, with the exception of the
tangible net worth covenant which was eliminated through the maturity date of
the loan.

We are actively seeking finance sources to replace the credit facility prior to
its expiration. If we cannot replace the credit facility prior to December 31,
2004, we currently anticipate that we will have sufficient liquidity to repay
the credit facility and cover all our cash needs through March 31, 2005.

As of September 30, 2004, there was $962 borrowed on the $3,000 credit facility.

CASH OBLIGATIONS- Set forth below, in tabular form, is information as of
September 30, 2003, for the periods indicated concerning our obligations and
commitments to make future payments under long-term obligations:

<TABLE>
<CAPTION>
                                               Total       2004       2005    2006     2007     2008
                                               -----       ----       ----    ----     ----     ----
<S>                                            <C>        <C>        <C>      <C>      <C>      <C>
Line of credit                                 $1,383     $1,383     $  -     $  -     $  -     $  -
Long-term debt                                     33         22       11        -        -        -
Operating leases                                1,176        859      267       43        4        3
Earned distributor development
  program awards                                  800        200      200      200      200        -
Distributor development awards
  earned subsequent to fiscal 2003              1,000        200      200      200      200      200
                                               ------     ------     ----     ----     ----     ----
                                     Total     $4,392     $2,664     $678     $443     $404     $203
                                               ======     ======     ====     ====     ====     ====
</TABLE>

Our line of credit is solely related to our credit facility as described above.
Long-term debt of $33 consists entirely of capital leases for certain plant
equipment which will be fully paid by

                                       26
<PAGE>

March 2005. Rent associated with our manufacturing and corporate office
buildings as well as monthly obligations for various office equipment, primarily
a phone system and copiers, largely comprise our operating leases. These leases
expire on various dates through 2008.

ACCRUED DISTRIBUTOR DEVELOPMENT LIABILITIES

Pursuant to EITF 01-9 "Accounting for Consideration Given by a Vendor to a
Customer (Including a Reseller of the Vendor's Products)" we changed the way we
account for the potential one million dollar award for the Edge Success Program
("Program"). Prior to the adoption of EITF 01-9, we utilized the services of an
independent actuary who developed a model based on our historical sales and
other factors that identified the probability of distributors reaching the goal
(in aggregate) thereby triggering our cash payment obligation. We recognized
expense and recorded a liability based on that model. The original intentions of
the Program were to aid the Master Distributors in their retirement/succession
plan, and promote growth and retention within the new Distributor network.
Because of these original intentions and the long-term nature of this Program,
management did not, in 2001, consider the implications of EITF 01-9 (which deals
with several aspects of revenue recognition when awards or refunds are paid to
customers) to the Program and therefore EITF 01-9 was not adopted at that time.
However, as we recently became aware of the implications of EITF 01-9 to us, it
was determined that EITF 01-9 should have been adopted in 2001 as required. This
conclusion was based on the fact that because HMI is selling to distributors,
any monetary amounts that are paid to the distributors, pursuant to a program
that is geared to volume of sales falls within EITF 01-9.

EITF 01-9 states that any such amounts accrued must be reflected in the income
statement as a reduction of sales rather than selling expense. Prior to
adoption, we had been recognizing the expense associated with this obligation as
a selling expense. It also sets out the standard that a liability should be
recognized based on a systematic and rational allocation of the cost of honoring
rebates or refunds earned and claimed to each of the underlying revenue
transactions that result in progress by the customer toward earning the rebate
or refund. Breakage (the amount of distributors who will not reach the goal)
should be estimated only if it can be reasonably estimated. EITF 01-9 indicates
that the ability to make a reasonable estimate depends on many factors. Certain
factors (such as a relatively long period in which a particular rebate or refund
may be claimed, as is in the case of our Program) may indicate that the
liability cannot be reasonably estimated. Related guidance states that if
recurring variances between the actual and estimated amount of refunds are
immaterial to either revenue or net income in quarterly or annual financial
statements then the item is considered reasonably estimable. Over eleven
quarters ended September 30, 2003 to which EITF 01-9 applies, our average
actuarial gain (loss) may or may not be deemed material; however, on an
individual quarter-by-quarter basis the significant volatility of the actuarial
gains/loss to pre-tax income was deemed material to our financial results.
Therefore we concluded breakage from that perspective may not be reasonably
estimated and we could not use our actuarial method.

This results in our recording a liability related to every qualifying sale and
only derecognizing such liability (i.e. the accrual is eliminated) when (i) the
award is paid out or (ii) when a distributor is no longer eligible for the
award. The application of EITF 01-9 requires a $12,958 accrual at September 30,
2003, to reflect the future obligation associated with the Program since the
effective adoption of EITF 01-9. This amount was determined by multiplying the
percentage

                                       27
<PAGE>

of attainment of the 30,000 unit goal for every eligible distributor by the
present value of five payments of $200,000, discounted at a risk adjusted
interest rate.

We have been operating with a distributor network for over seventy years and we
implemented the Program in 1997. During those periods we have closely monitored
the distributor network and the turnover rate in the network. Based on that
accumulated knowledge, we believe that application of EITF 01-9, which requires
accruing on each sale as if every distributor involved with the sale was going
to earn the $1 million award, results in the recognition of an obligation we
believe will be significantly in excess of the payouts from the Program for the
foreseeable future. This is due to the assumption inherent in the maximum
accrual calculation that every distributor involved with a sale will qualify to
earn the award. Our history shows this not to be the case. During the twelve
quarters ended September 30, 2003, our turnover rate was, on average, more than
50%. For example, the participants in the Program from the Americas network who
left the Program during the twelve months ended September 30, 2003 represented
an accrual of over $2,000 and that period was not a period of extraordinary
turnover. Because we measure the accrual quarterly, departures may cause
quarterly results to vary greatly. In addition, the criteria for derecognizing
the accrual for any distributor requires that the distributor has lost
eligibility to participate in the Program.

We have been funding the actuarially determined present value of total award
payouts calculated on an aggregate basis under this program since September 2000
and such fund had a balance of $946 as of September 30, 2003. It is our
intention to continue to fund the projected stream of cash payouts subject to
our cash flow model based on our aggregate actuarial model, which will continue
to be updated annually by our independent actuaries based on our experience.
These funds are maintained in a short term investment account and recorded as
cash and cash equivalents in our Consolidated Balance Sheets.

FUTURE ACCOUNTING REQUIREMENTS

FASB Interpretation No. 46, Consideration of Variable Interest Entities (FIN No.
46): This statement was issued in January 2003 and requires certain variable
interest entities to be consolidated by the primary beneficiary of the entity if
the equity investors in the entity do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk for the
entity to finance its activities without additional subordinated financial
support from other parties. The provisions of FIN 46 are effective immediately
for all arrangements entered into after January 31, 2003. For those arrangements
entered into prior to February 1, 2003, we are required to adopt the provisions
of FIN No. 46 at the end of the first quarter of fiscal 2004, in accordance with
the FASB Staff Position 46-R which delayed the effective date of FIN No. 46 for
those arrangements. We are in the process of determining the effect, if any, the
adoption of FIN No. 46-R will have on our financial statements.

SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics
of both Liabilities and Equity (SFAS No. 150): This statement, issued in May
2003, establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its scope
as a liability (or an asset in some circumstances). Many of those instruments
were previously classified as equity. SFAS No. 150 has been deferred
indefinitely related to certain measurement and disclosure components of the
standard; however, certain disclosure provisions are still required if
applicable to us. The final adoption of SFAS

                                       28
<PAGE>

No. 150 is not expected to have a significant impact, if any, on our financial
statements; however, a formal assessment will be performed.

CAUTIONARY STATEMENT FOR "SAFE HARBOR" PURPOSES UNDER THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995

This report, including Management's Discussion and Analysis of Financial
Condition and Results of Operations contains forward-looking statements within
the meaning of the federal securities laws. As a general matter, forward-looking
statements are those focused upon future plans, objectives, or performance as
opposed to historical items and include statements of anticipated events or
trends and expectations and beliefs relating to matters not historical in
nature, including by way of example, but not limited to, the statements made in
"Net Product Sales" regarding our ability to influence the Japan network through
training and development programs and "Liquidity" regarding anticipated cash
requirements and the adequacy of our current ability to meet those requirements.
Such forward-looking statements are subject to uncertainties such as difficulty
in protecting our intellectual property rights in a particular foreign
jurisdiction; dependency on key personnel and the ability to retain them;
recessions in economies where we sell our products; longer payment cycles for
and greater difficulties collecting accounts receivable; export controls,
tariffs and other trade protection measures; social, economic and political
instability; changes in United States and foreign countries laws and policies
affecting trade; anticipated sales trends; the ability to attract and retain
Distributors and Importers; improved lead generation and recruiting; and the
ability to obtain financing for the end consumer through consumer financing
companies, including VCL. Such uncertainties are difficult to predict and could
cause our actual results of operation to differ materially from those matters
expressed or implied by such forward-looking statements.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (DOLLARS IN
THOUSANDS)

Our exposure to interest rate risk is related to our borrowings. Fixed rate
borrowings may have their fair market value adversely impacted from changes in
interest rates. Variable rate borrowings will lead to additional interest
expense if interest rates increase. As of September 30, 2003, we had $1,383
outstanding under our credit facility bearing interest at the prime rate. If
interest rates were to increase 50 basis points (0.5%) from the September 30,
2003, rates and assuming no changes in outstanding debt levels from the
September 30, 2003, levels, we would realize an increase in our annual interest
expense of approximately $7.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Reference is made to the Index to Financial Statements included in this report.

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

None.

ITEM 9A. CONTROLS AND PROCEDURES

(A) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

As a result of questions from the Division of Corporation Finance of the
Securities and Exchange Commission ("SEC"), we decided to restate our previously
issued financial statements. In preparation of our response to the SEC, our
Principal Executive Officer and Chief Financial Officer, after conducting an
evaluation, together with other members of our senior management,

                                       29
<PAGE>

conducted a re-evaluation of the effectiveness of the design and operation of
our disclosure controls and procedures as of the end of the period covered by
this report. As a result of that re-evaluation, we have concluded that our
disclosure controls and procedures (as defined in Exchange Act Rule 13a-14 (c))
were not effective to ensure that information required to be disclosed by us in
our reports filed or submitted under the Securities Exchange Act of 1934 (the
"Exchange Act') were recorded, processed, summarized, and reported within the
time periods specified in the rules and forms of the SEC.

Specifically, our disclosure controls and procedures were found to be
ineffective in identifying the proper accounting treatment for recording
reductions in sales, resulting from credits earned by our distributors toward
payment under the Program. With respect to these reductions, we were not aware
of the provisions of EITF 01-9 that required recognition of such credits for
payments to our distributors as reduction of sales. In addition, as originally
recorded prior to the effective implementation of EITF 01-9, we believed such
charges were reasonably estimable, and accordingly, had not recorded the maximum
liability.

Primarily in response to the matters identified as restatement adjustments
resulting from the adoption of EITF 01-9, management has taken significant steps
to strengthen control processes and procedures in order to identify and rectify
past accounting errors and prevent the recurrence of the circumstances that
resulted in the need to restate prior period financial statements. In 2004, we
corrected the identified weaknesses in our disclosure controls and procedures
that led to the above errors by taking the following steps, among others:


      -     Creation of a position within the Finance department with a prime
            responsibility being the ongoing research and analysis of all new
            accounting pronouncements and their implications to our Company. The
            analysis of the new pronouncements will be reviewed with the Chief
            Financial Officer, Corporate Controller and outside accountants to
            assess their applicability to the financial statements and
            disclosure requirements necessary to meet the requirements of the
            SEC and generally accepted accounting principles.

      -     Quarterly, our disclosure committee, which includes a cross
            functional team of senior personnel from the legal and finance
            areas, meets to review SEC periodic filings for adequacy of
            disclosure and communicates material findings to the executive
            management. To complement this committee, we have instituted
            enhanced processes with our new independent accountants to better
            ensure that all levels of recently issued Generally Accepted
            Accounting Principles, including new EITF's, are communicated to
            finance management so that their applicability to our financial
            disclosure and related statements can be timely evaluated.

There can be no assurances; however, that new problems will not be found in the
future. Because of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that all control issues,
if any, within HMI have been detected.

Subsequent to the end of the period covered by this report, after the need for a
restatement of our previously issued financial statements was determined, an
evaluation was performed of the effectiveness of the design and operation of our
disclosure controls and procedures by senior management. Based on that
evaluation, our management, including the Principal Executive Officer and Chief
Financial Officer, concluded that these procedures and controls are effective,
given the cautions stated above.

                                       30
<PAGE>

(B) CHANGES IN INTERNAL CONTROLS

Since the end of the period covered by this report, we have made the changes in
our internal controls described above. There were no significant changes in our
internal controls or in other factors that could significantly affect these
controls subsequent to the date of their last evaluation.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT

DIRECTORS

Robert Breadner, age 48, is a private investor. He was President and Chief
Executive Officer of Breadner Trailer Sales Ltd., a distributor of transport
trailers for the trucking industry, for over five years until the sale of the
company in 2001.

Kirk W. Foley, age 61, became a director in 2002 and Chairman of the Board in
2004. Mr. Foley has been the Chairman and Chief Executive Officer of Tube Fab
Ltd., a company that shapes, bends, and machines metal tubing since 1997. From
1989 to 1997 Mr. Foley served as Chairman or President and as Chief Executive
Officer of the Company. He also served as a director of the Company from 1988 to
1997. He is the father of Wesley Eric Foley, a director of HMI.

Wesley Eric Foley, age 34, became a director in 2003. He has been director of
sales and marketing for Tube Fab Ltd., a company that shapes, bends, and
machines metal tubing since 2000. From 1993 to 2000 he held several
international sales and marketing positions with the Company. He is the son of
Kirk W. Foley, Chairman of the Board and a director of HMI.

John A. Pryor, age 60, became a director in 2001. He has served as President and
Chief Operating Officer of the Company since 2001. From 1996 to 2000 he was
President and Chief Executive Officer of Valley Innovative Services, a food
services management company. From 1992 to 2001, he was President of Pryor and
Associates, which provides consulting services to the food service industry.

Murray Walker, age 54, became a director in 1998. He has been President of
Isetan Management Ltd., a private investment company, since 1988. He has been
Chairman of Simcoe Coach Lines Ltd., a school and charter bus service company,
since 2001 and served as President of Simcoe from 1989 to 2001.

Ivan J. Winfield, age 69, became a director in 1995. He is an independent
business and financial consultant and since 1995 also has been an Associate
Professor at Baldwin-Wallace College in Berea, Ohio. Mr. Winfield was a partner
of Coopers & Lybrand, a predecessor firm to PricewaterhouseCoopers (the
Company's auditors) from 1970 to 1994. Mr. Winfield is a director of Boykin
Lodging Company.

                                       31
<PAGE>

EXECUTIVE OFFICERS

Name                  Age             Position and Terms of Service as Officer
------------------    ---   --------------------------------------------------
Kirk W. Foley         61    Chairman (1)
John A. Pryor         60    President and Chief Operating Officer (2)
Julie A. McGraw       39    Vice President, Chief Financial Officer, Treasurer
                            and Assistant Secretary (3)
Joseph Najm           45    Vice President-Operations (4)
Daniel J. Duggan      43    Vice President (5)
Darrell Weeter        47    Vice President (6)
John S. Meany, Jr.    57    Vice President and Secretary (7)

      1)    Mr. Foley was elected Chairman in 2004. He also serves as Chairman
            and Chief Executive Officer of Tube Fab Ltd., a company that shapes,
            bends, and machines metal tubing since 1997.

      2)    Mr. Pryor was elected President and Chief Operating Officer in 2001.
            From 1992 to 2001 he was President of Pryor & Associates, which
            provided consulting services to the food service industry. From 1996
            to 2000 he was President and Chief Executive Officer of Valley
            Innovative Services, a food services management company.

      3)    Ms. McGraw was elected Chief Financial Officer and Treasurer in 2000
            and Vice President in 1999. She served as Corporate Controller from
            1998 to 2001 and as Assistant Corporate Controller from 1996 until
            1998.

      4)    Mr. Najm was elected Vice President-Operations in March 1999. He
            previously was employed by the Kirby Company as Vice
            President-Manufacturing from 1995 to 1999. The Kirby Company is a
            manufacturer of vacuum cleaners.

      5)    Mr. Duggan has served in various executive capacities with the
            Company since 1990. He was elected Vice President in 2001 and has
            served as President of the International Sales Division since 2002.
            From 1997 to 2002 he was President of the Asia-Pacific Sales
            Division.

      6)    Mr. Weeter was elected Vice President in 2001. He has also served as
            President of the Americas Sales Division since 2000 and was Vice
            President of the Americas Sales Division from 1998 to 2000. He has
            also served as President of FVS Inc., a Distributor of products
            manufactured by the Company, since 1985. (See Item 13 "Certain
            Relationships and Related Transactions")

      7)    Mr. Meany was elected Vice President in March 2002 and also has
            served as Corporate Secretary since 1995. He was an attorney in
            private practice from 1991 to 2002.

                                       32
<PAGE>

AUDIT COMMITTEE FINANCIAL EXPERT

The Board of Directors has determined that one of the Audit Committee members,
Ivan J. Winfield, is a "financial expert" as defined in Regulation S-K 401(h)
adopted under the Securities Exchange Act of 1934, as amended and deemed
"independent" in accordance with that term used in Item 7(d)(3)(iv) of Schedule
14A under the Exchange Act, based upon the definition of independence contained
in Rule 4200(a)(15) of the listing standards of the National Association of
Securities Dealers

IDENTIFICATION OF THE AUDIT COMMITTEE

Two members of our Board of Directors, Mr. Murray Walker and Mr. Ivan Winfield,
currently serve on our Audit Committee established in accordance with Section 3
(a)(58)(A) of the Exchange Act. A third member resigned from the Audit Committee
effective February 3, 2004.

COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT

Section 16(a) of the Exchange Act requires that our directors, officers, and
owners of more than 10% of our common stock file reports of ownership and
changes in ownership of our securities with the Securities and Exchange
Commission and to furnish us with a copy of all such reports that they file.
Specific due dates have been established and we are required to disclose any
failure to file the reports by the due dates. Based solely on a review of its
files, we believe that all of our directors, executive officers, and 10%
shareholders complied with all filing requirements applicable to them with
respect to transactions occurring during the fiscal year ended September 30,
2003.

CODE OF ETHICS

We have adopted a code of ethics for all our employees including our senior
financial officers that comprise the Principal Executive Officer, the Chief
Financial Officer, and other members of our financial leadership team. This Code
of Ethics has been provided as an exhibit to this report (Exhibit 14). This Code
of Ethics is also available on our website at www.filterqueen.com. We intend to
satisfy the disclosure requirement regarding any amendment to, or a waiver of, a
provision of our Code of Ethics by posting such information on our website.

                                       33
<PAGE>

ITEM 11. EXECUTIVE COMPENSATION (NOT IN THOUSANDS)

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
                                                                                              Long Term              All Other
                                                       Annual Compensation             Compensation Awards (4)     Compensation
                                            -----------------------------------------  ----------------------      ------------
                                                                         Other Annual
                                                                         Compensation   Restricted     Stock
 Name and Principal Position      Year      Salary (1)     Bonus (2)       ($) (3)       Stock ($) Options (#) (5)
 ---------------------------      ----      ----------    ------------   ------------   ---------- ---------------
<S>                               <C>       <C>           <C>           <C>             <C>        <C>             <C>
John A. Pryor (9)                 2003      $ 240,254     $  51,639             -              -             -       $ 6,591 (10)
President                         2002      $ 227,559     $  79,174             -              -             -       $ 5,784 (10)
                                  2001      $  13,641             -             -              -       150,000       $ 1,608 (10)

Joseph L. Najm(11)                2003      $ 149,368     $  26,197             -              -             -       $ 4,226 (10)
Vice President-Operations         2002      $ 143,825     $  56,846             -              -             -       $ 4,096 (10)
                                  2001      $ 132,392             -             -              -        50,000       $ 3,780 (10)

Darrell Weeter (12)               2003      $ 488,087             -             -              -             -       $ 5,185 (10)
Vice President; President,        2002      $ 411,715     $  16,729             -              -             -       $ 5,409 (10)
Americas Sales Division           2001      $ 317,505     $  11,667             -              -        40,000       $ 5,250 (10)

Daniel J. Duggan (13)             2003      $ 365,087             -             -              -             -       $ 4,800 (10)
Vice President; President,        2002      $ 312,569     $  16,729             -              -             -       $ 4,053 (10)
International Sales Division      2001      $ 226,606             -             -              -        40,000       $ 3,603 (10)

James R. Malone (6)               2003      $ 209,661     $  44,685     $  59,320              -             -       $30,742 (7)
Chairman and Chief                2002      $ 211,711     $  73,650     $  60,020              -             -       $28,300 (8)
Executive Officer                 2001      $ 343,986             -     $  70,597              -       100,000       $28,300 (8)
</TABLE>

      (1) Salary amounts include automobile expense and for Mr. Weeter and Mr.
      Duggan commissions on sales in their geographic areas of responsibility.

      (2) Amounts paid were pursuant to our management incentive bonus plan.
      Beginning in 2002, participants in our incentive bonus plan may elect to
      receive a portion of the bonus in common stock of our Company. Mr. Malone
      and Mr. Pryor were the only named executive officers to make this election
      in 2002. No named executive officers made this election in 2003.

      (3) No executive officer received perquisites or other benefits required
      to be disclosed under applicable regulations except for James R. Malone.
      He received a total of $50,000 to be spent in his discretion on such
      perquisites and benefits as he desired. The amount for 2001, 2002, and
      2003 also includes additional amounts for payment of taxes on certain
      perquisites.

      (4) We maintain plans under which stock options may be awarded. We do not,
      however, make "long term compensation awards" as that term is used in
      applicable SEC rules because the amount of our incentive awards is not
      measured by our performance over longer than a one-year period.

                                       34
<PAGE>

      (5) Reflects the number of shares of our common stock covered by stock
      options granted during the year. No stock appreciation rights ("SAR"),
      either in conjunction with or separate from stock options, were granted to
      the named executives during the years shown.

      (6) Mr. Malone was elected as our Chairman in 1996 and Chief Executive
      Officer in 1997. Mr. Malone resigned as Chairman and Chief Executive
      Officer effective February 2, 2004.

      (7) Includes life insurance premium ($28,300) and the cost of an executive
      physical examination ($2,442).

      (8) Life insurance premium.

      (9) Mr. Pryor has served as President since 2001. From 1992 to 2001 he was
      President of Pryor & Associates, which provided consulting services to the
      food service industry. From 1996 to 2000 he was President and Chief
      Executive Officer of Valley Innovative Services, a food services
      management company.

      (10) Matching contribution to our Salary Deferral Plan.

      (11) Mr. Najm was elected Vice President-Operations in March 1999. From
      1995 to 1999 he served as Vice President-Manufacturing of The Kirby
      Company, a vacuum cleaner manufacturer.

      (12) Mr. Weeter was elected Vice President in 2001. He has also served as
      President of the Americas Sales Division since 2000 and was Vice President
      of the Americas Sales Division from 1998 to 2000. He has also served as
      President of FVS Inc., a Distributor of products manufactured by the
      Company, since 1985.

      (13) Mr. Duggan has served in various executive capacities with us since
      1990. He was elected Vice President in 2001 and has served as President of
      the International Sales Division since 2002. From 1997 to 2002 he was
      President of the Asia-Pacific Sales Division.

OPTION GRANTS

There were no options granted to any of the named executive officers in 2003.

                                       35
<PAGE>

AGGREGATED OPTION EXERCISES AND FISCAL YEAR END OPTION TABLE

The following table sets forth information regarding stock options held at the
end of the fiscal year by the named executive officers. There were no stock
option exercises in 2003 by any named executive officer.

<TABLE>
<CAPTION>
                                  NUMBER OF SHARES OF
                                COMMON STOCK UNDERLYING                      VALUE OF UNEXERCISED
                                UNEXERCISED OPTIONS AT                     IN-THE-MONEY OPTIONS AT
                                SEPTEMBER 30, 2003 (1)                      SEPTEMBER 30, 2003 (2)
                                ----------------------                      ----------------------
NAME                        EXERCISABLE        UNEXERCISABLE         EXERCISABLE           UNEXERCISABLE
----                        -----------        -------------         -----------           -------------
<S>                         <C>                <C>                   <C>                   <C>
John A. Pryor                 100,000              50,000                $0                      $0
Joseph L. Najm                 43,333              16,667                $0                      $0
Darrell Weeter                 64,166              13,334                $0                      $0
Daniel Duggan                  86,666              13,334                $0                      $0
James R. Malone               343,332              58,334                $0                      $0
</TABLE>

      1)    There were no SARs outstanding at September 30, 2003, and none were
            granted during the year.

      2)    The "value of unexercised in-the-money options at September 30,
            2003" was calculated by determining the difference between the fair
            market value of the underlying shares of common stock at September
            30, 2003, ($.81 per share) and the exercise price of the option. An
            option is "in-the-money" when the fair market value of the
            underlying shares of common stock exceeds the exercise price of the
            option. None of the options held by the named executive officers
            were "in-the-money" on September 30, 2003.

COMPENSATION OF DIRECTORS

A director who is an employee of ours is not separately compensated for service
as a director. Each non-employee director receives a retainer of $20,000 per
year, payable quarterly. Each non-employee director also receives $1,000 per
meeting for each committee meeting attended and for each Special Board of
Directors meeting attended. Members of the Audit Committee receive an additional
retainer of $5,000 per year and a meeting fee of $1,500 for each Audit Committee
meeting attended.

Pursuant to our Omnibus Long-Term Compensation Plan, on the first business day
of each calendar year each non-employee director automatically receives an
option to purchase 6,000 shares of our common stock (as adjusted for stock
splits).

EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT AND CHANGE IN CONTROL
ARRANGEMENTS

We have employment agreements with each of the named executive officers, except
our former Chairman, under which they are to receive one year's salary in the
event of termination of employment without cause. Certain of our executives also
have agreements which provide that in the event of termination of employment
without cause (other than for death or disability or voluntary termination by
the employee) in the twelve months following a change in control (as defined in
the agreement); the executives are to receive compensation equal to one years'
base salary.

                                       36
<PAGE>

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

During 2003, Kirk W. Foley was on the Compensation Committee. Mr. Foley
previously served as our Chief Executive Officer from 1989 to 1997. In 2002, we
agreed to reimburse Mr. Foley in the amount of $80,000 for a portion of the
legal expenses incurred in his capacity as Designated Agent in connection with a
Stockholders' Voting Agreement (and related filing of Schedule 13D) (the
"Agreement") entered into by several stockholders pursuant to which Mr. Foley
was given an irrevocable proxy to vote their shares on all matters to come
before stockholders for a vote, including any vote relating to a sale or merger
of the Company or the purchase or sale of assets by the Company. The Agreement
also restricts the ability of the participating shareholders from selling or
transferring their shares other than in accordance with the Agreement. The
Agreement is valid until October 19, 2004, unless terminated sooner in
accordance with the terms of the Agreement.

BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION

The Compensation Committee of the Board of Directors is responsible for
recommending to the Board of Directors the compensation of our executive
officers and key employees. The Compensation Committee periodically reviews
compensation of the Chief Executive Officer, other of our executive officers,
and key employees. The Compensation Committee also monitors performance and
fixes awards based on performance standards. The Committee's policy in
evaluating and compensating executive officers and key employees is to consider
our performance as a whole and the individual's contribution toward our
attainment of our established and individual goals.

The composition of compensation varies broadly among our executive officers and
key employees based on their responsibilities. Generally, base salary is
targeted at competitive rates believed by the Committee members to be necessary
in their experience to retain qualified personnel. We maintain an Incentive
Bonus Plan under which participating employees may be eligible for a bonus if we
meet certain financial targets. For 2003, maximum bonus payable to an individual
was a percentage of base salary ranging from 10% to 60% with both quarterly and
annual targets. Bonuses were based on our sales (25% of the bonus) and on our
earnings before interest, taxes, depreciation, and amortization (EBITDA) (75% of
the bonus). Participants could elect to take part of their bonus in our common
stock. From time to time, we engage outside compensation consultants to provide
information and advice about competitive levels of compensation and particular
compensation techniques.

      Compensation of the Chief Executive Officer

Mr. Malone's base salary in 2003 was set by the Compensation Committee at
$200,000 per year, an amount which the Committee believed was competitive with
other consumer goods companies of similar size and taking into account Mr.
Malone's reduced involvement with us while he retained his titles of Chairman
and Chief Executive Officer. Mr. Malone received other benefits available
generally to all executives and was also given a total of $50,000 to be spent in
his discretion for other benefits. Mr. Malone participated in the Incentive
Bonus Plan for management employees at a maximum bonus rate of 60% of salary.
His bonus for 2003 was $44,685, or 37% of his maximum bonus. We also paid a life
insurance premium for Mr. Malone and an additional amount to cover income taxes
due on such benefits provided to him.

                                       37
<PAGE>

On February 2, 2004, the Board of Directors accepted the resignation of Mr.
Malone. Consequently, compensation expense approximating $200,000 will be
recorded in the second quarter of fiscal 2004 in accordance with Mr. Malone's
provisions of resignation.

            For the Compensation Committee

                    Ivan J. Winfield
                    Kirk W. Foley

PERFORMANCE GRAPH

The following chart compares the cumulative shareholder return of our stock for
the five years ended September 30, 2003, to the NASDAQ National Market Composite
Index and a peer group of companies that we selected. There are two peer groups
shown due to a change in the companies that make up the peer group. One company
that was in the previous year's peer group was sold, so two other companies were
added for this year's peer group. Our common stock is traded on the OTC Bulletin
Board. The chart assumes the investment of $100 on September 30, 1998, and the
immediate reinvestment of all dividends.

      [PERFORMANCE GRAPH]

<TABLE>
<CAPTION>
                         1998        1999        2000        2001         2002        2003
                        -------     -------     -------     -------     -------     -------
<S>                     <C>         <C>         <C>         <C>         <C>         <C>
HMI Industries Inc.     $100.00     $100.00     $ 64.29     $ 65.71     $ 29.14     $ 46.29
New Peer Group          $100.00     $117.99     $ 89.74     $ 71.72     $ 91.72     $122.81
Old Peer Group          $100.00     $213.87     $172.14     $117.25     $104.14     $123.85
NASDAQ Market Index     $100.00     $163.15     $216.67     $ 88.55     $ 69.59     $106.64
</TABLE>

The new peer group companies, which are in similar lines of business as us, are
AB Electrolux, Applica Incorporated, Maytag Corporation, National Presto
Industries, Inc. and Salton, Inc. Last year's peer group did not include
Electrolux and Maytag. Royal Appliance Mfg. Co., which was sold earlier this
year, was in last year's peer group. Some of our direct competitors are
divisions of larger corporations, privately held corporations or foreign
corporations and are not included in the peer comparisons since the pertinent
information is not available to the public.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT (NOT IN
THOUSANDS)

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS

The following table sets forth the names and share ownership as of January 31,
2004, of those persons who, to our knowledge, are the beneficial owners of more
than 5% of our outstanding common stock based upon information furnished to us
by such person or through a Schedule 13D, 13G or Form 4. Each beneficial owner
has sole power to vote and dispose of the shares indicated, except as otherwise
stated.

                                       38
<PAGE>

<TABLE>
<CAPTION>
Name & Address of Beneficial Owners as of              Number of Shares                  % of Common
            September 30, 2003                        Beneficially Owned                    Stock
-----------------------------------------------       ------------------                 -----------
<S>                                                   <C>                                <C>
Barry L. Needler                                          1,860,000(1)(2)                 27.57%
P.O. Box 2463, Station B
Richmond Hill, Ontario L4E 1A5

Steeplechase Corp. (3)                                    1,709,250                       25.34%
P.O. Box 2463, Station B
Richmond Hill, Ontario L4E 1A5

Kirk. W. Foley                                            2,894,044(4)                    42.90%
2045 Lakeshore Blvd., #3507
Toronto, Ontario  M8V 2Z6

Amherst Tanti U.S. Inc. (5)                                 520,148                        7.71%
2045 Lakeshore Blvd., #3507
Toronto, Ontario  M8V 2Z6

James R. Malone                                             621,738(6)                     8.77%
5150 N. Tamiami Trail
Suite 600
Naples, FL 34103

U.S. Bancorp                                                546,015(7)                     8.09%
800 Nicollet Mall
Minneapolis, MN  55402

John S. Meany, Jr.                                          528,479(8)                     7.83%
9200 S. Winchester Ave.
Chicago, Illinois 60620

Robert J. Williams                                          466,937                        6.92%
50 Midtown Park East
Mobile, AL  36606

Thomas N. Davidson                                          378,692(9)                     5.61%
7 Sunrise Cay Drive
Key Largo, FL  33037
</TABLE>

      1)    Includes shares owned of record and beneficially by Fairway Inc.
            (150,750 shares) and Steeplechase Corp. (1,709,250 shares). Mr.
            Needler controls these corporations and serves as a Director and
            Chief Executive Officer of these corporations.

      2)    Under the terms of the Agreement Barry Needler has surrendered his
            right to vote or transfer the shares except in accordance with the
            Agreement.

      3)    Mr. Needler is the President and Chief Executive Officer of
            Steeplechase Corp.

                                       39
<PAGE>

      4)    Includes 520,148 shares owned of record by Amherst Tanti U.S. Inc.
            and 10,300 shares in a retirement fund. Also includes 2,339,028
            shares for which Mr. Foley holds an irrevocable proxy pursuant to
            the Agreement.

      5)    Amherst Tanti U.S. Inc. is owned by Kirk W. Foley and his wife. Mr.
            Foley serves as President of this corporation.

      6)    Includes 343,332 shares subject to issuance upon the exercise of
            stock options exercisable within 60 days hereof. Also includes
            11,000 shares owned by his wife, beneficial ownership of which is
            disclaimed.

      7)    These shares are included in the total for Mr. Foley. US Bancorp
            does not have power to dispose of or vote these shares.

      8)    Includes 6,750 shares owned by his wife, beneficial ownership of
            which is disclaimed.

      9)    Includes 4,500 shares subject to issuance upon the exercise of stock
            options exercisable with 60 days hereof.

SECURITY OWNERSHIP OF MANAGEMENT

The following table sets forth, as of January 31, 2004, information concerning
the number of shares of common stock beneficially owned by each director, each
named executive officer, and by all executive officers and directors as a group.
The totals shown below for each person and for the group include shares held
personally, shares held by immediate family members, and shares acquirable
within sixty days of the date hereof by the exercise of stock options.

<TABLE>
<CAPTION>
                             AMOUNT AND NATURE OF BENEFICIAL OWNERSHIP (1)
-------------------------------------------------------------------------------------------------------
                                          Direct            Exercisable
       Name of Beneficial Owner         Ownership           Options (2)         Total        Percent (3)
       ------------------------         ------------        ----------          -------      ----------
<S>                                     <C>                 <C>               <C>            <C>
Robert Breadner                             2,700                     0           2,700               *
Daniel J. Duggan                          216,550                86,666         303,216           4.44%
Kirk W. Foley                           2,894,044 (4)                 0       2,894,044          42.90%
Wesley Eric Foley                           3,437                     0           3,437               *
James R. Malone                           278,406 (5)           343,332         621,738           8.77%
Joseph L. Najm                             22,000                43,333          65,333               *
John A. Pryor                              53,752 (6)           100,000         153,752           2.25%
Murray Walker                             258,100 (7)            15,000         273,100           4.04%
Darrell Weeter                             85,625                64,166         149,791           2.20%
Ivan J. Winfield                           15,000 (8)           115,000         130,000           1.89%
All Executive Officers and
  Directors as a Group                  4,111,493               826,663       4,938,156          65.21%
</TABLE>

1)    Each person has sole voting and investment power with respect to all
      shares shown except as indicated below.

