##### Table of Contents









UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549




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Form 10-K

|   |  |                                                                                                 
|-- |  | ------------------------------------------------------------------------------------------------
|þ  |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR
    15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934    
|  
|   |  | For the fiscal year ended September 28,
    2002                                                
|  
|OR
|  
|o  |  | TRANSITION REPORT PURSUANT TO SECTION 13
    OR 15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934
|  
|   |  | For the transition period
    from          to                                                  

Commission File Number 1-14557



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U.S. Industries, Inc.

(Exact name of registrant as specified in its
charter)


|                                                                   |  |                                            
|------------------------------------------------------------------ |  | -------------------------------------------
|Delaware                                                           |  | 22-3568449                                 
|(State or other jurisdiction of
    incorporation or organization) |  | (I.R.S. employer
    identification number)

|                                                                                                              |  |                
|------------------------------------------------------------------------------------------------------------- |  | ---------------
|777 S. Flagler Drive;
    Suite 1108 West
    West Palm Beach, FL(Address of principal executive
    offices) |  | 33401(Zip Code)

(561) 514-3838

(Registrants telephone number, including
area code)


101 Wood Avenue South

Iselin, NJ 08830


(Former address, if changed since last
report)


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

|                                       |  |                                          
|-------------------------------------- |  | -----------------------------------------
|Title of Each Class                    |  | Name of each exchange on which registered
|                                       |  |                                          
|Common Stock, par value $.01 per share |  | New York Stock Exchange                  

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



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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 ninety
days:    Yes þ        No o

Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be
contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any
amendment to this
Form 10-K.    o

Indicate by check mark whether the registrant is
an accelerated filer (as defined in Exchange Act
Rule 12b-2).    Yes þ        No o

The aggregate market value of the voting and
non-voting common equity held by non-affiliates of the
registrant as of March 28, 2002 (based on the last reported
sale price of such stock on the New York Stock Exchange on such
date) was approximately $275,423,882.

As of December 1, 2002, the registrant had
74,738,069 shares of Common Stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Certain portions of the registrants
definitive proxy statement pursuant to Regulation 14A of
the Securities Exchange Act of 1934 in connection with the
annual meeting of stockholders of the registrant to be held on
February 20, 2003 are incorporated by reference into
Part III of this Report.



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TABLE OF CONTENTS



|                                                                                             |                                                                                               |  |  |  |  |  |  | 
|-------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|TABLE OF CONTENTS                                                                           
|PART I                                                                                      
|                                                                                             | Item 1. Business                                                                             
|Item 2. Properties                                                                          
|Item 3. Legal Proceedings                                                                   
|Item 4. Submission of Matters to a Vote of Security Holders                                 
|PART II                                                                                     
|Item 5. Market for Registrants Common Equity and Related Stockholder Matters               
|Item 6. Selected Financial Data                                                             
|                                                                                             | Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                                                                                             | Item 7A. Qualitative and Quantitative Disclosures About Market Risk                          
|                                                                                             | Item 8. Financial Statements and Supplementary Data                                          
|REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS                                          
|Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
|PART III                                                                                    
|                                                                                             | Item 10. Directors and Executive Officers of the Registrant                                  
|                                                                                             | Item 11. Executive Compensation                                                              
|                                                                                             | Item 12. Security Ownership of Certain Beneficial Owners and Management                      
|                                                                                             | Item 13. Certain Relationships and Related Transactions                                      
|                                                                                             | Item 14. Controls and Procedures                                                             
|                                                                                             | Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K [Not updated]      
|SIGNATURES                                                                                  
|CERTIFICATION                                                                               
|CERTIFICATION                                                                               
|SCHEDULE II                                                                                 
|Fourth Supplemental Indenture                                                               
|Waiver dated October 30, 2002                                                               
|Amendment to Consent dated October 30, 2002                                                 
|First Amendment Restated Employ Agree-Sander                                                
|Amendment to Employ Agree - Weingarten                                                      
|Amend to Employ Agree - Punal                                                               
|Stock Purchase Agreement                                                                    
|Megapro Tools, Inc Stockholder's Agreement                                                  
|Standstill Agreement                                                                        
|Subsidiaries of the Company                                                                 
|Consent of Ernst & Young LLP                                                                
|Separate Company Financial Statements                                                       



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##### Table of Contents






TABLE OF CONTENTS

|     |     |  |  |                                                                                           |  |  |    | 
|---- | --- |  |  | ----------------------------------------------------------------------------------------- |  |  | -- | 
|Item |     |  |  | Page                                                                                     
|     |     |  |  |                                                                                          
|     |     |  |  | PART I                                                                                    |  |  |    | 
|     | 1.  |  |  | Business                                                                                  |  |  | 2  | 
|     | 2.  |  |  | Properties                                                                                |  |  | 7  | 
|     | 3.  |  |  | Legal Proceedings                                                                         |  |  | 7  | 
|     | 4.  |  |  | Submission of Matters to a Vote of Security
    Holders                                   |  |  | 8  | 
|     |     |  |  | PART II                                                                                   |  |  |    | 
|     | 5.  |  |  | Market for Registrants Common Equity and
    Related Stockholder Matters                 |  |  | 8  | 
|     | 6.  |  |  | Selected Financial Data                                                                   |  |  | 9  | 
|     | 7.  |  |  | Managements Discussion and Analysis of
    Financial Condition and Results of Operations |  |  | 10 | 
|     | 7a. |  |  | Quantitative and Qualitative Disclosures About
    Market Risk                            |  |  | 31 | 
|     | 8.  |  |  | Financial Statements and Supplementary Data                                               |  |  | 33 | 
|     | 9.  |  |  | Changes in and Disagreements with Accountants on
    Accounting and Financial Disclosure  |  |  | 78 | 
|     |     |  |  | PART III                                                                                  |  |  |    | 
|     | 10. |  |  | Directors and Executive Officers of the Registrant                                        |  |  | 78 | 
|     | 11. |  |  | Executive Compensation                                                                    |  |  | 78 | 
|     | 12. |  |  | Security Ownership of Certain Beneficial Owners
    and Management                        |  |  | 78 | 
|     | 13. |  |  | Certain Relationships and Related Transactions                                            |  |  | 78 | 
|     | 14. |  |  | Controls and Procedures                                                                   |  |  | 78 | 
|     | 15. |  |  | Exhibits, Financial Statement Schedules, and
    Reports on Form 8-K                      |  |  | 79 | 
|     |     |  |  | Signatures                                                                                |  |  | 87 | 
|     |     |  |  | Certifications                                                                            |  |  | 88 | 
|     |     |  |  | FINANCIAL STATEMENT SCHEDULES                                                             |  |  |    | 
|     |     |  |  | Valuation and Qualifying Accounts                                                         |  |  | 90 | 

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PART I




Item
1.     Business

General

U.S. Industries, Inc. (USI and,
together with its subsidiaries, the Company) is a
leading international producer of bath and plumbing products.
The Company serves residential markets through Jacuzzi Inc. and
related subsidiaries (Jacuzzi) and
commercial/institutional markets through Zurn Industries, Inc.
(Zurn). The Company also manufactures premium
RAINBOW® vacuum cleaner systems through Rexair Inc.
(Rexair).

The Company was originally formed in May 1995,
when USI Atlantic, Inc. (USI Atlantic), a Company
predecessor then known as U.S. Industries, Inc., was spun-off
from Hanson PLC with holdings in 34 diverse businesses,
including Jacuzzi and Rexair. In a merger transaction completed
in June 1998, the Company acquired Zurn as a wholly-owned
subsidiary. The Company has disposed of numerous businesses to
reduce debt and achieve its present focus. These dispositions
included Ames True Temper, Lighting Corporation of America,
Selkirk and Spear & Jackson in fiscal 2002, and SiTeco in
October 2002.

The Company operates on a 52- or 53-week fiscal
year ending on the last Saturday closest to September 30.
The Companys public filings may be obtained through the
Securities and Exchange Commission at its website at
www.sec.gov, free of charge.

Bath & Plumbing

The JACUZZI® brand has worldwide recognition
for innovative whirlpool baths, showers, outdoor spas and
bathroom fixtures. Its products are used extensively in
residential renovation and new construction.

In North America, Jacuzzi Whirlpool Bath
manufactures bath and shower systems in facilities in California
and Georgia and distributes its products through wholesalers,
home centers and specialty kitchen and bath retailers. The major
homebuilders, as well as building and plumbing contractors, are
principally served through the wholesale channels. The home
centers and other mass merchants focus on do-it-yourself
customers and local contractors.

Sundance Spas manufactures outdoor jetted spas at
facilities in California and Florida. These products are
marketed under the SUNDANCE®, JACUZZI® and
GATSBY® brands and distributed by specialty mass merchants
and retailers in the U.S. and Europe.

ELJER® is a leading North American
manufacturer of bathroom products including toilets, baths and
sinks, with facilities in Pennsylvania, Mississippi and Ohio.
Its products are distributed by home centers and wholesalers.

Jacuzzi Europe S.p.A. (JESPA), based in Italy, is
a European market leader in whirlpool bath and shower products,
with a manufacturing facility in Italy.

Jacuzzis United Kingdom operations market a
full line of bathroom products under the JACUZZI®,
SANITAN® and FORDHAM® brands, with manufacturing
facilities in England and France.

The Company serves Asian markets from
headquarters in Singapore, principally with JACUZZI®
products manufactured in Europe and North America. The Company
also serves South American markets with JACUZZI® bath and
spa products, which are manufactured in Brazil and Chile.

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Zurn is a leading North American manufacturer and
distributor of plumbing products for commercial and
institutional markets. The ZURN® brand is widely recognized
by plumbing contractors, architects and other building
professionals for high quality and innovation. Products
manufactured by Zurn and related subsidiaries include:



| |   |                                                                                                                                                                                                   
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Specification Drainage  carriers and
    behind-the-wall fittings, floor and roof drains, trench drains,
    hydrants, grease traps, chemical drainage systems and roadside
    drainage systems.
|
| |  | WILKINS® backflow preventers, automatic
    control valves and pressure reducing valves.                                                                                                          
|
| |  | Commercial Brass  sensor-operated
    flush valves and faucets, manual flush valves, commercial
    faucets and tubular brass products.                                                          
|
| |  | ZURN®  PEX 
    cross-linked polyethylene pipes and fittings used in plumbing,
    radiant heat and snow melt systems.                                                                          

These products are distributed by wholesalers and
are manufactured at several facilities in the United States.
Zurn also sources some components from suppliers in Asia.

Sales of several Jacuzzi products such as spas
and swimming pool equipment are sensitive to weather conditions
and tend to experience a significant decrease in sales during
the fall and winter months (predominantly the first and second
fiscal quarters). Sales at Jacuzzi and Zurn are also affected
when weather impacts outside construction and installation.

A single customer of the Bath & Plumbing
segment accounts for 10%, 14% and 10% of sales from continuing
operations in fiscal 2002, 2001 and 2000, respectively.

Rexair

Rexair is a leading manufacturer of premium
vacuum cleaner systems. Its RAINBOW® vacuum cleaners
collect dirt particles by means of a water filtration and
separator system. Sales to consumers are made through in-home
demonstrations by sales representatives and are typically
arranged by referrals from other consumers.

Rexair distributes its RAINBOW® vacuum
cleaners and related accessories through an extensive network of
independent authorized distributors and sub-distributors. Rexair
experiences competition in recruiting its distributors. In
addition, its distributors experience competition in recruiting
and retaining sales representatives. Independent consumer
finance companies or, to a lesser extent, independent
distributors finance most of the purchases of Rexair products in
the United States.

In fiscal 2002, 2001 and 2000, sales in the
United States and Canada accounted for approximately 53%, 51%
and 48%, respectively, of Rexairs total unit sales. The
remaining sales were spread over a number of foreign markets,
with significant sales made in Europe. Rexair manufactures its
products at a facility in Michigan.

Rexair has been a wholly-owned subsidiary since
August 15, 2001, when the Company re-acquired a 75% equity
interest in Rexair originally sold to SILLC Holdings, LLC
(Strategic) in March 2000.

Diversified

In March 2000, the Company disposed of a majority
equity interest in its Diversified segment. Diversified
manufactured a wide range of consumer, precision engineered and
automotive interior products. A comprehensive discussion of this
disposition can be found under Results of
Operations  Acquisition and Disposition of Businesses
and Discontinued Operationsin Managements Discussion
and Analysis of Financial Condition and Results of Operations
(MD&A).

Discontinued Operations

On December 28, 2001, the Board of Directors
approved a formal Disposal Plan in connection with the
Companys obligation to pay debt amortization as set forth
in the restructured debt agreements. The

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disposal plan called for the sale of five
businesses  Ames True Temper, Spear & Jackson,
Lighting Corporation of America, SiTeco Lighting and Selkirk. As
of September 30, 2002, the Company had completed the
disposals of all the businesses with the exception of SiTeco,
which was completed on October 18, 2002.


Ames True Temper is a leading manufacturer of
non-powered lawn and garden tools and industrial hand and
striking tools in North America. Spear & Jackson is a
leading manufacturer and distributor of a broad line of hand
tools, lawn and garden tools, industrial magnets and metrology
tools primarily in the United Kingdom. Lighting Corporation of
America and SiTeco Lighting manufacture and distribute indoor
and outdoor lighting fixtures for markets in North America and
Europe. Selkirk is involved in the manufacture and distribution
of grilles, registers, chimneys, gas vents and other venting
products to the North American HVAC (heating, venting and air
conditioning) markets. Further information on these discontinued
operations can be found under Results of
Operations  Acquisition and Disposition of Businesses
and Discontinued Operationsin the MD&A.

Share Repurchase

During 1999 and 2000, the Companys Board of
Directors authorized share repurchase programs aggregating
$350 million. Prior to the termination of these programs in
late 2001, the Company repurchased 21.8 million shares of
its common stock for $331.8 million. During June 2000, in a
separate transaction authorized and undertaken outside the
existing share repurchase programs, the Company repurchased
3.7 million shares representing all of its common stock
held by the former owners of Spear & Jackson for
$44.2 million. The Company indefinitely suspended all share
repurchase programs in 2001.

Competition

The Company competes in mature and highly
competitive industries on the basis of brand identification,
quality, price, marketing and distribution. In some markets,
certain competitors have greater financial strength, market
share or product breadth than the Company.

Backlog Orders

The Companys backlogs, believed to be firm,
were $62.8 million and $54.7 million as of
September 30, 2002 and 2001, respectively. The backlog
orders are all in the Bath & Plumbing segment.

Export and International Operations

Certain of the Companys domestic businesses
generate revenue from export sales and/or revenue from
operations conducted outside the United States. Export sales
amounted to 7%, 4% and 9% of total revenues in fiscal 2002, 2001
and 2000, respectively, principally reflecting sales by Rexair
to foreign distributors of RAINBOW® products in numerous
countries. Revenue from foreign operations amounted to 27% of
total revenues in fiscal 2002, 2001 and 2000. Identifiable
assets of foreign operations represented approximately 17%, 21%
and 26% of total identifiable assets (excluding net assets held
for sale) at September 30, 2002, 2001 and 2000,
respectively. Revenue and identifiable assets from foreign
operations principally reflect certain Jacuzzi operations.

The Companys export sales and foreign
manufacturing and sourcing are subject to certain risks
including currency fluctuation, transportation delays, political
and economic instability, restrictions on the transfer of funds,
the imposition of duties, tariffs and import and export controls
and changes in governmental policies. The Company has numerous
sourcing relationships with companies in the Far East.

Employees

As of September 30, 2002, the Company had
approximately 6,562 employees in its continuing operations.
Unions represented approximately 24% of those employees. The
Company believes that the relations of its operating
subsidiaries with its employees and unions are satisfactory.

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Governmental Regulation

The Companys operating units are subject to
numerous federal, state and local laws and regulations
concerning such matters as zoning, health and safety and
protection of the environment. The Company believes that its
operating units are currently operating in substantial
compliance with, or under approved variances from, various
federal, state and local laws and regulations.

Certain present and former operating sites, or
portions thereof, currently or previously owned and/or leased by
current or former operating units of the Company are the subject
of investigations, monitoring or remediation under the federal
Comprehensive Environmental Response, Compensation and Liability
Act of 1980 (CERCLA or Superfund), the
federal Resource Conservation and Recovery Act or comparable
state statutes or agreements with third parties. These
proceedings are in various stages ranging from initial
investigations to active settlement negotiations to
implementation of the clean-up or remediation of sites. The
Company has been named as a Potentially Responsible Party
(PRP) at 11 Superfund sites under CERCLA or
comparable state statutes in a number of federal and state
proceedings. In each of these matters, the operating unit of the
Company is working with the governmental agencies involved and
other PRPs to address environmental claims in a responsible and
appropriate manner. Under CERCLA and other similar statutes, any
generator of hazardous waste sent to a hazardous waste disposal
site is potentially responsible for the clean-up, remediation
and response costs required for such site in the event the site
is not properly closed by its owner or operator, irrespective of
the amount of waste which the generator sent to the site. No
information currently available reasonably suggests that
projected expenditures associated with any of these proceedings,
whether for any single site or for those in the aggregate, will
have a material adverse effect on the Companys financial
condition, results of operations or cash flows.

From time to time, the Company may receive
notices of violation or may be denied applications for certain
licenses or permits because the practices of the operating unit
are not consistent with regulations or ordinances. In some
cases, the relevant operating unit may seek to meet with the
agency to determine mutually acceptable methods of modifying or
eliminating the practice in question. The Company believes that
its operating units will comply with the applicable regulations
and ordinances in a manner which will not have a material
adverse effect on its financial condition, results of operations
or cash flows.

The Companys subsidiaries have made capital
and maintenance expenditures over time to comply with zoning,
water, air and solid and hazardous waste regulations. While the
amount of expenditures in future years will depend on legal and
technological developments which cannot be predicted at this
time, these expenditures may progressively increase if
regulations become more stringent. Future costs for compliance
cannot be predicted with precision and there can be no certainty
with respect to any costs the Company may be forced to incur in
connection with historical on-site or off-site waste disposal.
No information currently available reasonably suggests that
these expenditures will have a material adverse effect on the
Companys financial condition, results of operations or
cash flows. Laws and regulations protecting the environment may
in certain circumstances impose strict liability,
rendering a person liable for environmental damage without
regard to negligence or fault on the part of such person.

At September 30, 2002, the Company has
accrued approximately $9.1 million ($0.6 million
accrued as current liabilities and $8.5 million as
non-current liabilities), including $4.5 million for
discontinued operations, for various environmental liabilities
of which the Company is aware. The Company believes that the
range of liability for these matters could reach
$15.2 million if it included cases where the likelihood of
an unfavorable outcome is only reasonably possible. The Company
cannot predict whether future developments in laws and
regulations concerning environmental protection or unanticipated
enforcement actions, particularly with respect to environmental
standards, will require material capital expenditures or
otherwise affect its financial condition, results of operations
or cash flows in a materially adverse manner, or whether its
operating units will be successful in meeting future demands of
regulatory agencies in a manner which will not have a material
adverse effect on the Companys financial condition,
results of operations or cash flows.

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Patents and Trademarks

The Companys subsidiaries have numerous
United States and foreign patents, patent applications,
registered trademarks and trade names, and licenses, that relate
to various businesses. The Company believes that certain of the
trademarks and trade names are of material importance to the
businesses to which they relate and may be of material
importance to the Company as a whole. None of the material
trademarks or trade names are of limited duration. Although
protection of the Companys patents and related
technologies are important components of its business strategy,
none of the individual patents is material to the Company.

This Report references trademarks of the Company
such as JACUZZI®, ZURN®, ELJER®, SUNDANCE®
and RAINBOW®, as well as other trademarks, trade names and
product names.

Executive Officers

The executive officers of the Company are as
follows (ages shown as of September 30, 2002):

|                    |  |                                                         
|------------------- |  | --------------------------------------------------------
|Name                |  | Position                                                
|                    |  |                                                         
|David H. Clarke     |  | Chairman of the Board and Chief Executive Officer       
|Steven C. Barre     |  | Senior Vice President, General Counsel and
    Secretary
|Dorothy E. Sander   |  | Senior Vice President  Administration                  
|Allan D. Weingarten |  | Senior Vice President and Chief Financial Officer       
|Diana E. Burton     |  | Vice President  Investor Relations                     
|Francisco V. Puñal  |  | Vice President and Controller                           
|Alan Schutzman      |  | Vice President and Associate General Counsel            
|R. Bruce Clithero   |  | Treasurer                                               

David H. Clarke, 61,
has served as Chairman of the Board and Chief Executive Officer
of the Company since the spin-off of USI from Hanson.
Mr. Clarke was Vice Chairman of Hanson from 1993 until the
spin-off, Deputy Chairman and Chief Executive Officer of Hanson
Industries, the U.S. arm of Hanson, from 1992 until the spin-off
and a Director of Hanson from 1989 until May 1996.
Mr. Clarke is a director of Fiduciary Trust International,
a subsidiary of Franklin Mutual, a company engaged in investment
management and administration of assets for individuals.

Steven C. Barre, 42,
has served as Senior Vice President, General Counsel and
Secretary since September 2001. From April 2000 to
September 2001, he served as Vice President, General
Counsel and Secretary. Prior to that date, Mr. Barre served as
Associate General Counsel beginning with the spin-off from
Hanson in 1995.

Dorothy E. Sander,
49, has served as Senior Vice
President  Administration since June 1998. Previously
she had served as Vice President  Administration of
the Company since the spin-off from Hanson. She is a member of
the Board of Directors of The Feminist Press, the Advisory Board
of the Bank of New York and the Board of Editors of HR-Law
and Practice magazine.

Allan D. Weingarten,
64, has served as Senior Vice
President and Chief Financial Officer since January 2001
when he joined the Company. Mr. Weingarten was previously a
senior partner with the accounting firm of Ernst & Young,
where he spent his entire 34-year career. Subsequent to his
retirement from Ernst & Young in 1995, Mr. Weingarten
was a business consultant and private investor.
Mr. Weingarten is a director of Programmers Paradise, Inc.
and AXS-One, Inc.

Diana E. Burton, 57,
has served as Vice President  Investor Relations of
the Company since the spin-off from Hanson.

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Francisco V. Puñal,
43, joined the Company as Vice
President  Finance on January 2, 2001. Promoted
to Controller in 2002. Mr. Puñal was previously with
Vitas Healthcare Corporation where he was Vice President and
Controller from 1997 to 2000. Prior to that, Mr. Puñal
served as Director of Finance. Vitas Healthcare Corporation is a
privately held healthcare provider.

Alan Schutzman, 46,
has served as Vice President and Associate General Counsel since
September, 2001. Mr. Schutzman served as Associate General
Counsel from January 1, 2001 until September, 2001. From
July 1996 to December 2000, he served as Vice
President and General Counsel of various operating subsidiaries,
including Ames True Temper and Keller Ladders, Inc.

R. Bruce Clithero,
49, has served as Treasurer since
February 2001. Previously he served as Director of Treasury
and Risk Management for Oxbow Corporation. Oxbow Corporation is
a privately held company which manages a diverse array of
businesses, including several in the energy-related field.




Item 2.     Properties

The Companys continuing operations own 38
and lease 55 properties, none of which has value that is
significant in relation to the Companys assets as a whole.
These properties include offices, warehouses and manufacturing
facilities. As described in Item 1, the principal
manufacturing facilities are at various locations in the United
States, Canada, Europe and South America.




Item 3.     Legal
Proceedings

The Company and its subsidiaries are parties to
legal proceedings that are considered to be either ordinary,
routine litigation incidental to the business of present and
former operations or immaterial to the Companys financial
condition, results of operations or cash flows. For information
concerning environmental proceedings, see Governmental
Regulationunder Item 1. Business.

