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                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   ]FORM 10-K

<Table>
<C>        <S>
(Mark One)
   [X]     ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
           SECURITIES EXCHANGE ACT OF 1934

           FOR THE YEAR ENDED DECEMBER 31, 2002

                                  OR


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

           FOR THE TRANSITION PERIOD FROM          TO
</Table>

                       COMMISSION FILE NUMBER: 333-40076

                       KNOWLES ELECTRONICS HOLDINGS, INC.
             (Exact name of registrant as specified in its charter)

<Table>
<S>                                            <C>
                   DELAWARE                                      36-2270096
       (State or other jurisdiction of                        (I.R.S. Employer
        incorporation or organization)                     Identification Number)

            1151 MAPLEWOOD DRIVE,                                  60143
               ITASCA, ILLINOIS                                  (Zip Code)
   (Address of principal executive offices)
</Table>

              REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
                                  630-250-5100

          SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

<Table>
<Caption>
             TITLE OF EACH CLASS                 NAME OF EACH EXCHANGE ON WHICH REGISTERED
             -------------------                 -----------------------------------------
<S>                                            <C>
                     None
</Table>

          SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

                              TITLE OF EACH CLASS

                                      None

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

     Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (Section 229.405 of this chapter) 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.  [ ]

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

     There is no voting stock held by non-affiliates of the registrant. This
Annual Report is being filed by the registrant as a result of undertakings made
pursuant to Section 15(d) of the Securities Exchange Act of 1934.
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                       KNOWLES ELECTRONICS HOLDINGS, INC.

                                   FORM 10-K
                          YEAR ENDED DECEMBER 31, 2002

                                    CONTENTS

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<Caption>
SECTION                                                                  PAGE
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<S>        <C>                                                           <C>
PART I.
  Item 1   Business....................................................    2
  Item 2   Properties..................................................   14
  Item 3   Legal Proceedings...........................................   14
  Item 4   Submission of Matters to a Vote of Security Holders.........   14
PART II.
  Item 5   Market for Registrant's Common Equity and Related
           Stockholder Matters.........................................   14
  Item 6   Selected Financial Data.....................................   15
  Item 7   Management's Discussion and Analysis of Financial Condition
           and Results of Operations...................................   18
  Item 7A  Quantitative and Qualitative Disclosures about Market
           Risk........................................................   37
  Item 8   Financial Statements and Supplementary Data.................   38
  Item 9   Changes in and Disagreements with Accountants on Accounting
           and Financial Disclosure....................................   65
PART III.
  Item 10  Directors and Executive Officers of the Registrant..........   65
  Item 11  Executive Compensation......................................   66
  Item 12  Security Ownership of Certain Beneficial Owners and
           Management..................................................   69
  Item 13  Certain Relationships and Related Transactions..............   71
  Item 14  Controls and Procedures.....................................   72
PART IV.
  Item 15  Exhibits, Financial Statement Schedules, and Reports on Form
           8-K.........................................................   73
Signatures.............................................................   75
</Table>

                                        1
<PAGE>

                                     PART I

ITEM 1.  BUSINESS

OVERVIEW

     We are a leading international manufacturer of technologically advanced
products in the hearing aid and automotive components markets. We also operate
in markets for acoustics and infrared technology products. Since our company was
founded in 1946 by Hugh and Josephine Knowles, we have leveraged our core
competency in acoustic technology to build expertise in hearing aid transducers
and low voltage integrated circuit design, electronic controls and sensors,
infrared technology and precision manufacturing. We have operations around the
world with the largest facilities in the United States, China and Malaysia. Our
2002 revenue, operating income and EBITDA, as reported, were $216.1 million,
$21.4 million and $32.3 million, respectively. Our 2002 adjusted EBITDA
(adjusted for the $16.7 million loss on sale of our Ruf operations) was $49.0
million. EBITDA is earnings before interest income and expense, income taxes,
and depreciation and amortization. 2002 operating income of $21.4 million plus
$10.9 million of depreciation and amortization equals EBITDA as reported of
$32.3 million. Through our three core business units, KE, Emkay and Automotive
Components, we manufacture and market products with strong market share
positions in several key markets. We believe that we have achieved these
positions in our markets as a result of our strong customer base, technological
expertise, international low cost manufacturing capability and strong management
team. Our principal executive offices are located at 1151 Maplewood Drive,
Itasca, Illinois 60143, and our telephone number is (630) 250-5100.

OUR THREE BUSINESS UNITS

  KE -- HEARING AID COMPONENTS

     KE, which accounted for approximately 61% of our 2002 revenue, is our most
significant business unit. The KE business unit designs, manufactures and
markets subminiature acoustic transducers and other components for hearing aids.
KE is the world's largest manufacturer of hearing aid transducers, with what we
estimate to be approximately 80% of the worldwide market, and has held a major
share of the transducer market for over 30 years. The transducer is the name
given to both the microphone and the receiver in a hearing aid. The microphone
is located at the top of the hearing aid and converts surrounding sounds to
electronic signals. The circuitry then modifies the signal over the audio
frequency spectrum. These signals are transferred to the receiver, which then
converts the signals to sounds in the ear. We manufacture transducers for all
hearing aid categories, and also produce non-transducer hearing aid components
under the brand name Deltek. KE often customizes transducers to meet the
specifications of our customers, and in certain cases develops transducer
designs in partnership with our customers. KE provides data on the hearing aid
market to our customers through the publication MarkeTrak, and is a leader in
transducer technology with 38 scientists, engineers and technicians dedicated to
research and development. We have consistently and successfully maintained our
market share over the years due to our long-standing relationships with a wide
range of customers, value-added services and technological leadership.

  EMKAY -- ACOUSTIC AND INFRARED TECHNOLOGY

     Emkay, which accounted for approximately 17% of our 2002 revenue, was
created in 1994 to explore non-hearing aid applications for our technology.
Emkay combines KE's transducer and acoustic expertise with its core competencies
in infrared technology and electronics to provide high technology solutions for
markets with high growth potential, including mobile and automotive
communications, entertainment systems, and telephony. Mobile communication
applications include PEDs (personal electronic devices), PDAs (personal digital
assistants), mobile phones, smart phones, 3G phones, and tablets. Emkay produces
and is developing a broad range of voice input solution (including ECMs
(electret condenser microphones), silicon microphones, specialty transducers,
custom microphone assemblies), and infrared remote controls primarily for sale
to original equipment manufacturers in these markets. Emkay has significant
in-house research and development capabilities, with 34 engineers and
technicians operating worldwide.

                                        2
<PAGE>

 AUTOMOTIVE COMPONENTS

     Results for our Automotive Components business unit combine two businesses,
SSPI, which produces diesel engine solenoids and electronic governors, and Ruf,
a leading producer of automotive position sensors which was sold in November
2002. Automotive Components accounted for approximately 22% (70% from SSPI and
30% from Ruf) of our 2002 revenue. The largest percentage of SSPI's sales
consists of solenoids for key start/stop operations of diesel engines used in
trucks (in countries outside the United States and Europe), tractors, turf
equipment, construction, generators and other industrial equipment. Solenoids
are two position linear actuators that are used mainly to start and stop diesel
engines by converting electrical energy into mechanical work. Electronic
governors, which control engine speed and power by adjusting the engine
throttle, represent a small but growing percentage of SSPI's business.

     Ruf, headquartered near Munich, Germany, was founded in 1926, acquired by
Knowles in 1996 and the net assets were sold in November 2002. Ruf's business is
primarily based on sales of position sensors for automotive applications,
including passenger vehicles and light trucks.

COMPETITIVE STRENGTHS

     Our strong financial record is attributable to the following competitive
strengths:

  LEADING INTERNATIONAL MARKET POSITION AND STRONG CUSTOMER BASE

     - We have been a market leader in hearing aid transducers for more than 30
       years, and our worldwide market share is approximately 80%. We protect
       our leading market share by maintaining strong relationships with all of
       the key manufacturers in the hearing aid industry. We offer transducers
       for all hearing aid categories and often customize models to meet the
       specifications of individual hearing aid manufacturers.

     - We have also been the market leader in solenoids for diesel engine
       shutdown devices for over 20 years, and our worldwide market share is
       approximately 65%. Customers of SSPI include most major industrial diesel
       engine manufacturer and mobile equipment builders.

 TECHNOLOGICAL EXPERTISE

     - We believe that we are a technological leader in each of our business
       units. We offer an advanced transducer product line that is the most
       comprehensive in the hearing aid industry, setting the standard for both
       miniaturization and performance, and have been a technology leader in the
       transducer market for over 30 years. We are also at the forefront of the
       MEMS (micro electro mechanical systems) acoustics market as a result of
       our semiconductor knowledge and our 50 years of experience in acoustics.
       We believe that we are the only microphone maker that also manufactures a
       MEMS based surface mount silicon microphone. With our Automotive
       Components unit, we have leveraged our technological expertise to create
       innovative designs of solenoids and electronic governors for our
       Automotive Components customers.

     - To enhance our technological expertise, we emphasize research and
       development investment. Our 2002 research and development expenditures
       were $13.7 million, or 6.3% of net sales. We have demonstrated leadership
       in developing new technologies and have the scale to devote substantial
       resources toward product development. In addition, we have strategically
       established patent protection for our products while creating
       manufacturing processes that competitors cannot readily replicate. We
       believe these factors serve as barriers to entry to the hearing aid and
       automotive components businesses.

 INTERNATIONAL LOW COST MANUFACTURING CAPABILITY

     - Since our founding more than 50 years ago, we have developed an
       international network of well equipped manufacturing facilities. We
       operate 8 manufacturing facilities in the United States, Austria,
       Malaysia and China. We have a proven capability of moving manufacturing
       to lower cost environ-
                                        3
<PAGE>

       ments. Our manufacturing facilities are not unionized, with the exception
       of our facilities in China and Austria, which are required to be
       unionized under local law. In March 2000, we announced plans to
       consolidate our worldwide manufacturing operations. The consolidation
       plan included outsourcing some activities performed in Itasca and Rolling
       Meadows, Illinois. In addition, we ceased production at our United
       Kingdom, Taiwanese and German manufacturing facilities. Production from
       those operations was moved to China, Malaysia and Hungary. As of December
       2002, the consolidation plan is complete and our headcount related to
       operations that existed in March 2000 has been reduced by 20%.

     - The manufacturing life cycles of some transducers, particularly models
       for less technologically advanced applications, have been as long as 25
       years, reducing our production development costs and allowing us to
       improve the efficiency of our manufacturing processes. Our KE and
       Automotive Components business units use automated sub-assembly
       operations and manual final assembly operations. We are also working to
       develop automated final assembly equipment for select products. Emkay's
       operations are subcontracted in part, providing us with cost structure
       flexibility and allowing us to change capacity quickly based on product
       demand.

GROWTH STRATEGY

     Our principal objective is to increase revenues, cash flow and
profitability by strengthening our leading market positions in our core
businesses and applying our technological expertise to new growth opportunities
in related businesses. The primary components of our strategy are to:

  CAPITALIZE ON GROWTH OPPORTUNITIES IN THE HEARING AID MARKET

     Our worldwide share of the hearing aid transducer market is approximately
80% and we have been a market leader in transducer technology for over 30 years.
We believe we will increase our sales as the hearing aid industry continues to
expand. Hearing aid penetration into the market of potential users has
historically been low, ranging from approximately 22% in the United States to
less than 1% in some emerging economies. The hearing aid industry is projected
to grow based on the following trends:

     - technological advances and improved customer satisfaction;

     - improvement in the cosmetic appearance and reduction in stigma;

     - growth in the elderly population;

     - increasing use of binaural hearing aids; and

     - increasing international penetration of hearing aids into developing
       economies.

     Our strategy is designed to capitalize on these trends and develop products
designed to expand the hearing aid and hearing aid component market. For
example, we have developed transducers for multiple microphone hearing aids,
which provide better performance than single microphone hearing aids and require
three or four, rather than two, transducers per hearing aid. To increase hearing
aid market growth, we also collect market data that identifies consumer needs
and work with industry participants to improve market penetration.

  LEVERAGE CORE ACOUSTIC EXPERTISE TO DEVELOP INNOVATIVE PRODUCTS FOR MARKETS
  WITH HIGH GROWTH POTENTIAL

     We expect to continue combining our core competency in acoustics with other
technologies such as wireless, micro-machining systems and digital signal
processing to provide technology solutions for high growth markets, including
mobile communications, computer telephony integration, telematics (voice
controlled wireless services delivered to an automobile environment) and home
entertainment systems. Emkay has developed several new technologies and products
for these markets, including:

          SiSonic(TM) Silicon Microphone -- We have recently introduced what we
     believe is the world's first solid state silicon microphone. Since the
     SiSonic(TM) Silicon Microphone can withstand high temperatures,

                                        4
<PAGE>

     it can be mounted to printed circuit boards using automated pick and place
     soldering equipment, thereby eliminating costly manual installations
     currently required for many microphone applications. This microphone's
     environmental robustness also enables it to perform in harsh environments
     such as automobiles. Automotive applications include hands-free cellular
     telephones, voice command and control systems.

          Far-Field Microphone Array Technology -- To support the emerging
     telematics market Emkay has developed a microphone array that uses digital
     signal processing to enable clear processing of voice signals in a noisy
     environment, such as an automobile. This technology will facilitate clear
     voice communications, allow effective use of voice commands for vehicle
     control systems, and enable the use of emerging telematic services through
     voice command. In non-automotive applications this technology can improve
     communication in noisy environments and provide a high quality signal input
     to voice recognition systems.

          ECMs (Electret Condenser Microphones) -- To offer the broadest line of
     voice input, Emkay continues to work to introduce differentiated ECMs to
     the marketplace. These products continue to expand the Knowles ability to
     make ultra low cost microphones in high volume.

          Custom Acoustic Assemblies -- A significant differentiator in the
     voice input market, is Emkay's ability to utilize its acoustic engineering
     expertise, coupled with its low cost manufacturing operations and supply
     chain to create custom assemblies for the OEM and finished goods market.
     This has allowed us to offer complete acoustic solutions.

          Infrared Remote Control Products -- Remote controls for use with set
     top boxes for digital television providers, for manufacturers of
     entertainment devices, and for replacement markets including universal
     remotes capable of controlling multiple entertainment devices.

 STRENGTHEN CUSTOMER RELATIONSHIPS

     Our business units have well-established customer relationships. We plan to
continue to strengthen our existing relationships and develop new relationships
through the following.

     - KE often customizes its transducer models to design and manufacture
       transducers that meet the specifications of individual hearing aid
       manufacturers. KE and Emkay also conduct joint research and product
       development with some of its customers. Emkay is also involved in
       developing products with its customers.

     - We act as a leading source of consumer data for the hearing aid industry.
       We have conducted more than 30 market studies for our customers and
       communicate our market data that identifies consumer needs to the hearing
       aid industry through our MarkeTrak reports, other publications and
       seminars.

     - SSPI has a strong position in the international solenoid marketplace and
       supplies over 250 customers. We anticipate that future growth of this
       Automotive Components unit will come from leveraging our existing
       relationships to introduce new products and services.

     - Emkay continues to expand its geographical presence around the world in
       order to better serve the OEM electronics market it serves.

 MAINTAIN LOW COST AND HIGH QUALITY MANUFACTURING LEADERSHIP

     We believe that we are the lowest cost producer of hearing aid transducers
due to our relatively large volume production and market share. KE has more than
25 years of experience operating in both Asia and Europe. During this time, we
have developed manufacturing and management systems that allow us to operate low
cost offshore facilities without compromising either quality or level of
service. Approximately 82% of our manufacturing activity is located in China and
Malaysia to benefit from both their lower cost labor markets and proximity to
emerging product markets.

                                        5
<PAGE>

  DEVELOP AUTOMOTIVE MICROPHONE BUSINESS

     We believe the increasing focus on limiting the use of cellular phones
while operating automobiles (driven in part by existing and proposed legislation
at the state level) along with the growing popularity of voice driven navigation
systems will create demand for microphones and provide an opportunity for us to
expand.

  PURSUE STRATEGIC ACQUISITIONS

     Strategic acquisitions have been an important element in our growth and
efforts to enhance our leading market and technological positions. We will
continue to review attractive acquisition opportunities that preserve our
financing flexibility. We will focus on acquisitions that can:

     - enhance existing product, process and technological capabilities;

     - provide us with growth opportunities that complement our acoustic
       expertise; and/or

     - expand our presence in new geographic areas.

PRODUCTS

  KE

     KE primarily manufactures hearing aid transducers, including microphones
and receivers, that are sold to hearing aid manufacturers. KE offers transducers
for all types of hearing aids, from the smallest which completely fit in the
canal to the largest which are body-worn, and often customizes models to meet
the specifications of individual hearing aid manufacturers. KE also occasionally
conducts joint research and product development with some of its customers. In
addition to transducers, KE sells other hearing aid components under the brand
name Deltek, including trimmers, volume controls and connectors for hearing aid
manufacturers. These other products represented a very small percentage of our
sales in 2002.

     KE also acts as a source of consumer data for the hearing aid industry. It
provides free market data to its customers through distribution of its
publication MarkeTrak and has conducted more than 30 market studies for its
customers.

  EMKAY

     Emkay produces and is developing a wide range of microphones, custom
acoustic assemblies, and infrared remote controls primarily for sale to original
equipment manufacturers. Major products are discussed below.

     Microphones.  Emkay has leveraged its microphone technology to create
devices for diverse applications. Emkay has completed the development and
initial introduction of a low cost silicon microphone based on traditional
semiconductor manufacturing processes. This technology offers significant
advantages over traditional microphones used in high volume mass market consumer
products such as cellular telephones and personal digital assistants (PDA's).
Key advantages include significantly reduced assembly costs and greater
tolerances in high temperature applications. The Company also markets
boom-mounted microphones for use in conference rooms, helmets, aerospace and
civil/military communications; high sensitivity condenser microphones for laptop
computers, wireless phones and modem accessories; computer monitor microphones;
lapel microphones; and noise canceling and waterproof microphones for headsets,
helmets and handsets.

     Custom Acoustic Assemblies.  Emkay manufactures a variety of acoustic
assemblies from wired and noise canceling headsets used for internet based
telephony and voice recognition to custom acoustic housings and attached leads
for microphones for the OEM market.

     Infrared Remote Controls.  Emkay has developed several infrared remote
control products, including remote controls for televisions and digital
broadcast services that provide Internet access. These products include an
infrared keyboard to facilitate email, internet browsing and shopping along with
remotes with gamepad features to facilitate playing electronic games provide by
the broadcast service provider. Emkay's
                                        6
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remote controls have been introduced in Europe both in the retail market and as
a platform for sales to original equipment manufacturers in connection with
specific applications.

  AUTOMOTIVE COMPONENTS

     Diesel Engine Solenoids.  SSPI produces solenoids used to control diesel
engines, as well as certain natural gas, liquid propane and gasoline engines, in
industrial, marine and construction applications. These products serve various
functions including key start/stop, throttle and choke control and emergency
engine shutdown. Solenoid kits made by SSPI include mounting hardware, brackets
and linkage accessories for connecting the solenoid to the engine and fuel
system. We rigorously test these kits to meet the highest industry standards.

     Electronic Governors.  SSPI's electronic governors are used to control the
speed and power of industrial engines used in applications such as electric
power generators, compressors, tractors, hydraulic pumps and man lifts. SSPI's
Advanced Proportional Engine Control System (APECS) addresses the increasingly
sophisticated equipment of its customers by comparing actual engine speed to the
desired operational parameters of the equipment using a digital microprocessor
and proprietary software and adjusting the throttle of the engine accordingly.

     Position Sensors.  This product line was sold in November 2002.

RESEARCH AND DEVELOPMENT

     Our 2002 research and development expenditures were $13.7 million, or 6.3%
of net sales. We focus on leveraging our acoustic research for use by all three
of our business units. We are carrying out extensive research and development on
producing a silicon microphone using the emerging technology of the micro-
machining of silicon (also referred to as micro-electro mechanical systems). We
believe that we have a leading position in this application of micro-electro
mechanical systems and are continuing development of manufacturing processes
that will deliver production quantities. There is a team of ten engineers within
Emkay that is working on development of the silicon microphone.

  KE

     KE's research and development group consists of 38 scientists, engineers
and technicians located in Itasca, Illinois, focused on technologically improved
new product. KE believes that its ability to rapidly develop new transducers
with superior performance is critical to sustaining its market share and
margins. Applied research and advanced modeling lead to new and creative
products, which we believe gives KE a competitive advantage as hearing aid
manufacturers look for technology improvements in their components.

     Planned new products and improvements include receivers with improved
maximum power output and reduced vibration sensitivity, significantly reduced
vibration with magnetic shield outer housing, screenless damping using
Ferrofluid(R), and microphone improvements with respect to a analog/digital
(A/D) signal converter, programmable digitally controlled gain amplifier,
co-joined ultra-thin microphone pairs, noise reduction, improved electrostatic
discharge thresholds and significantly reduced cellular telephone interference.

  EMKAY

     Emkay has developed a significant in-house research and development effort,
with 34 engineers and technicians. Over the next five years, Emkay will continue
to focus its research and development efforts on acoustics, radio frequency,
infrared, video image sensing, micro-electro mechanical systems and digital
signal processing products for the mobile communications, voice recognition,
digital television, computer telephony integration and telematics markets. Emkay
is also concentrating on the development of a "far field" microphone system
which employs an array of microphones that focuses on a particular speaker while
canceling other background noise. We have licensed digital sound processing
technology to further the

                                        7
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development of this microphone system. We expect to leverage this microphone
technology for the development of additional products for our KE and Automotive
Components units.

     Emkay has decentralized research and development groups located in the
United States, Austria and Taiwan in order to coordinate closely with regional
sales and marketing teams, and more efficiently meet the demands of local
markets. Research and development efforts for micro-electro mechanical systems
for the production of silicon microphones, digital signal processing technology
and far field microphone technology is conducted in the United States, infrared
product development is conducted in Austria and wireless headset product
development is conducted in Taiwan.

  AUTOMOTIVE COMPONENTS

     SSPI.  SSPI's advanced development group currently employs 18 engineers for
the design and development of new actuators and solenoids.

MANUFACTURING

     We operate from eight manufacturing facilities in the United States,
Austria, Malaysia and China. We believe that our facilities meet our present
needs and that our properties are generally well-maintained and suitable for
their intended uses. We believe that we generally have sufficient capacity to
satisfy the demand for our products in the foreseeable future. We periodically
evaluate the composition of our various manufacturing facilities in light of
current and expected market conditions and demand, toward that end, we have
signed a letter of intent concerning a new facility in China.

     In March 2000, we announced plans to consolidate our worldwide
manufacturing operations. The consolidation plan included outsourcing some
activities performed in Itasca and Rolling Meadows, Illinois. In addition, we
ceased production at our United Kingdom, Taiwanese and German manufacturing
facilities in 2000 and 2001. Production from those operations was moved to
China, Malaysia and Hungary. As of December 2002, the consolidation plan is
complete and our headcount related to operations that existed in March 2000 has
been reduced by 20%.

  KE

     KE operates manufacturing facilities in Illinois, Malaysia and China.
Several sub-assembly processes are automated, but transducer assembly is largely
manual. Manual transducer assembly has proven to be a cost-flexible production
method and KE's workforce is generally highly stable and semi-skilled. KE is
also working to develop automated final assembly equipment for select products.

     The total production space available to KE is approximately 85% utilized
and our transducer manufacturing facilities are ISO 9000 certified.

  EMKAY

     Emkay's assembly processes for the SiSonic(TM) Silicon Microphone are
largely automated, and assembly operations of older products are largely manual
and performed by subcontractors in China and Taiwan. Capacity can be increased
as demand increases.

  AUTOMOTIVE COMPONENTS

     SSPI.  Approximately 40% of SSPI's finished products are manufactured in
Niles, Illinois, with the remainder manufactured in the Suzhou, China facility.
Components such as coils and metal parts are primarily sourced in Asia for both
manufacturing facilities. All of SSPI's manufacturing facilities are ISO 9000
certified. In addition, the Niles manufacturing facility is QS 9000 certified
while the Suzhou facility has TS 16949 certification.

     Ruf.  The Ruf operations were sold in November 2002.

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SALES AND MARKETING

  KE

     KE sells directly to hearing aid manufacturers through its 31-member sales
group which operates from offices in Illinois, United Kingdom and Japan.
Australia is covered by an independent sales representative. Pricing of KE's
products is based on a volume/price grid in which volume discounts are provided
based on actual purchases. From time to time, KE reduces prices to meet
competition. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."

  EMKAY

     Emkay sells most of its products through a 37-member sales group to
original equipment manufacturers including Plantronics, Shure, Phillips
Electronics, IBM and HTC. Emkay's sales force and independent sales
representatives are located in the United States, United Kingdom, Germany,
France, Austria, Japan, Taiwan, China, Korea, and Australia. In addition, Emkay
products are available through catalog distributors in North America and Europe.

  AUTOMOTIVE COMPONENTS

     SSPI.  Solenoids and electronic governors are generally sold directly to
manufacturers of diesel engines and mobile industrial equipment worldwide
through SSPI's direct sales force. SSPI maintains sales, distribution and
application support operations in Niles, Illinois, Burgess Hill, England, and
Suzhou, China. This direct distribution system is expected to continue due to
the specialized design of products for particular customers. SSPI's application
engineers often work in conjunction with its major customers to design
proprietary products for specific engine models. SSPI's Independent
representatives and distributors located in North America, Europe, Asia, South
America and Austrialia primarily provide service and support to the aftermarket.

     Ruf.  Ruf operations were sold in November 2002.

CUSTOMERS

  KE

     KE is the principal supplier of transducers to all of the major hearing aid
manufacturers, including GN Resound, Oticon, Phonak, Rion, Siemens, Sonic
Innovations, Starkey Laboratories and Widex. In 2002, KE's top ten customers
represented approximately 91% of sales with Siemens accounting for more than 10%
of both consolidated sales and accounts receivable.

  EMKAY

     Emkay's top customers for voice recognition products include Scansoft and
marketers of language learning software. Generally, customers for voice command
and control products include computer and communications original equipment
manufacturers and computer peripheral manufacturers. Top customers for Emkay's
products are Aswo International, High Tech Computer Corp., Plantronics, Shure,
Supportplus, Tatung and TW Electronics. In 2002, Emkay's top ten customers
represented approximately 42% of sales.

  AUTOMOTIVE COMPONENTS

     SSPI.  SSPI provides engine control solenoids to every major diesel engine
manufacturer worldwide. Its top customers include Ingersoll Rand, Cummins,
Isuzu, Ford, John Deere, Yanmar, Kubota, Perkins, Caterpillar, Deutz, MWM and
Navistar. SSPI's top ten customers comprised 61% of its sales in 2002.

     Ruf.  The Ruf operations were sold in November 2002.

                                        9
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COMPETITION

  KE

     KE has held a major share of the transducer market for over 30 years, and
its worldwide market share was approximately 80% in 2002. KE's principal
competitor is SonionMicrotronic, which we believe had a significant portion of
the remaining market share in 2002. SonionMicrotronic generally prices their
products below our pricing levels and this difference has increased due to the
strength of the U.S. Dollar versus European currencies relative to exchange
rates prevailing in late 1998.

  EMKAY

     The voice recognition, digital television, computer telephony integration
and mobile communications markets are highly competitive and in many cases
highly fragmented. Many companies compete with Emkay in its targeted markets,
generally on the basis of technological expertise, price, product quality,
reliability and on-time delivery. These competitors include large consumer
electronics, communications equipment and acoustic component product companies
as well as a number of smaller specialized companies.

  AUTOMOTIVE COMPONENTS

     SSPI.  As the leading global producer of diesel engine solenoids, SSPI had
worldwide unit market share of approximately 65% in 2002. SSPI also held a small
but growing share of the worldwide electronic governor market in 2002. SSPI
competes with a variety of U.S. and non-U.S. companies in these two markets.

     Ruf.  The Ruf operations were sold in November 2002.

PATENTS, COPYRIGHTS AND TRADEMARKS

     Patents play an important role in the strategy for each of our business
units. As a matter of practice, we follow an aggressive program of filing patent
applications for all new design and development concepts as soon as practical,
subject to review for patentability, technical and commercial feasibility and
approval by the appropriate business unit. We currently have approximately 170
patents issued in 15 countries around the world. The technology covered by these
patents range from the very latest in solid state, micro-machined microphone
technology to the now well-established Class D amplifier in hearing aid
transducers.

     In addition to patents, we have more than 100 trademarks registrations and
applications for registration in 20 countries around the world and 8 registered
domain names for Internet web sites.

     Although we have no registered copyrights, we have unregistered copyrights
in our original works of authorship. In addition, we have in excess of 150
unregistered trade names used to identify our products and a number of trade
secret processes used to design and manufacture our products.

     Our patents and other intellectual property rights may not protect us from
competition. In addition, patents by their nature are of limited duration, and
several of our patents will expire during the next two years.

EMPLOYEES

     We had 2,225 employees as of December 31, 2002. Of these, approximately 60%
were production employees and approximately 40% were staff. Geographically, 445
of our employees are based in North America, 1,568 employees are based in Asia
and 212 employees are based in Europe. With the exception of employees in China
and Austria, who are required to be unionized under local law, none of our
employees are members of labor unions. We have good relationships with our
employees and turnover is relatively low.

