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UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

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Form 10-K

FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

(Mark One)

|/x/ | Annual Report Pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934
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For the fiscal year ended June 30, 2001

|/ / | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
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For the transition period from  to

Commission file number: 33-80701

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AAF-MCQUAY INC.(Exact name of the Registrant as specified in its charter)

Delaware(State or other Jurisdiction of Incorporation or Organization)

41-0404230(I.R.S. Employer Identification No.)10300 Ormsby Park Place, Suite 600
Louisville, Kentucky(Address of principal executive offices)

40223(Zip Code)


Registrant's telephone number, including area code(502) 637-0011

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

None

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

None

Indicate
by checkmark whether the registrant: (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes /x/  No / /

Indicate
by check mark 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
the 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.Not Applicable

The
aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant at June 30, 2001 was $-0-.

The
number of shares outstanding of the registrant's only class of common stock as of September 26, 2001 (latest practicable date) was 2,497.

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Index    AAF-MCQUAY INC. AND SUBSIDIARIES

|         |  |                                                                                       |  | Page
|-------- |  | ------------------------------------------------------------------------------------- |  | ----
|Part I   |  |                                                                                       |  |     
|Item 1   |  | Business                                                                              |  | 3   
|Item 2   |  | Properties                                                                            |  | 11  
|Item 3   |  | Legal Proceedings                                                                     |  | 12  
|Item 4   |  | Submission of Matters to a Vote of Securities Holders                                 |  | 13  
|Part II  |  |                                                                                       |  |     
|Item 5   |  | Market for Registrant's Common Stock and Related Stockholder Matters                  |  | 13  
|Item 6   |  | Selected Financial Data                                                               |  | 14  
|Item 7   |  | Management's Discussion and Analysis of Financial Condition and Results of Operations |  | 15  
|Item 7a  |  | Quantitative and Qualitative Disclosures about Market Risk                            |  | 21  
|Item 8   |  | Financial Statements and Supplemental Data                                            |  | 22  
|Item 9   |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure  |  | 50  
|Part III |  |                                                                                       |  |     
|Item 10  |  | Directors and Executive Officers of the Registrant                                    |  | 51  
|Item 11  |  | Executive Compensation                                                                |  | 53  
|Item 12  |  | Security Ownership of Certain Beneficial Owners and Management                        |  | 55  
|Item 13  |  | Certain Relationships and Related Transactions                                        |  | 56  
|Part IV  |  |                                                                                       |  |     
|Item 14  |  | Exhibits, Financial Statement Schedules and Reports on Form 8-K                       |  | 58  

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Part I

Item 1. Business

General

AAF-McQuay Inc. (the "Company"), a Delaware corporation, is a leading worldwide manufacturer and marketer of commercial air conditioning and
air filtration products and systems primarily for commercial, institutional and industrial customers. The Company believes that it is the leading global manufacturer of air filtration products for
non-vehicular applications and is a major participant in the global commercial heating, ventilation, air conditioning and refrigeration ("HVAC&R") market. The Company maintains production
facilities in nine countries and its products are sold in over 80 countries. The Company believes that its geographic and product diversification makes it less susceptible to an economic downturn in
any particular market or region.

In
1994, O.Y.L. Industries Berhad ("OYL"), a member of the Hong Leong Group Malaysia ("Hong Leong"), one of Malaysia's leading manufacturers and exporters of commercial and industrial
air conditioners, refrigerators, freezers and electrical components, purchased all the outstanding stock of the Company for approximately $420 million, including the assumption of debt (the
"OYL Acquisition"). As part of the funding, OYL made a cash investment of $170 million, applied both to purchase the prior owner's interest and to restructure the Company's debt. OYL is a
subsidiary of Hume Industries Malaysia Berhad ("Hume"). Hume, like OYL, is a publicly traded Malaysian company controlled by Hong Leong. Mr. Quek Leng Chan is Hong Leong's controlling
shareholder.

The
Company believes its affiliation with Hong Leong, which has a significant Asian presence, substantially improves the Company's financial and operating flexibility and access to
Asian markets. The Company has also expanded into other new markets outside Asia, including Latin America. In addition, the Company seeks to expand its product lines through research and development
and seeks to pursue strategic technology joint ventures and acquisitions.

During
2001, the Company conducted business in two principal segments: Commercial Air Conditioning & Refrigeration and Filtration Products.

Commercial Air Conditioning and Refrigeration

The Company, through the Commercial Air Conditioning and Refrigeration segment, is a worldwide leader in the design, manufacture, sale and service of HVAC&R
equipment principally for the commercial, industrial and institutional markets. Products include chillers, applied air handling systems, applied terminal systems, industrial refrigerators, service and
parts. In the United States, the Company believes that its share of the commercial air conditioning market is approximately 10%. The Company's products are sold primarily under the widely recognized
McQuay® brand name and services are marketed under the McQuayServiceSM name. This equipment has been installed in many prominent facilities around the world, including the
GTE Headquarters in Dallas, Texas, Motorola production facilities in the United Kingdom and Singapore, Emirates Tower, U.A.E., the Jumerirah Beach Hotel, U.A.E., Kodak facilities in Ontario, Philips
Semiconductor facilities in China, Taiwan and Singapore and the Jai Lie Building in Wuhan, China. The Company's broad range of standard and custom products and services fulfill the HVAC&R requirements
of most building types and sizes and offer multiple solutions to a variety of HVAC&R needs. The Company markets its commercial HVAC&R equipment principally to building contractors, architects,
consulting engineers, building developers and building owners. In addition, the Company manufactures, sells, and services industrial refrigeration equipment under the J&E Hall brand names, including
J&E Hall, Hallmark®, and Thermotank®. Principal customers for refrigeration products are in the food and beverage, chemical and naval and maritime industries.
Three of the Company's facilities used to produce its air conditioning and

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refrigeration products have earned ISO 9001 certification and four facilities have earned ISO 9002 certification.

The
Company's Commercial Air Conditioning and Refrigeration products are divided among the following business units: (i) chiller products, (ii) applied air handling
systems, (iii) applied terminal systems, and (iv) industrial refrigeration.

Chiller Products.The Company's chiller products include centrifugal, screw, scroll and reciprocating chillers,
condensing units and air-cooled condensers, all of which frequently contain state of the art control systems. These products are normally engineered and assembled to meet specific design
criteria for a wide range of commercial, institutional and industrial applications. Typical applications include large square footage buildings which require integrated HVAC&R systems, served by
chillers ranging in capacity from 10 to over 2,300 tons (the cooling capacity of air conditioning units is measured in tons; one ton being equivalent to 12,000 Btu/h and generally adequate to air
condition approximately 350 to 500 square feet of space). The Company is also the only HVAC&R manufacturer to offer a broad line of dual compressor centrifugal chillers, which offer improved energy
efficiency because of their unique
part-load capability. The dual compressor centrifugal chiller provides the Company with additional competitive advantages by virtue of its small footprint, built-in redundancy,
and its utilization of HFC-134a, a non-chloroflorocarbon refrigerant.

Under
the trade name McQuayServiceSM, the Company services both its own and its competitors' products and systems and provides start-up assistance, warranty
support, full after market service, and chiller retrofit services. The Company's service operations are conducted primarily in North America through 20 field offices and employ approximately 300
personnel. In addition to providing a non-cyclical source of revenues, the Company's service business provides access to the growing replacement and retrofit markets.

Applied Air Handling Systems.Applied air handling systems include indoor and roof mounted air handling units, packaged
rooftop systems, self-contained systems and coils with capacities up to 135 tons that are generally mounted on the roof of a building, in ceilings and/or duct work, or installed on each
floor of a multi-story building. These units generally combine heating and cooling capabilities in a single or self-contained configuration. The Company has a line of advanced technology
air handlers which combine European and North American designs to meet the market's growing demand for quiet, reliable, high quality air handlers in response to demand for improved indoor air quality.

Applied Terminal Systems.Applied terminal systems consist of HVAC&R units that provide heating and cooling for a
defined space on a "localized" basis. They include fan-coil units, water source heat pumps, packaged terminal air conditioners ("PTAC"), heat pumps, and unit ventilators. Capacities of
individual units are less than 20 tons and typically include electronic controls. Typical applications include facilities where air conditioning is required on a "room-by-room"
basis such as hotels/motels, condominiums, schools and office buildings. Within the United States, the Company believes that it is a leading manufacturer of water source heat pumps and unit
ventilators. The large installed base is expected to provide significant replacement and service opportunities.

The
Company globally serves its installed base by providing high value support services and original specification Certified McQuay Parts. The parts business also serves
the broader HVAC&R replacement market through the distribution of PTAC equipment and replacement components under its Spectrum Parts banner. The Company provides value added customer
service through e-commerce, electronic parts catalogs and industry leading order cycle times.

Industrial Refrigeration.The acquisition of J&E Hall in December 1995 expanded the Company's product offerings
and also accelerated its development of the single screw compressors that both the Company and J&E Hall had been developing separately for several years. The Company believes that single screw
chillers, rather than the twin screw chillers produced by a number of its competitors in the

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commercial HVAC&R markets, provide competitive advantages, including improvements in efficiency and cost, lower service requirements and noise reduction.

J&E
Hall sells and services industrial refrigeration equipment under several well known J&E Hall brand names, including J&E Hall, Hallmark® and
Thermotank®. The principal customers for industrial refrigeration products are concentrated in the food and meat processing, dairy, brewing and beverage (soft and alcoholic), chemical,
petrochemical, pharmaceutical, naval and merchant marine industries. In fiscal year 1997, the Company acquired Coulstock & Place Engineering Co. Ltd., a motor rewind specialist providing
support for the compressor business.

Competition
in the global industrial refrigeration business is fragmented and over the last two years, the industry has consolidated into a few global companies. Recognizing the
consolidation within the industrial refrigeration industry, over capacity in the market place and strength of its trading currency (pound sterling), J&E Hall embarked on a major restructuring exercise
in the beginning of fiscal year 2000, which was completed in June 2001. The Company believes that these actions will strengthen the Company and enable it to maintain its position as a leading
UK provider of refrigeration solutions through its extensive network of 13 regional offices.

Commercial Air Conditioning and Refrigeration Strategic Partnerships.

The Company, through its Commercial Air Conditioning and Refrigeration segment, has entered into selective strategic partnerships throughout the world to
maximize its market penetration through enhancement of its manufacturing and distribution capabilities and further diversification of its product lines. The Company has formed partnerships with local
companies in India, Japan, Hungary, Greece, Italy, Mexico and Puerto Rico. The Company has formed strategic partnerships in selected metropolitan markets to increase its market penetration in the
domestic market, having already formed partnerships in Philadelphia, Pennsylvania and Atlanta, Georgia. In addition, the Company has established regional sales offices in Miami, Florida (to sell its
products throughout Latin America), Beirut, Lebanon and Dubai, UAE and markets its products throughout Asia, including China, through manufacturing and sales joint ventures established by OYL.

Filtration Products

The Company's Filtration Products Segment engages in the manufacture, sale and distribution of air filtration products and systems, including air filters. The
Company's filtration products are sold worldwide to commercial, institutional and industrial customers as well as retailers for residential use. The Filtration Products segment's largest customers
include Shinwa Corporation, Wal-Mart Stores, Inc., Intel, Lowes, General Electric, Menard Cashway, and TRU*SERVE. Within its Filtration Products segment, the Company has two
principal businesses: replacement filters and environmental products. Replacement filters are sold to commercial and industrial building owners, contractors, retailers for residential applications,
hospitals and computer chip manufacturers for clean room applications, locomotive and air conditioning original equipment manufacturers and railroad companies. The
Company has marketed its replacement filters under the AmericanAirFilter® and AAF® brand names since the 1920's and also under private label. The environmental products
business has two major product areas: Air Pollution Control Products and Systems ("APC") and Machinery Filtration and Acoustical Systems ("MFAS") products. Environmental products are sold throughout
the world for a wide variety of commercial, institutional and industrial applications. Three of the Company's facilities used to produce its air filtration products have earned ISO 9001 certification,
and four facilities have earned ISO 9002 certification.

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Replacement Filter Products

The Company believes that it is one of the world's largest manufacturers and distributors of commercial, industrial and residential air filters, which are used
to remove airborne contaminants from intake and conditioned air, for a wide variety of applications. The Company estimates its global and North American served market share in
non-vehicular applications to be approximately 15% and 20%, respectively. The Company's filters, including replacement filters, are sold globally under the AmericanAirFilter®
and AAF® brand names and under private label. The filters are designed to be used in all types of air filtration systems regardless of the original manufacturer.

The
Filtration Products segment's replacement filter products consist of a broad product line including: (i) standard filters and equipment for use in a wide range of
commercial, institutional, industrial and residential settings; (ii) custom-designed 99.9999%+ high-efficiency filters and equipment for "clean rooms" required by certain industries
such as semiconductor manufacturers and health care; and (iii) specialty intake air filtration systems for locomotives and other niche applications.

Environmental Products

Air Pollution Control Products and Systems.The Company's APC equipment is designed to improve atmospheric quality by
removing airborne pollutants such as dust, mist and fumes from air exhaust streams. The Company's APC systems are sold primarily in Europe, Latin America and Asia and include design and construction
services. The Company markets APC equipment to a broad range of industrial customers including the food, pharmaceutical, chemical, steel, cement, power generation, waste incineration, chemical and
pulp and paper industries, as well as special market niches such as woodworking companies, welding shops and restaurants. The Company's APC equipment includes wet and dry scrubbers, cartridge and
fabric filter collectors, electrostatic precipitators and dust and mist collection products. These products collect contaminants, recover materials from the manufacturing process and solve
in-plant air quality problems. APC systems, offered by the Company, are integrated
systems engineered to combine air pollution control equipment with peripheral equipment, ductwork and instrumentation to produce an integrated emission control process.

Machinery Filtration and Acoustical Systems.MFAS products and systems are designed to remove particulate contamination
from air supplies to machines to reduce the performance inhibiting effects of corrosion, erosion and fouling. Acoustical systems are designed to protect the environment in which the machines are
installed from excessive noise generated by the machines and their ancillary processes.

Machinery
filtration systems can include weather protection, mechanical separators, high efficiency barrier filters enhanced by lower efficiency pre-filtration and
self-cleaning reverse pulse filters, and they can also incorporate air tempering equipment including anti-ice systems and evaporative coolers. Acoustical equipment includes air
intake ducts and silencers, high temperature exhaust ducts and silencers, ventilation fan silencers and machinery enclosures, all designed individually or as integrated systems with ancillary access,
supports, controls and instrumentation systems. The Company designs and supplies MFAS products and systems to major machinery manufacturers for the oil, gas, electrical and chemical/petro-chemical
industries in the global market. Continued research and development of products and systems allows the Company to provide a complete range of products and a single source, total package capability for
its customers.

Filtration Products Strategic Partnerships

The Company, through its Filtration Products segment, has entered into selective strategic partnerships and alliances throughout the world to maximize its
market penetration through enhancement of its manufacturing and distribution capabilities and further diversification of its product lines. The Company has formed partnerships with local companies in
Japan, Korea, India, Saudi Arabia

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and Malaysia to manufacture and distribute its products. In addition, the Company has entered into technology sharing agreements for the development of antimicrobial filters.

Financial Information About Industry Segments, and Domestic Operations and Export Sales

See Note 16 "Segment Information" in the Notes to the Consolidated Financial Statements.

Sales and Distribution

General.The Company has a diverse base of customers. No customer of the Commercial Air Conditioning and Refrigeration
segment or the Filtration Products segment accounted for more than 10% of the Company's net sales of these products during any of the past three fiscal years.

Commercial Air Conditioning and Refrigeration.The Company distributes its commercial HVAC&R equipment and systems in
the United States and Canada through a network of approximately 125 independent manufacturers' representatives and joint ventures that sell on a commission basis. Replacement parts for HVAC&R
equipment are sold through a network of 90 independent parts distributors and two Company-owned stores. Service products and contracts are sold through the Company's own sales force working from
offices located throughout the United States and Canada. The Company distributes its commercial HVAC&R products and parts internationally through a combination of direct sales personnel, independent
distributors and joint venture partners selling in over 80 countries throughout the world. Backlog for the Commercial Air Conditioning and Refrigeration segment at June 30, 2001 and 2000 was
$111 million and $124 million, respectively. The Company anticipates that substantially all of these orders will be filled in the next 12 months.

Filtration Products.The Company deploys separate sales forces and distribution channels to market its replacement
filter and environmental products. The Company employs the industry's largest commercial replacement filter direct sales force, with approximately 120 factory sales people worldwide to market
commercial replacement filters. Residential replacement filters are sold primarily in the United States through national retail stores, such as Wal-Mart Stores, Inc., Menard Cashway
Intel, Lowes and TRU*SERVE. Environmental products are sold through factory direct sales people, independent distributors, agents and joint venture partners. Backlog for the Filtration Products
segment at June 30, 2001 and 2000 was $71 million and $61 million, respectively. The Company anticipates that substantially all of these orders will be filled in the next
12 months.

Manufacturing

Commercial Air Conditioning and Refrigeration.The Company's commercial HVAC&R products are manufactured in 6 factories
in the United States, Italy and the United Kingdom. The Company's industrial refrigeration products are manufactured in three manufacturing facilities in the United Kingdom. See "Properties."

Filtration Products.In the Company's filter manufacturing business, fiberglass filtermedia is manufactured at 3
facilities located in the United States, Singapore and The Netherlands and then shipped to filter assembly facilities throughout Europe and North America from which finished products are then shipped
to customers. Air filtration equipment and systems are manufactured at facilities that are geographically dispersed throughout the world including 12 locations for replacement filters and 3 locations
for environmental products. See "Properties."