Certain of the Companys subsidiaries are
defendants or plaintiffs in lawsuits that have arisen in the
normal course of business. While certain of these matters
involve substantial amounts, it is managements opinion,
based on the advice of counsel, that the ultimate resolution of
such litigation and environmental matters will not have a
material adverse effect on the Companys financial
condition, results of operations or cash flows.

Zurn is a wholly-owned subsidiary of the Company
which, along with many other companies, is a co-defendant in
numerous asbestos related lawsuits pending in the United States.
Plaintiffs claims against Zurn allege personal injuries
allegedly caused by exposure to asbestos used primarily in
industrial boilers formerly manufactured by a segment of Zurn
that has been presented as a discontinued operation as of the
date of the merger. Zurn did not manufacture asbestos or
asbestos components but purchased it from other suppliers. As of
September 30, 2002, the number of asbestos claims pending
against Zurn was approximately 65,000.

Since Zurn received its first asbestos claim in
the 1980s, Zurn has settled or otherwise disposed of
approximately 48,000 asbestos claims. Zurns insurers
have paid all settlement costs relating to these claims. Defense
costs are currently being paid by Zurns insurers without
eroding the coverage amounts of its insurance policies.

Zurn estimates that its potential liability for
asbestos claims pending against it and for claims estimated to
be filed through 2012 is approximately $145 million. This
estimate is based on its view of the current and anticipated
number of future asbestos claims, the timing and amounts of
asbestos payments, the status of ongoing litigation and the
potential impact of defense strategies and settlement
initiatives. However, there are inherent uncertainties involved
in estimating both the number of future asbestos claims as well
as future settlement costs, and the actual liability could
exceed Zurns estimate due to changes in facts and
circumstances after the date of the estimate. Zurns
present estimate of its asbestos liability is predicated on the
assumption that its recent vigorous defense strategy will enable
it to reduce both its claim frequency and claim severity in the
future. While Zurn believes there is evidence, in recent claims
settlements, for such an impact of a successful defense
strategy, if the defense strategy ultimately is not

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successful, to the extent assumed by Zurn, then
severity and frequency of asbestos claims could increase
substantially above Zurns estimates. Further, while there
is presently no reasonable basis for estimating Zurns
asbestos liability beyond 2012, such liability may continue
beyond 2012, and such liability could be substantial.


Zurns analysis of its available insurance
to cover its potential asbestos liability is between
approximately $282 million to $350 million. The $68
million range involves a dispute with one of Zurns
insurers regarding the availability of $68 million in
insurance coverage under certain excess policies. Subject to
completion of a definitive settlement agreement, the parties
have preliminarily agreed to the terms of settlement of an
action commenced by Zurn in the United States District Court of
the Western District of Pennsylvania seeking, among other
things, a declaration that the insurance coverage limits of
certain excess policies provide $68 million in coverage.
Under the terms of the proposed settlement, Zurns
available insurance to cover its potential asbestos liability
would be approximately $350 million.

Zurn believes, based on its experience in
defending and dismissing such claims and the amount of insurance
coverage available, that it has sufficient insurance to cover
the pending and reasonably estimable future claims. This
conclusion was reached after considering Zurns experience
in asbestos litigation, the insurance payments made to date by
Zurns insurance carriers, existing insurance policies, the
industry ratings of the insurers and the advice of insurance
coverage counsel with respect to applicable insurance coverage
law relating to the terms and conditions of those policies.
After review of the foregoing with Zurn and its consultants, the
Company believes that the resolution of Zurns pending and
reasonably estimable asbestos claims will not have a material
adverse effect on the Companys financial condition,
results of operations or cash flows.




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

The Company did not submit any matter to a vote
of its security holders during the fourth quarter of fiscal 2002.




PART II




Item 5.     Market
for Registrants Common Equity and Related Stockholder
Matters

(a) Market Information.

The Companys Common Stock is traded on the
NYSE under the symbol USI. The following table sets forth, for
the fiscal periods indicated, the high and low closing sales
price per share of Common Stock as reported by the NYSE.

|               |  |             |      |             |  |      |      |     |  |   |       |  |  |   |      | 
|-------------- |  | ----------- | ---- | ----------- |  | ---- | ---- | --- |  | - | ----- |  |  | - | ---- | 
|               |  |             |      |            
|               |  | Fiscal 2002 |      | Fiscal 2001
|               |  |             |      |            
|               |  | High        |      | Low         |  | High |      | Low
|               |  |             |      |             |  |      |      |    
|First Quarter  |  | $           | 2.69 |             |  | $    | 1.91 |     |  | $ | 10.06 |  |  | $ | 6.44 | 
|Second Quarter |  | $           | 3.92 |             |  | $    | 1.76 |     |  | $ | 8.55  |  |  | $ | 5.60 | 
|Third Quarter  |  | $           | 4.40 |             |  | $    | 3.20 |     |  | $ | 6.12  |  |  | $ | 4.10 | 
|Fourth Quarter |  | $           | 3.70 |             |  | $    | 2.25 |     |  | $ | 3.90  |  |  | $ | 1.74 | 

(b) Holders.

As of December 2, 2002, there were
approximately 19,423 record holders of Common Stock. The closing
price per share of Common Stock as reported by the NYSE on such
date was $2.99.

(c) Dividends.

Prior to March 2001, the Companys Board of
Directors adopted a cash dividend policy under which the Company
paid cash quarterly dividends of $0.05 per share of Common
Stock. The last dividend payment was declared on
December 31, 2000 and paid on January 21, 2001. In
March 2001, the Board of Directors indefinitely suspended the
Companys quarterly payment of dividends. Furthermore, the

8



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##### Table of Contents



Restructured Facilities (See Note 6 to the
Companys Consolidated Financial Statements) executed on
August 15, 2001 and amended in October 2002 include a
restriction on the payment of any dividends.





Item 6.     Selected
Financial Data

The following table sets forth the consolidated
historical selected financial data of the Company:

|                                                           |                                            |                                          |         |      |  |      |         |       |   |      |         |       |   |   |         |      |  |   |         |       |  
|---------------------------------------------------------- | ------------------------------------------ | ---------------------------------------- | ------- | ---- |  | ---- | ------- | ----- | - | ---- | ------- | ----- | - | - | ------- | ---- |  | - | ------- | ----- | -
|                                                           |                                            |                                         
|                                                           |                                            | For the Fiscal Years Ended September 30,
|                                                           |                                            |                                         
|                                                           |                                            | 2002                                     |         | 2001 |  | 2000 |         | 1999  |   | 1998
|                                                           |                                            |                                          |         |      |  |      |         |       |   |     
|                                                           |                                            |                                         
|                                                           |                                            | (In millions, except per share)         
|Statement of Operations:                                   |                                            |                                          |         |      |  |      |         |       |   |      |         |       |   |   |         |      |  |   |         |      
|Net sales                                                  |                                            | $                                        | 1,159.5 |      |  | $    | 1,107.1 |       |   | $    | 1,724.9 |       |   | $ | 2,129.2 |      |  | $ | 1,974.5 |      
|Operating income (loss)                                    |                                            |                                          | 98.5    |      |  |      | (22.9   | )     |   |      | 83.8    |       |   |   | 207.3   |      |  |   | 48.5    |      
|Income (loss) from continuing operations                   |                                            |                                          | 33.8    |      |  |      | (179.8  | )     |   |      | 38.7    |       |   |   | 95.2    |      |  |   | (55.6   | )    
|Income (loss) from discontinued operations, net
    of tax |                                            |                                          | 7.8     |      |  |      | (344.1  | )     |   |      | (3.1    | )     |   |   | 46.2    |      |  |   | 17.1    |      
|Cumulative effect of accounting change, net of tax         |                                            |                                          |        |      |  |      | (0.7    | )     |   |      |        |       |   |   |        |      |  |   |        |      
|Net income (loss)                                          |                                            |                                          | 41.6    |      |  |      | (524.6  | )     |   |      | 35.6    |       |   |   | 141.4   |      |  |   | (43.6   | )    
|Basic income (loss) per share:                             |                                            |                                          |         |      |  |      |         |       |   |      |         |       |   |   |         |      |  |   |         |      
|                                                           | Income (loss) from continuing operations   |                                          |         | 0.46 |  |      |         | (2.43 | ) |      |         | 0.48  |   |   |         | 1.03 |  |   |         | (0.58 | )
|                                                           | Income (loss) from discontinued operations |                                          |         | 0.10 |  |      |         | (4.65 | ) |      |         | (0.04 | ) |   |         | 0.50 |  |   |         | 0.18  |  
|                                                           | Cumulative effect of accounting change     |                                          |         |     |  |      |         | (0.01 | ) |      |         |      |   |   |         |     |  |   |         |      |  
|                                                           | Net income (loss)                          |                                          |         | 0.56 |  |      |         | (7.09 | ) |      |         | 0.44  |   |   |         | 1.53 |  |   |         | (0.46 | )
|Diluted income (loss) per share:                           |                                            |                                          |         |      |  |      |         |       |   |      |         |       |   |   |         |      |  |   |         |      
|                                                           | Income (loss) from continuing operations   |                                          |         | 0.46 |  |      |         | (2.43 | ) |      |         | 0.47  |   |   |         | 1.02 |  |   |         | (0.58 | )
|                                                           | Income (loss) from discontinued operations |                                          |         | 0.10 |  |      |         | (4.65 | ) |      |         | (0.04 | ) |   |         | 0.49 |  |   |         | 0.18  |  
|                                                           | Cumulative effect of accounting change     |                                          |         |     |  |      |         | (0.01 | ) |      |         |      |   |   |         |     |  |   |         |      |  
|                                                           | Net income (loss)                          |                                          |         | 0.56 |  |      |         | (7.09 | ) |      |         | 0.43  |   |   |         | 1.51 |  |   |         | (0.45 | )
|Cash dividend declared per share                           |                                            |                                          |        |      |  |      | 0.05    |       |   |      | 0.20    |       |   |   | 0.20    |      |  |   | 0.20    |      
|                                                           |                                            |                                          |         |      |  |      |         |       |   |      |         |       |   |   |         |      |  |   |         |      
|Balance Sheet Data (at period end):                        |                                            |                                          |         |      |  |      |         |       |   |      |         |       |   |   |         |      |  |   |         |      
|Cash and cash equivalents                                  |                                            | $                                        | 32.1    |      |  | $    | 65.2    |       |   | $    | 24.7    |       |   | $ | 57.7    |      |  | $ | 44.3    |      
|Working capital                                            |                                            |                                          | 262.9   |      |  |      | 453.7   |       |   |      | 541.5   |       |   |   | 864.2   |      |  |   | 800.6   |      
|Total assets                                               |                                            |                                          | 1,575.3 |      |  |      | 1,883.6 |       |   |      | 2,249.9 |       |   |   | 2,765.0 |      |  |   | 2,530.3 |      
|Total debt                                                 |                                            |                                          | 808.1   |      |  |      | 1,226.8 |       |   |      | 1,046.2 |       |   |   | 1,251.8 |      |  |   | 954.2   |      
|Stockholders equity                                       |                                            |                                          | 237.7   |      |  |      | 199.6   |       |   |      | 753.7   |       |   |   | 920.3   |      |  |   | 960.4   |      

Financial data in fiscal 1998, 1999 and 2000
includes the Diversified segment and Rexair which were sold in
March 2000. Rexair was repurchased in August of 2001. A
comprehensive discussion of these dispositions can be found
under Results of Operations  Acquisition and
Disposition of Businesses and Discontinued Operations in
Managements Discussion and Analysis of Financial Condition
and Results of Operations (MD&A).

Operating income for fiscal 2001, 2000, 1999 and
1998 includes goodwill amortization of $9.7 million,
$13.2 million, $12.3 million and $14.1 million,
respectively. The Company stopped amortizing goodwill after
adopting SFAS No. 142 on October 1, 2001. Operating
income for fiscal 1999 and 1998 includes $6.8 million and
$2.4 million, respectively, of equity losses from the
Companys investment in the United Pacific Industries
(UPI). These losses include charges associated with
impairments of UPI and its subsidiaries of $5.5 million and
$4.0 million in fiscal 1999 and 1998, respectively.

9



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Income from continuing operations in fiscal 2002
includes non-recurring after-tax charges of $4.7 million,
which consists of $2.2 million for a lease obligation,
$2.0 million in severance charges and $0.5 million to
increase reserves related to the U.S. Brass product lines which
were discontinued in 2000.

Loss from continuing operations in fiscal 2001
includes non-recurring after-tax charges of $176.7 million
for 1) the recognition of goodwill impairment charges
($100.2 million), 2) the write-down of the carrying
value of the Strategic Notes to net realizable value
($45.1 million), 3) the payment of advisory and other
related fees associated with the debt restructuring
($6.7 million), 4) the write-off of deferred selling
costs related to the original sale of Rexair in March 2000
($17.4 million), 5) the payment of professional fees
associated with the previously planned Spin-off of the LCA Group
($4.6 million), and 6) the elimination of certain
product lines ($2.7 million).

Income from continuing operations in fiscal 2000
includes non-recurring after-tax charges of $64.9 million
for 1) the closure of the former Zurn corporate office
($8.0 million), 2) the elimination of certain products
lines, write-down of inventory and other related costs at the
U.S. Brass operations ($14.1 million), and 3) the
recognition of goodwill and asset impairments at the European
HVAC operations ($42.8 million). Fiscal 2000 also includes
net after-tax credits of $24.4 million related to the gain
on the sale of the Diversified Businesses, the gains on the sale
of Strategic Notes and additional equity interest and costs
written off related to the abandoned sale of the lighting
segment. In addition, fiscal 2000 includes a $20.0 million
reversal of tax contingencies related to the spin-off from
Hanson.

Income from continuing operations in fiscal 1999
includes $2.3 million after-tax of unusual costs in
conjunction with severance for certain senior executives, and
net after tax costs of $4.7 million primarily for the
closure of a manufacturing facility and the elimination of
certain product lines. Fiscal 1999 also includes a
$6.2 million tax benefit from the resolution of prior
years tax issues.

Loss from continuing operations in fiscal 1998
includes non-recurring and unusual after-tax charges of
$128.2 million of merger, restructuring and other costs,
$7.0 million to write-off interest rate protection
agreements, $34.1 million to discontinue a business and
$5.0 million associated with the refinancing of Zurns
outstanding indebtedness.

Cash dividends exclude dividends declared and
paid by Zurn prior to the Merger. In March 2001, the Board
of Directors indefinitely suspended the Companys quarterly
payment of dividends. Furthermore, the restructured facilities
include a restriction on the payment of dividends.




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

Results of Operations

The Company redefined its business segments for
fiscal 2002 due to the reacquisition of Rexair on
August 15, 2001. The Company now has a Bath & Plumbing
segment and a Rexair segment, which consists solely of the
Rexair business. On December 28, 2001, the Companys
Board of Directors adopted a formal Disposal Plan in connection
with the Companys obligation to pay debt amortization. The
Disposal Plan called for the sale of five businesses 
Ames True Temper, Selkirk, Lighting Corporation of America,
Spear & Jackson and SiTeco Lighting. The results of
operations classified as discontinued are excluded from the
following discussions of the Companys continuing operating
results and are discussed separately under the caption,
Discontinued Operations. On March 24, 2000, the
Company completed the disposition of a majority equity interest
in its Diversified segment. The Company accounted for the

10



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##### Table of Contents



retained interest in its Diversified segment
under the equity method of accounting from March 24, 2000
until January 16, 2002, when the Company sold all remaining
interests in that segment.


|                        |                          |                               |       |         |         |      |       |         |         |   |       |         |         | 
|----------------------- | ------------------------ | ----------------------------- | ----- | ------- | ------- | ---- | ----- | ------- | ------- | - | ----- | ------- | ------- | 
|                        |                          |                              
|                        |                          | For the Fiscal Years Ended   
|                        |                          | September 30,                
|                        |                          |                              
|                        |                          | 2002                          |       | 2001    |         | 2000
|                        |                          |                               |       |         |         |     
|                        |                          |                              
|                        |                          | (In millions)                
|Net Sales               |                          |                               |       |         |         |      |       |         |         |   |       |        
|                        | Bath & Plumbing          |                               | $     | 1,060.9 |         |      | $     | 1,093.8 |         |   | $     | 1,309.6 |        
|                        | Rexair                   |                               |       | 98.6    |         |      |       | 13.3    |         |   |       |        |        
|                        | Diversified(4)           |                               |       |        |         |      |       |        |         |   |       | 415.3   |        
|                        |                          |                               |       |         |         |      |       |         |         |   |       |        
|                        |                          | Total Net Sales               |       | $       | 1,159.5 |      |       | $       | 1,107.1 |   |       | $       | 1,724.9 | 
|                        |                          |                               |       |         |         |      |       |         |         |   |       |        
|Operating Income (Loss) |                          |                               |       |         |         |      |       |         |         |   |       |        
|                        | Bath & Plumbing(1)(2)(3) |                               | $     | 90.3    |         |      | $     | (2.8    | )       |   | $     | 62.2    |        
|                        | Rexair                   |                               |       | 28.5    |         |      |       | 3.0     |         |   |       |        |        
|                        | Diversified(4)           |                               |       |        |         |      |       |        |         |   |       | 35.7    |        
|                        |                          |                               |       |         |         |      |       |         |         |   |       |        
|                        |                          |                               | 118.8 |         |         |      | 0.2   |         |         |   | 97.9  |        
|Corporate expenses      |                          |                               | (20.3 | )       |         |      | (23.1 | )       |         |   | (14.1 | )      
|                        |                          |                               |       |         |         |      |       |         |         |   |       |        
|                        |                          | Total Operating Income (Loss) |       | $       | 98.5    |      |       | $       | (22.9   | ) |       | $       | 83.8    | 
|                        |                          |                               |       |         |         |      |       |         |         |   |       |        



---



|    |                                                                                                                                                                                             
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Operating income for fiscal 2002 includes
    restructuring costs of $7.2 million (see Note 5 to the
    Companys Consolidated Financial Statements).                                      
|   
|(2) | The operating loss for fiscal 2001 includes
    restructuring, impairment and other unusual costs of
    $105.0 million (see Note 5 to the Companys
    Consolidated Financial Statements).
|   
|(3) | Operating income for fiscal 2000 includes
    restructuring, impairment and other unusual costs of
    $79.7 million (see Note 5 to the Companys
    Consolidated Financial Statements).   
|   
|(4) | Rexairs sales and operating income are
    included in the Diversified segment in fiscal 2000.                                                                                             

Overall

The Companys overall sales increased
$52.4 million (5%) in 2002 when compared to 2001 due to the
inclusion of Rexair in the fiscal 2002 results. On August 15,
2001, the Company reacquired the 75% equity interest in Rexair
previously sold to Strategic as part of the Diversified
transactions in March 2000. The Company previously accounted for
Rexair under the equity method of accounting during the time
period from March 24, 2000 until August 15, 2001 when
the Company held only a 25% equity interest. The increase was
partially offset by a 3% decrease in sales in the Bath &
Plumbing segment.

Overall sales in 2001 decreased
$617.8 million (36%) from 2000. The 2001 results were
impacted by the disposals of the Companys Diversified
businesses in March 2000, its fire protection business in
January 2000 and its European HVAC business in November 2000, as
well as the Companys decision to exit certain unprofitable
Bath & Plumbing product lines during 2000. The European HVAC
and fire protection businesses were both included in the
Companys Bath & Plumbing segment. The remaining
sales decrease of 9% was attributable to the weaker economy,
inventory reduction programs instituted by major customers,
inclement weather and unfavorable fluctuations in currency
exchange rates.

The Companys operating income
(loss) for 2002, 2001 and 2000 included goodwill
impairment, restructuring, and other non-recurring charges of
$7.2 million, $105.0 million and $79.7 million,
respectively (see Note 5 to the Companys consolidated
financial statements). Also included in fiscal 2001 and 2000
results is goodwill amortization of $9.7 million and
$13.2 million, respectively. The Company stopped amortizing
goodwill after adopting SFAS No. 142 on October 1, 2001.
Excluding all these items, operating income increased by
$13.9 million (15%) in fiscal 2002 and decreased by
$84.9 million (48%) in

11



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##### Table of Contents



fiscal 2001 when compared to the comparable prior
year periods. The increase in fiscal 2002 is due to the
inclusion of Rexair, partially offset by a decrease in operating
income in the Bath & Plumbing segment. The decrease in
fiscal 2001 was largely due to the disposal of the Diversified
businesses, a decrease in operating income in the Bath &
Plumbing segment, as well as higher corporate costs.


Bath & Plumbing

Sales in the Bath & Plumbing segment
decreased $32.9 million (3%) in 2002 in comparison with the
prior year. The decrease was partially due to the disposal of
the segments European HVAC businesses and discontinued
product lines in the segments U.S. Brass operations, which
contributed approximately $14.0 million to sales in fiscal
2001. In addition, the segment reported decreased sales in the
non-premium spa, whirlpool bath and above-ground pools
businesses, partially offset by sales increases in the U.K. bath
and sink and domestic premium spa businesses. The non-premium
spa and whirlpool bath businesses were affected by reduced sales
to home center mass merchants. The above-ground pools business
was negatively impacted by excess inventory levels experienced
by their distributor network due to poor weather conditions over
the last two selling seasons. The U.K. bath and sink business
experienced improved weather conditions and implemented customer
programs that have increased sales to existing customers. The
premium spa businesses have been successful in adding a number
of new products and dealers for its Jacuzzi and Sundance lines.
Foreign currency exchange rates also favorably impacted the
sales comparison with prior year by $2.2 million. In 2002,
sales of the Companys Eljer line of bathroom products
increased over 2001 as a result of greater demand in the
homecenter channel. In the industrial and commercial markets,
sales of the Companys Zurn Plumbing products in 2002 were
flat when compared to 2001 as this sector experienced a decrease
in construction activity.

Sales in the Bath & Plumbing segment
decreased $215.8 million (16%) in 2001 compared to 2000.
The decrease was partially attributable to the disposal of the
segments fire protection and European HVAC businesses and
the discontinuance of certain unprofitable product lines at U.S.
Brass, which provided the Company with $109.4 million of
sales in 2000 while only contributing $14.0 million to
sales in 2001. The remaining decrease in sales for 2001 was
primarily the result of the economic downturn, inventory
reduction programs instituted by major customers, inclement
weather in the segments major markets and increased energy
costs, which have softened consumer interest in purchasing spas.
The domestic bath and spa businesses accounted for $93.2 million
of the sales decrease in 2001. Overseas operations were impacted
by unfavorable currency exchange rates, which accounted for
approximately $23.7 million of the sales decrease in 2001.

Operating income (loss) included goodwill
impairment, restructuring and other non-recurring charges of
$7.2 million, $105.0 million and $79.7 million
for 2002, 2001 and 2000, respectively. In fiscal 2002, the
restructuring charges of $7.2 million included
$3.1 million in severance charges, $3.4 million
associated with a lease obligation and $0.7 million to
increase the reserve for the discontinued product lines of U.S.
Brass. For fiscal 2001, the charges consisted of goodwill
impairment charges of $100.2 million and non-recurring
charges of $4.8 million related to the discontinued product
lines at U.S. Brass. The 2000 charges included restructuring
charges of $13.1 million related to the closure of the
former Zurn corporate office and goodwill and property, plant
and equipment impairment charges as well as restructuring
charges related to the European HVAC and U.S. Brass operations
totaling $45.8 million and $20.8 million, respectively. The
segment also recorded goodwill amortization of $9.7 million
and $11.1 million in fiscal 2001 and 2000, respectively.
Excluding all these items, operating income decreased by $14.4
million (13%) in 2002 and $41.1 million (27%) in 2001 from
their comparable prior year periods. The decreases in both years
were primarily due to the decreases in sales discussed above.
Also contributing to the decrease in fiscal 2002 were the costs
of consolidating selected whirlpool bath manufacturing
facilities, which were fully operational in the first fiscal
quarter of 2003. These decreases were partially offset by an
increase in operating margins at the domestic spa business due
to a shift in the sales mix towards the premium spa lines, which
are sold at higher margins. After factoring in the sales
decrease in 2001 when compared with 2000, the decrease in
operating income was further influenced by increased freight and
energy costs, and an increase in unabsorbed overhead due to
lower production levels.