ENVIRONMENTAL MATTERS

     Our facilities, like similar manufacturing facilities, are subject to a
range of stringent environmental laws and regulations, including those relating
to air emissions, wastewater discharges, the handling and disposal of solid and
hazardous waste, and the remediation of contamination associated with the
current and historic use

                                        10
<PAGE>

of hazardous substances or materials. Based on the information available to us,
environmental laws currently in force and the advice and assessment of our
environmental consultants, we do not consider that we have any material
environmental liabilities or failures to comply with applicable environmental
laws.

REGULATION

     Hearing aid manufacturers are subject to a variety of regulatory agency
requirements in the United States and in various other countries in which they
sell hearing aids. Manufacturers of hearing aids are subject to the United
States Food, Drug, and Cosmetic Act and other federal statutes and regulations
governing, among other things, the design, manufacture, testing, safety,
labeling, storage, record keeping, reporting, approval, advertising and
promotion of medical devices.

     Sales of hearing aids outside the United States are also subject to
regulatory requirements that vary from country to country. Similar requirements
to those in place in the United States are imposed on hearing aid manufacturers
by the European Union. All hearing aid manufacturers are required to obtain
quality assurance certifications for their components to sell their products in
the European Union. Accordingly, KE maintains ISO 9001 and ISO 9002 quality
assurance certifications which subject KE's operations to periodic surveillance
audits.

                                    INDUSTRY

     We apply our acoustic technology capabilities in several markets, including
hearing aids and acoustic and infrared technology. In addition, we manufacture
diesel engine solenoid and electronic governors for the automotive components
market.

HEARING AID TRANSDUCERS

     Hearing aids have three basic internal components: a microphone, signal
processing and amplification circuitry, and a receiver. The microphone is
located at the top of the hearing aid and converts surrounding sounds to
electronic signals. The circuitry then modifies the signal over the audio
frequency spectrum. These signals are transferred to the receiver, which then
converts the signals to sounds in the ear. The transducer is the name given to
both the microphone and the receiver. Transducers are critical to the
performance capabilities of any hearing aid. Without high performance
transducers, the processing capabilities of hearing devices are ineffective.

     Hearing aid manufacturers distribute their products through hearing aid
fitters, referred to as dispensers, which are either audiologists or hearing
instrument specialists. An audiologist has a masters degree in audiology and is
National Board Certified by the American Speech and Hearing Association Board.
Hearing instrument specialists are licensed and may or may not be National Board
Certified. Ear, nose and throat physicians' offices, hospitals and clinics
typically employ only audiologists, whereas retail settings employ both
audiologists and hearing instrument specialists.

     Significant factors affecting demand for hearing aids include the
following:

     - Technological advances.  A number of technological advances made in
       recent years have increased consumer satisfaction by decreasing the size
       and improving the performance of hearing aids. The development of
       programmable, digital and multiple microphones devices, greater
       applicability of computer software, increased use of high technology
       circuitry, enhanced performance in noisy environments and improved
       hearing aid casings are expected to further improve product performance
       and increase consumer satisfaction.

     - Fitting and after sales care.  Improved fitting of hearing aids, both
       physically and audiologically, is an important factor affecting growth of
       the hearing aid market. Additionally, a few dispensers are introducing
       after sales care of patients and their hearing aids, including personal
       visits to older clients.

     - Improvement in cosmetic appearance and reduction in stigma.  Through
       technological advances, some higher priced hearing aids have become so
       small that they are virtually invisible, although
                                        11
<PAGE>

       occlusion (ear blockage) in connection with their use must be managed. At
       the same time, the stigma associated with hearing loss may be decreasing,
       as there has been an increase in the number of baby boomers (between ages
       45 to 54) who admitted to having a hearing loss.

     - Growing elderly population.  30% of the population over the age of 65 has
       historically had a hearing loss problem. The 2000 U.S. Census indicated
       that 35 million people were age 65 or older. The U.S. Census Bureau also
       projects that the population age 65 or older will be 39.7 million people
       in 2010, and five years later in 2015, 46 million.

     - Greater use of binaural hearing aids.  Clinical data has demonstrated
       that the use of binaural hearing aids (i.e., two hearing aids per user)
       benefits individuals with a hearing loss in both ears. Increased use of
       binaural hearing aids would result in more transducer sales (four per
       hearing aid user instead of two).

     - Undiagnosed hearing loss.  We estimate that approximately 10% of the U.S.
       population has some form of hearing loss, and that a relatively high
       proportion of this population is either unaware of their hearing loss
       since it has occurred gradually over time or has not sought medical
       advice. There are considerable opportunities to increase sales to this
       group by educating them on the signs of hearing loss and encouraging them
       to visit physicians who can diagnose the hearing loss and recommend
       purchase of a hearing aid. The development of a systematic program of
       routine hearing screening could also lead to significantly more referrals
       for treatment.

     - International penetration.  According to industry studies, approximately
       10% of the population in developed countries could benefit from hearing
       aids, but only approximately 2% of the population in developed countries
       owns them. Since two-thirds of the worldwide population over 65 will be
       in developing countries by 2025, there are substantial opportunities for
       increased use of hearing aids in developing economies such as China,
       India and eastern Europe, especially as hearing aids become more
       affordable.

     - Price sensitive market segments.  The average price of hearing aids in
       the United States was approximately $1,446 in 2001 according to a survey
       in The Hearing Journal, making them too expensive for a large portion of
       the elderly population who rely on fixed incomes. Several manufacturers
       have entered the low price hearing aid market to explore opportunities in
       this segment.

ACOUSTIC AND INFRARED TECHNOLOGY

     The Emkay business unit began operations in 1994 leveraging our acoustic
and infrared competencies to target new growth markets within the digitally
enhanced and converging information technology (IT), telecomm and broadcasting
industries. Critical to the successful evolution of specific markets within
these industries will be the speed and quality of the acoustic, audio and data
input technology.

     - Mobile Communications.  Mobile communication devices continue to expand
       in prevalence world wide, with over 390 million mobile phones sold in
       2002. Currently the infrastructure is rapidly expanding to begin the
       rollout of 3G applications such as streaming video and Internet access.
       Many of the services have new voice driven communications applications,
       thus requiring vendors with high volume manufacturing, significant
       acoustic application support and a broad line of voice input solutions.
       Emkay is well positioned to capitalize on this market selling ECMs,
       Silicon microphones, custom assemblies and software for elimination of
       ambient noise.

     - Automotive.  Industry officials expect half of the cars manufactured in
       the U.S., Japan and Western Europe to have in-vehicle communications and
       entertainment systems by 2006. Using natural voice commands the user can
       dial phone numbers, check e-mail, receive navigational information,
       change radio stations, play CD disks and run third party software
       applications. It is expected that every major automotive manufacturer
       will offer in car telematic systems by 2006 and that 6 million users will
       subscribe to telematic services offered by wireless carriers, car makers
       or internet service providers by 2007.

                                        12
<PAGE>

     Emkay has been aggressively promoting its range of acoustic components and
sub-assemblies for such hostile environments to suppliers and global automotive
manufacturers and has developed single and multiple microphone assemblies
(supported by noise reduction software techniques) for specific in vehicle
applications.

     - Multi-Media.  With the trend toward digital television provided by
       broadcast, cable and satellite providers, new services previously that
       were available only through personal computer ("PC") access to the
       internet can now be accessed through television. The consumer can now
       access on-line banking, on-line gaming, home shopping, e-mail, chat and
       other integrated home entertainment without the need of a PC.

     Emkay has developed a complete infrared ("IR") input transmission portfolio
of game pad, keyboard, pre-programmed and voice driven remote control to
simplify this on-line access. Further a unique IR-transmission system that
allows bi-directional communication for 4 individual game pads and an increase
of more than 40% battery life has been developed for OEM customers.

AUTOMOTIVE COMPONENTS

     - Diesel Engine Solenoids.  Solenoids are two position linear actuators
       that are used mainly to start and stop diesel engines by controlling the
       engine fuel system. We believe the worldwide diesel engine solenoid
       market was approximately $38.0 million in 2002. Longer-lasting engines
       and alternative technologies, developed principally in response to
       stringent vehicle emissions regulations in the United States and Europe
       are expected to reduce demand for solenoids in these markets on diesel
       engines over 100 horse power. We expect this to be offset by the higher
       market penetration of industrial diesel engines under 100 horse power
       which will we believe will require less sophisticated emissions
       technologies. The Asian markets for solenoids are forecasted to grow
       substantially over the next 5 years. The economic growth of these
       economies will drive increased demand for diesel engines and solenoids
       used in construction, agricultural and industrial applications. These
       markets have typically required less stringent emissions regulations.

     - Electronic Governors.  Electric engine governors control engine speed and
       power by adjusting the engine throttle for varing parameters. The
       worldwide market for electric governors is approximately $110 million.
       Increased future demand is projected based on the increasing need for
       precision speed management of small diesel and gas engines and the
       increased use of advanced control drive-by-wire systems in small mobile
       industrial equipment that use both diesel and gas engines.

                                        13
<PAGE>

ITEM 2.  PROPERTIES

                                   PROPERTIES

<Table>
<Caption>
                                                                      SQUARE FEET
                                                             ------------------------------
                                       OWNED/     LEASE                          AUTOMOTIVE
LOCATION                      USAGE    LEASED   EXPIRATION     KE       EMKAY    COMPONENTS    TOTAL
--------                     -------   ------   ----------   -------   -------   ----------   -------
<S>                          <C>       <C>      <C>          <C>       <C>       <C>          <C>
US
Elgin, IL..................     Mfg.    Owned                 71,800                           71,800
Itasca, IL.................  Hdqtrs.    Owned                 57,900     3,000                 60,900
*Lisle, IL.................     Eng.   Leased    2/28/2003                         21,000      21,000
Niles, IL..................     Mfg.    Owned                                      70,900      70,900
*Monroe, MI................    Sales   Leased    8/31/2003                            300         300
*Lansdale, PA..............    Sales   Leased    6/30/2003                            300         300
                                                             -------   -------    -------     -------
                                                             129,700     3,000     92,500     225,200
EUROPE
Neumarkt, Austria..........     Mfg.    Owned                  4,000    54,400                 58,400
Burgess Hill, UK...........    Sales   Leased    3/31/2021     8,000     2,500      4,500      15,000
                                                             -------   -------    -------     -------
                                                              12,000    56,900      4,500      73,400
ASIA
*Pudong, China.............    Sales   Leased    6/30/2003       100       100                    200
Suzhou, China (No. 20).....     Mfg.   Leased     1/1/2005    21,000                           21,000
Suzhou, China (Block B)....     Mfg.   Leased     1/1/2005    12,400       500                 12,900
Suzhou, China (No. 16).....     Mfg.   Leased     1/1/2005                         15,100      15,100
*Tokyo, Japan..............    Sales   Leased    6/30/2003       300       300                    600
**Penang, Malaysia.........     Mfg.    Owned                 57,500                           57,500
Weifang, China.............     Mfg.   Leased    9/30/2005              32,900                 32,900
Taipei, Taiwan.............    Sales   Leased   11/30/2005              13,157                 13,157
                                                             -------   -------    -------     -------
                                                              91,300    46,957     15,100     153,357
                                                             -------   -------    -------     -------
GRAND TOTAL................                                  233,000   106,857    112,100     451,957
                                                             =======   =======    =======     =======
</Table>

---------------

*  With the exception of the Lisle, IL facility, the Company expects to renew
   all leased facilities that expire in 2003.

** Land lease expires 09/18/2049.

ITEM 3.  LEGAL MATTERS

     The Company has no material pending or threatened litigation.

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

     Not applicable.

                                    PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

     Not applicable.

                                        14
<PAGE>

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

<Table>
<Caption>
                                        1998       1999        2000        2001        2002
                                      --------   ---------   ---------   ---------   ---------
                                                           (IN THOUSANDS)
<S>                                   <C>        <C>         <C>         <C>         <C>
STATEMENT OF OPERATIONS DATA:
Net sales...........................  $234,899   $ 229,106   $ 238,123   $ 223,721   $ 216,105
Costs and expenses:
  Cost of sales(7)..................   136,236     147,665     134,069     124,587     123,222
  Research and development..........    14,419      13,891      13,380      14,684      13,728
  Selling and administrative
     expense........................    33,075      33,421      36,342      41,470      38,850
  Recapitalization expense(1).......        --      10,674          --          --          --
  Loss on sale of business(8).......        --          --          --          --      16,736
  Restructuring expenses(2).........        --          --      18,440         317       2,158
                                      --------   ---------   ---------   ---------   ---------
Operating income....................    51,169      23,455      35,892      42,663      21,411
Interest income.....................       278         883         959         146         129
Interest expense....................      (634)    (23,194)    (43,341)    (37,756)    (34,126)
Miscellaneous, net..................    (1,058)       (123)         --          --          --
                                      --------   ---------   ---------   ---------   ---------
Income (loss) from continuing
  operations before income taxes....    49,755       1,021      (6,490)      5,053     (12,586)
Income tax expense (benefit)........     7,107       8,980      (1,627)      6,532      11,790
                                      --------   ---------   ---------   ---------   ---------
Income (loss) from continuing
  operations........................    42,648      (7,959)     (4,863)     (1,479)    (24,376)
Income from discontinued operations
  less applicable income taxes(3)...     6,936       2,556          --          --          --
                                      --------   ---------   ---------   ---------   ---------
Net income (loss)...................  $ 49,584   $  (5,403)  $  (4,863)  $  (1,479)  $ (24,376)
                                      ========   =========   =========   =========   =========
C Corporation Pro Forma Data(4) --
  unaudited:
  C Corporation pro forma income
     taxes(4).......................  $ 18,500   $  19,125          --          --          --
  C corporation pro forma income
     (loss)from continuing
     operations adjusted for income
     taxes..........................  $ 31,255   $ (18,104)         --          --          --
OTHER FINANCIAL DATA:
  Depreciation and amortization.....  $ 11,235   $  12,638   $  12,406   $  13,683   $  10,897
  Capital expenditures..............    16,326      14,500      16,151      21,276       8,427
  Cash flows from operating
     activities.....................    56,078      49,274      22,835       9,448      29,466
  Cash flows from investing
     activities.....................   (16,326)    (14,500)    (15,488)    (17,614)     (4,867)
  Cash flows from financing
     activities.....................   (41,733)    (19,055)    (12,160)     (6,152)     (3,563)
  EBITDA(5).........................    61,346      35,970      48,298      56,346      32,308
  EBITDA as adjusted(9).............    61,346      46,644      48,298      56,346      49,044
  Ratio of earnings to fixed
     charges(6).....................      39.1x        1.0x                    1.1x
BALANCE SHEET DATA:
Cash and cash equivalents...........  $  7,060   $  23,798   $  17,076   $   2,446   $  24,082
Total assets........................   271,175     190,334     191,757     177,882     150,617
Long-term debt including current
  maturities........................        --     350,134     348,807     341,263     341,360
Preferred stock manditorily
  redeemable in 2019................        --     194,250     213,675     235,042     258,547
Total common stockholders' equity
  (deficit).........................   223,230    (410,498)   (444,617)   (467,890)   (515,749)
</Table>

                            See accompanying notes.
                                        15
<PAGE>

---------------

(1) The "Recapitalization expenses" consisted primarily of bonuses, special
    one-time recognition payments to employees, termination costs of a
    supplemental executive retirement plan and legal, accounting, public
    relations and other professional fees.

(2) The "Restructuring expenses" are related to the restructuring announced in
    March 2000. The Company consolidated its worldwide manufacturing operations
    by ending production at five manufacturing facilities and either outsourcing
    component production or moving final assembly to lower cost locations in
    Malaysia, China and Hungary. Through December 2002, these actions reduced
    our global workforce by about 20%.

(3) Net income from discontinued operations represents the activity of The
    Finance Company of Illinois, an equipment financing business that was
    distributed to our preexisting stockholders on June 29, 1999.

(4) Effective January 1, 1997, our stockholders elected under the S Corporation
    rules of the Internal Revenue Code to have Knowles' income included in their
    own income for federal income tax purposes. As a result of the
    Recapitalization, we terminated our S Corporation status for federal income
    tax purposes effective June 29, 1999. For informational purposes, the
    selected historical consolidated financial data includes an unaudited pro
    forma presentation of income taxes which would have been recorded if we had
    been a C Corporation.

(5) "EBITDA" is defined as earnings before interest, taxes, depreciation and
    amortization. For the years 2000, 2001 and 2002, EBITDA includes
    restructuring charges of $18,440, $317 and $2,158 respectively. EBITDA
    should not be construed as an alternative to operating income, or net
    income, as determined in accordance with GAAP, as an indicator of our
    operating performance, or as an alternative to cash flows generated by
    operating, investing and financing activities. EBITDA is presented solely as
    a supplemental disclosure because we believe that it is a widely used
    measure of operating performance. Because EBITDA is not calculated under
    GAAP, it may not be comparable to similarly titled measures reported by
    other companies.

    Reconciliation of operating income to EBITDA:

<Table>
<Caption>
                                            1998       1999       2000       2001       2002
                                           -------    -------    -------    -------    -------
    <S>                                    <C>        <C>        <C>        <C>        <C>
    Operating income....................   $51,169    $23,455    $35,892    $42,663    $21,411
    Depreciation and amortization.......    11,235     12,638     12,406     13,683     10,897
    Miscellaneous, net..................    (1,058)      (123)        --         --         --
                                           -------    -------    -------    -------    -------
    EBITDA..............................   $61,346    $35,970    $48,298    $56,346    $32,308
                                           =======    =======    =======    =======    =======
</Table>

(6) The ratio of earnings to fixed charges has been computed by dividing
    earnings available for fixed charges (income from continuing operations
    before income taxes and fixed charges) by fixed charges (interest expense
    plus one-third of rental expense (the portion deemed representative of the
    interest factor). Knowles earnings were inadequate to cover fixed charges
    for the twelve months ended December 31, 2000 by approximately $6.5 million.
    Knowles earnings were inadequate to cover fixed charges for the twelve
    months ended December 31, 2002 by approximately $12.6 million.

(7) During the fourth quarter of 2001, the Company changed its method of
    determining the cost of domestic inventories from the LIFO method to the
    FIFO method. Prior year results have been restated to reflect the
    retroactive application of this tax accounting change; 2000 and 1999 results
    were decreased by $1,011 and $1,674, respectively. 1998 and 1997 results
    were increased by $1,402 and $478, respectively.

(8) In November 2002 the Company sold its Ruf Electronics operations, which were
    part of the Automotive Components segment, and recorded a loss of $16,736.
    The loss includes $1,186 transferred from accumulated other comprehensive
    income. The proceeds from the sale were not material. The Company may
    receive additional payment amounts in 2003, 2004 and 2005 if the Ruf
    operations meet certain financial targets.

(9) "EBITDA as adjusted" is defined as earnings before interest, taxes,
    depreciation and amortization; and for the year 1999 recapitalization
    expense; and for the year 2002 loss on sale of business. EBITDA as adjusted
    is presented solely as a supplemental disclosure. For the years 2000, 2001
    and 2002, EBITDA as adjusted includes restructure charges of $18,440, $317
    and $2,158, respectively.

                                        16
<PAGE>

    Reconciliation of EBITDA to EBITDA as adjusted:

<Table>
<Caption>
                                            1998       1999       2000       2001       2002
                                           -------    -------    -------    -------    -------
    <S>                                    <C>        <C>        <C>        <C>        <C>
    EBITDA..............................   $61,346    $35,970    $48,298    $56,346    $32,308
    Recapitalization expense............        --     10,674         --         --         --
    Loss on sale of business............        --         --         --         --     16,736
                                           -------    -------    -------    -------    -------
    EBITDA as adjusted..................   $61,346    $46,644    $48,298    $56,346    $49,044
                                           =======    =======    =======    =======    =======
</Table>

                                        17
<PAGE>

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

     The following discussion should be read in conjunction with the "Selected
Consolidated Financial Data" and our consolidated financial statements and the
related notes included elsewhere in this report on Form 10-K.

OVERVIEW

     We are a leading international manufacturer of technologically advanced
products in the hearing aid and automotive components markets. We also operate
in markets for acoustics and infrared technology products that have higher
growth potential. Since we were founded in 1946, we have leveraged our core
competence in acoustic technology to build expertise in hearing aid transducer
and low voltage integrated circuit design, electronic controls and sensors,
infrared technology and precision manufacturing in the United States and other
countries. We have numerous international operations with our largest facilities
in the United States, China, Malaysia and Austria. Our 2002 revenue, operating
income and EBITDA, as reported, were $216.1 million, $21.4 million and $32.3
million, respectively. Our 2002 operating income and EBITDA, adjusted for the
$16.7 loss on the sale of the Ruf operations, were $38.1 million and $49.0
million, respectively.

     The Company borrowed $200 million under a Credit Agreement plus $153.2
million of 13 1/8% Senior Subordinated Notes associated with its
recapitalization June 30, 1999. On August 29, 2002, the Company issued $10
million of 10% Senior Subordinated Notes in a private placement. The Company is
required to maintain certain leverage and interest coverage ratios in order to
be in compliance with its Credit Agreement covenants and to access its revolving
credit facility. The Company was in compliance with its leverage and interest
coverage ratios and its other covenant requirements as of December 31, 2002. In
March 2003, the Company refinanced the A facility under the Credit Agreement,
which represented $31.7 million of the outstanding debt as of March 31 pursuant
to a Limited Waiver and Fifth Amendment to the Credit Agreement (the "Fifth
Amendment") dated as of March 25, 2003. The Fifth Amendment revised the required
interest coverage ratio and leverage ratio for the period from March 31, 2003 to
June 29, 2007. The Fifth Amendment approved a new $35 million borrowing facility
(the "C Facility"), the proceeds of which were used to prepay the existing A
Facility as of March 31, 2003 and to pay certain fees to certain lenders
incurred in connection with such amendment. Any remaining proceeds may be used
for general corporate purposes. The C Facility has no amortization of principal
during the term of the facility, which matures on June 29, 2007 and accrues
interest at a fixed rate of 18 1/2%.

     The Company is in compliance with its leverage and interest coverage
ratios, as defined in the Limited Amendment and Waiver to the Credit Agreement
dated March 25, 2003 and expects to be in compliance through December 31, 2003.

     The Company had previously received an Amendment and Waiver dated May 10,
2002 to the Credit Agreement. This amendment waived our non-compliance with the
required ratios for the period ended March 31, 2002 and amended these required
ratios for the periods from March 31, 2002 through the first quarter of 2003.
This Amendment and Waiver restricted the Company's capital expenditures for
2002, as well as setting various other operating and financing requirements, all
of which the Company met through December 31, 2002.

BUSINESS SEGMENTS

     The Company is organized into three business segments. They are as follows:

     - KE-Hearing Aid Components.  KE, our most significant business unit,
       designs, manufactures and markets subminiature acoustic transducers and
       other components for hearing aids. The transducer is the name given to
       both the microphone and receiver in a hearing aid. KE is the world's
       largest manufacturer of hearing aid transducers.

     - Emkay-Acoustics and Infrared Technology.  Emkay began business in 1994 to
       explore non-hearing aid applications for our technology. Emkay combines
       KE's transducer and acoustic expertise with its

                                        18
<PAGE>

       core competencies in infrared technology and electronics to provide high
       technology solutions for markets with high growth potential including
       mobile phones, PDAs, and entertainment systems.

     - Automotive Components(ACG).  Our Automotive Components business unit is
       comprised of Synchro-Start Products, Inc. ("SSPI"), which produces diesel
       engine solenoids and electronic governors. On November 1, 2002 the
       Company announced the sale of its Ruf Electronics operations ("Ruf"),
       which previously represented 35% of the sales and a negligible portion of
       the EBITDA of this segment.

     The following table sets forth our net sales growth from each segment the
last three years.

<Table>
<Caption>
                                                   2000 VS 1999   2001 VS 2000   2002 VS 2001
                                                   ------------   ------------   ------------
<S>                                                <C>            <C>            <C>
KE...............................................       4.0%          (1.4)%         (4.6)%
Emkay............................................      10.1%          (4.6)%          5.5%
Automotive Components............................       0.4%         (17.6)%         (6.2)%
     Total.......................................       3.9%          (6.0)%         (3.4)%
</Table>

     The following table sets forth the approximate percentage of our net sales
from each segment.

<Table>
<Caption>
                                                              YEAR ENDED DECEMBER 31,
                                                              ------------------------
SEGMENT                                                        2000     2001     2002
-------                                                       ------   ------   ------
<S>                                                           <C>      <C>      <C>
KE..........................................................   59.2%    62.1%    61.3%
Emkay.......................................................   14.9%    15.2%    16.6%
Automotive Components.......................................   25.9%    22.7%    22.1%
                                                              -----    -----    -----
     Total..................................................  100.0%   100.0%   100.0%
                                                              =====    =====    =====
</Table>

     The following table sets forth the percentage of our operating income from
each segment. The percentages for the year ended December 31, 2000 exclude
restructuring charges of $18.4 million; for the year ended December 31, 2001
exclude restructuring charges of $0.3 million and for the year ended December
31, 2002 exclude the loss on the sale of Ruf of $16.7 million and restructuring
charges of $2.2 million.

<Table>
<Caption>
                                                              YEAR ENDED DECEMBER 31,
                                                              ------------------------
SEGMENT                                                        2000     2001     2002
-------                                                       ------   ------   ------
<S>                                                           <C>      <C>      <C>
KE..........................................................   94.3%   121.5%   121.5%
Emkay.......................................................    5.6%    (5.8)%   (2.3)%
Automotive Components.......................................   10.4%    14.0%    12.3%
Unallocated amount -- Corporate overhead....................  (10.3)%  (29.7)%  (31.5)%
                                                              -----    -----    -----
     Total..................................................  100.0%   100.0%   100.0%
                                                              =====    =====    =====
</Table>

     Net sales.  We recognize net sales when title to the products transfers to
the customer, which typically is upon the shipment of products to the customers.

     Growth in net sales for KE has generally been driven by demographics,
technological advances and improved hearing aids. There has been growing price
competition in KE's market over the last several years. KE believes that demand
for improved transducers and an expanding market for hearing aids will more than
offset any decline in existing transducer prices in 2003.

     Net sales for Emkay have been driven by the emergence of new markets for
acoustic and infrared technologies and our penetration of those markets. The
market for Emkay's products has been growing substantially, due to technological
advances in and increased penetration of mobile phones, PDA type devices that
access the web, and a variety of specialty applications that require high
performance acoustic performance. Emkay realized a major milestone in December,
2002 with what we believe was the first commercial shipment of the world's first
surface mount microphone, based on semiconductor technology.

     Net sales from Automotive Components are primarily driven by the sale of
solenoids in both diesel engine applications and other commercial markets. Sales
of diesel engine solenoid products for use as

                                        19
<PAGE>

replacement parts fluctuate substantially from quarter to quarter, which can
have a noticeable effect on the operating income of the Automotive Components
segment. In the last several years, the diesel engine solenoid market has been
flat in the United States, declining in western Europe and growing in the rest
of the world. We expect net sales of these solenoids to grow slowly. Demand for
the Company's solenoids in other markets, including commercial locks and
security applications, are expected to grow more rapidly.

     Cost of sales.  Our cost of sales consists mainly of materials, direct and
indirect labor costs and other overhead. Other overhead includes depreciation,
equipment and tooling maintenance, shipping and manufacturing supplies. Indirect
labor payroll expense and production overhead expense make up the largest
component of cost of sales. Materials makes up the next largest and direct labor
payroll expense is the smallest component of cost of sales. Depreciation is
included as an expense in the line item that corresponds to the asset being
depreciated (i.e., manufacturing facilities are depreciated in cost of sales,
headquarter facilities are depreciated in general and administrative expense).
About 61% of our depreciation expense in 2002 and 58% in 2001 is reflected in
cost of sales.

     Most of our direct labor is performed by a semi-skilled workforce.
Therefore, we have emphasized moving manufacturing to lower wage locations,
including China and Malaysia. In March 2000, we announced plans which we
executed in 2000 and 2001 to consolidate our worldwide manufacturing operations.
We have outsourced some manufacturing activities previously performed at our
Itasca, Illinois facility and we have outsourced all our manufacturing
activities of our Rolling Meadows, Illinois facility. In addition, we have
ceased production at our manufacturing facilities in the United Kingdom, Taiwan
and Germany. Production from those operations has been moved to China and
Malaysia. As a result of this consolidation our headcount related to operations
that existed in March 2000 have been reduced by 20%.

     KE's material costs primarily relate to unprocessed materials or
commodities, including steel, copper wire, and magnet bar stock. KE purchases
certain integrated circuits, magnets and diaphragm assemblies customized
specifically for its products from outside suppliers, some of which are single
sourced. Emkay's materials costs generally relate to similar unprocessed
materials or commodities. Emkay has subcontracted some of its final assembly to
third parties. These costs are included in materials costs. Automotive
Components also purchases similar unprocessed materials and commodities.

     Research and development.  Research and development costs consist mainly of
personnel cost, facilities and contract costs. The principal purpose of our
research and development efforts is to strengthen the product lines of our
segments and to provide new products for growth markets.