Purchasing

The principal component parts and materials purchased by the Company for use in its equipment and systems are compressors, electric motors, filter media,
copper tubes, glass pellets and castings, all of which are readily available through multiple sources. No single supplier has accounted for more than

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10% of the annual purchases by the Company of raw materials or component parts in any of the past three fiscal years. The Company believes it has contracts and commitments or readily available sources
of supply sufficient to meet its anticipated raw material or key component requirements. The Company maintains alternate sources for key components where dependence upon a single supplier could have
an adverse impact upon production to the extent that it is technologically and commercially feasible.

The
Company negotiates corporate-wide agreements with many of its major suppliers of purchased material. These agreements, which are typically from one to three years in
length, are intended to increase the responsiveness of suppliers to the Company's needs and to provide the Company with assured sources of supplies at competitive prices and terms.

Competition

General.The commercial HVAC&R and filtration products business segments are highly competitive. In the commercial
HVAC&R industry, the principal methods of competition are lead time, product performance, feature availability, energy efficiency, price, and service. In the refrigeration industry, competitive
factors include price, quality and a vertically integrated approach of supplying products. In the filtration products business, participants generally compete on the basis of service, price, quality,
reliability, efficiency, and conditions of sale and range of product offering. Certain portions of these markets are also very fragmented, both geographically and by product line. The Company believes
its competitive position is strengthened in those international markets in which it has both a manufacturing and a marketing presence and that it has a competitive advantage through its affiliation
with Hong Leong and OYL in gaining access to certain markets where barriers exist for non-local companies.

Commercial Air Conditioning and Refrigeration.International markets for commercial HVAC&R products are competitive and
fragmented along geographic and product lines. On a global basis, the Company's primary competitors across the full range of its HVAC&R product offerings are Carrier Corporation (a subsidiary of
United Technologies Corporation), The Trane Company (a division of American Standard, Inc.) and York International Corporation. Outside North America, the Company also competes with numerous
European and Japanese companies. Competition in the global industrial refrigeration business is fragmented, consisting of a limited number of large companies and a significant number of local
companies. The Company believes that price and quality in addition to a vertically integrated approach to supplying products and systems are significant competitive factors in selling industrial
refrigeration products.

Filtration Products.Competition in the air filtration products and systems, air pollution control equipment and
systems and MFAS businesses is very fragmented. Globally, the Company competes with many companies along each product line. The Company believes that price, quality and breadth of product offerings
are among the leading competitive factors in selling air filtration products and systems.

Research and Development

The Company's research and development programs are involved in creating new products, enhancing and redesigning existing equipment and systems to reduce
manufacturing costs and increasing product efficiency. The Company spent approximately $9.0, $8.7 and $8.9 million during its 2001, 2000, and 1999 fiscal years, respectively, for research and
development.

A
significant focus of the Company's research and development efforts since 1988 has been to develop and extend its range of water-cooled and air-cooled chillers using
advanced single screw compressor technology. The Company introduced its first single screw air conditioning product in 1994 and has continued to expand the product line and its application through
fiscal 2001. J&E Hall has been marketing industrial refrigeration products using single screw compressor technology since 1978.

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The Company expects to further enhance single screw air conditioning product technology during fiscal year 2002 with the introduction of the next generation screw compressor and screw chiller
products. Single screw compressor technology will continue to be an important element of research and development programs in the Commercial Air Conditioning and Refrigeration segment.

The
Company has developed and is now producing the next generation of air handlers which is highly energy and sound efficient. The product is available in a variety of configurations
and material options. The Company expects this family of products to meet the growing market for quiet, high quality air handlers.

Since
the OYL acquisition, the Filtration Products segment continues to introduce new products, including a new range of self supporting pleated air filters; a new range of cleaners;
a new extended surface pleated filter that exceeds the standards proposed in ASHRAE 62-1989R (American Society of Heating, Refrigeration and Air Conditioning Engineers); a variety of
replacement filters treated with antimicrobial agents that inhibit the growth of various microbial contaminants on the filter media; and a range of self-cleaning filters for gas turbines.

Patents and Trademarks

The Company holds numerous patents related to the design and use of its equipment and systems that are considered important to the overall conduct of its
business. The Company's policy is to maintain patent protection for as many of its new products as possible. The Company believes that certain of its patents are important to distinguish the Company's
equipment and systems from those of its competitors; however, the Company does not consider any particular patent, or any groups of related patents, essential to its operations. The Company believes
that its rights in its patents are adequately protected. In fiscal year 2001, the Filtration Products segment obtained 5 patents related to filter media and filter design and construction.

The
Company owns several registered trademarks and operates under certain trade names that are important in the marketing of its products, including AmericanAirFilter®,
AAF®, McQuay®, McQuayServiceSM, HermanNelson®, Thermotank®, Hallmark®, J&E Hall and Beth®. The
Company believes that its rights to use tradenames and trademarks are adequately protected. The Company's trademarks have various terms and expirations. The Company's policy is to renew significant
trademarks prior to the expiration of their current term.

Employees

As of June 30, 2001, the Company employed approximately 5,200 employees worldwide, with approximately 3,400 persons employed in the United States and
1,800 employed in non-U.S. locations. The Company has a total of seven labor union bargaining agreements, covering approximately 2,000 employees, of which one agreement, covering 503
employees,will expire in fiscal year 2002. The Company currently believes that it will be able to obtain new labor agreements without interruption of
work when these agreements expire. The Company considers its relations with its employees to be good.

Environmental Regulations

Environmental laws that affect or could affect the Company's domestic operations include, among others, the Comprehensive Environmental Response,
Compensation & Liability Act ("CERCLA"), the Clean Air Act, the Clean Water Act, the Resource Conservation and Recovery Act ("RCRA"), the Occupational Safety and Health Act, the National
Environmental Policy Act, the Toxic Substances Control Act, any regulations promulgated under these acts and various other federal, state and local laws and regulations governing environmental
matters. The Company's foreign operations are also subject to various environmental statutes and regulations.

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Some of the refrigerants used in HVAC&R equipment manufactured by the Company are regulated under international agreements and domestic and foreign laws and regulations governing
stratospheric ozone depleting chemicals.

In
1987, the United States became a signatory to the Montreal Protocol on Substances that Deplete the Ozone Layer. The Montreal Protocol has been amended several times since 1987,
including in 1990 (the "London Amendments"), in 1992 (the "Copenhagen Amendments"), in 1997 (the "Montreal Amendments"), and in 1999 (the "Beijing Amendments"). Over 140 countries (including the
United States) have ratified the Montreal Protocol and the London Amendments. More than 100 countries (including the United States) have also agreed to abide by the Montreal Protocol as amended by the
Copenhagen Amendments. The United States has not yet ratified the Montreal and Beijing Amendments.

Under
the Montreal Protocol, as amended, the production and consumption (defined as production plus imports minus exports) of chlorofluorocarbons ("CFC") by participating
industrialized countries is banned, with limited exceptions, as of January 1, 1996. Additionally, the Montreal Protocol places a cap on the consumption of hydrochlorofluorocarbons ("HCFC")
beginning on January 1, 1996 and mandates a gradual phaseout culminating in 2020, for participating industrialized countries, with a ten-year service tail exemption allowing
industrialized countries to supply old equipment with HCFCs during this period. In addition, certain countries, not including the United States, declared during December 1995 that they would
take all appropriate measures to limit the use of HCFCs as soon as possible.

The
federal Clean Air Act Amendments of 1990 establish minimum statutory timetables for the phaseout of production and consumption of ozone-depleting chemicals in the United States,
and authorize the EPA to establish regulatory timetables which meet or exceed those set forth in the Montreal Protocol, as amended. Pursuant to that authority, the EPA has adopted regulations
mandating, among other things and with limited exceptions, (a) a total ban on the consumption of CFCs by January 1, 1996 (b) a prohibition on the consumption of
HCFC-142b and HCFC-22 (a refrigerant used
in some equipment manufactured by the Company) for new equipment manufactured on or after January 1, 2010, (c) a ban on consumption of HCFC-142b and HCFC-22 for
use in any equipment beginning on January 1, 2020, and (d) a phaseout of other HCFCs commencing in 2015 and culminating on December 31, 2029.

The
manner in which the other signatories to the Montreal Protocol implement its requirements and regulate ozone-depleting refrigerants could differ from the approach and timetables
adopted in the United States.

With
respect to the ban on consumption of CFCs (which began January 1, 1996), the Company was a leader in the industry in redesign of its large cooling capacity central station
system HVAC&R equipment to utilize hydrofluorocarbon-134a ("HFC-134a"), a non-chlorinated refrigerant that is believed to be harmless to the ozone layer and is not
scheduled for elimination pursuant to the Montreal Protocol.

Substantially
all major manufacturers of HVAC&R products, including the Company, produce HVAC&R equipment for smaller cooling capacity applications that utilize HCFC-22.
The Company (and its competitors) must develop substitute refrigerants for use in HVAC&R products that currently use HCFC-22 prior to the phaseout of HCFC-22. Presently, the
EPA has identified several refrigerants that it considers acceptable HCFC-22 substitutes for certain uses applicable to some of the Company's products. The Company is conducting a
comprehensive program to introduce ozone friendly refrigerant for all products in the near future.

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Item 2. Properties

A description of the Company's principal facilities with the approximate square feet of building space is summarized below. Unless otherwise specified below,
the facilities are devoted to manufacturing:

|Location                                      |  | Square Feet |  | Leased/Owned |  | Principal Function                                                                                                              
|--------------------------------------------- |  | ----------- |  | ------------ |  | --------------------------------------------------------------------------------------------------------------------------------
|                                              |  |             |  |              |  |                                                                                                                                 
|Commercial Air Conditioning and Refrigeration
|Plymouth, Minnesota                           |  | 166,000     |  | Owned        |  | Americas headquarters, testing, research and development, and applied air handling systems business unit administrative facility
|Staunton, Virginia                            |  | 665,000     |  | Owned        |  | Chiller products                                                                                                                
|Owatonna, Minnesota                           |  | 68,000      |  | Owned        |  | Applied air handling system products                                                                                            
|Faribault, Minnesota                          |  | 244,000     |  | Owned        |  | Applied air handling system products                                                                                            
|Auburn, New York                              |  | 417,000     |  | Owned        |  | Applied terminal system products                                                                                                
|Scottsboro, Alabama                           |  | 270,000     |  | Owned        |  | Held for sale                                                                                                                   
|Cecchina, Italy                               |  | 175,000     |  | Owned        |  | Europe headquarters and chiller products                                                                                        
|Dayton, Ohio                                  |  | 100,000     |  | Leased       |  | Parts distribution                                                                                                              
|Dartford, England                             |  | 105,000     |  | Leased       |  | Headquarters for industrial refrigeration business                                                                              
|Derby, England                                |  | 17,000      |  | Leased       |  | Spares distribution and compressor remanufacturing facility                                                                     
|Birkenhead, England                           |  | 7,000       |  | Owned        |  | Compressor remanufacturing facility                                                                                             
|Doncaster, England                            |  | 5,300       |  | Owned        |  | Motor rewinding facility                                                                                                        
|                                              |  | 7,900       |  | Leased       |  | Cabling facility                                                                                                                
|Filtration Products                          
|Louisville, Kentucky                          |  | 60,000      |  | Leased       |  | Americas headquarters                                                                                                           
|Atlanta, Georgia                              |  | 113,000     |  | Leased       |  | Replacement filters                                                                                                             
|Columbia, Missouri                            |  | 58,000      |  | Owned        |  | Replacement filters                                                                                                             
|                                              |  | 35,000      |  | Leased       |  | Replacement filters                                                                                                             
|Hutchins, Texas                               |  | 340,000     |  | Owned        |  | Replacement filters                                                                                                             
|Elizabethtown, Pennsylvania                   |  | 160,000     |  | Leased       |  | Replacement filters                                                                                                             
|Fayetteville, Arkansas                        |  | 175,000     |  | Owned        |  | Replacement filters                                                                                                             
|Los Angeles, California                       |  | 70,000      |  | Leased       |  | Replacement filters                                                                                                             
|Lebanon, Indiana                              |  | 154,000     |  | Leased       |  | Replacement filters                                                                                                             
|Boucherville, Quebec                          |  | 62,000      |  | Owned        |  | Replacement filters                                                                                                             
|Cramlington, England                          |  | 160,000     |  | Owned        |  | Applied air handling systems and environmental products                                                                         
|Linton, England                               |  | 27,000      |  | Owned        |  | Replacement filters                                                                                                             

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|Amsterdam, The Netherlands |  | 16,000  |  | Leased |  | European headquarters and administrative office
|-------------------------- |  | ------- |  | ------ |  | -----------------------------------------------
|Emmen, The Netherlands     |  | 97,000  |  | Owned  |  | Replacement filters                            
|                           |  | 75,000  |  | Leased |  | Replacement filters                            
|Lubeck, Germany            |  | 19,000  |  | Leased |  | Engineering office                             
|Gasny, France              |  | 109,000 |  | Owned  |  | Environmental products                         
|Ecoparc, France            |  | 46,000  |  | Leased |  | Replacement filters                            
|Vitoria, Spain             |  | 40,000  |  | Owned  |  | Environmental products                         
|Singapore                  |  | 41,000  |  | Owned  |  | Replacement filters                            

In
addition to the properties above, the Company also leases numerous facilities worldwide for use as sales and service offices, regional warehouses and distribution centers. The
Company also leases 11,000 square feet for its Corporate headquarters in Louisville, Kentucky.

Substantially
all of the Company's property is subject to encumbrances. See Notes 5 and 7 to the Consolidated Financial Statements and Notes thereto.

Item 3. Legal Proceedings

Environmental Proceedings

The Company is subject to potential liability under CERCLA, and other federal, state and local statutes and regulations governing the discharge of pollutants
into the environment and the handling and disposal of hazardous substances and waste. These statutes and regulations, amongst other things, impose potential liability on the Company for remediating
contamination arising from the Company's past and present operations and from former operations of other entities at sites later acquired and now owned by the Company. Many of the Company's facilities
have operated for many years, and substances which are or might be considered hazardous were generated, used, and disposed of at some locations, both on and off-site. The Company records
liabilities if, in management's judgment, environmental assessments or remedial efforts are probable and the costs can be reasonably estimated. These accrued liabilities are not discounted. Such
estimates are adjusted if necessary based on the completion of a formal study or the Company's commitment to a formal plan of action.

Based
upon estimates prepared by environmental consultants, at June 30, 2001 the Company estimates that related probable remediation costs will be approximately
$14.0 million. The Company believes that these costs have been adequately reserved for on the balance sheet and are included in other liabilities. The Company has settled or exhausted its
remedies against all of its insurance companies and any third parties, and expects no additional recoveries. No amounts have been recorded in the accompanying Consolidated Balance Sheets relating to
any potential recoveries. It is possible that environmental liabilities may arise in the future. The precise costs associated with such liabilities are difficult to predict at this time.

Miscellaneous

The Company is involved in various other lawsuits arising out of the conduct of its business. The Company believes that the outcome of any such pending claims
or proceedings will not have a material adverse effect upon its business or financial condition. The Company maintains various insurance policies regarding many of such matters, including general
liability and property damage insurance, as well as product liability, workers' compensation and other policies, which it believes provide adequate coverage for its operations. See Note 15 to
the Consolidated Financial Statements.

12

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Item 4. Submission of Matters to a Vote of Security Holders

On April 24, 2001, OYL, the Company's sole shareholder, elected the following persons as members of the Board of Directors of the Company to serve until
the next annual meeting of the stockholder: Quek Leng Chan, Ho Nyuk Choy, Roger Tan Kim Hock and Liu Wan Min. On July 1, 2001, the sole shareholder accepted the resignation of Roger Tan Kim
Hock and elected Kwek Leng San as Director.

Part II

Item 5. Market for Registrant's Common Stock and Related Stockholder Matters

The Company's common stock is owned by a single shareholder, OYL. There is no public trading market for the Company's common stock.

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Item 6. Selected Financial Data

The following table sets forth selected consolidated historical financial data of the Company for the fiscal years ended June 30, 2001, 2000, 1999,
1998, and 1997. The Company's fiscal year ends on the Saturday closest to June 30. For clarity of presentation in the consolidated financial statements, all fiscal years are shown to begin on
July 1 and end on June 30.

The
table should be read in conjunction with Item 7"Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial
Statements and the related Notes included herein.