12



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Rexair

The Rexair segment consists solely of the Rexair
business, which the Company reacquired in August 2001. While
still owned by Strategic, Rexair recorded sales of
$96.1 million and operating income of $24.3 million
for the period ended August 15, 2001. For the year ended
September 30, 2000, Rexair recorded sales of
$109.5 million and operating income of $28.8 million.
The sales decrease of $10.8 million in fiscal 2002 over the
comparable prior year period is primarily attributable to a
decrease in unit sales due to political uncertainty as a result
of the events of September 11th and recent events in the
Middle East. Operating income for fiscal 2001 and 2000 included
goodwill amortization of $3.5 million and
$2.4 million, respectively. Excluding goodwill
amortization, the decrease in operating income in fiscal 2002
compared to 2001 was primarily due to lower sales, partially
offset by reduced general and administrative costs.

Corporate expenses

Corporate expenses decreased $2.8 million in
fiscal 2002 in comparison with the prior year due to a decrease
in staff over the latter half of the year, as well as an
increase in pension income recognized in 2002. In July 2002, the
Company announced the closure of its corporate office in Iselin,
New Jersey, in conjunction with its consolidation into a smaller
office in West Palm Beach, Florida. The increase in pension
income was largely related to a $58 million pension asset
retained as a result of the Ames True Temper sale in January
2002. Fiscal 2002 expenses include severance and related
compensation expenses of $1.0 million and an increase in legal
and other professional services of approximately
$1.8 million.

Corporate expenses increased in 2001 in
comparison to 2000 because of less pension income and an
increase in compensation expense. Also, the Company partially
offset corporate expenses through fiscal 2000 with the
amortization of a non-compete agreement. The Company amortized
$2.2 million per year in connection with this agreement.
The pension plans were reorganized in 2000 resulting in a
$2.7 million reduction in pension income allocable to the
corporate office in 2001. Compensation expenses increased in
2001 because of additional staff added in anticipation of a
previously planned spin-off of Lighting Corporation of America
and Spear & Jackson.

Interest Income and Expense

Interest expense decreased $13.1 million in
2002 compared to 2001 largely due to lower debt balances
resulting from payments made to satisfy the permanent debt
reductions of the Restructured Credit Facilities. Interest
expense increased $3.5 million in fiscal 2001 compared to
2000. This is largely the result of higher borrowing rates in
connection with an amendment of the Companys Revolving
Facilities in February 2001, higher borrowing rates under the
new Restructured Credit Agreement executed on August 15,
2001, and the assumption of Rexairs $172.5 million
debt on August 15, 2001.

Interest income decreased by $20.6 million
and increased by $8.5 million in fiscal 2002 and 2001,
respectively, when compared with the respective prior years. The
variation for both years is largely due to the interest earned
on the senior notes received from Strategic as part of the sale
of the Companys Diversified businesses in March 2000 (see
Acquisition and Disposition of Businesses). These notes
were sold back to Strategic in January 2002. Interest on these
notes totaled $1.6 million, $22.5 million and
$12.7 million in fiscal 2002, 2001 and 2000, respectively.

Other



| |                                           
| | ------------------------------------------
| | Gain on Sale of Diversified
    Businesses

The Company recorded a gain of $39.3 million
on the sale of its Diversified businesses in fiscal 2000 (see
Acquisition and Disposition of Businesses and Discontinued
Operations).

13



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| |                                          
| | -----------------------------------------
| | Equity (Losses) Earnings in
    Investees

The Company recorded equity losses related to its
investment in Strategic and Rexair of $1.4 million in 2001,
compared to equity earnings of $3.1 million in 2000. As a
result of the Rexair acquisition on August 15, 2001, the
Company now owns 100% of Rexair. In January 2002, the Company
sold all of its remaining interests in Strategic.



| |                   
| | ------------------
| | Other Expense, Net

Other expense, net, was $15.6 million,
$97.2 million and $4.7 million for fiscal 2002, 2001
and 2000, respectively. Fiscal 2002 primarily includes $9.2
million in financing related charges, $5.2 million
associated with the Companys ladder operations disposed of
in October 1999, and $1.7 million in write-downs of
property plant and equipment, offset by a gain on sale of excess
property of $0.8 million. Fiscal 2001 included
$45.1 million in impairment charges related to the
Strategic Notes, $23.6 million in advisory and other
related costs associated with the companys debt
restructuring, $17.4 million in deferred transaction costs
related to the original sale of Rexair in March 2000,
$8.1 million of professional fees related to the
Companys previously planned spin-off of the LCA group and
$4.3 million related to the Companys ladder
operations. Expenses for 2000 include $5.7 million in
charges related to the ladder operations and $0.9 million
in charges related to the abandoned sale of the Lighting
segment, partially offset by $3.2 million in gains on the
sale of excess real estate.

Taxes

The effective tax rates for continuing operations
for 2002, 2001 and 2000 were (186.4%), 2.9% and 26.9%,
respectively. The tax benefit recorded in 2002 is largely
attributable to benefits that will be realized due to the recent
completion of certain asset sales and changes in tax laws
regarding the utilization of loss carry backs. For 2001, the
difference between the U.S. statutory rate and the
Companys effective tax rate arose principally as a result
of the non-deductibility of a portion of the goodwill
impairments and non-recurring charges recorded during the year,
as well as a valuation allowance for deferred tax assets. The
2000 tax provision includes a $20.0 million benefit from the
reversal of tax contingencies established when the Company spun
off from Hanson and excludes a tax benefit associated with the
write-off of goodwill related to the Companys European
HVAC business.

Impairment, Restructuring and Other
Non-Recurring Charges



| |                            
| | ---------------------------
| | Goodwill Impairment Charges

Operating results at a number of the
Companys subsidiaries declined during 2001. In the third
quarter of 2001, the Company evaluated the recoverability of the
goodwill of these subsidiaries based on a fair value
methodology. This evaluation indicated that the carrying value
of the goodwill of certain of its subsidiaries was impaired. As
a result, the Company recorded goodwill impairment charges
totaling $100.2 million in the Bath & Plumbing segment
in fiscal 2001.

In fiscal 2000, the Company conducted a strategic
review of certain operations in the Bath & Plumbing segment.
Upon completion of its review, the Company decided to dispose of
its European HVAC operations and to exit three product lines at
its U.S. Brass operations. In reaching this decision, the
Company considered the profitability of these operations, the
fact that the Company was not a market leader in these
businesses and the fact that significant investment would be
required in order to make these businesses competitive with no
assurance of a reasonable return on such investment. As a result
of this decision, the Company recorded goodwill impairment
charges totaling $24.1 million related to its European HVAC
operations and $1.4 million related to its U.S. Brass
operations. Other non-recurring charges recorded in conjunction
with this decision are discussed below.

14



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| |                                                  
| | -------------------------------------------------
| | Restructuring and Other Non-recurring
    Charges

In the latter half of 2002, the Company recorded
restructuring charges of $7.2 million, which included
$3.4 million associated with a lease obligation, $3.1
million in severance charges and $0.7 million to increase
the reserve related to the discontinued U.S. Brass product
lines. The $3.4 million lease charge related to a revised
estimate on the lease obligation associated with the decision to
close the Zurn corporate office in January 2000 (see below). In
estimating its lease obligation, the Company assumed that it
would be able to sublease sections of the building over the
course of the lease. Due to the current real estate conditions
in that market, the Company has not been able to sublease the
office space. The severance charges relate to the elimination of
the executive layer of management within the Bath &
Plumbing segment and recent Jacuzzi management changes, which
resulted in the termination of four employees. These charges
consist of $2.3 million in cash related charges, which the
Company expects to pay within the next twelve months and
$0.8 million in non-cash related charges associated with
the accelerated vesting of restricted stock. The reserve related
to the U.S. Brass product lines discontinued in fiscal 2000 was
increased largely due to an increase in the amount of estimated
product liability and warranty claims related to those products.

In September 2000, the Companys
Bath & Plumbing segment announced to its employees and
to the marketplace that U.S. Brass was exiting its Valley line
of faucets, Eastman line of connectors and Sanitary Dash line of
under-the-sink pipes. Accordingly, in 2000, the Company recorded
restructuring and other non-recurring charges of
$19.4 million, which consists of severance and commitment
costs of $3.4 million, inventory related charges of
$16.0 million ($13.9 million recorded in cost of goods
sold and $2.1 million recorded in selling, general and
administrative expenses). The Company also recorded other
non-recurring charges of $4.8 million in 2001 consisting
primarily of accelerated depreciation on machinery that was used
to complete the remaining in-process inventory. The
Companys decision to exit these three product lines
required the closure of two manufacturing facilities in Abilene
and Plano, Texas and the termination of approximately 335
employees.

The Company recorded restructuring and other
non-recurring charges of $21.7 million in 2000 related to its
decision to dispose of its European HVAC operations (see
Goodwill Impairment Charges). These charges consisted of
$18.2 million in fixed asset impairments and
$3.5 million in inventory-related charges (recorded in Cost
of Goods Sold). The European HVAC operation was subsequently
sold in November 2000 (See Acquisition and Disposition of
Businesses and Discontinued Operations).

In January 2000, a decision was made to close the
former Zurn corporate office in Dallas, Texas which resulted in
the termination of 30 employees. The Company recorded a
restructuring charge in fiscal 2000 of $13.1 million
relating to this decision, which included severance costs of
$1.9 million, lease costs of $9.1 million for a lease
expiring November 2007, and write-offs of $2.1 million
relating to leasehold improvements and other fixed assets.

The principal components of impairment and
restructuring charges recorded for continuing operations are:

|                                                         |       |               |     |      |  |      |       |       |  |   |      |      | 
|-------------------------------------------------------- | ----- | ------------- | --- | ---- |  | ---- | ----- | ----- |  | - | ---- | ---- | 
|                                                         |       | 2002          |     | 2001 |  | 2000
|                                                         |       |               |     |      |  |     
|                                                         |       |              
|                                                         |       | (In millions)
|Impairment of goodwill                                   |       | $             |    |      |  | $    | 100.2 |       |  | $ | 25.5 |     
|Lease obligations, impairment of equipment and
    other |       |               | 4.1 |      |  |      |      |       |  |   | 29.6 |     
|Severance and related costs                              |       |               | 3.1 |      |  |      |      |       |  |   | 5.1  |     
|                                                         |       |               |     |      |  |      |       |       |  |   |      |     
|                                                         | Total |               | $   | 7.2  |  |      | $     | 100.2 |  |   | $    | 60.2 | 
|                                                         |       |               |     |      |  |      |       |       |  |   |      |     
|Cash charges                                             |       | $             | 6.4 |      |  | $    |      |       |  | $ | 16.4 |     
|Non-cash charges                                         |       |               | 0.8 |      |  |      | 100.2 |       |  |   | 43.8 |     
|                                                         |       |               |     |      |  |      |       |       |  |   |      |     
|                                                         | Total |               | $   | 7.2  |  |      | $     | 100.2 |  |   | $    | 60.2 | 
|                                                         |       |               |     |      |  |      |       |       |  |   |      |     

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As of September 30, 2002, the Company had
remaining accruals of $9.4 million for restructuring costs.
The activity in the restructuring liability accounts by cost
category is as follows:

|                              |                                 |               |      |             |   |       |     |      |   |   |      |      |  
|----------------------------- | ------------------------------- | ------------- | ---- | ----------- | - | ----- | --- | ---- | - | - | ---- | ---- | -
|                              |                                 | Lease and     |      |             |   |      
|                              |                                 | Contract      |      | Severance   |   |      
|                              |                                 | Related       |      | and Related |   | Total
|                              |                                 | Costs         |      | Costs       |   | Costs
|                              |                                 |               |      |             |   |      
|                              |                                 |              
|                              |                                 | (In millions)
|Balance at September 30, 2000 |                                 | $             | 10.1 |             |   | $     | 4.9 |      |   | $ | 15.0 |     
|2001 activity:                |                                 |               |      |             |   |       |     |      |   |   |      |     
|                              | Cash payments                   |               |      | (3.3        | ) |       |     | (1.6 | ) |   |      | (4.9 | )
|                              | Reserves of divested businesses |               |      |            |   |       |     | (3.0 | ) |   |      | (3.0 | )
|                              |                                 |               |      |             |   |       |     |      |   |   |      |     
|Balance at September 30, 2001 |                                 |               | 6.8  |             |   |       | 0.3 |      |   |   | 7.1  |     
|2002 activity:                |                                 |               |      |             |   |       |     |      |   |   |      |     
|                              | Fiscal 2002 charges             |               |      | 4.1         |   |       |     | 2.3  |   |   |      | 6.4  |  
|                              | Cash payments                   |               |      | (2.1        | ) |       |     | (2.0 | ) |   |      | (4.1 | )
|                              |                                 |               |      |             |   |       |     |      |   |   |      |     
|Balance at September 30, 2002 |                                 | $             | 8.8  |             |   | $     | 0.6 |      |   | $ | 9.4  |     
|                              |                                 |               |      |             |   |       |     |      |   |   |      |     

Approximately $2.2 million of the reserves
are included in the balance sheet caption Accrued expenses
and other current liabilities, while the remaining
$7.2 million are recorded in the balance sheet caption
Other liabilities. The Company expects the remaining
accruals to be paid with cash over the periods provided by the
severance and lease agreements of one and five years,
respectively.



| |      
| | -----
| | Other

In 2001, the Company incurred $8.1 million
for professional fees associated with the previously planned
spin-off of the LCA Group; recorded charges of
$45.1 million to reflect the Strategic Notes at their net
realizable value; expensed $17.4 million in deferred
transaction costs previously incurred as part of the original
sale of Rexair; and incurred $6.7 million in advisory and
other related costs associated with the Companys debt
restructuring executed on August 15, 2001. During 2002, the
Company sold the Strategic Notes together with its equity
interest in Strategic for net proceeds of $105.9 million,
which approximated their carrying value. In 2000, the Company
recorded $0.9 million in charges related to the abandoned
sale of the LCA Group. All of these costs have been classified
as Other expenses in the Companys consolidated
statement of operations.

Acquisition and Disposition of Businesses and
Discontinued Operations



| |                          
| | -------------------------
| | Acquisition of Businesses

In connection with the Companys sale to
Strategic in March 2000 of a 75% interest in Rexair (see
Disposition of Businessesbelow), the Company guaranteed
Rexairs $200 million credit facility (Rexair
Guarantee). This guarantee required the Company to
maintain certain credit rating levels. In response to a
downgrade of its credit ratings in March 2001, the Company
obtained waivers of the ratings default from Rexairs
lenders while it pursued the reacquisition of Rexair from
Strategic and the restructuring of its debt. On August 15,
2001, the Company reacquired the 75% equity interest in Rexair
previously sold to Strategic. The purchase consideration
included the return to Strategic of $27.4 million in face
value of Strategics senior notes and the assumption of
borrowings outstanding under Rexairs $200 million
credit facility. In connection with the reacquisition, the
Company reduced the reacquired basis in Rexair by the amount of
its previously deferred gain and reclassified its retained 25%
share of Rexairs net liabilities from other long-term
liabilities. The allocation of the purchase consideration,
including the deferred gain and the carrying value of the
retained liabilities, to the assets acquired and liabilities
assumed resulted in intangible assets of approximately
$73.7 million, the majority of which have indefinite lives
and will not be amortized. The Company expensed
$17.4 million of deferred transaction costs associated with
the March 2000 sale of Rexair. The results of Rexair have been
included in the Rexair segment from the date of re-

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acquisition. The Company accounted for Rexair
under the equity method of accounting during the time period
from March 24, 2000 to August 15, 2001 when the Company
held only a 25% interest.


In June 2000, upon expiration of the contingency
period related to the December 1997 acquisition of
Spear & Jackson, the Company made additional cash
payments totaling $71.4 million to the former owners of
Spear & Jackson. The Company was required to pay
$36.0 million because the Companys stock price fell
below a guaranteed minimum as defined in the acquisition
agreement. This amount was recorded as an adjustment to paid-in
capital as it was based upon the market price of the
Companys stock. The remaining $35.4 million payment
was made in satisfaction of additional contingent consideration
based on other criteria set forth in the purchase agreement.
This amount was recorded as additional goodwill. In September
2002, the Company sold Spear & Jackson as part of its
Disposal Plan (see Note 4 to the Companys
Consolidated Financial Statements).



| |                                                                               
| | ------------------------------------------------------------------------------
| | Disposition of Businesses (excluding
    Disposals of Discontinued Operations)

In November 2000, the Company sold its
European HVAC business for proceeds of $7.5 million, which
approximated its carrying value.

On March 24, 2000, the Company disposed of a
majority equity interest in its Diversified segment in two
separate transactions. In the first transaction, the Company
disposed of the following subsidiaries: Atech Turbine
Components, Inc.; Bearing Inspection, Inc.; BiltBest Products,
Inc.; EJ Footwear Corp. (including Georgia Boot Inc. and Lehigh
Safety Shoe Co.); Garden State Tanning Inc.; Huron Inc.; Jade
Holdings Pte Ltd (including Jade Technologies Singapore Ltd and
FSM Europe B.B.); Leon Plastics Inc.; Native Textiles Inc. and
SCF Industries, Inc. The Company received gross cash proceeds of
approximately $203.4 million, retained a preferred equity
interest in the buyer, Strategic, having a stated value of
approximately $19.5 million, retained a common equity
interest in Strategic of 17.7% and received approximately
$209.0 million aggregate principal amount of 12% (12.5%
effective August 18, 2000) senior notes (the
Strategic Notes) due 2007. In addition, Strategic
assumed approximately $7.9 million of existing bank debt.
As a result of its disposal of the Diversified businesses, the
Company recorded a pre-tax gain of $38.4 million.

In the second transaction, Rexair sold newly
issued shares to Strategic representing, after issuance, 75% of
the equity interest in Rexair. The Company received
approximately $195.0 million in cash and retained a 25%
direct equity interest in Rexair. In addition, the Company
guaranteed Rexairs $200 million credit facility. In
connection with the Rexair transaction, the Company recorded a
liability of $82.2 million, related to its retained 25%
share of Rexairs net liabilities and a deferred gain,
which together with the deferral of the related transaction
costs, was to be deferred until the release of the
Companys guarantee of Rexairs credit facility. On
August 15, 2001, the Company reacquired Rexair from
Strategic in exchange for $27.4 million in face value of
the Strategic Notes. Accordingly, the Companys retained
25% share of Rexairs net liabilities reduced the
reacquired basis in Rexair (see Acquisition of Businesses
above).

In August 2000, the Company sold
$25.0 million of the Strategic Notes, approximately
$1.8 million of the stated value of its preferred equity
interest in Strategic and approximately 1.9% of its common
equity interest in Strategic. This transaction resulted in a
pre-tax gain of $0.9 million. In January 2002, the
Company sold its remaining preferred equity interest in
Strategic having a stated value of approximately
$18 million, its 15.8% common equity interest and its
Strategic Notes with a face value of $156.9 million back to
Strategic for net proceeds of $105.9 million.

In the second quarter of fiscal 2000, the Company
sold its fire protection businesses. The cash consideration paid
for these businesses totaled approximately $23.0 million,
which approximated their carrying value.

During the first quarter of fiscal 2000, the
Company disposed of assets relating to its ladder operations and
the infant and children footwear operation. The total proceeds
of these separate transactions were

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$18.0 million, which approximated their carrying
values. The Company has retained certain product liabilities of
the ladder operations for which $12.3 million has been
accrued at September 30, 2002.




| |                        
| | -----------------------
| | Discontinued Operations

On December 28, 2001, the Board of Directors
approved a formal Disposal Plan for five businesses in
connection with the Companys obligation to pay debt
amortization as set forth in the restructured debt agreements.
In connection with the Disposal Plan, the Company incurred a
charge of $232.6 million, net of tax, in fiscal 2001, which
represented the difference between the historical net carrying
value and the estimated net realizable value of the five
businesses  Ames True Temper, Selkirk, Lighting
Corporation of America, Spear & Jackson and SiTeco Lighting.
In fiscal 2002, the Company recorded income from discontinued
operations of $7.8 million, as it re-evaluated the
estimated loss on disposal of its discontinued operations. The
discontinued businesses previously comprised the Companys
Lawn & Garden and Lighting segments. The net assets of the
discontinued businesses are included in net assets held for sale
in all periods presented. The Company completed the sales of
Ames True Temper in January 2002, Lighting Corporation of
America in April 2002, Selkirk in June 2002 and Spear
& Jackson in September 2002. In October 2002, the
Company completed the sale of SiTeco Lighting.

The operating results of these businesses were
classified as discontinued operations in 2001 and 2000 and, in
accordance with APB No. 30, their estimated fiscal 2002
operating income was included in the Companys expected
loss on disposal of $232.6 million which was recorded in
September 2001 and adjusted in fiscal 2002.

Summarized results of these businesses are as
follows:

|                                                                   |  |                                      |       |      |  |      |         |   |  |   |         | 
|------------------------------------------------------------------ |  | ------------------------------------ | ----- | ---- |  | ---- | ------- | - |  | - | ------- | 
|                                                                   |  |                                     
|                                                                   |  | For Fiscal Years Ended September 30,
|                                                                   |  |                                     
|                                                                   |  | 2002                                 |       | 2001 |  | 2000
|                                                                   |  |                                      |       |      |  |     
|                                                                   |  |                                     
|                                                                   |  | (In millions)                       
|Net sales                                                          |  | $                                    | 714.1 |      |  | $    | 1,346.1 |   |  | $ | 1,419.8 | 
|Operating income (loss)                                            |  |                                      | 31.7  |      |  |      | (57.9   | ) |  |   | 3.9     | 
|Income (loss) from discontinued operations
    before income taxes |  |                                      | 31.8  |      |  |      | (66.6   | ) |  |   | 3.4     | 

Included in operating income (loss) in
fiscal 2001 and 2000 are goodwill impairment charges totaling
$121.4 million and $84.0 million, respectively. These
goodwill impairment charges resulted from evaluations of the
recoverability of goodwill performed by the Company based on a
fair value methodology. The impairment charges were recorded as
part of continuing operations before the approval of the
Disposal Plan and were reclassified into discontinued operations
after the approval of the Disposal Plan. Excluding the
impairment charges, the decrease in sales and operating income
for these discontinued operations in fiscal 2002 compared to
fiscal 2001 primarily relates to the lost contribution from
businesses sold during fiscal 2002.

The decrease in sales in 2001 compared to 2000
relates primarily to the Lighting companies (Lighting
Corporation of America and SiTeco Lighting) and Spear &
Jackson. Sales at the Lighting companies decreased
$50.1 million due to the discontinuance of certain
unprofitable product lines in 2000 combined with lower volume
sales at the commercial and institutional indoor businesses.
Sales at Spear & Jackson decreased primarily due to the sale
of its Saws Division in March 2001. Excluding the goodwill
impairment charges mentioned above, operating income for the
discontinued operations decreased $24.4 million in 2001
compared to 2000. This decrease was largely from the Ames True
Temper business. This was primarily the result of higher
warehousing and distribution costs due to higher-than-normal
inventory levels and the under-absorption of fixed costs as
manufacturing production schedules were curtailed to reduce
inventories. The inventory levels were higher than expected due
to the opening of a new master distribution center in December
2000, which coincided with inventory reduction plans instituted
by major customers. Ames True Temper also incurred
$3.8 million in non-recurring charges related to the
opening of the new master distribution center.

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Liquidity and Capital Resources

The Companys primary sources of liquidity
and capital resources are cash and cash equivalents, cash
provided from operations and available borrowings under the
Companys Restructured Facilities (as defined below and in
Note 6 to the Companys Consolidated Financial
Statements). The Company expects to satisfy operating liquidity
needs through operating cash flow.