     Sales and marketing expense.  Our sales and marketing expenses consist of
personnel costs, advertising, market research and occupancy expenses. Our
selling expenses have not been a significant portion of our period expenses, but
are increasing due to Emkay, which is building a sales and product management
infrastructure to support future growth. We sell most of our products to
original equipment manufacturers and distributors, through internal sales forces
and outside sales agents.

     General and administrative expense.  Our general and administrative
expenses consist of personnel costs, legal, accounting and other professional
costs, management information systems and rent.

     We have replaced certain management information systems, requiring
expenditures of approximately $10 million from 2000 through 2002. Approximately
$8 million was spent in 2001, of which $6.6 million was capitalized.

     Other income (expense).  Other income (expense) consists of interest
income, interest expense and miscellaneous expenses. Due to our
recapitalization, interest expense was $43.3 million in 2000, and $37.8 million
in 2001 and $34.1 million in 2002.

     Income taxes.  Effective June 30, 1999, Knowles became a C corporation and
subsequently, has been subject to federal income taxes. Income taxes were a
small net benefit in 2000 due to our ability to use a net loss carry forward
from 1999. Income taxes were 129% of pretax income in 2001 due to not being able
to offset the profitable foreign operations with the U.S. loss arising from the
interest expense. In 2002 the Company provided for $11.8 million of taxes
despite a pre-tax loss of $12.6 million primarily due to providing a valuation

                                        20
<PAGE>

allowance against the net U.S. deferred income tax assets. The valuation
allowance was recorded due to the uncertainty of realizing the benefit of
deferred tax assets due to the continued U.S. losses caused by the significant
interest expense associated with the Company's debt. Due to the distribution of
earnings between profitable foreign operations and a U.S. loss, income taxes are
expected to significantly exceed the statutory rate in 2003.

     Foreign exchange exposure.  Our revenues are primarily denominated in the
U.S. dollar, the Euro, the Japanese Yen and the British Pound. Our expenses are
principally denominated in those currencies, but are also denominated in the
local currencies of China, Malaysia, and Taiwan. We do not hedge this exposure,
since we generally incur significant costs in the same currencies in which we
have sales. China has had a managed floating exchange rate since 1994 and the
exchange rate to the U.S. Dollar has been effectively fixed since 1996. Malaysia
has practiced a fixed exchange rate regime since 1998 and the exchange rate to
the U.S. Dollar has been effectively fixed since then.

ACCOUNTING METHOD CHANGE MADE IN 2001

     As of October 1, 2001, the Company elected to change its inventory costing
method for domestic inventories from last in, first out (LIFO) to first in,
first out (FIFO). We made the change because we believe that FIFO reflects
current economics more accurately in a deflationary environment and is the
prevalent industry practice. The manufacturing restructuring program announced
in 2000 has reduced the direct labor content of the product significantly and
raw materials and components were stable in price. We also have made significant
changes in where various components and subassemblies are being manufactured and
therefore, we believe the FIFO method results in a better measurement of
operating results. There was no effect on the 2001 results as reported. However,
the 2000 gross margin, operating income, and EBITDA were lowered by $1.6
million, specifically for the KE Division by $1.2 million and for the ACG
division by $0.4 million. The 2000 net income was lowered $1.0 million.

CONSOLIDATED RESULTS OF OPERATIONS

     The table below shows the principal line items from our historical
consolidated income statements, as a percentage of our net sales, for each of
the periods discussed below.

<Table>
<Caption>
                                                              YEAR ENDED DECEMBER 31,
                                                              ------------------------
                                                               2000     2001     2002
                                                              ------   ------   ------
<S>                                                           <C>      <C>      <C>
Net sales...................................................  100.0%   100.0%   100.0%
Cost of sales...............................................   56.3%    55.7%    57.0%
Research and development....................................    5.6%     6.6%     6.4%
Sales and marketing expense.................................    5.3%     6.6%     6.4%
General and administrative expense..........................   10.0%    11.9%    11.6%
Loss on sale of Ruf.........................................    0.0%     0.0%     7.7%
Restructuring expense.......................................    7.7%     0.1%     1.0%
                                                              -----    -----    -----
Operating income............................................   15.1%    19.1%     9.9%
EBITDA as reported..........................................   20.3%    25.2%    14.9%
EBITDA, excluding loss on sale of Ruf.......................   20.3%    25.2%    22.7%
</Table>

     Operating income and EBITDA, as a percentage of net sales, as reported,
were 9.9% and 14.9%, respectively, for the year ended December 31, 2002.
Operating income and EBITDA, as a percentage of net sales, excluding the loss on
the sale of Ruf of $16.7 million, were 17.7% and 22.7%, respectively, for the
year ended December 31, 2002. Operating income and EBITDA, as a percentage of
net sales, as reported, were 19.1% and 25.2%, respectively, for the year ended
December 31, 2001.

                                        21
<PAGE>

YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001

     The following table sets forth net sales by segment and segment net sales
as a percent of total sales.

<Table>
<Caption>
                                                                             PERCENT OF
                                                           NET SALES         TOTAL SALES
                                                          YEAR ENDED         YEAR ENDED
                                                         DECEMBER 31,       DECEMBER 31,
                                                       -----------------   ---------------
SEGMENT                                                 2001      2002      2001     2002
-------                                                -------   -------   ------   ------
                                                        (IN MILLIONS, EXCEPT PERCENTAGES)
<S>                                                    <C>       <C>       <C>      <C>
KE...................................................  $138.9    $132.6     62.1%    61.3%
Emkay................................................    33.9      35.8     15.2%    16.6%
Automotive Components................................    50.9      47.7     22.7%    22.1%
                                                       ------    ------    -----    -----
     Total...........................................  $223.7    $216.1    100.0%   100.0%
                                                       ======    ======    =====    =====
</Table>

     Overall, consolidated net sales decreased 3% in 2002 compared to 2001. KE's
net sales decreased 5% in 2002 compared to 2001. The major cause was a reduction
in selling prices, caused by greater price competition in the industry and a
consolidation of customers. Unit sales of transducers increased by 5% but were
more than offset by a 9% reduction in average selling price. Emkay's net sales
increased 6% in 2002 over the prior year primarily due to increased sales of
microphones in applications outside of the Company's traditional hearing aid
market. Automotive Components' net sales declined 6% primarily due to the
November sale of Ruf operations.

     The following table sets forth cost of sales by segment and segment cost of
sales as a percent of segment net sales.

<Table>
<Caption>
                                                                               PERCENT OF
                                                          COST OF SALES      SEGMENT SALES
                                                           YEAR ENDED          YEAR ENDED
                                                          DECEMBER 31,        DECEMBER 31,
                                                        -----------------   ----------------
SEGMENT                                                  2001      2002      2001      2002
-------                                                 -------   -------   ------    ------
                                                         (IN MILLIONS, EXCEPT PERCENTAGES)
<S>                                                     <C>       <C>       <C>       <C>
KE....................................................  $ 70.3    $ 69.4     50.6%     52.4%
Emkay.................................................    21.5      22.0     63.4%     61.4%
Automotive Components.................................    32.8      31.8     64.5%     66.6%
                                                        ------    ------
     Total............................................  $124.6    $123.2     55.7%     57.0%
                                                        ======    ======
</Table>

     Consolidated cost of sales increased by 1.3 percentage points as a percent
of sales in 2002 compared to the prior year. KE's cost of sales increased by 1.8
percentage points primarily due to lower average selling prices partially offset
by lower warranty costs. Emkay's cost of sales decreased by 2.0 percentage
points primarily due to reduced expenses associated with obsolete inventory. The
Automotive Components Group division cost of sales increased by 2.1 percentage
points due to higher freight and overhead costs at SSPI.

                                        22
<PAGE>

     The following table sets forth operating income, excluding restructure
charges, by segment and segment operating income as a percentage of segment net
sales.

<Table>
<Caption>
                                                                            PERCENT OF
                                                       OPERATING INCOME    SEGMENT SALES
                                                          YEAR ENDED        YEAR ENDED
                                                         DECEMBER 31,      DECEMBER 31,
                                                       -----------------   -------------
SEGMENT                                                 2001      2002     2001    2002
-------                                                -------   -------   -----   -----
                                                       (IN MILLIONS, EXCEPT PERCENTAGES)
<S>                                                    <C>       <C>       <C>     <C>
KE...................................................  $ 52.2    $ 49.0     37.6%   36.9%
Emkay................................................    (2.5)     (0.9)    (7.4)%  (2.6)%
Automotive Components................................     6.0       4.9     11.8%   10.4%
Unallocated amount -- corporate overhead.............   (12.7)    (12.7)
                                                       ------    ------
Operating income before restructuring expenses and
  loss on sale of Ruf................................    43.0      40.3     19.1%   18.7%
Restructuring expenses...............................    (0.3)     (2.2)
Loss on the sale of Ruf..............................      --     (16.7)
                                                       ------    ------
     Total operating income..........................  $ 42.7    $ 21.4     19.1%    9.9%
                                                       ======    ======
</Table>

     Excluding restructuring expenses and loss on the Ruf sale, operating income
declined by $2.7 million in 2002 compared to the prior year. Gross margin
decreased by $6.3 million due to the KE selling price and SSPI cost issues
discussed above. Offsetting these margin declines was a reduction in period
expenses of $3.6 million, including lower general and administrative, marketing
and sales and research and development expenses. The Company reduced operating
expenses by initiating a program to reduce discretionary spending on
non-essential programs.

     The Company announced the sale of Ruf in November, 2002. Although the
proceeds from the sale were not significant, the sale allowed the Company to
exit from a non-core business which was creating a cash drain. The net loss from
the sale of Ruf was $16.7 million. The Company also recorded $2.2 million in
restructuring expenses in 2002, including a $1.2 million loss on the sale of a
facility in Taiwan. The balance of the restructuring expense was severance.

     In connection with our recapitalization, we incurred $200 million of senior
debt and $153 million of senior subordinated debt in 1999. We incurred an
additional $10 million of senior subordinated debt in 2002. As a result,
interest expense was $34.1 million in 2002 compared to $37.8 million in 2001,
with the decrease primarily due to lower interest rates.

     Income tax expense was $11.8 million this year compared to $6.5 million
last year. In 2002 the Company provided for $11.8 million of taxes despite a
pre-tax loss of $12.6 million primarily due to providing a valuation allowance
against the net U.S. deferred income tax assets. Due to the distribution of
earnings between profitable foreign operations and a U.S. loss, income taxes are
expected to significantly exceed the statutory rate in 2003.

                                        23
<PAGE>

YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000

     The following table sets forth net sales by segment and segment net sales
as a percent of total sales.

<Table>
<Caption>
                                                                             PERCENT OF
                                                           NET SALES         TOTAL SALES
                                                          YEAR ENDED         YEAR ENDED
                                                         DECEMBER 31,       DECEMBER 31,
                                                       -----------------   ---------------
SEGMENT                                                 2000      2001      2000     2001
-------                                                -------   -------   ------   ------
                                                        (IN MILLIONS, EXCEPT PERCENTAGES)
<S>                                                    <C>       <C>       <C>      <C>
KE...................................................  $140.8    $138.9     59.2%    62.1%
Emkay................................................    35.6      33.9     14.9%    15.2%
Automotive Components................................    61.7      50.9     25.9%    22.7%
                                                       ------    ------    -----    -----
     Total...........................................  $238.1    $223.7    100.0%   100.0%
                                                       ======    ======    =====    =====
</Table>

     Overall, consolidated net sales decreased 6% in 2001 compared to 2000. KE's
net sales decreased 1% in 2001 compared to 2000. The major cause was a
significant inventory reduction by our largest customer in the first half of the
year. As a result, first half KE sales were much weaker, while second half KE
sales were closer to the typical level. Emkay's net sales decreased 5% in 2001
compared to the prior year primarily due to decreased sales of voice recognition
headsets. Automotive Components' net sales declined 18% primarily due to very
weak construction and agriculture equipment related sales, lower service parts
orders and lower sales at three large customers.

     The following table sets forth cost of sales by segment and segment cost of
sales as a percent of segment net sales.

<Table>
<Caption>
                                                                               PERCENT OF
                                                          COST OF SALES      SEGMENT SALES
                                                           YEAR ENDED          YEAR ENDED
                                                          DECEMBER 31,        DECEMBER 31,
                                                        -----------------   ----------------
SEGMENT                                                  2000      2001      2000      2001
-------                                                 -------   -------   ------    ------
                                                         (IN MILLIONS, EXCEPT PERCENTAGES)
<S>                                                     <C>       <C>       <C>       <C>
KE....................................................  $ 70.5    $ 70.3     50.1%     50.6%
Emkay.................................................    20.6      21.5     57.7%     63.4%
Automotive Components.................................    43.0      32.8     69.6%     64.5%
                                                        ------    ------
     Total............................................  $134.1    $124.6     56.3%     55.7%
                                                        ======    ======
</Table>

     Consolidated cost of sales decreased by 0.6 percentage points as a percent
of sales in 2001 compared to the prior year. However, there are noticeable
differences by division. KE's cost of sales increased by 0.5 percentage points.
This occurred because of quality costs associated with an outsourced part,
coupled with significant underabsorption (lower production levels did not fully
absorb overhead costs), and certain manufacturing inefficiencies. Emkay's cost
of sales increased by 5.7 percentage points due to surplus obsolete expense and
an unfavorable mix of lower margin infrared product sales versus higher margin
components and finished goods sales. The Automotive Components Group division
cost of sales declined by 5.1 percentage points due to the SSPI manufacturing
restructuring program and a favorable mix of higher margin SSPI sales versus
lower margin Ruf sales.

                                        24
<PAGE>

     The following table sets forth operating income by segment and segment
operating income as a percentage of segment net sales.

<Table>
<Caption>
                                                                              PERCENT OF
                                                        OPERATING INCOME    SEGMENT SALES
                                                           YEAR ENDED         YEAR ENDED
                                                          DECEMBER 31,       DECEMBER 31,
                                                        -----------------   --------------
SEGMENT                                                  2000      2001     2000     2001
-------                                                 -------   -------   -----    -----
                                                        (IN MILLIONS, EXCEPT PERCENTAGES)
<S>                                                     <C>       <C>       <C>      <C>
KE....................................................  $ 54.1    $ 52.2    38.4%    37.6%
Emkay.................................................     3.1      (2.5)    8.7%    (7.4)%
Automotive Components.................................     5.4       6.0     8.8%    11.8%
Restructuring expenses................................   (18.4)     (0.3)
Unallocated amount -- corporate overhead..............    (8.3)    (12.7)
                                                        ------    ------
     Total............................................  $ 35.9    $ 42.7    15.1%    19.1%
                                                        ======    ======
</Table>

     Excluding restructuring expenses, operating income declined by $11.3
million. The sales volume decrease accounts for $6.3 million of the operating
income decline partially offset by the gross margin improvement of $1.4 million
for a net operating income decline at the gross margin level of $4.9 million.
The remaining $6.4 million of the operating income decline is due to higher
period expense which includes research and development, sales and marketing and
general and administrative. The increases in period expense were due to Emkay,
which increased almost $3 million, and to Corporate, which increased $4.4
million, partially offset by ACG, which had over a $1 million decline in period
expense. The Emkay increase was due primarily to higher research and development
expense for the silicon microphone and far field product lines and increased
sales and marketing expense for product management. The Corporate expense
increase primarily was for the new ERP system.

     Corporate expense also increased for professional fees, some of which were
associated with our attempts to sell Ruf.

     We announced a major restructuring in March 2000, resulting in a charge in
2000 of $18.4 million. We consolidated our worldwide manufacturing operations by
ending production at five manufacturing facilities and either outsourcing the
components or moving final assembly to lower cost locations in Malaysia, China
and Hungary. The restructuring expenses were essentially composed of severance
payments to terminated employees or outplacement expenses. The realized savings
from the restructuring program are approximately $15 million annually. These
benefits are reduced by the amount of cost increases that are paid to remaining
employees.

     We reported operating income of $42.7 million in 2001 compared to operating
income of $35.9 million in 2000, which included significant restructuring
expenses. After adjusting out the restructuring expenses for both years, we had
adjusted operating income of $43.0 million in 2001 compared to $54.3 million in
2000. On an adjusted basis our operating income declined $11.3 million or 21% in
2001 compared to the prior year.

     In connection with our recapitalization, we incurred $200 million of senior
debt and $153 million of senior subordinated debt. As a result, interest expense
was $37.8 million in 2001 compared to $43.3 million in 2000, with the decrease
primarily due to lower interest rates.

     Income tax expense was $6.5 million in 2001 compared to a benefit of $1.6
million in 2000. The high effective tax rate in 2001 was caused by foreign taxes
not being offset by the benefit of the U.S. federal taxable loss this year,
while during the second half of 2000 the U.S. federal taxable income was high
enough to allow us to use the tax loss carryforward from the second half of
1999.

LIQUIDITY AND CAPITAL RESOURCES

     We have historically used available funds for capital expenditures,
inventory, accounts receivable and acquisitions. These funds have been obtained
from operating activities and from lines of credit. In the future,

                                        25
<PAGE>

we will continue to have these needs, and we will also need to fund repayments
of principal under our term loans of approximately $3.0 million annually in 2003
through 2005, and increasing amounts thereafter. We also will have substantial
interest expense of approximately $35 to $40 million each year.

     We are a holding company. Our subsidiaries conduct substantially all of our
consolidated operations and own substantially all of our consolidated assets.
Consequently, our cash flow and our ability to meet our debt service obligations
depends substantially upon the cash flow of our subsidiaries and the payment of
funds by our subsidiaries to us in the form of loans, dividends or otherwise.

     In association with its recapitalization on June 30, 1999 the Company
borrowed $200 million under a bank credit agreement in two facilities, an A
Facility of $50 million and a B Facility of $150 million. On June 30, 1999, the
Company also borrowed $153.2 million under a senior subordinated note agreement.
The Company borrowed an additional $10 million in Senior Subordinated Debt in
August, 2002, as required under the Amendment and Waiver to the Credit Agreement
dated May 10, 2002 (see below).

     The Company received approval for the Fifth Amendment dated March 25, 2003.
This agreement refinanced $31.7 million of the bank credit agreement, replacing
the original A Facility with a C Facility of debt and revised certain terms and
conditions of the Credit Agreement. Under this Fifth Amendment, the Company
received agreement from its lenders to waive compliance with the terms of
certain ratios of EBITDA through June 29, 2003 and to revise the terms of such
ratios thereafter. The two primary ratios the Company must maintain are the
leverage ratio, which is total net debt divided by EBITDA, and the interest
coverage ratio, which is EBITDA divided by net cash interest expense. The
Company is required to maintain its leverage ratio below a specified level and
its interest coverage ratio above a specified level.

     The required ratios as amended for future years ends are as follows:

<Table>
<Caption>
                                                              REQUIRED      REQUIRED INTEREST
                                                           LEVERAGE RATIO    COVERAGE RATIO
                                                           --------------   -----------------
<S>                                                        <C>              <C>
December 31, 2003........................................       6.5               1.35
December 31, 2004........................................       6.0               1.45
December 31, 2005........................................       5.5               1.55
December 31, 2006........................................       5.0               1.65
</Table>

     We expect to be able to comply with the required covenants through the term
of the agreement, June 29, 2007. However, our ability to meet these covenants is
highly dependent upon market and competitive conditions. If future results are
lower than planned, the company may be unable to comply with the debt covenants
or make required debt service payments. Such inability could have a material
adverse impact on the Company's financial condition, results of operations or
liquidity.

     The Fifth Amendment substantially revises the term of the Credit Agreement.
The interest rates were increased from 3.5 to 4 points above LIBOR for the
Revolving Credit Facility. The interest rates for the B Facility were increased
to 5 points above LIBOR. In addition, the agreement provides for additional
interest to accrue to the B Facility at the rate of approximately $420,000 per
year (subject to reduction in the event of a prepayment of the B Facility), to
be paid at the maturity of the facility (or, in certain cases, at an earlier
date). The refinancing provides for an interest rate on the C Facility that
totals 18.5%, a portion of which is payable in cash on a monthly basis. The
portion of interest that must be paid in cash on a monthly basis for the C
Facility is 13% for the year ending March 2004, with the cash portion of
interest increasing to 14% in the year ending March 2005 and by 1% per year
thereafter. The remainder of the interest on the C Facility shall, at the option
of the Company, be paid in cash or accrue and be added monthly to the
outstanding principal balance of the C Facility and paid at maturity, scheduled
for June, 2007. The Fifth Amendment also provided that interest on all revolving
credit loans and loans under the B Facility be paid monthly.

     The Fifth Amendment dated March 25, 2003 reduced the Revolving Credit
Facility to $15 million and increased the quarterly amortization of the B
Facility to approximately $750,000 per quarter beginning June 30, 2003 through
June 30, 2006, with the balance paid in four quarterly principal payments from
September 30, 2006 to June 29, 2007. The Fifth Amendment also provides that in
the event the B Facility is

                                        26
<PAGE>

fully prepaid prior to June 30, 2006, the Revolving Credit Facility will cease
to be available to the Company and any amounts outstanding thereunder shall
thereupon become due and payable. The C Facility is payable in full on June 29,
2007. The agreement also calls for the Company to pay an upfront fee of
approximately $350,000 to the B Facility lenders as well as certain fees to the
C Facility lenders.

     The Fifth Amendment dated March 25, 2003 amends the Credit Agreement that
was substantially amended on May 10, 2002. On that date, the Company received
agreement from the lenders to revise the terms and conditions of the Credit
Agreement. At the end of the first quarter of 2002, the Company was not in
compliance with the terms of the Credit Agreement, particularly the required
leverage and interest coverage ratios. As a result, the Company did not make the
interest payment on its senior subordinated notes scheduled for April 15, 2002.
After the Company obtained the Fourth Amendment and Waiver to the Credit
Agreement on May 10, 2002 (the "Fourth Amendment"), on May 14, 2002 the Company
made the interest payment on our senior subordinated notes. The Fourth Amendment
waived our non-compliance with the required interest coverage ratio for the
period ended March 31, 2002 and the leverage ratio for the period January 1,
2002 through March 31, 2002, and amended these required ratios for subsequent
periods through the first quarter of 2003. This Fourth Amendment also limited
capital expenditures for the year 2002 to $15 million, decreased the Revolving
Credit Facility to $18.25 million and provided for certain other restrictions on
capital expenditures, acquisitions, and asset sales. In addition the Amendment
required the Company to receive additional funding of at least $10 million by
September 3, 2002, which was required to pay down the outstanding balance on the
revolving credit facility to $8.25 million. As a result of this agreement, the
Company entered into a Senior Subordinated Debt agreement with an affiliate of
Doughty Hanson on August 28, 2002 for $10 million in financing, under terms pari
passu to the Senior Subordinated Debt Agreement of 1999. The proceeds were used
to provide funding for working capital and reduced the balance under the
revolving credit agreement to zero. In connection with the Fourth Amendment, the
Company paid an up front fee of about $475,000 and the interest rate spreads
were increased 50 basis points.

     Cash balances increased by $21.6 million in 2002 due to $29.5 million in
cash provided by operating activities that was only partly offset by $8.4
million used in investing and financing activities. In 2001, cash balances
decreased by $14.6 million as cash provided by operations of $9.4 million was
offset by net cash used in investing activities of $17.6 million and net cash
used in financing activities of $6.2 million.

     Net cash provided by operating activities was $29.5 million compared to
$9.4 million in 2001. The favorable cash provided by operating activities was
despite an increase in net loss, which increased to $24.4 million in 2002
compared to a net loss of $1.5 million in 2001. The increase in the net loss in
2002 was largely comprised of the $16.6 million non-cash loss on the sale of
Ruf, $2.2 million of restructuring charges and a $6.3 million increase in
deferred income taxes. Most of the improvement in cash flow from operations in
2002 compared to 2001 came from improvements in working capital during 2002. The
decrease in working capital was primarily due to $8.8 million reduction in
inventory and $6.3 million reduction in receivables, only partly offset by $3.9
million reduction in accrued restructuring expenses. Accrued interest payable
increased $2.1 million in 2002, reflecting the timing of interest payments under
the Credit Agreement. In 2001 several working capital items were a major use of
cash including a reduction in accrued restructuring expenses of $9.9 million, an
increase in inventory of $2.4 million and a decrease in accrued compensation and
benefits of $1.9 million.

     Net cash used in investing activities was $4.9 million in 2002 compared to
$17.6 million in 2001. Investing activities for both years is primarily
purchases and sales of property, plant and equipment. In 2002, gross purchases
of property, plant and equipment were $8.4 million, partially offset by the sale
of the Taiwan building for $3.6 million. In 2001, gross purchases of fixed
assets were $21.3 million, partially offset by the sale of the United Kingdom
plant for $3.7 million. The primary capital expenditures in 2002 were for new
product tooling and production equipment. In 2001 expenditures were for new
product tooling and production equipment and automation equipment, plus $6.6
million for IT hardware and software and the capitalization of Oracle consulting
assistance to support the new ERP system. Such ERP related expenditures were not
significant in 2002.

                                        27
<PAGE>

     Net cash used in financing activities was $3.6 million in 2002 compared to
$6.2 million in 2001. Debt payments on the long term portion of the Company's
Credit Agreement totaled $10.5 million in 2002, with an additional $2.0 million
in payments used to reduce the Company's short term debt. The Company issued $10
million of 10% Senior Subordinated Notes dated August 28, 2002. In addition, the
Company paid $0.7 million in costs associated with the May 10, 2002 Amendment to
the Credit Agreement and $0.4 million for expenses related to the repurchase of
common stock. Net debt payments of $9.4 million were the primary financing
activities for 2001.

     Net cash provided by operating activities was $9.4 million in 2001 compared
to $22.8 million in 2000. The net loss of $1.5 million in 2001 compared to a net
loss of $4.9 million in 2000. Most of the reduction in cash flow from operations
came from the fact that net income after adjustments for non-cash charges was
$7.2 million less in 2001 than 2000. Working capital was a net use of cash of
$7.6 million in 2001 compared to $1.4 million in 2000. In both years,
restructuring expense was the primary working capital use of cash. In 2001,
accrued compensation and benefits and other accrued liabilities were a use of
cash while in 2000 they were a source of cash due to higher accrued expense in
2000 and lower accrued expense in 2001.

     Net cash used in investing activities was $17.6 million in 2001 compared to
$15.5 million in 2000. Investing activities for both years is primarily net
purchases of property, plant and equipment. In 2001, gross purchases of fixed
assets were $21.3 million, partially offset by the sale of the United Kingdom
plant for $3.7 million. The primary capital expenditures in 2001 were for new
product tooling and production equipment and automation, but IT hardware and
software and capitalization of Oracle consulting assistance to support the new
ERP system was $6.6 million in 2001 compared to $1.3 million in 2000.

     Net cash used in financing activities was $6.2 million in 2001 as compared
to $12.2 million in 2000. Net debt payments of $5.3 million were the primary
financing activities for 2001, while the purchase price adjustment paid to the
prior owners of Knowles of $8.3 million was the primary financing activities for
2000.

     The amount payable to our preexisting stockholders for the repurchase of
their common stock in our recapitalization was subject to a post-closing
adjustment. In June 2000, the independent accountants appointed pursuant to the
recapitalization agreement determined that Knowles owed the preexisting
stockholders approximately $8.3 million of the $13.3 million purchase price
adjustment originally proposed by the preexisting stockholders, plus
approximately $0.7 million in interest. The purchase price adjustment was
recorded as a reduction to stockholders' equity in 2000.

     The net of the cash flow provided by operations and used in investing and
financing activities resulted in a reduction of cash of $14.6 million in 2001
compared to a reduction in cash of $6.7 million in 2000.

     The following table outlines various financial contractual obligations of
the Company (reflects March 2003 refinancing including the C Facility):

<Table>
<Caption>
                                                       LESS THAN    1 - 3     3 - 5     AFTER 5
CONTRACTUAL OBLIGATIONS                      TOTAL      1 YEAR      YEARS     YEARS      YEARS
-----------------------                     --------   ---------   -------   --------   --------
<S>                                         <C>        <C>         <C>       <C>        <C>
Credit Agreement dated June 28, 1999 and
  most recently amended March 25, 2003....  $181,785    $11,996    $ 5,630   $164,159   $     --
13 1/8% Senior Subordinated Notes due
  2009....................................   153,200         --         --         --    153,200
10% Senior Subordinated Notes due 2009....    10,000         --         --         --     10,000
Ruwido Austria GmbH debt due September
  2006....................................     1,145        287        572        286         --
Ruwido Austria GmbH debt due June 2006....       593        169        338         86         --
Operating leases..........................     4,434      1,157      1,377        349      1,551
                                            --------    -------    -------   --------   --------
Total.....................................  $351,157    $13,609    $ 7,917   $164,880   $164,751
                                            ========    =======    =======   ========   ========
</Table>

                                        28
<PAGE>

THE RECAPITALIZATION

     On June 30, 1999, Key Acquisition, L.L.C. ("Key Acquisition"), all of whose
membership interests are held by limited partnerships for which Doughty Hanson &
Co. Limited or its affiliates (collectively, "Doughty Hanson") act as general
partner, acquired control of Knowles Electronics, Inc. in a recapitalization
transaction ("Recaptilization"). On June 29, 1999, Knowles' equipment financing
business, which included certain parcels of real estate, were distributed to our
preexisting stockholders, in redemption of 10% of the stock owned by those
stockholders. As part of the June 30, 1999 recapitalization, we repurchased from
our preexisting stockholders for $505.5 million 90% of our common stock
remaining outstanding after the previous day's redemption, and our preexisting
stockholders exchanged their remaining common stock for shares of the newly
authorized common stock and preferred stock. In addition, upon closing of the
Recapitalization, certain of our senior officers purchased shares of newly
authorized common stock issued by Knowles. Upon the closing of the
recapitalization, Key Acquisition owned approximately 82.3% of our newly
authorized common stock and approximately 88.9% of our newly authorized
preferred stock, certain of our preexisting stockholders owned approximately
10.3% of our common stock and approximately 11.1% of our preferred stock, and
certain of our senior officers owned approximately 7.4% of our common stock.