Selected Financial Data

|                                    |                                   | 2001                 |   | 2000    |         | 1999 |         | 1998    |   | 1997    |        
|----------------------------------- | --------------------------------- | -------------------- | - | ------- | ------- | ---- | ------- | ------- | - | ------- | -------
|INCOME STATEMENT DATA:              |                                   |                      |   |         |         |      |         |         |   |         |        
|                                    | Net sales                         |                      | $ | 870,854 |         | $    | 867,704 |         | $ | 924,028 |        
|                                    | Cost of sales                     |                      |   | 638,825 |         |      | 641,346 |         |   | 691,222 |        
|                                    |                                   |                      |   |         |         |      |         |         |   |         |        
|                                    | Gross profit                      |                      |   | 232,029 |         |      | 226,358 |         |   | 232,806 |        
|                                    | Operating expenses                |                      |   | 189,442 |         |      | 196,662 |         |   | 216,669 |        
|                                    | Restructuring expenses            |                      |   | 7,237   |         |      | 3,493   |         |   | 5,170   |        
|                                    |                                   |                      |   |         |         |      |         |         |   |         |        
|                                    | Operating income                  |                      |   | 35,350  |         |      | 26,203  |         |   | 10,967  |        
|                                    | Interest expense, net             |                      |   | 19,372  |         |      | 21,627  |         |   | 23,975  |        
|                                    | Other (income) expense, net       |                      |   | (4,542  | )       |      | 1,566   |         |   | (5,324  | )      
|                                    |                                   |                      |   |         |         |      |         |         |   |         |        
|                                    | Income (loss) before income taxes |                      |   | 20,520  |         |      | 3,010   |         |   | (7,684  | )      
|                                    | Income taxes                      |                      |   | 8,540   |         |      | 2,647   |         |   | (1,444  | )      
|                                    | Minority interest earnings        |                      |   | 238     |         |      | 261     |         |   | 286     |        
|                                    |                                   |                      |   |         |         |      |         |         |   |         |        
|                                    | Net income (loss)                 |                      | $ | 11,742  |         | $    | 102     |         | $ | (6,526  | )      
|                                    |                                   |                      |   |         |         |      |         |         |   |         |        
|BALANCE SHEET DATA (end of period): |                                   |                      |   |         |         |      |         |         |   |         |        
|                                    | Working capital                   |                      | $ | 56,056  |         | $    | 61,144  |         | $ | 42,034  |        
|                                    | Total assets                      |                      |   | 654,014 |         |      | 685,400 |         |   | 755,195 |        
|                                    | Total debt                        |                      |   | 201,487 |         |      | 218,854 |         |   | 266,419 |        
|                                    | Stockholder's equity              |                      |   | 187,241 |         |      | 183,508 |         |   | 186,428 |        
|OTHER DATA:                         |                                   |                      |   |         |         |      |         |         |   |         |        
|                                    | EBITDA(a)                         |                      | $ | 69,164  |         | $    | 54,733  |         | $ | 45,104  |        
|                                    | EBITDA margin                     |                      |   | 7.9     | %       |      | 6.3     | %       |   | 4.8     | %      
|                                    | Depreciation and amortization     |                      | $ | 29,510  |         | $    | 30,356  |         | $ | 29,099  |        
|                                    | Capital expenditures              |                      |   | 16,006  |         |      | 7,881   |         |   | 19,514  |        
|                                    | Net cash provided by (used in)    |                      |   |         |         |      |         |         |   |         |        
|                                    |                                   | Operating activities |   |         | 28,957  |      |         | 47,643  |   |         | 18,362 
|                                    |                                   | Investing activities |   |         | (9,892  | )    |         | 5,115   |   |         | (19,514
|                                    |                                   | Financing activities |   |         | (15,043 | )    |         | (48,981 | ) |         | 544    

FOOTNOTES TO TABLE OF SELECTED FINANCIAL DATA



14

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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

Results of Operations

The following should be read in conjunction with Item 6"Selected Financial Data" and the Consolidated Financial Statements and the Notes thereto.

2001 Compared to 2000

Consolidated net sales were $870.9 million for the fiscal year ended June 30, 2001 compared to $867.7 million for the prior year, an
increase of $3.2 million. In October 1999, the Company sold its commercial air conditioning operation in France, which had sales of $11.6 million in fiscal 2000. Additionally, the
Company estimates that sales have decreased by approximately $23.3 million for fiscal 2001 due to the impact of unfavorable currency trends in translating European sales. Excluding the net
sales attributable to the operation in France for fiscal 2000 and currency impact, net sales for fiscal 2001 increased $38.1 million or 4.5%, as compared to the prior year. Income from
operations was $35.4 million or 4.1% of net sales compared to $26.2 million or 3.0% for fiscal 2001 and 2000, respectively. Gross margin increased year over year from 26.1% of net sales
to 26.6% driven by improved manufacturing productivity and material cost reduction programs. Selling, general and administrative expenses as a percent of net sales decreased from 21.4% for fiscal 2000
to 20.4% for fiscal 2001 as a result of cost control programs and lower commission and warranty expense.

Commercial Air Conditioning and Refrigeration

Net sales for the Commercial Air Conditioning and Refrigeration segment were $535.0 million in fiscal 2001 compared to $540.9 million in fiscal
2000, a decrease of $5.9 million. The decrease is partially due to the sale of the commercial air conditioning and refrigeration operation in France in 1999. Additionally, the Company estimates
that sales have decreased by $5.7 million for fiscal 2001 due to the impact of unfavorable currency trends in translating European sales. Excluding these two items, sales increased
$11.4 million or 2.2% primarily due to increased North America sales.

North
America fiscal 2001 net sales increased approximately 3.5%. This increase was primarily attributable to increased rooftop applied air handling product demand and increased
service revenue, partially offset by decreased sales in applied terminal systems. Applied air handling sales increased 7.8% from the prior year, service revenues increased 13.8% and applied terminal
systems sales decreased 7.6%.

International
net sales in fiscal 2001 decreased 2.4%, excluding the impact of the sale of the operation in France and the impact of the unfavorable currency trends on translating
European sales activity. The decrease is attributable to the ongoing restructuring in the industrial refrigeration business in the United Kingdom where the Company has exited from certain
non-core business.

Backlog
for the Commercial Air Conditioning and Refrigeration segment was $111 million and $124 million at June 30, 2001 and 2000, respectively. The decrease in
backlog was primarily attributable to the softening of office building construction, negatively impacting air handling volume.

Operating
income excluding amortization and restructuring was $30.2 million, or 5.6% of net sales, in fiscal 2001 as compared to $13.0 million, or 2.4% of net sales, in
fiscal 2000. The gross margin rate increased by 1.6 percentage points from the prior year primarily due to improved manufacturing efficiency in the domestic chiller business unit and increased
field service volume. Selling, general and administrative expenses as a percent of sales decreased 1.7 percentage points with the majority of the improvement resulting from lower commission and
warranty expense.

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Filtration Products

Net sales for the Filtration Products segment were $340.6 million in fiscal 2001, an increase of $12.0 million from the net sales of
$328.6 million in fiscal 2000. The Company estimates that sales have decreased approximately $17.6 million for fiscal 2001 due to the impact of unfavorable currency trends in translating
European sales. Excluding the currency impact, net sales increased $29.7 million or 9.0%.

Domestic
operations net sales increased 6.4% in fiscal 2001 compared to fiscal 2000. The growth was primarily attributable to continued strong clean room market demand and an increase
in MFAS North America projects. International sales volume increased 11.1% from fiscal 2000, excluding the impact of the unfavorable currency trends on translating European sales activity. The
increase is primarily attributable to improved air filtration product sales in Asia and an increase in APC systems volume in Latin America.

Operating
income excluding amortization and restructuring was $26.3 million in fiscal year 2001, a decrease of $1.7 million or 6.1%, from $28.0 million for fiscal
year 2000. Operating income excluding amortization and restructuring as a percent of sales decreased from 8.5% in fiscal 2000 to 7.7% in fiscal 2001. Gross margins decreased to 27.5% from 29.0% as a
percentage of net sales for the fiscal years 2001 and 2000, respectively. The decrease in gross margin percentage was primarily the result of competitive pricing pressures in North America and Europe
in the replacement filter business. Selling, general and administrative expenses as a percentage of sales decreased 0.6 percentage points in fiscal 2001 from fiscal 2000, primarily due to
continued management focus on overhead cost reduction.

Non-operating Expenses

Interest expense was $19.4 million for fiscal 2001 compared to $21.6 million for fiscal 2000. The decrease in interest expense is primarily due
to the reduced borrowing levels. During fiscal 2001 and 2000, the Company had net other income (expense) of $4.5 million and $(1.6) million, respectively. The increase in income in fiscal 2001
is primarily related to the sale of property in Dartford, United Kingdom associated with its industrial refrigeration business resulting in a gain of $4.5 million. Additionally, the Company
repurchased $16.2 million of its Senior Notes at a discount resulting in a net gain of $0.4 million. In fiscal 2000, the Company recorded a $1.3 million loss related to the sale
of the commercial air conditioning operation in France, which was completed in October 1999. The remaining components of other income and expenses primarily result from foreign currency and
equity affiliate transactions.

The
provision for income taxes was $8.5 million and the effective tax rate was 41.6% for fiscal 2001 compared to an income tax provision of $2.6 million and an effective
tax rate of 87.9% for fiscal 2000. The effective tax rate differs from the statutory rate primarily due to the effect of nondeductible goodwill amortization and foreign losses not benefited.

2000 Compared to 1999

Consolidated net sales were $867.7 million for the fiscal year ended June 30, 2000 compared to $924.0 million for the prior year, a
decrease of $56.3 million. The primary reason for the decrease is the sale of the Company's commercial air conditioning operation in France in October 1999 which was the cause of
$40.8 million of the year over year decrease. Also, the Company estimates that $16.4 million of the decrease was attributable to having one less week of sales in the fiscal year 2000 as
compared to fiscal year 1999. Excluding these two non-recurring items, sales increased $0.9 million or 0.1% compared to the prior year. Income from operations was
$26.2 million or 3.0% of sales compared to $11.0 million or 1.2% of net sales for the fiscal years 2000 and 1999, respectively. Gross margin increased year over year from 25.2% of net
sales to 26.1% driven by improved manufacturing productivity and material cost reduction programs. Selling, general and administrative expenses as a percent of net sales decreased from 22.2% to 21.4%,
for the fiscal years 2000 and 1999, respectively, primarily as a result of lower warranty expenses.

16

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Commercial Air Conditioning and Refrigeration

Net sales for the Commercial Air Conditioning and Refrigeration segment were $540.9 million in fiscal 2000 compared to $598.6 million in fiscal
1999, a decrease of $57.7 million. The sale of the operation in France in October 1999 attributed to $40.8 million of the decrease with another estimated $10.3 million due
to one less week of sales in fiscal year 2000 as compared to fiscal year 1999. Excluding these two non-recurring items, sales decreased 1.2% year over year primarily due to the product
rationalization program in the North American applied terminal systems business unit and the unfavorable currency trends on translating European sales activity.

North
American net sales decreased approximately 1.9% excluding the estimated impact of one less week of sales in fiscal 2000 reporting period compared to fiscal 1999. This decrease
was primarily due to the applied terminal systems business unit where sales decreased 11.1% as a result of the market reaction to the product rationalization program introduced during fiscal year
1999. Chiller product net sales for fiscal 2000 decreased 8.5% from fiscal 1999. This decrease was primarily the result of the restructuring of the chiller business unit implemented in the prior year.
The sales decreases in the chiller products and applied terminal systems business units were partially offset by net sales increases in the applied air handling and parts business units. The parts
business unit increased sales by 17.0% year over year as a result of strong demand for replacement parts while sales increased 4.6% in the applied air handling business unit due to strong demand for
air handling and self contained units.

International
net sales in fiscal year 2000 decreased 0.2%, excluding the impact of the sale of the operation in France and the estimated impact of one less week of sales, from fiscal
1999 primarily due to the ongoing restructuring in the industrial refrigeration business in the United Kingdom where the Company has begun exiting from certain non-core business and the
impact of unfavorable currency trends on translating European sales activity. Excluding the industrial refrigeration business and unfavorable currency impact of approximately $4.9 million, net
sales in fiscal 2000 increased 23.6% from fiscal 1999 primarily due to strong chiller demand in Italy and the United Kingdom and further penetration into Middle East markets.

Backlog
for the Commercial Air Conditioning and Refrigeration segment was $124 million as compared to $134 million at June 30, 2000 and 1999, respectively. The
decrease in backlog was primarily attributable to the sale of the commercial air conditioning operation in France and also the market reaction to the applied terminal systems product rationalization
program introduced in fiscal 1999.

Operating
income excluding amortization and restructuring was $13.0 million, or 2.4% of net sales, in fiscal 2000 as compared to $2.0 million, or 0.3% of net sales, in
fiscal 1999. The gross margin rate increased by 1.0 percentage point from the prior year rate primarily due to improved manufacturing productivity in the North American plants. Selling, general
and administrative expenses as a percent of sales decreased 1.5 percentage points with the majority of the improvement resulting from lower warranty expenses in North America related to
favorable experience compared to the prior year.

Filtration Products

Net sales for the Filtration Products segment were $328.6 million in fiscal 2000, a decrease of $5.5 million from the net sales of
$334.1 million in fiscal 1999. Excluding the estimated impact of the additional week in fiscal 1999, net sales increased approximately 0.2% year over year.

Domestic
operations net sales increased 1.5% in fiscal 2000 compared to fiscal 1999. The growth was primarily attributable to a strengthened clean room market. International sales
volume decreased 0.8% from fiscal 1999 due to sales volumes increases in Latin America and Asia offset by unfavorable European results. Latin American sales increased 96.4% compared to fiscal 1999 as
the result of certain large air pollution control system projects during fiscal 2000, while Asia net sales increased

17

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4.9% versus the prior year primarily due to improving market conditions. Net sales for Europe decreased 6.5% primarily due to the impact of the unfavorable currency trends on translating European
sales activity which represented an estimated $12.2 million decrease in net sales. Excluding the unfavorable currency impact, net sales for Europe increased 1.7%.

Operating
income excluding amortization and restructuring was $28.0 million in fiscal year 2000, an increase of $4.8 million or 20.6%, from $23.2 million for
fiscal year 1999. Operating income excluding amortization and restructuring as a percent of sales increased from 7.0% in fiscal 1999 to 8.5% in fiscal 2000. Gross margins increased to 29.0% from 27.8%
as a percentage of net sales for the fiscal years 2000 and 1999, respectively. The increase in gross margin percentage was primarily attributable to material cost reduction programs in the replacement
filter products business globally. Selling, general and administrative expenses as a percentage of sales decreased 0.5 percentage points in fiscal year 2000 from fiscal year 1999, primarily due
to continued management focus in reducing overhead expenses throughout the Company.

Non-operating Expenses

Interest expense was $21.6 million for fiscal year 2000 compared to $24.0 million for fiscal year 1999. The decrease in interest expense is
primarily due to the reduced borrowing levels from the favorable net cash from operating and investing activities during fiscal 2000. During fiscal years 2000 and 1999, the Company had net other
(income) expense of $1.6 million and $(5.3) million, respectively. The increase in expense in fiscal year 2000 is primarily related to events that occurred in the first quarters of fiscal years
2000 and 1999. In the first quarter of fiscal year 2000, the Company accrued a $1.3 million loss related to the sale of the commercial air conditioning operation in France, which was completed
in October 1999. In the first quarter of fiscal year 1999, the Company recognized $2.9 million in other income as a result of favorable developments in the IRS audit and the tax
indemnification settlement with former shareholders of the Company. The Company also recorded a $1.5 million gain related to the termination of a pension plan in Canada. The remaining
components of other income and expenses primarily result from foreign currency and equity affiliate transactions.

The
provision for income taxes was $2.6 million and the effective tax rate was 87.9% for fiscal year 2000 compared to a benefit of $1.4 million and an effective tax rate
of (18.8)% for fiscal year 1999. The effective tax rate differs from the statutory rate primarily due to the effect of nondeductible goodwill amortization and foreign losses not benefited.

Sale of Businesses and Restructuring

On
an on-going basis the Company seeks to evaluate its various businesses and product lines with the objective of enhancing shareholder value. Consistent with this
strategy, the Company intends to pursue global business opportunities that are synergistic with the Company's core business or exit low value-added and non-synergistic operations. In
October 1999, the Company sold its commercial air conditioning and refrigeration business in France for $13.0 million.

The
Company also seeks to identify opportunities to improve its cost structure on an on-going basis. These opportunities may involve the elimination of certain positions
or the closure of manufacturing facilities. As more fully described in Note 9 to the Consolidated Financial Statements, the Company recognized restructuring charges of $7.2, $3.5, and
$5.2 million during fiscal years 2001, 2000, and 1999, respectively. These restructuring charges relate to actions that have been implemented in both the Commercial Air Conditioning and
Refrigeration and Filtration Products segments. The Company continues to identify and evaluate other opportunities to improve its cost structure and may recognize additional restructuring charges in
the future.

18

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In September 2001, the Company's Board of Directors signed a resolution to sell the Company's Singapore subsidiary to OYL for approximately $13.1 million, which would
result in an immaterial gain. Proceeds from the sale are planned to be used to pay down debt.

Liquidity and Capital Resources

Cash generated from operating activities and supplemented when necessary by short-term credit facilities provides the Company's liquidity needs.
For the year ended June 30, 2001, net cash provided by operating activities was $29.0 million as compared to a generation of $47.6 million for the year ended June 30, 2000.
For the fiscal year ended June 30, 2001 net cash used by investing activities of $9.8 million included $16.0 million in capital expenditures of which $5.1 million relates
to the consolidation of domestic air handling operations in Minnesota, offset by cash proceeds of $6.9 million from the sale of property in the United Kingdom (see below).

On
September 30, 1999, the Company refinanced its Bank Credit Agreement with a New Term Loan of $30 million and a New Revolving Credit Facility of $90 million
("New Bank Credit Agreement"). The New Bank Credit Agreement expires in February 2003, was used to retire all obligations under the previous Bank Agreement and is designed to provide added
flexibility and borrowing availability. The New Bank Credit Agreement also provides favorable interest rates and fees compared to the previous Bank Credit Agreement. At June 30, 2001, the
Company had borrowed $53.5 million under the New Revolving Credit Facility, $7.5 million in letters of credit were issued and outstanding, and the Company had remaining borrowing
availability of $29.0 million.

A
short-term credit facility provided to a subsidiary of the Company is supported by a £8.5 million ($12.0 million) letter of credit from the
Company's parent, OYL, which expires on May 31, 2002. Approximately £2.8 million ($3.9 million) of the facility was utilized at June 30, 2001. This support
arrangement may be extended for additional time periods with the consent of OYL and the bank providing the facilities.

Total
net payments on short-term and long-term debt for the year ended June 30, 2001 was $15.0 million which is a result of $8.0 million
in payments on long-term debt, $15.5 million in repurchases of Senior Notes, net additional borrowings under short-term arrangements of $7.8 million and
$0.7 million in proceeds from the issuance of new long-term debt. Total debt of the Company has been reduced from $218.9 million at June 30, 2000 to
$201.5 million at June 30, 2001.

In
October 2000, cash proceeds from the sale of property in the United Kingdom of $6.9 million was used to reduce short-term borrowings. In
October 1999, the Company sold its commercial air conditioning and refrigeration business in France for $13.0 million with the proceeds being used to reduce debt.

Planned
capital expenditures are approximately $16.0 million for each of fiscal 2002 and 2003.