                                       40
<PAGE>

2)    Represents shares subject to stock options that are exercisable as of
      January 31, 2004, or became exercisable prior to March 31, 2004.

3)    Unless otherwise indicated, the percentage of Common Stock owned is less
      than one percent of the Common Stock outstanding.

4)    Includes 520,148 shares owned of record by Amherst Tanti U.S. Inc. and
      10,300 shares in a retirement fund. Also includes 2,339,028 shares for
      which Mr. Foley holds an irrevocable proxy pursuant to the Agreement.

5)    Includes 11,000 shares owned by his wife, beneficial ownership of which is
      disclaimed.

6)    Includes 34,900 shares held in a retirement fund.

7)    A portion of these shares (253,100) are subject to the Agreement.

8)    Includes 12,200 shares held in a retirement plan.

SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS

Refer to Part II, Item 5 above for information relating to securities authorized
for issuance under equity compensation plans.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS (DOLLARS IN THOUSANDS)

James R. Malone, our former Chairman and Chief Executive Officer, Darrell
Weeter, President of the Company's Americas division, and John Glomb, a Regional
Vice President of the Company, each own 31.67% of the membership interests in a
Company called Vision Capital Logistics, LLC ("VCL"). VCL, a brokerage service
provider for sourcing consumer credit, assists its clients in securing third
party financing for its clients' customers to purchase products, including
products manufactured by us and sold by our Distributors. VCL charges additional
fees to our Distributors for these financing services. VCL's client list also
includes a number of other "direct sales" companies, including other floor care
companies. In securing such financing, VCL may guarantee the legal compliance
obligations (but not any payment obligations) of our Distributors to a third
party lender. The third party lender pays VCL a participation fee for such
financing services, a part of which (twelve percent (12%)) VCL pays to us.
During the fiscal years ended September 30, 2003, 2002 and 2001, VCL paid us
$24, $17 and $10, respectively in connection with such financing services.
Additionally, in certain cases a Distributor may not be able to complete a sale
because of the substandard credit status of the retail customer. In such cases
VCL may provide the Distributor with financing for this sale. We entered into an
arrangement with VCL known as a Swap Program under which VCL will purchase the
contract of the retail customer from the Distributor and arrange for the
financing of the contract at a significant discount. To replace the product sold
by our Distributor and for which the Distributor received only a portion of the
consumer sale price, VCL will purchase a replacement product from us at the same
price paid by our Master Distributors and we will ship it to the Distributor to
replace the product the Distributor just sold. During the fiscal years ended
September 30, 2003, 2002 and 2001, VCL purchased an aggregate of $35, $19 and
$19, respectively of our products under the Swap Program. Under the terms of our
credit facility in place from time to time, we were prohibited from engaging in
certain of the financing activities provided by VCL.

                                       41
<PAGE>

From June 2000 until January 2003 we sublet to VCL a portion of our office space
in Naples, Florida. During the fiscal years ended September 30, 2003, 2002, and
2001 VCL paid us $8, $24 and $13, respectively, in rent for such space, which
amount was based upon an allocation of our total monthly lease payments to the
amount of space utilized by VCL. In February, 2003 a new lease was entered into
for office space with VCL as the tenant. We began subleasing space from VCL for
$3 per month, which amount was based upon an allocation of VCL's total monthly
lease payments to the amount of space that we utilized. In the fiscal year ended
September 30, 2003 we paid VCL a total of $21 in lease payments. The sublease
was terminated in February, 2004.

We have had a long standing relationship with Ametek Inc. by which we have
purchased motors for our products. James R. Malone, our former Chairman and
Chief Executive Officer, is a director of Ametek, Inc. During the fiscal years
ended September 30, 2003, 2002 and 2001 our purchases from Ametek were $1,973,
$1,704 and $1,633, respectively. We believe the terms of these purchases were as
favorable to us as those which could have been obtained from unrelated parties.

Darrell Weeter has served for many years as President of FVS, Inc. a distributor
of products manufactured by us and which is owned by Mr. Weeter and his wife.
For the fiscal years ended September 30, 2003, 2002 and 2001, FVS, Inc.
purchased, at Master Distributor pricing, a total of $78, $100 and $107
respectively in products from us. Mr. Weeter also received amounts due to him
under our Career Development Program of $132, $126 and $165 for the fiscal years
ended September 30, 2003, 2002 and 2001, respectively. The amounts paid were
Distributor paid overrides ("DPO's") collected by us from Distributors that were
brought into the business by Mr. Weeter. DPO's are a unit price override charged
on top of our standard unit sales price for which we, HMI, act as a pass
through, meaning that we collect the DPO from the promoted distributor and
disburse it to the promoting distributor upon their request; accordingly these
DPO's are not reflected in our income statement as revenue. The total DPO's
still owed to Mr. Weeter were $3 and $12 as of September 30, 2003, and 2002,
respectively. This payable to Mr. Weeter was recorded on the other accrued
expense and liabilities line item of our Consolidated Balance Sheets as of
September 30, 2003, and 2002.

Derek Hookom, became an employee of HMI on January 1, 2003. Mr. Hookom is also a
distributor of products manufactured by HMI. For the fiscal years ended
September 30, 2003, 2002 and 2001, Summit Air purchased, at Master Distributor
pricing, a total of $254, $604 and $1,133 respectively in products from us.
Under the terms of Mr. Hookom's employment agreement, Mr. Hookom remains
eligible to receive the Millionaires Club Award associated with the Edge Success
Program through sales generated by his personally developed sales network. The
Company incurred $173 of distributor development program revenue reduction
associated with Mr. Hookom's participation in the Program for the fiscal year
ended September 30, 2003. Mr. Hookom also received DPO's due to him under our
Career Development Program of $102, $58 and $1, for the fiscal years ended
September 30, 2003, 2002 and 2001, respectively. The amounts paid were
Distributor paid overrides collected by us from Distributors that were brought
into the business by Mr. Hookom. The total DPO's still owed to Mr. Hookom was
$38 as of September 30, 2003. This payable to Mr. Hookom was recorded on the
other accrued expense and liabilities line item of our Consolidated Condensed
Balance Sheets as of September 30, 2003.

                                       42
<PAGE>

The above amounts are not considered to be significant to the financial
statements as a whole and therefore have not separately identified in the
Consolidated Condensed Balance Sheets, Statements of Operations or Statements of
Cash Flow.

For information regarding a transaction involving Kirk Foley, please see
"Compensation Committee Interlocks and Insider Participation" in Item 11 above.

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(A) DOCUMENTS FILED AS PART OF THIS REPORT.

      1.    FINANCIAL STATEMENTS AND RELATED SCHEDULES:

<TABLE>
<CAPTION>
                                                                         Page
                                                                        Number
                                                                        ------
<S>                                                                     <C>
Report of Independent Registered Public Accounting Firm                   47

Consolidated Balance Sheets as of September 30, 2003, and 2002            48

Consolidated Statements of Operation for the years ended September
 30, 2003, 2002, and 2001                                                 49

Consolidated Statements of Stockholders' Equity for the years ended
 September 30, 2003, 2002, and 2001                                       50

Consolidated Statements of Cash Flow for the years ended September
 30, 2003, 2002, and 2001                                                 51

Notes to Consolidated Financial Statements                                52

Schedule II - Valuation and Qualifying Accounts and Reserves              82
</TABLE>

      Schedules other than those listed above are omitted because they are not
      required or are not applicable, or the required information is shown in
      the consolidated financial statements, the notes thereto, or in
      Management's Discussion and Analysis of Financial Condition and Results of
      Operations.

      2.    EXHIBIT LIST:

<TABLE>
<CAPTION>
Exhibit
Number    Description
------    ---------------------------------------------------------------------------------
<S>       <C>
 3.1      Certificate of Incorporation~

            Incorporated by reference from Annual Report on form 10-K for the year
            ended September 30, 1995

 3.2      Bylaws~

           Incorporated by reference from Form 10-Q for the quarter ended June 30, 2003
</TABLE>

                                       43
<PAGE>

<TABLE>
<CAPTION>
<S>       <C>
 9.0      Voting Trust Agreement~

            Stockholders Voting Agreement, incorporated by reference from Form 13-D filed
            on October 19, 2001

10.00     Material Contracts~

          U.S. Bank N.A. $2,000,000 Revolving Credit Note, incorporated by reference from
          Form 10-Q for the quarter ended June 30, 2001

10.01     Material Contracts~

          U.S. Bank N.A.$1,000,000 Revolving Credit Note, incorporated by reference from
          Form 10-Q for the period ended March 31, 2002

10.02     Material Contracts~

          Amendment to U.S. Bank N.A. $1,000,000 Revolving Credit Note, incorporated by
          reference from Form 10-K for the year ended September 30, 2002

10.03     Material Contracts~

            Amendment to U.S. Bank N.A. $2,000,000 Revolving Credit Note, incorporated by
            reference from Form 10-Q for the quarter ended December 31, 2002

10.04     Material Contracts~

            Amendment to U.S. Bank N.A. $2,000,000 Revolving Credit Note, incorporated by
            reference from Form 10-K for the year ended September 30, 2003

10.05     Material Contracts~

             U.S. Bank N.A. Waiver Letter and Amendment to Revolving Credit Note, dated
             February 20, 2004, incorporated by reference from Form 10-K for the year
             ended September 30, 2003.

10.06     Material Contracts~

             U.S. Bank N.A. Waiver Letter and Amendment to Revolving Credit Note, dated
             October 15, 2004, incorporated by reference from Form 8-K filed on October
             21, 2004.

10.07     Material Contracts~

             13-D Settlement Agreement incorporated by reference from Form 8-K filed on
             February 19, 2002

10.08     Material Contracts~

             Change of Control Agreement - Weeter, incorporated by reference from Form
             10-K for the year ended September 30, 2003.

10.09     Material Contracts~

             Change of Control Agreement - Duggan, incorporated by reference from Form
             10-K for the year ended September 30, 2002

10.10     Material Contracts~

             Change of Control Agreement - Pryor, incorporated by reference from Form 10-K
             for the year ended September 30, 2001

10.11     Material Contracts~

             Change of Control Agreements - McGraw and Malone, incorporated by reference
             from Form 10-K/A3 for the year ended September 30, 1997

10.12     Material Contracts~

             Employment Agreement - Pryor, incorporated by reference from Form 10-K for
             the year ended September 30, 2001
</TABLE>

                                       44
<PAGE>

<TABLE>
<S>       <C>
10.13     Material Contacts~

             Accelerated Incentive Stock Option Agreements, incorporated by reference from
             Form 10-K for the year ended September 30, 2000

10.14     Material Contracts~

             Incentive Stock Option Agreement - Pryor, incorporated by reference from Form
             10-K for the year ended September 30, 2001

10.15     Material Contracts~

             Incentive Stock Option Agreements, incorporated by reference from Form 10-K
             for the year ended September 30, 2001

10.16     Material Contracts~

             Incentive Stock Option Agreements, incorporated by reference from Form 10-K
             for the year ended September 30, 2000

10.17     Material Contracts~

             Incentive Stock Option Agreements incorporated by reference from Form 10-Q
             for the quarter ended March 31, 1999

  11         Statement re:  Computation of per share earnings~
               See Note 1 on Page 60 of the Financial Statements

  14         Code of Ethics~ incorporated by reference from Form 10-K for the year ended
             September 30, 2003.

  21         Subsidiaries of Registrant~
               Note 1 on Page 52 of this report

  23         Consent of Independent Accountants~
               Attached

 31.1        Rule 13a-14(a)/15d-14(a) Certification~
               Certification Pursuant to 15 U.S.C. Section 7241 for Kirk. W. Foley, attached

 31.2        Rule 13a-14(a)/15d-14(a) Certification~
               Certification Pursuant to 15 U.S.C. Section 7241 for Julie A. McGraw, attached

 32.1        Section 1350 Certification~
               Certification for Kirk W. Foley Pursuant to Section 906 of the Sarbanes-Oxley Act
                of 2002  (18 U.S.C. Section 1350), attached

 32.2        Section 1350 Certification~
               Certification for Julie A. McGraw Pursuant to Section 906 of the Sarbanes-Oxley Act
                of 2002  (18 U.S.C. Section 1350), attached
</TABLE>

(B)  REPORTS ON FORM 8-K.

     No report on Form 8-K was filed during the last quarter of fiscal 2003.

(C)  EXHIBITS.

     Reference is made to the above Exhibit List table.

                                       45
<PAGE>
(D)   FINANCIAL STATEMENT SCHEDULES.

      Schedules required to be filed in response to this Item are listed above
      in the Financial Statements and Related Schedules table.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this Report on Form 10-K to be
signed on its behalf by the undersigned, thereunto duly authorized.

                                HMI INDUSTRIES INC.
                                (Registrant)

                                by /s/ Julie A. McGraw
                                   -------------------
                                   Julie A. McGraw
                                   Vice President, Chief Financial Officer
                                   and Treasurer
                                   October 22, 2004

Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
on Form 10-K has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.

<TABLE>
<S>                                           <C>                                         <C>
/s/ Kirk W. Foley                             /s/ John A. Pryor
------------------------------------          ----------------------------------          ----------------------------
Kirk W. Foley                                 John A. Pryor                               Robert Breadner
Chairman of the Board and                     President and Chief Operating               Director
Director                                      Officer and Director                        October 22, 2004
October 22, 2004                              October 22, 2004

/s/ Wesley E. Foley                           /s/ Murray Walker                           /s/ Ivan J. Winfield
------------------------------------          ----------------------------------          ----------------------------
Wesley E. Foley                               Murray Walker                               Ivan J. Winfield
Director                                      Director                                    Director
October 22, 2004                              October 22, 2004                            October 22, 2004

/s/ Earl J. Watson
------------------------------------
Earl J. Watson
Corporate Controller
October 22, 2004
</TABLE>

                                       46
<PAGE>

             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, stockholders' equity, and cash flows
present fairly, in all material respects, the financial position of HMI
Industries, Inc. and its subsidiaries at September 30, 2003 and 2002, and the
results of their operations and their cash flows for each of the three years in
the period ended September 30, 2003, in conformity with accounting principles
generally accepted in the United States of America. These financial statements
are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements 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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

As discussed in Note 1 to the consolidated financial statements, the Company
changed its method of accounting for goodwill and other intangible assets to
comply with the provisions of Statement of Financial Accounting Standard No.
142, "Goodwill and Other Intangible Assets," effective October 1, 2002, and
changed its method of revenue recognition to adopt EITF 01-9 "Accounting for
Consideration Given by a Vendor to a Customer (Including a Reseller of the
Vendor's Products)," effective January 1, 2001.

As discussed in Note 5 and Note 12, the Company's credit facility agreement
expires on December 31, 2004.

As described in Note 2, the Company restated its consolidated financial
statements for the years ended September 30, 2003, 2002 and 2001.

/s/  PricewaterhouseCoopers LLP
Cleveland, Ohio
February 13, 2004 (except for Note 2, Note 5, and Note 12, as to which the date
is October 20, 2004)

                                       47
<PAGE>

HMI INDUSTRIES INC.

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                                      SEPTEMBER 30,               September 30,
                                                                                           2003                       2002
Dollars and shares in thousands, except par values                                       RESTATED                   Restated
------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                   <C>                         <C>
ASSETS
CURRENT ASSETS:
  Cash and cash equivalents                                                           $        948                $        481
  Trade accounts receivable (net of allowance of $194 and $482)                              1,892                       2,007
  Inventories:
    Finished goods                                                                           2,555                       2,076
    Work-in-progress, raw material and supplies                                              2,153                       2,113
  Deferred income taxes                                                                          -                           -
  Prepaid expenses                                                                             397                         292
  Other current assets                                                                         152                          54
------------------------------------------------------------------------------------------------------------------------------
      Total current assets                                                                   8,097                       7,023
------------------------------------------------------------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT, NET                                                           2,178                       4,310
------------------------------------------------------------------------------------------------------------------------------
OTHER ASSETS:
  Cost in excess of net assets of acquired businesses
    (net of accumulated amortization of $-0- and $3,739)                                         -                       5,451
  Deferred income taxes                                                                          -                           -
  Trademarks (net of accumulated amortization of $202 and $162)                                272                         375
  Other                                                                                        121                         271
------------------------------------------------------------------------------------------------------------------------------
      Total other assets                                                                       393                       6,097
------------------------------------------------------------------------------------------------------------------------------
      Total assets                                                                    $     10,668                $     17,430
==============================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
  Line of credit                                                                      $      1,383                $      1,392
  Trade accounts payable                                                                     2,143                       1,957
  Income taxes payable                                                                         506                         517
  Accrued expenses and other liabilities                                                     2,399                       1,863
  Distributor Development Liability due within one year                                        200                           -
  Long-term debt due within one year                                                            22                         302
------------------------------------------------------------------------------------------------------------------------------
     Total current liabilities                                                               6,653                       6,031
------------------------------------------------------------------------------------------------------------------------------
LONG-TERM LIABILITIES:
  Long-term debt (less amounts due within one year)                                             11                          33
  Distributor Development Liability (less amounts due within one year)                      12,758                       8,789
------------------------------------------------------------------------------------------------------------------------------
      Total long-term liabilities                                                           12,769                       8,822
------------------------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' (DEFICIT) EQUITY:
  Preferred stock, $5 par value; authorized, 300 shares; issued, none                            -                           -
  Common stock, $1 par value; authorized, 10,000 shares;
    issued and outstanding, 6,746 shares                                                     6,746                       6,746
  Capital in excess of par value                                                             8,231                       8,231
  Unearned compensation, net                                                                     -                          (3)
  Accumulated deficit                                                                      (23,731)                    (11,492)
  Accumulated other comprehensive loss (Note 1)                                                  -                        (905)
------------------------------------------------------------------------------------------------------------------------------
      Total stockholders' (deficit) equity                                                  (8,754)                      2,577
------------------------------------------------------------------------------------------------------------------------------
      Total liabilities and stockholders' (deficit) equity                            $     10,668                $     17,430
==============================================================================================================================
</TABLE>

See notes to consolidated financial statements.