     The amount payable to our preexisting stockholders for the repurchase of
their common stock in our recapitalization was subject to a post-closing
adjustment payable by Knowles to our preexisting stockholders or by our
preexisting stockholders to Key Acquisition. In June 2000, the independent
accountants appointed pursuant to the recapitalization agreement determined that
Knowles owed the preexisting stockholders approximately $8.3 million of the
$13.3 million purchase price adjustment originally proposed by the preexisting
stockholders, plus approximately $0.7 million in interest. The purchase price
adjustment was recorded as a reduction to stockholders' equity in the second
quarter of 2000. In addition, Knowles agreed to indemnify our preexisting
stockholders for any damages they suffer as a result of any breach of the
various representations, warranties and agreements made by Key Acquisition in
connection with our recapitalization.

     In connection with the Recapitalization, a syndicate of lenders led by The
Chase Manhattan Bank and Morgan Stanley Senior Funding, Inc. provided us with a
$250 million senior credit facility consisting of a $50 million revolving credit
facility, subject to certain conditions, and $200 million in term loans. We also
sold $150 million of subordinated bridge notes to Morgan Stanley Senior Funding,
Inc. and The Chase Manhattan Bank, all of which were repaid with proceeds from
the senior subordinated offering of October 15, 1999 and available cash. The
Recapitalization was financed with the term loans under the senior credit
facility and subordinated bridge notes as well as a $214.2 million equity
investment by Key Acquisition, certain senior officers of Knowles and the
Knowles family.

     Ownership of Knowles.  Interests in Key Acquisition, which owns
approximately 82.5% of our common stock and 88.9% of our preferred stock are
held by the limited partnerships which together form Doughty Hanson & Co. III.
The general partner of these limited partnerships is Doughty Hanson & Co.
Limited.

     Holding Company Reorganization.  Subsequent to the Recapitalization, we
reorganized Knowles Electronics, Inc. as a holding company. Pursuant to a
contribution agreement on August 30, 1999 Knowles Electronics, Inc. contributed
substantially all of its assets and liabilities (other than the capital stock of
Knowles Intermediate Holding Company, Inc. and certain foreign subsidiaries and
Knowles Electronics, Inc.'s liabilities under the Credit Agreement and
Subordinated Bridge Notes) to Knowles Electronics, LLC, a newly created Delaware
limited liability company. As a result of this reorganization, Knowles
Electronics, Inc. is now a holding company that does not conduct any significant
operations. Subsequent to the transaction, Knowles Electronics, Inc. changed its
name to Knowles Electronics Holdings, Inc.

                                        29
<PAGE>

THE CREDIT AGREEMENT

     We entered into the Credit Agreement, dated as of June 28, 1999 and amended
and restated as of July 21, 1999, and further amended as of December 23, 1999,
April 10, 2000, December 12, 2001, May 10, 2002 and March 25, 2003 with the
Lenders named therein, JP Morgan Chase Bank (as successor to The Chase Manhattan
Bank), as Administrative Agent and Swingline Lender, Morgan Stanley Senior
Funding, Inc., as Syndication Agent, and Chase Securities Inc., as Lead Arranger
and Book Manager. The Credit Agreement, as amended, consists of (i) an
approximately $137 million term loan facility ("B Facility") due in scheduled
principal payments that are completed as of June 29, 2007, (ii) a $35 million
term loan facility ("C Facility") due June 29, 2007 and (iii) a $15 million (as
amended December 12, 2001, May 10, 2002 and March 25, 2003) revolving credit
facility due June 30, 2006 (the "Revolving Facility"). Under the terms of the
Credit Agreement, and in order to provide financing for the Recapitalization, A
Facility (which was subsequently replaced with C Facility in March, 2003) and B
Facility were fully drawn on June 30, 1999, the closing date of the
Recapitalization. The Revolving Facility is available for working capital and
general corporate purposes. No borrowing was outstanding under The Revolving
Facility as of December 31, 2002.

     On March 28, 2003 we repaid $9.53 million of aggregate principal of the A
and B Facilities in accordance with the excess cash provision of the amended
Credit Agreement.

REPAYMENT DATES

     According to the revised terms provided in the Fifth Amendment dated March
25, 2003, and taking into account the effect of the March 28, 2003 prepayment,
the B Facility will amortize quarterly, with the following payments being made
at the end of each quarter during the following periods.

<Table>
<Caption>
                                                                 AMOUNT
                                                              ------------
<S>                                                           <C>
March 31, 2003..............................................  $    351,922
June 30, 2003 to June 30, 2006..............................       703,859
September 30, 2006 to June 29, 2007.........................    31,937,624
                                                              ------------
     Total..................................................  $137,252,585
</Table>

     The C Facility is due and payable upon maturity on June 29, 2007.

     The Revolving Facility is available as revolving credit advances or letters
of credit. Pursuant to the Fifth Amendment, this facility has no scheduled
reduction in availability, unless the B Facility is fully repaid prior to June
30, 2006, in which case the Revolving Facility will cease to be available to the
Company and any amounts outstanding thereunder shall thereupon become due and
payable. If such earlier maturity does not occur, final repayment is due on all
amounts outstanding under this facility on June 30, 2006. The Credit Agreement
provides for certain limitations governing advances under the Revolving
Facility, in particular limits on the amount of letters of credit and swingline
loans outstanding at any one time. In the Fourth Amendment dated as of May 10,
2002, the Company was required to receive additional funding of at least $10
million by September 3, 2002. As a result, the Company entered into a $10
million Note Purchase Agreement on August 28, 2002 with an affiliate of Doughty
Hanson.

PREPAYMENT

     In addition to the scheduled repayment dates described above, in certain
circumstances the Credit Agreement requires us to make mandatory prepayments of
outstanding amounts under B Facility and thereafter, beginning on April 1, 2004,
under C Facility, when we or our subsidiaries receive proceeds of certain
material dispositions and insurance claims or issue certain indebtedness or when
we have a positive adjusted cash flow in the prior year. Pursuant to these
provisions, a prepayment in the amount of $9.53 million was made on March 28,
2003 from excess cash flow. This prepayment was applied to prepay the B Facility
and the A Facility (which was not replaced by the C Facility until March 31,
2003). Indebtedness under the B Facility may be voluntarily prepaid by us in
whole or in part without premium or penalty, and indebtedness under the C
Facility may be voluntarily prepaid on or after April 1, 2004. Any voluntary and
certain

                                        30
<PAGE>

mandatory prepayments of the C Facility are subject to a prepayment penalty of
3%, 2.5% and 2% for the yearly periods ending March 2005, March 2006 and March
2007, respectively.

INTEREST RATE AND FEES

     Amounts outstanding under the Revolving Facility will bear interest, at our
option, at either (1) one-, two-, three- or six-month LIBOR plus an initial
interest margin of 4.0% (as amended April 10, 2000, December 12, 2001, May 10,
2002 and March 25, 2003) or (2) the greatest of the prime rate, a base
certificate of deposit rate plus 1.0% or the federal funds effective rate plus
0.50% ("Alternate Base Rate"), in each case plus an initial margin of 3%.
Amounts outstanding under B Facility will bear interest, at our option, at
either (1) one-, two-, three- or six-month LIBOR plus an initial interest margin
of 5.0% (as amended April 10, 2000, December 12, 2001, May 10, 2002, and March
25, 2003) or (2) the Alternate Base Rate plus an initial margin of 4%. The
interest margin may be reduced for advances under all three facilities if we, on
a consolidated basis, meet certain specified leverage ratio targets during a
period consisting of the prior four consecutive fiscal quarters. Any reduced
interest margin may be increased to the original interest margin if such
leverage ratios do not continue to be met. In addition, the Fifth Amendment
provides for additional interest to accrue to the B Facility at the rate of
approximately $420,000 per year (subject to reduction in the event of a
prepayment of the B Facility), to be paid at the maturity of the facility (or,
in certain cases, at an earlier date). Amounts outstanding under C Facility will
bear interest at 18.5%, a portion of which is payable in cash on a monthly basis
and a portion of which may, at the Company's option, be payable upon maturity of
the loan, scheduled for June 29, 2007. The portion of interest on the C Facility
paid in cash monthly is 13% for the year ending March 2004. The portion of
interest on the C Facility mandatorily payable in cash increases to 14% for the
year ending March 2005 and increases by 1% for each year thereafter. The
remainder of the C Facility interest shall, at the option of the Company, be
paid in cash or accrue and be added to the outstanding principal balance of the
C Facility each month and paid at maturity, scheduled for June 29, 2007.

     We will pay a commitment fee on the undrawn portion of the Revolving
Facility at a rate of 0.375% to 0.50% per annum, depending upon our leverage
ratio. In addition, we will pay certain agency and other fees.

GUARANTEE AND SECURITY

     Our obligations under the Credit Agreement are guaranteed by our U.S.
subsidiaries. As security for our obligations under the Credit Agreement, we
have pledged all of the shares of our U.S. subsidiaries and 65% of the shares of
our non-U.S. subsidiaries and have granted the lenders a security interest in
substantially all of our assets and the assets of our U.S. subsidiaries.

COVENANTS

     The Credit Agreement contains a number of covenants requiring us to achieve
or maintain specified consolidated financial ratios, including certain interest
expense coverage ratios and certain leverage ratios, which have been described
above. The Credit Agreement also contains general covenants which restrict the
incurrence of debt and liens, the payment of dividends, the incurrence of
substantially all other additional debt (with the exception of the Notes), the
disposition of assets, the incurrence of capital expenditures above certain
levels or the making of other investments and certain other activities and
transactions. In amendments to the Credit Agreement dated as of May 10, 2002,
the Company agreed to limit our capital expenditures to $15 million in 2002, and
to limit the net proceeds from asset sales that may be applied to acquire assets
in lieu of prepayment to $2.0 million and agreed not to make any acquisitions of
another company or business.

RECENT DEVELOPMENTS

     The Company entered into a Fifth Amendment dated March 25, 2003. Based on
the terms and conditions of this agreement, we are in compliance with Credit
Agreement, as amended. As a result, we expect to make the interest payment on
our senior subordinated notes scheduled for April 15, 2003. The Company expects
to be in compliance with all the covenants in the amended Credit Agreement.
However, the Company's compliance with these covenants is dependent on Business
Risks and Conditions in the key markets in which

                                        31
<PAGE>

the Company operates. The inability to meet the required covenants could have a
material adverse effect on the Company's financial condition, results of
operations and liquidity.

SENIOR SUBORDINATED DEBT

  13 1/8% SENIOR SUBORDINATED NOTES DUE 2009

     We issued Notes under an Indenture, dated October 1, 1999, among us, the
Subsidiary Guarantors and the Bank of New York, as Trustee (the "Trustee"). The
Notes are general unsecured obligations of the Company, rank subordinate to all
Senior Indebtedness of the Company and pari passu or senior to all other
Indebtedness of the Company, and are unconditionally guaranteed on a general
unsecured senior subordinated basis by all of the Company's existing and future
domestic Restricted Subsidiaries and any other Restricted Subsidiaries of the
Company that guarantee the Company's indebtedness under the Credit Agreement.

     - PRINCIPAL, MATURITY AND INTEREST

     The Company issued $153,200,000 aggregate principal amount of Notes on
October 1, 1999 in denominations of $1,000 and integral multiples of $1,000. The
Notes will mature on October 15, 2009. The Notes will not be entitled to the
benefit of any mandatory sinking fund.

     Subject to the covenants described below under "Covenants" and applicable
law, the Company may issue additional Notes under the Indenture. The Notes
offered hereby and any additional Notes subsequently issued will be treated as a
single class for all purposes under the Indenture.

     The Company's registration became effective September 13, 2000 and all the
notes were exchanged for registered notes on October 13, 2000. The penalty
interest accrued through that day and all but 13 days was paid with the October
15, 2000 interest payment. The remaining interest penalty was paid on the next
interest payment date, April 16, 2001.

     Interest on the Notes will accrue at the rate of 13 1/8% per annum and will
be payable semi-annually in arrears on each April 15 and October 15 (each, an
"Interest Payment Date"), commencing on April 15, 2000. Payments will be made to
the persons who are registered Holders at the close of business on April 1 and
October 1, respectively (each, a "Regular Record Date"), immediately preceding
the applicable interest payment date. The Company did not make the interest
payment on our senior subordinated notes scheduled for April 15, 2002. We
subsequently obtained an Amendment and Waiver dated as of May 10, 2002 to our
Credit Agreement and made the interest payment on our senior subordinated notes
that was scheduled for April 15, 2002 on May 14, 2002.

     - GUARANTEES

     Payment of the principal of, premium, if any, and interest on the Notes
will be guaranteed, jointly and severally, on an unsecured senior subordinated
basis by certain Subsidiaries of the Company (the "Subsidiary Guarantors"), each
of which has guaranteed Indebtedness of the Company incurred under the Credit
Agreement. All current and future Restricted Subsidiaries of the Company other
than Foreign Subsidiaries will be "Subsidiary Guarantors." In addition, if any
Restricted Subsidiary which is a Foreign Subsidiary becomes a guarantor of
Indebtedness of the Company incurred under the Credit Agreement, the Company
will cause such Restricted Subsidiary to guarantee the Company's obligations
under the Notes. Foreign Subsidiaries of the Company, which have substantial
assets, liabilities, net sales and income, will not initially guarantee the
Notes, and the Company does not anticipate that any Foreign Subsidiary will at
any time become a Subsidiary Guarantor.

     The Note Guarantee of any Subsidiary Guarantor may be released in certain
circumstances.

     - COVENANTS

     The Senior Subordinated Note Agreement also contains general covenants,
which restrict Limitation on Indebtedness, Limitation on Senior Subordinated
Indebtedness, Limitation on Restricted Payments, Limita-

                                        32
<PAGE>

tion on Dividend and Other Payment Restrictions Affecting Restricted
Subsidiaries, and Limitation on Liens. The Senior Subordinate Note Agreement
also contains the following covered in detail below.

  Limitation on Asset Sales

     The Company will not, and will not permit any Restricted Subsidiary to,
consummate any Asset Sale, unless: (i) the consideration received by the Company
or such Restricted Subsidiary is at least equal to the fair market value of the
assets sold or disposed of; and (ii) at least 75% of the consideration received
consists of: (A) Replacement Assets; or (B) cash or Temporary Cash Investments,
provided that the amount of: (a) any liabilities of the Company or any such
Restricted Subsidiary that are assumed by the transferee of any such assets,
provided that the Company or such Restricted Subsidiary is irrevocably and
unconditionally released in writing from all such liabilities, or (b) any notes
or other obligations received by the Company or any such Restricted Subsidiary
from such transferee that are converted within 120 days by the Company or such
Restricted Subsidiary into, shall be deemed to be cash for the purposes of
determining the percentage of cash or Temporary Cash Investments received by the
Company or such Restricted Subsidiary.

  Repurchase of Notes upon a Change of Control

     The Company must commence, within 30 days of the occurrence of a Change of
Control, and consummate an Offer to Purchase for all Notes then outstanding, at
a purchase price equal to 101% of the principal amount thereof, plus accrued
interest (if any) to the Payment Date.

     There can be no assurance that the Company will have sufficient funds
available at the time of any Change of Control to make any debt payment
(including repurchases of Notes) required by the foregoing covenant (as well as
any covenant that may be contained in other securities of the Company which
might be outstanding at the time). The above covenant requiring the Company to
repurchase the Notes will, unless consents are obtained, require the Company to
repay all indebtedness then outstanding which by its terms would prohibit such
Note repurchase, either prior to or concurrently with such Note repurchase.

  10% SENIOR SUBORDINATED NOTES DUE 2009

     We issued a Note under a Note Purchase Agreement dated August 28, 2002,
among us, the Subsidiary Guarantors and Key Acquisition LLC. The Note is a
general unsecured obligation of the Company, ranks subordinate to all Senior
Indebtedness of the Company and pari passu to the 13 1/8% Senior Subordinated
Notes due 2009.

     - PRINCIPAL, MATURITY AND INTEREST

     The Company issued a $10,000,000 Note on August 28, 2002. The Notes will
mature on October 15, 2009. The Notes will not be entitled to the benefit of any
mandatory sinking fund.

     Interest on the Note will accrue at the rate of 10% per annum and will be
payable semi-annually in arrears on each April 15 and October 15 (each, an
"Interest Payment Date"), commencing on April 15, 2003. Payments will be made to
the persons who are registered Holders of such Note either in cash or at the
option of the Company, by issuance of an additional Note registered in the name
of such Holders, bearing interest from the relevant Interest Payment Date at a
rate of 10%, and having a face value equal to the amount of the Interest Payment
applicable to such Note.

     - GUARANTEES

     Payment of the principal of, premium, if any, and interest on the Notes
will be guaranteed, jointly and severally, on an unsecured senior subordinated
basis by certain Subsidiaries of the Company (the "Subsidiary Guarantors"), each
of which has guaranteed Indebtedness of the Company incurred under the Credit
Agreement. All current and future Restricted Subsidiaries of the Company other
than Foreign Subsidiaries will be "Subsidiary Guarantors." In addition, if any
Restricted Subsidiary which is a Foreign Subsidiary becomes a guarantor of
Indebtedness of the Company incurred under the Credit Agreement, the Company

                                        33
<PAGE>

will cause such Restricted Subsidiary to guarantee the Company's obligations
under the Notes. Foreign Subsidiaries of the Company, which have substantial
assets, liabilities, net sales and income, will not initially guarantee the
Notes, and the Company does not anticipate that any Foreign Subsidiary will at
any time become a Subsidiary Guarantor.

     The Note Guarantee of any Subsidiary Guarantor may be released in certain
circumstances.

     - COVENANTS

     The Senior Subordinated Note Agreement also contains general covenants,
which restrict Limitation on Indebtedness, Limitation on Restricted Payments,
Limitation on Dividend and Other Payment Restrictions Affecting Restricted
Subsidiaries, Limitation on the Issuance of Capital Stock of Restricted
Subsidiaries, Limitation on Issuances of Guarantees by Restricted Subsidiaries,
Limitation on Transactions with Stockholders and Affiliates, Limitation on
Senior Subordinated Indebtedness and Limitation on Liens. The Senior Subordinate
Note Agreement also contains the following covered in detail below.

  Limitation on Asset Sales

     The Company will not, and will not permit any Restricted Subsidiary to,
consummate any Asset Sale, unless: (i) the consideration received by the Company
or such Restricted Subsidiary is at least equal to the fair market value of the
assets sold or disposed of; and (ii) at least 75% of the consideration received
consists of: (A) Replacement Assets; or (B) cash or Temporary Cash Investments,
provided that the amount of: (a) any liabilities of the Company or any such
Restricted Subsidiary that are assumed by the transferee of any such assets,
provided that the Company or such Restricted Subsidiary is irrevocably and
unconditionally released in writing from all such liabilities, or (b) any notes
or other obligations received by the Company or any such Restricted Subsidiary
from such transferee that are converted within 120 days by the Company or such
Restricted Subsidiary into, shall be deemed to be cash for the purposes of
determining the percentage of cash or Temporary Cash Investments received by the
Company or such Restricted Subsidiary.

  Repurchase of Notes upon a Change of Control

     The Company must commence, within 30 days of the occurrence of a Change of
Control, and consummate an Offer to Purchase for all Notes then outstanding, at
a purchase price equal to 101% of the principal amount thereof, plus accrued
interest (if any) to the Payment Date.

     There can be no assurance that the Company will have sufficient funds
available at the time of any Change of Control to make any debt payment
(including repurchases of Notes) required by the foregoing covenant (as well as
any covenant that may be contained in other securities of the Company which
might be outstanding at the time). The above covenant requiring the Company to
repurchase the Notes will, unless consents are obtained, require the Company to
repay all indebtedness then outstanding which by its terms would prohibit such
Note repurchase, either prior to or concurrently with such Note repurchase.

CRITICAL ACCOUNTING POLICIES

     The consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States, which require
management to make estimates and assumptions. We believe that of our significant
accounting policies (see Note 1 to the consolidated financial statements), the
following may involve a higher degree of judgment and complexity.

  BAD DEBT

     We maintain allowances for doubtful accounts for estimated losses resulting
from the inability of our customers to make required payments. If the financial
condition of our customers were to deteriorate, resulting in an impairment of
their ability to make payments, additional allowances may be required.

                                        34
<PAGE>

  EXCESS AND OBSOLETE INVENTORY

     Significant management judgment is required to determine the reserve for
obsolete or excess inventory. Inventory on hand may exceed future demand either
because the product is outdated, or obsolete, or because the amount on hand is
more than can be used to meet future need. We currently make a 50% provision for
all inventory that has had no activity for 18 months and a 100% provision for
all inventory that had no activity for more than 36 months as well as any
additional specifically identified inventory to be excess. We also provide for
the total value of inventories that we determine to be obsolete based on
criteria such as customer demand and changing technologies. At December 31,
2002, our inventory reserves were $7.7 million, or 20% of our $39.3 million
gross inventories.

     We value our inventories at lower of cost or market. Cost is determined by
the first-in, first-out (FIFO) method.

  WARRANTIES

     Products sold are generally covered by a warranty for periods ranging from
one to three years. We accrue a warranty reserve for estimated costs to provide
warranty services. Our estimate of costs to service warranty obligations is
based on historical experience and expectation of future conditions. To the
extent we experience increased warranty claim activity or increased costs
associated with servicing those claims, our warranty accrual will increase
resulting in decreased gross profit.

  DEFERRED TAX ASSETS

     We account for deferred income taxes based upon differences between the
financial reporting and income tax bases of our assets and liabilities. The
measurement of deferred tax assets is adjusted by a valuation allowance, if
necessary, to recognize the extent to which, more likely than not, the future
tax benefits will be recognized.

     At December 31, 2002, we have recorded net deferred tax assets of
approximately $0.2 million, which includes a $52.3 million valuation allowance.
The Company has provided a valuation allowance against the net U.S. deferred tax
assets due to the uncertainty of realization of those assets.

NEW ACCOUNTING PRONOUNCEMENTS

     In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 143, "Accounting for Asset Retirement
Obligations," which is effective for fiscal years beginning after June 15, 2002.
The Statement requires legal obligations associated with the retirement of
long-lived assets to be recognized at their fair value at the time that the
obligations are incurred. Upon initial recognition of a liability, that cost
should be capitalized as part of the related long-lived asset and allocated to
expense over the useful life of the asset. We will adopt SFAS No. 143 as of
January 1, 2003, and the impact of adoption of SFAS No. 143 is not expected to
have a material impact on our financial position or results of operations.

     In June 2002, the Financial Accounting Standards Board issued SFAS No. 146,
"Accounting for Cost Associated with Exit or Disposal Activities", which changes
the timing of the recognition of restructuring charges. Liabilities for
restructuring costs will be required to re recognized when the liability is
incurred rather than when we commit to the plan. SFAS No. 146 is effective for
restructuring activity initiated after December 31, 2002. We do not anticipate
that the adoption of this statement will have a material impact on our financial
position, results of operations or cash flows.

     In November 2002, the FASB issued FASB Interpretation (FIN) No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others". FIN No. 45 clarifies that a
guarantor is required to recognize, at the inception of a guarantee, a liability
for the fair value of the obligation undertaken in issuing the guarantee. We
will adopt the provisions of FIN No. 45 on January 1, 2003 for all new or
amended guarantees subsequent to that date.

                                        35
<PAGE>

     Management does not anticipate that the adoption of any other new
accounting pronouncement will have a material effect on our results of
operations or on the financial position of the Company.

SEASONALITY AND QUARTERLY RESULTS OF OPERATIONS

     Our sales have been subject to a small degree of seasonality in the past
several years. The second and fourth quarters have been our strongest quarters.
This seasonality of our sales resulted primarily from stronger KE and Emkay
sales in the second and fourth quarter.

     The following table sets forth net sales, costs and expenses, operating
income and net income by fiscal quarter.

   NET SALES, COSTS AND EXPENSES, OPERATING INCOME AND NET INCOME BY QUARTER

<Table>
<Caption>
                       MARCH 31,   JUNE 30,   SEPT. 30,   DEC. 31,   MARCH 31,   JUNE 30,   SEPT. 30,   DEC. 31,
                         2001        2001       2001        2001       2002        2002       2002      2002(3)
                       ---------   --------   ---------   --------   ---------   --------   ---------   --------
                                                             (IN MILLIONS)
<S>                    <C>         <C>        <C>         <C>        <C>         <C>        <C>         <C>
Net sales............    $54.7      $57.3       $54.6      $57.1       $51.0      $58.2       $51.6      $ 55.3
Cost of sales........     29.7       33.6        29.5       31.7        29.7       32.9        29.5        31.1
Research and
  development........      3.5        3.4         3.3        4.4         3.5        3.9         2.9         3.4
Selling and
  marketing..........      3.4        3.3         3.9        4.2         3.6        3.6         3.1         3.5
General and
  administrative.....      6.9        6.7         6.6        6.6         6.3        7.2         5.4         6.2
Loss on sale of
  business(1)........       --         --          --         --          --        8.7         4.2         3.8
Restructuring
  expense(2).........       .3       (2.1)         .2        1.9          --         .6         1.1          .5
                         -----      -----       -----      -----       -----      -----       -----      ------
Operating income.....    $10.9      $12.4       $11.1      $ 8.3       $ 7.9      $ 1.3       $ 5.4      $  6.8
Net income (loss)....    $ 0.7      $ 0.4       $(0.4)     $(2.2)      $(0.4)     $(7.8)      $(1.4)     $(14.8)
</Table>

---------------

(1) The "Loss on Sale of Business" is related to the losses recorded on the sale
    of Ruf in November 2002. For the quarters ended June 30 and September 30,
    2002, the loss represents the impairment of the Ruf assets recorded in those
    quarters.

(2) The "Restructuring expenses" relate to the restructuring announced in March
    2000. The Company consolidated its worldwide manufacturing operations by
    ending production at five manufacturing facilities and either outsourcing
    component production or moving final assembly to lower cost locations in
    Malaysia, and China . These actions have reduced our global workforce by
    about 20%. In 2002 these expenses are related to the loss on the sale of a
    facility in Taiwan, and severance. The costs in 2001 include a gain on the
    sale of our U.K. facility and severance.

(3) The quarter ended December 31, 2002 includes a $1.7 million reduction of
    expenses to adjust depreciation and amortization expense and to adjust the
    warranty liability related to historical sales and claim experience.

FORWARD LOOKING STATEMENTS

     Certain of the statements that are contained in this report on Form 10-K
are "forward-looking" (as defined in the Private Securities Litigation Reform
Act of 1995). These forward-looking statements are based on information
currently available to the Company as of the date of this document. Actual
events and the Company's actual results may differ materially from what is
described in the forward-looking statements. Forward-looking statements are
typically identified by the words "believe", "expect", "anticipate", "intend",
"estimate", and similar expressions. The forward-looking statements contained in
this document involve risks and uncertainties including, but not limited to, the
following: changes in economic conditions, fluctuations in

                                        36
<PAGE>

currency exchange rates and interest rates; implementation of new software
systems; improvements in technology for complex voice recognition software;
dependence on our largest customers and key suppliers; competition; regulatory,
legislative and judicial developments, including environmental regulations;
ability to generate sufficient liquidity to service debt obligations; and
ability to maintain compliance with debt covenants.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     We do not hedge our foreign currency exchange rate exposure. Therefore, we
are exposed to foreign currency exchange rate risks. Our revenues are primarily
denominated in the U.S. dollar and the Euro. During 2002, approximately 75% of
our revenue was denominated in U.S. dollars, approximately 15% of our revenue
was denominated in Euros, and the balance was denominated in other foreign
currencies. During 2002, the average Euro exchange rate strengthened
approximately 5% versus the U.S. Dollar, and as a result our reported sales for
2002 was $1.6 million higher than it would have been at 2001 rates. During 2001,
the effect of exchange rates on our sales comparisons was smaller. Our expenses
are principally denominated in the same currencies in which we have sales,
allowing us to essentially hedge through offsetting revenue and expense
exposures. As a result, during 2002, our operating income and margins were not
significantly affected by the change in the Euro exchange rate. Some of our
expenses are denominated in the local currencies of the United Kingdom, China,
Japan, Malaysia and Taiwan, a number of which are closely tied to the U.S.
dollar and Euro. China has had a managed floating exchange rate since 1994 and
the exchange rate to the U.S. Dollar has been effectively fixed since 1996.
Malaysia has practiced a fixed exchange rate regime since 1998 and the exchange
rate to the U.S. Dollar has been effectively fixed since then. The Company
recorded an exchange rate loss of $472,000 in 2002.