The
ongoing costs of compliance with existing environmental laws and regulations and the estimated costs to clean up and monitor existing contaminated sites is not expected to have a
material adverse effect on the Company's capital expenditures or financial position. See "Legal Proceedings" and Note 15 to the Consolidated Financial Statements.

The
Company has manufacturing facilities and sells products in various countries around the world. As a result, the Company is exposed to movements in exchange rates of various
currencies against the U.S. dollar. Management's response to currency movements varies (e.g., changes in pricing actions, changes in cost structures and changes in hedging strategy). Currently, the
Company enters into short-term forward exchange contracts to hedge its exposure to currency fluctuations affecting certain foreign currency denominated trade payables and certain
intercompany debt of its foreign subsidiaries. The Company will continue to report, from time to time, fluctuations in both earnings and equity due to foreign exchange movements since it is not
cost-effective to establish a hedging strategy that eliminates all risks.

19

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Management believes, based upon current levels of operations and forecasted earnings, that cash flows from operations, together with borrowings under the New Bank Credit Agreement and
other short-term credit facilities, will be adequate to make payments of principal and interest on debt, to permit anticipated capital expenditures and to fund working capital requirements
and other cash needs. Nevertheless, the Company will remain leveraged to a significant extent and its debt service obligations will continue to be substantial. If the Company's sources of funds were
to fail to satisfy the Company's requirements, the Company may need to refinance its existing debt or obtain additional financing. There is no assurance that any such new financing alternatives would
be available and, in any case, such new financing (if available) could be expected to be more costly and restrictive than the debt agreements currently in place.

Goodwill and Other Intangible Assets

In June 2001, the Financial Standards Board issued Statements of Financial Accounting Standards (SFAS) No. 141,Business
Combinations, and No. 142,Goodwill and Other Intangibles Assets, effective for fiscal years beginning after
December 15, 2001. Under the new rules, goodwill and intangible assets deemed to have indefinite lives will no longer be amortized but will be subject to annual impairment tests in accordance
with the Statements. Other intangible assets will continue to be amortized over their useful lives. The Company is required to apply the new rules on accounting for goodwill and other intangible
assets beginning the first quarter of fiscal 2003, although it has the option to adopt the new
Standards in the first quarter of fiscal year 2002. The Company is currently assessing the financial impact that SFAS Nos. 141 and 142 will have on its earnings and financial position.

Seasonality

The demand for certain replacement filter products, particularly residential filters, is seasonal in nature. Normally, sales of residential filters are
relatively low in the winter and early spring with an increase in sales during the late spring, summer and fall months. Replacement air filter sales in the commercial and industrial markets are also
higher during the spring and summer months, although these sales are driven primarily by maintenance cycles. Sales of some air filtration equipment are seasonal to the extent that construction
activity increases during the warmer months.

Sales
of commercial air conditioning equipment are generally not seasonal. However, the Company's air conditioning service business is seasonal in nature due to off-season
maintenance cycles and service needs during the summer months. Demand for unitary air conditioning equipment in the small unit commercial new construction markets varies according to the season, with
increased demand generally from March to October. Demand in the small unit commercial replacement markets is impacted by seasonal temperature fluctuations. Sales of unit ventilators for educational
facilities tend to increase in the second and third calendar quarters of any given year in part due to the start of a new school year as well as the availability of bond or other funds budgeted for
capital expenditures.

Euro Conversion

Management has implemented systems for the conversion to the Euro effective July 1, 2001. The Euro conversion has not had a material effect on the
Company's operating results or competitive position. The Company will continue to investigate opportunities for European-wide system infrastructures.

20

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Forward-Looking Statements

When used in this report the words "believes," "anticipates," "estimates," "plans" and "expects" and similar expressions are intended to identify
forward-looking statements. These forward-looking statements are intended to provide management's current expectations or plans for the future operating and financial performance of the Company, based
on assumptions currently believed to be valid. A variety of factors could cause actual results to differ materially from those anticipated in the Company's
forward-looking statements, some of which include risk factors previously discussed in this and other SEC reports filed by the Company. These risk factors include, but are not limited to, economic
conditions in the United States, changes in world financial markets, environmental laws and regulations, risks associated with currency fluctuations, a weakening in Latin America and Asian markets,
unforeseen competitive pressures, warranty expenses, market acceptance of new products, unseasonably cool spring or summer weather, unforeseen difficulties in maintaining mutually beneficial
relationships with strategic partnerships and alliances, and the results of restructuring activities. Readers are cautioned not to place undue reliance on these forward-looking statements which speak
only as of the date on which those statements are made. The Company undertakes no obligation to update any forward-looking statements to reflect unanticipated events or circumstances occurring after
that date.

Item 7A. Quantitative and Qualitative Disclosure about Market Risk

The Company's earnings are affected by fluctuations in the value of the U.S. dollar, as compared to foreign currencies, as a result of transactions in foreign
markets. At June 30, 2001, the result of a uniform 10% strengthening in the value of the dollar relative to the currencies in which the Company's transactions are denominated would result in a
decrease in operating income of approximately $0.6 million for the year ending June 30, 2001. This calculation assumes that each exchange rate would change in the same direction relative
to the U.S. dollar. In addition to the direct effects of changes in exchange rates, which are a changed dollar value of the resulting sales, changes in exchange rates also affect the volume of sales
or the foreign currency sales price as competitors' services become more or less attractive. The Company's sensitivity analysis of the effects of changes in foreign currency exchange rates does not
factor in a potential change in sales levels or local currency prices.

Total
short-term and long-term debt outstanding at June 30, 2001 was $201.5 million, consisting of $81.0 million in variable rate
borrowing and $120.5 million in fixed rate borrowing. At this level of variable rate borrowing, a hypothetical 10% increase in interest rates would decrease pre-tax current year
earnings by approximately $0.6 million for the year ended June 30, 2001. At June 30, 2001, the fair value of the Company's fixed rate debt outstanding was estimated at
$120.5 million using quoted market price. A hypothetical 10% change in interest rates would not result in a material change in the fair value of the Company's fixed rate debt. The Company may,
at times, seek to limit the impacts of interest rate fluctuations on its debt through the use of interest rate derivative instruments. See Note 8 to the Consolidated Financial Statements for
further information.

21

---



Item 8. Financial Statements and Supplementary Data

INDEX TO FINANCIAL STATEMENTS

|                                                                                                     |  | Page in this Report
|---------------------------------------------------------------------------------------------------- |  | -------------------
|Financial Statements                                                                                 |  |                    
|Report of the Independent Auditors                                                                   |  | 23                 
|Consolidated Balance Sheets
as of June 30, 2001 and 2000                                            |  | 24                 
|Consolidated Statements of Operations
Years ended June 30, 2001, 2000 and 1999                      |  | 25                 
|Consolidated Statements of Cash Flows
Years ended June 30, 2001, 2000 and 1999                      |  | 26                 
|Consolidated Statements of Stockholder's Equity
Years ended June 30, 2001, 2000 and 1999            |  | 27                 
|Consolidated Statements of Comprehensive Income
Years ended June 30, 2001, 2000 and 1999            |  | 28                 
|Schedule IIValuation and Qualifying Accounts and Reserves
Years ended June 30, 2001, 2000 and 1999 |  | 50                 

22

---

REPORT OF INDEPENDENT AUDITORS

The
Board of Directors and Stockholder
AAF-McQuay Inc.

We
have audited the accompanying consolidated balance sheets of AAF-McQuay Inc. and subsidiaries as of June 30, 2001 and 2000, and the related consolidated
statements of operations, cash flows, stockholder's equity and comprehensive income for each of the three years in the period ended June 30, 2001. Our audits also included the financial
statement schedule listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.

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

In
our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of AAF-McQuay Inc. and
subsidiaries at June 30, 2001 and 2000, and the consolidated results of their operations and their cash flows for each of the three years in the period ended June 30, 2001, in conformity
with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken
as a whole, present fairly in all material respects the information set forth therein.

ERNST & YOUNG LLP

Louisville,
Kentucky
August 10, 2001

23

---



AAF-McQUAY INC. AND SUBSIDIARIES        CONSOLIDATED BALANCE SHEETS  (Dollars in thousands, except per share data)

|                                                                              |                                                                                             | June 30, |                           
|----------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------- | -------- | --------------------------
|
|ASSETS                                                                        |                                                                                            
|Current assets:                                                               |                                                                                             |          |                           
|                                                                              | Cash and cash equivalents                                                                   |          | $                         
|                                                                              | Accounts receivable                                                                         |          |                           
|                                                                              | Inventories                                                                                 |          |                           
|                                                                              | Other current assets                                                                        |          |                           
|                                                                              |                                                                                             |          |                           
|                                                                              |                                                                                             |          | Total current assets      
|Property, plant and equipment, net                                            |                                                                                             |          | 118,744                   
|Cost in excess of net assets acquired and other identifiable intangibles, net |                                                                                             |          | 201,731                   
|Other assets and deferred charges                                             |                                                                                             |          | 17,171                    
|                                                                              |                                                                                             |          |                           
|                                                                              |                                                                                             |          | Total assets              
|                                                                              |                                                                                             |          |                           
|LIABILITIES AND STOCKHOLDER'S EQUITY                                          |                                                                                            
|Current liabilities:                                                          |                                                                                             |          |                           
|                                                                              | Short-term borrowings                                                                       |          | $                         
|                                                                              | Current maturities of long-term debt                                                        |          |                           
|                                                                              | Accounts payable, trade                                                                     |          |                           
|                                                                              | Accrued warranty                                                                            |          |                           
|                                                                              | Accrued employee compensation                                                               |          |                           
|                                                                              | Other accrued liabilities                                                                   |          |                           
|                                                                              |                                                                                             |          |                           
|                                                                              |                                                                                             |          | Total current liabilities 
|Long-term debt.                                                               |                                                                                             |          | 131,429                   
|Deferred income taxes                                                         |                                                                                             |          | 26,029                    
|Other liabilities                                                             |                                                                                             |          | 49,003                    
|                                                                              |                                                                                             |          |                           
|                                                                              |                                                                                             |          | Total liabilities         
|Stockholder's equity:                                                         |                                                                                             |          |                           
|                                                                              | Preferred stock ($1 par value; 1,000 shares authorized, none issued)                        |          |                           
|                                                                              | Common stock ($100 par value; 8,000 shares authorized, 2,497 shares issued and outstanding) |          |                           
|                                                                              | Additional paid-in capital                                                                  |          |                           
|                                                                              | Retained earnings                                                                           |          |                           
|                                                                              | Accumulated other comprehensive income (loss)                                               |          |                           
|                                                                              |                                                                                             |          |                           
|                                                                              |                                                                                             |          | Total stockholder's equity
|                                                                              |                                                                                             |          |                           
|Total liabilities and stockholder's equity                                    |                                                                                             | $        | 654,014                   
|                                                                              |                                                                                             |          |                           

See
Notes to Consolidated Financial Statements.

24

---

AAF-McQUAY INC. AND SUBSIDIARIES        CONSOLIDATED STATEMENTS OF OPERATIONS  (Dollars in thousands)

|                                  |                                     | Years Ended June 30, |        
|--------------------------------- | ----------------------------------- | -------------------- | -------
|
|Net sales                         |                                     | $                    | 870,854
|Cost of sales                     |                                     |                      | 638,825
|                                  |                                     |                      |        
|Gross profit                      |                                     |                      | 232,029
|Operating expenses:               |                                     |                      |        
|                                  | Selling, general and administrative |                      |        
|                                  | Amortization of intangible assets   |                      |        
|                                  | Restructuring charges               |                      |        
|                                  |                                     |                      |        
|                                  |                                     |                      | 196,679
|                                  |                                     |                      |        
|Income from operations            |                                     |                      | 35,350 
|Interest expense, net             |                                     |                      | 19,372 
|Other (income) expense, net       |                                     |                      | (4,542 
|                                  |                                     |                      |        
|Income (loss) before income taxes |                                     |                      | 20,520 
|Income taxes                      |                                     |                      | 8,540  
|Minority interest in earnings     |                                     |                      | 238    
|                                  |                                     |                      |        
|Net income (loss)                 |                                     | $                    | 11,742 
|                                  |                                     |                      |        

See
Notes to Consolidated Financial Statements.

25

---



AAF-McQUAY INC. AND SUBSIDIARIES        CONSOLIDATED STATEMENTS OF CASH FLOWS  (Dollars in thousands)

|                                                     |                                                                     | Years Ended June 30,                           |        
|---------------------------------------------------- | ------------------------------------------------------------------- | ---------------------------------------------- | -------
|
|Cash flows from operating activities:                |                                                                     |                                                |        
|                                                     | Net income (loss)                                                   |                                                | $      
|                                                     | Adjustments to reconcile to cash from operating activities:         |                                                |        
|                                                     | Depreciation and amortization                                       |                                                |        
|                                                     | Gain (loss) on the sale of business/property                        |                                                |        
|                                                     | Deferred income taxes                                               |                                                |        
|                                                     | Other non-cash items, net                                           |                                                |        
|                                                     | Changes in operating assets and liabilities:                        |                                                |        
|                                                     |                                                                     | Accounts receivable                            |        
|                                                     |                                                                     | Inventories                                    |        
|                                                     |                                                                     | Accounts payable and other accrued liabilities |        
|                                                     |                                                                     | Other assets/liabilities, net                  |        
|                                                     |                                                                     |                                                |        
|Net cash from operating activities                   |                                                                     |                                                | 28,957 
|Cash flows from investing activities:                |                                                                     |                                                |        
|                                                     | Capital expenditures                                                |                                                |        
|                                                     | Acquisition of additional interest in joint venture, net of cash    |                                                |        
|                                                     | Proceeds from the sale of business/property                         |                                                |        
|                                                     |                                                                     |                                                |        
|Net cash from investing activities                   |                                                                     |                                                | (9,892 
|Cash flows from financing activities:                |                                                                     |                                                |        
|                                                     | Net borrowings (repayments) under short-term borrowing arrangements |                                                |        
|                                                     | Payments on long-term debt                                          |                                                |        
|                                                     | Proceeds from issuance of long-term debt                            |                                                |        
|                                                     | Repurchase of senior notes                                          |                                                |        
|                                                     | Payment of debt issuance costs                                      |                                                |        
|                                                     |                                                                     |                                                |        
|Net cash from financing activities                   |                                                                     |                                                | (15,043
|Effect of exchange rate changes on cash              |                                                                     |                                                | (1,290 
|                                                     |                                                                     |                                                |        
|Net increase (decrease) in cash and cash equivalents |                                                                     |                                                | 2,732  
|Cash and cash equivalents at beginning of year       |                                                                     |                                                | 11,522 
|                                                     |                                                                     |                                                |        
|Cash and cash equivalents at end of year             |                                                                     | $                                              | 14,254 
|                                                     |                                                                     |                                                |        

See
Notes to Consolidated Financial Statements.

26

---

AAF-McQUAY INC. AND SUBSIDIARIES        CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY  (Dollars in thousands)

|                                                           |  |   |     |  |   |         |  | Accumulated Other Comprehensive
Income (Loss) |        |   |  
|---------------------------------------------------------- |  | - | --- |  | - | ------- |  | --------------------------------------------- | ------ | - | -
|
|Balance, June 30, 1998                                     |  | $ | 250 |  | $ | 179,915 |  | $                                             | 24,288 |   | $
|Net loss                                                   |  |   |    |  |   |        |  |                                               | (6,526 | ) |  
|Currency translation adjustment                            |  |   |    |  |   |        |  |                                               |       |   |  
|                                                           |  |   |     |  |   |         |  |                                               |        |   |  
|Balance, June 30, 1999                                     |  |   | 250 |  |   | 179,915 |  |                                               | 17,762 |   |  
|Net income                                                 |  |   |    |  |   |        |  |                                               | 102    |   |  
|Currency translation adjustment                            |  |   |    |  |   |        |  |                                               |       |   |  
|                                                           |  |   |     |  |   |         |  |                                               |        |   |  
|Balance, June 30, 2000                                     |  |   | 250 |  |   | 179,915 |  |                                               | 17,864 |   |  
|Net income                                                 |  |   |    |  |   |        |  |                                               | 11,742 |   |  
|Currency translation adjustment                            |  |   |    |  |   |        |  |                                               |       |   |  
|Minimum pension liability adjustment, net of tax of $2,110 |  |   |    |  |   |        |  |                                               |       |   |  
|                                                           |  |   |     |  |   |         |  |                                               |        |   |  
|Balance, June 30, 2001                                     |  | $ | 250 |  | $ | 179,915 |  | $                                             | 29,606 |   | $
|                                                           |  |   |     |  |   |         |  |                                               |        |   |  

See
Notes to Consolidated Financial Statements.

27

---

AAF-McQUAY INC. AND SUBSIDIARIES        CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME  (Dollars in thousands)

|                                   |                                                                                           | Years Ended June 30, |       
|---------------------------------- | ----------------------------------------------------------------------------------------- | -------------------- | ------
|
|Net income (loss)                  |                                                                                           | $                    | 11,742
|Other comprehensive income (loss): |                                                                                           |                      |       
|                                   | Foreign currency translation adjustments                                                  |                      |       
|                                   | Write off of accumulated foreign currency translation adjustments due to sale of business |                      |       
|                                   | Minimum pension liability adjustment, net of tax of 2,110                                 |                      |       
|                                   |                                                                                           |                      |       
|Comprehensive income (loss)        |                                                                                           | $                    | 3,733 
|                                   |                                                                                           |                      |       

See
Notes to Consolidated Financial Statements.

28

---



AAF-McQUAY INC. AND SUBSIDIARIES        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Organization

The accompanying financial statements include the accounts of AAF-McQuay Inc. (the Company), a wholly owned subsidiary of
AAF-McQuay Group Inc., and its subsidiaries. AAF-McQuay Group Inc. is a wholly owned subsidiary of O.Y.L. Industries Berhad ("OYL").