                                       48

<PAGE>

HMI INDUSTRIES INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                              FOR THE YEARS ENDED SEPTEMBER 30,
                                                                        2003                 2002                 2001
Dollars and shares in thousands, except per share data                RESTATED             Restated             Restated
---------------------------------------------------------------------------------------------------------------------------
<S>                                                                  <C>                  <C>                   <C>
REVENUES:
  Product sales, less returns and allowances                              34,539               37,113                32,536
  Distributor development program                                         (4,369)              (2,589)               (1,009)
---------------------------------------------------------------------------------------------------------------------------
Net product sales                                                    $    30,170          $    34,524           $    31,527
----------------------------------------------------------------------------------------------------------------------------

OPERATING COSTS AND EXPENSES:
  Cost of products sold                                                   21,025               21,298                19,370
  Selling, general and administrative expenses                            13,404               14,591                13,306
  Loss on impairment of asset                                              1,711                    -                     -
  Loss on liquidation of subsidiary                                          905                    -                     -
  Interest expense                                                            53                   86                    86
  Other (income) expense, net                                               (158)                 344                   186
---------------------------------------------------------------------------------------------------------------------------
    Total operating costs and expenses                                    36,940               36,319                32,948
---------------------------------------------------------------------------------------------------------------------------
Loss before income taxes and cumulative effect of accounting change       (6,770)              (1,795)               (1,421)
Provision for income taxes                                                    18                   38                 3,672
---------------------------------------------------------------------------------------------------------------------------
Loss before cumulative effect of accounting change                        (6,788)              (1,833)               (5,093)
Cumulative effect of accounting change                                     5,451                    -                 4,943
---------------------------------------------------------------------------------------------------------------------------
NET LOSS                                                             $   (12,239)         $    (1,833)          $   (10,036)
===========================================================================================================================

Weighted average number of shares outstanding:
  Basic                                                                    6,744                6,719                 6,691
  Diluted                                                                  6,744                6,719                 6,691
===========================================================================================================================

BASIC AND DILUTED PER SHARE OF COMMON STOCK (NOTE 1):
  Loss before cumulative effect of accounting change                 $    (1.01)          $    (0.27)           $    (0.76)
  Cumulative effect of accounting change                             $    (0.81)          $        -            $    (0.74)
---------------------------------------------------------------------------------------------------------------------------
  NET LOSS                                                           $    (1.82)          $    (0.27)           $    (1.50)
==========================================================================================================================
</TABLE>

See notes to consolidated financial statements.

                                       49

<PAGE>

HMI INDUSTRIES INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 2003, 2002, AND 2001

<TABLE>
<CAPTION>
                                        Capital
                                          in                                Accumulated
                                        Excess                                  Other               Treasury     Total
                                Common  of Par     Unearned    Accumulated  Comprehensive  Treasury   Stock  Stockholders'
Dollars in thousands             Stock   Value   Compensation    Deficit         Loss       Shares   Amount     Equity
                                ------- -------  ------------- -----------  -------------  -------- -------- -------------
<S>                             <C>     <C>      <C>           <C>          <C>            <C>      <C>      <C>
Balance at September 30, 2000   $ 6,658 $ 8,279          ($41) $       377          ($879) $      - $      - $      14,394

  Comprehensive income:
    Net loss, restated                                             (10,036)                                        (10,036)
    Translation adjustment                                                            (21)                             (21)
                                                                                                             -------------
  Total comprehensive income                                                                                       (10,057)
  Issuance of common stock           50                                                                                 50
  Unearned compensation                                    33                                                           33

                                ------- -------  ------------  -----------  -------------  -------- -------- -------------
Balance at September 30, 2001,
  Restated                        6,708   8,279            (8)      (9,659)          (900)        -        -         4,420

  Comprehensive income:
    Net loss, restated                                              (1,833)                                         (1,833)
    Translation adjustment                                                             (5)                              (5)
                                                                                                             -------------
  Total comprehensive income                                                                                        (1,838)
  Issuance of common stock           38                                                                                 38
  Unearned compensation                                     5                                                            5
  Employee benefit stock                    (48)                                                                       (48)

                                ------- -------  ------------  -----------  -------------  -------- -------- -------------
Balance at September 30, 2002,
  Restated                        6,746   8,231            (3)     (11,492)          (905)        -        -         2,577

  COMPREHENSIVE INCOME:
    NET LOSS, RESTATED                                             (12,239)                                        (12,239)
    TRANSLATION ADJUSTMENT                                                              -                                -
                                                                                                             -------------
  TOTAL COMPREHENSIVE LOSS                                                                                         (12,239)
  CUMULATIVE TRANSLATION
    ADJUSTMENT ASSOCIATED WITH
    LIQUIDATION OF FOREIGN
    SUBSIDIARY                                                                        905                              905
  UNEARNED COMPENSATION                                     3                                                            3

                                ------- -------  ------------  -----------  -------------  -------- -------- -------------
BALANCE AT SEPTEMBER 30, 2003,
  RESTATED                      $ 6,746 $ 8,231             -  ($   23,731)             -         -        - ($      8,754)
                                ======= ======== ============  ===========  =============  ======== ======== =============
</TABLE>

See notes to consolidated financial statements.

                                       50

<PAGE>

HMI INDUSTRIES INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                       FOR THE YEARS ENDED SEPTEMBER 30,
                                                                                  2003               2002               2001
Dollars in thousands                                                            RESTATED           Restated           Restated
--------------------------------------------------------------------------------------------------------------------------------
<S>                                                                            <C>                <C>                <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net (loss) income                                                            $   (12,239)       $   (1,833)        $   (10,036)
  Adjustments to reconcile net (loss) income to net cash provided by
    (used in) operating activities:
        Cumulative effect of accounting change                                       5,451                 -               4,943
        Loss on impairment of asset                                                  1,711                 -                   -
        Loss on liquidation of foreign subsidiary                                      905                 -                   -
        Distributor development program                                              3,969             2,589               1,033
        Depreciation and amortization                                                  744               928                 913
        Provision for loss on sale/disposal of assets                                    -                17                   -
        Provision for loss on receivables                                                -                59                   -
        Treasury/common shares issued, net of unearned compensation
          and employee benefit stock                                                     -               (5)                  83
        Unearned compensation                                                            3                 -                   -
        Deferred income taxes                                                            -                 -               4,036
  Changes in operating assets and liabilities:
    Decrease in receivables                                                            115               100               1,181
    Increase in inventories                                                           (518)             (441)               (532)
   (Increase) decrease in prepaid expenses                                            (105)             (108)                227
   (Increase) decrease in other current assets                                         (98)              309                 (73)
    Increase (decrease) in accounts payable                                            186              (343)               (258)
    Increase (decrease) in accrued expenses and other liabilities                      536               188                (943)
    Increase in distributor development liability                                      200                 -                   -
    Decrease in income taxes payable                                                   (11)              (18)               (431)
    Other, net                                                                         105               (86)               (169)
--------------------------------------------------------------------------------------------------------------------------------
            Net cash provided by (used in) operating activities                        954             1,356                 (26)
--------------------------------------------------------------------------------------------------------------------------------

CASH FLOWS FROM INVESTING ACTIVITIES:
  Capital expenditures                                                                (176)             (866)             (2,278)
--------------------------------------------------------------------------------------------------------------------------------
            Net cash used in investing activities                                     (176)             (866)             (2,278)
--------------------------------------------------------------------------------------------------------------------------------

CASH FLOWS FROM FINANCING ACTIVITIES:
  Net (repayments) borrowing under credit facility                                      (9)              201               1,191
  Payment of long term debt                                                           (302)             (615)                (17)
--------------------------------------------------------------------------------------------------------------------------------
            Net cash (used in) provided by financing activities                       (311)             (414)              1,174
--------------------------------------------------------------------------------------------------------------------------------

Net increase (decrease) in cash and cash equivalents                                   467                76              (1,130)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                                         481               405               1,535
--------------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD                                       $       948        $      481         $       405
================================================================================================================================
</TABLE>

See notes to consolidated financial statements.

                                       51

<PAGE>

HMI INDUSTRIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (DOLLARS IN THOUSANDS, EXCEPT
SHARES AND PER SHARE DATA)

BASIS OF CONSOLIDATION

The consolidated financial statements include all controlled subsidiaries.
Operations include the accounts of HMI Industries Inc. and the following
wholly-owned subsidiaries: Health-Mor International Inc., HMI Incorporated,
Health-Mor Acceptance Corporation, HMI Acceptance Corporation, and Health-Mor
Acceptance Pty. Ltd. All significant intercompany accounts and transactions have
been eliminated.

Our principal products include a high filtration portable surface cleaner that
is marketed as a healthier alternative to the typical vacuum cleaner and a
portable room air cleaner that helps to remove particles, gases, and odors from
the air. The two products are sold together as a complete Filter Queen Indoor
Air Quality System(TM).

RECLASSIFICATION

Certain amounts in the fiscal 2001 consolidated financial statements have been
reclassified to conform to the fiscal 2003 and 2002 presentation.

USE OF ESTIMATES

The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of any contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from those estimates.

FAIR VALUE OF FINANCIAL INSTRUMENTS

Our financial instruments consist principally of cash and cash equivalents,
accounts and notes receivable, accounts payable, accrued expenses and other
liabilities, line of credit, and short and long-term debt in which the fair
value of these financial instruments approximates the carrying value.

CASH EQUIVALENTS

We consider all highly liquid instruments purchased with a maturity of less than
three months to be cash equivalents. Cash equivalents are comprised primarily of
commercial paper. We believe the carrying amounts approximate fair value due to
the short maturities of these instruments.

ALLOWANCE FOR DOUBTFUL ACCOUNTS

We maintain an allowance for doubtful accounts for estimated losses resulting
from the inability of our customers to make required payments. Quarterly, we
perform a review of all customer accounts with respect to aging of receivables,
historical payment patterns, customers' financial condition, and from this
review determine if an allowance is needed.

                                       52

<PAGE>

SALES RETURN AND ALLOWANCE

We record a provision for estimated sales returns and allowances on product
sales in the same period as the related revenues are recorded. These estimates
are based on historical sales returns and other known factors.

ADVERTISING COSTS

We expense the production costs of advertising the first time the advertising
takes place. Advertising expense was $151, $1,808, and $591, in fiscal 2003,
2002, and 2001, respectively.

INVENTORIES

Inventories are stated at the lower of cost or market. Cost is determined
principally on the last-in, first-out (LIFO) method, which provides a better
matching of current costs and revenues. The following presents the effect on
inventories and income before taxes had we used the first-in, first-out (FIFO)
method of inventory valuation.

<TABLE>
<CAPTION>
                                                                                   2003              2002
                                                                               -------------      ------------
<S>                                                                            <C>                <C>
Percentage of total inventories on LIFO                                                  100%              100%
Inventory amount had FIFO method been utilized to value inventory              $       5,103      $      4,599
(Decrease) increase in net income before taxes due to LIFO                     $         (14)     $        (11)
</TABLE>

EXCESS AND OBSOLESCENCE RESERVES

We evaluate our inventory quarterly to determine excess or slow moving items
based on current order activity and projections of future demand. For those
items identified, we estimate their market value or net sales value based on
current trends. An allowance is created for those items having a net sales value
less than cost.

PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment are recorded at cost. Depreciation is provided on
the straight-line method over estimated useful lives of 5 years for leasehold
improvements and 3 to 10 years for machinery and equipment. Improvements, which
extend the useful life of property, plant and equipment, are capitalized, and
maintenance and repairs are expensed. When property, plant and equipment are
retired or otherwise disposed of, the cost and accumulated depreciation are
removed from the appropriate accounts and any gain or loss is included in
income.

GOODWILL AND OTHER INTANGIBLE ASSETS

Pursuant to SFAS 142 "Goodwill and Other Intangible Assets" we ceased amortizing
goodwill in the period beginning October 1, 2002. Prior to the adoption of SFAS
No. 142, we amortized goodwill on a straight-line basis over 40 years. Other
intangible assets are amortized on a straight-line basis over their useful
lives, ranging from ten to seventeen years. Goodwill amortization for the years
ended September 30, 2002, and 2001, was $245 and $245, respectively.

FAS 142 primarily addresses the accounting for goodwill and intangible assets
subsequent to their initial recognition. The provisions of FAS 142 prohibit the
amortization of goodwill and indefinite-lived intangible assets, require that
goodwill and indefinite-lived intangible assets be tested annually for
impairment (and in interim periods if certain events occur indicating that the
carrying value of goodwill and/or indefinite-lived intangible assets may be
impaired), require that reporting units be identified for the purpose of
assessing potential impairments of goodwill, and remove the forty-year
limitation on the amortization period of intangible assets that have finite
lives.

                                       53

<PAGE>

During the first quarter of fiscal 2003 we completed the first step of the
two-step implementation process by obtaining a valuation of HMI for comparison
to the carrying value and began the process of measuring the amount of the
impairment (step two). Management does not believe that the market value of
common stock fairly reflects the value of HMI, because of, among other things,
the absence of liquidity, and the absence of analyst coverage. Accordingly, the
valuation experts employed by us utilized the market value of the common stock
as of October 1, 2002, but also weighted the valuation for comparable values of
peer companies, recent sales of similar types of companies, and a discounted
cash flow methodology. Based on the assumptions used in any of the three
valuations referred to above and depending on the weighting used for each
valuation, results of the valuation could be significantly changed. However, for
accounting purposes we believe that the weighting methodology used is reasonable
and results in an accurate and fair value of HMI.

During the second quarter of fiscal 2003 we completed our initial impairment
test for October 1, 2002, resulting in a full impairment of the goodwill
recorded on HMI's books through a non-cash charge of $5,451. Such charge is
non-operational in nature and is reflected as a Cumulative Effect of Accounting
Change in the accompanying Consolidated Statements of Operations for the year
ended September 30, 2003.

A reconciliation of the reported net (loss) income and net (loss) income per
share to the amounts adjusted for the exclusion of amortization of goodwill and
the cumulative effect of a change in accounting principle for the years ended
September 30, 2003, 2002, and 2001, respectively, had the provisions of SFAS 142
been applied on October 1, 2000, is as follows:

<TABLE>
<CAPTION>
                                                                     2003               2002             2001
----------------------------------------------------------------------------------------------------------------
<S>                                                               <C>                 <C>              <C>
Loss before cumulative effect of accounting change                $   (6,788)         $ (1,833)        $  (5,093)
Cumulative effect of accounting change                                 5,451                 -             4,943
----------------------------------------------------------------------------------------------------------------
Net loss                                                             (12,239)           (1,833)          (10,036)
Goodwill amortization add back, net of tax                                 -               245               245
----------------------------------------------------------------------------------------------------------------
Adjusted net loss                                                 $  (12,239)         $ (1,588)        $  (9,791)
================================================================================================================

Weighted average number of shares outstanding:
  Basic                                                                6,744             6,719             6,691
  Diluted                                                              6,744             6,719             6,691
================================================================================================================

Basic and diluted per share of common stock:
  Loss before cumulative effect of accounting change              $    (1.01)         $  (0.27)        $   (0.76)
  Cumulative effect of accounting change                               (0.81)         $      -         $   (0.74)
  Goodwill amortization add back, net of tax                               -          $   0.04         $    0.04
================================================================================================================
  Adjusted net loss                                               $    (1.82)         $  (0.23)        $   (1.46)
================================================================================================================
</TABLE>

Total amortization expense for trademarks and patents was $49, $41, and $40 for
the years ended September 30, 2003, 2002, and 2001, respectively. Amortization
expense for trademarks and patents is estimated for the next five fiscal years
ending September 30, 2004, through 2008, as $41, $19, $19, $17, and $15.


                                       54

<PAGE>
VALUATION OF LONG-LIVED ASSETS

As of the beginning of fiscal 2003 we adopted Statement of Financial Accounting
Standards ("FAS") No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets". The adoption of this accounting standard did not have a
material impact on our operating results and financial position. We assess
potential impairments to our long-lived assets when there is evidence that
events or changes in circumstances indicate that the carrying amount of an asset
may not be recovered. An impairment loss is recognized when the carrying amount
of the long-lived asset is not recoverable and exceeds its fair value. The
carrying amount of a long-lived asset is not recoverable if it exceeds the sum
of the undiscounted cash flows expected to result from the use and eventual
disposition of the asset. Any required impairment loss is measured as the amount
by which the carrying amount of a long-lived asset exceeds its fair value and is
recorded as a reduction in the carrying value of the related asset and a charge
to operating results.

During the fourth quarter of fiscal 2003 we performed an analysis on the
potential impairment on certain tooling assets, and related patents and
trademarks, approximating $1,711 which related to a potential new product. An
additional $98 was added to this impairment as part of our restatement. See Note
2 to the Consolidated Financial Statements. Based upon our analysis, we
concluded that the tooling assets were fully impaired as of September 30, 2003;
this conclusion was based upon the held and used model which includes
significant assumptions regarding future cash flows and utilizes a model of
weighted probability cash flow projections over the estimated life of the
product. Scrap value for these assets was determined to be nominal; accordingly
a $1,711 impairment of this asset was recorded as of September 30, 2003, to
write the assets down to their net realizable value. This product will not have
any additional resources devoted to its refinement and completion, nor will the
product be marketed or sold as an ongoing part of our product portfolio. As a
result the impairment is not expected to have an impact on future revenue or net
income.