     We do not invest in speculative or derivative financial instruments. We
have significant amounts of debt that are subject to interest rate fluctuation
risk. The amounts outstanding under the term loans of the Credit Agreement have
variable interest rates, and therefore, adjust to market conditions. An increase
of 1 percentage point in the interest rate of the loans under the Credit
Agreement would increase annual interest expense by approximately $1.8 million.
The amount outstanding under the 13 1/8% senior subordinated notes accrues
interest at a fixed rate of 13.125%. We have estimated the fair value of the
notes as of December 31, 2002 to be $107 million based on current market prices.
We also have $10 million outstanding under 10% senior subordinated notes.

                                        37
<PAGE>

ITEM 8

                       KNOWLES ELECTRONICS HOLDINGS, INC.

                       CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000

                                    CONTENTS

<Table>
<S>                                                           <C>
Report of Independent Auditors..............................    39
Consolidated Financial Statements
  Consolidated Balance Sheets...............................    40
  Consolidated Statements of Operations.....................    41
  Consolidated Statements of Changes in Stockholders' Equity
     (Deficit)..............................................    42
  Consolidated Statements of Cash Flows.....................    43
  Notes to Consolidated Financial Statements................    44
</Table>

                                        38
<PAGE>

                         REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Stockholders
Knowles Electronics Holdings, Inc.

     We have audited the accompanying consolidated balance sheets of Knowles
Electronics Holdings, Inc., as of December 31, 2002, and 2001, and the related
consolidated statements of operations, changes in stockholders' equity
(deficit), and cash flows for each of the three years in the period ended
December 31, 2002. Our audits also included the financial statement schedule
listed in the index at Item 15. 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 Knowles
Electronics Holdings, Inc., at December 31, 2002 and 2001, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 2002, 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, presents fairly, in all material respects, the
information set forth therein.

                                          /s/ ERNST & YOUNG LLP

February 3, 2003
except for Note 4, as to
which the date is March 31, 2003

                                        39
<PAGE>

                       KNOWLES ELECTRONICS HOLDINGS, INC.

                          CONSOLIDATED BALANCE SHEETS

<Table>
<Caption>
                                                                  DECEMBER 31,
                                                              ---------------------
                                                                2002        2001
                                                              ---------   ---------
                                                              (IN THOUSANDS, EXCEPT
                                                                   SHARE DATA)
<S>                                                           <C>         <C>
ASSETS
  Cash and cash equivalents.................................  $  24,082   $   2,446
  Accounts receivable, less allowance for doubtful accounts
    of $1,098 and $1,095....................................     31,455      39,113
  Inventories, net..........................................     31,618      46,662
  Prepaid expenses and other................................      6,446       6,082
  Deferred taxes, current portion...........................         --       6,096
                                                              ---------   ---------
Total current assets........................................     93,601     100,399
Property, plant and equipment, at cost:
  Land......................................................      3,719       6,829
  Building and improvements.................................     23,694      32,464
  Machinery and equipment...................................     57,920      62,026
  Furniture and fixtures....................................     28,076      27,453
  Construction in progress..................................      4,866       5,559
                                                              ---------   ---------
    Subtotal................................................    118,275     134,331
Accumulated depreciation....................................    (71,202)    (68,704)
                                                              ---------   ---------
    Net.....................................................     47,073      65,627
Other assets, net...........................................      1,726       3,105
Deferred finance costs, net.................................      8,058       8,421
Deferred income taxes.......................................        159         330
                                                              ---------   ---------
Total assets................................................  $ 150,617   $ 177,882
                                                              =========   =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
  Accounts payable..........................................  $  15,010   $  17,727
  Accrued compensation and employee benefits................      7,444       7,403
  Accrued interest payable..................................      7,253       5,096
  Accrued warranty & rebates................................      8,790       7,545
  Accrued restructuring costs...............................      1,234       4,197
  Other liabilities.........................................      4,918       7,885
  Income taxes..............................................      7,124       6,940
  Short-term debt...........................................      2,120       3,797
  Current portion of notes payable..........................     12,452       9,115
                                                              ---------   ---------
    Total current liabilities...............................     66,345      69,705
Accrued pension liability...................................     12,566       8,872
Other noncurrent liabilities................................         --           5
Notes payable...............................................    328,908     332,148
Preferred stock mandatorily redeemable in 2019 including
  accumulating dividends of: $73,547 December 2002; $50,042
  December 2001.............................................    258,547     235,042
Stockholders' equity (deficit):
  Common stock,Class A, $.001 par value, 1,052,632 shares
    authorized, outstanding: 969,167 December 2002; 981,667
    December 2001...........................................         --          --
  Common stock, Class B, $.001 par value, 52,632 shares
    authorized, none ever issued............................         --          --
  Capital in excess of par value............................     16,838      17,213
  Accumulated deficit.......................................   (525,752)   (477,937)
  Accumulated other comprehensive loss......................     (6,835)     (7,166)
                                                              ---------   ---------
Total stockholders' equity (deficit)........................   (515,749)   (467,890)
                                                              ---------   ---------
Total liabilities and stockholders' equity (deficit)........  $ 150,617   $ 177,882
                                                              =========   =========
</Table>

                            See accompanying notes.
                                        40
<PAGE>

                       KNOWLES ELECTRONICS HOLDINGS, INC.

                     CONSOLIDATED STATEMENTS OF OPERATIONS

<Table>
<Caption>
                                                                 YEAR ENDED DECEMBER 31,
                                                              ------------------------------
                                                                2002       2001       2000
                                                              --------   --------   --------
                                                                      (IN THOUSANDS)
<S>                                                           <C>        <C>        <C>
Net sales...................................................  $216,105   $223,721   $238,123
Cost of sales...............................................   123,222    124,587    134,069
                                                              --------   --------   --------
Gross margin................................................    92,883     99,134    104,054
Research and development expenses...........................    13,728     14,684     13,380
Selling and marketing expenses..............................    13,769     14,732     12,511
General and administrative expenses.........................    25,081     26,738     23,831
Loss on sale of business....................................    16,736         --         --
Restructuring expenses......................................     2,158        317     18,440
                                                              --------   --------   --------
Operating income............................................    21,411     42,663     35,892
Other income (expense):
  Interest income...........................................       129        146        959
  Interest expense..........................................   (34,126)   (37,756)   (43,341)
                                                              --------   --------   --------
Income (loss) before income taxes...........................   (12,586)     5,053     (6,490)
Income taxes................................................   (11,790)    (6,532)     1,627
                                                              --------   --------   --------
Net loss....................................................  $(24,376)  $ (1,479)  $ (4,863)
                                                              ========   ========   ========
</Table>

                            See accompanying notes.
                                        41
<PAGE>

                       KNOWLES ELECTRONICS HOLDINGS, INC.

      CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)

<Table>
<Caption>
                                                                  COST OF     ACCUMULATED
                                      CAPITAL IN                   COMMON        OTHER
                             COMMON   EXCESS OF    ACCUMULATED    TREASURY   COMPREHENSIVE
                             STOCK    PAR VALUE      DEFICIT       SHARES        LOSS          TOTAL
                             ------   ----------   ------------   --------   -------------   ---------
                                                          (IN THOUSANDS)
<S>                          <C>      <C>          <C>            <C>        <C>             <C>
Balance at December 31,
  1999.....................  $  --     $15,223      $(422,188)     $  --        $(3,533)     $(410,498)
Net loss...................     --          --         (4,863)        --             --         (4,863)
Other comprehensive
  income -- Foreign
  currency translation
  adjustment...............     --          --             --         --         (3,270)        (3,270)
                                                                                             ---------
Comprehensive loss.........     --          --             --         --             --         (8,133)
Issuance of common stock...     --         750             --         --             --            750
Repurchase of common
  stock....................     --        (400)            --         --             --           (400)
Price adjustment on
  previously repurchased
  common stock.............     --          --         (8,316)        --             --         (8,316)
Adjustment to previously
  accrued direct costs
  associated with issuance
  of common stock..........     --       1,690             --         --             --          1,690
Preferred stock
  dividends................     --          --        (19,425)        --             --        (19,425)
Other......................     --          --           (285)        --             --           (285)
                             -----     -------      ---------      -----        -------      ---------
Balance at December 31,
  2000.....................  $  --     $17,263      $(455,077)     $  --        $(6,803)     $(444,617)
Net loss...................     --          --         (1,479)        --             --         (1,479)
Other comprehensive
  income -- Foreign
  currency translation
  adjustment...............     --          --             --         --           (363)          (363)
                                                                                             ---------
Comprehensive loss.........     --          --             --         --             --         (1,842)
Issuance of common stock...     --         250             --         --             --            250
Repurchase stock...........     --        (300)            --         --             --           (300)
Preferred stock
  dividends................     --          --        (21,367)        --             --        (21,367)
Other......................     --          --            (14)        --             --            (14)
                             -----     -------      ---------      -----        -------      ---------
Balance at December 31,
  2001.....................  $  --     $17,213      $(477,937)     $  --        $(7,166)     $(467,890)
Net loss...................     --          --        (24,376)        --             --        (24,376)
Other comprehensive income:
  Foreign currency
     translation
     adjustment............     --          --             --         --          4,068          4,068
  Minimum pension liability
     pension adjustment net
     of tax................     --          --             --         --         (3,737)        (3,737)
                                                                                             ---------
Comprehensive loss.........     --          --             --         --             --        (24,045)
Issuance of common stock...     --         150             --         --             --            150
Repurchase stock...........     --        (525)            --         --             --           (525)
Preferred stock
  dividends................     --          --        (23,505)        --             --        (23,505)
Other......................     --          --             66         --             --             66
                             -----     -------      ---------      -----        -------      ---------
Balance at December 31,
  2002.....................  $  --     $16,838      $(525,752)     $  --        $(6,835)     $(515,749)
                             =====     =======      =========      =====        =======      =========
</Table>

                            See accompanying notes.
                                        42
<PAGE>

                       KNOWLES ELECTRONICS HOLDINGS, INC.

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

<Table>
<Caption>
                                                                 YEAR ENDED DECEMBER 31,
                                                              ------------------------------
                                                                2002       2001       2000
                                                              --------   --------   --------
                                                                      (IN THOUSANDS)
<S>                                                           <C>        <C>        <C>
OPERATING ACTIVITIES
Net loss....................................................  $(24,376)  $ (1,479)  $ (4,863)
Adjustments to reconcile net loss to net cash provided by
  operating activities:
  Depreciation and amortization.............................    10,897     13,683     12,406
  Restructuring costs.......................................       988      1,628     18,440
  Loss on sale of business..................................    16,626         --         --
  Amortization of deferred financing fees and debt
     discount...............................................     1,434      2,133      2,679
  Inventory obsolescence provision..........................     2,989      3,976      2,910
  Deferred income taxes.....................................     6,267       (137)    (9,388)
  Stock compensation expense................................       504         --         --
  (Gain) loss on disposal of fixed assets...................     1,170     (2,745)     2,096
  Change in assets and liabilities:
     Accounts receivable....................................     6,270      2,079      1,020
     Inventories............................................     8,813     (2,365)    (2,915)
     Other assets...........................................       345     (1,997)      (158)
     Accounts payable.......................................    (1,779)     5,472      4,018
     Accrued restructuring costs............................    (3,906)    (9,891)    (7,779)
     Accrued interest payable...............................     2,157        198     (3,472)
     Accrued compensation and benefits......................       310     (1,931)     1,626
     Other current liabilities..............................      (853)    (2,193)     4,736
     Other noncurrent liabilities...........................     1,426        211     (1,114)
     Income taxes payable...................................       184      2,806      2,593
                                                              --------   --------   --------
Net cash provided by operating activities...................    29,466      9,448     22,835
INVESTING ACTIVITIES
Proceeds from sales of property, plant & equipment..........     3,560      3,662        663
Purchases of property, plant, and equipment, net............    (8,427)   (21,276)   (16,151)
                                                              --------   --------   --------
Net cash used in investing activities.......................    (4,867)   (17,614)   (15,488)
FINANCING ACTIVITIES
Debt payments -- long term..................................   (10,541)    (9,375)    (1,625)
Debt proceeds -- long term..................................    10,055         --         --
Debt proceeds (payments) -- short term, net.................    (1,996)     4,034       (213)
Issuance of preferred stock and common stock................        --        125        750
Price adjustment on previously purchased treasury stock.....        --         --     (8,316)
Costs associated with equity transaction....................        --         --     (1,195)
Costs associated with debt..................................      (681)      (636)    (1,161)
Repurchase of common stock..................................      (400)      (300)      (400)
                                                              --------   --------   --------
Net cash used in financing activities.......................    (3,563)    (6,152)   (12,160)
Effect of exchange rate changes on cash.....................       600       (312)    (1,909)
                                                              --------   --------   --------
Net increase (decrease) in cash and cash equivalents........    21,636    (14,630)    (6,722)
Cash and cash equivalents at beginning of year..............     2,446     17,076     23,798
                                                              --------   --------   --------
Cash and cash equivalents at end of year....................  $ 24,082   $  2,446   $ 17,076
                                                              ========   ========   ========
Cash paid for interest......................................  $ 30,535   $ 35,425   $ 44,134
                                                              ========   ========   ========
Cash paid for taxes.........................................  $  5,339   $  4,457   $  1,377
                                                              ========   ========   ========
</Table>

                            See accompanying notes.
                                        43
<PAGE>

                       KNOWLES ELECTRONICS HOLDINGS, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2002 AND 2001
                                 (IN THOUSANDS)

1.  ACCOUNTING POLICIES

BASIS OF RECAPITALIZATION AND PRESENTATION

     The consolidated financial statements of Knowles Electronics Holdings, Inc.
(the Company) include all of its subsidiaries, including Austrian, British,
French, German, Chinese, Japanese, Malaysian, Singaporean and Taiwanese
subsidiaries. Significant intercompany and affiliate accounts and transactions
have been eliminated.

     In connection with a reorganization as a holding company, the Company
changed its name from Knowles Electronics, Inc. to Knowles Electronics Holdings,
Inc. on September 23, 1999.

     On June 23, 1999, the Company entered into a recapitalization agreement
with Key Acquisition L.L.C., (the Investor) and the preexisting common
stockholders' of the Company (the Recapitalization). The recapitalization
transaction closed on June 30, 1999. The Recapitalization was treated as a
leveraged recapitalization in which the issuance of the debt has been accounted
for as a financing transaction, the sales and purchases of the Company's stock
have been accounted for as capital transactions at amounts paid or received, and
no changes were made to the carrying values of the Company's assets and
liabilities.

     In conjunction with the Recapitalization, the Company authorized and
issued, on June 30, 1999, new shares of mandatorily redeemable preferred stock
(Series A-1 and Series A-2), each with par value $0.001 per share (the Preferred
Stock), and common stock (Class A and Class B), par value $0.001 per share
(Common Stock). The Investor purchased 800,000 shares of Common Stock for
$24,000 and 164,444 shares of Series A-1 Preferred Stock for $164,444. In
addition, certain members of management purchased 71,667 shares of Common Stock
for $2,150. After the transactions related to the Recapitalization, which are
described below, the preexisting stockholders held 100,000 shares of Common
Stock and 20,556 shares of Series A-2 Preferred Stock which was recorded at
$20,556. As of December 31, 2002, the liquidation value of the outstanding
Series A-1 Preferred Stock is $229,819 and the liquidation value of the
outstanding Series A-2 Preferred stock is $28,728.

     The Preferred Stock ranks senior to all other equity securities of the
Company with respect to dividend and distribution preference. The liquidation
value of each share of Preferred Stock is $1,000. Dividends on each share of
Preferred Stock accrue at a rate of 10% per annum of the liquidated value plus
any accumulated dividends. Such dividends for the year ended December 31, 2002,
amounted to $23,505. The Preferred Stock is mandatorily redeemable on July 2,
2019, at a redemption price per share equal to the liquidation value plus all
previously accumulated dividends and all accrued dividends not yet paid or
accumulated. The Company may, at any time, and the holders may, upon the earlier
of June 30, 2010, or an initial public offering of the Company's Common Stock
which is a primary registered offering or the sale of all or substantially all
of the Company's Common Stock or assets, require the Company to redeem all or
any portion of the Series A-1 Preferred Stock then outstanding at a price per
share equal to the liquidation value plus all accumulated and all accrued and
unpaid or unaccumulated dividends. The Series A-2 Preferred Stock is not
redeemable at the Company's option at any time. In the event of such an initial
public offering, holders of Series A-2 Preferred Stock may elect to convert the
shares into Common Stock. In addition, on each June 30, the Company has an
option to exchange the then outstanding shares of Series A-1 Preferred Stock in
whole, but not part of, for 10% Junior Subordinated Notes due 2010 of the
Company, in an aggregate principal amount equal to the sum of the liquidation
value of the Series A-1 Preferred Stock plus an amount equal to all accumulated
and all accrued and unpaid, but not yet accumulated, dividends.

     Series A Preferred Stock have no voting rights; with respect to any issue
required to be voted on and approved by holders of Series A-1 Preferred Stock,
the holders of the Series A-1 Preferred Stock and the holders of Series A-2
Preferred Stock will each vote as a single class.
                                        44
<PAGE>
                       KNOWLES ELECTRONICS HOLDINGS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     After completion of the Recapitalization transactions, the Investor's,
preexisting stockholders', and management's ownership percentage of the Company
was approximately 82.3%, 10.3%, and 7.4%, respectively.

     The amount payable to the preexisting common stockholders for the purchase
of their common stock in the Recapitalization was subject to a post-closing
adjustment which resulted in an additional payment of $8,316 by the Company to
the preexisting stockholders in 2000.

DESCRIPTION OF BUSINESS

     The Company develops, manufactures, and supplies audio communications
components, primarily miniaturized electromagnetic microphones, and receivers
and ceramic and electret microphones used in hearing aids, microphones,
headsets, and accessories for the computer and communication industries. In
addition, the Company manufactures engine control and other devices for
industrial equipment and infrared remote control devices for the consumer
electronics market.

REVENUE RECOGNITION

     Revenues from the Company's products are recognized when title to the
products transfers to the customer, which typically is upon the shipment of
products to the customers.

SHIPPING COSTS

     Amounts invoiced to customers to cover shipping costs are included in
sales. The cost of shipping product to customers is included in cost of sales.

ACCRUED WARRANTY LIABILITY

     The Company provides an accrual for estimated future warranty costs at the
time products are sold and periodically adjusts the accrual to reflect actual
experience. The warranty on products sold generally extends from one to three
years.

     Changes in the Company's accrual for warranty during each year are as
follows:

<Table>
<Caption>
                                                               2002       2001
                                                              -------    -------
<S>                                                           <C>        <C>
Balance, beginning of period................................  $ 5,819    $ 6,023
Warranties issued during the period.........................    1,667      4,526
Settlements made during the period..........................   (2,602)    (4,730)
                                                              -------    -------
Balance, end of period......................................  $ 4,884    $ 5,819
                                                              =======    =======
</Table>

FOREIGN OPERATIONS

     Assets and liabilities are translated using the exchange data at the
balance sheet date and revenues and expenses are translated using
weighted-average exchange data. Translation adjustments for those entities which
have the U.S. dollar as their functional currency are recorded to the income
statement and adjustments for all other entities are recorded as a separate
component of common stockholders' equity.

CASH EQUIVALENTS

     Cash equivalents consist of highly liquid investments, having maturities of
three months or less from date of purchase, which are readily convertible into
cash.

                                        45
<PAGE>
                       KNOWLES ELECTRONICS HOLDINGS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

DEFERRED FINANCE COSTS

     Deferred finance costs associated with the issuance of long-term debt are
capitalized and amortized over the life of the related debt using the effective
interest method.

INVENTORIES

     Inventories are stated at the lower of cost (first in, first out) or
market.

     During the fourth quarter of 2001, the Company changed its method of
determining the cost of domestic inventories from the LIFO method to the FIFO
method as it experienced reduced costs from offshore assembly operations and
expects continuing cost reductions. The cost of inventories on a LIFO basis at
December 31, 2001 was approximately equal to their replacement cost.
Accordingly, the Company believes that the FIFO method will result in a better
measurement of operating results. Additionally, FIFO is the prevalent method
used by other entities within the Company's industry. All previously reported
results have been restated to reflect the retroactive application of this
accounting change as required by generally accepted accounting principles. Due
principally to the reversal of the effect of LIFO reserve liquidations in prior
years, the net loss previously reported for 2000 was increased by $1,011.

FAIR VALUE OF FINANCIAL INSTRUMENTS

     The carrying amounts reported in the Company's balance sheets for cash and
cash equivalents, trade accounts receivable, accounts payable, and short-term
debt approximate fair value because of the short-term nature of these
instruments.

     The carrying amounts reported in the Company's balance sheets for
variable-rate long-term debt approximate fair value.

     The Company estimates the fair value of fixed rate long-term debt
obligations using current market prices available for these obligations. The
fair value of the Senior Subordinated Notes was approximately $107 million at
December 31, 2002.

ACCOUNTS RECEIVABLE AND ALLOWANCES FOR DOUBTFUL ACCOUNTS

     The Company carries its accounts receivable at face value amount net of an
allowance for doubtful accounts. The allowance for doubtful accounts is
calculated by applying standard reserve percentages to the aging categories. An
additional reserve is also recorded for uncollectible accounts that have been
specifically identified. A receivable is considered past due if payments have
not been received within agreed upon invoice terms. Uncollectible receivables
are charged against the allowance for doubtful accounts when approved by
management after all collection efforts have been exhausted.

PROPERTY, PLANT, AND EQUIPMENT

     Depreciation of property, plant, and equipment is computed principally on a
declining-balance method based on the following estimated useful lives:
Buildings and Improvements -- 10 to 40 years; Leasehold Improvements -- lesser
of useful life of assets or lease terms including option periods; Machinery and
Equipment -- 4 to 12 years; Furniture and Fixtures -- 3 to 18 years; and
Computer Equipment -- 3 to 5 years.

     Property, plant, and equipment are reviewed for impairment whenever changes
in circumstances indicate that the carrying value of the assets may not be
recoverable. Approximately $11 million of assets held for disposal related to
Ruf are included in net property plant and equipment at December 31, 2001.

                                        46
<PAGE>
                       KNOWLES ELECTRONICS HOLDINGS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

INCOME TAXES

     Income taxes are provided currently on financial statement earnings of
non-U.S. subsidiaries expected to be repatriated. The Company accounts for
income taxes using the asset and liability method. This approach requires the
recognition of deferred tax assets and liabilities for the expected future tax
consequences of temporary differences between the carrying amounts and the tax
bases of assets and liabilities.

ACCUMULATED OTHER COMPREHENSIVE INCOME

     The balance of accumulated other comprehensive income is $7,166 of
translation adjustment in 2001, and in 2002, $3,098 of translation adjustment
plus $3,737 of minimum pension liability.

STOCK OPTIONS

     The Company accounts for its stock-based compensation plan using the
intrinsic value method in accordance with Accounting Principles Board (APB)
Opinion No. 25, Accounting for Stock Issued to Employees, and related
interpretations. Under the intrinsic value method, compensation expense for
stock options is based on the excess, if any, of the fair value of the stock at
the date of the grant over the exercise price.

USE OF ESTIMATES

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

NEW ACCOUNTING STANDARDS

     In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 143, "Accounting for Asset Retirement
Obligations," which is effective for fiscal years beginning after June 15, 2002.
The Statement requires legal obligations associated with the retirement of
long-lived assets to be recognized at their fair value at the time that the
obligations are incurred. Upon initial recognition of a liability, that cost
should be capitalized as part of the related long-lived asset and allocated to
expense over the useful life of the asset. We will adopt SFAS No. 143 as of
January 1, 2003, and the impact of adoption of SFAS No. 143 is not expected to
have a material impact on our financial position or results of operations.

     In June 2002, the Financial Accounting Standards Board issued SFAS No. 146,
"Accounting for Cost Associated with Exit or Disposal Activities," which changes
the timing of the recognition of restructuring charges. Liabilities for
restructuring costs will be required to re recognized when the liability is
incurred rather than when we commit to the plan. SFAS No. 146 is effective for
restructuring activity initiated after December 31, 2002. We do not anticipate
that the adoption of this statement will have a material impact on our financial
position, results of operations or cash flows.

     In November 2002, the FASB issued FASB Interpretation (FIN) No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others". FIN No. 45 clarifies that a
guarantor is required to recognize, at the inception of a guarantee, a liability
for the fair value of the obligation undertaken in issuing the guarantee. We
will adopt the provisions of FIN No. 45 on January 1, 2003 for all new or
amended guarantees subsequent to that date.

                                        47
<PAGE>
                       KNOWLES ELECTRONICS HOLDINGS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

RECLASSIFICATIONS

     Certain prior years' amounts have been reclassified to conform to the 2002
financial statement presentation.

2.  INVENTORY

     Inventories are as follows:

<Table>
<Caption>
                                                               2002      2001
                                                              -------   -------
<S>                                                           <C>       <C>
Raw materials...............................................  $19,896   $30,985
Work in process.............................................    2,772     5,789
Finished goods..............................................   16,644    19,939
                                                              -------   -------
                                                               39,312    56,713
Less allowances for:
  Obsolescence and net realizable value.....................    7,694    10,051
                                                              -------   -------
                                                              $31,618   $46,662
                                                              =======   =======
</Table>

3.  INCOME TAXES

     Income (loss) before income taxes consists of the following:

<Table>
<Caption>
                                                          2002      2001       2000
                                                        --------   -------   --------
<S>                                                     <C>        <C>       <C>
Domestic (U.S.).......................................  $(26,020)  $(3,583)  $(17,613)
Foreign...............................................    13,434     8,636     11,123
                                                        --------   -------   --------
                                                        $(12,586)  $ 5,053   $ (6,490)
                                                        ========   =======   ========
</Table>

     A reconciliation of income tax expense to the statutory federal rate of 35%
is as follows:

<Table>
<Caption>
                                                           YEAR ENDED DECEMBER 31,
                                                         ----------------------------
                                                           2002      2001      2000
                                                         --------   -------   -------
<S>                                                      <C>        <C>       <C>
Statutory federal income tax expense (benefit).........  $ (4,405)  $ 1,769   $(2,272)
Effects of:
  State income taxes...................................      (806)     (265)       25
  Foreign rate differential............................   (10,587)   (7,817)     (530)
  Taxes on unremitted foreign earnings.................    (1,179)    5,441     7,050
  Valuation allowance..................................    28,073     7,070    (5,991)
  Other, net...........................................       694       334        91
                                                         --------   -------   -------
                                                         $ 11,790   $ 6,532   $(1,627)
                                                         ========   =======   =======
</Table>

                                        48
<PAGE>
                       KNOWLES ELECTRONICS HOLDINGS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The income tax provision (benefit) for the years ended December 31, 2002,
2001, and 2000 consists of the following:

<Table>
<Caption>
                                                            YEAR ENDED DECEMBER 31,
                                                          ---------------------------
                                                           2002      2001      2000
                                                          -------   -------   -------
<S>                                                       <C>       <C>       <C>
Current:
  Federal...............................................  $    --   $ 1,464   $    --
  State.................................................       45        25        25
  Foreign...............................................    5,478     5,180     7,736
                                                          -------   -------   -------
Total Current...........................................    5,523     6,669     7,761
Deferred
  Federal...............................................    6,522    (1,109)   (7,136)
  State.................................................      230       108    (1,757)
  Foreign...............................................     (485)      864      (495)
                                                          -------   -------   -------
Total Deferred..........................................    6,267      (137)   (9,388)
                                                          -------   -------   -------
Total tax provision (benefit)...........................  $11,790   $ 6,532   $(1,627)
                                                          =======   =======   =======
</Table>

     Deferred income taxes reflect the net tax effect 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 deferred tax assets and liabilities as of
December 31, 2002 and 2001, are as follows:

<Table>
<Caption>
                                                                 DECEMBER 31,
                                                              -------------------
                                                                2002       2001
                                                              --------   --------
<S>                                                           <C>        <C>
Deferred tax assets:
  Non-U.S. net operating loss carryforward..................  $ 20,810   $  9,523
  U.S. net operating loss carryforward......................    15,206      4,404
  Foreign tax credits carryforward..........................    17,131     14,504
  Pension...................................................     2,345      2,412
  Inventory.................................................     2,401      3,099
  Accrued expenses..........................................     7,290      4,728
  Other, net................................................       160      4,235
                                                              --------   --------
Total deferred tax assets...................................    65,343     42,905
Deferred tax liabilities:
  Taxes on unremitted foreign earnings......................   (12,619)   (10,765)
  Other deferred tax liabilities............................      (282)      (325)
                                                              --------   --------
Total deferred tax liabilities..............................   (12,901)   (11,090)
Valuation allowance.........................................   (52,283)   (25,389)
                                                              --------   --------
Net deferred tax assets.....................................  $    159   $  6,426
                                                              ========   ========
</Table>

     The Company had foreign net operating loss carryforwards of $47,559 at
December 31, 2002 that have an indefinite carryforward period. In addition, the
Company had federal net operating loss carryforwards of $36,465 at December 31,
2002 that begin to expire in 2021 and state net operating loss carry forwards of
$51,583 at December 31, 2002, that begin to expire in 2019. The Company's
foreign tax credit carryforward of

                                        49
<PAGE>
                       KNOWLES ELECTRONICS HOLDINGS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

$17,131 begins to expire in 2004. The Company has provided a valuation allowance
against the net deferred tax assets due to the uncertainty of realization of
those assets.