Net cash provided by (used in) operating
activities of continuing operations was $35.8 million,
$29.3 million and $(64.3) million in fiscal 2002, 2001
and 2000, respectively. The increase in fiscal 2002 over 2001
was primarily the result of increased operating income, largely
due to a full years contribution from the Rexair business
re-acquired in August 2001. The improvement in fiscal 2001 was
principally realized through implementing liquidity management
actions, primarily directed at accounts receivable, inventories
and accounts payable. Also contributing to the improvement over
2000 was the fact that the Diversified businesses were net cash
users during 2000. The Diversified businesses are seasonal in
nature. They were divested in March 2000 just as they were
starting their seasonal change from net cash users to cash
generators. The Company has experienced some seasonality in its
Jacuzzi and Zurn businesses. Sales of several Jacuzzi products
such as spas and swimming pool equipment are sensitive to
weather conditions and tend to experience a significant decrease
in sales during the fall and winter months (predominantly the
first and second fiscal quarters). Sales at Jacuzzi and Zurn are
also negatively affected when weather impedes outside
construction and installation.

Net cash provided by discontinued operations was
$24.7 million, $67.2 million and $28.8 million in
2002, 2001 and 2000, respectively. The decrease in cash provided
by discontinued operations in 2002 compared to 2001 is due to
the disposals during 2002, largely Ames True Temper in January
2002 and Lighting Corporation of America in April 2002. The
increase in cash provided in 2001 over 2000 relates mainly to
the implementation of the liquidity management actions described
above in continuing operations. Also there were increased
working capital requirements at Ames True Temper during 2000 due
to a planned move into a new distribution center in early fiscal
2001.

Net cash provided by investing activities was
$481.8 million in 2002, compared to net cash used of
$7.4 million in 2001, and net cash provided of $322.0
million in 2000. Net cash provided by investing activities in
2002 included $388.2 million in proceeds from the sale of
businesses. These net proceeds consisted of $143.1 million
for Ames True Temper, $210.2 million for Lighting
Corporation of America and $34.9 million for Selkirk. Also
included in cash provided from investing activities in 2002 was
$105.9 million received from the sale of the Strategic
Notes and $3.3 million from the sale of excess real estate,
fixed assets and other investments, partially offset by
$15.6 million in capital expenditures. Net cash used by
investing activities in 2001 consisted of $22.9 million for
capital expenditures, partially offset by cash proceeds of
$7.5 million received from the sale of the European HVAC
operations and $8.7 million from the sale of excess real
estate and fixed assets. Net cash provided by investing
activities in 2000 primarily consisted of cash proceeds of
$402.2 million received from the sale of a majority equity
interest in the Diversified businesses and the sale of its fire
protection, childrens footwear and ladder operations,
$24.3 million received from the sale of Strategic Notes and
$6.7 million from the sale of excess real estate and
property, plant and equipment. This increase in cash was
partially offset by $33.1 million required for capital
expenditures and $71.4 million for the Spear & Jackson
contingency payment (see Note 3 to the Companys
Consolidated Financial Statements).

The Company used net cash of $575.9 million,
$39.5 million and $307.5 million for financing
activities in fiscal 2002, 2001 and 2000, respectively. Cash
used in financing activities in 2002 consisted of net repayments
of debt and notes payable of $423.2 million and escrow
deposits of $152.7 million. The escrow deposits, made for
the benefit of the holders of the Companys Senior Notes
and certain other creditors, were required under the terms of
the Restructured Facilities. Cash used in financing activities
for fiscal 2001 includes net proceeds from long-term debt and
notes of $16.3 million, offset by dividend payments of
$7.7 million and $43.1 million of cash used to
purchase the Companys common stock for treasury. The
fiscal 2000 amount primarily consists of net repayments of
long-term debt and notes of $151.7 million,
$143.4 million of cash used to purchase the Companys
common stock for treasury and

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dividend payments of $16.8 million. The cash
for the repayments and treasury stock repurchases was generated
by the proceeds from the sale of the Companys Diversified
businesses discussed earlier.


During October 1999, the Company entered into
equity instrument contracts to purchase 2.8 million shares
of its common stock. These contracts were settled during 2001
for $43.1 million. During 1999 and 2000, the Companys
Board of Directors authorized share repurchase programs
aggregating $350.0 million. Under these programs, the
Company repurchased $331.8 million of its common stock for
treasury, of which $43.1 million and $99.2 million was
purchased in 2001 and 2000, respectively. During June 2000, in a
separate transaction authorized and undertaken outside the
existing share repurchase programs, the Company repurchased all
of its common stock held by the former owners of Spear &
Jackson for $44.2 million. The repurchase programs have
been suspended indefinitely, as the Restructured Facilities
entered into on August 15, 2001 contains restrictions on
the purchase of Company stock, dividends and other restrictive
payments. In March 2001, the Companys Board of Directors
indefinitely suspended the Companys quarterly payment of
dividends.

Total stockholders equity increased
$38.1 million in fiscal 2002, primarily due to net income
recorded for the year of $41.6 million.

During fiscal 2002, the Company paid
approximately $4.1 million related to its restructuring
plans and expects an additional $2.2 million to be paid in
the next 12 months (see Note 5 to the Companys
Consolidated Financial Statements for more information on the
Companys restructuring activities). Below is a summary of
the Companys significant contractual cash obligations as
of September 30, 2002, which reflects the sale of SiTeco,
the amendments to the Restructured Facilities and the exchange
of the Senior Notes.

|                                   |  |               |        |                        |  |          |        |      |  |      |      |      |  |            |       |  |  |   |       |  |  |   |      |  |  |   |     | 
|---------------------------------- |  | ------------- | ------ | ---------------------- |  | -------- | ------ | ---- |  | ---- | ---- | ---- |  | ---------- | ----- |  |  | - | ----- |  |  | - | ---- |  |  | - | --- | 
|                                   |  |               |        |                        |  |         
|                                   |  |               |        | Payments due in fiscal |  | Payments
|                                   |  |               |        |                        |  | due     
|                                   |  | Total         |        | 2003                   |  | 2004     |        | 2005 |  | 2006 |      | 2007 |  | Thereafter
|                                   |  |               |        |                        |  |          |        |      |  |      |      |      |  |           
|                                   |  |               |        |                       
|                                   |  | (In millions) |        |                       
|Long-term debt                     |  | $             | 792.8  |                        |  | $        | 275.9  |      |  | $    | 13.1 |      |  | $          | 296.5 |  |  | $ | 134.4 |  |  | $ | 71.1 |  |  | $ | 1.8 | 
|Escrow deposits for Senior Notes   |  |               | (134.1 | )                      |  |          | (130.5 | )    |  |      | (3.6 | )    |  |            |      |  |  |   |      |  |  |   |     |  |  |   |    | 
|Other escrow deposits              |  |               | (12.4  | )                      |  |          | (12.4  | )    |  |      |     |      |  |            |      |  |  |   |      |  |  |   |     |  |  |   |    | 
|Notes payable                      |  |               | 15.3   |                        |  |          | 15.3   |      |  |      |     |      |  |            |      |  |  |   |      |  |  |   |     |  |  |   |    | 
|Operating leases                   |  |               | 29.5   |                        |  |          | 9.2    |      |  |      | 6.7  |      |  |            | 5.1   |  |  |   | 4.0   |  |  |   | 2.4  |  |  |   | 2.1 | 
|                                   |  |               |        |                        |  |          |        |      |  |      |      |      |  |            |       |  |  |   |       |  |  |   |      |  |  |   |     | 
|Total Contractual cash obligations |  | $             | 691.1  |                        |  | $        | 157.5  |      |  | $    | 16.2 |      |  | $          | 301.6 |  |  | $ | 138.4 |  |  | $ | 73.5 |  |  | $ | 3.9 | 
|                                   |  |               |        |                        |  |          |        |      |  |      |      |      |  |            |       |  |  |   |       |  |  |   |      |  |  |   |     | 

In October 1998, USI and USI American
Holdings, Inc. (USIAH), issued $250.0 million
aggregate principal amount of Senior Notes due October 15,
2003, which bear interest at 7.125%, payable semiannually
(7.125% Notes). The net cash proceeds were
$247.7 million after transaction fees and discounts. A
supplemental indenture was later executed adding USI Global
Corporation (USI Global), a wholly owned subsidiary
of USI, as a co-obligor under the 7.125% Notes. On
September 9, 2002, the Company commenced an Exchange Offer
to exchange cash and notes with an interest rate of 11.25%
payable December 31, 2005 (the New Notes) for
all outstanding 7.125% Notes due October 2003. In
connection with the Exchange Offer, the Company also solicited
consents from a majority of the 7.125% Note holders to a
proposed amendment to the indenture under which the 7.125% Notes
were issued so that the cash deposited into a cash collateral
account from the sales of the Companys non-core assets
that is proportionally allocable to tendering holders may be
used to pay the cash consideration in the Exchange Offer
(Consent Solicitation).

On November 4, 2002, the Company announced
that it had accepted for payment all 7.125% Notes validly
tendered in the exchange offer. Approximately
$238.2 million or 95% of the 7.125% Notes were tendered for
exchange. Note holders who tendered their 7.125% Notes received
an amount of cash and principal amount of New Notes that
together equaled the principal amount of the 7.125% Notes
tendered. The transaction resulted in $104.8 million paid
to the note holders from the 7.125% Notes escrow account, New
Notes issued of $133.4 million and a balance remaining in
7.125% Notes of $11.8 million. The other

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terms of the New Notes are substantially similar
to the 7.125% Notes. A consent payment of $15 per $1,000
principal amount of the New Notes issued was paid out of the
Companys general working capital to all holders who
delivered their consents on or prior to the consent date,
resulting in an additional payment to tendering note holders of
approximately $2.0 million.


In fiscal 1997, USIAH issued $125.0 million
aggregate principal amount of Senior Notes due December 1,
2006, which bear interest at 7.25%, payable semiannually
(7.25% Notes). The net cash proceeds were
$123.0 million after transaction fees and discounts. A
supplemental indenture was later executed adding USI and USI
Global as co-obligors with USIAH under the 7.25% Notes. On
October 24, 2002, the Company commenced an offer to
purchase up to $54.8 million in aggregate principal amount
of its outstanding 2006 Notes. On November 7, 2002, the
Company announced that it received tenders, and related
consents, from a majority of the holders of its outstanding
7.25% Notes. An amount just shy of 100% or $125.0 million
of the 7.25% Notes, were tendered for exchange. The transaction
resulted in $54.8 million paid to the note holders from the
7.25% Notes escrow account.

The 7.25% Notes, 7.125% Notes and New Notes
(collectively, the Senior Notes) are guaranteed by
USI Atlantic. The 7.25% and 7.125% Senior Notes are redeemable
at the option of the Company, in whole or in part, at a
redemption price equal to the greater of (i) 100% of the
principal amount to be redeemed or (ii) the sum of the
present values of the remaining scheduled payments of principal
and interest on the Senior Notes to be redeemed, discounted at a
rate based on the yield to maturity of the comparable U.S.
Government securities plus a spread (10 basis points for
the 7.25% Notes and 50 basis points for the 7.125% Notes)
plus, in each case, accrued interest to the date of redemption.
The New Notes are redeemable without premium or penalty using
the New Notes escrow account or otherwise at 103% if redeemed
from the issue date to, but not including, the first anniversary
of issuance, 102% thereafter through December 30, 2004 and
101% from December 31, 2004 to, but not including, the
maturity date. Certain restrictions on dividends and the
purchase of common stock for treasury contained in the indenture
for the 7.25% Notes were eliminated in August 1998 based
upon the Companys credit rating at that time. The 7.125%
Notes and New Notes were issued without such restrictions;
however, the Restructured Facilities (discussed below) contain
restrictions on dividends as well as the purchase of common
stock for treasury. The security interests granted to the
holders of the Senior Notes as a result of the Restructured
Facilities are discussed in more detail below.

During fiscal 2001, the Company had a
$300 million 364-day credit facility (the Credit
Facility) scheduled to expire on October 26, 2001.
The Company also had a five-year revolving line of credit
providing for borrowings in both U.S. dollars and foreign
currencies and letters of credit, which had original
availability of $500 million (the Credit
Agreement), scheduled to terminate on December 12,
2001. The Credit Facility and Credit Agreement (together, the
Revolving Facilities) were restructured on
August 15, 2001. The Company completed the re-acquisition
of Rexair and restructured the Rexair Credit Facilities on the
same date. The amended facilities (including the Rexair Credit
Facility, the Restructured Facilities) extended the
final maturity date of the Companys debt under the
Revolving Facilities to November 30, 2002, which coincided
with the final maturity of the Rexair Credit Facility. On
October 21, 2002, the Company announced that it obtained an
amendment to the Restructured Facilities, providing for an
extension of the maturity date to October 2004 (see further
below for more details on the amended facilities).

The Restructured Facilities originally provided
for an increase in availability under the five-year Credit
Agreement from $500 million to $830 million,
availability under the Rexair Credit Facility of
$195 million (reduced by $5 million in May 2002), the
termination of the multi-currency borrowing feature under the
five-year Credit Agreement, the elimination of the 364-day
Credit Facility and scheduled permanent reductions of the
Companys senior debt (a combination of the Restructured
Facilities, the Senior Notes and other defined obligations). The
required cumulative permanent principal reductions of the
Companys senior debt were scheduled at $75 million,
$200 million, $450 million and $600 million
during the periods ending December 31, 2001; March 31,
2002; June 30, 2002 and October 15, 2002, respectively.

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On December 21, 2001, the Company obtained a
waiver from its lenders under the Restructured Facilities that
permitted the Company to satisfy the remaining balance of the
December 31, 2001 $75 million reduction through a
permanent reduction of the unfunded commitments under the
Restructured Facilities, to the extent not satisfied through
cash flow or asset sale proceeds. Under the terms of the waiver,
the permanent reduction resulting from the sale of Ames True
Temper was reduced by the amount of the unfunded commitment
(approximately $58 million) used to satisfy the
December 31, 2001 amortization. In October 2002, the
Company obtained a similar waiver from its lenders to satisfy
the remaining balance of the October 15, 2002 reduction
(approximately $27 million), through a reduction of the
unfunded commitments. With the sale of SiTeco on October 18,
2002, this portion of the unfunded commitment was restored. On
June 30, 2002, the Company obtained an amendment to the
Rexair Credit Facility which contained, among other things,
revised ratios for interest coverage and consolidated leverage
as well as revised minimum EBITDA covenants.

Under the Restructured Facilities, substantially
all proceeds from the sale of assets are required to be applied
to reduce the Companys funded and unfunded senior debt, on
a pro rata basis. The senior debt includes the Senior Notes
where the Company or any subsidiary subject to the Senior
Notes covenants completes an asset sale. Proceeds
allocable to the Senior Notes and other defined obligations are
required to be deposited in cash collateral accounts for the
benefit of the relevant holders; any claims of the lenders of
the Restructured Facilities to amounts on deposit in the cash
collateral accounts are subordinated to the claims of the
relevant holders, including the payment in full of the Senior
Notes and other obligations. Any reductions of senior debt with
asset sale proceeds are credited dollar-for-dollar towards the
scheduled permanent principal reductions. Below is a summary of
significant asset sales completed in fiscal 2002.

|                          |  |             |           |          |  |                 |       |           |  |              |      |  |  |   |      |  |  |   |       | 
|------------------------- |  | ----------- | --------- | -------- |  | --------------- | ----- | --------- |  | ------------ | ---- |  |  | - | ---- |  |  | - | ----- | 
|                          |  |             |           |          |  | Estimated       |       | Deposited |  | Reduction of
|                          |  | Transaction |           | Gross    |  | Transaction and |       | in Escrow |  | Restructured
|                          |  | Date        |           | Proceeds |  | Other Costs(1)  |       | Accounts  |  | Facilities  
|                          |  |             |           |          |  |                 |       |           |  |             
|Ames True Temper          |  |             | 1/14/2002 |          |  | $               | 165.0 |           |  | $            | 21.9 |  |  | $ | 44.1 |  |  | $ | 99.0  | 
|Strategic Notes           |  |             | 1/16/2002 |          |  |                 | 107.6 |           |  |              | 1.7  |  |  |   | 31.9 |  |  |   | 74.0  | 
|Lighting Corp. of America |  |             | 4/26/2002 |          |  |                 | 250.0 |           |  |              | 39.8 |  |  |   | 64.3 |  |  |   | 145.9 | 
|Selkirk                   |  |             | 6/24/2002 |          |  |                 | 40.0  |           |  |              | 5.1  |  |  |   | 7.1  |  |  |   | 27.8  | 



---



|    |                                                                                                                                                                                                                                                                                                              
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Estimated transaction and other costs include
    working capital adjustments and escrows for future liabilities.
    Approximately $24.3 million of these costs are still
    outstanding as of September 30, 2002 ($15.8 million in
    current liabilities and $8.5 million in long-term
    liabilities).

On September 6, 2002, the Company sold
substantially all of the assets of Spear & Jackson to
MegaPro Tools, Inc. (MegaPro). Net proceeds
consisted of notes from the buyer and an equity interest in the
common shares of the buyer. The Company is subject to
restrictions on the voting and disposition of these shares and
has no involvement in the continuing management or operations of
MegaPro. The investment was recorded at its fair value at the
date of acquisition based on an independent valuation.

On October 18, 2002, the Company completed
the sale of SiTeco to funds advised by JPMorgan Partners, the
private equity arm of JPMorgan Chase & Company. Net proceeds
of approximately $103.8 million were applied to reduce the
Companys funded and unfunded senior debt, including
$34.0 million deposited into escrow accounts for the
benefit of the holders of the Companys Senior Notes and
certain other creditors.

Also in October 2002, the Restructured Facilities
were amended, extending the maturity of the facilities to
October 4, 2004. The amended Restructured Facilities
decrease the availability of USI borrowings (excluding Rexair,
the USI Facility) to $365 million, which
consists of a $250 million term loan and $115 million
revolving facility. Availability on the Rexair portion of the
facilities decreased to $90 million, which includes a
$75 million term loan and $15 million revolver.
Required cumulative permanent reductions of the USI Facility are
scheduled on July 31, 2003 and August 31, 2004 for
$20 million and $50 million, respectively. The Rexair
Facility requires cumulative permanent reductions of
$2 million per quarter in fiscal 2003 and $3 million
for each of the first three quarters of 2004.

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The Restructured Facilities require that the
Company and Rexair maintain minimum monthly EBITDA, as defined;
comply with maximum monthly capital expenditure limits; maintain
minimum availability (as defined) of no less than
$25 million and comply with other customary affirmative and
negative covenants. In addition, the amended Rexair Credit
Facility requires that excess cash generated by Rexair be
segregated from excess cash generated by the remainder of the
Companys operations and used only to reduce the debt
outstanding on the Rexair Credit Facility. The Senior Notes and
the Restructured Facilities contain cross-default and
cross-acceleration provisions.

The Restructured Facilities provide for
increasing interest rates over the remaining term. The spread
over London Interbank Offered Rate (LIBOR) was 275
basis points until December 31, 2001, after which the
spread increased by 50 basis points each quarter thereafter
through December 2002. With the amendment in October 2002, the
interest rate increases to 675 basis points over LIBOR from
December 2002 through June 2003. Beginning July 2003 the spread
will increase by 50 basis points on the first day of each
quarter through the maturity date. The Restructured Facilities
also provide for several new fees including an unused commitment
fee of 0.50% (which increases to 0.75% with the October 2002
amendment) and a facing fee on all outstanding letters of credit
of 0.25% per annum.

The lenders of the Revolving Facilities were
granted on April 30, 2001 security interests in
substantially all of the assets of the Company and its domestic
subsidiaries, including shares of the Companys domestic
subsidiaries and 65% of the shares of certain of the
Companys foreign subsidiaries. As a result of having the
Revolving Facilities secured, the Rexair Guarantee became
secured with certain assets. In addition, the Companys
Senior Notes also became equally and ratably secured with the
Revolving Facilities and the Rexair Guarantee with respect to
the assets of the Company and its subsidiaries that are subject
to the covenant restrictions under the Senior Notes. The
covenants contained in the indentures under which the Senior
Notes were issued apply to the Company and any domestic
subsidiary that is a significant subsidiary (within
the meaning of rule 1-02(w) of Regulation S-X promulgated
under the Securities and Exchange Act of 1934 or any successor
provision). In accordance with the Rule, the determination that
a subsidiary is a significant subsidiary is made on
a consolidated basis, taking into account such subsidiary and
all of its consolidated subsidiaries. The subsidiaries
identified as significant subsidiaries at October 1, 2002
include USI Atlantic Corp., USI American Holdings, Inc., USI
Global Corp., JUSI Holdings, Inc., Jacuzzi, Inc. and Zurn
Industries, Inc. After considering the equal and ratable
security interest of the Senior Notes, separate financial
statements for USI Atlantic Corp.; USI American Holdings, Inc.;
USI Global Corp. and JUSI Holdings, Inc. are included elsewhere
in this annual report. A significant subsidiary may itself have
one or more subsidiaries that, when looked at on a consolidated
basis, do not constitute significant subsidiaries
under the Rule. As a result, these subsidiaries, on a
stand-alone basis, are not subject to the covenant restrictions
under the Senior Notes, and no portion of the proceeds of assets
sales completed by these subsidiaries would be allocable to the
Senior Notes.

The security interests that were granted to the
lenders of the Revolving Facilities on April 30, 2001
remain in place under the Restructured Facilities, as do the
arrangements to equally and ratably secure the Rexair Guaranty
and to equally and ratably secure the Senior Notes with certain
assets. In addition, certain domestic and foreign subsidiaries
of the Company that are not subject to the Senior Notes
covenant restrictions have guaranteed the Restructured
Facilities. Under the Restructured Facilities, the Company also
agreed to provide the lenders with security interests in the
shares and assets of certain of the Companys foreign
subsidiaries.

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Below is a pro forma summary of the new debt
structure of the Company after considering the exchange
offerings on the Senior Notes, the proceeds received on the sale
of SiTeco and the amendment to the Restructured Facilities.

|                                         |  |               |        |              |  |   |       |  
|---------------------------------------- |  | ------------- | ------ | ------------ |  | - | ----- | -
|                                         |  |               |        | Pro Forma   
|                                         |  | As of         |        | As of       
|                                         |  | Sep 30, 2002  |        | Sep 30, 2002
|                                         |  |               |        |             
|                                         |  |              
|                                         |  | (In millions)
|Notes payable                            |  | $             | 15.3   |              |  | $ | 15.3  |  
|7.125% Senior Notes due fiscal 2004      |  |               | 249.5  |              |  |   | 11.8  |  
|7.25% Senior Notes due fiscal 2007       |  |               | 124.1  |              |  |   | 69.8  |  
|11.25% Senior Notes due fiscal 2006      |  |               |       |              |  |   | 133.1 |  
|Restructured Facilities, Rexair          |  |               | 92.8   |              |  |   | 78.8  |  
|Restructured Facilities, U.S. Industries |  |               | 317.5  |              |  |   | 245.7 |  
|Other long-term debt                     |  |               | 8.9    |              |  |   | 8.9   |  
|                                         |  |               |        |              |  |   |       |  
|                                         |  |               | 808.1  |              |  |   | 563.4 |  
|Less escrow for Senior Notes             |  |               | (134.1 | )            |  |   | (4.9  | )
|                                         |  |               |        |              |  |   |       |  
|Net debt outstanding                     |  | $             | 674.0  |              |  | $ | 558.5 |  
|                                         |  |               |        |              |  |   |       |  

At November 23, 2002, the Company had
approximately $355.0 million committed under the USI
Facility, of which approximately $261.2 million had been
utilized and the balance of $93.8 million was available.
Also as of November 23, 2002, $14.3 million was
available for borrowing solely by Rexair under the Rexair Credit
Facility. These amounts are net of letters of credit outstanding
of $15.1 million. The Company also had letters of credit
outstanding with other financial institutions totaling
$28.6 million as of November 23, 2002. The Company
believes that completed assets sales, cash flows from operations
and proceeds from refundable taxes will be sufficient to meet
future liquidity and other capital needs. The Company will
continue to pursue alternative funding arrangements to fund
amounts due upon the maturity of the Restructured Facilities and
Senior Notes beginning on October 4, 2004.