The
Company is a worldwide manufacturer and marketer of commercial air conditioning and refrigeration and air filtration products and systems primarily for commercial, institutional
and industrial customers. The Company maintains production facilities in nine countries and its products are sold in over 80 countries.

2. Summary of Significant Accounting Policies



The consolidated financial statements include the accounts of the Company and all of its subsidiaries. All intercompany transactions and balances have been
eliminated. The accompanying financial statements reflect the financial results of the Company for the fiscal years ended June 30, 2001, 2000 and 1999. The Company's fiscal year end is the
Saturday closest to June 30 and, for clarity of presentation in the consolidated financial statements, fiscal years are shown to begin on July 1 and end on June 30.

The
preparation of financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

Certain
reclassifications have been made to prior year amounts to conform to the current year presentation.



The Company invests cash in excess of operating requirements in short-term time deposits. These investments have original maturities of less than
three months and are considered cash equivalents for financial reporting purposes.



Inventories are valued at the lower of cost or market at June 30, 2001 and 2000. Cost is determined by the last-in, first-out
(LIFO) method for U.S. inventories (65% in 2001 and 59% in 2000), and the first-in, first-out (FIFO) method for the Company's foreign subsidiaries (35% in 2001 and 41% in
2000).



Property, plant and equipment are capitalized at cost and depreciated using the straight-line method over their estimated useful lives as follows:

Buildings

20 to 40 yearsMachinery and Equipment

3 to 12 years


Maintenance
and repairs are charged to operations when incurred, while expenditures, which have the effect of extending the useful life of an asset, are capitalized.

29

---



The Company capitalizes qualifying costs of computer software developed or obtained for internal use and amortizes these costs on a straight-line
basis over the software's useful life, which is generally a period of three to five years.



The excess of cost over fair values of net assets acquired is being amortized on a straight-line basis over forty years. Other identifiable
intangibles acquired include trademarks and tradenames, technical drawings, technology; and assembled work force, which are being amortized on a straight-line basis over forty, fifteen and
ten years, respectively.

On
a periodic basis, the Company evaluates the carrying value of its intangible assets to determine if the facts and circumstances suggest that intangible assets may be impaired. If
this review indicates that intangible assets may not be recoverable, as determined based on the undiscounted cash flow of the entity acquired over the remaining amortization period, the Company's
carrying value of intangible assets is reduced to the then estimated fair value of such assets.

In
June 2001, the Financial Standards Board issued Statements of Financial Accounting Standards (SFAS) No. 141,Business
Combinations, and No. 142,Goodwill and Other Intangibles Assets, effective for fiscal years beginning after
December 15, 2001. Under the new rules, goodwill and intangible assets deemed to have indefinite lives will no longer be amortized but will be subject to annual impairment tests in accordance
with the Statements. Other intangible assets will continue to be amortized over their useful lives. The Company is required to apply the new rules on accounting for goodwill and other intangible
assets beginning the first quarter of fiscal 2003, although it has the option to adopt the new Standards in the first quarter of fiscal year 2002. The Company is currently assessing the financial
impact that SFAS Nos. 141 and 142 will have on its earnings and financial position.



The Company uses derivative financial instruments, principally, in the management of its interest rate and foreign currency exposures. The Company does not
enter into speculative derivative transactions.

The
differential between interest rate payments due and amounts receivable under interest rate swap agreements is recognized as yield adjustments to interest expense over the term of
the related debt.

Gains
and losses on foreign exchange forward contracts are recognized in income and offset the foreign exchange gains and losses on the underlying foreign currency transactions.

In
June 1998, the Financial Accounting Standards Board issued SFAS No. 133, Accounting for Derivative Instruments and for Hedging
Activities, which was amended by Statement Nos. 137 and 138, in June 1999 and June 2000, respectively. The Statement requires the Company to recognize all
derivatives on the balance sheet at fair value. Derivatives that do not receive hedge accounting treatment are adjusted to fair value through income. If a derivative is a hedge, depending on the
nature of the hedge, changes in the fair value of the derivative are either offset against the change in fair value of assets, liabilities, or firm commitments through earnings or are recognized in
other

30

---

comprehensive income until the hedged item is recognized in earnings. The Company adopted Statement No. 133, as amended, on July 1, 2000 resulting in no cumulative effect of an
accounting change being recognized in the consolidated statements of operations or comprehensive income.

Foreign Currencies

Assets and liabilities of the Company's subsidiaries outside the U.S. are translated into U.S. dollars at the exchange rates in effect at the end of the
period. Revenue and expense accounts are translated at a weighted average of exchange rates in effect during the period. Translation adjustments that arise from translating a foreign subsidiary's
financial statements from local currency (the functional currency) to U.S. dollars are reflected as a separate component of stockholder's equity.

Transaction
gains and losses that arise from exchange rate changes on transactions denominated in a currency other than the local currency are included currently in other (income)
expense in the results of the Company's operations. The Company recognized net foreign currency transaction (gains) losses of $1,101,000, $25,000 and $(738,000), for the fiscal years ended
June 30, 2001, 2000 and 1999, respectively.



Revenues are generally recognized as products are shipped and title passes to the customer or services are rendered. Revenues and costs associated with
long-term contracts are recognized on the percentage-of-completion method. Provisions are recorded for losses on contracts whenever it is estimated that costs will
exceed contract value.

In
December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101 "Revenue Recognition in Financial Statements" ("SAB 101"). SAB 101
provides guidance on the recognition, presentation and disclosure of revenue in financial statements. The Company adopted SAB 101 in the fourth quarter of fiscal 2001. The adoption of SAB 101 had no
effect on the Company's results of operations or financial position.



Product warranties are provided as charges to current expense for estimated normal warranty costs and, if applicable, for specific performance issues known to
exist on products sold. The expenses estimated to be incurred are provided at the time of sale, based primarily upon estimates derived from experience. Warranty costs on some purchased parts and
components are partially reimbursed to the Company by supplying vendors. Estimated obligations beyond one year are classified as other long-term liabilities. Revenue from the sale of
extended warranty and related service contracts is deferred and amortized over the respective contract life on a straight-line basis.



Research and development costs were approximately $9.0, $8.7 and $8.9 million, for the fiscal years ended June 30, 2001, 2000 and 1999,
respectively, and are included in selling, general and administrative expenses in the accompanying Consolidated Statements of Operations.

31

---



As described in Note 12, the Company has elected to follow the accounting provisions of Accounting Principles Board Opinion ("APB") No. 25 for
stock-based compensation and to furnish the pro forma disclosures required under SFAS No. 123.



The Company uses the liability method for financial accounting and reporting of income taxes. Under the liability method, deferred tax assets and liabilities
are determined based on the difference between financial statement carrying amounts and the tax bases of assets and liabilities. These differences are measured at the enacted tax rates that will be in
effect when these differences reverse.

3. Accounts Receivable

Accounts receivable consist of the following (dollars in thousands):

2001

2000Accounts receivable, trade

$
189,500

$
200,408Accounts receivable, other


8,653


11,083198,153


211,491Less allowance for doubtful receivables


6,211


6,968$
191,942

$
204,523


The
Company manufactures and sells heating, ventilating, air conditioning, refrigeration and air filtration products to companies in various industries with the most significant sales
concentration being
in the construction industry. The Company performs periodic evaluations of its customers' financial condition and generally does not require collateral. For domestic equipment sales, it is the
Company's practice to attach liens in the event of non-payment, when such recourse is available. Trade receivables generally are due within 30-90 days.

4. Inventories

Inventories consist of the following (dollars in thousands):

2001

2000FIFO cost:Raw materials

$
42,706

$
42,278Work-in-process


17,691


19,313Finished goods


41,851


42,325102,248


103,916LIFO adjustment


(446
)

(81
)$
101,802

$
103,835


32

---

5. Property, Plant and Equipment

Property, plant and equipment consists of the following (dollars in thousands):

2001

2000Land

$
7,693

$
8,845Buildings


59,794


57,627Machinery and equipment


141,321


134,517208,808


200,989Less accumulated depreciation and amortization


90,064


75,991$
118,744

$
124,998


At
June 30, 2001, substantially all property, plant and equipment are encumbered by various debt obligations of the Company. Depreciation expense was $17.3, $19.2, and
$17.7 million for fiscal 2001, 2000 and 1999, respectively. Pursuant to the close of the Scottsboro, Alabama air handling manufacturing facility (see Note 9), certain assets with a
carrying amount of $3.4 million are held for sale. The assets, consisting principally of building and land, are expected to be sold by the end of fiscal 2003.

6. Intangible Assets

Intangible assets consist of the following (dollars in thousands):

2001

2000Cost in excess of net assets acquired

$
143,867

$
144,142Other intangibles:Technology


14,021


14,129Trademarks


58,874


58,874Drawings


54,000


54,000Workforce


17,046


17,046Total other intangibles


143,941


144,049Less accumulated amortization


86,077


73,880$
201,731

$
214,311


Amortization
of intangible assets in the Consolidated Statement of Operations for fiscal 2001 includes the write-off of intangibles and goodwill in the amount of
$1.1 million related to the Company's German
subsidiary. This write-off was based on an analysis of projected undiscounted cash flows, which were no longer deemed adequate to support the value of intangibles and goodwill associated
with the business.

7. Debt

In September 1999, the Company refinanced a previous bank agreement with a new Bank Credit Agreement. The Bank Credit Agreement expires in
February 2003 and includes a $30 million term loan ("Term Loan") and a $90 million revolving credit commitment ("Revolver"). Use of the Revolver is subject to the Company's
availability (as defined in the Bank Agreement) and is based on the Company's level of domestic receivables and inventories. Interest on advances is generally payable

33

---

quarterly, at the Company's option on 1.) the higher of the domestic base rate (prime) or a rate based on the Federal Funds Rate plus a specified premium or 2.) the average rate at which Eurodollar
deposits are offered to prime banks in the London interbank market ("LIBOR") plus a specified premium. The interest rate premiums are determined by an interest rate matrix, which is based on a certain
financial ratio as described in the Bank Credit Agreement. As of June 30, 2001, the Company's interest rate premiums were LIBOR + 1.75% or prime + 0% for Revolver
borrowings and LIBOR + 2.00% or prime + 0% for Term Loan borrowings. The interest rate premiums are subject to a 0.25% increase or decrease depending on the applicable
ratio. At June 30, 2001, the Company's borrowing rate under the Revolver was approximately 5.6%. The average effective interest rate under the Revolver for the fiscal year ended June 30,
2001 was approximately 7.8%. A commitment fee of 0.25% is required on the unused portion of the Revolver. At June 30, 2001, the Company had borrowed $53.5 million under the Revolving
Credit Facility, $7.5 million in letters of credit were issued and outstanding, and the Company had remaining borrowing availability of $29.0 million. At June 30, 2000, the
Company had borrowed $31.9 million under the Revolving Credit Facility.

At
June 30, 2001, certain of the Company's foreign subsidiaries had available lines of credit with foreign banks of approximately $40.0 million which may be drawn as
needed at an average interest rate of approximately 7.0%. Outstanding borrowings against international lines of credit amounted to approximately $10.5 and $26.0 million at June 30, 2001
and 2000, respectively. In addition, certain of the Company's foreign subsidiaries have non-borrowing bank facilities (letters of credit, guarantees, performance bonds, etc.) totaling
$21.3 million as of June 30, 2001 and $22.3 million as of June 30, 2000
of which approximately $12.4 million was used at June 30, 2001 and $15.6 million was used at June 30, 2000.

The
weighted average effective interest rate on short-term borrowings was 5.8% and 8.9% at June 30, 2001 and 2000, respectively.

Long-term
debt consists of the following (dollars in thousands):

2001

2000Senior Term Loans

$
17,975

$
23,075Senior Unsecured Notes due February 15, 2003, bearing interest at 8.875%


108,834


125,000Other issues


10,740


12,920137,549


160,995Less: Current maturities


(6,120
)

(7,319
)$
131,429

$
153,676


The
term loan portion of the Bank Credit Agreement is a direct obligation of the Company. This term loan is secured by substantially all the domestic assets of the Company and its
domestic subsidiaries and a portion of the capital stock of certain foreign subsidiaries. Interest is generally payable quarterly. As of June 30, 2001, the repayment schedule calls for
19 monthly payments of $425,000 with a final payment of $9.9 million due at maturity (February 1, 2003).

34

---

The Bank Credit Agreement contains covenants that, among other things, imposes limitations on incurrence of indebtedness, capital expenditures, transactions with affiliates, mergers
and the disposition of assets, investments by the Company, and transactions involving the capital of the Company, including payment of any dividends. In addition, the Bank Credit Agreement contains
financial covenants relating to net worth and fixed charge coverage. The Company is in compliance with the Bank Credit Agreement.

The
term loan portion of the Bank Credit Agreement contains provisions requiring accelerated payments as a result of asset sales above a prescribed minimum. Accelerated payments of
$3.5 million were required during the fiscal year ended June 30, 2000. No accelerated payments were required for the years ended June 30, 2001 or 1999.

In
February 1996, the Company issued the 8.875% Senior Unsecured Notes ("Senior Notes") with the proceeds being used to reduce indebtedness under the previous bank agreement.
The Senior Notes were issued under an indenture agreement which, among other things, contains restrictive covenants relating to dividend distributions, additional debt, sale of assets, transactions
with affiliates, guarantees and investments by the Company and its subsidiaries. The Senior Notes are not redeemable prior to maturity (February 15, 2003) and are not subject to any sinking
fund requirement.

During
the year ended June 30, 2001, the Company repurchased bond principal amounts totaling $16.2 million of its Senior Notes at a discount, resulting in a gain of
approximately $0.4 million after write-off of associated debt issuance costs. The Company plans to hold these repurchased notes until their maturity in February 2003.

Included
in other issues of long-term debt are various term loans incurred by certain foreign subsidiaries, as well as obligations under Industrial Revenue Bonds and
mortgage notes. The foreign term loans are secured by certain assets of the issuing foreign subsidiary and contain various repayment terms ranging from 3 to 14 years.

The
Company paid cash interest of $18.3, $20.7 and $23.1 million for the fiscal years ended June 30, 2001, 2000 and 1999, respectively.

Maturities
of long-term debt during each of the next five fiscal years subsequent to June 30, 2001 are as follows (dollars in millions): 2002$6.1;
2003$122.8; 2004$1.0; 2005$1.1; 2006$1.0.

35

---

The Company operates internationally and borrows at floating interest rates, giving rise to exposure to market risks from changes in foreign exchange rates and interest rates. The
Company may utilize derivatives to reduce those risks. The notional amounts of derivatives noted below do not represent amounts exchanged by the parties and, thus, are not a measure of the exposure of
the Company through its use of derivatives. The Company does not hold or issue derivative financial instruments for trading purposes.

Interest rate risk management:The Company may, at times, seek to limit the impacts of rising interest rates on its
variable rate debt through the use of interest rate derivative instruments. In January 2000, the Company entered into an interest rate swap transaction whereby the Company receives a fixed rate
of 7.04% and pays a floating rate on the basis of 3-month LIBOR. The January 2000 swap has a three-year term and a notional amount of $30 million and effectively
converts a portion of the Company's fixed rate borrowings to a floating rate. In September 2000, the Company sold an interest rate floor with a notional amount of $30 million, which
requires the Company to make payments if 3-month LIBOR falls below a certain level. The Company received a payment of $165,000 as selling price for the floor. The measurement dates and
maturity dates of the swap and floor match interest payment dates and maturity date of the Senior Notes. The Company records the swap and floor in its balance sheet at fair market value. As of
June 30, 2001, the fair market value of the interest rate swap and floor was an asset of $1.4 million and a liability of $1.2 million, respectively. The net result of these
positions recognized in operations for the year ended June 2001 was income of $0.3 million.

Foreign currency management:The Company enters into short-term foreign exchange contracts to hedge its
exposure to currency fluctuations affecting certain foreign currency denominated trade payables and certain intercompany debt of its foreign subsidiaries. The notional amount of foreign exchange
forward contracts outstanding at June 30, 2001 and 2000 respectively, was approximately $28.9 and $20.3 million, respectively. The U.S. dollar equivalent notional amount of these foreign
exchange forward contracts by applicable foreign currency at June 30, 2001 and 2000 was as follows: Canadian dollars$4.5 and $5.9 million; Singapore dollars$0
and $0.9 million; Euro-related currencies$6.8 and $2.8 million; British pounds$12.4 and $9.2 million; Mexican peso$5.0 and
$0 million; and various other currencies$0.2 and $1.5 million.

The
Company is exposed to credit-related losses in the event of non-performance by counter parties to derivative financial instruments. The Company monitors the credit
worthiness of the counter parties and presently does not anticipate nonperformance by the counter parties. The credit exposure of derivative financial instruments is represented by the fair value of
contracts with a positive fair value.

36

---

SFAS No. 107,Disclosures about Fair Values of Financial Instruments,defines the fair value of a financial instrument as the
amount at which the instrument could be exchanged in a current transaction between willing parties. The carrying values reported in the balance sheets for cash and cash equivalents, accounts
receivable and short-term borrowings approximate their respective fair values. The fair value of the Company's Senior Unsecured Notes is estimated using a quoted market price. The carrying
amount of the Company's long-term debt at June 30, 2001 of $137.5 million approximates fair value. The fair values of the Company's foreign exchange forward contracts are
based on current settlement values and fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counter parties' credit standing. At
June 30, 2001 and 2000, the net carrying amount of these contracts approximates their fair value.