FOREIGN CURRENCY TRANSLATION

Prior to the liquidation, in the second quarter of fiscal 2003, of our remaining
foreign subsidiaries, all consolidated foreign operations used the local
currency of the country of operation as the functional currency and translated
the local currency asset and liability accounts at year-end exchange rates while
income and expense accounts were translated at weighted average exchange rates.
The resulting translation adjustments were accumulated as a separate component
of Stockholders' Equity titled "Accumulated Other Comprehensive Loss." Such
adjustments will affect net income only upon sale or liquidation of the
underlying foreign investments.

Exchange gains and losses from transactions in a currency other than the local
currency of the entity involved are included in income as they occur.
Significantly all of our product sales to our customer base are conducted in
U.S. dollars and therefore net transaction and translation adjustments are not
significant.

During the second quarter of fiscal 2003 we recorded a write-off of $905 for
cumulative translation adjustments associated, primarily, with the liquidation
of our Canadian subsidiary. The loss on disposal solely related to cumulative
foreign currency translation adjustment as a result of the Canadian subsidiary
ceasing to function as an operating entity in a prior fiscal year and in part
the result of the goodwill impairment associated with the adoption of FAS 142.

In March 1998, we changed the way we operated in Canada by engaging an importer
to assume responsibility for and manage the distribution network in that
country, similar to the way we do

                                       55

<PAGE>

business in the rest of our international markets. Consequently it was no longer
necessary to maintain a physical presence in Canada, gradually reducing the
necessity for the entity. For a period of time after we began selling to the
importer in Canada and based on his sales results in Canada, we considered the
possibility of utilizing the subsidiary again.

Moreover, at the time we completed step two of our FAS 142 Goodwill
implementation the only material remaining items in the financial records of the
Canadian subsidiary related to Goodwill and Cumulative Translation Adjustments
("CTA"). As discussed in Note 1 to the Consolidated Financial Statements, the
goodwill was deemed to be fully impaired and was written off as a cumulative
change in accounting principal due to the adoption of FAS 142. In conjunction
with the goodwill write off we reviewed possible future options for our Canadian
subsidiary, and we chose to liquidate the entity. Therefore we recorded a loss
on disposal of $905 associated with cumulative translation adjustments for this
subsidiary.

COMPREHENSIVE INCOME/LOSS

Prior to the liquidation in the second quarter of fiscal 2003 of our remaining
foreign subsidiaries, comprehensive income/loss combined net income/loss and
"other comprehensive items," which represented foreign currency translation
adjustments, were reported as a separate component of Stockholders' Equity in
the accompanying Consolidated Balance Sheets. We present such information in our
Statements of Stockholders' Equity on an annual basis and in a footnote in our
quarterly reports. Subsequent to the liquidation of our Canadian subsidiary, we
do not incur foreign currency translation adjustments.

GUARANTEES

During the second quarter of fiscal 2003 we adopted Financial Accounting
Standards Board Interpretation No. 45 ("FIN 45") "Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others." FIN 45 requires that a liability be recorded in the
guarantor's balance sheet upon issuance of a guarantee. In addition, FIN 45
requires disclosures about the guarantees that an entity has issued, including a
reconciliation of changes in the entity's product warranty liabilities. The
disclosure requirements are effective for financial statements for interim or
annual periods ended after December 15, 2002, while the recognition and
measurement provisions of FIN 45 are applicable on a prospective basis to
guarantees issued or modified after December 31, 2002.

We have guaranteed repayment to a finance company for certain events of default
by some of our Canadian distributors. The finance company purchases the
installment sales contracts that the distributors entered into with their
customers for the sale of products manufactured by HMI. Our obligation to
repurchase any contracts is limited to situations in which the borrower has any
valid defense, right of set-off or counterclaim regarding the loan; the loan
does not comply with all applicable laws and regulations; or the loan is not a
binding obligation of the borrower. For example, we would be required to
purchase from the finance company a contract entered into by an end consumer to
finance the purchase of our product if the finance company believes that the
contract has been improperly obtained.

We require the participating Canadian distributors to provide us with cash
reserves, which are held as liabilities on our records, in order to provide a
fund for the payments of any defaults by the participating Canadian
distributors. As of September 30, 2003, we had $75 of cash reserves we had
received from Canadian Distributors. The amount was included in the accrued
expenses and other liabilities line item of our Consolidated Balance Sheets and
we expect to hold them for

                                       56

<PAGE>

at least a period approximating the term of the finance contracts with the end
consumers, which typically have a 36 month term.

Although it is not practical for us to estimate future cash payments on possible
repurchases; the maximum potential of future payments that we could be required
to make under the guarantee is the total contacts outstanding of $843 at
September 30, 2003. However, from the commencement of the contract in July 2002
we have repurchased only one contract approximating $2 under this guarantee.
Moreover, we are permitted pursuant to agreements with our Canadian distributors
to be reimbursed from the cash reserves referred to above for the costs and
expenses incurred in fulfilling our guarantee to the finance company.

      Warranty

We warrant our surface cleaner for a two-year period from the date of purchase
and offer a lifetime service benefit for the replacement of the surface
cleaner's motor at a price not to exceed $99 (Dollar's not in thousands). On
occasion, we also support a five-year optional extended warranty on the portable
surface cleaner offered by our U.S. Distributors to the end user as a sales
promotion during an in home product demonstration. As an enticement to the end
user to buy our product during that demonstration, the five year optional
extended warranty is offered to them at no cost; accordingly no revenue for this
optional warranty is recognized by HMI. Outside the U.S. we offer a two-year
warranty for our high filtration portable surface cleaner. The portable room air
cleaner is warranted for renewable one-year periods so long as the main air
filter is replaced annually. A five-year warranty is offered for our built-in
vacuum system.

Our policy is to record a provision for the expected cost of warranty-related
claims at the time of the sale and adjust the provision to reflect actual
experience quarterly. The amount of warranty liability accrued reflects
management's best estimate of the expected future cost of honoring our
obligations under the warranty plans. Historically, the cost of fulfilling our
warranty obligations has principally involved replacements parts, labor and
sometimes travel. Our estimates are based on historical experience, the number
of units involved and the extent of features/components included in product
models.

Changes in our warranty liability for the years ended September 30, 2003, 2002,
and 2001, were as follows:

<TABLE>
<CAPTION>
                                                       2003           2002           2001
                                                    ---------      ---------      ----------
<S>                                               <C>            <C>            <C>
Balance at beginning of period                    $       190    $       299    $        368
  Charges to expense                                      245             60             164
  Usage                                                  (242)          (169)           (233)
                                                  -----------    -----------    ------------
Balance at end of period                          $       193    $       190    $        299
                                                  ===========    ===========    ============
</TABLE>

SHIPPING AND HANDLING COSTS

Costs incurred for shipping and handling are included in the cost of products
sold when incurred. Amounts billed to customers for shipping and handling are
reported as net product sales.

SEGMENT REPORTING

We conduct our business as a single reportable segment.

CONCENTRATIONS

We are subject to risks specific to the individual customers with whom we do
business. In fiscal 2003 no individual customer accounted for more than 10% of
our product sales. In fiscal 2002

                                       57
<PAGE>

one international customer in Japan accounted for more than 10% of our product
sales. This international customers product sales were 11.9% of our total
product sales. In fiscal 2001 three international customers, one each in Canada,
Japan and Portugal, accounted for more than 10% each of our product sales with
individual total product sales of 13.1%, 11.2%, and 10.2%, respectively.

Our revenues, and the stability of such revenues, are dependent on our
relationships with third-party distributors and their sales persons and their
level of satisfaction with our products and us. The Distributors and Importers
are independent third parties who are not our employees and are not directly
under our control. There can be no assurance that the current relationships with
Distributors and Importers will continue on acceptable terms and conditions to
us, nor can there be any assurance that additional distributorship arrangements
with third parties will be obtained on acceptable terms. Moreover, there can be
no assurance that the Distributors and Importers will devote sufficient time and
resources to our products to enable the products to be successfully marketed.
Failure of some or all of our products to be successfully and efficiently
distributed could have a material adverse effect on our financial condition and
results of operations.

In addition, our business could be adversely affected by a variety of
uncontrollable and changing factors, including but not limited to: difficulty in
protecting our intellectual property rights in a particular foreign
jurisdiction; recessions in economies where we sell our products; longer payment
cycles for and greater difficulties collecting accounts receivable; export
controls, tariffs and other trade protection measures; social, economic and
political instability; and changes in United States and foreign countries laws
and policies affecting trade.

Sales to international customers represent 35.8%, 43.1%, and 49.7% of net
product sales for the years ending September 30, 2003, 2002, and 2001,
respectively.

REVENUE RECOGNITION

Our revenue recognition policy is to recognize revenues when products are
shipped, or for certain customers when the products are received by the
customer's shipping agent, at which time title transfers to the customer. Our
sales are based on standard pricing and our product is shipped with FOB shipping
point terms (ExWorks for all but one international customer) at which time all
of the risks and rewards of ownership pass to the customer including the risk of
collection from the end user; accordingly, revenue is recognized at the time of
shipment. Additionally we are not required to repurchase the product nor do we
have bill and hold arrangements with any of our customers.

In the U.S. and Canada terms are generally prepaid or C.O.D. In some limited
cases shipments bear net 30 day terms; however, in no instances is payment ever
dependent on the distributors' sale of product to end user. Therefore the
guarantee to the Canadian finance company for certain events of default by some
of our Canadian distributors does not impact the recognition of revenue for
sales made to these distributors. When the financing company finances an end
consumer purchase (and pays the distributor), we guarantee that the contract was
not fraudulently prepared or entered into only. See "Guarantees" above for
further information.

On occasion, our customers (distributors) in the United States and Canada offer
a five year extended warranty to the end users of our surface cleaner product as
a promotion to purchase the product during that demonstration. The five year
optional extended warranty is offered to them at no cost; accordingly no revenue
is recognized.

                                       58

<PAGE>

Discounts earned based on promotional programs in place, volume of purchases or
other factors are also estimated at the time of revenue recognition and recorded
as a reduction of that revenue. In February 2002, the Emerging Issues Task Force
codified and issued EITF 01-9, Accounting for Consideration Given by a Vendor to
a Customer (Including a Reseller of the Vendors Products). The pronouncement
requires that cash consideration, including sales incentives, given by a vendor
to a customer be presumed to be a reduction of the selling prices of the
vendor's products or services and, therefore, characterized as a reduction of
revenue when recognized in the vendor's income statement. We adopted this
pronouncement effective in the second quarter of fiscal 2001 and accordingly
recorded a $4,943 cumulative effect of accounting change related to our
Distributor Development Program, from inception in 1997. Breakage occurs when a
distributor is no longer eligible for the award; the associated accrued
liability is derecognized at that time and the resultant termination gain is
netted in the contra sales Distributor Development Program line item of our
Consolidated Statement of Operations. See Note 2 "Restatement" for further
information.

RESEARCH AND DEVELOPMENT COSTS

Costs incurred in research and development are expensed as incurred and included
in SG&A expenses. In fiscal year 2003, 2002, and 2001, we invested $74, $273,
and $351, respectively, in new product development.

INCOME TAXES

We account for income taxes pursuant to the provisions of Statement of Financial
Accounting Standards No. 109 ("SFAS 109"), "Accounting for Income Taxes." Under
SFAS 109, the tax consequences in the future years for differences between the
financial and tax bases of assets and liabilities at year-end are reflected as
deferred income taxes.

Carrying value of our domestic net deferred tax assets assumes that we will be
able to generate sufficient future taxable income in certain tax jurisdictions,
based on estimates and assumptions. Management evaluates the realizability of
the deferred tax assets quarterly and assesses the need for additional valuation
allowances quarterly.

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

Cash paid for interest was $53, $86, and $96 for the years ended September 30,
2003, 2002, and 2001, respectively. Cash paid for income taxes was $29, $56, and
$70 for the years ended September 30, 2003, 2002, and 2001.

Each of the following transactions has been treated as non-cash financing items
for purposes of the Consolidated Statements of Cash Flows. During the third and
fourth quarter of fiscal 2002 we recorded $290 in debt in exchange for assets.
These vendor-financed assets consisted primarily of tools, molds, and equipment
associated with new product development. During the fourth quarter of fiscal
2001, we recorded $588 in debt in exchange for assets. These assets were
vendor-financed and consisted primarily of tools, molds, and production
equipment also related to new product development.

                                       59

<PAGE>

EARNINGS PER SHARE

Earnings per share have been computed according to Statement of Financial
Accounting Standards (SFAS) No. 128, "Earnings Per Share." The following is a
reconciliation of the number of shares (denominator) used in the basic and
diluted earnings per share computations (shares in thousands) for the year ended
September 30,

<TABLE>
<CAPTION>
                                          2003                         2002                    2001
                                   ------------------          -------------------   -------------------------
                                              Per                         Per                         Per
                                             Share                       Share                       Share
                                   Shares    Amount            Shares    Amount        Shares        Amount
                                   ------  ----------          -----   -----------   -----------   -----------
<S>                                <C>     <C>                 <C>     <C>           <C>           <C>
Basic EPS                          6,744   $    (1.82)         6,719   $     (0.27)  $     6,691   $     (1.50)
  Effect of dilutive
    stock options                      -            -              -             -             -             -
                                   -----   ----------          -----   -----------   -----------   -----------
Diluted EPS                        6,744   $    (1.82)         6,719   $     (0.27)  $     6,691   $     (1.50)
                                   =====   ==========          =====   ===========   ===========   ===========
</TABLE>

Options outstanding during the years ended September 30, 2003, 2002 and 2001, to
purchase approximately 1,164, 1,147, and 1,322 shares of common stock,
respectively, were not included in the computation of diluted EPS because the
options' exercise prices were greater than the average market prices of the
common stock during the period and, therefore, the effect would be
anti-dilutive. The exercise prices of the options outstanding at September 30,
2003, range from $1.00 to $7.50 per share and expire between the period January
4, 2004, and August 29, 2010.

LONG-TERM COMPENSATION PLAN

We apply APB Opinion No. 25, "Accounting for Stock Issued to Employees" and
related interpretations in accounting for our stock plans as allowed under SFAS
Statement No. 123, "Accounting for Stock-Based Compensation" (SFAS 123). Had
compensation cost for the stock granted in 2003, 2002, and 2001 been determined
consistent with SFAS 123, pro forma net (loss)

                                       60

<PAGE>

income and earnings per common share would have been as follows (dollars in
thousands, except per share data):

<TABLE>
<CAPTION>
                                                                              2003            2002           2001
                                                                            --------        --------      ---------
<S>                                                                         <C>             <C>           <C>
Net loss as reported                                                        $(12,239)       $ (1,833)     $ (10,036)
Add:  Stock-based employee compensation expense included in reported
net income, net of related tax effects                                             2               3             20

Deduct:  Total stock-based employee compensation expense determined
under fair value based method for all awards, net of related tax effects
                                                                                  93             150            240
                                                                            --------        --------      ---------
PRO FORMA NET LOSS                                                          $(12,330)       $ (1,980)     $ (10,256)
                                                                            ========        ========      =========

BASIC AND DILUTED PER SHARE OF COMMON STOCK:
As reported                                                                 $  (1.82)       $  (0.27)     $   (1.50)
Proforma                                                                    $  (1.83)       $  (0.29)     $   (1.53)
</TABLE>

FUTURE ACCOUNTING REQUIREMENTS

FASB Interpretation No. 46, Consideration of Variable Interest Entities (FIN No.
46): This statement was issued in January 2003 and requires certain variable
interest entities to be consolidated by the primary beneficiary of the entity if
the equity investors in the entity do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk for the
entity to finance its activities without additional subordinated financial
support from other parties. The provisions of FIN 46 are effective immediately
for all arrangements entered into after January 31, 2003. For those arrangements
entered into prior to February 1, 2003, we are required to adopt the provisions
of FIN No. 46 at the end of the first quarter of fiscal 2004, in accordance with
the FASB Staff Position 46-R which delayed the effective date of FIN No. 46 for
those arrangements. We are in the process of determining the effect, if any, the
adoption of FIN No. 46-R will have on our financial statements.

SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics
of both Liabilities and Equity (SFAS No. 150): This statement, issued in May
2003, establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its scope
as a liability (or an asset in some circumstances). Many of those instruments
were previously classified as equity. SFAS No. 150 has been deferred
indefinitely related to certain measurement and disclosure components of the
standard; however, certain disclosure provisions are still required if
applicable to us. The final adoption of SFAS No. 150 is not expected to have a
significant impact, if any, on our financial statements; however, a formal
assessment will be performed.