New Accounting Pronouncements

In June 2001, the Financial Accounting Standards
Board (FASB) issued Statement of Financial
Accounting Standard (Statement) 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 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. The Company will adopt the
new rules on asset retirement obligations on October 1,
2002. Application of the new rules is not expected to have a
significant impact on the Companys financial position and
results of operations.

In August 2001, the FASB issued Statement
No. 144, Accounting for the Impairment or Disposal of
Long-lived Assets, which addresses financial accounting and
reporting for the impairment or disposal of long-lived assets
and supercedes Statement No. 121, Accounting for the
Impairment of Long-lived Assets and for Long-lived Assets to be
Disposed Of, and the accounting and reporting provisions of
Accounting Principles Board Opinion No. 30, Reporting
the Results of Operations for a Disposal of a Segment of a
Business. Statement No. 144 is effective for fiscal
years beginning after December 15, 2001, with earlier
application encouraged. The Company expects to adopt the new
rules as of October 1, 2002, and it does not expect
adoption of the Statement to have a significant impact on the
Companys financial position and results of operations.

In April 2002, the FASB issued Statement
No. 145, Rescission of FASB Statements No. 4, 44
and 64, Amendment of FASB Statement No. 13 and Technical
Correction.This Statement eliminates extraordinary
accounting treatment for reporting gain or loss on debt
extinguishment, and amends other existing authoritative
pronouncements to make various technical corrections, clarifies
meanings or describes their applicability under changed
conditions. The provisions of this Statement will be effective
for the Company October 1, 2002; however, early application
of the Statement is encouraged. Debt

24



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##### Table of Contents



extinguishments reported as extraordinary items
prior to scheduled or early adoption of this Statement would be
reclassified following adoption. The Company does not anticipate
a significant impact on its cash flows or results of operations
as a result of adopting this Statement.


In June 2002, the FASB issued Statement
No. 146, Accounting for Costs Associated with Exit or
Disposal Activities.This Statement requires that the
Company record costs associated with exit or disposal activities
at their fair values when a liability has been incurred. Under
previous guidance, certain exit costs were accrued upon
managements commitment to an exit plan, which is generally
before an actual liability has been incurred. The Company is
required to adopt this Statement on October 1, 2002. The
Company does not expect the adoption of this Statement to have a
material affect on its cash flows or the results of its
operations.

Foreign Currency Matters

The functional currency of each of the
Companys foreign operations at September 30, 2002 is
the local currency. Assets and liabilities of foreign
subsidiaries are translated at the exchange rates in effect at
the balance sheet dates, while revenue, expenses and cash flows
are translated at average exchange rates for the period.
Translation gains and losses are reported as a component of
Stockholders Equity.

Effects of Inflation

Because of the relatively low level of inflation
experienced in the Companys principal markets, inflation
did not have a material impact on its results of operations in
fiscal 2002, 2001 or 2000.

Critical Accounting Policies and
Estimates

Managements discussion and analysis of its
financial condition and results of operations are based upon the
Companys condensed consolidated financial statements,
which have been prepared in accordance with accounting
principles generally accepted in the United States of America.
The preparation of these financial statements requires
management to make estimates and assumptions that affect the
reported amounts of assets, liabilities, revenues and expenses
as well as the disclosure of contingent assets and liabilities.
Management regularly reviews its estimates and assumptions.
These estimates and assumptions, which are based upon historical
experience and on various other factors believed to be
reasonable under the circumstances, form the basis for making
judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Reported
amounts and disclosures may have been different had management
used different estimates and assumptions or if different
conditions had occurred in the periods presented. The
Companys accounting policies can be found in Note 2 to the
Companys Consolidated Financial Statements. Below is a
discussion of the policies that the Company believes may involve
a high degree of judgment and complexity.



| |                  
| | -----------------
| | Trade Receivables

The Company records an allowance for doubtful
accounts, reducing its receivables balance to an amount the
Company estimates is collectible from its customers. Management
uses significant judgment in estimating uncollectible amounts,
considering numerous factors such as current overall economic
conditions, industry-specific economic conditions, historical
and current customer performance and customer relationships.
Although the Company considers its allowances for uncollectible
accounts to be adequate and proper, changes in economic
conditions or customer circumstances could have a material
effect on the reserve balances required. Historically, actual
results have not deviated significantly from those previously
estimated by management.



| |            
| | -----------
| | Inventories

The Companys inventories are stated at the
lower of cost or market value. Management reviews its inventory
balances to determine if inventories can be sold at amounts
equal to or greater than their recorded values. The review
includes the identification of slow-moving inventories, obsolete
inventories and

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discontinued products based on the historical
performance of the inventories and current operational plans for
inventories, as well as estimated future customer demand for the
inventories. Historically, actual results have not deviated
significantly from those previously estimated by management.




| |                      
| | ---------------------
| | Deferred Income Taxes

Deferred tax assets and liabilities represent the
tax effects, based on current law, of any temporary differences
in the timing of when revenues and expenses are recognized for
tax purposes and when they are recognized for financial
statement purposes. Management reviews the deferred tax assets
periodically for recoverability, and valuation allowances are
provided as necessary. The Company considers expected future
income and gains from investments as well as tax planning
strategies, including the potential sale of certain assets, in
assessing the need for a valuation allowance against its
deferred tax assets. If future taxable income is different than
expected, the Company may need to change its valuation allowance
on its deferred tax assets.



| |                         
| | ------------------------
| | Net Assets Held for Sale

The Company records reserves for the difference
between the carrying value and the net realizable value of its
net assets held for sale. These reserves require that management
make assumptions about estimated proceeds, based on the demand
for these assets and current market conditions, and about
estimated costs to sell, based on managements professional
knowledge and experience. The Company monitors these reserves on
an on-going basis and records adjustments to its estimates based
on actual results and managements updated knowledge.



| |                                   
| | ----------------------------------
| | Goodwill and Other
    Intangibles

The Company has significant intangible assets
related to goodwill and other acquired intangibles. The
determination of related estimated useful lives and whether or
not these assets are impaired involves significant judgment.
Changes in strategy, reporting unit operating results and/or
market conditions could significantly impact managements
judgment and could require adjustments to recorded asset
balances.



| |                              
| | -----------------------------
| | Commitments and Contingencies

The Company is subject to proceedings, lawsuits
and other claims related to environmental, labor, product and
other matters. The Company is required to assess the likelihood
of any adverse judgments or outcomes to these matters as well as
potential ranges of probable losses. Management determines the
amount of reserves needed, if any, for each individual issue
based on their professional knowledge and experience and
discussions with legal counsel. The required reserves may change
in the future due to new developments in each matter, the
ultimate resolution of each matter or changes in approach, such
as a change in settlement strategy, in dealing with these
matters.



| |                                         
| | ----------------------------------------
| | Pension and Post-Retirement
    Benefits

The Company has significant pension and
post-retirement benefit income and expense and
assets/liabilities that are developed from actuarial valuations.
These valuations include key assumptions regarding discount
rates, expected return on plan assets, mortality rates, merit
and promotion increases and the current health care cost trend
rate. The Company considers current market conditions in
selecting these assumptions. Changes in the related pension and
post-retirement benefit income/costs or assets/liabilities may
occur in the future due to changes in the assumptions. When
valuing the pension plans at September 2002, the Company reduced
its discount rate and expected rate of return on assets. This
change in assumptions will reduce the amount of pension income
recognized by approximately $5.2 million in fiscal 2003 as
compared to fiscal 2002. The lower discount rate and increase in
current healthcare costs are also expected to increase expenses
related to post-retirement benefits by approximately
$2.3 million in 2003.

26



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##### Table of Contents





| |                                           
| | ------------------------------------------
| | Environmental and Asbestos
    Liabilities

It is often difficult to estimate the future
impact of environmental matters, including potential
liabilities. The Company accrues for losses associated with
environmental remediation obligations when such losses are
probable and reasonably estimable. This practice is followed
whether the claims are asserted or unasserted. Reserves for
estimated losses from environmental remediation are, depending
on the site, based primarily upon internal or third party
environmental studies, and estimates as to the number,
participation level and financial viability of any other
PRPs, the extent of contamination and the nature of
required remedial actions. Such accruals are adjusted as further
information develops or circumstances change. Costs of future
expenditures for environmental remediation obligations are not
discounted to their present fair value. Recoveries of
environmental remediation costs from other parties are
recognized as assets when their receipt is deemed probable.
Management expects that the amount reserved will be paid out
over the periods of remediation for the applicable sites, which
range up to 30 years, and that such reserves are adequate
based on all current data. Each of the sites in question is at
various stages of investigation or remediation; however, no
information currently available reasonably suggests that
projected expenditures associated with remedial action or
compliance with environmental laws for any single site or for
all sites in the aggregate, will have a material adverse affect
on the Companys financial condition, results of operations
or cash flows.

The estimate of Zurns asbestos liability is
developed from actuarial valuations and is based on its view of
the current and anticipated number of future asbestos claims,
the timing and amounts of asbestos payments, the status of
ongoing litigation and the potential impact of defense
strategies and settlement initiatives. However, there are
inherent uncertainties involved in estimating both the number of
future asbestos claims as well as future settlement costs, and
the actual liability could exceed Zurns estimate due to
changes in facts and circumstances after the date of the
estimate. Zurns present estimate of its asbestos liability
is predicated on the assumption that its recent vigorous defense
strategy will enable it to reduce both its claim frequency and
claim severity in the future. While Zurn believes there is
evidence, in recent claims settlements, for such an impact of
successful defense strategy, if the defense strategy ultimately
is not successful, to the extent assumed by Zurn, then severity
and frequency of asbestos claims could increase substantially
above Zurns estimates. Further, while there is presently
no reasonable basis for estimating Zurns asbestos
liability beyond 2012, such liability may continue beyond 2012,
and such liability could be substantial.



| |                    
| | -------------------
| | Revenue Recognition

The Company records revenue when delivery has
occurred and title has passed to the customer. Provisions are
made for warranties and returns. Management uses significant
judgment in estimating warranty and sales return costs,
considering numerous factors such as current overall economic
conditions, industry-specific economic conditions and historical
sales return and warranty rates. Although the Company considers
its warranty and sales return reserves to be adequate and
proper, changes in historical customer patterns could require
adjustments to the reserves. Historically, however, actual
results have not deviated significantly from those previously
estimated by management. The Company also records reductions to
its revenues for customer and distributor programs and incentive
offerings including special pricing agreements, promotions and
other volume-based incentives. The Company may take actions to
increase customer incentive offerings possibly resulting in an
incremental reduction of revenue at the time the incentive is
offered.

Disclosure Concerning Forward-Looking
Statements and Factors That May Affect Future Results

In December 1995, the Private Securities
Litigation Reform Act of 1995 (the Act) was enacted
by the United States Congress. The Act, as amended, contains
certain amendments to the Securities Act of 1933 and the
Securities Exchange Act of 1934. These amendments provide
protection from liability in private lawsuits for
forward-looking statements made by public companies.
The Company takes advantage of the safe harbor
provisions of the Act.

27



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The Companys Annual Report on
Form 10-K, including the Letter of the Chairman and Chief
Executive Officer included in the Annual Report to Stockholders
contains both historical information and other information that
may be used to infer future performance. Examples of historical
information include the Companys annual financial
statements and the commentary on past performance contained in
the MD&A. While the Company has specifically identified
certain information as being forward-looking in the context of
its presentation, the Company cautions the reader that, with the
exception of information that is clearly historical, all the
information contained in this Annual Report on Form 10-K and the
letter of the Chairman and Chief Executive Officer included in
the Report to Stockholders should be considered to be
forward-looking statements as referred to in the
Act. Without limitation, when it uses the words
believe, estimate, plan,
expect, intend, anticipate,
continue, project, probably,
should, and similar expressions, the Company intends
to clearly express that the information deals with possible
future events and is forward-looking in nature.

Forward-looking information involves risks and
uncertainties. This information is based on various factors and
assumptions about future events that may or may not actually
come true. As a result, the Companys operations and
financial results in the future could differ substantially from
those the Company has discussed in the forward-looking
statements in this Annual Report and other documents that have
been filed with the Securities and Exchange Commission. In
particular, various economic and competitive factors, including
those discussed below could cause the Companys actual
results in future years to differ materially from those
expressed in any forward-looking statement. All subsequent
written and oral forward-looking statements attributable to the
Company are expressly qualified in their entirety by the
foregoing factors.

The following are some of the factors we believe
could cause our actual results to differ materially from
expected and historical results. Other factors besides those
listed here could also adversely affect results.

Covenants of Senior Secured Credit
Facilities

The senior secured credit facilities contain
various provisions that limit our managements discretion
by restricting its ability to, among other things:



| |   |                                                                                         
| | - | ----------------------------------------------------------------------------------------
| |  | incur additional debt or enter into sale and
    lease back transactions;               
|
| |  | pay dividends or distributions on our capital
    stock or repurchase our capital stock;
|
| |  | issue preferred stock of subsidiaries;                                                  
|
| |  | make certain investments;                                                               
|
| |  | create liens to secure debt;                                                            
|
| |  | enter into transactions with affiliates;                                                
|
| |  | merge or consolidate with another company; and                                          
|
| |  | transfer and sell assets.                                                               

In addition, the senior secured credit facilities
require the Company to meet specified financial ratios and
tests. These restrictions could limit the Companys ability
to plan for or react to market conditions or meet extraordinary
capital needs or otherwise restrict corporate activities.

If the Company were to fail to comply with the
covenants and restrictions of the senior secured credit
facilities, senior notes or any other subsequent financing
agreements, a default could occur. Such a default could allow
the lenders, if the agreements so provide, to accelerate the
related debt as well as any other debt to which a
cross-acceleration or cross-default provision applies. In
addition, the lenders could terminate any commitments they had
made to supply us with further funds.

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| |                         
| | ------------------------
| | Substantial Indebtedness

The Company is highly leveraged. The
Companys high level of indebtedness could further
interfere with its ability to operate its business. For example,
it could:



| |   |                                                                                                                                                            
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | increase our vulnerability to general adverse
    economic and industry conditions;                                                                        
|
| |  | limit our ability to obtain additional financing;                                                                                                          
|
| |  | require the dedication of a substantial portion
    of our cash flow from operations to the payment of principal of,
    and interest on, our indebtedness;
|
| |  | limit our flexibility in planning for, or
    reacting to, changes in our business and the industry; and                                                   
|
| |  | place us at a competitive disadvantage relative
    to less leveraged competitors.                                                                         

The Companys ability to generate sufficient
cash flow from operations to pay the principal of, and interest
on, our indebtedness is uncertain. In particular, the Company
may not meet its anticipated revenue and operating expense
targets, and as a result, its future debt service obligations
could exceed the cash available to it.



| |                      
| | ---------------------
| | Significant Customers

The Company has certain customers that are very
important to its business and the successful implementation of
its business strategy. Some of the Companys products are
sold in very competitive markets. Competitors may adopt more
aggressive policies and devote greater resources to the
development, promotion and sale of their products than the
Company, which could result in a loss of customers. The loss of
one or more of these major customers could have a material
adverse effect on the Companys business, results of
operations and financial condition.



| |                                              
| | ---------------------------------------------
| | Prices of Raw Materials or Finished
    Goods

The Company purchases most of the raw materials
for its products on the open market, and relies on third parties
for the sourcing of certain finished goods. As such, cost of
products sold may be affected by changes in the market price of
raw materials or sourced finished goods. The Company does not
generally engage in commodity hedging transactions for raw
materials. Significant increases in the prices of the
Companys products due to increases in the cost of raw
materials or sourcing could have a negative effect on demand for
its respective end-products, or to the extent the Company cannot
pass such increases on to its customers, on its margins and
profitability, as well as a material adverse effect on the
Companys business, financial condition and results of
operations.



| |                          
| | -------------------------
| | Interest Rate Sensitivity

The interest rate relating to the Companys
Restructured Facilities is based on a spread over LIBOR. The
Restructured Facilities represent a considerable portion of the
Companys debt, and a significant change in the LIBOR rate
could have a material adverse effect on the Companys
business, financial condition and results of operations.
Currently the Company is not utilizing any interest rate
protection agreements to limit its exposure to this risk.



| |                         
| | ------------------------
| | International Operations

The Company has significant operations outside
the United States. Also, certain of its domestic businesses
generate significant revenue from export sales and certain
businesses obtain a significant amount of finished goods from
unaffiliated suppliers in East Asia. The Companys
international operations subject it to risks associated with
operating in foreign countries, including fluctuations in
currency exchange rates, unstable political and economic
conditions, imposition of limitations on conversion of foreign
currencies into dollars or remittance of dividends and other
payments by foreign subsidiaries, imposition or increase of
withholding and other taxes on remittances and other payments of
foreign subsidiaries, hyperinflation in

29



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certain foreign countries and imposition or
increase of investment and other restrictions by foreign
governments. No assurance can be given that such risks will not
have a material adverse effect on the Companys business,
financial condition and results of operations.




| |            
| | -----------
| | Product Mix

Historically, the Companys businesses have
sold a wide range of products. If the mix of products it sells
shifts to include a larger percentage of products with lower
profit margins, earnings may be negatively affected.



| |                         
| | ------------------------
| | Environmental Regulation

The Companys past and present business
operations and its past and present ownership and operation of
real property are subject to extensive and changing federal,
state, local and foreign environmental laws and regulations
pertaining to the discharge of materials into the environment,
the handling and disposal of wastes (including solid and
hazardous wastes) or otherwise relating to health, safety and
protection of the environment. As such, the nature of its
operations and previous operations by others at real property
owned by the Company expose it to the risk of claims under
environmental, health and safety laws and regulations, and there
can be no assurance that material costs or liabilities will not
be incurred in connection with such claims. Based on the
Companys experience to date, it does not expect such
claims or the costs of compliance with federal, state, local and
foreign environmental, health and safety laws and regulations to
have a material impact on its capital expenditures, earnings or
competitive position. No assurance can be given, however, that
the discovery of presently unknown environmental conditions,
changes in environmental, health and safety laws and regulations
or their interpretation, or other unanticipated events will not
give rise to expenditures or liabilities that may have such an
effect.



| |            
| | -----------
| | Seasonality

The Companys business segments experience
seasonal business swings, which correspond to the North American
seasons. This seasonality requires the Company to manage its
cash flows over the course of the year. If sales were to fall
substantially below what the Company would normally expect
during certain periods, its annual financial results would be
adversely impacted and its ability to service debt may also be
adversely affected.



| |        
| | -------
| | Weather

Weather could adversely affect the Companys
business, financial condition and our results of operation.
Adverse weather, such as unusually prolonged periods of cold or
rain, blizzards, hurricanes and other severe weather patterns,
could delay or halt construction activity. For example, an
unusually severe winter can lead to reduced construction
activity and magnify the seasonal decline in the Companys
net sales and earnings during the winter months.



| |            
| | -----------
| | Competition

The markets in which the Company sells its
products are highly competitive. The Company competes against
some international, national and many regional rivals, resulting
in substantial pressure on our pricing and profit margins. In
addition, certain of the Companys products from foreign
manufacturers are subject to competition from other importers
and could even be subject to competition from certain of the
Companys customers seeking to source directly from such
foreign manufacturers. As a result of pricing pressures, the
Company may in the future experience reductions in profit
margins. The Company believes that its purchasing power,
nationwide distribution network and marketing capabilities and
its manufacturing efficiency allow it to competitively price its
products. The Company cannot assure you that it will be able to
maintain or increase the current market share of its products
successfully in the future.

30



---



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| |                    
| | -------------------
| | Demand for Products

Many individuals who purchase the Companys
products depend on financing either by independent consumer
finance companies or, to a lesser extent, by independent
distributors in order to make purchases. Fluctuations in the
prevailing interest rates could affect the availability of
financing to the Companys customers. The unavailability of
consumer credit could lead to a reduction in demand for the
Companys products and have a material adverse effect on
the Companys business, financial condition and results of
operations.

Furthermore, demand in the building and home
improvement product industries is influenced by new construction
activity and the demand for replacement products as well as
repairs/remodeling activity. There can be no assurance that the
Company will maintain a balanced mix of new and repair/remodel
revenue within the Bath & Plumbing segment. Accordingly, the
strength of the U.S. economy (including confidence in the U.S.
economy by our customers), the strength of the residential and
commercial real estate markets, institutional building activity,
the age of existing housing stock, job growth and interest rates
have a direct impact on the Company. Threat or actual break out
of hostilities and acts of war or terrorism involving the U.S.
could also negatively impact construction, repair or remodeling
activity. Any declines in new housing or commercial construction
starts or demand for replacement building and home improvement
products may adversely impact the Company and there can be no
assurance that any such adverse effects would not be material
and would not continue for an indeterminate period of time.



| |                                                      
| | -----------------------------------------------------
| | Increase in Size and Market Power of
    Distributors

The Company believes that there is a trend among
its distributors to increase in size and market power. If this
trend continues, they may be able to exert pressure on the
Company to reduce prices and create price competition. Any
resulting price competition may adversely affect the
Companys sales and profit margins.



| |                  
| | -----------------
| | Business Strategy

The Companys ability to implement its
business strategy successfully is dependent upon a number of
factors including competition, availability of working capital
and general economic conditions. Significant elements of the
business strategy include growth of market share and
introduction of related and new products. There can be no
assurance that the Company will be able to implement its
strategy or be able to obtain financing for such strategy on
acceptable terms. The Indentures governing the senior secured
credit facilities and senior notes will substantially limit the
Companys ability to incur additional debt to finance its
strategy. In addition, the failure to implement the
Companys business strategy successfully may adversely
affect its ability in the future to service its debt.




Item 7A.     Qualitative
and Quantitative Disclosures About Market Risk

In the normal course of doing business, the
Company is exposed to the risks associated with changes in
interest rates and currency exchange rates. To limit the risks
from such fluctuations, the Company enters into various hedging
transactions that have been authorized pursuant to the
Companys policies, but does not engage in such
transactions for trading purposes.

To manage exposure to interest rate movements,
the Company has used interest rate protection agreements.
However, as of September 30, 2002, the Company does not
have any such agreements outstanding. Based on the
Companys overall exposure to interest rate changes, a
hypothetical increase of 100 basis points across all maturities
of its floating rate debt obligations, would decrease the
Companys estimated pre-tax earnings by approximately
$4.2 million in fiscal 2003, compared to an approximate
$7.3 million decrease in fiscal 2002 pre-tax earnings had
LIBOR rates been 100 basis points higher. Net payments
(receipts) under swap agreements amounted to approximately
$3.4 million, $1.0 million and $(0.7) million for
fiscal 2002, 2001 and 2000, respectively. The swaps were of
notional amounts and maturities that related to specific
portions of outstanding debt, and accordingly, were accounted
for as hedge transactions.

31



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The Company is also exposed to foreign currency
exchange risk related to its international operations as well as
its U.S. businesses, which import or export goods. The Company
has made limited use of financial instruments to manage this
risk.

Effective October 1, 2000, the Company
adopted Financial Accounting Standard No. 133,
Accounting for Derivative Instruments and Hedging
Activities, as amended, which requires that all derivative
instruments be reported on the balance sheet at fair value and
establishes criteria for designation and effectiveness of
hedging relationships. See Note 2 to the Companys
Consolidated Financial Statements for additional information on
its derivative and hedging activities.