9. Restructuring

The Company initiated several restructuring plans during fiscal 2001 in both the Commercial Air Conditioning and Refrigeration and Filtration Products
segments. Restructuring reserves of approximately $7.2 were recorded. During the first quarter of fiscal 2001, the Company announced its intention to close its air handling manufacturing facility in
Scottsboro, Alabama. Related to this closure, the Company recorded a restructuring reserve of approximately $2.2 million, primarily related to severance accruals for the elimination of
approximately 330 employees. Additionally during fiscal 2001, the Commercial Air Conditioning and Refrigeration segment continued restructuring efforts in its United Kingdom operations recording a
reserve of approximately $4.4 million. This reserve primarily represents severance accruals related to the elimination of approximately 180 employees in its industrial refrigeration
headquarters and air handling, plate freezer and compressor manufacturing units. The remaining restructuring reserves of approximately $0.6 million primarily relate to severance costs for the
Filtration Products segment and the elimination of approximately 15 positions in Germany. At June 30, 2001, the Company had utilized $6.0 million of the reserves related to these
restructuring plans. The Company expects to complete these restructuring efforts by the end of fiscal 2002.

During
fiscal year 2000, restructuring reserves of $3.5 million were recorded. The Commercial Air Conditioning and Refrigeration business segment continued the restructuring of
the United Kingdom operations in the third and fourth quarters of fiscal 2000, recording approximately $2.7 million primarily representing severance accruals. Additionally, the Filtration
Products business segment restructured the United Kingdom operations in the fourth quarter of fiscal 2000 resulting in a restructuring charge of approximately $0.8 million for severance
accruals. These combined efforts resulted in the elimination of approximately 140 employees in the United Kingdom. At June 30, 2001, the Company had utilized substantially all of the
$3.5 million reserves recorded in fiscal 2000 related to these restructuring plans.

During
fiscal 1999, restructuring reserves of $5.2 million were recorded. The Commercial Air Conditioning and Refrigeration business segment commenced restructuring efforts of
the United Kingdom and Italian operations in the third quarter, recording approximately $1.0 million representing primarily severance accruals. Additionally, the chiller business unit was
reorganized in the fourth quarter resulting in a
restructuring charge of approximately $1.0 million for severance accruals. These combined efforts resulted in the elimination of approximately 120 employees. The Filtration Products business
segment restructured the German operations in the first quarter and additional European operations and domestic operations in the fourth quarter of fiscal year 1999. Total restructuring charges of
$3.2 million were recorded. Components of the $3.2 million related primarily to severance accruals related to the elimination of approximately 40 positions. At June 30, 2000, the
Company had utilized substantially all of the $5.2 million reserve recorded in fiscal year 1999 related to these restructuring plans.

37

---

10. Provision for Income Taxes

Pretax income (loss) subject to taxation by the U.S. and foreign jurisdictions for the fiscal years ended 2001, 2000 and 1999 was as follows:

2001

2000

1999Domestic

$
14,700

$
4,513

$
(9,460
)Foreign


5,820


(1,503
)

1,776Total

$
20,520

$
3,010

$
(7,684
)


Deferred
income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used
for income tax purposes. Significant components of the Company's deferred tax assets and liabilities at June 30, 2001 and 2000 are as follows (dollars in thousands):

2001

2000Deferred tax assets:Net operating loss carryforwards

$
10,012

$
14,644Fixed assets


951


1,012Post-retirement benefits


4,813


4,476Other accruals


23,304


22,769Tax credit carryforwards


390


2,458Other


5,950


3,095Total deferred tax assets


45,420


48,454Valuation allowance


(12,281
)

(19,865
)Net deferred tax assets

$
33,139

$
28,589Deferred tax liabilities:Unrepatriated foreign earnings

$
2,755

$
2,755Fixed assets


13,790


16,611Intangible assets


28,907


30,708Inventories


6,028


7,453Other


7,688


5,973Total deferred tax liabilities


59,168


63,500Net deferred tax liabilities

$
26,029

$
34,911


Deferred
tax assets for net operating loss carryforwards and other items at June 30, 2001 and 2000 include approximately $2.0 million and $2.6 million,
respectively, related to periods prior to the acquisition by OYL which have been offset by a valuation allowance. If realized, the benefit of these deferred tax assets will be applied to reduce
goodwill related to the acquisition. During fiscal year 2001, the deferred tax asset valuation allowance decreased by approximately $7.6 million. The decrease is principally attributable to the
release of valuation allowances associated with the use or expiration of corresponding deferred tax assets during the fiscal year. There is no additional tax on repatriation of any current year
earnings because of the availability of tax credits. During fiscal year 2000, the deferred tax asset valuation allowance increased by approximately $5.5 million. The increase was principally
attributable to the recognition of tax asset valuation allowances associated with tax loss carryforwards and tax credit carryforwards generated during the fiscal year.

38

---

Significant components of the provision (benefit) for income taxes are as follows (dollars in thousands):

2001

2000

1999Federal taxescurrent

$
9,792

$
2,278

$
(2,398
)Federal taxesdeferred


(4,223
)

(168
)

(568
)State taxes


1,307


377


(331
)Foreign taxescurrent


3,229


3,428


1,853Foreign taxesdeferred


(1,565
)

(3,268
)

Total

$
8,540

$
2,647

$
(1,444
)


During
the fiscal years ended June 30, 2001, 2000 and 1999, the Company paid income taxes (net of tax refunds) of approximately $15.5, $(1.8), and $0.6 million,
respectively. A reconciliation between the Company's reported tax provision (benefit) and the tax provision (benefit) computed based on the U.S. statutory rate is as follows (dollars in thousands):

2001

2000

1999Statutory U.S. Federal income tax provision

$
7,182

$
1,054

$
(2,690
)Nondeductible goodwill amortization


1,089


1,095


1,116State taxes, net of federal benefit


1,307


377


(331
)Other


(1,038
)

121


461Reported tax provision

$
8,540

$
2,647

$
(1,444
)


At
June 30, 2001, the Company has net operating loss and tax credit carryforwards of approximately $29 million and $0.4 million, respectively, in the United
States and various foreign countries. Approximately $1.6 million of the net operating loss carryforwards and all tax credit carryforwards expire in fiscal years 2002 through 2012. The remaining
net operating loss carryforwards can be carried forward indefinitely.

11. Employee Benefit Plans

The Company has frozen defined benefit pensions plans in effect for certain of the Company's domestic hourly employees and active defined benefit pension plans
for certain of its foreign employees. Benefits are computed using formulas, which are generally based on age and years of service. Plan assets consist primarily of common stock, insurance contracts
and government obligations. The Company's method of funding pension costs is to contribute amounts to the plans sufficient to meet minimum funding requirements, plus such amounts as the Company may
determine to be appropriate from time to time.

39

---

The Company also sponsors defined benefit health care plans for certain salaried and non-salaried employees whereby certain health care and life insurance benefits are
provided on retirement. The benefits are provided only for a frozen group of active employees and retirees.

The
following table sets forth the funded status of the defined benefit pension and defined benefit health care plans, and amounts recognized in the Consolidated Balance Sheet
(dollars in thousands):

|                                                     |  | Pension Benefits
Plans in the
United States |        | Pension Benefits
Plans outside the
United States |   | Other
Postretirement Benefits
All Plans |  
|---------------------------------------------------- |  | ------------------------------------------- | ------ | ------------------------------------------------ | - | --------------------------------------- | -
|
|Change in Benefit Obligation                         |  |                                             |        |                                                  |   |                                         |  
|Benefit obligation at beginning of year              |  | $                                           | 25,269 |                                                  | $ | 27,306                                  |  
|Service cost                                         |  |                                             | 131    |                                                  |   | 241                                     |  
|Interest cost                                        |  |                                             | 1,854  |                                                  |   | 1,831                                   |  
|Plan participants' contributions                     |  |                                             |       |                                                  |   |                                        |  
|Actuarial (gains)/losses                             |  |                                             | 1,148  |                                                  |   | (1,491                                  | )
|Benefits paid                                        |  |                                             | (2,430 | )                                                |   | (2,574                                  | )
|Curtailments (gain)/loss                             |  |                                             |       |                                                  |   | (44                                     | )
|Settlements                                          |  |                                             | (84    | )                                                |   |                                        |  
|Sale of business                                     |  |                                             |       |                                                  |   |                                        |  
|Effects of currency exchange rates                   |  |                                             |       |                                                  |   |                                        |  
|                                                     |  |                                             |        |                                                  |   |                                         |  
|Benefit obligation at end of year                    |  | $                                           | 25,888 |                                                  | $ | 25,269                                  |  
|                                                     |  |                                             |        |                                                  |   |                                         |  
|Change in Plan Assets                                |  |                                             |        |                                                  |   |                                         |  
|Fair value of plan assets at beginning of year       |  | $                                           | 28,723 |                                                  | $ | 26,671                                  |  
|Actual return on plan assets                         |  |                                             | (3,625 | )                                                |   | 4,284                                   |  
|Benefits paid                                        |  |                                             | (2,430 | )                                                |   | (2,574                                  | )
|Employer contributions                               |  |                                             | 664    |                                                  |   | 342                                     |  
|Contributions by plan participants                   |  |                                             |       |                                                  |   |                                        |  
|Settlements                                          |  |                                             | (126   | )                                                |   |                                        |  
|Effects of currency exchange rates                   |  |                                             |       |                                                  |   |                                        |  
|                                                     |  |                                             |        |                                                  |   |                                         |  
|Fair value of plan assets at end of year             |  |                                             | 23,206 |                                                  |   | 28,723                                  |  
|                                                     |  |                                             |        |                                                  |   |                                         |  
|Funded status                                        |  |                                             | (2,682 | )                                                |   | 3,454                                   |  
|Unrecognized net actuarial (gain)/loss               |  |                                             | 361    |                                                  |   | (7,135                                  | )
|                                                     |  |                                             |        |                                                  |   |                                         |  
|Prepaid (accrued) benefit cost                       |  | $                                           | (2,321 | )                                                | $ | (3,681                                  | )
|                                                     |  |                                             |        |                                                  |   |                                         |  
|Amounts recognized in the Consolidated Balance Sheet |  |                                             |        |                                                  |   |                                         |  
|Prepaid benefit cost                                 |  | $                                           | 1,972  |                                                  | $ | 1,320                                   |  
|Accrued benefit cost                                 |  |                                             | (4,712 | )                                                |   | (5,001                                  | )
|Accumulated other comprehensive loss                 |  |                                             | 419    |                                                  |   |                                        |  
|                                                     |  |                                             |        |                                                  |   |                                         |  
|Net amount recognized                                |  | $                                           | (2,321 | )                                                | $ | (3,681                                  | )
|                                                     |  |                                             |        |                                                  |   |                                         |  

40

---

The aggregate accumulated benefit obligation for defined benefit pension plans with an accumulated benefit obligation in excess of plan assets was $10.5 and $10.6 million as of
June 30, 2001 and 2000, respectively. The aggregate projected benefit obligation for defined benefit pension plans with a projected benefit obligation in excess of plan assets was $54.8 and
$50.9 million as of June 30, 2001 and 2000, respectively. The aggregate fair value of plan assets for defined benefit pension plans with either an accumulated benefit obligation or a
projected benefit obligation in excess of plan assets was $44.1 and $55.5 million as of June 30, 2001 and 2000, respectively.

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

|                               |  | Pension Benefits Plans
In the United States |        | Pension Benefits Plans
Outside the United States |  
|------------------------------ |  | ------------------------------------------- | ------ | ------------------------------------------------ | -
|
|Service cost                   |  | $                                           | 94     |                                                  | $
|Interest cost                  |  |                                             | 1,864  |                                                  |  
|Expected return on plan assets |  |                                             | (2,528 | )                                                |  
|Net amortization/deferral      |  |                                             | (319   | )                                                |  
|Curtailment                    |  |                                             | 45     |                                                  |  
|                               |  |                                             |        |                                                  |  
|Net periodic (benefit) cost    |  | $                                           | (844   | )                                                | $
|                               |  |                                             |        |                                                  |  
|Assumptions as of June 30:     |  |                                             |        |                                                  |  
|Discount rate                  |  |                                             | 7.25   | %                                                |  
|Expected return on plan assets |  |                                             | 9.00   | %                                                |  
|Rate of compensation increase  |  |                                             | N/A    |                                                  |  

The
net periodic benefit cost related to the defined benefit health care plans included the following components (dollars in thousands):

2001

2000

1999Service cost

$
205

$
204

$
256Interest cost


469


393


400Net amortization/deferral


1


(18
)

(29
)Net periodic benefit cost

$
675

$
579

$
627Weighted average discount rate as of June 30


7.25
%

7.75
%

7.00
%


The
health care cost trend rate used to determine the health care benefit obligation was 8.5% for 2001. This rate decreases gradually annually to the ultimate medical trend rate of
5.00% in 2008, and remains at that level thereafter. The trend rate is a significant factor in determining the amounts reported. A one-percentage-point change in these assumed health care
cost trend rates would have the following effects (dollars in thousands):

Increase

DecreaseEffect on total service and interest cost components

$
65

$
(55
)Effect on postretirement benefit obligation


244


(216
)


41

---

The Company has a defined contribution plan that covers domestic employees. Company contributions to the plan are based on employee compensation. The Company expensed
$1.5 million, $1.3 million and $1.3 million under this plan during the fiscal years ended June 30, 2001, 2000 and 1999, respectively.

The
Company also sponsors a 401(k) defined contribution plan that covers domestic employees. Participants may contribute a percentage of their compensation to the plan. The Company
with certain limitations matches contributions. During the fiscal years ended June 30, 2001, 2000 and 1999, the Company expensed $1.5 million, $1.2 million and
$1.2 million, respectively, related to this plan.

12. Stock-based Compensation

In 1998, the Company adopted a Stock Option Plan which provides for the grant of non-qualified stock options to certain members of management and
key employees to purchase the common stock of the Company's parent AAF-McQuay Group Inc. which has 1,000 shares outstanding. The Company has elected to follow APB No. 25, Accounting for Stock Issued to
Employees, in accounting for its stock-based compensation.

Under
the stock option plan, options to purchase common stock may be granted until 2007. Options may be granted at fair market value at the date of the grant or at fair market value
at the date of grant discounted for a lack of marketability and are exercisable up to 10 years after the date of grant unless terminated sooner or in the event of a public offering of the
Company's shares, two years following the later of the public offering or the date the grantee becomes vested in that portion of the option. Generally, stock options vest and thus can be exercised at
331/3% on each of the first three anniversaries of the date of the grant or 100% at termination of employment because of disability, death or wrongful termination or change in ownership
control.

The
Company recognized income of $1.1 million during fiscal 1999 for stock option grants receiving variable accounting treatment under APB No. 25. These options were
forfeited in 2001.

As
of June 30, 2001, 2000 and 1999, there were stock options for 6.6, 10.3 and 40.0 shares of AAF-McQuay Group, Inc. issued and outstanding under the plan.
Transactions are summarized as follows:

Stock Options

Weighted Average
Exercise PriceOutstanding at June 30, 1998

38.3

$
197,997Granted, vested over three years

5.3


203,214Forfeited

3.6


203,214Outstanding at June 30, 1999

40.0

$
198,219Forfeited

29.7


196,204Outstanding at June 30, 2000

10.3

$
203,214Forfeited

3.7


203,214Outstanding at June 30, 2001

6.6

$
203,214Shares exercisable at June 30, 1999

27.3

$
195,880Shares exercisable at June 30, 2000

7.0

$
203,214Shares exercisable at June 30, 2001

6.0

$
203,214


42

---

In electing to follow APB No. 25 for expense recognition purposes, the Company is obligated to provide the expanded disclosures required under SFAS No. 123 for
stock-based compensation including, if materially different from reported results, disclosure of pro forma net income had compensation expense been measured under the fair value recognition provisions
of SFAS No. 123. No options were granted in fiscal year 2000 or 2001. The weighted-average fair values at date of grant for options granted in 1999 was $43,468, and was estimated using the
Black-Scholes option valuation model with the following weighted average assumptions:

Expected life in years

10.0Interest Rate

6.0
%Dividend Yield

0
%


The
Company's pro forma net income (loss) for the years ended June 30, 2001, 2000, and 1999 would be $11.7, $0.1, and ($7.3) million, respectively. For pro forma disclosure,
stock-based compensation is amortized to expense on a straight-line basis over the vesting period.

13. Leases and Commitments

The following is a schedule of future minimum lease payments required under third party operating leases that have initial or remaining noncancelable lease
terms in excess of one year (dollars in thousands):

Year2002

$
7,1782003


5,2662004


3,9992005


3,0972006


2,744Thereafter


12,225


Rental
expense associated with third party operating leases was approximately $10.9, $10.5 and $9.1 million for the fiscal years ended June 30, 2001, 2000 and 1999,
respectively. It is expected that, in the normal course of business, leases that expire will be renewed or replaced by leases on other property and equipment.

The
Company has a contract whereby a third party manages certain of its data processing operations. Monthly charges during the fiscal years ended June 30, 2001, 2000 and 1999
averaged approximately $732,000, $838,000 and $767,000,respectively, under this contract. This contract extends through December 31, 2005.

14. Indemnification Agreement

The purchase agreement between OYL and the former owners of the Company contained certain indemnifications relating to specified contingencies that existed as
of the acquisition date relating to certain environmental, tax and litigation matters. On July 8, 1998, the Company and the former owners entered into a settlement agreement in resolution of
certain disputes, which were pending before the American Arbitration Association in Dallas, Texas, concerning the interpretation of the indemnification

43

---

obligation. As a result of the settlement agreement, the Company paid $10.5 million of a $11.5 million promissory note due to the former shareholders; the parties agreed to discharge
claims and entitlements under the indemnification provisions in the purchase agreement. The residual balance of
the promissory note was reclassified to other liabilities for specified contingencies that existed as of the acquisition date.

In
addition, as a result of the indemnification settlement agreement and the IRS settlement, the Company expected to receive payments of approximately $5 million and to incur
approximately $2.1 million in obligations relating to the IRS settlement. The Company has now received substantially all payments due under the settlement and funded substantially all
obligations.