2. RESTATEMENT

The accompanying balance sheets as of September 30, 2003 and 2002, and the
accompanying statements of operations and of cash flows for the years ended
September 30, 2003, 2002 and 2001 have been restated. The adjustments associated
with the restatement related to the following:


                                       61

<PAGE>
      Accrued Distributor Development Liabilities

Pursuant to EITF 01-9, "Accounting for Consideration Given by a Vendor to a
Customer", which was issued in 2001, we changed the way we account for the
potential one million dollar award for the Program. Prior to the adoption of
EITF 01-9, we utilized the services of an independent actuary who developed a
model based on our historical sales and other factors that identified, in
aggregate, the probability of distributors reaching the goal (earning 30,000
credits for sales of our product units) thereby triggering our cash payment
obligation. We recognized expense and recorded a liability based on that model.
The original intentions of the Program were to aid Master Distributors in their
retirement/succession plan and promote growth and retention within the new
distributor network. Because of these original intentions and the long-term
nature of this Program (fifteen years), management did not consider the
implications of EITF 01-9 to the Program and therefore EITF 01-9 was not adopted
in 2001 as required. Accordingly, we have restated our revenues to properly
reflect the accrual for this award as a reduction of revenues, not as a selling
and administrative expense. We have determined that for purposes of EITF 01-9 it
is not possible to reasonably estimate such a liability. We have therefore
accrued such awards assuming a maximum accrual rate whereby we assume each
eligible distributor will earn the award. In other words, for each qualifying
sale, we have recorded a liability by reducing revenue. Such a liability will
only be derecognized (i.e. the accrual eliminated) when (i) the award is paid
out or (ii) when a distributor is no longer eligible for the award. For the
years ended September 30, 2003, 2002 and 2001, this adjustment (i) decreased
sales by $4,369, $2,589 and $1,009, respectively, and (ii) decreased selling,
general and administrative expenses by $713, $191 and $79, respectively. In
addition, in the second quarter of fiscal 2001, $4,943 was recorded which
represented the cumulative effect of the adoption of EITF 01-9 since the
inception of the Program in 1997.

      Tooling Assets

In 2003, we performed an analysis on the potential impairment of certain tooling
assets. We concluded from our analysis, which was based upon the held and used
model that the tooling assets were fully impaired and accordingly we recorded an
impairment charge of $1,613 as of September 30, 2003. We inadvertently omitted
impairment charges of $98 for patents and trademarks relating to these tooling
assets and have reflected such additional impairment in the restated 2003
consolidated financial statements.

      Deferred Tax Asset

In 2003, we provided a full valuation allowance on our deferred tax assets. As a
result of the restatement related to the Distributor Development Program, our
recorded income in 2001 changed to a loss and caused a significant cumulative
loss for financial statement purposes. Accordingly, we determined that the
impairment of our deferred tax assets should be reflected in the second quarter
of fiscal 2001, when we first reflected the adoption of EITF 01-9. As a result
we reversed the original impairment recorded in fiscal 2003.

                                       62

<PAGE>

      Summary of Restatement Adjustments

The following table summarizes the effects of the restatement adjustments on
certain of our previously issued financial statements by type of adjustment and
by the affected captions in our Statement of Operations. The various adjustments
recorded to prior years as part of the restatement have no effect on our cash
flows.

<TABLE>
<CAPTION>
                                                                                     YEAR ENDED SEPTEMBER 30,
   Summary of Restatement Adjustments by Type                                  2003           2002           2001
   ------------------------------------------                                --------       ---------      --------
<S>                                                                          <C>            <C>            <C>
(Increase) decrease to net loss-
  DISTRIBUTOR DEVELOPMENT LIABILITIES:
    Revenues                                                                 $ (4,369)      $  (2,589)     $ (1,009)
    Selling, general and administrative  expenses                                 713             191            79
    Interest expense                                                                -               -            15
    Cumulative effect of accounting change                                          -               -        (4,943)

  TOOLING ASSET IMPAIRMENT
    Loss on impairment of asset                                                   (98)              -             -

  DEFERRED TAX ADJUSTMENT
    Provision for income taxes                                                  4,038             227        (4,265)
                                                                             --------       ---------      --------
Total effect of restatement on net loss                                      $    284       $  (2,171)     $(10,123)
                                                                             ========       =========      ========
</TABLE>

                                       63

<PAGE>

      Summary of Restated Financial Data

The following tables present a summary of our balance sheet, statements of
operations and of cash flows as previously reported, and as restated as a result
of the restatement adjustments summarized above.

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                                   Previously                    Previously
                                                                     RESTATED       Reported       RESTATED       Reported
                                                                   SEPTEMBER 30,  September 30,  SEPTEMBER 30,  September 30,
     Dollars and shares in thousands, except par values                2003           2003           2002           2002
     --------------------------------------------------            -------------  -------------  -------------  -------------
<S>                                                                <C>            <C>            <C>            <C>
ASSETS
CURRENT ASSETS:
  Cash and cash equivalents                                          $    948        $    948       $    481       $    481
  Trade accounts receivable (net of allowance of $194 and $482)         1,892           1,892          2,007          2,007
  Inventories:
    Finished goods                                                      2,555           2,555          2,076          2,076
    Work-in-progress, raw material and supplies                         2,153           2,153          2,113          2,113
  Deferred income taxes                                                     -               -              -          1,476
  Prepaid expenses                                                        397             397            292            292
  Other current assets                                                    152             152             54             54
                                                                     --------        --------       --------       --------
      Total current assets                                              8,097           8,097          7,023          8,499
                                                                     --------        --------       --------       --------

PROPERTY, PLANT AND EQUIPMENT, NET                                      2,178           2,178          4,310          4,310
                                                                     --------        --------       --------       --------

OTHER ASSETS:
  Cost in excess of net assets of acquired businesses
    (net of accumulated amortization of $-0- and $3,739)                    -               -          5,451          5,451
  Deferred income taxes                                                     -               -              -          2,550
  Trademarks (net of accumulated amortization of $202 and $162)           272             370            375            375
  Other                                                                   121             121            271            271
                                                                     --------        --------       --------       --------
      Total other assets                                                  393             491          6,097          8,647
                                                                     --------        --------       --------       --------
      Total assets                                                   $ 10,668        $ 10,766       $ 17,430       $ 21,456
                                                                     ========        ========       ========       ========

LIABILITIES AND STOCKHOLDERS'(DEFICIT) EQUITY
CURRENT LIABILITIES:
  Line of credit                                                     $  1,383        $  1,383       $  1,392       $  1,392
  Trade accounts payable                                                2,143           2,143          1,957          1,957
  Income taxes payable                                                    506             506            517            506
  Accrued expenses and other liabilities                                2,399           3,445          1,863          2,395
  Distributor Development Liability due within one year                   200               -              -              -
  Long-term debt due within one year                                       22              22            302            302
                                                                     --------        --------       --------       --------
     Total current liabilities                                          6,653           7,499          6,031          6,552
                                                                     --------        --------       --------       --------

LONG-TERM LIABILITIES:
  Long-term debt (less amounts due within one year)                        11              11             33             33
  Distributor Development Liability (less amounts due
    within one year)                                                   12,758               -          8,789              -
                                                                     --------        --------       --------       --------
      Total long-term liabilities                                      12,769              11          8,822             33
                                                                     --------        --------       --------       --------

STOCKHOLDERS' (DEFICIT) EQUITY:
  Preferred stock, $5 par value; authorized, 300 shares;
    issued, none                                                            -               -              -              -
  Common stock, $1 par value; authorized, 10,000 shares;
    issued and outstanding, 6,746 shares                                6,746           6,746          6,746          6,746
  Capital in excess of par value                                        8,231           8,231          8,231          8,231
  Unearned compensation, net                                                -               -             (3)            (3)
  (Accumulated deficit) Retained earnings                             (23,731)        (11,721)       (11,492)           802
  Accumulated other comprehensive loss (Note 1)                             -               -           (905)          (905)
                                                                     --------        --------       --------       --------
      Total stockholders' (deficit) equity                             (8,754)          3,256          2,577         14,871
                                                                     --------        --------       --------       --------
      Total liabilities and stockholders' (deficit) equity           $ 10,668        $ 10,766       $ 17,430       $ 21,456
                                                                     ========        ========       ========       ========
</TABLE>

                                       64

<PAGE>

CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                      FOR THE YEARS ENDED SEPTEMBER 30,
                                                                   2003                    2002                   2001
       Dollars and shares in thousands,                2003     Previously     2002     Previously    2001     Previously
            except per share data                    RESTATED    Reported    RESTATED    Reported   RESTATED    Reported
       --------------------------------              --------   ----------   --------   ----------  --------   ----------
<S>                                                  <C>        <C>          <C>        <C>         <C>        <C>
REVENUES:
  Product sales, less returns expenses
    and allowances                                     34,539      34,539      37,113      37,113     32,536      32,536
  Distributor development program                      (4,369)          -      (2,589)          -     (1,009)          -
                                                     --------    --------    --------    --------   --------    --------
Net product sales                                    $ 30,170    $ 34,539    $ 34,524    $ 37,113   $ 31,527    $ 32,536
                                                     --------    --------    --------    --------   --------    --------

OPERATING COSTS AND EXPENSES:
  Cost of products sold                                21,025      21,025      21,298      21,298     19,370      19,370
  Selling, general and administrative expenses         13,404      14,117      14,591      14,782     13,306      13,385
  Loss on impairment of asset                           1,711       1,613           -           -          -           -
  Loss on liquidation of subsidiary                       905         905           -           -          -           -
  Interest expense                                         53          53          86          86         86         101
  Other (income) expense, net                            (158)       (158)        344         344        186         186
                                                     --------    --------    --------    --------   --------    --------
    Total operating costs and expenses                 36,940      37,555      36,319      36,510     32,948      33,042
                                                     --------    --------    --------    --------   --------    --------
(Loss) income before income taxes and
    cumulative effect of accounting change             (6,770)     (3,016)     (1,795)        603     (1,421)       (506)
Provision (benefit) for income taxes                       18       4,056          38         265      3,672        (593)
                                                     --------    --------    --------    --------   --------    --------
(Loss) income before cumulative effect of
    accounting change                                  (6,788)     (7,072)     (1,833)        338     (5,093)         87
Cumulative effect of accounting change                  5,451       5,451           -           -      4,943           -
                                                     --------    --------    --------    --------   --------    --------
NET (LOSS) INCOME                                    $(12,239)   $(12,523)   $ (1,833)   $    338   $(10,036)   $     87
                                                     ========    ========    ========    ========   ========    ========

Weighted average number of shares outstanding:
  Basic                                                 6,744       6,744       6,719       6,719      6,691       6,691
  Diluted                                               6,744       6,744       6,719       6,719      6,691       6,724
                                                     ========    ========    ========    ========   ========    ========

BASIC AND DILUTED PER SHARE OF COMMON STOCK
  (NOTE 1):
  (Loss) income before cumulative effect of
    accounting change                                $  (1.01)   $  (1.05)   $  (0.27)   $   0.05   $  (0.76)   $   0.01
  Cumulative effect of accounting change             $  (0.81)   $  (0.81)   $      -    $      -   $  (0.74)   $      -
                                                     --------    --------    --------    --------   --------    --------
  NET (LOSS) INCOME                                  $  (1.82)   $  (1.86)   $  (0.27)   $   0.05   $  (1.50)   $   0.01
                                                     ========    ========    ========    ========   ========    ========
</TABLE>

                                       65

<PAGE>

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                            FOR THE YEARS ENDED SEPTEMBER 30,
                                                                       2003                    2002                    2001
                                                           2003     Previously     2002     Previously     2001     Previously
                Dollars in thousands                     RESTATED    Reported    RESTATED    Reported    RESTATED    Reported
                --------------------                     --------   ----------   --------   ----------   --------   ----------
<S>                                                      <C>        <C>          <C>        <C>          <C>        <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net (loss) income                                      $(12,239)   $(12,523)   $ (1,833)   $    338    $(10,036)   $     87
  Adjustments to reconcile net (loss) income
    to net cash provided by (used in)
    operating activities:
        Cumulative effect of accounting change              5,451       5,451           -           -       4,943           -
        Loss on impairment of asset                         1,711       1,613           -           -           -           -
        Loss on liquidation of foreign subsidiary             905         905           -           -           -           -
        Distributor development program                     3,969           -       2,589           -       1,033           -
        Depreciation and amortization                         744         744         928         928         913         913
        Provision for loss on sale/disposal of assets           -           -          17          17           -           -
        Provision for loss on receivables                       -           -          59          59           -           -
        Treasury/common shares issued, net of unearned
           compensation and employee benefit stock              -           -          (5)         (5)         83          83
        Unearned compensation                                   3           3           -           -           -           -
        Deferred income taxes                                   -       4,026           -         235       4,036        (230)
  Changes in operating assets and liabilities:
    Decrease in receivables                                   115         115         100         100       1,181       1,181
    Increase in inventories                                  (518)       (518)       (441)       (441)       (532)       (532)
   (Increase) decrease in prepaid expenses                   (105)       (105)       (108)       (108)        227         227
   (Increase) decrease in other current assets                (98)        (98)        309         309         (73)        (73)
    Increase (decrease) in accounts payable                   186         186        (343)       (343)       (258)       (258)
    Increase (decrease) in accrued expenses
      and other liabilities                                   536       1,050         188         379        (943)       (824)
    Increase in distributor development liability             200           -           -           -           -           -
    Decrease in income taxes payable                          (11)          -         (18)        (26)       (431)       (431)
    Other, net                                                105         105         (86)        (86)       (169)       (169)
                                                         --------    --------    --------    --------    --------    --------
            Net cash provided by (used in)
              operating activities                            954         954       1,356       1,356         (26)        (26)
                                                         --------    --------    --------    --------    --------    --------

CASH FLOWS FROM INVESTING ACTIVITIES:
  Capital expenditures                                       (176)       (176)       (866)       (866)     (2,278)     (2,278)
                                                         --------    --------    --------    --------    --------    --------
            Net cash used in investing activities            (176)       (176)       (866)       (866)     (2,278)     (2,278)
                                                         --------    --------    --------    --------    --------    --------

CASH FLOWS FROM FINANCING ACTIVITIES:
  Net (repayments) borrowing under credit facility             (9)         (9)        201         201       1,191       1,191
  Payment of long term debt                                  (302)       (302)       (615)       (615)        (17)        (17)
                                                         --------    --------    --------    --------    --------    --------
            Net cash (used in) provided by
              financing activities                           (311)       (311)       (414)       (414)      1,174       1,174
                                                         --------    --------    --------    --------    --------    --------

Net increase (decrease) in cash and cash equivalents          467         467          76          76      (1,130)     (1,130)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                481         481         405         405       1,535       1,535
                                                         --------    --------    --------    --------    --------    --------
CASH AND CASH EQUIVALENTS, END OF PERIOD                 $    948    $    948    $    481    $    481    $    405    $    405
                                                         ========    ========    ========    ========    ========    ========
</TABLE>

3. PROPERTY, PLANT AND EQUIPMENT

<TABLE>
<CAPTION>
                                     2003     2002
                                    ------   ------
<S>                                 <C>      <C>
Leasehold improvements              $  288   $  288
Machinery and equipment              7,747    7,564
Construction in progress                 -    1,620
                                    ------   ------
                                     8,035    9,472
Accumulated depreciation             5,857    5,162
                                    ------   ------
Net property, plant and equipment   $2,178   $4,310
                                    ======   ======
</TABLE>

Depreciation expense relating to continuing operations for the years ended
September 30, 2003, 2002, and 2001, was $695, $639, and $608, respectively.

                                       66

<PAGE>

During the fourth quarter of fiscal 2003, we performed an analysis on the
potential impairment of certain tooling assets approximating $1,613. We
concluded from our analysis, which was based upon the held and used model that
the tooling assets were fully impaired and accordingly recorded an impairment
charge of $1,613 as of September 30, 2003, as the scrap value for these assets
was determined to be nominal. Additionally $98 of patents and trademarks
relating to these tooling assets were deemed impaired as of September 30, 2003
and accordingly recorded as an addition to the impairment charge as part of our
restatement (refer to Note 2).

4. ACCRUED EXPENSES AND OTHER LIABILITIES

Accrued expenses and other liabilities consist of the following:

<TABLE>
<CAPTION>
                            2003     2002
                           ------   ------
<S>                        <C>      <C>
Distributor fund payable   $1,020   $  630
Accrued compensation          544      579
Other                         835      654
                           ------   ------
                           $2,399   $1,863
                           ======   ======
</TABLE>

The distributor fund payable represents the accumulation of distributor price
overrides ("DPO's") such as those that are paid by promoted distributors to
promoting distributors. The promoted distributors represent individuals who are
recruited as sales associates and subsequently promoted to become distributors
themselves. DPO's are a unit price override charged on top of our standard unit
sales price for which we, HMI, act as a pass through, meaning that we collect
the DPO from the promoted distributor and disburse it to the promoting
distributor upon their request; accordingly these DPO's are not reflected in our
income statement as revenue, but rather are recorded as an accrual when the
receivable is paid

The increase in Accrued Distributor Development Costs and Distributor Fund
Payable is primarily driven by the increased sales volume in the Americas direct
sales network as well as the inception of the Distributor Development (Edge
Program) in the International market during the first quarter of fiscal 2003.

5. DEBT AND CREDIT FACILITY

In June 2001 we terminated our credit facility of $3,500 with Finova Capital and
entered into a $2,000 revolving line of credit with US Bank consisting of loans
against our eligible receivables and inventory. The credit agreement calls for
interest to accrue at the prime rate (4.00% at September 30, 2003). The facility
provided us with an improved interest rate, increased availability and more
favorable eligibility requirements, lower annual fees, and less restrictive
covenants than the Finova arrangement. The credit facility agreement includes
various covenants that include, but are not limited to, restrictions on paying
dividends, limitations on our ability to incur additional indebtedness, and
minimal requirements on tangible net worth, interest coverage ratio and capital
expenditures.

On March 1, 2002, we entered into an additional $1,000 revolving line of credit
with our current lender consisting of loans against our eligible receivables and
inventory. This additional line, which expired on May 31, 2002, carried the same
interest rate and covenants as our existing $2,000 revolving line of credit and
was obtained to assist, if necessary, with the build-up of

                                       67

<PAGE>

inventory associated with the launch of our new product and other strategic
initiatives. In July 2002 our lender approved the extension of the expiration
date of this additional line to January 31, 2003. In addition, we reset the
capital expenditure covenant in anticipation of exceeding the previously
established levels during our fiscal year ending September 30, 2002.