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##### Table of Contents






Item 8.     Financial
Statements and Supplementary Data




REPORT OF INDEPENDENT CERTIFIED PUBLIC
ACCOUNTANTS

To the Board of Directors and Stockholders of

U.S. Industries, Inc.


We have audited the consolidated balance sheets
of U.S. Industries, Inc. (the Company) as of
September 30, 2002 and 2001, and the related consolidated
statements of operations, cash flows, and changes in
stockholders equity for each of the three years in the
period ended September 30, 2002. Our audits also included
the financial statement schedule listed in the index at
Item 14(a). These financial statements and schedule are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements and schedule based on our audits.

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

In our opinion, the financial statements referred
to above present fairly, in all material respects, the
consolidated financial position of the Company at
September 30, 2002 and 2001, and the consolidated results
of its operations and its cash flows for each of the three years
in the period ended September 30, 2002, in conformity with
accounting principles generally accepted in the United States.
Also, in our opinion, the financial statement schedule referred
to above, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material
respects the information set forth therein.

As discussed in Note 2 to the consolidated
financial statements, the Company changed its method of
accounting for goodwill and other intangible assets in 2002.



| |                      
| | ---------------------
| | /s/ Ernst & Young LLP

West Palm Beach, Florida

November 8, 2002


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U.S. INDUSTRIES, INC.

CONSOLIDATED STATEMENTS OF
OPERATIONS

|                                                                                                              |                                                                                                   |                                |         |       |      |      |         |        |        |   |         |         |      | 
|------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------- | ------------------------------ | ------- | ----- | ---- | ---- | ------- | ------ | ------ | - | ------- | ------- | ---- | 
|                                                                                                              |                                                                                                   |                               
|                                                                                                              |                                                                                                   | For the Fiscal Years Ended    
|                                                                                                              |                                                                                                   | September 30,                 
|                                                                                                              |                                                                                                   |                               
|                                                                                                              |                                                                                                   | 2002                           |         | 2001  |      | 2000
|                                                                                                              |                                                                                                   |                                |         |       |      |     
|                                                                                                              |                                                                                                   |                               
|                                                                                                              |                                                                                                   | (In millions except per share)
|Net sales                                                                                                     |                                                                                                   | $                              | 1,159.5 |       |      | $    | 1,107.1 |        |        | $ | 1,724.9 |        
|Operating costs and expenses:                                                                                 |                                                                                                   |                                |         |       |      |      |         |        |        |   |         |        
|                                                                                                              | Cost of products sold                                                                             |                                |         | 799.8 |      |      |         | 783.4  |        |   |         | 1,250.8 |     
|                                                                                                              | Selling, general and administrative expenses                                                      |                                |         | 254.0 |      |      |         | 246.4  |        |   |         | 330.1   |     
|                                                                                                              | Impairment and restructuring charges                                                              |                                |         | 7.2   |      |      |         | 100.2  |        |   |         | 60.2    |     
|                                                                                                              |                                                                                                   |                                |         |       |      |      |         |        |        |   |         |        
|                                                                                                              |                                                                                                   | Operating income (loss)        |         |       | 98.5 |      |         |        | (22.9  | ) |         |         | 83.8 | 
|Interest expense                                                                                              |                                                                                                   |                                | (75.7   | )     |      |      | (88.8   | )      |        |   | (85.3   | )      
|Interest income                                                                                               |                                                                                                   |                                | 4.6     |       |      |      | 25.2    |        |        |   | 16.7    |        
|Gain on sale of businesses                                                                                    |                                                                                                   |                                |        |       |      |      |        |        |        |   | 39.3    |        
|Equity (losses) earnings in investees                                                                         |                                                                                                   |                                |        |       |      |      | (1.4    | )      |        |   | 3.1     |        
|Other expense, net                                                                                            |                                                                                                   |                                | (15.6   | )     |      |      | (97.2   | )      |        |   | (4.7    | )      
|                                                                                                              |                                                                                                   |                                |         |       |      |      |         |        |        |   |         |        
|Income (loss) before income taxes,
    discontinued operations and cumulative effect of accounting
    change |                                                                                                   |                                | 11.8    |       |      |      | (185.1  | )      |        |   | 52.9    |        
|Benefit (provision) for income taxes                                                                          |                                                                                                   |                                | 22.0    |       |      |      | 5.3     |        |        |   | (14.2   | )      
|                                                                                                              |                                                                                                   |                                |         |       |      |      |         |        |        |   |         |        
|                                                                                                              | Income (loss) from continuing operations                                                          |                                |         | 33.8  |      |      |         | (179.8 | )      |   |         | 38.7    |     
|Discontinued operations:                                                                                      |                                                                                                   |                                |         |       |      |      |         |        |        |   |         |        
|                                                                                                              | Loss from operations (net of tax provisions of
    $37.1 and $6.5 in 2001 and 2000, respectively) |                                |         |      |      |      |         | (103.7 | )      |   |         | (3.1    | )   
|                                                                                                              | Gain (loss) on disposals (net of tax benefit
    of $10.3 in 2001)                                |                                |         | 7.8   |      |      |         | (240.4 | )      |   |         |        |     
|                                                                                                              |                                                                                                   |                                |         |       |      |      |         |        |        |   |         |        
|                                                                                                              | Income (loss) from discontinued operations                                                        |                                |         | 7.8   |      |      |         | (344.1 | )      |   |         | (3.1    | )   
|Cumulative effect of accounting change, net of
    taxes of $0.8 in 2001                                      |                                                                                                   |                                |        |       |      |      | (0.7    | )      |        |   |        |        
|                                                                                                              |                                                                                                   |                                |         |       |      |      |         |        |        |   |         |        
|                                                                                                              |                                                                                                   | Net income (loss)              |         | $     | 41.6 |      |         | $      | (524.6 | ) |         | $       | 35.6 | 
|                                                                                                              |                                                                                                   |                                |         |       |      |      |         |        |        |   |         |        
|Income (loss) per basic share:                                                                                |                                                                                                   |                                |         |       |      |      |         |        |        |   |         |        
|                                                                                                              | Continuing operations                                                                             |                                | $       | 0.46  |      |      | $       | (2.43  | )      |   | $       | 0.48    |     
|                                                                                                              | Discontinued operations                                                                           |                                |         | 0.10  |      |      |         | (4.65  | )      |   |         | (0.04   | )   
|                                                                                                              | Cumulative effect of accounting change                                                            |                                |         |      |      |      |         | (0.01  | )      |   |         |        |     
|                                                                                                              |                                                                                                   |                                |         |       |      |      |         |        |        |   |         |        
|                                                                                                              | Net income (loss)                                                                                 |                                | $       | 0.56  |      |      | $       | (7.09  | )      |   | $       | 0.44    |     
|                                                                                                              |                                                                                                   |                                |         |       |      |      |         |        |        |   |         |        
|Income (loss) per diluted share:                                                                              |                                                                                                   |                                |         |       |      |      |         |        |        |   |         |        
|                                                                                                              | Continuing operations                                                                             |                                | $       | 0.46  |      |      | $       | (2.43  | )      |   | $       | 0.47    |     
|                                                                                                              | Discontinued operations                                                                           |                                |         | 0.10  |      |      |         | (4.65  | )      |   |         | (0.04   | )   
|                                                                                                              | Cumulative effect of accounting change                                                            |                                |         |      |      |      |         | (0.01  | )      |   |         |        |     
|                                                                                                              |                                                                                                   |                                |         |       |      |      |         |        |        |   |         |        
|                                                                                                              | Net income (loss)                                                                                 |                                | $       | 0.56  |      |      | $       | (7.09  | )      |   | $       | 0.43    |     
|                                                                                                              |                                                                                                   |                                |         |       |      |      |         |        |        |   |         |        

See notes to Consolidated Financial Statements.

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U.S. INDUSTRIES, INC.

CONSOLIDATED BALANCE SHEETS

|                                               |                                                                                                                                                                                           |                            |         |        |         |   |         |        |         | 
|---------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------- | ------- | ------ | ------- | - | ------- | ------ | ------- | 
|                                               |                                                                                                                                                                                           |                           
|                                               |                                                                                                                                                                                           | At September 30,          
|                                               |                                                                                                                                                                                           |                           
|                                               |                                                                                                                                                                                           | 2002                       |         | 2001  
|                                               |                                                                                                                                                                                           |                            |         |       
|                                               |                                                                                                                                                                                           |                           
|                                               |                                                                                                                                                                                           | (In millions, except      
|                                               |                                                                                                                                                                                           | share data)               
|ASSETS                                        
|Current assets:                                |                                                                                                                                                                                           |                            |         |        |         |   |         |       
|                                               | Cash and cash equivalents                                                                                                                                                                 |                            | $       | 32.1   |         |   | $       | 65.2   |        
|                                               | Restricted cash collateral accounts                                                                                                                                                       |                            |         | 142.9  |         |   |         |       |        
|                                               | Trade receivables, net of allowances of $8.6 in
    2002 and $8.3 in 2001                                                                                                                 |                            |         | 230.7  |         |   |         | 228.8  |        
|                                               | Inventories                                                                                                                                                                               |                            |         | 183.0  |         |   |         | 191.0  |        
|                                               | Deferred income taxes                                                                                                                                                                     |                            |         | 31.0   |         |   |         | 6.2    |        
|                                               | Net assets held for sale                                                                                                                                                                  |                            |         | 103.8  |         |   |         | 491.6  |        
|                                               | Income taxes receivable                                                                                                                                                                   |                            |         | 37.2   |         |   |         | 6.8    |        
|                                               | Other current assets                                                                                                                                                                      |                            |         | 24.6   |         |   |         | 137.4  |        
|                                               |                                                                                                                                                                                           |                            |         |        |         |   |         |       
|                                               |                                                                                                                                                                                           | Total current assets       |         |        | 785.3   |   |         |        | 1,127.0 | 
|Restricted cash collateral accounts            |                                                                                                                                                                                           |                            | 15.4    |        |         |   | 4.4     |       
|Property, plant and equipment, net             |                                                                                                                                                                                           |                            | 144.3   |        |         |   | 158.5   |       
|Pension assets                                 |                                                                                                                                                                                           |                            | 140.4   |        |         |   | 152.1   |       
|Insurance for asbestos claims                  |                                                                                                                                                                                           |                            | 145.0   |        |         |   | 107.0   |       
|Other assets                                   |                                                                                                                                                                                           |                            | 34.9    |        |         |   | 32.2    |       
|Goodwill and other intangibles, net            |                                                                                                                                                                                           |                            | 310.0   |        |         |   | 302.4   |       
|                                               |                                                                                                                                                                                           |                            |         |        |         |   |         |       
|TOTAL ASSETS                                   |                                                                                                                                                                                           | $                          | 1,575.3 |        |         | $ | 1,883.6 |       
|                                               |                                                                                                                                                                                           |                            |         |        |         |   |         |       
|LIABILITIES AND STOCKHOLDERS
    EQUITY      
|Current liabilities:                           |                                                                                                                                                                                           |                            |         |        |         |   |         |       
|                                               | Notes payable                                                                                                                                                                             |                            | $       | 15.3   |         |   | $       | 12.0   |        
|                                               | Current maturities of long-term debt                                                                                                                                                      |                            |         | 275.9  |         |   |         | 436.5  |        
|                                               | Trade accounts payable                                                                                                                                                                    |                            |         | 99.5   |         |   |         | 101.3  |        
|                                               | Accrued expenses and other current liabilities                                                                                                                                            |                            |         | 131.7  |         |   |         | 123.5  |        
|                                               |                                                                                                                                                                                           |                            |         |        |         |   |         |       
|                                               |                                                                                                                                                                                           | Total current liabilities  |         |        | 522.4   |   |         |        | 673.3   | 
|Long-term debt                                 |                                                                                                                                                                                           |                            | 516.9   |        |         |   | 778.3   |       
|Deferred income taxes                          |                                                                                                                                                                                           |                            | 17.9    |        |         |   | 12.5    |       
|Asbestos claims                                |                                                                                                                                                                                           |                            | 145.0   |        |         |   | 107.0   |       
|Other liabilities                              |                                                                                                                                                                                           |                            | 135.4   |        |         |   | 112.9   |       
|                                               |                                                                                                                                                                                           |                            |         |        |         |   |         |       
|                                               |                                                                                                                                                                                           | Total liabilities          |         |        | 1,337.6 |   |         |        | 1,684.0 | 
|                                               |                                                                                                                                                                                           |                            |         |        |         |   |         |       
|Commitments and contingencies                  |                                                                                                                                                                                           |                            |         |        |         |   |         |       
|Stockholders equity:                          |                                                                                                                                                                                           |                            |         |        |         |   |         |       
|                                               | Common stock (par value $.01 per share,
    authorized 300,000,000 shares; issued 99,096,734 shares;
    outstanding 74,607,499 and 74,286,648 shares in 2002 and 2001,
    respectively) |                            |         | 1.0    |         |   |         | 1.0    |        
|                                               | Paid in capital                                                                                                                                                                           |                            |         | 655.5  |         |   |         | 660.8  |        
|                                               | Accumulated deficit                                                                                                                                                                       |                            |         | (19.3  | )       |   |         | (60.9  | )      
|                                               | Unearned restricted stock                                                                                                                                                                 |                            |         | (1.7   | )       |   |         | (6.0   | )      
|                                               | Accumulated other comprehensive loss                                                                                                                                                      |                            |         | (39.1  | )       |   |         | (30.8  | )      
|                                               | Treasury stock (24,489,235 and 24,810,086 shares,
    respectively) at cost                                                                                                               |                            |         | (358.7 | )       |   |         | (364.5 | )      
|                                               |                                                                                                                                                                                           |                            |         |        |         |   |         |       
|                                               |                                                                                                                                                                                           | Total stockholders equity |         |        | 237.7   |   |         |        | 199.6   | 
|                                               |                                                                                                                                                                                           |                            |         |        |         |   |         |       
|TOTAL LIABILITIES AND STOCKHOLDERS
    EQUITY |                                                                                                                                                                                           | $                          | 1,575.3 |        |         | $ | 1,883.6 |       
|                                               |                                                                                                                                                                                           |                            |         |        |         |   |         |       

See notes to Consolidated Financial Statements.

35



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##### Table of Contents



U.S. INDUSTRIES, INC.

CONSOLIDATED STATEMENTS OF CASH
FLOWS

|                                                                 |                                                                                                                                                            |                                                               |                                                                                  |        |       |      |       |          |       |      |        |          |       |       |  
|---------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------- | -------------------------------------------------------------------------------- | ------ | ----- | ---- | ----- | -------- | ----- | ---- | ------ | -------- | ----- | ----- | -
|                                                                 |                                                                                                                                                            |                                                              
|                                                                 |                                                                                                                                                            | For the Fiscal Years Ended                                   
|                                                                 |                                                                                                                                                            | September 30,                                                
|                                                                 |                                                                                                                                                            |                                                              
|                                                                 |                                                                                                                                                            | 2002                                                          |                                                                                  | 2001   |       | 2000
|                                                                 |                                                                                                                                                            |                                                               |                                                                                  |        |       |     
|                                                                 |                                                                                                                                                            |                                                              
|                                                                 |                                                                                                                                                            | (In millions)                                                
|OPERATING ACTIVITIES:                                            |                                                                                                                                                            |                                                               |                                                                                  |        |       |      |       |          |       |      |        |         
|                                                                 | Income (loss) from continuing operations                                                                                                                   |                                                               | $                                                                                | 33.8   |       |      | $     | (179.8   | )     |      | $      | 38.7     |      
|                                                                 | Adjustments to reconcile income (loss) from
    continuing operations to net cash provided by (used in)
    operating activities of continuing operations: |                                                               |                                                                                  |        |       |      |       |          |       |      |        |          |      
|                                                                 |                                                                                                                                                            | Depreciation and amortization                                 |                                                                                  |        | 27.0  |      |       |          | 37.9  |      |        |          | 48.0  |      
|                                                                 |                                                                                                                                                            | Amortization of deferred financing costs                      |                                                                                  |        | 6.9   |      |       |          | 4.2   |      |        |          | 3.9   |      
|                                                                 |                                                                                                                                                            | (Benefit) provision for deferred income taxes                 |                                                                                  |        | (34.4 | )    |       |          | (2.6  | )    |        |          | 9.6   |      
|                                                                 |                                                                                                                                                            | Provision for doubtful accounts                               |                                                                                  |        | 3.9   |      |       |          | 2.8   |      |        |          | 3.0   |      
|                                                                 |                                                                                                                                                            | Gain on sale of excess real estate                            |                                                                                  |        | (0.8  | )    |       |          |      |      |        |          | (3.2  | )    
|                                                                 |                                                                                                                                                            | Equity loss (earnings) in investee                            |                                                                                  |        |      |      |       |          | 1.4   |      |        |          | (3.1  | )    
|                                                                 |                                                                                                                                                            | Gain on sale of businesses                                    |                                                                                  |        |      |      |       |          |      |      |        |          | (39.3 | )    
|                                                                 |                                                                                                                                                            | Loss on sale of property, plant and equipment                 |                                                                                  |        | 1.7   |      |       |          |      |      |        |          | 0.7   |      
|                                                                 |                                                                                                                                                            | Impairment, restructuring and other non-recurring
    charges |                                                                                  |        | 0.8   |      |       |          | 145.2 |      |        |          | 43.8  |      
|                                                                 | Changes in operating assets and liabilities,
    excluding the effects of acquisitions and dispositions:                                                   |                                                               |                                                                                  |        |       |      |       |          |       |      |        |          |      
|                                                                 |                                                                                                                                                            | Trade receivables                                             |                                                                                  |        | (11.0 | )    |       |          | 39.3  |      |        |          | (20.8 | )    
|                                                                 |                                                                                                                                                            | Inventories                                                   |                                                                                  |        | 10.6  |      |       |          | 10.6  |      |        |          | (3.7  | )    
|                                                                 |                                                                                                                                                            | Other current assets                                          |                                                                                  |        | 3.9   |      |       |          | (3.3  | )    |        |          | (5.1  | )    
|                                                                 |                                                                                                                                                            | Other assets                                                  |                                                                                  |        | (7.4  | )    |       |          | (4.1  | )    |        |          | (26.1 | )    
|                                                                 |                                                                                                                                                            | Trade accounts payable                                        |                                                                                  |        | (1.9  | )    |       |          | 1.0   |      |        |          | (38.9 | )    
|                                                                 |                                                                                                                                                            | Income taxes payable                                          |                                                                                  |        | (2.2  | )    |       |          | 0.4   |      |        |          | (14.8 | )    
|                                                                 |                                                                                                                                                            | Accrued expenses and other current liabilities                |                                                                                  |        | (4.7  | )    |       |          | (18.5 | )    |        |          | (40.1 | )    
|                                                                 |                                                                                                                                                            | Other liabilities                                             |                                                                                  |        | 9.9   |      |       |          | (4.9  | )    |        |          | (16.9 | )    
|                                                                 |                                                                                                                                                            | Other, net                                                    |                                                                                  |        | (0.3  | )    |       |          | (0.3  | )    |        |          |      |      
|                                                                 |                                                                                                                                                            |                                                               |                                                                                  |        |       |      |       |          |       |      |        |         
|                                                                 |                                                                                                                                                            |                                                               | Net cash provided by (used in) operating
    activities of continuing operations |        |       | 35.8 |       |          |       | 29.3 |        |          |       | (64.3 | )
|                                                                 |                                                                                                                                                            |                                                               |                                                                                  |        |       |      |       |          |       |      |        |         
|                                                                 | Income (loss) from discontinued operations                                                                                                                 |                                                               |                                                                                  | 7.8    |       |      |       | (344.1   | )     |      |        | (3.1     | )    
|                                                                 | Adjustments to reconcile income (loss) from
    discontinued operations to net cash provided by discontinued
    operations:                               |                                                               |                                                                                  |        |       |      |       |          |       |      |        |          |      
|                                                                 |                                                                                                                                                            | (Gain)/loss on disposal of discontinued operations            |                                                                                  |        | (7.8  | )    |       |          | 240.4 |      |        |          |      |      
|                                                                 |                                                                                                                                                            | Impairments and other non-recurring charges                   |                                                                                  |        |      |      |       |          | 121.4 |      |        |          | 84.0  |      
|                                                                 |                                                                                                                                                            | Other increases (decreases) in net assets
    held for sale   |                                                                                  |        | 24.7  |      |       |          | 49.5  |      |        |          | (52.1 | )    
|                                                                 |                                                                                                                                                            |                                                               |                                                                                  |        |       |      |       |          |       |      |        |         
|                                                                 |                                                                                                                                                            |                                                               | Net cash provided by discontinued operations                                     |        |       | 24.7 |       |          |       | 67.2 |        |          |       | 28.8  |  
|                                                                 |                                                                                                                                                            |                                                               |                                                                                  |        |       |      |       |          |       |      |        |         
|NET CASH PROVIDED BY (USED IN) OPERATING
    ACTIVITIES          |                                                                                                                                                            |                                                               | 60.5                                                                             |        |       |      | 96.5  |          |       |      | (35.5  | )       
|                                                                 |                                                                                                                                                            |                                                               |                                                                                  |        |       |      |       |          |       |      |        |         
|INVESTING ACTIVITIES:                                            |                                                                                                                                                            |                                                               |                                                                                  |        |       |      |       |          |       |      |        |         
|                                                                 | Proceeds from sale of businesses                                                                                                                           |                                                               |                                                                                  | 388.2  |       |      |       | 7.5      |       |      |        | 402.2    |      
|                                                                 | Proceeds from sale of Strategic Notes                                                                                                                      |                                                               |                                                                                  | 105.9  |       |      |       |         |       |      |        | 24.3     |      
|                                                                 | Acquisition of companies, net of cash acquired                                                                                                             |                                                               |                                                                                  |       |       |      |       |         |       |      |        | (78.4    | )    
|                                                                 | Purchases of property, plant and equipment                                                                                                                 |                                                               |                                                                                  | (15.6  | )     |      |       | (22.9    | )     |      |        | (33.1    | )    
|                                                                 | Proceeds from sale of property, plant and
    equipment                                                                                                    |                                                               |                                                                                  | 1.5    |       |      |       | 5.5      |       |      |        | 1.2      |      
|                                                                 | Proceeds from sale of excess real estate                                                                                                                   |                                                               |                                                                                  | 0.5    |       |      |       | 3.2      |       |      |        | 5.5      |      
|                                                                 | Other investing activities, net                                                                                                                            |                                                               |                                                                                  | 1.3    |       |      |       | (0.7     | )     |      |        | 0.3      |      
|                                                                 |                                                                                                                                                            |                                                               |                                                                                  |        |       |      |       |          |       |      |        |         
|NET CASH PROVIDED BY (USED IN) INVESTING
    ACTIVITIES          |                                                                                                                                                            |                                                               | 481.8                                                                            |        |       |      | (7.4  | )        |       |      | 322.0  |         
|                                                                 |                                                                                                                                                            |                                                               |                                                                                  |        |       |      |       |          |       |      |        |         
|FINANCING ACTIVITIES:                                            |                                                                                                                                                            |                                                               |                                                                                  |        |       |      |       |          |       |      |        |         
|                                                                 | Proceeds from long-term debt                                                                                                                               |                                                               |                                                                                  | 72.5   |       |      |       | 1,544.6  |       |      |        | 3,127.7  |      
|                                                                 | Repayment of long-term debt                                                                                                                                |                                                               |                                                                                  | (498.3 | )     |      |       | (1,514.9 | )     |      |        | (3,284.9 | )    
|                                                                 | Escrow deposits                                                                                                                                            |                                                               |                                                                                  | (152.7 | )     |      |       | (4.4     | )     |      |        |         |      
|                                                                 | Proceeds (repayment) of notes payable, net                                                                                                                 |                                                               |                                                                                  | 2.6    |       |      |       | (13.4    | )     |      |        | 5.5      |      
|                                                                 | Payment of dividends                                                                                                                                       |                                                               |                                                                                  |       |       |      |       | (7.7     | )     |      |        | (16.8    | )    
|                                                                 | Proceeds from exercise of stock options                                                                                                                    |                                                               |                                                                                  |       |       |      |       | 0.3      |       |      |        | 4.4      |      
|                                                                 | Purchase of treasury stock                                                                                                                                 |                                                               |                                                                                  |       |       |      |       | (43.1    | )     |      |        | (143.4   | )    
|                                                                 | Other financing activities, net                                                                                                                            |                                                               |                                                                                  |       |       |      |       | (0.9     | )     |      |        |         |      
|                                                                 |                                                                                                                                                            |                                                               |                                                                                  |        |       |      |       |          |       |      |        |         
|NET CASH PROVIDED BY (USED IN) FINANCING
    ACTIVITIES          |                                                                                                                                                            |                                                               | (575.9                                                                           | )      |       |      | (39.5 | )        |       |      | (307.5 | )       
|                                                                 |                                                                                                                                                            |                                                               |                                                                                  |        |       |      |       |          |       |      |        |         
|Effect of exchange rate changes on cash and cash
    equivalents |                                                                                                                                                            |                                                               | 0.5                                                                              |        |       |      | (9.1  | )        |       |      | (12.0  | )       
|                                                                 |                                                                                                                                                            |                                                               |                                                                                  |        |       |      |       |          |       |      |        |         
|INCREASE (DECREASE) IN CASH AND CASH
    EQUIVALENTS             |                                                                                                                                                            |                                                               | (33.1                                                                            | )      |       |      | 40.5  |          |       |      | (33.0  | )       
|CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR                   |                                                                                                                                                            |                                                               | 65.2                                                                             |        |       |      | 24.7  |          |       |      | 57.7   |         
|                                                                 |                                                                                                                                                            |                                                               |                                                                                  |        |       |      |       |          |       |      |        |         
|CASH AND CASH EQUIVALENTS AT END OF YEAR                         |                                                                                                                                                            | $                                                             | 32.1                                                                             |        |       | $    | 65.2  |          |       | $    | 24.7   |         
|                                                                 |                                                                                                                                                            |                                                               |                                                                                  |        |       |      |       |          |       |      |        |         

See notes to Consolidated Financial Statements.