15. Contingencies



The Company is subject to potential liability under CERCLA, and other federal, state and local statutes and regulations governing the discharge of pollutants
into the environment and the handling and disposal of hazardous substances and waste. These statutes and regulations, amongst other things, impose potential liability on the Company for remediating
contamination arising from the Company's past and present operations and from former operations of other entities at sites later acquired and now owned by the Company. Many of the Company's facilities
have operated for many years, and substances which are or might be considered hazardous were generated, used, and disposed of at some locations, both on and off-site. The Company records
liabilities if, in management's judgment, environmental assessments or remedial efforts are probable and the costs can be reasonably estimated. These accrued liabilities are not discounted. Such
estimates are adjusted if necessary based on the completion of a formal study or the Company's commitment to a formal plan of action.

Based
upon estimates prepared by environmental consultants, at June 30, 2001 the Company estimates that related probable remediation costs will be approximately
$14.0 million. The Company believes that these costs have been adequately reserved for on the balance sheet and are included in other liabilities. The Company has settled or exhausted its
remedies against all of its insurance companies and any third parties, and expects no additional recoveries. No amounts have been recorded in the accompanying Consolidated Balance Sheets relating to
any potential recoveries. It is possible that environmental liabilities may arise in the future. The precise costs associated with such liabilities are difficult to predict at this time.



The Company is involved in various lawsuits in the ordinary course of business. These lawsuits primarily involve claims for damages arising out of the use of
the Company's products. The Company is also involved in litigation and administrative proceedings involving employment matters and commercial disputes. Some of these lawsuits include claims for
punitive as well as compensatory damages. The Company is insured for product liability claims for amounts in excess of established deductibles and accrues for the estimated liability on a
case-by-case basis up to the limits of the deductibles. All other claims and lawsuits are also handled on a case-by-case basis.

The
Company does not believe that the potential liability from the ultimate outcome of environmental and litigation matters will have a material adverse effect on it.

44

---

16. Business Segments and Geographic Information

The Company globally manufactures and markets commercial air conditioning and air filtration products and systems within two principal segments: Commercial Air
Conditioning and Refrigeration, the manufacture, sale and distribution of heating, ventilating, air conditioning, industrial refrigeration equipment products, and Filtration Products, the manufacture
and sale of air filtration products and systems. Information relating to operations in each industry segment and information by geographic area is as follows as of and for the fiscal years ended
June 30, 2001, 2000 and 1999:

|Classified By Industry:    |                                               | 2001 |       | 2000    |   | 1999    |        
|-------------------------- | --------------------------------------------- | ---- | ----- | ------- | - | ------- | -------
|
|Net Sales:                 |                                               |      |       |         |   |         |        
|                           | Commercial Air Conditioning and Refrigeration |      | $     | 534,965 |   | $       | 540,898
|                           | Filtration Products                           |      |       | 340,593 |   |         | 328,586
|                           | Eliminations                                  |      |       | (4,704  | ) |         | (1,780 
|                           |                                               |      |       |         |   |         |        
|                           |                                               |      | Total |         | $ | 870,854 |        
|                           |                                               |      |       |         |   |         |        
|Operating Income (Loss):   |                                               |      |       |         |   |         |        
|                           | Commercial Air Conditioning and Refrigeration |      | $     | 17,195  |   | $       | 3,705  
|                           | Filtration Products                           |      |       | 19,885  |   |         | 22,885 
|                           | Corporate                                     |      |       | (1,730  | ) |         | (387   
|                           |                                               |      |       |         |   |         |        
|                           |                                               |      | Total |         | $ | 35,350  |        
|                           |                                               |      |       |         |   |         |        
|Total Assets:              |                                               |      |       |         |   |         |        
|                           | Commercial Air Conditioning and Refrigeration |      | $     | 383,987 |   | $       | 404,546
|                           | Filtration Products                           |      |       | 269,619 |   |         | 278,847
|                           | Corporate                                     |      |       | 408     |   |         | 2,007  
|                           |                                               |      |       |         |   |         |        
|                           |                                               |      | Total |         | $ | 654,014 |        
|                           |                                               |      |       |         |   |         |        
|Depreciation/Amortization: |                                               |      |       |         |   |         |        
|                           | Commercial Air Conditioning and Refrigeration |      | $     | 19,149  |   | $       | 20,595 
|                           | Filtration Products                           |      |       | 10,339  |   |         | 9,728  
|                           | Corporate                                     |      |       | 22      |   |         | 33     
|                           |                                               |      |       |         |   |         |        
|                           |                                               |      | Total |         | $ | 29,510  |        
|                           |                                               |      |       |         |   |         |        
|Capital Expenditures:      |                                               |      |       |         |   |         |        
|                           | Commercial Air Conditioning and Refrigeration |      | $     | 10,319  |   | $       | 4,125  
|                           | Filtration Products                           |      |       | 5,682   |   |         | 3,693  
|                           | Corporate                                     |      |       | 5       |   |         | 63     
|                           |                                               |      |       |         |   |         |        
|                           |                                               |      | Total |         | $ | 16,006  |        
|                           |                                               |      |       |         |   |         |        

The
Company estimates corporate expenses and determines fixed allocations of these expenses for each business segment at the beginning of the fiscal year. Any over or under allocation
of actual expenses incurred results in income or expense reported at the corporate level. The $(1.7), $(0.4), and $2.2 million noted above represent the over (under) allocation of expenses for
fiscal years 2001, 2000 and 1999, respectively. Assets at the corporate level consist of cash, receivables, property and other assets.

45

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The reconciliation of segment profit to the Company's earnings before taxes for each year is as follows:

|                                              |  | 2001 |         | 2000 |   | 1999    |  
|--------------------------------------------- |  | ---- | ------- | ---- | - | ------- | -
|
|Operating Income from business segments       |  | $    | 37,080  |      | $ | 26,590  |  
|Over (under) allocation of corporate expenses |  |      | (1,730  | )    |   | (387    | )
|Interest expense, net                         |  |      | (19,372 | )    |   | (21,627 | )
|Other income (expense), net                   |  |      | 4,542   |      |   | (1,566  | )
|                                              |  |      |         |      |   |         |  
|Income (loss) before income taxes             |  | $    | 20,520  |      | $ | 3,010   |  
|                                              |  |      |         |      |   |         |  

|Classified By Geographic Region |        | 2001  |   | 2000    |         | 1999
|------------------------------- | ------ | ----- | - | ------- | ------- | ----
|
|Net Sales:                      |        |       |   |         |         |     
|                                | U.S.   |       | $ | 559,956 |         | $   
|                                | Europe |       |   | 245,756 |         |     
|                                | Other  |       |   | 65,142  |         |     
|                                |        |       |   |         |         |     
|                                |        | Total |   | $       | 870,854 |     
|                                |        |       |   |         |         |     

Transfers
between geographic areas are not significant.

The
composition of the Company's property, plant and equipment, net, between those in the United States and those in Europe and other countries as of the end of each year is as
follows:

| |        | 2001  |   | 2000   |         | 1999
| | ------ | ----- | - | ------ | ------- | ----
|
| | U.S    |       | $ | 95,561 |         | $   
| | Europe |       |   | 19,146 |         |     
| | Other  |       |   | 4,037  |         |     
| |        |       |   |        |         |     
| |        | Total |   | $      | 118,744 |     
| |        |       |   |        |         |     

17. Related Party Transactions

Hong Leong and its subsidiary companies, including OYL and the Company, have a policy of buying from related companies whenever feasible. During fiscal years
ended June 30, 2001, 2000 and 1999, pursuant to this policy, the Company and various of its subsidiaries sold an aggregate of approximately $6.7, $9.5 and $6.7 million, respectively, of
the Company's products to various OYL entities in the ordinary course of business. Additionally, during fiscal years 2001, 2000 and 1999, the Company purchased approximately $3.1, $8.4 and
$1.2 million, respectively, of product from OYL and its subsidiary companies in the ordinary course of business. The Company does not expect a change in this policy and plans to continue to buy
from and sell to OYL and Hong Leong related entities in the future.

46

---

The Company has entered into trademark license and royalty agreements with O.Y.L. Manufacturing Company SDN BHD ("OMC") (the "OMC Agreement"), Shenzhen O.Y.L. Electrical
Co. Ltd. ("Shenzhen") (the "Shenzhen Agreement") and P.T. O.Y.L. Sentra Manufacturing ("PT OYL") (the "PT OYL Agreement"). Pursuant to such Agreements, the Company has granted
OMC, Shenzhen and
PT OYL, respectively, nonexclusive, nontransferable rights and licenses to use the trademark "McQuay" in connection with the sale and marketing of certain products exclusively through Shenzhen's,
OMC's and PT OYL's respective international distribution networks. In exchange for such grants, OMC, Shenzhen and PT OYL have each agreed to pay the Company earned royalty payments
ranging from 2% to 5% of the accumulated net sales of such products. The Company has been paid or was owed $340,500, $506,400 and $166,000 pursuant to the OMC Agreement, $225,000, $525,600 and
$105,000 pursuant to the Shenzhen Agreement, and $0, $11,621 and $8,000 pursuant to the PT OYL Agreement for the years ended June 30, 2001, 2000 and 1999, respectively. Each of OMC, Shenzhen
and PT OYL are subsidiaries of OYL.

In
August 1995, the Company entered into an agreement with Wuhan-McQuay Air Conditioning & Refrigeration Company Ltd. ("Wuhan-McQuay"), a joint venture of
Wuhan-New World Refrigeration Industrial Company Limited and McQuay Asia (Hong Kong) Ltd., an OYL subsidiary, to license certain technology and trademarks for use in the People's
Republic of China in exchange for a royalty of 2%-3% of net sales. Pursuant to such agreement, the Company has paid or was owed royalties from Wuhan-McQuay of $449,500, $43,000 and $0 for
the years ended June 30, 2001, 2000 and 1999, respectively. Payments are to be paid quarterly contingent on Wuhan-McQuay's financial condition and receipt of approval from the Government of the
People's Republic of China.

J &
E Hall Limited, a wholly owned, U.K. based subsidiary of the Company, had a short-term credit facility supported by a letter of credit from OYL. Borrowings
under this facility totaled $24.1 million at June 30, 2000. This arrangement expired in September 2000. AAF-McQuay UK Limited, a wholly owned subsidiary of the
Company, carries a new short-term credit facility with availability of £8.5 million ($12.0 million) supported by a letter of credit from OYL. Borrowings under
this facility totaled £2.8 million ($3.9 million) at June 30, 2001.

47

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18. Investment in Affiliates

The Company has entered into a number of partnerships with local entities throughout the world to maximize its brand name exposure, increase its market
penetration and enhance its manufacturing and distribution capabilities. The Company currently has fourteen (14) joint ventures (20% to 50% Company ownership) accounted for by the equity
method. The Company sold $18.4, $17.4, and $27.6 million for fiscal years 2001, 2000 and 1999, respectively, to these joint ventures. The Company has loans outstanding to eight of the joint
ventures for a total principal sum of $3.3 and $3.8 million as of June 30, 2001 and 2000, respectively. Summary financial information for the affiliated companies (20% to 50% owned) is
as follows:

|                                               |  | 2001 |        | 2000 |   | 1999   | 
|---------------------------------------------- |  | ---- | ------ | ---- | - | ------ | 
|
|Current assets                                 |  | $    | 25,005 |      | $ | 28,798 | 
|Property, plant and equipment and other assets |  |      | 2,749  |      |   | 2,660  | 
|Current liabilities                            |  |      | 18,900 |      |   | 21,693 | 
|Long-term debt                                 |  |      | 2,750  |      |   | 3,218  | 
|Net sales                                      |  |      | 52,406 |      |   | 59,460 | 
|Gross profit                                   |  |      | 12,073 |      |   | 15,234 | 
|Net income (loss)                              |  |      | 996    |      |   | 223    | 

Investments
in affiliates of $3.9 and $4.6 million is included in Other assets and deferred charges in the Consolidated Balance Sheets at June 30, 2001 and 2000,
respectively. The Company provides guarantees for obligations of its joint ventures totaling $1.4 million.

19. Other Income (Expense)

During the fiscal years ended June 30, 2001, 2000 and 1999, the Company had net other income (expense) of $4.5, $(1.6), and $5.3 million,
respectively. In fiscal 2001, the Company completed the sale of property in Dartford, United Kingdom associated with its industrial refrigeration business resulting in a gain of $4.5 million
before taxes. Proceeds from the sale of approximately $6.9 million were used to
reduce debt. Additionally, during the fiscal year ended June 30, 2001, the Company repurchased $16.2 million of its Senior Notes at a discount resulting in a net gain of approximately
$0.4 million before taxes. See Note 7 for further discussion. In fiscal 2000, the Company recorded a loss of $1.3 million due to the sale of the commercial air conditioning
operation in France in October 1999. In fiscal year 1999, the Company recorded $2.9 million in other income as a result of favorable developments in the IRS audit and tax indemnification
settlement with former shareholders of the Company as described in Note 14. Additionally, during the fiscal year ended June 30, 1999, the Company recognized a $1.5 million gain
related to the termination of a pension plan in Canada and $0.8 million in expense related to the potential sale of the Company. Gain or losses from foreign currency and equity affiliate
transactions are also included in other income (expense) for the fiscal years ended June 30, 2001, 2000 and 1999.

48

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20. Subsequent Event

In September 2001, the Company's Board of Directors signed a resolution to sell the Company's Singapore subsidiary to OYL for approximately
$13.1 million, which would result in an immaterial gain. Proceeds from the sale are planned to be used to pay down debt.

21. Selected Quarterly Financial Data (Unaudited)

(Dollars in thousands)

|                       |  | Fiscal 2001 Quarters |         | Fiscal 2000 Quarters
|---------------------- |  | -------------------- | ------- | --------------------
|
|                       |  |                      |         |                     
|Sales                  |  | $                    | 215,009 |                     
|Gross margin           |  |                      | 58,347  |                     
|Income from operations |  |                      | 7,361   |                     
|Net income (loss)      |  |                      | 1,030   |                     

49

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Schedule II.  Valuation and Qualifying Accounts and Reserves

AAF-MCQUAY INC.  (dollars in thousands)

|Col. A                             |  | Col. B |        | Col. C
Additions |   | Col. D |  | Col. E
|---------------------------------- |  | ------ | ------ | ---------------- | - | ------ |  | ------
|
|Year Ended June 30, 2001           |  |        |        |                  |   |        |  |       
|Allowance for doubtful receivables |  | $      | 6,968  |                  | $ | 1,015  |  |       
|Accrued warranty expense           |  |        | 29,439 |                  |   | 12,585 |  |       
|Year Ended June 30, 2000           |  |        |        |                  |   |        |  |       
|Allowance for doubtful receivables |  | $      | 7,057  |                  | $ | 2,218  |  |       
|Accrued warranty expense           |  |        | 28,627 |                  |   | 14,963 |  | $     
|Year Ended June 30, 1999           |  |        |        |                  |   |        |  |       
|Allowance for doubtful receivables |  | $      | 7,361  |                  | $ | 698    |  |       
|Accrued warranty expense           |  |        | 25,813 |                  |   | 23,227 |  |       

---

Item 9.  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

50

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Part III

Item 10.  Directors and Officers of the Registrant

The following table sets forth the name, age, and position of the Company's directors and executive officers.

|Name                   |  | Age |  | Position                                        
|---------------------- |  | --- |  | ------------------------------------------------
|Ho Nyuk Choy           |  | 47  |  | President, Chief Executive Officer and Director 
|Eric R. Roberts        |  | 43  |  | Executive Vice PresidentMcQuay Americas        
|Robert E. Brymer       |  | 43  |  | Vice PresidentAAF Americas                     
|Bruce D. Krueger       |  | 39  |  | Vice President of Finance                       
|Stephen T. Kapsalis    |  | 43  |  | Vice President of Strategic Business Development
|Gary R. Boyd           |  | 49  |  | Vice President of Human Resources               
|Dixie L. Randle        |  | 48  |  | General Counsel and Secretary                   
|Ronald J. Pederson     |  | 43  |  | Treasurer                                       
|Tan Sri Quek Leng Chan |  | 58  |  | Director                                        
|Liu Wan Min            |  | 57  |  | Director                                        
|Kwek Leng San          |  | 46  |  | Director                                        

Ho Nyuk Choyjoined AAF-McQuay Inc. in January 2000 as President and Chief Executive Officer and also
continues to serve as the Joint Group Managing Director of OYL. Mr. Ho has served as Group Managing Director of OYL since 1993. From 1989 to 1993, he served in various management positions with
OYL. Mr. Ho is a Director of McQuay Asia (Hong Kong) Limited.

Eric R. Robertshas served as Executive Vice President of McQuay Americas since June 2000. From October 1999 to
June 2000, Mr. Roberts served as Vice President & General Manager of the Applied Air Handling business unit within the McQuay North America segment and was general manager of the
business unit since March 1998. Mr. Roberts was Director of Marketing for McQuay International from January 1997 to March 1998. Prior to joining McQuay, Mr. Roberts
was Director of Marketing for Onan Corporation, a division of Cummins Engine Company.

Robert E. Brymerhas served as Vice President of AAF Americas since June 2000. From May 1999 to June 2000,
Mr. Brymer was Vice PresidentSales & Marketing for McQuay International. From May 1998 to May 1999, Mr. Brymer served as a consultant for McQuay
International prior to rejoining the Company. From June 1996 to April 1998, he served as PresidentAir Filtration Division of AAF International. Prior to June 1996,
Mr. Brymer served in various executive capacities with AAF since joining them in May 1993 as Director of Marketing. Prior to joining AAF, he served as Vice President of Marketing and
Sales for Wedge Innovations for three years and Director of Marketing and various other positions for Skil Tools for seven years.

Bruce D. Kruegerhas served as Vice President of Finance of the Company since November 1999. From October 1997
until October 1999, Mr. Krueger served as Vice President and Corporate Controller of the Company. He joined the Company as Vice President and Global Controller of the Air Filtration
Division of AAF in January of 1996 and has held senior financial management positions in the air filtration industry since 1992. Prior to 1992, Mr. Krueger served as Director of Internal Audit
at Clarcor and was with Coopers & Lybrand from 1984 to 1990.