In January 2003 we entered into an amendment to our credit facility agreement
with our current lender. This amendment, which expired January 31, 2004,
increased our revolving line of credit from $2,000 to $3,000 and carried the
same interest rate and similar covenants as the original loan agreement. As of
September 30, 2003, we were not in compliance with our interest coverage ratio
and net worth covenants; however, we obtained a waiver on these covenants which
was effective until the February 20, 2004 amendment of the credit facility. We
were required to maintain an interest coverage ratio of greater than or equal to
5.0 to 1.0 interest to earnings before interest, taxes, depreciation and
amortization ("EBITDA") and a net worth of never less than $7,400, calculated
quarterly and increasing by 50% of net income annually.

On February 20, 2004, an amendment of our $3,000 credit facility agreement was
executed with our lender. The credit facility expired October 15, 2004. The
amended agreement carries the same interest rate and similar covenants as the
previous amended loan agreement, with the exception of the interest coverage
ratio which was amended to exclude non-cash expenses from the 5.0 to 1.0 ratio,
including but not limited to, the impairment of tooling assets and associated
inventory, and the tangible net worth covenant in which the minimum amount was
reset to $2,400.

The cumulative effect of the adjustments on our statement of operations
associated with the restatement of our financial statements was a $12,010
reduction in our net earnings over the period from January 1, 2001 through
September 30, 2003. Such an earnings reduction caused us to be in default of our
$2,400 tangible net worth covenant. In addition we have violated our financial
reporting requirements to the bank as the restatement process has delayed any
subsequent filings of our public statements with the Securities and Exchange
Commission since our first fiscal quarter of 2003. Our credit agreement
covenants require that our statements be filed quarterly with the bank within 45
days of the end of each quarter.

On October 15, 2004, an amendment of our $3,000 credit facility agreement was
executed with our lender. The bank has agreed to extend the maturity date of the
loan until December 31, 2004. In addition the bank provided a waiver for the
aforementioned covenant and financial reporting violations. The amended
agreement carries an interest rate of prime plus one percent and covenants
similar to the previous amended loan agreement, with the exception of the
tangible net worth covenant which was eliminated through the maturity date of
the loan.

As of September 30, 2004, there was $962 borrowed on our $3,000 amended credit
facility.

During the fourth quarter of fiscal 2001 we recorded $588 in obligations
relating to vendor-financed assets. These assets consisted primarily of tools,
molds, and production equipment associated with new product development. These
obligations required monthly payments, including principal and interest, of $67
with the nominal annual interest rates on these leases ranging from 0.0% to
11.5% compounding monthly. The remaining terms of the obligations ranged from 6
to 13 months and are no longer outstanding at September 30, 2003.

                                       68

<PAGE>

During the third and fourth quarters of fiscal 2002 we recorded $290 in
obligations relating to vendor-financed assets. These assets consisted primarily
of tools, molds, and equipment associated with new product development. These
obligations required monthly payments, including interest, of $21 with the
nominal annual interest rates on this debt ranging from 0.0% to 2.0% compounding
monthly. The remaining terms of the obligations ranged from 6 to 12 months and
are no longer outstanding at September 30, 2003.

Long-term debt consists of the following:

<TABLE>
<CAPTION>
                                                   2003     2002
                                                  ------   ------
<S>                                               <C>      <C>
Bank line of credit - see above                   $1,383   $1,392

Vendor-finance obligations                             -      282
bearing interest at 0.00% to 11.50% through
October 2002 adjusting to 2.00% thereafter, due
in monthly installments of $43 (including
interest) through September 2003

Capitalized lease obligations                         33       53
bearing interest at 2.62% to 12.00% due in
monthly installments of $2 (including interest)
through March 2005
                                                  ------   ------
                                                   1,416    1,727
Less amounts due within one year                   1,405    1,694
                                                  ------   ------
                                                  $   11   $   33
                                                  ======   ======
</TABLE>

The principal amount of long-term debt payable in the five years ending
September 30, 2004, through 2008, is $1,405, $11, $-0-, $-0-, and $-0-. The
weighted average interest rate on short-term borrowings at September 30, 2003,
and 2002, was 4.08% and 4.50%, respectively.

6. LONG-TERM COMPENSATION PLAN

We adopted the Health-Mor Inc. 1992 Omnibus Long-Term Compensation Plan in 1992.
The Plan provides for the granting of stock options, stock appreciation rights,
restricted stock awards, phantom stock, and/or performance shares ("Awards") to
our key employees and stock options for our non-employee directors. Options
granted under the Plan expire up to ten years after the date of grant if not
exercised and may be exercisable in whole or in part at the discretion of the
Committee established by the Board of Directors. Shares available for issuance
under the Plan may be authorized and unissued shares or treasury shares. The
maximum number of shares of common stock available for grant of Awards under the
Plan are limited on an annual and cumulative basis as further defined in the
Plan.

Stock options under the Plan generally have exercise prices equal to the fair
market values at dates of grant, otherwise, if the option price is less than the
fair market value at the date of the grant, compensation expense is recorded for
the difference. For restricted or phantom stock, we record compensation expense
as the excess of the quoted market price of the unrestricted share of stock at
the award date over the purchase price, if any.

                                       69
<PAGE>

During fiscal 2000 the Board of Directors granted 415,000 incentive stock
options (215,000 at $1.0625 per share and 200,000 at $1.25 per share) and 10,000
restricted shares to certain of our key employees in accordance with the Plan.
Vesting immediately were 215,000 options. The remaining options, 200,000
options, vest over a 48-month period with the vesting subject to acceleration
clauses based upon our company's stock price. No compensation expense was
recorded related to the stock options during fiscal 2000 as the exercise price
was equal to the fair market value at the grant date.

During fiscal 2001 the Board of Directors granted 560,000 incentive stock
options (410,000 at $1.15 per share and 150,000 at $1.30 per share) to certain
of our key employees in accordance with the Plan. All 560,000 options vest over
a three-year period. No compensation expense was recorded related to the stock
options as the exercise price was equal to the fair market value at the grant
date.

No options or awards were granted during fiscal 2003 or 2002 to key employees.

There were -0-, -0-, and -0- shares issued and -0-, -0-, and -0- non-vested
shares forfeited pursuant to the Plan in fiscal 2003, 2002, and 2001,
respectively. Unamortized deferred compensation amounted to $-0-, $3, and $8 at
September 30, 2003, 2002, and 2001, respectively. Total compensation expense, in
conjunction with the Plan was $3, $5, and $33 in fiscal 2003, 2002, and 2001,
respectively.

The fair value for all options granted in 2003, 2002, and 2001 were estimated at
the date of grant using a Black-Scholes option pricing model with the following
weighted-average assumptions:

<TABLE>
<CAPTION>
                                               2003                2002              2001
                                              OPTIONS             OPTIONS           OPTIONS
                                              -------             -------           -------
<S>                                           <C>                 <C>           <C>
Risk free interest rate                          3.8%                4.5%           3.9% to 4.9%
Expected life of option                       4 yrs.              4 yrs.       3 yrs. to 4 yrs.
Expected dividend yield of stock                 0.0%                0.0%                   0.0%
Expected volatility of stock                   108.8%              102.2%        95.3% to 102.5%
</TABLE>

A summary of our stock option activity and related information for the years
ended September 30, 2003, 2002, and 2001, is shown in the following table.

                                       70
<PAGE>

<TABLE>
<CAPTION>
                                                    Shares subject              Weighted
                                                      to option               average option
                                                    (in thousands)           price per share
                                                    --------------           ---------------
<S>                                                 <C>                      <C>
September 30, 2000, Outstanding                          1,061                   $ 2.89
    Granted                                                596                     1.18
    Canceled                                               (54)                    5.14
                                                         -----
September 30, 2001                                       1,603                     2.18
    Granted                                                 46                     1.08
    Canceled                                              (537)                    2.84
                                                         -----
September 30, 2002                                       1,112                     1.81
    Granted                                                 24                     1.00
    Canceled                                               (12)                    3.63
                                                         -----
September 30, 2003, Outstanding                          1,124                   $ 1.77
                                                         =====
</TABLE>

Options exercisable and shares available for future grant on September 30 (in
thousands except per share data):

<TABLE>
<CAPTION>
                                                         2003              2002          2001
                                                         ----              ----          ----
<S>                                                      <C>               <C>           <C>
Options exercisable                                        898               704           784
Weighted-average option price per share
  of options exercisable                                 $1.92             $2.16         $3.16
Weighted-average fair value of options
  granted during the year                                $0.49             $0.47         $0.77
</TABLE>

The ranges of exercise prices and the remaining contractual life of options as
of September 30, 2003, were:

<TABLE>
<S>                                                      <C>               <C>
Range of exercise prices                                 $1-$2             $2-$8
Options outstanding:
  Outstanding as of September 30, 2003 (in thousands)    1,024               100
  Weighted-average remaining contractual life             2.55              2.72
  Weighted-average exercise price                        $1.21             $7.50
Options exercisable:
  Outstanding as of September 30, 2003 (in thousands)      798               100
  Weighted-average remaining contractual life             2.31              2.72
  Weighted-average exercise price                        $1.22             $7.50
</TABLE>

                                       71
<PAGE>

7. INCOME TAXES

The provision for income taxes relating to continuing operations consists of the
following:

<TABLE>
<CAPTION>
                               2003       2002      2001
                               ----       ----      ----
<S>                          <C>        <C>       <C>
Current:
  Federal and state          $   18     $    38   $   (314)
  Foreign                         -           -          -
                             ------     -------   --------
                                 18          38       (314)
Deferred expense                  -           -      3,986
                             ------     -------   --------
                             $   18     $    38   $  3,672
                             ======     =======   ========
</TABLE>

A reconciliation of the provision for income taxes at the federal statutory rate
to that included in the Consolidated Statements of Operation related to earnings
from continuing operations is as follows:

<TABLE>
<CAPTION>
                                                              2003        2002          2001
                                                              ----        ----          ----
<S>                                                         <C>          <C>          <C>
Tax at federal statutory rate of 34%                        $ (2,302)    $  (611)     $  (2,163)
Increases (reductions) in taxes resulting from:
    Tax expense relating to Internal Revenue Service
      audits and settlements                                       -           -           (445)
    Cumulative translation adjustment write-off with
       no tax benefit                                              -           -              -
     Amortization of cost in excess of net assets of
       acquired businesses                                         -           -             84
    Valuation allowances against deferred tax assets           2,302         611          6,118
    Other - net                                                   18          38             78
                                                            --------     -------      ---------
                                                            $     18     $    38      $   3,672
                                                            ========     =======      =========
</TABLE>

The decrease in the effective tax rate from fiscal 2002 to fiscal 2003 is the
result of the decrease in pre-tax earnings in fiscal 2003. As a result of the
full valuation allowance on all deferred tax assets, an insignificant state
provision constituted the entire tax provision for both fiscal 2003 and 2002.

The components of deferred tax assets and liabilities are comprised of the
following at September 30,

<TABLE>
<CAPTION>
                                                         2003         2002
                                                         ----         ----
<S>                                                   <C>          <C>
Gross deferred tax assets:
    Operating loss carryforwards                      $    4,434   $    4,174
    Receivable and inventory reserves                        859          230
    Accrued compensation                                     161           85
    Distributor Development Accruals                       4,989        3,384
    Other                                                    126          127
                                                      ----------   ----------
                                                          10,569        8,000
                                                      ----------   ----------
Gross deferred tax liabilities:  Depreciation                106           91
Valuation allowances on net deferred tax assets           10,463        7,909
                                                      ----------   ----------
Net deferred tax asset                                $        -   $        -
                                                      ==========   ==========
</TABLE>

                                       72
<PAGE>

The valuation allowance increased from $7,932 to $10,375 due to an increase in
deferred tax assets for which a full allowance had previously been established.
Periodically and when indicators suggest, we assess the realizability of our
domestic deferred tax assets, giving consideration to our actual historical
results supplemented by future expected results. SFAS No. 109, "Accounting for
Income Taxes" considers a historic pattern of losses as significant negative
evidence that tax assets will not be realized and this consideration is not
outweighed by any prospective view of management that sufficient taxable income
will ultimately be available to realize the tax benefits. Given the history of
losses and the results in 2003, we concluded that under the "more likely than
not" criteria of SFAS No. 109 a full valuation allowance is still required
against the net U.S. deferred tax assets at September 30, 2003. The valuation
allowance will be subject to periodic review and can be partially or totally
reversed either when income is generated that utilizes the loss or when
sufficient positive evidence emerges (i.e. A sustained positive trend of U.S.
income for financial accounting purposes.) Our income tax expense recorded in
the future will be reduced to the extent of offsetting decreases in our
valuation allowance.

Net operating loss carryforwards of approximately $12,075 for tax are available
to offset future taxable income. The carryforwards will expire in 2005 through
2020.

8. EMPLOYEE BENEFIT PLANS

We have a qualified profit sharing plan that covers substantially all employees.
The overall contribution to our plan and the allocation method is at the
discretion of our Board of Directors. The allocation to the participants is
based on a fixed amount per participant, a percentage of eligible wages, or a
combination of a fixed amount and a percentage of eligible wages. There was no
profit sharing expense for the plan for the years ended September 30, 2003,
2002, and 2001.

In addition, we offer a 401(K) savings plan to all of our employees. We match
50% of the first 6% of the employee's contribution to the plan up to a maximum
of 6% of compensation. Employees may currently contribute up to 50% of
compensation to the plan. Amounts expensed for the years ended September 30,
2003, 2002, and 2001, were $134, $91, and $110, respectively, of which the
company match in fiscal 2002 was reduced in the second quarter as the match was
funded by forfeitures of prior matches from unvested former
participant/employees.

9. COMMITMENTS AND CONTINGENCIES, GUARANTEES AND LEASES

We are obligated under certain operating leases for facilities and equipment
which expire on various dates through 2008. The minimum annual lease payments
under these agreements, including renewal options, if exercised, are $859, $267,
$43, $4, and $3 for the years ending September 30, 2004, 2005, 2006, 2007, and
2008, respectively. Rent expense was $956, $1,035, and $1,104 for the years
ended September 30, 2003, 2002, and 2001, respectively.

LITIGATION

Bliss Technologies, Inc. ("Bliss"), the company formed from the 1998 sale of the
subsidiary of HMI, filed for bankruptcy in January 2000 in the United States
Bankruptcy Court, Eastern District of Michigan. In a separate action filed in
2002, the Official Committee of Unsecured Creditors of Bliss alleges a
fraudulent conveyance claim against us asserting that the sale of Bliss in 1998
was a fraudulent transfer insofar as we received more for Bliss than it was
worth and that Bliss was insolvent from its inception. Former directors of
Bliss, Mark Kirk and Carl Young, are also named as defendants in the action.
Claims pending against them allege that in their capacity

                                       73
<PAGE>

as Bliss directors they breached fiduciary duties to Bliss creditors. The
complaint seeks damages in an unspecified sum. The claims against us and the
claims against Mr. Kirk and Mr. Young are being vigorously defended. We believe
that we will resolve this matter in a manner that will not have a material
adverse effect on our consolidated financial position, results of operations, or
cash flows.

CONET Industries, Inc., Royal Queen Club International Limited, Chang-whan Chang
and Young-so Song ("Plaintiffs") filed a complaint against HMI on or about
February 18, 2001, in the Seoul, Korea District Court. It was served by
Registered Mail upon HMI at our corporate offices in Seven Hills, Ohio, on or
around April 10, 2002. The complaint was filed as a result of lawsuits by us
against Mr. Song, a former HMI Distributor in Korea, and Royal Queen Club
concerning Mr. Song's CYVAC product. In our lawsuits, we sought and were granted
preliminary injunctions against Plaintiffs that prohibited Plaintiffs from
manufacturing and selling the old model CYVAC for 311 days and the new model
CYVAC for 209 days until the Seoul High Court issued a declaration of suspension
of the injunctions. Despite the fact that Plaintiffs had been enjoined by the
Courts, Plaintiffs allege that we should compensate them for actual damages for
sale discontinuance, supplemental managerial costs, and new mold fabrication
costs due to the interruption in the manufacturing and marketing of each product
during that period. Plaintiffs also claim that we tortuously interfered with
Plaintiffs' business advantages, caused irreparable harm to Plaintiffs' normal
business activities, and damaged Plaintiffs' reputation and standing. Chang-whan
Chang and Young-so Song allege that they have been critically damaged personally
due to the accusations, improper provisional seizure and criminal allegations
alleged by us, which they assert resulted in disturbance to business,
reputation, and credit. All matters are pending. The Plaintiffs originally
alleged damages in excess of U.S. $21,894. After several hearings the court
ruled in our favor and against the Plaintiffs on all counts. We have been
notified that the Plaintiffs have appealed this decision in accordance with
Korean law. We believe that we will resolve this matter in a manner that will
not have a material adverse effect on our consolidated financial position,
results of operations, or cash flows.

Claims arising in the ordinary course of business are also pending against us.
Although these are in various stages of the litigation process, we believe that
none of these matters will have a material adverse effect on our consolidated
financial position, results of operations, or cash flows. Included in the
accompanying Consolidated Balance Sheets at September 30, 2003, and 2002, were
accruals of $15 and $15, respectively, relating to various claims.

                                       74
<PAGE>

10. QUARTERLY FINANCIAL DATA (UNAUDITED)

The below quarterly financial data has been restated to reflect the adoption of
the Emerging Issues Task Force issued EITF 01-9, Accounting for Consideration
Given by a Vendor to a Customer (Including a Reseller of the Vendors Products).
See Note 2 for further information.