36



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##### Table of Contents



U.S. INDUSTRIES, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS EQUITY

For the Fiscal Years Ended September 30, 2002,
2001 and 2000


|                                                                        |                                                           |                                 |     |         |  |           |       |            |  |               |        |          |  |               |       |       |  |   |       |      |  |   |        |   |  |   |        |      |  |   |        |      | 
|----------------------------------------------------------------------- | --------------------------------------------------------- | ------------------------------- | --- | ------- |  | --------- | ----- | ---------- |  | ------------- | ------ | -------- |  | ------------- | ----- | ----- |  | - | ----- | ---- |  | - | ------ | - |  | - | ------ | ---- |  | - | ------ | ---- | 
|                                                                        |                                                           |                                 |     |         |  |           |       |            |  | Accumulated   |        |          |  |               |       |      
|                                                                        |                                                           |                                 |     |         |  |           |       |            |  | Other         |        |          |  |               |       |      
|                                                                        |                                                           |                                 |     |         |  | Retained  |       | Unearned   |  | Comprehensive |        |          |  | Comprehensive |       |      
|                                                                        |                                                           | Common                          |     | Paid in |  | Earnings  |       | Restricted |  | Income        |        | Treasury |  | Income        |       |      
|                                                                        |                                                           | Stock                           |     | Capital |  | (Deficit) |       | Stock      |  | (Loss)        |        | Stock    |  | (Loss)        |       | Total
|                                                                        |                                                           |                                 |     |         |  |           |       |            |  |               |        |          |  |               |       |      
|                                                                        |                                                           |                                
|                                                                        |                                                           | (In millions except share data)
|Balance at September 30, 1999                                           |                                                           | $                               | 1.0 |         |  | $         | 701.1 |            |  | $             | 448.2  |          |  | $             | (15.9 | )     |  | $ | (26.9 | )    |  | $ | (187.3 | ) |  |   |        |      |  | $ | 920.2  |     
|                                                                        |                                                           |                                 |     |         |  |           |       |            |  |               |        |          |  |               |       |       |  |   |       |      |  |   |        |   |  |   |        |      |  |   |        |     
|Net income                                                              |                                                           |                                 |     |         |  |           |       |            |  |               | 35.6   |          |  |               |       |       |  |   |       |      |  |   |        |   |  | $ | 35.6   |      |  |   | 35.6   |     
|Cash dividend declared ($0 20 per share)                                |                                                           |                                 |     |         |  |           |       |            |  |               | (16.2  | )        |  |               |       |       |  |   |       |      |  |   |        |   |  |   |        |      |  |   | (16.2  | )   
|Amortization of unearned restricted stock                               |                                                           |                                 |     |         |  |           |       |            |  |               |        |          |  |               | 3.3   |       |  |   |       |      |  |   |        |   |  |   |        |      |  |   | 3.3    |     
|Purchase of 11,453,020 shares of common stock                           |                                                           |                                 |     |         |  |           |       |            |  |               |        |          |  |               |       |       |  |   |       |      |  |   | (143.4 | ) |  |   |        |      |  |   | (143.4 | )   
|Treasury stock issued to employees and directors
    (223,753 shares)   |                                                           |                                 |     |         |  |           | (0.6  | )          |  |               |        |          |  |               | (2.9  | )     |  |   |       |      |  |   | 3.5    |   |  |   |        |      |  |   |       |     
|Forfeiture of 148,698 shares of unearned
    restricted stock           |                                                           |                                 |     |         |  |           |       |            |  |               |        |          |  |               | 2.5   |       |  |   |       |      |  |   | (2.5   | ) |  |   |        |      |  |   |       |     
|Treasury stock issued (428,311 shares) upon
    exercises of options    |                                                           |                                 |     |         |  |           | (3.3  | )          |  |               |        |          |  |               |       |       |  |   |       |      |  |   | 7.7    |   |  |   |        |      |  |   | 4.4    |     
|Payment for guarantee of stock value for
    acquisition                |                                                           |                                 |     |         |  |           | (36.0 | )          |  |               |        |          |  |               |       |       |  |   |       |      |  |   |        |   |  |   |        |      |  |   | (36.0  | )   
|Sale of Diversified businesses:                                         |                                                           |                                 |     |         |  |           |       |            |  |               |        |          |  |               |       |       |  |   |       |      |  |   |        |   |  |   |        |      |  |   |       |     
|                                                                        | Accelerated amortization of unearned restricted
    stock |                                 |     |         |  |           |       |            |  |               |        |          |  |               |       | 3.9   |  |   |       |      |  |   |        |   |  |   |        |      |  |   |        | 3.9  | 
|                                                                        | Translation adjustment                                    |                                 |     |         |  |           |       |            |  |               |        |          |  |               |       |       |  |   |       | 5.4  |  |   |        |   |  |   |        | 5.4  |  |   |        | 5.4  | 
|                                                                        | Minimum pension liability adjustment                      |                                 |     |         |  |           |       |            |  |               |        |          |  |               |       |       |  |   |       | 1.7  |  |   |        |   |  |   |        | 1.7  |  |   |        | 1.7  | 
|Translation adjustment                                                  |                                                           |                                 |     |         |  |           |       |            |  |               |        |          |  |               |       |       |  |   | (24.8 | )    |  |   |        |   |  |   | (24.8  | )    |  |   | (24.8  | )   
|Minimum pension liability adjustment                                    |                                                           |                                 |     |         |  |           |       |            |  |               |        |          |  |               |       |       |  |   | (0.4  | )    |  |   |        |   |  |   | (0.4   | )    |  |   | (0.4   | )   
|                                                                        |                                                           |                                 |     |         |  |           |       |            |  |               |        |          |  |               |       |       |  |   |       |      |  |   |        |   |  |   |        |      |  |   |        |     
|Other comprehensive loss                                                |                                                           |                                 |     |         |  |           |       |            |  |               |        |          |  |               |       |       |  |   |       |      |  |   |        |   |  |   | (18.1  | )    |  |   |        |     
|                                                                        |                                                           |                                 |     |         |  |           |       |            |  |               |        |          |  |               |       |       |  |   |       |      |  |   |        |   |  |   |        |      |  |   |        |     
|Total comprehensive income                                              |                                                           |                                 |     |         |  |           |       |            |  |               |        |          |  |               |       |       |  |   |       |      |  |   |        |   |  | $ | 17.5   |      |  |   |        |     
|                                                                        |                                                           |                                 |     |         |  |           |       |            |  |               |        |          |  |               |       |       |  |   |       |      |  |   |        |   |  |   |        |      |  |   |        |     
|Balance at September 30, 2000                                           |                                                           |                                 | 1.0 |         |  |           | 661.2 |            |  |               | 467.6  |          |  |               | (9.1  | )     |  |   | (45.0 | )    |  |   | (322.0 | ) |  |   |        |      |  |   | 753.7  |     
|                                                                        |                                                           |                                 |     |         |  |           |       |            |  |               |        |          |  |               |       |       |  |   |       |      |  |   |        |   |  |   |        |      |  |   |        |     
|Net loss                                                                |                                                           |                                 |     |         |  |           |       |            |  |               | (524.6 | )        |  |               |       |       |  |   |       |      |  |   |        |   |  | $ | (524.6 | )    |  |   | (524.6 | )   
|Cash dividend declared ($0.05 per share)                                |                                                           |                                 |     |         |  |           |       |            |  |               | (3.9   | )        |  |               |       |       |  |   |       |      |  |   |        |   |  |   |        |      |  |   | (3.9   | )   
|Amortization of unearned restricted stock                               |                                                           |                                 |     |         |  |           |       |            |  |               |        |          |  |               | 2.9   |       |  |   |       |      |  |   |        |   |  |   |        |      |  |   | 2.9    |     
|Purchase of 2,815,200 shares of common stock                            |                                                           |                                 |     |         |  |           |       |            |  |               |        |          |  |               |       |       |  |   |       |      |  |   | (43.1  | ) |  |   |        |      |  |   | (43.1  | )   
|Treasury stock issued to directors (20,640 shares)                      |                                                           |                                 |     |         |  |           | (0.2  | )          |  |               |        |          |  |               |       |       |  |   |       |      |  |   | 0.3    |   |  |   |        |      |  |   | 0.1    |     
|Forfeiture of 8,500 shares of unearned restricted
    stock             |                                                           |                                 |     |         |  |           |       |            |  |               |        |          |  |               | 0.2   |       |  |   |       |      |  |   | (0.2   | ) |  |   |        |      |  |   |       |     
|Treasury stock issued (30,000 shares) upon
    exercise of options      |                                                           |                                 |     |         |  |           | (0.2  | )          |  |               |        |          |  |               |       |       |  |   |       |      |  |   | 0.5    |   |  |   |        |      |  |   | 0.3    |     
|Discontinued operations:                                                |                                                           |                                 |     |         |  |           |       |            |  |               |        |          |  |               |       |       |  |   |       |      |  |   |        |   |  |   |        |      |  |   |        |     
|                                                                        | Translation adjustment                                    |                                 |     |         |  |           |       |            |  |               |        |          |  |               |       |       |  |   |       | 27.4 |  |   |        |   |  |   |        | 27.4 |  |   |        | 27.4 | 
|                                                                        | Minimum pension liability adjustment                      |                                 |     |         |  |           |       |            |  |               |        |          |  |               |       |       |  |   |       | 7.1  |  |   |        |   |  |   |        | 7.1  |  |   |        | 7.1  | 
|Translation adjustment                                                  |                                                           |                                 |     |         |  |           |       |            |  |               |        |          |  |               |       |       |  |   | (13.2 | )    |  |   |        |   |  |   | (13.2  | )    |  |   | (13.2  | )   
|Fair value of derivatives adjustment                                    |                                                           |                                 |     |         |  |           |       |            |  |               |        |          |  |               |       |       |  |   | (1.4  | )    |  |   |        |   |  |   | (1.4   | )    |  |   | (1.4   | )   
|Minimum pension liability adjustment                                    |                                                           |                                 |     |         |  |           |       |            |  |               |        |          |  |               |       |       |  |   | (5.7  | )    |  |   |        |   |  |   | (5.7   | )    |  |   | (5.7   | )   
|                                                                        |                                                           |                                 |     |         |  |           |       |            |  |               |        |          |  |               |       |       |  |   |       |      |  |   |        |   |  |   |        |      |  |   |        |     
|Other comprehensive income                                              |                                                           |                                 |     |         |  |           |       |            |  |               |        |          |  |               |       |       |  |   |       |      |  |   |        |   |  |   | 14.2   |      |  |   |        |     
|                                                                        |                                                           |                                 |     |         |  |           |       |            |  |               |        |          |  |               |       |       |  |   |       |      |  |   |        |   |  |   |        |      |  |   |        |     
|Total comprehensive loss                                                |                                                           |                                 |     |         |  |           |       |            |  |               |        |          |  |               |       |       |  |   |       |      |  |   |        |   |  | $ | (510.4 | )    |  |   |        |     
|                                                                        |                                                           |                                 |     |         |  |           |       |            |  |               |        |          |  |               |       |       |  |   |       |      |  |   |        |   |  |   |        |      |  |   |        |     
|Balance at September 30, 2001                                           |                                                           |                                 | 1.0 |         |  |           | 660.8 |            |  |               | (60.9  | )        |  |               | (6.0  | )     |  |   | (30.8 | )    |  |   | (364.5 | ) |  |   |        |      |  |   | 199.6  |     
|                                                                        |                                                           |                                 |     |         |  |           |       |            |  |               |        |          |  |               |       |       |  |   |       |      |  |   |        |   |  |   |        |      |  |   |        |     
|Net income                                                              |                                                           |                                 |     |         |  |           |       |            |  |               | 41.6   |          |  |               |       |       |  |   |       |      |  |   |        |   |  | $ | 41.6   |      |  |   | 41.6   |     
|Amortization of unearned restricted stock
    (continuing operations)   |                                                           |                                 |     |         |  |           |       |            |  |               |        |          |  |               | 2.4   |       |  |   |       |      |  |   |        |   |  |   |        |      |  |   | 2.4    |     
|Amortization of unearned restricted stock
    (discontinued operations) |                                                           |                                 |     |         |  |           |       |            |  |               |        |          |  |               | 1.7   |       |  |   |       |      |  |   |        |   |  |   |        |      |  |   | 1.7    |     
|Treasury stock issued to directors (90,880 shares)                      |                                                           |                                 |     |         |  |           | (1.3  | )          |  |               |        |          |  |               |       |       |  |   |       |      |  |   | 1.5    |   |  |   |        |      |  |   | 0.2    |     
|Treasury stock issued in 401K match (262,804
    shares)                |                                                           |                                 |     |         |  |           | (3.5  | )          |  |               |        |          |  |               |       |       |  |   |       |      |  |   | 4.4    |   |  |   |        |      |  |   | 0.9    |     
|Forfeiture of 32,833 shares of unearned
    restricted stock            |                                                           |                                 |     |         |  |           | (0.5  | )          |  |               |        |          |  |               | 0.2   |       |  |   |       |      |  |   | (0.1   | ) |  |   |        |      |  |   | (0.4   | )   
|Translation adjustment                                                  |                                                           |                                 |     |         |  |           |       |            |  |               |        |          |  |               |       |       |  |   | 3.4   |      |  |   |        |   |  |   | 3.4    |      |  |   | 3.4    |     
|Fair value of derivatives adjustment                                    |                                                           |                                 |     |         |  |           |       |            |  |               |        |          |  |               |       |       |  |   | 1.4   |      |  |   |        |   |  |   | 1.4    |      |  |   | 1.4    |     
|Minimum pension liability adjustment                                    |                                                           |                                 |     |         |  |           |       |            |  |               |        |          |  |               |       |       |  |   | (13.1 | )    |  |   |        |   |  |   | (13.1  | )    |  |   | (13.1  | )   
|                                                                        |                                                           |                                 |     |         |  |           |       |            |  |               |        |          |  |               |       |       |  |   |       |      |  |   |        |   |  |   |        |      |  |   |        |     
|Other comprehensive loss                                                |                                                           |                                 |     |         |  |           |       |            |  |               |        |          |  |               |       |       |  |   |       |      |  |   |        |   |  |   | (8.3   | )    |  |   |        |     
|                                                                        |                                                           |                                 |     |         |  |           |       |            |  |               |        |          |  |               |       |       |  |   |       |      |  |   |        |   |  |   |        |      |  |   |        |     
|Total comprehensive income                                              |                                                           |                                 |     |         |  |           |       |            |  |               |        |          |  |               |       |       |  |   |       |      |  |   |        |   |  | $ | 33.3   |      |  |   |        |     
|                                                                        |                                                           |                                 |     |         |  |           |       |            |  |               |        |          |  |               |       |       |  |   |       |      |  |   |        |   |  |   |        |      |  |   |        |     
|Balance at September 30, 2002                                           |                                                           | $                               | 1.0 |         |  | $         | 655.5 |            |  | $             | (19.3  | )        |  | $             | (1.7  | )     |  | $ | (39.1 | )    |  | $ | (358.7 | ) |  |   |        |      |  | $ | 237.7  |     
|                                                                        |                                                           |                                 |     |         |  |           |       |            |  |               |        |          |  |               |       |       |  |   |       |      |  |   |        |   |  |   |        |      |  |   |        |     

See notes to Consolidated Financial Statements.

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U.S. INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

Note 1  Basis of
Presentation

The Company manufactures and distributes a broad
range of consumer and industrial products through its two
business segments  Bath & Plumbing and
Rexair.

The Company operates on a 52- or 53-week fiscal
year ending on the Saturday nearest to September 30. The
fiscal year periods presented in our consolidated financial
statements consisted of the 52 weeks ending on
September 28, 2002, September 29, 2001, or
September 30, 2000, but are presented as of
September 30 in each of those years for convenience.
Businesses over which the Company has the ability to exercise
significant influence, but are not consolidated into the
Companys results, are accounted for using the equity
method. In March 2000, the Company completed the disposition of
a majority equity interest in its Diversified segment. The
Company accounted for its retained interest in the Diversified
segment under the equity method of accounting from March 2000
until January 2002, when the Company sold all remaining
interests in that segment. The Company eliminates intercompany
balances and transactions when consolidating the account
balances of the subsidiaries.

Certain amounts have been reclassified in the
Companys prior year statements to conform them to the
presentation used in the current year.

Note 2  Accounting
Policies

Use of Estimates:Accounting guidelines require that the Company make estimates
and assumptions that affect amounts reported in its financial
statements and accompanying notes. Actual results could differ
from those estimates.

Foreign Currency
Translation:The Companys
subsidiaries outside of the United States record transactions
using their local currency as their functional currency. In
accordance with Statement of Financial Accounting Standards
(SFAS) No. 52, Foreign Currency
Translation, the assets and liabilities of the
Companys foreign subsidiaries are translated into U.S.
dollars using the exchange rates in effect at the balance sheet
dates. Revenues, expenses and cash flow items are translated at
average daily exchange rates for the period. The gains and
losses resulting from the changes in exchange rates from year to
year have been reported in other comprehensive income.

Cash and Cash
Equivalents:The Company considers all
highly liquid investments with original maturities of three
months or less to be cash equivalents.

Restricted Cash:The
Company has restricted cash, which is comprised of escrow
deposits required under the terms of the Restructured Facilities
for the benefit of the holders of the Companys Senior
Notes and certain other creditors (See Note 6).

Trade Receivables and Concentration of Credit
Risk:The Company records an allowance
for doubtful accounts, reducing its receivables balance to an
amount the Company estimates is collectible from its customers.

The Company operates in the United States, Europe
and, to a lesser extent, in other regions of the world. The
Company performs periodic credit evaluations of its
customers financial condition and generally does not
require collateral. The Company encounters a certain amount of
credit risk as a result of a concentration of receivables among
a few significant customers. The Bath & Plumbing
segment has a customer that accounts for 10%, 14% and 10% of
total Company sales in fiscal 2002, 2001 and 2000, respectively.
As of September 30, 2002 and 2001, this customer represents
approximately 11% and 10% of the Companys trade
receivables balances. Credit losses have not been significant
and are within managements expectations.

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U.S. INDUSTRIES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Income Taxes:Deferred tax assets and liabilities represent the tax effects,
based on current law, of any temporary differences in the timing
of when revenues and expenses are recognized for tax purposes
and when they are recognized for financial statement purposes.
The deferred tax assets are reviewed periodically for
recoverability and valuation allowances are provided as
necessary.

Inventories:The
Companys inventories are stated at the lower of cost or
market value. The Company used the first-in-first-out
(FIFO) method for determining the cost of approximately 40%
of its inventories in 2002 and approximately 39% of its
inventories in 2001, and the last-in-first-out (LIFO) method for
the remainder of its inventories. The carrying value of the
Companys LIFO method inventories approximate their FIFO
cost value at September 30, 2002 and 2001. The FIFO method
approximates replacement cost. The Companys inventories
can be categorized as follows:

|                    |  |                  |       |      |  |   |       | 
|------------------- |  | ---------------- | ----- | ---- |  | - | ----- | 
|                    |  |                 
|                    |  | At September 30,
|                    |  |                 
|                    |  | 2002             |       | 2001
|                    |  |                  |       |     
|                    |  |                 
|                    |  | (In millions)   
|Finished products   |  | $                | 110.2 |      |  | $ | 115.6 | 
|In-process products |  |                  | 14.2  |      |  |   | 11.5  | 
|Raw materials       |  |                  | 58.6  |      |  |   | 63.9  | 
|                    |  |                  |       |      |  |   |       | 
|                    |  | $                | 183.0 |      |  | $ | 191.0 | 
|                    |  |                  |       |      |  |   |       | 

Property, Plant and
Equipment:The Company records its
property, plant and equipment at cost. The Company records
depreciation and amortization in a manner that recognizes the
cost of its depreciable assets in operations over their
estimated useful lives using the straight-line method. The
Company estimates the useful lives of its depreciable assets to
be 20-50 years for buildings and 1-15 years for
machinery, equipment and furniture. Leasehold improvements are
amortized over the shorter of the terms of the underlying
leases, including probable renewal periods, or the estimated
useful lives of the improvements.

Property, plant and equipment consisted of:

|                                          |  |                  |        |      |  |   |        |  
|----------------------------------------- |  | ---------------- | ------ | ---- |  | - | ------ | -
|                                          |  |                 
|                                          |  | At September 30,
|                                          |  |                 
|                                          |  | 2002             |        | 2001
|                                          |  |                  |        |     
|                                          |  |                 
|                                          |  | (In millions)   
|Land and buildings                        |  | $                | 84.0   |      |  | $ | 89.2   |  
|Machinery, equipment and furniture        |  |                  | 193.0  |      |  |   | 186.5  |  
|Accumulated depreciation and amortization |  |                  | (132.7 | )    |  |   | (117.2 | )
|                                          |  |                  |        |      |  |   |        |  
|                                          |  | $                | 144.3  |      |  | $ | 158.5  |  
|                                          |  |                  |        |      |  |   |        |  

Depreciation and
Amortization:Depreciation and
amortization consisted of:

|                                               |  |                            |      |      |  |      |      |  |  |   |      |  
|---------------------------------------------- |  | -------------------------- | ---- | ---- |  | ---- | ---- |  |  | - | ---- | -
|                                               |  |                           
|                                               |  | For the Fiscal Years Ended
|                                               |  | September 30,             
|                                               |  |                           
|                                               |  | 2002                       |      | 2001 |  | 2000
|                                               |  |                            |      |      |  |     
|                                               |  |                           
|                                               |  | (In millions)             
|Depreciation                                   |  | $                          | 24.5 |      |  | $    | 25.3 |  |  | $ | 33.7 |  
|Amortization of goodwill and intangible assets |  |                            | 0.1  |      |  |      | 9.7  |  |  |   | 13.2 |  
|Amortization of unearned restricted stock      |  |                            | 2.4  |      |  |      | 2.9  |  |  |   | 3.3  |  
|Amortization of deferred income                |  |                            |     |      |  |      |     |  |  |   | (2.2 | )
|                                               |  |                            |      |      |  |      |      |  |  |   |      |  
|                                               |  | $                          | 27.0 |      |  | $    | 37.9 |  |  | $ | 48.0 |  
|                                               |  |                            |      |      |  |      |      |  |  |   |      |  

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U.S. INDUSTRIES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Other Current Assets and Other
Assets:Included in other current
assets are notes receivable from certain Company executives of
$2.5 million. These amounts include interest and are due in
February 2003. Included in other assets are excess properties
held for sale, consisting primarily of land and buildings no
longer used in operations. These assets are carried at the lower
of cost or fair value less costs to sell. The carrying value of
such properties was $17.5 million and $10.1 million as
of September 30, 2002 and 2001, respectively. In fiscal
2002 the Company recorded income from excess properties of
$0.7 million, compared to a net loss from excess properties
of $0.2 million in fiscal 2001 and income from excess
properties of $2.7 million in fiscal 2000. These amounts
are included in other income (expense), and consist of net gains
on the sales of these properties, adjustments to net realizable
value and the carrying costs incurred in the period.