Gary R. Boydhas served as Vice President of Human Resources for the Company since July 1997 and as Vice President of
Human Resources for McQuay International from February 1996 until July 1997. From 1984 to 1996, Mr. Boyd served in various Human Resources positions at Cummins Engine Company,
most recently as Director of Human Resources for Worldwide operations for Onan Corporation, a division of Cummins Engine Company.

51

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Dixie L. Randlehas served as the General Counsel and Secretary of the Company since October 1999. From April 1998
until October 1999, Ms. Randle served as General Counsel and Assistant Secretary, she served as Division General Counsel of the Commercial Air Conditioning segment from July 1994
to April 1998, and from May 1993 to July 1994, as Senior Attorney for the segment. Prior to 1993, she served on the in-house counsel staff of the Lehndorff Group of
Companies, a commercial real estate investment and property management group and was with Vinson & Elkins from 1982 to 1987.

Stephen T. Kapsalishas served as Vice President of Strategic Business Development for the Company since August 2000. In
that role, he is primarily responsible for growing the MFAS business and developing business opportunities worldwide. From 1995 to 1998, Mr. Kapsalis served as Vice President of the
Environmental Products business unit in Europe, and from 1998 until assuming his current position, he served as Vice President of AAF Europe. Prior to joining the Company, he served as
President of Winter Welding and Machine Corporation from 1990 to 1995 and served as a Manager in the Power Construction and Engineering Industry for eight years.

Ronald J. Pedersonhas served as the Treasurer since July 1997. From March 1995 until July 1997,
Mr. Pederson served as the Assistant Treasurer of the Company. He served as Manager of Treasury Operations from February 1988 through March 1995.

Tan Sri Quek Leng Chanhas served as Executive Chairman of Hume since 1990. He has served as Chairman and Chief Executive Officer of
Hong Leong since 1968. Mr. Quek currently serves as Executive Chairman of Hong Leong Credit Berhad, Hong Leong Bank Berhad, Hong Leong Industries Berhad, Hong Leong Properties Berhad, Hume
Cemboard Berhad, Camerlin Group Berhad and Tasek Corporation Berhad and as Chairman of Guoco Group Limited, Benchmark Group PLC and HLG Capital Berhad. Mr. Quek is Deputy Chairman of Brierley
Investments Limited and a Director of OYL, First Capital Corporation Ltd, Hong Leong Finance Limited and Thistle Hotels PLC. Mr. Quek is a brother of Kwek Leng San.

Liu Wan Mincurrently serves as Joint Group Managing Director of OYL since December 1999 and has served as Deputy Chairman of
OYL since 1993. From 1974 to 1993, Mr. Liu served as Group Managing Director of OYL. From 1996 through 1997, Mr. Liu served as the Group Managing Director of Nanyang Press Holdings Bhd.

Kwek Leng Sanhas served on the Board of Directors of Hong Leong Industries Berhad since September 1990. Mr. Kwek
currently serves as President & Chief Executive Officer of Hong Leong Industries Berhad and Hume Industries (Malaysia) Berhad and as Executive Chairman of Malaysian Pacific Industries Berhad.
He is also the Group Managing Director of Camerlin Group Berhad and a director of Hume Cemboard Berhad, O.Y.L. Industries Bhd and Southern Steel Berhad. From September 1990 to
August 1993, Mr. Kwek was the Group Managing Director of Malaysian Pacific Industries Berhad. Mr. Kwek is a brother to Tan Sri Quek Leng Chan. Mr. Kwek was elected as a
Director of the Company at a special meeting of the sole shareholder on July 1, 2001.

Roger Tan Kim Hockhas served as President and Chief Executive Officer of Hume since 1993. From 1988 to 1993, he served as Chief
Executive Officer of HLG Securities Sdn Bhd. From 1985 through 1988 he served as the Managing Director of Hong Leong Industries Berhad and from 1976 through 1985, he served as the General Manager of
Hong Leong Property Management Co Sdn Bhd. Mr. Tan resigned as a Director effective July 1, 2001.

Except
for Kwek Leng San who was elected as a Director at a special meeting of the sole shareholder on July 1, 2001, each of the Directors has been a Director since
May 2, 1994. All Directors hold office until the next annual meeting of shareholders of the Company and until their successors have been elected and qualified. The Company does not currently
pay the Directors any fees for serving on the Board of Directors, although the Company may consider a change in this policy in the future. Executive officers of the Company are elected by and serve at
the discretion of the Board of Directors.
Except as noted above, there are no family relationships among the Directors or executive officers of the Company.

52

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Item 11. Executive Compensation



The following table sets forth information concerning compensation paid or accrued by the Company to the following individuals for services rendered in all
capacities to the Company and its subsidiaries during the 2001, 2000 and 1999 fiscal years: (i) the Chief Executive Officer and (ii) each of the next four most highly compensated
executive officers.

Summary Compensation Table

|                                                                         |  |                |  | Annual Compensation     |     |                      
|------------------------------------------------------------------------ |  | -------------- |  | ----------------------- | --- | ---------------------
|
|Ho Nyuk Choy
  President and Chief Executive
  Officer and Director(c)   |  | 2001
2000
1999 |  | 455,976
223,188
       |     | 140,000
81,667
     
|Eric R. Roberts
  Executive Vice President
  McQuay Americas            |  | 2001
2000
1999 |  | 220,331
161,854
126,827 |     | 81,825
31,546
107,381
|Robert E. Brymer
  Vice PresidentAAF Americas                           |  | 2001
2000
1999 |  | 200,000
170,769
48,846  | (d) | 36,000
20,381
5,452  
|Bruce D. Krueger
  Vice President of Finance                             |  | 2001
2000
1999 |  | 190,001
181,490
176,539 |     | 61,023
47,960
98,379 
|Stephen T. Kapsalis
  Vice President of Strategic
  Business Development |  | 2001
2000
1999 |  | 154,808
161,539
157,091 |     | 56,000
37,122
33,833 

---



53

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Stock Option Plan

In 1997, the Company adopted a Stock Option Plan that provides for the grant of non-qualified stock options to certain members of management and
key employees to purchase the common stock of the Company's parent AAF-McQuay Group Inc. The Company granted options under the stock option plan
during fiscal year 1999. The related impact to the Statement of Operations was based on an independent valuation of the Company at or near the grant date.

There
were no options granted during fiscal year 2000 or 2001.

The
following table presents a summary of the options and their respective fiscal year end values for the three executive officers named in the summary compensation table who held
options at the end of fiscal 2001:

Aggregated Option/SAR Exercises in Last Fiscal Year and Fiscal Year-End Option/SAR Values

|                                                                       |  | Shares
Acquired on
Exercise |  | Value
Realized ($) |  | Number of Securities
Underlying
Unexercised
Options/SARs At
Fiscal Year-End (#) |  | Value of
Unexercised
In-The-Money
Options/SARs At
Fiscal Year-End ($)
|---------------------------------------------------------------------- |  | --------------------------- |  | ------------------ |  | ------------------------------------------------------------------------------- |  | ---------------------------------------------------------------------
|Eric R. Roberts
  Executive Vice President
  McQuay Americas          |  | none                        |  | 0                  |  | 0.58                                                                            |  | 0                                                                    
|Bruce D. Krueger
  Vice President of Finance                           |  | none                        |  | 0                  |  | 0.97                                                                            |  | 0                                                                    
|Stephen T. Kapsalis
  Vice President of Strategic
Business Development |  | none                        |  | 0                  |  | 0.60                                                                            |  | 0                                                                    



Mr. Ho Nyuk Choy is the only officer or employee of the Company who participated in deliberations of the Company's Board of Directors concerning
executive officer compensation during the last fiscal year. The Company's Board of Directors determines the compensation paid to the President and Chief Executive Officer.

54

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Item 12. Security Ownership of Certain Beneficial Owners and Management

PRINCIPAL STOCKHOLDERS

The following table sets forth information as of September 26, 2001, with respect to the beneficial ownership of shares of the Company's Common Stock by
each person known to the Company to own 5% or more of its Common Stock (determined in accordance with the applicable rules of the Commission), by each the Company's directors and current executive
officers named in the summary compensation table, and by such directors and executive officers as a group.

Common Stock, par value $100.00 per share

|Name                                                                        |                               | Number of Shares |  | Percent Outstanding
|--------------------------------------------------------------------------- | ----------------------------- | ---------------- |  | -------------------
|5% Beneficial Owners                                                        |                               |                  |  |                    
|AAF-McQuay Group Inc.(a)                                                    |                               | 2,497            |  | 100                
|                                                                            | 10300 Ormsby Park Pl. Ste 600 |                  |  |                    
|                                                                            | Louisville, KY 40223          |                  |  |                    
|Directors and Executive Officers                                            |                               |                  |  |                    
|Tan Sri Quek Leng Chan(a)                                                   |                               | 2,497            |  | 100                
|Liu Wan Min                                                                 |                               | 0.00             |  | *                  
|Kwek Leng San                                                               |                               | 0.00             |  | *                  
|Ho Nyuk Choy                                                                |                               | 0.00             |  | *                  
|Bruce D. Krueger(b)                                                         |                               | 0.97             |  | *                  
|Eric R. Roberts(b)                                                          |                               | 0.38             |  | *                  
|Robert E. Brymer                                                            |                               | 0.00             |  | *                  
|Stephen T. Kapsalis(b)                                                      |                               | 0.60             |  | *                  
|All current directors and executive officers as a group (11 persons)(a),(b) |                               | 2,499            |  | 100                

---

Security Ownership of Management in Parents of the Company

The following tables set forth information as of June 30, 2001, for OYL and Hume with respect to the beneficial ownership of shares of each of those
company's equity securities by the Company's directors and current executive officers who hold such securities and the directors and executive officers as a group.

55

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OYL Ordinary Shares, par value RM 1.00 per share

|Name                                                                 |  | Number of Shares |     | Percent Outstanding
|-------------------------------------------------------------------- |  | ---------------- | --- | -------------------
|Tan Sri Quek Leng Chan                                               |  | 84,868,828       | (a) | 64.4               
|Liu Wan Min                                                          |  | 6,000,000        |     | 4.6                
|Ho Nyuk Choy                                                         |  | 204,000          |     | *                  
|Bruce D. Krueger                                                     |  | 1,400            |     | *                  
|All current directors and executive officers as a group (11 persons) |  | 91,074,228       |     | 69.0               

Hume Ordinary Stock Units, par value RM 1.00 per unit

|Name                                                                 |  | Number of Shares |     | Percent Outstanding
|-------------------------------------------------------------------- |  | ---------------- | --- | -------------------
|Tan Sri Quek Leng Chan                                               |  | 139,666,855      | (b) | 57.4               
|Liu Wan Min                                                          |  | 1,439,000        |     | *                  
|All current directors and executive officers as a group (11 persons) |  | 141,105,855      |     | 58.0               

---

Item 13. Certain Relationships and Related Transactions

Hong Leong and its subsidiary companies, including OYL and the Company, have a policy of buying from related companies whenever feasible. During fiscal years
ended June 30, 2001, 2000 and 1999, pursuant to this policy, the Company and various of its subsidiaries sold an aggregate of approximately $6.7, $9.5 and $6.7 million, respectively, of
the Company's products to various OYL entities in the ordinary course of business. Additionally, during fiscal years 2001, 2000 and 1999, the Company purchased approximately $3.1, $8.4 and
$1.2 million, respectively, of product from OYL and its subsidiary companies in the ordinary course of business. The Company does not expect a change in this policy and plans to continue to buy
from and sell to OYL and Hong Leong related entities in the future.

The
Company has entered into trademark license and royalty agreements with O.Y.L. Manufacturing Company SDN BHD ("OMC") (the "OMC Agreement"), Shenzhen O.Y.L. Electrical
Co. Ltd. ("Shenzhen") (the "Shenzhen Agreement") and P.T. O.Y.L. Sentra Manufacturing ("PT OYL") (the "PT OYL Agreement"). Pursuant to such Agreements, the Company has granted
OMC, Shenzhen and PT OYL, respectively, nonexclusive, nontransferable rights and licenses to use the trademark "McQuay" in connection with the sale and marketing of certain products exclusively
through Shenzhen's, OMC's and PT OYL's respective international distribution networks. In exchange for such grants, OMC, Shenzhen and PT OYL have each agreed to pay the Company earned
royalty payments ranging from 2% to 5% of the accumulated net sales of such products. The Company has been paid or was owed $340,500, $506,400 and $166,000 pursuant to the OMC Agreement, $225,000,
$525,600 and $105,000 pursuant to the Shenzhen Agreement, and $0, $11,621 and $8,000 pursuant to the PT OYL Agreement for the years ended June 30, 2001, 2000 and 1999 respectively. Each of OMC,
Shenzhen and PT OYL are subsidiaries of OYL.

56

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In August 1995, the Company entered into an agreement with Wuhan-McQuay Air Conditioning & Refrigeration Company Ltd. ("Wuhan-McQuay"), a joint venture of
Wuhan-New World Refrigeration Industrial Company Limited and McQuay Asia (Hong Kong) Ltd., an OYL subsidiary, to license certain technology and trademarks for use in the People's
Republic of China in exchange for a royalty of 2%-3% of net sales. Pursuant to such agreement, the Company has paid or was owed royalties from Wuhan-McQuay of $449,500, $43,000 and $0 for
the years ended June 30, 2001, 2000 and 1999, respectively. Payments are to be paid quarterly contingent on Wuhan-McQuay's financial condition and receipt of approval from the Government of the
People's Republic of China.

In
September 2001, the Company's Board of Directors signed a resolution to sell the Company's Singapore subsidiary to OYL (see Note 20 to the Consolidated Financial
Statements).

57

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Part IV

Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K





58

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|3.1   |  | Articles of Incorporation(1)                                                                                                     
|----- |  | ---------------------------------------------------------------------------------------------------------------------------------
|3.2   |  | By-Laws(1)                                                                                                                       
|4.1   |  | Indenture dated as of February 14, 1996 with IBJ Schroder Bank and Trust Company(5)                                              
|4.2   |  | Form of Note (included in Exhibit 4.1)                                                                                           
|10.1  |  | Trademark License and Royalty Agreement dated December 27, 1995 with P.T. O.Y.L. Sentra Manufacturing(1)                         
|10.2  |  | Trademark License and Royalty Agreement dated December 27, 1995 with Shenzhan O.Y.L. Electrical Company Ltd.(1)                  
|10.3  |  | Trademark License and Royalty Agreement dated December 27, 1995 with O.Y.L. Manufacturing Company SDN BHD(1)                     
|10.4  |  | Technology Licensing Agreement dated August 8, 1995 with McQuay-Wuhan Air Conditioning & Refrigeration Company Ltd.(1)           
|10.5  |  | Asset Transfer Agreement dated May 29, 1995 by and among AAF Asia Pte., Ltd. and McQuay Air Conditioning (Singapore) Pte. Ltd.(1)
|10.6  |  | Supply and Procurement Agreement dated May 2, 1994 with EnergyLine Systems, Inc.(1)                                              
|10.7  |  | Stock Option Plan effective January 1, 1996(2)                                                                                   
|10.8  |  | Revolving Credit, Term Loan and Security Agreement dated September 30, 1999 with PNC Bank, N.A.(4)                               
|10.9  |  | First Amendment to Revolving Credit, Term Loan and Security Agreement dated October 25, 1999, with PNC Bank, N.A.(4)             
|10.10 |  | Second Amendment to Revolving Credit, Term Loan and Security Agreement dated November 12, 1999, with PNC Bank, N.A.(4)           
|10.11 |  | Third Amendment to Revolving Credit, Term Loan and Security Agreement dated June 26, 2001, with PNC Bank, N.A.(5)                
|21    |  | Subsidiaries                                                                                                                     
|24    |  | Power of Attorney                                                                                                                

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59

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized, in the City of Louisville, State of Kentucky, on September 26, 2001.

| |  | AAF-MCQUAY INC.
| |  | ---------------
| |  | By:            

Pursuant
to the requirements of the Securities Exchange Act of 1934, this registration statement has been signed by the following persons in the capacities and on the dates indicated.

|By:                     |              | /s/HO NYUK CHOYHo Nyuk Choy Principal Executive Officer                                                  |                | September 26, 2001
|----------------------- | ------------ | -------------------------------------------------------------------------------------------------------- | -------------- | ------------------
|By:                     |              | /s/BRUCE D. KRUEGERBruce D. Krueger Vice President of Finance
(Principal Finance and Accounting Officer) |                | September 26, 2001
|The Board of Directors: |              |                                                                                                         
|                        | Liu Wan Min  |                                                                                                          | Quek Leng Chan
|                        | Ho Nyuk Choy |                                                                                                          | Kwek Leng San 
|By:                     |              | /s/HO NYUK CHOYHo Nyuk Choy Attorney-in-Fact                                                             |                | September 26, 2001

SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION 15(d) OF THE SECURITIES EXCHANGE ACT 0F 1934 BY REGISTRANTS WHICH HAVE
NOT REGISTERED SECURITIES PURSUANT TO SECTION 12 OF THE ACT.

No
annual report or proxy materials have been sent to security-holders during the period covered by this report.

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Exhibit Index

|Number |  | Description                                                                                                   
|------ |  | --------------------------------------------------------------------------------------------------------------
|4.1    |  | Indenture dated as of February 14, 1996 with IBJ Schroder Bank and Trust Company                              
|4.2    |  | Form of Note (included in Exhibit 4.1)                                                                        
|10.11  |  | Third Amendment to Revolving Credit, Term Loan and Security Agreement dated June 26, 2001, with PNC Bank, N.A.
|21     |  | Subsidiaries                                                                                                  
|24     |  | Power of Attorney                                                                                             

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