     The Company's future operating plan is to repatriate all foreign earnings
not needed for near term investment in each country. As a result, a substantial
portion of the unremitted earnings of the affected foreign subsidiaries is not
considered permanently reinvested. The deferred foreign provision includes a
benefit for which a valuation allowance has been established for the year ended
December 31, 2002 and a charge of $5,441 and $7,050 for the years ended December
31, 2001 and 2000, respectively, for the anticipated tax liability on the
unremitted foreign earnings, which are not considered permanently reinvested.

4.  NOTES PAYABLE

     As part of the Recapitalization transaction, the Company entered into a
senior credit agreement dated as of June 28, 1999, and amended and restated as
of July 21, 1999, and further amended as of December 23, 1999, April 10, 2000,
December 12, 2001, May 10, 2002 and March 25, 2003 with certain lenders (Senior
Credit Agreement). The credit agreement as amended consists of approximately
$195,000 (effective March 31, 2003), which provides for revolving loans of
$15,000 (Revolving Credit Facility) through June 30, 2006 (unless the Term B
Facility is paid in full prior to such date in which case the Revolving Credit
Facility will cease to exist and any amounts outstanding thereunder shall become
due and payable), a Term B Facility of $145,000 (Term B Facility), which matures
on June 29, 2007, and a Term C Facility of $35,000 (Term C Facility), which
matures on June 29, 2007. In addition, on June 30, 1999, the Company issued
Subordinated Bridge Notes (Bridge Notes) for $150,000 to certain lenders. The
Bridge Notes were subsequently repaid following the issuance by the Company of
$153,200 of 13 1/8% Senior Subordinated Notes (the 13 1/8% Notes). As required
by the May 10, 2002 Fourth Amendment to the credit agreement, the Company issued
$10 million of 10% Senior Subordinated Notes in a private placement to Key
Acquisition LLC.

     The Revolving Credit facility bears interest, at the Company's option, at
either: (1) one-, two-, three-, or six-month LIBOR plus 4.0% (as amended March
25, 2003), or (2) the greater of the prime rate (4.25% at December 31, 2002), a
base certificate of deposit rate plus 1.00%, or the federal funds effective rate
plus 0.50% (the Alternate Base Rate), in each case plus an initial margin of 3%
as of March 31, 2003. Under the Limited Waiver and Amendment dated March 25,
2003, the remaining balance of the Term A Facility was replaced by a $35 million
Term C Facility due June 29, 2007. The $33.5 million balance of the Term A
Facility that was outstanding at December 31, 2002 is classified based on the
terms of the replacement debt.

     The Term B Facility bears interest, at the Company's option, at either: (1)
one-, two-, three-, or six-month LIBOR plus 5.00% (as of March 31, 2003), or (2)
Alternate Base Rate plus an initial margin of 4.00%. In addition, as of March
31, 2003, the B Facility will accrue additional interest at the rate of
approximately $420 per year (subject to reduction in the event of a prepayment
of the B Facility), to be paid at the maturity of the facility (or, in certain
cases, at an earlier date).

     The initial margin may be reduced if the Company meets certain specified
leverage ratios during a period consisting of the prior four consecutive fiscal
quarters. Any reduced interest margin may be increased to the original margin if
such leverage ratios do not continue to be met by the Company.

     The Term B Facility is due on June 29, 2007, and is payable in quarterly
installments during the following periods as amended:

<Table>
<S>                                                           <C>
March 31, 2003..............................................  $   352
June 30, 2003 to June 30, 2006..............................      704
September 30, 2006 to June 29, 2007.........................   31,938
</Table>

     In December 2002 the Company prepaid $1,560 of principal under the Senior
Credit Agreement, as required, out of the proceeds from the sale of the Taiwan
facility.

                                        50
<PAGE>
                       KNOWLES ELECTRONICS HOLDINGS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The Company prepaid $9,533 of principal under the Senior Credit Agreement
on March 28, 2003 as required by the excess cash flow calculation.

     The Revolving Credit Facility expires on June 30, 2006, unless the B
Facility is fully repaid prior to June 30, 2006, in which case the Revolving
Facility will cease to be available to the Company and any amounts outstanding
thereunder shall thereupon become due and payable. There were no borrowings
under this facility at December 31, 2002.

     Our Austrian subsidiary has two long term debt borrowings: $1,145 is
payable in semi-annual installments from March 2003 through September 2006 and
bears interest of 4.95%; $593 is payable in semi-annual installments through
June 2006 and bears interest of 4.75%.

     Short-term debt includes $2,120 drawn against a line of credit by our
Austrian subsidiary at an interest rate of 6%.

     The balance under the Term A Facility, Term B Facility, 13 1/8% Senior
Subordinated Notes (13 1/8% Notes), 10% Senior Subordinated Notes (10% Notes)
and our Austrian subsidiary's long term debt as of December 31, 2002 and 2001,
is as follows:

<Table>
<Caption>
                                                                 DECEMBER 31,
                                                              -------------------
                                                                2002       2001
                                                              --------   --------
<S>                                                           <C>        <C>
Term A facility.............................................  $ 33,461   $ 41,250
Term B facility.............................................   144,998    147,750
13 1/8% Senior Subordinated Notes, net of discount of $2,037
  and $2,427, respectively..................................   151,163    150,773
10% Senior Subordinated Notes...............................    10,000         --
Austrian subsidiary long term debt due September 2006.......     1,145        972
Austrian subsidiary long term debt due June 2006............       593        518
                                                              --------   --------
                                                               341,360    341,263
Less: Current portion.......................................    12,452      9,115
                                                              --------   --------
Total long-term notes payable...............................  $328,908   $332,148
                                                              ========   ========
</Table>

     Maturities of Notes Payable follows (including Term A Facility and Term B
Facility under the Credit Agreement as amended March 25, 2003):

<Table>
<S>                                                           <C>
2003........................................................  $ 12,452
2004........................................................     3,270
2005........................................................     3,270
2006........................................................    65,655
2007........................................................    95,550
Thereafter..................................................   161,163
                                                              --------
                                                              $341,360
                                                              ========
</Table>

     The 13 1/8% Notes were issued in a private placement on October 1, 1999,
and are due October 15, 2009, with interest payable semiannually at 13 1/8%
commencing April 15, 2000. The Company subsequently exchanged all of the
privately placed Notes for a like amount of identical Notes registered with the
Securities and Exchange Commission. The 13 1/8% Notes rank equally with all
other unsecured senior subordinated indebtedness of the Company. The Notes are
junior to all of the Company's current and future indebtedness, except
indebtedness which is expressly not senior to the 13 1/8% Notes.

                                        51
<PAGE>
                       KNOWLES ELECTRONICS HOLDINGS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The 10% Senior Subordinated Notes were issued in a private placement to an
affiliate of Doughty Hanson on August 29, 2002 and are due October 15, 2009,
with interest payable semiannually at 10% commencing April 15, 2003. The 10%
Notes rank subordinate to all Senior Indebtedness of the Company and pari passu
to the 13 1/8% Notes.

     The Company's Senior Credit Agreement requires that the Company comply with
certain covenants and restrictions, including specific financial ratios that
must be maintained. Certain covenants and restrictions were modified in
accordance with the amendment to the Senior Credit Agreement dated December 12,
2001. The Company was not in compliance with the required leverage ratio and
interest coverage ratio under the bank credit agreement as of March 31, 2002.
Additionally, the Company did not make the interest payment on the 13 1/8% Notes
scheduled for April 15, 2002 on that date. An Amendment and Waiver to the credit
agreement was obtained dated as of May 10, 2002 and the Company made the
interest payment on the 13 1/8% Notes that was scheduled for April 15, 2002 on
May 14, 2002. The Amendment and Waiver waived the Company's non-compliance with
the required interest coverage ratio for the period ended March 31, 2002 and the
leverage ratio for the period January 1, 2002 through March 31, 2002, and
amended these required ratios for subsequent periods through the first quarter
of 2003. This Amendment and Waiver also limited capital expenditures for the
year 2002 to $15 million, prevents any acquisitions of another company or
business, decreases the revolving credit facility to $18.25 million (from $25
million), caps at $2 million the amount of net cash proceeds from asset sales
that can be applied to buying new assets and required the Company to receive
additional funding of at least $10 million by September 3, 2002 to pay down the
outstanding balance on the revolving credit facility to $8.25 million. The
Company met the additional funding requirement of the Amendment and Waiver by
issuing $10 million of 10% Senior Subordinated Notes to an affiliate of Doughty
Hanson.

     The Company was in compliance with all of its debt covenants at December
31, 2002. The Company obtained a Limited Waiver and Amendment dated as of March
25, 2003 under which the remaining balance of the Term A Facility was repaid and
replaced by a $35 million Term C Facility due June 29, 2007 with a fixed
interest rate of 18.50%. The Limited Waiver and Amendment waives the required
interest coverage ratio and leverage ratio from the effective date of the
Amendment through June 29, 2003 and amends these ratios for the remainder of the
Credit Agreement. The Limited Waiver and Amendment also increased the Term B
Facility interest rate and the Revolving Credit Facility interest rate by 0.5
percentage points, provided for additional interest to accrue on the B Facility
at the rate of $420 per year (subject to reduction in the event of a prepayment
of the B Facility) to be paid at the maturity of the facility (or in certain
cases, at an earlier date) modified the Term B Facility installment payments,
and reduced the Revolving Credit Facility to $15 million. The Company expects,
based on current operating forecasts, that the amendments to the covenants in
the Credit Agreement will enable it to remain in compliance with the covenants
of the Credit Agreement, as amended, through December 31, 2003, and provide
sufficient financial flexibility to meet its debt service requirements as well
as other operating needs. However, there can be no assurance of such compliance.
If future actual results are lower than planned, the Company may be unable to
comply with the debt covenants or make required debt service payments. Such
inability could have a material adverse impact on the Company's financial
condition, results of operations or liquidity. There are no assurances that the
Company could favorably resolve such a situation.

     The 13 1/8% Notes and 10% Notes are unconditionally guaranteed, on a joint
and several basis, by the following wholly owned U.S. subsidiaries of the
Company: Knowles Electronics LLC, Knowles Intermediate Holding, Inc., Emkay
Innovative Products, Inc., Knowles Manufacturing Ltd., and Synchro Start
Products, Inc. The following tables present summarized balance sheet information
of the Company as of December 31, 2002 and 2001, and summarized income statement
and cash flow information for the years ended December 31, 2002, 2001, and 2000.
The column labeled "Parent Company" represents the holding company for each of
the Company's direct subsidiaries which are guarantors of the Notes, all of
which are wholly owned

                                        52
<PAGE>
                       KNOWLES ELECTRONICS HOLDINGS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

by the parent company; and the column labeled "Nonguarantors" represents wholly
owned subsidiaries of the Guarantors which are not guarantors of the Notes. The
Company believes that separate financial statements and other disclosures
regarding the Guarantors, except as otherwise required under Regulation S-X, are
not material to investors.

     Summarized information as of December 31, 2002 and 2001, and for the three
years ended December 31, 2002, is as follows:

<Table>
<Caption>
                                                             DECEMBER 31, 2002
                                   ---------------------------------------------------------------------
                                    PARENT     GUARANTORS   NON-GUARANTORS   ELIMINATIONS   CONSOLIDATED
                                   ---------   ----------   --------------   ------------   ------------
<S>                                <C>         <C>          <C>              <C>            <C>
Cash.............................  $   9,614    $  7,581       $  6,887       $      --      $  24,082
Accounts receivable..............         --      32,021         66,365         (66,931)        31,455
Inventories......................         --      13,215         18,403              --         31,618
Other current assets.............         --       2,268          4,178              --          6,446
Net property, plant and
  equipment......................         --      22,152         24,921              --         47,073
Investment in and advances to
  subsidiaries...................    101,347     246,110            425        (347,882)            --
Deferred finance costs, net......      8,058          --             --              --          8,058
Deferred income taxes............         --          --            159              --            159
Other non-current assets.........         --       1,132            594              --          1,726
                                   ---------    --------       --------       ---------      ---------
     Total assets................  $ 119,019    $324,479       $121,932       $(414,813)     $ 150,617
                                   =========    ========       ========       =========      =========
Accounts payable.................  $      --    $ 41,929       $ 39,164       $ (66,083)     $  15,010
Accrued restructuring costs......         --       1,082            152              --          1,234
Advances from parent.............    137,293      45,373          5,149        (187,815)            --
Other current liabilities........      6,361      19,902         10,113            (847)        35,529
Short-term debt..................     11,996          --          2,576              --         14,572
Noncurrent liabilities...........         --      10,101          2,465              --         12,566
Notes payable....................    327,626          --          1,282              --        328,908
Preferred stock..................    258,547          --             --              --        258,547
Stockholders' equity (deficit)...   (622,804)    206,092         61,031        (160,068)      (515,749)
                                   ---------    --------       --------       ---------      ---------
     Total liabilities and
       stockholders' equity
       (deficit).................  $ 119,019    $324,479       $121,932       $(414,813)     $ 150,617
                                   =========    ========       ========       =========      =========
</Table>

                                        53
<PAGE>
                       KNOWLES ELECTRONICS HOLDINGS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

<Table>
<Caption>
                                                             DECEMBER 31, 2001
                                   ---------------------------------------------------------------------
                                    PARENT     GUARANTORS   NON-GUARANTORS   ELIMINATIONS   CONSOLIDATED
                                   ---------   ----------   --------------   ------------   ------------
<S>                                <C>         <C>          <C>              <C>            <C>
Cash.............................  $       5    $     32       $  2,409       $      --      $   2,446
Accounts receivable..............         --      29,136         66,872         (56,895)        39,113
Inventories......................         --      21,813         24,849              --         46,662
Other current assets.............         --       6,801          5,377              --         12,178
Net property, plant and
  equipment......................         --      29,412         36,215              --         65,627
Investment in and advances to
  subsidiaries...................     97,967     192,688         10,749        (301,404)            --
Deferred finance costs, net......      8,421          --             --              --          8,421
Other non-current assets.........         --       3,311            124              --          3,435
                                   ---------    --------       --------       ---------      ---------
     Total assets................  $ 106,393    $283,193       $146,595       $(358,299)     $ 177,882
                                   =========    ========       ========       =========      =========
Accounts payable.................  $      --    $ 26,937       $ 46,762       $ (55,972)     $  17,727
Accrued restructuring costs......         --       3,553            644              --          4,197
Advances from parent.............     93,567      36,398         20,770        (150,735)            --
Other current liabilities........      4,156      17,986         13,693            (966)        34,869
Short-term debt..................     11,000          --          1,912              --         12,912
Noncurrent liabilities...........         --       6,919          1,958              --          8,877
Notes payable....................    330,773          --          1,375              --        332,148
Preferred stock..................    235,042          --             --              --        235,042
Stockholders' equity (deficit)...   (568,145)    191,400         59,481        (150,626)      (467,890)
                                   ---------    --------       --------       ---------      ---------
     Total liabilities and
       stockholders' equity
       (deficit).................  $ 106,393    $283,193       $146,595       $(358,299)     $ 177,882
                                   =========    ========       ========       =========      =========
</Table>

<Table>
<Caption>
                                                       YEAR ENDED DECEMBER 31, 2002
                                   ---------------------------------------------------------------------
                                    PARENT     GUARANTORS   NON-GUARANTORS   ELIMINATIONS   CONSOLIDATED
                                   ---------   ----------   --------------   ------------   ------------
<S>                                <C>         <C>          <C>              <C>            <C>
Net sales........................  $      --    $151,340       $195,150       $(130,385)     $ 216,105
Cost of sales....................         --      97,848        155,093        (129,719)       123,222
                                   ---------    --------       --------       ---------      ---------
Gross margin.....................         --      53,492         40,057            (666)        92,883
Selling, research and
  administrative expense.........         --      36,427         16,878            (727)        52,578
Loss on sale of business.........         --          --         16,736              --         16,736
Restructuring expenses...........         --       1,233            925              --          2,158
                                   ---------    --------       --------       ---------      ---------
Operating income.................         --      15,832          5,518              61         21,411
Other income (expense):
  Interest income................         --       2,305            431          (2,607)           129
  Interest expense...............    (34,106)     (1,382)        (1,244)          2,606        (34,126)
  Dividend income................      3,380      12,280             --         (15,660)            --
                                   ---------    --------       --------       ---------      ---------
Income (loss) before taxes.......    (30,726)     29,035          4,705         (15,600)       (12,586)
Income taxes.....................         --      (6,858)        (4,932)             --        (11,790)
                                   ---------    --------       --------       ---------      ---------
Net income (loss)................  $ (30,726)   $ 22,177       $   (227)      $ (15,600)     $ (24,376)
                                   =========    ========       ========       =========      =========
</Table>

                                        54
<PAGE>
                       KNOWLES ELECTRONICS HOLDINGS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

<Table>
<Caption>
                                                        YEAR ENDED DECEMBER 31, 2001
                                    --------------------------------------------------------------------
                                     PARENT    GUARANTORS   NON-GUARANTORS   ELIMINATIONS   CONSOLIDATED
                                    --------   ----------   --------------   ------------   ------------
<S>                                 <C>        <C>          <C>              <C>            <C>
Net Sales.........................  $     --    $170,436       $175,832       $(122,547)      $223,721
Cost of sales.....................        --     108,774        137,717        (121,904)       124,587
                                    --------    --------       --------       ---------       --------
Gross margin......................        --      61,662         38,115            (643)        99,134
Selling, research and
  administrative expenses.........        --      37,465         19,361            (672)        56,154
Restructuring expenses............        --       2,463         (2,146)             --            317
                                    --------    --------       --------       ---------       --------
Operating income..................        --      21,734         20,900              29         42,663
Other income (expense):
  Interest income.................        79       1,634            450          (2,017)           146
  Interest expense................   (37,653)       (922)        (1,093)          1,912        (37,756)
  Dividend income.................        --      29,804             --         (29,804)            --
                                    --------    --------       --------       ---------       --------
Income (loss) before taxes........   (37,574)     52,250         20,257         (29,880)         5,053
Income taxes......................        --        (796)        (5,736)             --         (6,532)
                                    --------    --------       --------       ---------       --------
     Net income (loss)............  $(37,574)   $ 51,454       $ 14,521       $ (29,880)      $ (1,479)
                                    ========    ========       ========       =========       ========
</Table>

<Table>
<Caption>
                                                        YEAR ENDED DECEMBER 31, 2000
                                    --------------------------------------------------------------------
                                     PARENT    GUARANTORS   NON-GUARANTORS   ELIMINATIONS   CONSOLIDATED
                                    --------   ----------   --------------   ------------   ------------
<S>                                 <C>        <C>          <C>              <C>            <C>
Net sales.........................  $     --    $182,466       $199,381       $(143,724)      $238,123
Cost of sales.....................        --     122,222        155,797        (143,950)       134,069
                                    --------    --------       --------       ---------       --------
Gross margin......................        --      60,244         43,584             226        104,054
Selling, research and
  administrative expenses.........       102      30,614         19,627            (621)        49,722
Restructuring expenses............        --       5,401         13,039              --         18,440
                                    --------    --------       --------       ---------       --------
Operating income (loss)...........      (102)     24,229         10,918             847         35,892
Interest income...................       452       1,775            407          (1,675)           959
Interest expense..................   (43,227)       (314)        (1,476)          1,676        (43,341)
Miscellaneous, net................        --         433         (1,782)          1,349             --
Dividend income...................     4,156      33,608          1,321         (39,085)            --
                                    --------    --------       --------       ---------       --------
Income (loss) before income
  taxes...........................   (38,721)     59,731          9,388         (36,888)        (6,490)
Income taxes......................        --       5,669         (3,862)           (180)         1,627
                                    --------    --------       --------       ---------       --------
     Net income (loss)............  $(38,721)   $ 65,400       $  5,526       $ (37,068)      $ (4,863)
                                    ========    ========       ========       =========       ========
</Table>

                                        55
<PAGE>
                       KNOWLES ELECTRONICS HOLDINGS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

<Table>
<Caption>
                                                        YEAR ENDED DECEMBER 31, 2002
                                    --------------------------------------------------------------------
                                     PARENT    GUARANTORS   NON-GUARANTORS   ELIMINATIONS   CONSOLIDATED
                                    --------   ----------   --------------   ------------   ------------
<S>                                 <C>        <C>          <C>              <C>            <C>
Net cash provided by (used in)
  operating activities............  $(30,495)   $ 64,956       $  7,285        $(12,280)      $ 29,466
Proceeds from sales of property...        --          --          3,560              --          3,560
Equity contributions into
  subsidiaries....................        --      (2,690)            --           2,690             --
Purchases of property, plant and
  equipment, net..................        --      (4,345)        (4,082)             --         (8,427)
                                    --------    --------       --------        --------       --------
Net cash used in investing
  activities......................        --      (7,035)          (522)          2,690         (4,867)
Debt payments -- long term........   (10,541)         --             --              --        (10,541)
Debt proceeds -- long term........    10,000          --             55              --         10,055
Debt proceeds (payments) -- short
  term, net.......................    (2,000)                         4                         (1,996)
Common stock transactions.........      (400)         --             --              --           (400)
Intercompany loans................    43,726     (44,721)           995              --             --
Costs associated with debt........      (681)         --             --              --           (681)
Intercompany dividends............        --      (5,651)        (6,629)         12,280             --
Equity contributions into
  subsidiaries....................        --          --          2,690          (2,690)            --
                                    --------    --------       --------        --------       --------
Net cash provided by (used in)
  financing activities............    40,104     (50,372)        (2,885)          9,590         (3,563)
Effect of exchange rate changes on
  cash............................        --          --            600                            600
                                    --------    --------       --------        --------       --------
Net increase in cash and cash
  equivalents.....................     9,609       7,572          4,455              --         21,636
Cash and cash equivalents at
  beginning of period.............         5          32          2,409              --          2,446
                                    --------    --------       --------        --------       --------
Cash and cash equivalents at
  end of period...................  $  9,614    $  7,581       $  6,887        $     --       $ 24,082
                                    ========    ========       ========        ========       ========
</Table>

                                        56
<PAGE>
                       KNOWLES ELECTRONICS HOLDINGS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

<Table>
<Caption>
                                                        YEAR ENDED DECEMBER 31, 2001
                                    --------------------------------------------------------------------
                                     PARENT    GUARANTORS   NON-GUARANTORS   ELIMINATIONS   CONSOLIDATED
                                    --------   ----------   --------------   ------------   ------------
<S>                                 <C>        <C>          <C>              <C>            <C>
Net cash provided by (used in)
  operating activities............  $(35,113)   $ 69,195       $ 5,222         $(29,856)      $  9,448
                                    --------    --------       -------         --------       --------
Proceeds from sales of property...        --         182         3,480               --          3,662
Equity contributions into
  subsidiaries....................        --      (8,002)           --            8,002             --
Purchases of property, plant and
  equipment, net..................        --     (13,674)       (7,602)              --        (21,276)
                                    --------    --------       -------         --------       --------
Net cash used in investing
  activities......................        --     (21,494)       (4,122)           8,002        (17,614)
Debt proceeds (payments)..........    (7,375)         --         2,034               --         (5,341)
Common stock transactions.........      (175)         --            --               --           (175)
Intercompany loans................    36,228     (35,588)         (640)              --             --
Costs associated with debt........      (636)         --            --               --           (636)
Dividends paid....................        --     (14,928)      (14,928)          29,856             --
Equity contributions into
  subsidiaries....................        --          --         8,002           (8,002)            --
                                    --------    --------       -------         --------       --------
Net cash provided by (used in)
  financing activities............    28,042     (50,516)       (5,532)          21,854         (6,152)
Effect of exchange rate changes on
  cash............................        --          --          (312)              --           (312)
                                    --------    --------       -------         --------       --------
Net increase (decrease) in cash
  and cash equivalents............    (7,071)     (2,815)       (4,744)              --        (14,630)
Cash and cash equivalents at
  beginning of period.............     7,076       2,847         7,153               --         17,076
                                    --------    --------       -------         --------       --------
Cash and cash equivalents at end
  of period.......................  $      5    $     32       $ 2,409         $     --       $  2,446
                                    ========    ========       =======         ========       ========
</Table>

                                        57
<PAGE>
                       KNOWLES ELECTRONICS HOLDINGS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

<Table>
<Caption>
                                                        YEAR ENDED DECEMBER 31, 2000
                                    --------------------------------------------------------------------
                                     PARENT    GUARANTORS   NON-GUARANTORS   ELIMINATIONS   CONSOLIDATED
                                    --------   ----------   --------------   ------------   ------------
<S>                                 <C>        <C>          <C>              <C>            <C>
Net cash provided by (used in)
  operating activities............  $(28,229)   $ 55,580       $ 34,569        $(39,085)      $ 22,835
                                    --------    --------       --------        --------       --------
Investments in subsidiaries.......        --      (3,300)            --           3,300             --
Purchases of property, plant and
  equipment, net..................        --      (5,886)        (9,602)             --        (15,488)
                                    --------    --------       --------        --------       --------
Net cash used in investing
  activities......................        --      (9,186)        (9,602)          3,300        (15,488)
Issuance of preferred stock and
  common stock....................       750          --             --              --            750
Costs associated with equity
  transaction.....................    (1,195)         --             --              --         (1,195)
Debt proceeds (payments)..........    (1,625)         --           (213)             --         (1,838)
Intercompany loans................    41,028     (41,099)            71              --             --
Price adjustment on previously
  purchased treasury stock........    (8,316)         --             --              --         (8,316)
Payment of accrued deferred
  finance fees....................    (1,161)         --             --              --         (1,161)
Repurchase of common stock........      (400)         --             --              --           (400)
Equity contributions into
  subsidiaries....................        --          --          3,300          (3,300)            --
Dividends paid....................        --     (12,727)       (26,358)         39,085             --
                                    --------    --------       --------        --------       --------
Net cash used in financing
  activities......................    29,081     (53,826)       (23,200)         35,785        (12,160)
Effect of exchange rate changes on
  cash............................        --          --         (1,909)             --         (1,909)
                                    --------    --------       --------        --------       --------
Net increase (decrease) in cash
  and cash equivalents............       852      (7,432)          (142)             --         (6,722)
Cash and cash equivalents at
  beginning of period.............     6,224      10,279          7,295              --         23,798
                                    --------    --------       --------        --------       --------
Cash and cash equivalents at end
  of period.......................  $  7,076    $  2,847       $  7,153        $     --       $ 17,076
                                    ========    ========       ========        ========       ========
</Table>

5.  OPERATING LEASES

     The Company leases various manufacturing facilities and office space. Lease
terms are generally from two to five years. Future minimum payments under
operating leases with initial terms of one year or more are as follows:

<Table>
<Caption>

<S>                                                           <C>
2003........................................................  $1,157
2004........................................................   1,006
2005........................................................     371
2006........................................................     183
2007........................................................     166
Thereafter..................................................   1,551
                                                              ------
                                                              $4,434
                                                              ======
</Table>

     Rent expense was $1,863, $2,210 and $2,846 for the years ended December 31,
2002, 2001, and 2000, respectively.