<TABLE>
<CAPTION>
                                                                    2003, Restated
                                            -----------------------------------------------------------
                                           December 31,    March 31,      June 30,        September 30,
                                           ------------   ----------     ---------        -------------
<S>                                        <C>            <C>            <C>              <C>
Product revenues                           $    8,826     $    9,295     $    8,873       $     7,545
Distributor development program            $     (819)    $   (1,409)    $   (1,072)      $    (1,069)
Net product revenues                       $    8,007     $    7,886     $    7,801       $     6,476
Gross margin, exclusive of distributor
   development program                     $    3,584     $    3,703     $    3,617       $     2,610
Loss before cumulative effect of
  accounting change                        $     (549)    $   (2,122)    $     (785)      $    (3,332)
Cumulative effect of accounting
  change                                   $    5,451     $        -     $        -       $         -
Net loss                                   $   (6,000)    $   (2,122)    $     (785)      $    (3,332)
Basic and diluted per share of
common stock:
   Loss before cumulative effect of
     accounting change                     $    (0.08)    $    (0.31)    $    (0.12)      $     (0.50)
  Cumulative effect of accounting
    change                                 $    (0.81)    $        -     $        -       $         -
  Net loss                                 $    (0.89)    $    (0.31)    $    (0.12)      $     (0.50)
</TABLE>

<TABLE>
<CAPTION>
                                                               2003, Previously Reported
                                           ----------------------------------------------------------
                                           December 31,     March 31,      June 30,      September 30,
                                           ------------   -----------    ----------      -------------
<S>                                        <C>            <C>            <C>             <C>
Product revenues                           $    8,826     $    9,295     $     8,873      $     7,545
Distributor development program            $        -     $        -     $         -      $         -
Net product revenues                       $    8,826     $    9,295     $     8,873      $     7,545
Gross margin, exclusive of distributor
   development program                     $    3,584     $    3,703     $     3,617      $     2,610
Income (loss) before cumulative
  effect of accounting change              $       88     $     (893)    $        74      $    (6,341)
Cumulative effect of accounting
  change                                   $    5,451     $        -     $         -      $         -
Net (loss) income                          $   (5,363)    $     (893)    $        74      $    (6,341)

Basic and diluted per share of
common stock:
  Income (loss) before cumulative
    effect of accounting change            $     0.01     $    (0.13)    $      0.01      $     (0.94)
  Cumulative effect of accounting
    change                                 $    (0.81)    $        -     $         -      $         -
  Net (loss) income                        $    (0.80)    $    (0.13)    $      0.01      $     (0.94)
</TABLE>

As of October 1, 2002, a full impairment of the goodwill recorded on HMI's books
was recorded through a non-cash charge of $5,451. Such charge is non-operational
in nature and is reflected as

                                       75
<PAGE>

a Cumulative Effect of Accounting Change in the accompanying Consolidated
Statements of Operations for the year ended September 30, 2003. See Note 1 for
further information.

During the second quarter of fiscal 2003 we recorded a write-off of $905 for
cumulative translation adjustments associated with the liquidation of our
Canadian subsidiary.

During the fourth quarter of fiscal 2003, we performed an analysis on the
potential impairment of certain tooling assets, and related patents and
trademarks, approximating $1,711. We concluded from our analysis, which was
based upon the held and used model that the tooling assets were fully impaired
and accordingly recorded an impairment charge of $1,711 as of September 30,
2003, as the scrap value for these assets was determined to be nominal.

<TABLE>
<CAPTION>
                                                            2002, Restated
                                          ------------------------------------------------------
                                          December 31,   March 31,     June 30,    September 30,
                                          ------------   ---------     --------    -------------
<S>                                       <C>            <C>           <C>         <C>
Product revenues                           $  9,371      $ 10,598      $  9,307    $    7,837
Distributor development program            $   (301)     $   (556)     $   (714)   $   (1,018)
Net product revenues                       $  9,070      $ 10,042      $  8,593    $    6,819
Gross margin, exclusive of distributor
   development program                     $  4,344      $  4,655      $  3,862    $    2,954
Net income (loss)                          $     66      $   (504)     $   (410)   $     (985)
Basic and diluted income per share
  of common stock                          $   0.01      $  (0.08)     $  (0.06)   $    (0.14)
</TABLE>

<TABLE>
<CAPTION>
                                                            2002, Previously Reported
                                          -------------------------------------------------------
                                          December 31,   March 31,     June 30,      September 30,
                                          ------------   ---------     --------      -------------
<S>                                       <C>            <C>           <C>           <C>
Product revenues                          $   9,371      $ 10,598      $  9,307      $   7,837
Distributor development program           $       -      $      -      $      -      $       -
Net product revenues                      $   9,371      $ 10,598      $  9,307      $   7,837
Gross margin, exclusive of distributor
   development program                    $   4,344      $  4,655      $  3,862      $   2,954
Net income (loss)                         $     184      $     (9)     $    156      $       7
Basic and diluted income per share
  of common stock                         $    0.03      $      -      $   0.02      $       -

</TABLE>

                                       76
<PAGE>

<TABLE>
<CAPTION>
                                                            2001, Restated
                                          ---------------------------------------------------
                                          December 31,   March 31,   June 30,   September 30,
                                          ------------   ---------   --------   -------------
<S>                                       <C>            <C>         <C>        <C>
Product revenues                          $    7,446     $   8,956   $   8,980  $      7,154
Distributor development program                    -     $    (292)  $      50  $       (767)
Net product revenues                      $    7,446     $   8,664   $   9,030  $      6,387
Gross margin, exclusive of distributor
   development program                    $    3,097     $   3,780   $   3,556  $      2,733
Income (loss) before cumulative
  effect of accounting change             $     (117)    $  (3,974)  $      88  $     (1,090)
Cumulative effect of accounting
  change                                  $        -     $   4,943   $       -  $          -
Net (loss) income                         $     (117)    $  (8,917)  $      88  $     (1,090)

Basic and diluted per share of
common stock:
  Income (loss) before cumulative
    effect of accounting change           $    (0.02)   $    (0.59)  $    0.01  $      (0.16)
  Cumulative effect of accounting
    change                                $        -    $    (0.74)  $       -  $          -
  Net (loss) income                       $    (0.02)   $    (1.33)  $    0.01  $      (0.16)
</TABLE>

<TABLE>
<CAPTION>
                                                           2001, Previously Reported
                                          -----------------------------------------------------
                                          December 31,   March 31,    June 30,    September 30,
                                          ------------  ----------   ---------    -------------
<S>                                       <C>           <C>          <C>          <C>
Product revenues                          $    7,442    $    9,032   $   9,033    $    7,029
Distributor development program           $        -    $        -   $       -    $        -
Net product revenues                      $    7,442    $    9,032   $   9,033    $    7,029
Gross margin, exclusive of distributor
   development program                    $    3,097    $    3,780   $   3,556    $    2,733
Income (loss) before cumulative
  effect of accounting change             $     (117)   $      392   $      49    $     (237)
Cumulative effect of accounting
  change                                  $        -    $        -   $       -    $        -
Net (loss) income                         $     (117)   $      392   $      49    $     (237)

Basic and diluted per share of
common stock:
  Income (loss) before cumulative
    effect of accounting change           $    (0.02)   $     0.06   $    0.01    $    (0.04)
  Cumulative effect of accounting
    change                                $        -    $        -   $       -    $        -
  Net (loss) income                       $    (0.02)   $     0.06   $    0.01    $    (0.04)
</TABLE>

In February 2002, the Emerging Issues Task Force issued EITF 01-9, Accounting
for Consideration Given by a Vendor to a Customer (Including a Reseller of the
Vendors Products). The pronouncement requires that cash consideration, including
sales incentives, given by a vendor to a customer be presumed to be a reduction
of the selling prices of the vendor's products or services and, therefore,
characterized as a reduction of revenue when recognized in the vendor's income
statement. We adopted this pronouncement in the second quarter of fiscal 2001
and accordingly recorded a $4,943 cumulative effect of accounting change related
to our Distributor Development Programs.

                                       77
<PAGE>

In the second quarter of fiscal 2001 we concluded that a full valuation
allowance for our deferred tax assets was required. Accordingly, we have
recorded a non-cash charge in the second quarter of fiscal 2001 of $6,647 to
increase our valuation allowance for our deferred tax assets.

11. Related Party Transactions

James R. Malone, our former Chairman and Chief Executive Officer, Darrell
Weeter, President of the Company's Americas division, and John Glomb, a Regional
Vice President of the Company, each own 31.67% of the membership interests in a
Company called Vision Capital Logistics, LLC ("VCL"). VCL, a brokerage service
provider for sourcing consumer credit, assists its clients in securing third
party financing for its clients' customers to purchase products, including
products manufactured by us and sold by our Distributors. VCL charges additional
fees to our Distributors for these financing services. VCL's client list also
includes a number of other "direct sales" companies, including other floor care
companies. In securing such financing, VCL may guarantee the legal compliance
obligations (but not any payment obligations) of our Distributors to a third
party lender. The third party lender pays VCL a participation fee for such
financing services, a part of which (twelve percent (12%)) VCL pays to us.
During the fiscal years ended September 30, 2003, 2002 and 2001, VCL paid us
$24, $17 and $10, respectively in connection with such financing services.
Additionally, in certain cases a Distributor may not be able to complete a sale
because of the substandard credit status of the retail customer. In such cases
VCL may provide the Distributor with financing for this sale. We entered into an
arrangement with VCL known as a Swap Program under which VCL will purchase the
contract of the retail customer from the Distributor and arrange for the
financing of the contract at a significant discount. To replace the product sold
by our Distributor and for which the Distributor received only a portion of the
consumer sale price, VCL will purchase a replacement product from us at the same
price paid by our Master Distributors and we will ship it to the Distributor to
replace the product the Distributor just sold. During the fiscal years ended
September 30, 2003, 2002 and 2001, VCL purchased an aggregate of $35, $19 and
$19, respectively of our products under the Swap Program. Under the terms of our
credit facility in place from time to time, we were prohibited from engaging in
certain of the financing activities provided by VCL.

From June 2000 until January 2003 we sublet to VCL a portion of our office space
in Naples, Florida. During the fiscal years ended September 30, 2003, 2002, and
2001 VCL paid us $8, $24 and $13, respectively, in rent for such space, which
amount was based upon an allocation of our total monthly lease payments to the
amount of space utilized by VCL. In February, 2003 a new lease was entered into
for office space with VCL as the tenant. We began subleasing space from VCL for
$3 per month, which amount was based upon an allocation of VCL's total monthly
lease payments to the amount of space that we utilized. In the fiscal year ended
September 30, 2003 we paid VCL a total of $21 in lease payments. The sublease
was terminated in February, 2004.

We have had a long standing relationship with Ametek Inc. by which we have
purchased motors for our products. James R. Malone, our former Chairman and
Chief Executive Officer, is a director of Ametek, Inc. During the fiscal years
ended September 30, 2003, 2002 and 2001 our purchases from Ametek were $1,973,
$1,704 and $1,633, respectively. We believe the terms of these purchases were as
favorable to us as those which could have been obtained from unrelated parties.

                                       78
<PAGE>

Darrell Weeter, has served for many years as President of FVS, Inc. a
distributor of products manufactured by us and which is owned by Mr. Weeter and
his wife. For the fiscal years ended September 30, 2003, 2002 and 2001, FVS,
Inc. purchased, at Master Distributor pricing, a total of $78, $100 and $107
respectively in products from us. Mr. Weeter also received amounts due to him
under our Career Development Program of $132, $126 and $165 for the fiscal years
ended September 30, 2003, 2002 and 2001, respectively. The amounts paid were
Distributor paid overrides ("DPO's") collected by us from Distributors that were
brought into the business by Mr. Weeter. DPO's are a unit price override charged
on top of our standard unit sales price for which we, HMI, act as a pass
through, meaning that we collect the DPO from the promoted distributor and
disburse it to the promoting distributor upon their request; accordingly these
DPO's are not reflected in our income statement as revenue. The total DPO's
still owed to Mr. Weeter were $3 and $12 as of September 30, 2003, and 2002,
respectively. This payable to Mr. Weeter was recorded on the other accrued
expense and liabilities line item of our Consolidated Balance Sheets as of
September 30, 2003, and 2002.

Derek Hookom, became an employee of HMI on January 1, 2003. Mr. Hookom is also a
distributor of products manufactured by HMI. For the fiscal years ended
September 30, 2003, 2002 and 2001, Summit Air purchased, at Master Distributor
pricing, a total of $254, $604 and $1,133 respectively in products from us.
Under the terms of Mr. Hookom's employment agreement, Mr. Hookom remains
eligible to receive the Millionaires Club Award associated with the Edge Success
Program through sales generated by his personally developed sales network. The
Company incurred $173 of distributor development program revenue reduction
associated with Mr. Hookom's participation in the Program for the fiscal year
ended September 30, 2003. Mr. Hookom also received DPO's due to him under our
Career Development Program of $102, $58 and $1, for the fiscal years ended
September 30, 2003, 2002 and 2001, respectively. The amounts paid were
Distributor paid overrides collected by us from Distributors that were brought
into the business by Mr. Hookom. The total DPO's still owed to Mr. Hookom was
$38 as of September 30, 2003. This payable to Mr. Hookom was recorded on the
other accrued expense and liabilities line item of our Consolidated Condensed
Balance Sheets as of September 30, 2003.

The above amounts are not considered to be significant to the financial
statements as a whole and therefore have not separately identified in the
Consolidated Condensed Balance Sheets, Statements of Operations or Statements of
Cash Flow.

12. SUBSEQUENT EVENTS

On February 2, 2004, the Board of Directors accepted the resignation and
retirement of James R. Malone, the Chairman and Chief Executive Officer.
Consequently, compensation expense of approximately $200 was recorded in the
second quarter of fiscal 2004 in accordance with Mr. Malone's provisions of his
resignation.

Our credit facility agreement includes, but is not limited to, various covenants
that limit our ability to incur additional indebtedness, restrict paying
dividends, maintain a minimum net worth, and limit the ability for capital
expenditures. As of September 30, 2003, we were not in compliance with our
interest coverage ratio and net worth covenants; however, we obtained a waiver
on this covenant which was effective until the February 20, 2004 amendment of
the credit

                                       79
<PAGE>

facility. We were required to maintain an interest coverage ratio of greater
than or equal to 5.0 to 1.0 interest to earnings before interest, taxes,
depreciation and amortization ("EBITDA") and a net worth of never less than
$7,400, calculated quarterly and increasing by 50% of net income annually.

On February 20, 2004, an amendment of our $3,000 credit facility agreement was
executed with our lender. The credit facility expired October 15, 2004. The
amended agreement carries the same interest rate and similar covenants as the
previous amended loan agreement, with the exception of the interest coverage
ratio which was amended to exclude non-cash expenses from the 5.0 to 1.0 ratio,
including but not limited to, the impairment of tooling assets and associated
inventory, and the tangible net worth covenant in which the minimum amount was
reset to $2,400.

The cumulative effect of the adjustments on our statement of operations
associated with the restatement of our financial statements was a $12,010
reduction in our net earnings over the period from January 1, 2001 through
September 30, 2003. Such an earnings reduction caused us to be in default of our
$2,400 tangible net worth covenant. In addition we have violated our financial
reporting requirements to the bank as the restatement process has delayed any
subsequent filings of our public statements with the Securities and Exchange
Commission since our first fiscal quarter of 2003. Our credit agreement
covenants require that our statements be filed quarterly with the bank within 45
days of the end of each quarter.

On October 15, 2004, an amendment of our $3,000 credit facility agreement was
executed with our lender. The bank has agreed to extend the maturity date of the
loan until December 31, 2004. In addition the bank provided a waiver for the
aforementioned covenant and financial reporting violations. The amended
agreement carries an interest rate of prime plus one percent and covenants
similar to the previous amended loan agreement, with the exception of the
tangible net worth covenant which was eliminated through the maturity date of
the loan.

                                       80
<PAGE>

           REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON
                          FINANCIAL STATEMENT SCHEDULE

To the Board of Directors and Stockholders of HMI Industries Inc.

Our audits of the consolidated financial statements referred to in our report
dated February 13, 2004, except for Note 2, Note 5, and Note 12, as to which the
date is October 20, 2004, appearing in the 2003 Annual Report to Shareholders of
HMI Industries, Inc. (which report and consolidated financial statements are
incorporated by reference in this Annual Report on Form 10-K/A) also included an
audit of the financial statement schedule listed in Item 15(a)(2) of this Form
10-K. In our opinion, this financial statement schedule presents fairly, in all
material respects, the information set forth therein when read in conjunction
with the related consolidated financial statements.

/s/ PricewaterhouseCoopers LLP
------------------------------
Cleveland, Ohio
February 13, 2004 (except for Note 2, Note 5, and Note 12, as to which the date
is October 20, 2004)

                                       81
<PAGE>

                               HMI INDUSTRIES INC.
                                   SCHEDULE II
                 VALUATION AND QUALIFYING ACCOUNTS AND RESERVES

Dollars in thousands

<TABLE>
<CAPTION>
                                                    Balance at      Additions                   Balance at
                                                   Beginning of     Charged to                    End of
               Description                           Period      Costs and Expense  Deductions    Period
               -----------                           ------      -----------------  ----------    ------
<S>                                                <C>           <C>                <C>         <C>
Valuation account for accounts receivable:
   Year ended September 30, 2003                     $   482        $       -         $  288     $    194
   Year ended September 30, 2002                     $   464        $      59         $   41     $    482
   Year ended September 30, 2001                     $   507        $       -         $   43     $    464

Valuation account for inventory:
   Year ended September 30, 2003                     $   109        $     177         $  175     $    111
   Year ended September 30, 2002                     $   199        $      56         $  146     $    109
   Year ended September 30, 2001                     $   235        $      90         $  126     $    199

Valuation for deferred tax asset:
   Year ended September 30, 2003                     $ 7,909        $   2,554         $    -     $ 10,463
   Year ended September 30, 2002                     $ 7,496        $     763         $  350     $  7,909
   Year ended September 30, 2001                     $   849        $   6,647         $    -     $  7,496
</TABLE>

                                       82