                                        58
<PAGE>
                       KNOWLES ELECTRONICS HOLDINGS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

6.  RETIREMENT PLANS

     The Company has a defined-benefit plan covering approximately 90% of its
U.S. employees. The Plan was amended effective January 1, 2002 to change the
calculation of benefits for employees hired after May 1, 2002 to a cash balance
benefit where the employee's account is credited each year with a percentage of
their salary based on their age and years of service. Additionally, any prior
year accumulated benefit balance is credited with interest based on the ten year
U.S. Treasury Notes rate. The pension benefit for employees age forty or older
continues to be calculated under the previous method generally based on salary
and years of service. Employees under age forty have their benefit under the
previous method frozen as of December 31, 2001 and start accruing a benefit
under the cash balance formula starting January 1, 2002. The Company's funding
of the plan is equal to the minimum contribution required by ERISA. The
following summarizes the activity related to the Company's domestic plan:

<Table>
<Caption>
                                                               2002      2001
                                                              -------   -------
<S>                                                           <C>       <C>
Change in benefit obligation:
  Benefit obligation at beginning of year...................  $56,935   $53,591
  Service cost..............................................    1,738     1,774
  Interest cost.............................................    4,052     3,828
  Plan amendment............................................     (103)      102
  Actuarial loss............................................    5,225       383
  Benefits paid.............................................   (2,624)   (2,743)
                                                              -------   -------
  Benefit obligation at end of year.........................   65,223    56,935
Change in plan assets:
  Fair value of plan assets at beginning of year............   53,176    60,302
  Adjustment to fair asset value disclosed..................       (4)       --
  Actual return on plan assets..............................   (6,388)   (4,383)
  Benefits paid.............................................   (2,624)   (2,743)
                                                              -------   -------
  Fair value of plan assets at end of year..................   44,160    53,176
                                                              -------   -------
Funded status...............................................  (21,063)   (3,759)
  Unrecognized actuarial (gain) loss........................   13,069    (3,590)
  Unrecognized prior service cost...........................      505       720
                                                              -------   -------
  Accrued pension cost before additional minimum
     liability..............................................   (7,489)   (6,629)
  Additional minimum liability..............................   (2,387)       --
                                                              -------   -------
  Accrued pension cost after additional minimum liability...  $(9,876)  $(6,629)
                                                              =======   =======
Additional minimum liability
  Intangible asset..........................................  $   504   $    --
  Reduction in equity included in other comprehensive
     income.................................................    1,883        --
                                                              -------   -------
  Additional minimum liability..............................  $ 2,387   $    --
                                                              =======   =======
Amounts recognized in the statement of financial position
  consist of accrued benefit liability......................  $(9,876)  $(6,629)
                                                              =======   =======
</Table>

                                        59
<PAGE>
                       KNOWLES ELECTRONICS HOLDINGS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

<Table>
<Caption>
                                                           2002      2001      2000
                                                          -------   -------   -------
<S>                                                       <C>       <C>       <C>
Weighted-average assumption as of December 31:
Discount rate...........................................     6.60%     7.25%     7.25%
Expected return on plan assets..........................     8.00%     8.00%     8.00%
Rate of compensation increase...........................     4.90%     5.20%     5.20%
Components of net periodic benefit cost:
Service cost............................................  $ 1,738   $ 1,774   $ 2,110
Interest cost...........................................    4,052     3,828     3,700
Expected return on plan assets..........................   (4,729)   (4,668)   (4,403)
Amortization of prior service cost......................      111       229       333
Amortization of transitional asset......................       --        --      (132)
Recognized actuarial gain...............................     (312)     (491)     (677)
                                                          -------   -------   -------
Net periodic benefit cost...............................  $   860   $   672   $   931
                                                          =======   =======   =======
</Table>

     The Company also has defined-benefit plans covering certain of its foreign
employees. The accrued pension liability related to these plans was $2,465 and
$1,954 at December 31, 2002 and 2001, respectively. The Company sold its Ruf
operations, including its pension liability, in November 2002. The Ruf
operations had an accrued pension liability of $1,238 at December 31, 2001.
Deferred pension assets related to these plans were $319 and $177 at December
31, 2002 and 2001, respectively. The Company recorded a minimum liability
related to the plan in the United Kingdom of $1,854 and $0 at December 31, 2002
and 2001. The net periodic benefit cost related to these plans was $385, $344
and $1,355 for the years ended December 31, 2002, 2001, and 2000, respectively.

     The Company has a defined-contribution plan covering substantially all of
its U.S. employees. The plan has funding provisions which, in certain
situations, require Company contributions based upon a formula relating to
employee gross wages, participant contributions, or hours worked. The plan also
allows for additional discretionary Company contributions based upon
profitability. The contributions made by the Company to the plan for 2002, 2001,
and 2000 were $639, $731 and $481, respectively.

7.  STOCK OPTIONS

     The Company implemented the 2001 Stock Option Plan (Option Plan) during
2001, and authorized 375,000 options. Eligibility for the Option Plan is
recommended by the Chief Executive Officer and approved by the Board of
Directors. Options are for shares of Class A Common Stock and are exercisable
only from and after an initial public offering (IPO) at a price per share equal
to eighty percent of the price per share which the underwriters pay for the
stock in connection with an initial public offering. Options are exercisable for
fifty percent (50%) of the shares on the second anniversary of the grant, and
for one hundred percent (100%) of the shares after the third anniversary of the
grant. Options expire ten years from the date of the grant. The options that had
been granted and were outstanding were 337,689 and 316,733 as of December 31,
2002 and 2001 respectively. During 2002, 25,350 options were cancelled and
46,306 options were granted. The Company will record a charge for the difference
between the exercise price and the IPO price of these options upon the
completion of the IPO.

8.  SEGMENTS AND GEOGRAPHICAL INFORMATION

     The Company's continuing business consists of three operating segments:
hearing aid components, acoustic and infrared technology, and automotive
components. These three operating segments were determined based on the
applications and markets for the Company's products.

                                        60
<PAGE>
                       KNOWLES ELECTRONICS HOLDINGS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The hearing aid components operating segment utilizes the Company's
acoustic technologies to design, manufacture, and market components for hearing
aids. The acoustic and infrared technology operating segment utilizes the
Company's acoustic and infrared technologies to design, manufacture, and market
products for high growth markets, including voice recognition, and computer
telephony integration. The automotive component operating segment designs,
manufactures, and markets diesel engine solenoids, electronic governors, and
position sensors primarily for use in automobiles and trucks.

     The Company uses the following financial information presented below to
assess performance and make resource allocation decisions:

<Table>
<Caption>
                                                       ACOUSTIC AND
                                         HEARING AID     INFRARED     AUTOMOTIVE
                                         COMPONENTS     TECHNOLOGY    COMPONENTS    TOTAL
                                         -----------   ------------   ----------   --------
<S>                                      <C>           <C>            <C>          <C>
2002
  Revenues from external customers.....   $132,578       $35,812       $47,715     $216,105
  Operating income (loss)..............     48,223        (2,393)        4,867       50,697(1)
2001
  Revenues from external customers.....   $138,925       $33,934       $50,862     $223,721
  Operating income (loss)..............     55,492        (2,839)        4,974       57,627
2000
  Revenues from external customers.....   $140,832       $35,576       $61,715     $238,123
  Operating income (loss)..............     45,652         2,896          (543)      48,005
</Table>

---------------

(1) A reconciliation of segment operating income and assets to the Company's
    consolidated totals follows below.

     The hearing aid components operating segment and the acoustic and infrared
technology operating segment utilize the same assets. The total assets of the
hearing aid components operating segment and the acoustic and infrared
technology operating segment as of December 31, 2002, 2001, and 2000 were
$134,396, $137,699 and $142,289, respectively. Depreciation expense associated
with these assets was $6,938, $8,244 and $8,219 for the years ended December 31,
2002, 2001, and 2000, respectively. Total capital expenditures for the hearing
aid components operating segment and the acoustic and infrared technology
operating segment were $6,497, $18,200 and $10,251 for the years ended December
31, 2002, 2001, and 2000, respectively. Due to the joint use of assets between
the hearing aid components operating segment and the acoustic and infrared
technology operating segment, allocations of various costs and expenses between
these two segments are made based on their respective revenues.

     The total assets of the automotive components business unit were $12,794,
$31,757 and $32,815 as of December 31, 2002, 2001, and 2000, respectively.
Depreciation expense associated with these assets was $1,405, $2,656 and $3,095
for the years ended December 31, 2002, 2001, and 2000, respectively. The assets
of the Automotive Components segment were reduced by the sale of the Ruf
business in November 2002. The total capital expenditures for the automotive
component business unit were $1,930, $3,076 and $5,900 for the years ended
December 31, 2002, 2001, and 2000.

     In 2002, the Company finalized the restructuring of its worldwide
manufacturing operations and recorded restructuring expenses of $2,158, which
affected the operating segments as follows: hearing aid components $740,
acoustic and infrared technology $1,471, automotive components $94, with the
remaining amount of ($147) impacting corporate. The charge for acoustic and
infrared technology includes a loss on the sale of the Taiwan facility of
$1,170. The Company also recorded a $16,736 loss on the sale of its Ruf
operations. For the ten months ended October 2002, Ruf had sales of $14,183 and
an operating loss of $1,310.

                                        61
<PAGE>
                       KNOWLES ELECTRONICS HOLDINGS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     In 2001, the Company continued with restructuring of its worldwide
manufacturing operations and recorded restructuring expenses of $317, which
affected the operating segments as follows: hearing aid components ($3,292),
acoustic and infrared technology $357, automotive components $1,032, with the
remaining amount of $2,220 impacting corporate. The charge for hearing aid
components includes a gain on the sale of UK facility of $3,046.

     In 2000, the Company announced a restructure of its worldwide manufacturing
operations and recorded restructuring expenses of $18,440, which affected the
operating segments as follows: hearing aid components $8,498, acoustic and
infrared technology $116, automotive components $5,988 with the remaining amount
of $3,838 impacting corporate.

     The following is a reconciliation of segment operating income and assets to
the Company's consolidated totals:

<Table>
<Caption>
                                                          YEAR ENDED DECEMBER 31,
                                                       ------------------------------
                                                         2002       2001       2000
                                                       --------   --------   --------
<S>                                                    <C>        <C>        <C>
Profit or Loss
  Total operating income for reportable segments.....  $ 50,697   $ 57,627   $ 48,005
  Unallocated amount -- corporate overhead...........   (12,697)   (12,744)    (8,275)
  Loss on sale of business...........................   (16,736)        --         --
  Corporate restructuring............................       147     (2,220)    (3,838)
                                                       --------   --------   --------
  Total consolidated operating income................    21,411     42,663     35,892
  Other expense......................................   (33,997)   (37,610)   (42,382)
                                                       --------   --------   --------
  Income (loss) before income taxes..................  $(12,586)  $  5,053   $ (6,490)
                                                       ========   ========   ========
Assets
  Total assets for reportable segments...............  $147,190   $169,456   $175,104
  Unallocated corporate assets.......................    14,454      8,426     16,653
                                                       --------   --------   --------
  Total consolidated assets..........................  $161,644   $177,882   $191,757
                                                       ========   ========   ========
Geographic Information
Revenues (based on invoicing location):
  United States......................................  $109,607   $135,352   $136,946
  Germany............................................    13,906     17,856     23,504
  United Kingdom.....................................    56,909     40,706     34,937
  Other geographic areas.............................    35,683     29,807     42,736
                                                       --------   --------   --------
                                                       $216,105   $223,721   $238,123
                                                       ========   ========   ========
Long Lived Assets
  United States......................................  $ 23,281   $ 32,028   $ 29,849
  Germany............................................        --      2,126      3,399
  Malaysia...........................................    10,650      7,500      8,162
  Taiwan.............................................     1,639      6,289      6,713
  Hungary............................................        --      8,830      6,466
  Other geographic areas.............................    13,229     11,959      9,800
                                                       --------   --------   --------
                                                       $ 48,799   $ 68,732   $ 64,389
                                                       ========   ========   ========
</Table>

                                        62
<PAGE>
                       KNOWLES ELECTRONICS HOLDINGS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

MAJOR CUSTOMERS

     The Company is dependent on sales of products to a small number of large
customers. The Company's top ten customers accounted for approximately 61%, 59%
and 57%, of consolidated sales in 2002, 2001, and 2000 respectively. Revenues
from one customer accounted for approximately 15%, 12% and 15% of consolidated
revenues and 14% and 7% of consolidated accounts receivable in 2002 and 2001
respectively.

9.  RESTRUCTURING EXPENSES

     The Company announced a major restructuring in March 2000 under which the
Company consolidated its worldwide manufacturing operations by ending production
at five manufacturing facilities and either outsourced component production or
moved final assembly to lower cost locations in Malaysia, China and Hungary. The
following table presents the restructure costs and payments for 2000, 2001 and
2002.

<Table>
<Caption>
                                                                                 ACCRUED
                                                              RESTRUCTURING   RESTRUCTURING
                                                                EXPENSES          COSTS
                                                              -------------   -------------
<S>                                                           <C>             <C>
2000 Activity
  Employee severance and outplacement.......................     $20,665         $20,665
  Pension curtailment.......................................      (2,225)             --
  Employee severance and outplacement payments..............          --          (7,779)
                                                                 -------         -------
     Balance December 31, 2000..............................     $18,440         $12,886
                                                                 =======         =======
2001 Activity
  Employee severance and outplacement.......................       1,628           1,628
  Employee outplacement costs...............................         876              --
  Gain on sale of United Kingdom facility...................      (3,046)             --
  Facility closure costs, loss on disposal of assets and
     other..................................................         859              --
  Employee severance and outplacement payments..............          --          (9,891)
  Foreign currency translation..............................          --            (426)
                                                                 -------         -------
     Balance December 31, 2001..............................     $   317         $ 4,197
                                                                 =======         =======
2002 Activity
  Employee severance and outplacement.......................         613             613
  Disposal of assets and other..............................         375              --
  Loss on sale of Taiwan facility...........................       1,170              --
  Employee severance and outplacement payments..............          --          (3,616)
  Foreign currency translation..............................          --              40
                                                                 -------         -------
     Balance December 31, 2002..............................     $ 2,158         $ 1,234
                                                                 =======         =======
</Table>

     Of the total positions that were planned to be eliminated in the
restructuring, 678, 976 and 1,072 had cumulatively been eliminated as of
December 31, 2000, 2001 and 2002 respectively. The majority of the remaining
liability balance is expected to be paid out in 2003.

     At the five facilities where production was eliminated, the number of
positions eliminated at each facility and the final production date at each
facility are as follows: (1) Burgess Hill, United Kingdom; 133 positions; June
2000, (2) Itasca, Illinois; 262 positions; September 2000, (3) Taipei, Taiwan;
220 positions; March 2001, (4) Rolling Meadows, Illinois; 16 positions; March
2001, (5) Hohenkirchen, Germany; 180 positions; September 2001.

                                        63
<PAGE>
                       KNOWLES ELECTRONICS HOLDINGS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

10.  DISPOSAL OF LONG LIVED ASSETS

     In November 2002 the Company sold its Ruf Electronics operations, which
were part of the Automotive Components segment, and recorded a loss of $16,736,
which was included in the Corporate segment. The loss includes $1,186 of
accumulated other comprehensive income relating to foreign currency translation.
The proceeds from the sale were not material. The Company may receive additional
payment amounts in 2003, 2004 and 2005 if the Ruf operations meet certain
financial targets.

     In December 2002, the Company sold its Taiwan facility as part of the
restructuring plan announced in March 2000 and recorded a loss of $1,170 which
is included in Restructuring Expenses in the Statement of Operations in the
Acoustic and Infrared segment. Proceeds from the sale were $3,560.

                                        64
<PAGE>

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

     None.

                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS

     Pursuant to Knowles' by-laws, each of its directors is designated as a
"Class A director" or a "Class B director." Each Class A director is entitled to
four votes and each Class B director is entitled to one vote. Knowles currently
has four directors, two of whom are with Doughty Hanson (Kenneth Terry and Kevin
Luzak). Set forth below is certain information with respect to our directors and
officers.

<Table>
<Caption>
NAME                       AGE                        POSITION
----                       ---                        --------
<S>                        <C>   <C>
Kenneth John Terry.......  38    Class A Director, Chairman of the Board
Kevin Luzak..............  39    Class A Director
James E. Knowles.........  72    Class B Director
John J. Zei..............  58    President and Chief Executive Officer, Class B
                                 Director
James H. Moyle...........  50    Vice President and Chief Financial Officer
Patrick W. Cavanagh......  50    Vice President and General Manager Automotive
                                 Components
Peter H. Stevens, Jr.....  52    Vice President and General Manager Emkay
Stephen D. Petersen......  44    Vice President Finance and Secretary
</Table>

     Kenneth John Terry is a principal with Doughty Hanson & Co. Limited. Mr.
Terry currently serves on the Board of Directors of Dunlop Standard Aerospace
Group Limited, Ilford Imaging Limited, Impress Group B.V., RHM Limited, LM Group
Holdings A/S. He is a graduate of University of Leeds.

     Kevin Luzak is a corporate director of Doughty Hanson & Co., Inc. Prior to
his current position, he served in various positions at Salomon Brothers Inc
from 1991 to 1998. Mr. Luzak currently serves on the Board of Directors of
Dunlop Standard Aerospace Group Limited, North American Membership Group, Inc.,
and Coastal Lumber Company, Inc.

     James E. Knowles is president of The Financial Corporation of Illinois.
Prior to his current position, Mr. Knowles served as a Director of Knowles from
1987 to 1996. He served as Chairman of the Compensation Committee and the Audit
Committee of Knowles from 1990 to 1996. Mr. Knowles also served as President of
Synergistic International Ltd. from 1969 to 1996. Mr. Knowles holds a bachelor
of science and a Master of Business Administration degree from Stanford
University.

     John J. Zei joined Knowles in January, 2000 as President and Chief
Operating Officer. He was elected a Class B Director in March, 2000 and
President and Chief Executive Officer as of April, 2000. Mr. Zei was with
Siemens Hearing Instrument Corporation from 1987 to 1999 and served as President
and Chief Executive Officer from 1990 through 1999. Prior to Siemens, John was
with Beltone Electronics from 1976 to 1987. Mr. Zei is a graduate of Loyola
University, Loyola University School of Law and the University of Chicago.

     James H. Moyle joined Knowles in July of 2002 as Vice President & Chief
Financial Officer. Prior to joining Knowles, he was Senior Vice President &
Chief Financial Officer of Contech Construction Products, the nation's leading
supplier of civil engineering site solutions. He is a graduate of Bethany
College and the University of Pennsylvania.

     Patrick W. Cavanagh has managed SSPI since 1992 and Automotive Components
since its inception in 1996. From 1978 to 1992, prior to joining Knowles, he
held various domestic and international management positions at the Barber
Colman Company. He is a graduate of the Milwaukee School of Engineering.

                                        65
<PAGE>

     Peter H. Stevens, Jr. joined Knowles in January, 2001 as Vice President,
General Manager of the EMKAY division and in 2002 became Vice President, General
Manager of the KE division. Prior to joining Knowles, he was Senior Vice
President, Western Region General Manager of Distribution Dynamics, an
integrated supply chain management company to the manufacturing industry. From
1990 to 1998, he served as Vice President General Manager of the U.S. operations
for Hirose Electric of Japan, a global manufacturer of electronic and fiber
optic connectors. He is a graduate of the University of California, Santa
Barbara and the University of California, Irvine.

     Stephen D. Petersen joined Knowles in 1980 and served in various accounting
positions including Assistant Treasurer and Vice President -- Controller of KE.
He was promoted to Vice President Finance in September 1999. Mr. Petersen is a
graduate of Augustana College, holds a Master of Management degree from
Northwestern University, and is a certified public accountant.

ITEM 11.  EXECUTIVE COMPENSATION

SUMMARY COMPENSATION TABLE

     The following table provides information concerning the compensation we
paid to our senior officers for 2002, 2001 and 2000:

<Table>
<Caption>
                                                                            LONG-TERM
                                                                           COMPENSATION
                                              ANNUAL COMPENSATION          ------------
                                       ---------------------------------    SECURITIES
                                                            OTHER ANNUAL    UNDERLYING       ALL OTHER
NAME AND PRINCIPAL POSITION     YEAR    SALARY    BONUS     COMPENSATION   OPTIONS/SARS   COMPENSATION(3)
---------------------------     ----   --------  --------   ------------   ------------   ---------------
<S>                             <C>    <C>       <C>        <C>            <C>            <C>
Reg G. Garratt................  2002   $414,050  $     --          --            --          $428,199
  Chairman(1)                   2001    414,050    50,000          --            --             8,721
                                2000    414,050   104,341          --            --             4,113
John J. Zei...................  2002    430,533   300,000          --            --           282,480
  President and Chief           2001    417,194   125,000          --            --             6,058
  Executive Officer             2000    374,815   413,673          --            --           117,711
Louis T. Morabito.............  2002    161,720        --          --            --             6,904
  Vice President Manufacturing  2001    158,850    50,000          --            --             5,830
                                2000    149,534    42,157          --            --             3,160
Patrick W. Cavanagh...........  2002    191,776        --          --            --             5,739
  Vice President & General      2001    175,891    71,759     $10,500(5)         --             7,820
  Manager Automotive            2000    160,333   151,109          --            --             3,683
  Components
Peter H. Stevens Jr. .........  2002    186,354   100,000          --            --             6,577
  Vice President & General      2001    191,783    26,777          --            --           131,754
  Manager KE(2)                 2000         --        --          --            --                --
James F. Brace(4).............  2002    200,706        --          --            --           209,642
  Executive Vice President      2001    249,784    85,000          --            --             6,198
  and Chief Financial Officer   2000    219,235   184,835          --            --             4,750
</Table>

---------------

(1) Reg Garratt resigned as Chairman effective December 31, 2002.

(2) Peter H. Stevens, Jr. joined Knowles January 29, 2001.

(3) The following chart is a breakdown of the payments made to the executive
    officers under the heading "All Other Compensation". The Company also made
    contributions to the Knowles Electronics, LLC. Employee Retirement Savings
    401(k) Plan on behalf of the executive officers and paid life insurance
    premiums on behalf of the executive officers in the amounts set fourth in
    the chart.

(4) James F. Brace resigned effective September 1, 2002.

(5) Reimbursement for executive medical.

                                        66
<PAGE>

<Table>
<Caption>
                                                                    KNOWLES        LIFE
                                                      SPECIAL     401(K) PLAN    INSURANCE    MOVING    SEVERANCE
EXECUTIVE                                      YEAR    BONUS     CONTRIBUTIONS   PREMIUMS    EXPENSES   BENEFITS
---------                                      ----   --------   -------------   ---------   --------   ---------
<S>                                            <C>    <C>        <C>             <C>         <C>        <C>
Reg G. Garratt...............................  2002   $     --      $4,778        $1,038     $     --   $422,383
  Chairman                                     2001         --       5,100         3,621           --         --
                                               2000         --       1,700         2,413           --         --
John J. Zei..................................  2002    275,000       5,500         1,980           --         --
  President and Chief Executive                2001         --       5,250           808           --         --
  Officer                                      2000         --       3,400         1,703      112,608         --
Louis T. Morabito............................  2002         --       4,582         2,322           --         --
  Vice President Manufacturing                 2001         --       5,250           580           --         --
                                               2000         --       2,902           258           --         --
Patrick W. Cavanagh..........................  2002         --       4,144         1,595           --         --
  Vice President & General                     2001         --       5,100         2,720           --         --
  Manager Automotive                           2000         --       2,625         1,058           --         --
  Components
Peter H. Stevens Jr..........................  2002         --       5,335         1,242           --         --
  Vice President & General                     2001         --       1,730           295      129,729         --
  Manager KE(1)                                2000         --          --            --           --         --
James F. Brace...............................  2002         --       5,500            --           --    204,142
  Executive Vice President                     2001         --       5,250           948           --         --
  and Chief Financial Officer                  2000         --       3,909           841           --         --
</Table>

PENSION PLAN

     The following table provides information concerning the estimated annual
pension benefit we pay to employees of KE and SSPI on their retirement, based
upon their years of service and their average monthly earnings prior to their
retirement (as described below).

<Table>
<Caption>
                                                      YEARS OF SERVICE
                                       -----------------------------------------------
REMUNERATION                             15        20        25        30        35
------------                           -------   -------   -------   -------   -------
<S>                                    <C>       <C>       <C>       <C>       <C>
$125,000.............................  $34,000   $45,000   $56,000   $56,000   $56,000
 150,000.............................   41,000    55,000    69,000    69,000    69,000
 175,000.............................   48,000    64,000    80,000    80,000    80,000
 200,000.............................   48,000    64,000    80,000    80,000    80,000
 225,000.............................   48,000    64,000    80,000    80,000    80,000
 250,000.............................   48,000    64,000    80,000    80,000    80,000
 275,000.............................   48,000    64,000    80,000    80,000    80,000
 300,000.............................   48,000    64,000    80,000    80,000    80,000
 325,000.............................   48,000    64,000    80,000    80,000    80,000
 350,000.............................   48,000    64,000    80,000    80,000    80,000
 400,000.............................   48,000    64,000    80,000    80,000    80,000
 450,000.............................   48,000    64,000    80,000    80,000    80,000
 500,000.............................   48,000    64,000    80,000    80,000    80,000
</Table>

     Our pension plan, which became effective on July 1, 1963, is a
non-contributory defined benefit plan covering employees of the KE business unit
and SSPI. As of December 31, 2001, Reg G. Garratt, John Zei, Louis Morabito,
Patrick W. Cavanagh, and Peter H. Stevens, Jr. have 25, 3, 6, 10 and 2 credited
years of service, respectively. Under the plan, a participant who terminates
employment with a vested benefit, and either immediately or at a later date
attains his or her early or normal retirement age is entitled to receive a
monthly pension benefit commencing on his or her normal or deferred retirement
date., which may be an early retirement date. Normal retirement is at age 65.
However, early retirement may commence any first of the month following
attainment of age 55, but benefits are actuarially reduced for early retirement.
The Plan was amended effective January 1, 2002 to change the calculation of
benefits for employees hired after May 1, 2002

                                        67
<PAGE>

to a cash balance benefit where the employee's account is credited each year
with a percentage of their salary based on their age and years of service.
Additionally, any prior year accumulated benefit balance is credited with
interest based on the ten year U.S. Treasury Notes. The pension benefit for
employees age forty or older would continue to be calculated under the previous
method generally based on salary and years of service. Employees under age forty
would have their benefit under the previous method frozen as of December 31,
2001 and start accruing a benefit under the cash balance formula starting
January 1, 2002. The retirement benefit for the executives listed would be
calculated using the previous calculation. The previous retirement benefit
payable under the plan is equal to 2% of a participant's average monthly covered
compensation during the five consecutive years during which such participant
received his or her highest earnings within the ten year period ending on the
date of termination, multiplied by credited service up to a maximum of
twenty-five years, reduced by the participant's Social Security offset
allowance. Under the plan, the Social Security offset allowance is equal to the
product of 0.65% multiplied by (i) the participant's years of credited service
up to a maximum of twenty-five years and (ii) the lessor of: (A) the
participant's average monthly earnings over the three years prior to termination
or (B) 1/12th of the average of the Social Security taxable wage base for the 35
year period ending with the last day of the calendar year in which the
participant attains Social Security retirement age.

EMPLOYMENT AGREEMENTS AND CHANGE IN CONTROL SEVERANCE PAY PLAN

     On April 7, 1992, we entered into an employment agreement with Reg G.
Garratt. The agreement, which was amended and restated on March 15, 1998 and
amended verbally with Doughty Hanson prior to the closing of the
Recapitalization, provides for Mr. Garratt's employment as the chairman and
chief executive officer of Knowles until a replacement chief executive officer
is appointed. Mr. Garratt resigned effective December 31, 2002 and was paid the
remainder of his contract through December 31, 2003. During the term of his
employment and for two years thereafter, Mr. Garratt is restricted from
competing with Knowles or any of its subsidiaries and soliciting employees,
distributors and customers of Knowles or any of its subsidiaries. The employment
agreement also restricts Mr. Garratt from disclosing any confidential or
proprietary information relating to Knowles or any of its subsidiaries.

     Effective January 3, 2000, John Zei became the President and Chief
Operating Officer of Knowles, with an annual salary of $325,000, a signing bonus
of $25,000 payable on the date Mr. Zei commenced his employment with Knowles,
and eligibility to participate in certain bonus plans generally available for
senior management employees. Mr. Zei succeeded Mr. Garratt as Chief Executive
Officer of Knowles on April 1, 2000.

     In connection with the commencement of his employment, Knowles has agreed
to loan Mr. Zei $300,000 to purchase Knowles' common stock at fair market value,
and Mr. Zei has purchased an additional $200,000 worth of common stock at fair
market value with his own funds. The stock is subject to Stockholders' and
Registration Rights Agreements described under the heading "Related Party
Transactions." As of December 31, 2002, the Company deemed the note satisfied in
its entirety. Mr. Zei received a special bonus related to interest on the note
and income taxes of $275,000.

     Mr. Brace resigned effective September 1, 2002 and will receive his base
salary and benefit continuation through May 31, 2003. The Company repurchased
$200,000 of common stock for the price paid and exchanged the Note Receivable
for the $125,000 of common stock purchased with a loan.

     Effective January, 2001, Peter H. Stevens, Jr. became the Vice President
and General Manager -- Emkay, with an annual salary of $210,000 and eligibility
to participate in certain bonus plans generally available for senior management
of Knowles. Effective September 15, 2002, Mr. Stevens became Vice President and
General Manager -- KE.

     In connection with his employment, Mr. Stevens is eligible to receive
Common Stock in the amount of $200,000, of which $100,000 will be available as
part of his 2001 year-end incentive and the remaining $100,000 as part of the
his 2002 year-end incentive calculation.

                                        68
<PAGE>

     In July of 2002, James H. Moyle joined the Company as Vice President and
Chief Financial Officer with an annual salary of $265,000 and eligibility to
participate in certain bonus plans generally available for senior management
employees. The Company agreed to reimburse Mr. Moyle for certain relocation
expenses and in connection with his relocation provided a bridge loan of
$900,000 which was repaid within one week. Mr. Moyle is also eligible to receive
common stock of the Company of $200,000 and $150,000 as part of his incentive
for 2002 and 2003, respectively.

EXECUTIVE STOCK PURCHASE AGREEMENT

     In connection with the purchase of Class A Common Stock by members of
management, each executive purchasing stock entered into an Executive Stock
Purchase Agreement with Knowles and Key Acquisition, LLC. Among other things,
the Executive Stock Purchase Agreements (i.) define Vested Stock, the
Executive's Put Option, and the Company's Call Option, (ii.) provides for
restrictions on the executive from competing with Knowles or soliciting its
employees and (iii.) provides for severance benefits to the executive under
certain circumstances.

COMPENSATION OF DIRECTORS

     Following the Recapitalization, our directors no longer receive any fees or
other compensation for services rendered in their capacity as directors.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     Set forth below is certain information, as of February 28, 2003, concerning
(a) the beneficial ownership of our voting securities by entities and persons
who beneficially own more than 5% of our voting securities and (b) the ownership
of our securities by our executive officers and directors. The determinations of
"beneficial ownership" of voting securities are based upon Rule 13d-3 under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). This rule
provides that securities will be deemed to be "beneficially owned" where a
person has, either solely or in conjunction with others, (1) the power to vote
or to direct the voting of securities and/or the power to dispose or to direct
the disposition of, the securities or (2) the right to acquire any such power
within 60 days after the date such "beneficial ownership" is determined.

<Table>
<Caption>
                                                                 AMOUNT
                                                              BENEFICIALLY   PERCENT
NAME AND ADDRESS OF BENEFICIAL OWNER(1)                         OWNED(2)     OF CLASS
---------------------------------------                       ------------   --------
<S>                                                           <C>            <C>
Key Acquisition, L.L.C. ....................................    800,000        82.5%
  c/o Doughty Hanson & Co. Limited
  Times Place, 45 Pall Mall,
  London SW1Y 5JG, England
Doughty Hanson & Co. Limited(3).............................    800,000        82.5%
  Times Place, 45 Pall Mall,
  London SW1Y 5JG, England
</Table>

---------------

(1) After the Recapitalization, various members of the Knowles family and trusts
    for the benefit of members of the Knowles family hold in the aggregate
    100,000 shares of common stock, or 10.3% of currently outstanding shares of
    common stock. Such stockholders have the right to elect one of our directors
    pursuant to a stockholders' agreement with Key Acquisition, L.L.C. We have
    no reason to believe that various members of the Knowles family and trusts
    for the benefit of members of the Knowles family constitute a group, as that
    term is in Section 13(d)(3) of the Exchange Act.

(2) Class A Common Stock

(3) Consists only of shares of Knowles owned by Key Acquisition, L.L.C., the
    majority of whose membership interests are held by limited partnerships for
    which Doughty Hanson acts as general partner.

                                        69
<PAGE>

                 SECURITY OWNERSHIP OF DIRECTORS AND MANAGEMENT

<Table>
<Caption>
                                                                        AMOUNT
                                                                     BENEFICIALLY   PERCENT
NAME OF BENEFICIAL OWNER                          TITLE OF CLASS        OWNED       OF CLASS
------------------------                        ------------------   ------------   --------
<S>                                             <C>                  <C>            <C>
James E. Knowles..............................  Class A Common           9,947        1.0
                                                Series A Preferred       2,045        0.2
Kenneth John Terry............................  --                          --         --
Kevin Luzak...................................  --                          --         --
John J. Zei...................................  Class A Common          16,667        1.7
James H. Moyle................................  --                          --         --
Louis T. Morabito.............................  Class A Common           5,000        0.5
Patrick W. Cavanagh...........................  Class A Common          10,000        1.0
Peter H. Stevens Jr. .........................  Class A Common           3,333        0.3
Stephen D. Petersen...........................  Class A Common           3,333        0.3
Combined holdings of directors and executive
  officers as a group.........................  Class A Common          70,780        5.0
                                                Series A Preferred       2,045        0.2
</Table>

                      EQUITY COMPENSATION PLAN INFORMATION

     The Company implemented the 2001 Stock Option Plan (Option Plan) during
2001, and authorized 375,000 options. Eligibility for the Option Plan is
recommended by the Chief Executive Officer and approved by the Board of
Directors. Options are for shares of Class A Common Stock and are exercisable
only from and after an initial public offering (IPO) at a price per share equal
to eighty percent of the price per share which the underwriters pay for the
stock in connection with an initial public offering. Options are exercisable for
fifty percent (50%) of the shares on the second anniversary of the grant, and
for one hundred percent (100%) of the shares after the third anniversary of the
grant. Options expire ten years from the date of the grant.

<Table>
<Caption>
                                              NUMBER OF SECURITIES                           NUMBER OF
                                               TO BE ISSUED UPON                        SECURITIES REMAINING
                                                  EXERCISE OF        WEIGHTED AVERAGE   AVAILABLE FOR FUTURE
                                              OUTSTANDING OPTIONS     EXERCISE PRICE          ISSUANCE
                                              --------------------   ----------------   --------------------
<S>                                           <C>                    <C>                <C>
Equity compensation plans not approved by
  securities holders........................        337,689                 (a)                37,311
                                                    -------                ---                 ------
</Table>

---------------

(a) The weighted average exercise price is based on an IPO transaction and is
    not determinable.

                                        70
<PAGE>

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

DISTRIBUTION OF THE EQUIPMENT FINANCING BUSINESS

     On June 29, 1999, Knowles' equipment financing business (The Financial
Corporation of Illinois), including certain parcels of real estate, were
distributed to our preexisting stockholders, in redemption of 10% of the stock
owned by those stockholders. James E. Knowles, one of our directors, is a
stockholder of, and currently serves as the president of, The Financial
Corporation of Illinois.

SERVICE AND COMMISSION AGREEMENTS

     In connection with the Recapitalization, we entered into a Service
Agreement dated June 23, 1999 (the "Service Agreement") with Doughty Hanson &
Co. Managers Limited ("DHCM"), a subsidiary of Doughty Hanson & Co. Limited,
pursuant to which DHCM received a fee of $3,000,000 upon the successful
completion of the Recapitalization for financial advisory services related to
the Recapitalization. The Service Agreement made available the resources of DHCM
concerning a variety of financial and operational matters including advice and
assistance in negotiating the purchase of shares owned by the Knowles family.

     Also in connection with the Recapitalization, we entered into a Commission
Agreement dated June 23, 1999 (the "Commission Agreement") with DHCM pursuant to
which DHCM received a total aggregate commission of $2,000,000 upon the
successful completion of the Recapitalization for its services in arranging the
equity financing for the Recapitalization.

STOCKHOLDERS' AND REGISTRATION RIGHTS AGREEMENTS

     In connection with the Recapitalization, Knowles and the holders of its
common stock, including Key Acquisition and certain members of management,
entered into a stockholders' agreement dated as of June 30, 1999 (the
"Stockholders' Agreement") and a registration rights agreement dated as of June
30, 1999 (the "Registration Rights Agreement"). Among other things, the
Stockholders' Agreement and Registration Rights Agreement (i) impose certain
restrictions on the transfer of shares of common stock by such holders and (ii)
give such holders registration rights under certain circumstances. We will bear
the costs of preparing and filing any such registration statement and will
indemnify and hold harmless, to the extent customary and reasonable, holders
selling shares covered by such a registration statement. Directors and
executives of the company to date have purchased 69,167 shares of common stock
which are subject to the Stockholders' Agreement and Registration Rights
Agreement.

LOAN TO JOHN J. ZEI

     In connection with the commencement of his employment, Knowles agreed to
loan Mr. Zei $300,000 to purchase Knowles' common stock at fair market value. As
of December 31, 2002, the Company awarded Mr. Zei a bonus to retire the note and
to pay interest and taxes totaling $275,000. (see the description of these items
under "Employment Arrangements").

LOAN TO JAMES F. BRACE

     Knowles had loaned $50,000 to Mr. Brace, due on or before May 31, 2002,
which was repaid. Knowles had also loaned $125,000 to Mr. Brace to purchase
Knowles common stock at fair market value. Mr. Brace resigned effective
September 1, 2002 and will receive his base salary and benefit continuation
through May 31, 2003. The Company repurchased $200,000 of common stock for the
price paid and exchanged the Note Receivable for the $125,000 of common stock
purchased with the loan.

LOAN TO PETER H. STEVENS, JR.

     In connection with the commencement of his employment, Knowles agreed to
loan Mr. Stevens up to $400,000 for a real estate bridge loan. The bridge loan
was repaid in full.

                                        71
<PAGE>

LOAN FROM KEY ACQUISITION LLC

     The Company issued a $10 million Note to an affiliate of Doughty Hanson
under a Note Purchase Agreement dated August 28, 2002. The Note is a general
unsecured obligation of the Company, ranks subordinate to all Senior
Indebtedness of the Company and pari passu to the 13 1/8% Senior Subordinated
Notes due 2009.

LOAN TO JAMES H. MOYLE

     In connection with his relocation, the Company provided a bridge loan to
Mr. Moyle of $900,000 in January 2003 which was repaid in one week.

ITEM 14.  CONTROLS AND PROCEDURES

     (a) Evaluation of disclosure controls and procedures:

     We maintain disclosure controls and procedures that are designed to ensure
that information required to be disclosed in our Exchange Act reports is
recorded, processed, summarized and reported within the time periods specified
in the Commission's rules and forms, and that such information is accumulated
and communicated to our management including our Chief Executive Officer and
Chief Financial Officer, as appropriate, to allow timely decisions regarding
required disclosure.

     Within the 90 days prior to the filing date of this Report (the "Evaluation
Date"), we carried out an evaluation, under the supervision and with the
participation of the Company's management, including, John J. Zei, our Chief
Executive Officer, and James H. Moyle, our Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures. Based upon that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that our disclosure controls and procedures were
effective as of the Evaluation Date.

     (b) Changes in internal controls:

     There have been no significant changes in the Company's internal controls
or in other factors that could significantly affect these internal controls
subsequent to the evaluation date.

                                        72
<PAGE>

                                    PART IV

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

<Table>
<Caption>
                                                                     PAGE
                                                                     ----
<S>    <C>                                                           <C>
a) 1.  Financial Statements --

       Consolidated balance sheets -- December 31, 2002 and 2001...   40
       Consolidated statements of operations for each of the three
       years in the period ended December 31, 2002.................   41
       Consolidated statements of stockholders' equity for each of
       the three years in the period ended December 31, 2002.......   42
       Consolidated statements of cash flows for each of the three
       years in the period ended December 31, 2002.................   43
       Notes to consolidated financial statements..................   44
   2.  Schedules

       The following consolidated financial schedule of Knowles
       Electronics Holdings, Inc. is included in response to Item
       15(a.)

       II -- Valuation and Qualifying Accounts.....................   74

       All other schedules under Regulation S-X for Knowles
       Electronics Holdings, Inc. have been omitted because they
       are either non-applicable, not required or because the
       information required is included in the financial statements
       or notes thereto.

       Signatures..................................................   75

       Certifications..............................................   76
   3.  Index to Exhibits...........................................   78
b) Reports on Form 8-K
</Table>

     There were no reports on Form 8-K filed during the three months ended
December 31, 2002

                                        73
<PAGE>

                SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS

                       KNOWLES ELECTRONICS HOLDINGS, INC.

<Table>
<Caption>
                                                           ADDITIONS
                                                     ---------------------
                                                     CHARGE TO   CHARGE TO
                                        BALANCE AT     COSTS       OTHER                       BALANCE AT
                                        BEGINNING       AND      ACCOUNTS     DEDUCTIONS --      END OF
                                        OF PERIOD    EXPENSES    DESCRIBE       DESCRIBE         PERIOD
                                        ----------   ---------   ---------    -------------    ----------
<S>                                     <C>          <C>         <C>          <C>              <C>
Year ended December 31, 2002
  Reserves and allowances deducted
     from asset accounts:
  Allowance for doubtful accounts.....   $ 1,095      $  186       $ 63(1)       $  246(2)      $ 1,098
  Allowance for obsolete inventory....    10,051       2,989        296(1)        5,642(3)        7,694
Year ended December 31, 2001
  Reserves and allowances deducted
     from asset accounts:
  Allowance for doubtful accounts.....     1,675          29                        609(4)        1,095
  Allowance for obsolete inventory....     8,167       3,976                      2,092(5)       10,051
Year ended December 31, 2000
  Reserves and allowances deducted
     from asset accounts:
  Allowance for doubtful accounts.....     1,200         542                         67(6)        1,675
  Allowance for obsolete inventory....    12,111       2,910                      6,854(7)        8,167
</Table>

---------------

(1) Foreign currency translation loss.

(2) Uncollectible accounts written off.

(3) Disposal of obsolete inventory.

(4) Uncollectible accounts written off, payments received of $120 and foreign
    currency gain of $11.

(5) Disposal of obsolete inventory and foreign currency gain of $135.

(6) Uncollectible accounts written off.

(7) Disposal of obsolete inventory and foreign currency gain of $293.

                                        74
<PAGE>

                                   SIGNATURES

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

                                          KNOWLES ELECTRONICS HOLDINGS, INC.
                                          (Registrant)

                                          By:        /s/ JOHN J. ZEI
                                            ------------------------------------
                                                        John J. Zei
                                               President and Chief Executive
                                                           Officer

Dated: March 31, 2003

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

<Table>
<Caption>
                    SIGNATURE                                      TITLE                       DATE
                    ---------                                      -----                       ----
<S>     <C>                                          <C>                                  <C>
                 /s/ JOHN J. ZEI                       President and Chief Executive      March 31, 2003
 ------------------------------------------------         Officer Class B Director
                   John J. Zei


                /s/ JAMES H. MOYLE                           Vice President and           March 31, 2003
 ------------------------------------------------         Chief Financial Officer
                  James H. Moyle


              /s/ KENNETH JOHN TERRY                          Class A Director            March 31, 2003
 ------------------------------------------------
                Kenneth John Terry


                 /s/ KEVIN LUZAK                              Class A Director            March 31, 2003
 ------------------------------------------------
                   Kevin Luzak


             /s/ STEPHEN D. PETERSEN                     Vice President Finance and       March 31, 2003
    -----------------------------------------                    Secretary
               Stephen D. Petersen
</Table>

                                        75
<PAGE>

                                 CERTIFICATION

I, John J. Zei, certify that:

     1. I have reviewed this annual report on Form 10-K of Knowles Electronics
Holdings, Inc.;

     2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state any material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report;

     3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

     4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

          a. designed such disclosure controls and procedures to ensure that
     material information relating to the registrant, including its consolidated
     subsidiaries, is made known to us by others within those entities,
     particularly during the period in which this annual report is being
     prepared;

          b. evaluated the effectiveness of the registrant's disclosure controls
     and procedures as of a date within 90 days prior to the filing date of this
     annual report (the "Evaluation Date"); and

          c. presented in this annual report our conclusions about the
     effectiveness of the disclosure controls and procedures based on our
     evaluation as of the Evaluation Date;

     5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing the
equivalent function):

          a. all significant deficiencies in the design or operation of internal
     controls which could adversely affect the registrant's ability to record,
     process, summarize and report financial data and have identified for the
     registrant's auditors any material weaknesses in internal controls; and

          b. any fraud, whether or not material, that involves management or
     other employees who have a significant role in the registrant's internal
     controls; and

     6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.

Date: March 31, 2003

                                          By: /s/ JOHN J. ZEI
                                            John J. Zei
                                            President and Chief Executive
                                              Officer

                                        76
<PAGE>

                                 CERTIFICATION

I, James H. Moyle, certify that:

     1. I have reviewed this annual report on Form 10-K of Knowles Electronics
Holdings, Inc.;

     2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state any material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report;

     3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

     4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

          a. designed such disclosure controls and procedures to ensure that
     material information relating to the registrant, including its consolidated
     subsidiaries, is made known to us by others within those entities,
     particularly during the period in which this annual report is being
     prepared;

          b. evaluated the effectiveness of the registrant's disclosure controls
     and procedures as of a date within 90 days prior to the filing date of this
     annual report (the "Evaluation Date"); and

          c. presented in this annual report our conclusions about the
     effectiveness of the disclosure controls and procedures based on our
     evaluation as of the Evaluation Date;

     5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing the
equivalent function):

          a. all significant deficiencies in the design or operation of internal
     controls which could adversely affect the registrant's ability to record,
     process, summarize and report financial data and have identified for the
     registrant's auditors any material weaknesses in internal controls; and

          b. any fraud, whether or not material, that involves management or
     other employees who have a significant role in the registrant's internal
     controls; and

     6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.

Date: March 31, 2003

                                          By: /s/ JAMES H. MOYLE
                                            James H. Moyle
                                            Vice President and Chief Financial
                                              Officer

                                        77
<PAGE>

                                 EXHIBIT INDEX

<Table>
<C>     <S>   <C>
 2.1    --    Recapitalization Agreement dated as of June 23, 1999, among
              Key Acquisition, L.L.C., Knowles Electronics Holdings, Inc.
              and the Stockholders (incorporated by reference to Exhibit
              2.1 to Registration Statement No. 333-40076)
 2.2    --    Contribution Agreement dated August 30, 1999, between
              Knowles Electronics Holdings, Inc. and Knowles Electronics,
              LLC (incorporated by reference to Exhibit 2.2 to
              Registration Statement No. 393-40076)
 3.1    --    Second Amended and Restated Certificate of Incorporation of
              Knowles Electronics, Inc. (incorporated by reference to
              Exhibit 3.1 to Registration Statement No. 333-40076)
 3.2    --    Certificate of Amendment to Second Amended and Restated
              Certificate of Incorporation of Knowles Electronics, Inc.
              changing its name to Knowles Electronics Holdings, Inc.
              (incorporated by reference to Exhibit 3.2 to Registration
              Statement No. 333-40076)
 3.3    --    Certificate of Incorporation of Knowles Intermediate
              Holding, Inc. (incorporated by reference to Exhibit 3.3 to
              Registration Statement No. 333-40076)
 3.4    --    Certificate of Incorporation of Emkay Associates, Inc.
              (incorporated by reference to Exhibit 3.4 to Registration
              Statement No. 333-40076)
 3.5    --    Certificate of Amendment of Certificate of Incorporation of
              Emkay Associates, Inc. changing its name to Emkay Innovative
              Products, Inc. (incorporated by reference to Exhibit 3.5 to
              Registration Statement No. 333-40076)
 3.6    --    Certificate of Incorporation of Knowles Manufacturing Ltd.
              (incorporated by reference to Exhibit 3.6 to Registration
              Statement No. 333-40076)
 3.7    --    Certificate of Incorporation of Synchro-Start Products, Inc.
              (incorporated by reference to Exhibit 3.7 to Registration
              Statement No. 333-40076)
 3.8    --    Certificate of Formation of Knowles Electronics, LLC
              (incorporated by reference to Exhibit 3.8 to Registration
              Statement No. 333-40076)
 3.9    --    Amended and Restated By-laws of Knowles Electronics
              Holdings, Inc. (incorporated by reference to Exhibit 3.9 to
              Registration Statement No. 333-40076)
 3.10   --    By-laws of Knowles Intermediate Holding, Inc. (incorporated
              by reference to Exhibit 3.10 to Registration Statement No.
              333-40076)
 3.11   --    By-laws of Emkay Innovative Products, Inc. (incorporated by
              reference to Exhibit 3.11 to Registration Statement No.
              333-40076)
 3.12   --    By-laws of Knowles Manufacturing Ltd. (incorporated by
              reference to Exhibit 3.12 to Registration Statement No.
              333-40076)
 3.13   --    By-laws of Synchro-Start Products, Inc. (incorporated by
              reference to Exhibit 3.13 to Registration Statement No.
              333-40076)
 3.14   --    Limited Liability Company Agreement of Knowles Electronics,
              LLC, and an amendment dated as of March 14, 2000 thereto
              (incorporated by reference to Exhibit 3.14 to Registration
              Statement No. 333-40076)
 4.1    --    Indenture, dated as of October 1, 1999, among Knowles
              Electronics Holdings, Inc., the Subsidiary Guarantors and
              The Bank of New York, as trustee, relating to the 13 1/8%
              Senior Subordinated Notes due 2009 (incorporated by
              reference to Exhibit 4.1 to Registration Statement No.
              333-40076)
 4.2    --    Form of 13 1/8% Senior Subordinated Note due 2009 of Knowles
              Electronics Holdings, Inc. (the "Initial Note") (included as
              Exhibit A to the Indenture filed as Exhibit 4.1)
              (incorporated by reference to Exhibit 4.2 to Registration
              Statement No. 333-40076)
 4.3    --    Form of 13 1/8% Senior Subordinated Note due 2009 of Knowles
              Electronics Holdings, Inc. (the "Exchange Note") (included
              as Exhibit A to the Indenture filed as Exhibit 4.1)
              (incorporated by reference to Exhibit 4.3 to Registration
              Statement No. 333-40076)
 4.4    --    Registration Rights Agreement, dated October 1, 1999,
              between Knowles Electronics Holdings, Inc., Morgan Stanley &
              Co. Incorporated and Chase Securities, Inc. (incorporated by
              reference to Exhibit 4.4 to Registration Statement No.
              333-40076)
</Table>

                                        78
<PAGE>
<Table>
<C>     <S>   <C>
 4.5    --    Note Purchase Agreement dated August 28, 2002 between
              Knowles Electronic Holdings, Inc., the Subsidiary Guarantors
              and Key Acquisition LLC, (incorporated by reference to
              Exhibit 4.5 to the Quarterly Report on Form 10-Q for the
              quarter ended September 30, 2002)
10.1    --    Credit Agreement, dated as of June 28, 1999, as amended and
              restated as of July 21, 1999, among Knowles Electronics
              Holdings, Inc., The Chase Manhattan Bank, as Administrative
              Agent, Morgan Stanley Senior Funding, Inc., as Syndication
              Agent and Chase Securities Inc., as Lead Arranger and Book
              Manager, and an amendment dated December 23, 1999 and an
              amendment dated April 10, 2000 thereto (incorporated by
              reference to Exhibit 10.1 to Registration Statement No.
              333-40076)
10.2    --    Parent Guarantee Agreement, dated as of June 30, 1999,
              between Knowles Electronics Holdings, Inc. and The Chase
              Manhattan Bank, as administrative agent (incorporated by
              reference to Exhibit 10.2 to Registration Statement No.
              333-40076)
10.3    --    Subsidiary Guarantee Agreement, dated as of June 30, 1999
              among Knowles Intermediate Holding, Inc., Emkay Innovative
              Products, Inc., Knowles Manufacturing Ltd., Synchro-Start
              Products, Inc., Knowles Electronics, LLC, the subsidiary
              guarantors of Knowles Electronics Holdings, Inc. that are
              signatories thereto, and The Chase Manhattan Bank, as
              administrative agent (incorporated by reference to Exhibit
              10.3 to Registration Statement No. 333-40076)
10.4    --    Security Agreement, dated as of June 30, 1999, among Knowles
              Intermediate Holding, Inc., Emkay Innovative Products, Inc.,
              Knowles Manufacturing Ltd., Synchro-Start Products, Inc.,
              Knowles Electronics, LLC, the subsidiary guarantors of
              Knowles Electronics Holdings, Inc. that are signatories
              thereto, and The Chase Manhattan Bank, as administrative
              agent (incorporated by reference to Exhibit 10.4 to
              Registration Statement No. 333-400076)
10.5    --    Pledge Agreement, dated as of June 30, 1999 among Knowles
              Electronics, Inc., the Subsidiary Pledgors and The Chase
              Manhattan Bank, as administrative agent (incorporated by
              reference to Exhibit 10.5 to Registration Statement No.
              333-40076)
10.6    --    Amended and Restated Employment Agreement, dated as of June
              21, 1993, between Knowles Electronics Holdings, Inc. and Reg
              G. Garratt (incorporated by reference to Exhibit 10.6 to
              Registration Statement No. 333-40076)
10.7    --    Employment Agreement between Knowles Electronics Holdings,
              Inc. and John J. Zei (incorporated by reference to Exhibit
              10.7 to Registration Statement No. 333-40076)
10.8    --    Employment Agreement, dated December 29, 1999, between
              Knowles Electronics Holdings, Inc. and James F. Brace
              (incorporated by reference to Exhibit 10.8 to Registration
              Statement No. 333-40076)
10.9    --    Executive Stock Purchase Agreement, dated as of April 28,
              2000, by and among Knowles Electronic Holdings, Inc., John
              J. Zei and Key Acquisition, L.L.C. (incorporated by
              reference to Exhibit 10.9 to Registration Statement No.
              333-40076)
10.10   --    Executive Stock Purchase Agreement, dated as of April 28,
              2000, by and among Knowles Electronics Holdings, Inc., James
              F. Brace and Key Acquisition, L.L.C. (incorporated by
              reference to Exhibit 10.10 to Registration Statement No.
              333-40076)
10.11   --    Executive Stock Purchase Agreement, dated as of June 30,
              1999, by and among Knowles Electronics Holdings, Inc.,
              Stephen D. Peterson and Key Acquisition, L.L.C.
              (incorporated by reference to Exhibit 10.11 to Registration
              Statement No. 333-40076)
10.12   --    Special Severance Commitment, dated as of September 9, 1998,
              between Knowles Electronics Holdings, Inc. and Bernard J.
              Smith (incorporated by reference to Exhibit 10.12 to
              Registration Statement No. 333-40076)
10.13   --    Change-in-Control Severance Pay Plan, dated as of September
              21, 1998, established by Knowles Electronics Holdings, Inc.
              (incorporated by reference to Exhibit 10.13 to Registration
              Statement No. 333-40076)
10.14   --    Management Incentive Plan of Knowles Electronics Holdings,
              Inc. for Calendar Year 1999 (incorporated by reference to
              Exhibit 10.14 to Registration Statement No. 333-40076)
10.15   --    Long Term Incentive Plan of Knowles Electronics Holdings,
              Inc. (incorporated by reference to Exhibit 10.15 to
              Registration Statement No. 333-40076)
</Table>

                                        79
<PAGE>

<Table>
<Caption>
..1610   --    Service Agreement, dated June 28, 1999, between Doughty Hanson & Co. Managers Limited and
              Knowles Electronics Holdings, Inc. (incorporated by reference to Exhibit 10.16 to Registration
              Statement No. 333-40076)
<C>     <S>   <C>
10.17   --    Commission Agreement, dated June 28, 1999, between Doughty Hanson & Co. Managers Limited and
              Knowles Electronics Holdings, Inc. (incorporated by reference to Exhibit 10.17 to Registration
              Statement No. 333-40076)
10.18   --    Stockholders Agreement dated as of June 30, 1999, among Knowles Electronics Holdings, Inc.,
              Key Acquisition, L.L.C., Management, the Vendor Group, Morgan Stanley Senior Funding, Inc.,
              Chase Securities, Inc. and The Chase Manhattan Bank (incorporated by reference to Exhibit
              10.18 to Registration Statement No. 333-40076)
10.19   --    Registration Rights Agreement, dated as of June 20, 1999, among Knowles Electronics Holdings,
              Inc., Key Acquisition, L.L.C., Management, the Existing Holder Group, Morgan Stanley Senior
              Funding Inc., Chase Securities Inc. and The Chase Manhattan Bank (incorporated by reference to
              Exhibit 10.19 to Registration Statement No. 333-40076)
10.20   --    Amendment No. 3 dated as of December 12, 2001 to the Credit Agreement, dated as of June 28,
              1999, as amended and restated as of July 21, 1999, and further amended as of December 23, 1999
              and April 10, 2000, among Knowles Electronics Holdings, Inc., The Chase Manhattan Bank, as
              Administrative Agent, Morgan Stanley Senior Funding, Inc., as Syndication Agent and Chase
              Securities Inc., as Lead Arranger and Book Manager. (incorporated by reference to Exhibit
              10.20 to Annual Report on Form 10-K for the year ended December 31, 2001)
10.21   --    Amendment No. 4 and Waiver dated as of May 10, 2002 to the Credit Agreement, dated as of June
              28, 1999, as amended and restated as of July 21, 1999, and further amended as of December 23,
              1999, April 10, 2000 and December 12, 2001, among Knowles Electronics Holdings, Inc., The
              Chase Manhattan Bank, as Administrative Agent, Morgan Stanley Senior Funding, Inc., as
              Syndication Agent and Chase Securities Inc., as Lead Arranger and Book Manager. (incorporated
              by reference to Exhibit 10.21 to Annual Report on Form 10-K for the year ended December 31,
              2001)
10.22   --    Investor Funding Agreement dated as of May 10, 2002 among Key Acquisition, LLC, a Delaware
              limited liability company, Knowles Electronics Holdings, Inc., a Delaware limited liability
              company, and JP Morgan Chase Bank, in its capacity as Administrative Agent for the lenders
              under the Credit Agreement, dated as of June 28, 1999, as amended and restated as of July 21,
              1999, among Knowles Electronics Holdings, Inc., The Chase Manhattan Bank, as Administrative
              Agent, Morgan Stanley Senior Funding, Inc., as Syndication Agent and Chase Securities Inc., as
              Lead Arranger and Book Manager. (incorporated by reference to Exhibit 10.22 to Annual Report
              on Form 10-K for the year ended December 31, 2001)
10.23   --    Employment Agreement between Knowles Electronics Holdings, Inc. and James H. Moyle.
              (incorporated by reference to Exhibit 4.5 to the Quarterly Report on Form 10-Q for the quarter
              ended September 30, 2002)

10.24   --    Limited Waiver and Fifth Amendment dated March 25, 2003 and entered into by and among Knowles
              Electronics Holdings, Inc. (f/k/a Knowles Electronics, Inc.), the financial institutions
              listed on the signature pages hereof, JPMorgan Chase Bank as agent for the lenders, and, for
              the purposes of Section 3.9 and Section 6 thereof, the subsidiaries of the Company party
              thereto.
12.1    --    Calculation of Ratio of Earnings to Fixed Charges
21.1    --    List of Subsidiaries
99.1    --    Certification pursuant to Section 906 of Sarbanes-Oxley Act
99.2    --    Certification pursuant to Section 906 of Sarbanes-Oxley Act
</Table>

                                        80