Goodwill and Other Intangible
Assets:In June 2001, the Financial
Accounting Standards Board issued Statements of Financial
Accounting Standards (SFAS) No. 141,
Business Combinations, and No. 142, Goodwill and
Other Intangible Assets, effective for the fiscal years
beginning after December 15, 2001. Under the new rules,
goodwill and intangible assets deemed to have indefinite lives
will no longer be amortized but will be subject to annual
impairment tests in accordance with Statement No. 142.
Other intangible assets will continue to be amortized over their
useful lives. SFAS No. 141 is effective commencing
July 1, 2001, and the Company elected to adopt SFAS
No. 142 as of October 1, 2001. Accordingly, as of
October 1, 2001, the Company no longer amortizes goodwill.

SFAS No. 142 requires that goodwill and
intangible assets with indefinite lives be tested for impairment
at the reporting unit level at the date of adoption and at least
annually thereafter, utilizing a two-step methodology. The
initial step requires the Company to determine the fair value of
each reporting unit and of each intangible asset with an
indefinite life and compare it to the respective carrying value,
including goodwill and other intangible assets, of such unit or
of such intangible asset. If the fair value exceeds the carrying
value, no impairment loss is recognized. However, if the
carrying value of the intangible asset exceeds its fair value,
an impairment charge equal to the difference in the values
should be recorded. Upon completion of its assessment in the
fourth quarter of 2002, the Company determined that the fair
value of the Companys intangible assets with indefinite
lives exceeded their carrying values. For goodwill, if the
carrying value of the reporting unit exceeds its fair value, the
goodwill and/or other intangible assets of this unit may be
impaired. The amount, if any, of the impairment would then be
measured in a second step. The Company performed the initial
step on its two reporting units  Bath &
Plumbing and Rexair  at October 1, 2001 and in
the fourth quarter of 2002. The fair values of each reporting
unit exceeded the carrying values. Consequently, no impairment
was recognized and the second step was not required. The Company
plans on performing its annual test for impairment in the fourth
quarter of its fiscal year.

As of September 30, 2002, the Company had
net goodwill of $236.4 million in the Bath &
Plumbing segment, compared to $233.5 million as of
September 30, 2001. The increase in the goodwill balance is
due to exchange rate fluctuations.

Identifiable intangible assets, which are
included in the Rexair segment, are comprised of:

|                                  |                                      |                    |      |                    |  |                |     |              |  |   |      |      |  |   |   |   | 
|--------------------------------- | ------------------------------------ | ------------------ | ---- | ------------------ |  | -------------- | --- | ------------ |  | - | ---- | ---- |  | - | - | - | 
|                                  |                                      |                    |      |                   
|                                  |                                      | September 30, 2002 |      | September 30, 2001
|                                  |                                      |                    |      |                   
|                                  |                                      | Gross Carrying     |      | Accumulated        |  | Gross Carrying |     | Accumulated 
|                                  |                                      | Amount             |      | Amortization       |  | Amount         |     | Amortization
|                                  |                                      |                    |      |                    |  |                |     |             
|Amortizable intangible assets     |                                      | $                  | 0.9  |                    |  | $              | 0.1 |              |  | $ | 0.9  |      |  | $ |  |  
|Non-amortizable intangible assets |                                      |                    | 72.8 |                    |  |                |    |              |  |   | 68.0 |      |  |   |  |  
|                                  |                                      |                    |      |                    |  |                |     |              |  |   |      |      |  |   |   |  
|                                  | Total identifiable intangible assets |                    | $    | 73.7               |  |                | $   | 0.1          |  |   | $    | 68.9 |  |   | $ |  | 
|                                  |                                      |                    |      |                    |  |                |     |              |  |   |      |      |  |   |   |  

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##### Table of Contents



U.S. INDUSTRIES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Amortizable intangible assets consist of patented
technology, which will be amortized over its 10-year useful
life. Amortization expense should approximate $0.1 million
per year through fiscal 2011. Non-amortizable intangible assets
include a trade name and distributor network.

The following table presents actual results of
operations for fiscal 2002 and a reconciliation of reported net
income (loss) to adjusted net income (loss) for fiscal
2001 and 2000.

|                                   |                                                 |                                                  |   |      |      |      |   |        |        |   |   |      |      | 
|---------------------------------- | ----------------------------------------------- | ------------------------------------------------ | - | ---- | ---- | ---- | - | ------ | ------ | - | - | ---- | ---- | 
|                                   |                                                 |                                                 
|                                   |                                                 | For the Fiscal Years Ended                      
|                                   |                                                 | September 30,                                   
|                                   |                                                 |                                                 
|                                   |                                                 | 2002                                             |   | 2001 |      | 2000
|                                   |                                                 |                                                  |   |      |      |     
|Net income (loss):                 |                                                 |                                                  |   |      |      |      |   |        |        |   |   |     
|                                   | Reported income (loss)                          |                                                  | $ | 41.6 |      |      | $ | (524.6 | )      |   | $ | 35.6 |     
|                                   | Add back: Goodwill amortization  after
    tax |                                                  |   |     |      |      |   | 12.1   |        |   |   | 17.7 |     
|                                   |                                                 |                                                  |   |      |      |      |   |        |        |   |   |     
|                                   |                                                 | Adjusted net income (loss)                       |   | $    | 41.6 |      |   | $      | (512.5 | ) |   | $    | 53.3 | 
|                                   |                                                 |                                                  |   |      |      |      |   |        |        |   |   |     
|Basic earnings (loss) per share:   |                                                 |                                                  |   |      |      |      |   |        |        |   |   |     
|                                   | Reported net income (loss) per share            |                                                  | $ | 0.56 |      |      | $ | (7.09  | )      |   | $ | 0.44 |     
|                                   | Add back: Goodwill amortization per share       |                                                  |   |     |      |      |   | 0.16   |        |   |   | 0.22 |     
|                                   |                                                 |                                                  |   |      |      |      |   |        |        |   |   |     
|                                   |                                                 | Adjusted earnings (loss) per
    share  basic   |   | $    | 0.56 |      |   | $      | (6.93  | ) |   | $    | 0.66 | 
|                                   |                                                 |                                                  |   |      |      |      |   |        |        |   |   |     
|Diluted earnings (loss) per share: |                                                 |                                                  |   |      |      |      |   |        |        |   |   |     
|                                   | Reported net income (loss) per share            |                                                  | $ | 0.56 |      |      | $ | (7.09  | )      |   | $ | 0.43 |     
|                                   | Add back: Goodwill amortization per share       |                                                  |   |     |      |      |   | 0.16   |        |   |   | 0.21 |     
|                                   |                                                 |                                                  |   |      |      |      |   |        |        |   |   |     
|                                   |                                                 | Adjusted earnings (loss) per
    share  diluted |   | $    | 0.56 |      |   | $      | (6.93  | ) |   | $    | 0.64 | 
|                                   |                                                 |                                                  |   |      |      |      |   |        |        |   |   |     

Accrued Expenses and Other Current
Liabilities:Accrued expenses and
other current liabilities consisted of the following:

|                     |  |                  |       |      |  |   |       | 
|-------------------- |  | ---------------- | ----- | ---- |  | - | ----- | 
|                     |  |                 
|                     |  | At September 30,
|                     |  |                 
|                     |  | 2002             |       | 2001
|                     |  |                  |       |     
|                     |  |                 
|                     |  | (In millions)   
|Compensation related |  | $                | 22.3  |      |  | $ | 19.2  | 
|Other                |  |                  | 109.4 |      |  |   | 104.3 | 
|                     |  |                  |       |      |  |   |       | 
|                     |  | $                | 131.7 |      |  | $ | 123.5 | 
|                     |  |                  |       |      |  |   |       | 

Fair Value of Financial
Instruments:SFAS No. 107,
Disclosure about Fair Value of Financial Instruments,
requires that the Company disclose the fair value of its
financial instruments when it is practical to estimate. The
Company has determined the estimated fair values of its
financial instruments, which are either recognized in the
Companys consolidated balance sheets or disclosed within
these notes, using available market information and appropriate
valuation methodologies. However, considerable judgment is
required in interpreting market data to develop estimates of
fair value. Accordingly, the estimates presented are not
necessarily indicative of the amounts the Company could realize
in a current market exchange.

Short-term Assets and
Liabilities:The fair values of the
Companys cash and cash equivalents, trade receivables and
accounts payable approximate their carrying values because of
their short-term nature.

Long-term Debt:The
fair values of the Companys Senior Notes represent quoted
market prices. The fair value of the Companys remaining
debt is determined by discounting the cash flows using current

41



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##### Table of Contents



U.S. INDUSTRIES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

interest rates for financial instruments with
similar characteristics and maturities. The fair value of the
Companys remaining debt approximates its carrying value as
of September 30, 2002.

There were no other significant differences as of
September 30, 2002 and September 30, 2001 between the
carrying value and fair value of the Companys financial
instruments except as disclosed below:

|                    |  |               |       |       |  |          |       |       |  |   |       |  |  |   |       | 
|------------------- |  | ------------- | ----- | ----- |  | -------- | ----- | ----- |  | - | ----- |  |  | - | ----- | 
|                    |  |               |       |      
|                    |  | 2002          |       | 2001 
|                    |  |               |       |      
|                    |  | Carrying      |       | Fair  |  | Carrying |       | Fair 
|                    |  | Amount        |       | Value |  | Amount   |       | Value
|                    |  |               |       |       |  |          |       |      
|                    |  |              
|                    |  | (In millions)
|7.125% Senior Notes |  | $             | 249.5 |       |  | $        | 227.5 |       |  | $ | 249.1 |  |  | $ | 180.0 | 
|7.25% Senior Notes  |  |               | 124.1 |       |  |          | 107.5 |       |  |   | 123.9 |  |  |   | 82.5  | 
|                    |  |               |       |       |  |          |       |       |  |   |       |  |  |   |       | 
|                    |  | $             | 373.6 |       |  | $        | 335.0 |       |  | $ | 373.0 |  |  | $ | 262.5 | 
|                    |  |               |       |       |  |          |       |       |  |   |       |  |  |   |       | 

Revenue Recognition:The Company currently records revenue when delivery has occurred
and title has passed to the customer. Provisions are made for
warranty and return costs at the time of sale. Such provisions
have not been material to the Company.

Accounting Change:In December 1999, the Securities and Exchange Commission
(SEC) issued Staff Accounting Bulletin
(SAB) No. 101, Revenue Recognition in
Financial Statements, which, along with other guidance,
clarified the SECs views on various revenue recognition
and reporting matters. As a result, the Company changed its
method of accounting for certain sales transactions.
Historically, the Company recognized revenue upon shipment of
products to the customer because, even though some products were
shipped FOB destination, the Company used a common carrier and
thus gave up substantially all the risks of ownership. Under the
new accounting method adopted retroactive to October 1,
2000, the Company now recognizes revenue when title passes. The
net effect of the accounting change was not material to the
results for the year ended September 30, 2001. Net sales
for the year ended September 30, 2001 includes
$4.4 million of net sales that, prior to the accounting
change, had been recognized through September 30, 2000. The
pro forma amounts, had the new revenue recognition method been
applied retroactively to prior periods, were not materially
different from the amounts shown in the Companys
consolidated statements of income for the year ended
September 30, 2000. Therefore, these amounts have not been
presented.

Shipping and Handling Fees and
Costs:The Company classifies amounts
charged to its customers for shipping and handling as revenues,
while shipping and handling costs are recorded as cost of goods
sold.

Other Expense, Net:Other expense, net consisted of the following:

|                                  |  |                            |      |      |  |      |      |   |  |   |      |  
|--------------------------------- |  | -------------------------- | ---- | ---- |  | ---- | ---- | - |  | - | ---- | -
|                                  |  |                           
|                                  |  | For the Fiscal Years Ended
|                                  |  | September 30,             
|                                  |  |                           
|                                  |  | 2002                       |      | 2001 |  | 2000
|                                  |  |                            |      |      |  |     
|                                  |  |                           
|                                  |  | (In millions)             
|Keller Ladder expenses            |  | $                          | 5.2  |      |  | $    | 4.3  |   |  | $ | 5.7  |  
|Financing costs                   |  |                            | 9.2  |      |  |      | 23.6 |   |  |   |     |  
|Impairment of Strategic Notes     |  |                            |     |      |  |      | 45.1 |   |  |   |     |  
|Rexair deferred transaction costs |  |                            |     |      |  |      | 17.4 |   |  |   |     |  
|LCA spin-off costs                |  |                            |     |      |  |      | 8.1  |   |  |   |     |  
|Other, net                        |  |                            | 1.2  |      |  |      | (1.3 | ) |  |   | (1.0 | )
|                                  |  |                            |      |      |  |      |      |   |  |   |      |  
|                                  |  | $                          | 15.6 |      |  | $    | 97.2 |   |  | $ | 4.7  |  
|                                  |  |                            |      |      |  |      |      |   |  |   |      |  

42



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##### Table of Contents



U.S. INDUSTRIES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Keller Ladder expenses are related to continuing
obligations associated with the Companys ladder operations
disposed of in October 1999. Financing costs relate primarily to
obligations associated with the Companys Restructured
Facilities and bond offerings. The impairment charge related to
the Strategic Notes, Rexair deferred transaction costs and LCA
spin-off costs were all considered non-recurring and additional
information on these can be found in Note 5.

Advertising Costs:Advertising costs are charged to expense when incurred.
Advertising expense totaled $20.5 million,
$31.1 million and $34.8 million in 2002, 2001 and
2000, respectively.

Research and Development
Costs:Research and development costs
are expensed as incurred. Such amounts totaled
$4.3 million, $5.2 million and $6.2 million in
2002, 2001 and 2000, respectively.

Derivative Financial
Instruments:Effective October 1,
2000, the Company adopted SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities, as amended,
which requires that all derivative instruments be reported on
the balance sheet at fair value and establishes criteria for
designation and effectiveness of hedging relationships. The
Company hedged a portion of its variable-rate debt by entering
into an interest rate swap in which the Company agreed to
exchange, at specified intervals, the calculated difference
between fixed and variable interest amounts on $90 million
of its debt. The swap, which matured on June 30, 2002, was
designated as a cash flow hedge of the underlying variable-rate
interest payments and was recorded as a current liability in the
Companys balance sheet at September 2001. Since an
assessment of the hedging relationship revealed that it was 100%
effective, the entire unrealized loss, net of tax, was recorded
in accumulated other comprehensive income (loss)
(OCI) within stockholders equity. As of
September 30, 2001 there was an unrealized loss of
$1.4 million in OCI related to this contract, which was
recognized as additional interest expense during fiscal 2002.

Comprehensive Income
(Loss):Comprehensive income
(loss) represents the change in stockholders equity
from transactions and other events and circumstances arising
from non-stockholder sources. The Companys comprehensive
income (loss) for 2002, 2001 and 2000 consisted of net
income (loss), foreign currency translation adjustments, minimum
pension liability adjustments and unrealized gains and losses on
derivatives established as cash flow hedges, net of applicable
income taxes.

Components of Accumulated other comprehensive
income (loss) consist of the following:

|                   |  |               |       |               |  |               |      |               |  |   |       |   |  |   |       |  
|------------------ |  | ------------- | ----- | ------------- |  | ------------- | ---- | ------------- |  | - | ----- | - |  | - | ----- | -
|                   |  |               |       |               |  |               |      | Accumulated  
|                   |  |               |       |               |  | Minimum       |      | Other        
|                   |  | Foreign       |       | Fair Value of |  | Pension       |      | Comprehensive
|                   |  | Currency      |       | Derivatives   |  | Liability     |      | Income       
|                   |  | Translation   |       | Adjustment    |  | Adjustment(1) |      | (Loss)       
|                   |  |               |       |               |  |               |      |              
|                   |  |              
|                   |  | (In millions)
|September 30, 1999 |  | $             | (23.2 | )             |  | $             |     |               |  | $ | (3.7  | ) |  | $ | (26.9 | )
|Fiscal 2000 change |  |               | (19.4 | )             |  |               |     |               |  |   | 1.3   |   |  |   | (18.1 | )
|                   |  |               |       |               |  |               |      |               |  |   |       |   |  |   |       |  
|September 30, 2000 |  |               | (42.6 | )             |  |               |     |               |  |   | (2.4  | ) |  |   | (45.0 | )
|Fiscal 2001 change |  |               | 14.2  |               |  |               | (1.4 | )             |  |   | 1.4   |   |  |   | 14.2  |  
|                   |  |               |       |               |  |               |      |               |  |   |       |   |  |   |       |  
|September 30, 2001 |  |               | (28.4 | )             |  |               | (1.4 | )             |  |   | (1.0  | ) |  |   | (30.8 | )
|Fiscal 2002 change |  |               | 3.4   |               |  |               | 1.4  |               |  |   | (13.1 | ) |  |   | (8.3  | )
|                   |  |               |       |               |  |               |      |               |  |   |       |   |  |   |       |  
|September 30, 2002 |  | $             | (25.0 | )             |  | $             |     |               |  | $ | (14.1 | ) |  | $ | (39.1 | )
|                   |  |               |       |               |  |               |      |               |  |   |       |   |  |   |       |  



---



|    |                                                                                                                                                                                       
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The minimum pension liability adjustment is net
    of an estimated tax benefit of $7.6 million,
    $0.5 million and $1.3 million at September 2002, 2001
    and 2000, respectively.

Income (Loss) Per
Share:Basic net income
(loss) per share is based on the weighted average number of
shares outstanding during each period, excluding the weighted
average of restricted shares

43



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##### Table of Contents



U.S. INDUSTRIES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

outstanding during each period (See Note 9).
Diluted earnings per share further assumes that, under the
treasury stock method, any dilutive stock options are exercised,
restricted stock awards are vested and any other dilutive equity
instruments are converted.

The information required to compute basic and
diluted net income (loss) per share is as follows:

|                                                                        |  |                            |      |      |  |      |      |  |  |  |      | 
|----------------------------------------------------------------------- |  | -------------------------- | ---- | ---- |  | ---- | ---- |  |  |  | ---- | 
|                                                                        |  |                           
|                                                                        |  | For the Fiscal Years Ended
|                                                                        |  | September 30,             
|                                                                        |  |                           
|                                                                        |  | 2002                       |      | 2001 |  | 2000
|                                                                        |  |                            |      |      |  |     
|                                                                        |  |                           
|                                                                        |  | (In millions)             
|Basic weighted average number of common shares
    outstanding          |  |                            | 73.8 |      |  |      | 74.0 |  |  |  | 81.4 | 
|                                                                        |  |                            |      |      |  |      |      |  |  |  |      | 
|Shares issued upon assumed exercise of dilutive
    stock options       |  |                            |     |      |  |      |     |  |  |  | 0.4  | 
|Shares issued upon assumed vesting of restricted
    stock              |  |                            |     |      |  |      |     |  |  |  | 0.7  | 
|Shares issued upon assumed conversion of equity
    instrument contract |  |                            |     |      |  |      |     |  |  |  | 0.5  | 
|                                                                        |  |                            |      |      |  |      |      |  |  |  |      | 
|Diluted weighted average number of common shares
    outstanding        |  |                            | 73.8 |      |  |      | 74.0 |  |  |  | 83.0 | 
|                                                                        |  |                            |      |      |  |      |      |  |  |  |      | 

Options to purchase 4.7 million,
6.1 million and 2.4 million shares in the years ended
September 30, 2002, 2001 and 2000, respectively, were not
included in the computation of earnings per share because the
exercise prices of these options exceeded the average market
price of the common shares. The effect of assuming that
1.0 million shares of restricted stock vested in 2001 was
also excluded from the computation of diluted earnings per share
because the effect would have been anti-dilutive.

New Accounting
Pronouncements:In June 2001, the
Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard
(Statement) 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 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. The
Company will adopt the new rules on asset retirement obligations
on October 1, 2002. Application of the new rules is not
expected to have a significant impact on the Companys
financial position and results of operations.

In August 2001, the FASB issued Statement
No. 144, Accounting for the Impairment or Disposal of
Long-lived Assets, which addresses financial accounting and
reporting for the impairment or disposal of long-lived assets
and supercedes Statement No. 121, Accounting for the
Impairment of Long-lived Assets and for Long-lived Assets to be
Disposed Of, and the accounting and reporting provisions of
Accounting Principles Board Opinion No. 30, Reporting
the Results of Operations for a Disposal of a Segment of a
Business. Statement No. 144 is effective for fiscal
years beginning after December 15, 2001, with earlier
application encouraged. The Company expects to adopt the new
rules as of October 1, 2002, and it does not expect
adoption of the Statement to have a significant impact on the
Companys financial position and results of operations.

In April 2002, the FASB issued Statement
No. 145, Rescission of FASB Statements No. 4, 44
and 64, Amendment of FASB Statement No. 13 and Technical
Correction. This Statement eliminates extraordinary
accounting treatment for reporting gain or loss on debt
extinguishment, and amends other existing authoritative
pronouncements to make various technical corrections, clarifies
meanings, or describes their applicability under changed
conditions. The provisions of this Statement will be effective
for the Company October 1, 2002; however, early application
of the Statement is encouraged. Debt extinguishments reported as
extraordinary items prior to scheduled or early adoption of this
Statement would be reclassified following adoption. The Company
does not anticipate a significant impact on its cash flows or
results of operations as a result of adopting this Statement.

44



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##### Table of Contents



U.S. INDUSTRIES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

In June 2002, the FASB issued Statement
No. 146, Accounting for Costs Associated with Exit or
Disposal Activities.This Statement requires that the
Company record costs associated with exit or disposal activities
at their fair values when a liability has been incurred. Under
previous guidance, certain exit costs were accrued upon
managements commitment to an exit plan, which is generally
before an actual liability has been incurred. The Company is
required to adopt this Statement on October 1, 2002. The
Company does not expect the adoption of this Statement to have a
material affect on its cash flows or the results of its
operations.

Note 3  Acquisitions and
Dispositions of Businesses

Acquisition
of Businesses

In connection with the Companys sale to
Strategic in March 2000 of a 75% interest in Rexair (see
Disposition of Businessesbelow), the Company guaranteed
Rexairs $200 million credit facility. This guarantee
required the Company to maintain certain credit rating levels.
In response to a downgrade of its credit ratings in March 2001,
the Company obtained waivers of the ratings default from
Rexairs lenders while it pursued the reacquisition of
Rexair from Strategic and the restructuring of its debt. On
August 15, 2001, the Company reacquired the 75% equity
interest in Rexair previously sold to Strategic. The purchase
consideration included the return to Strategic of
$27.4 million in face value of Strategics senior
notes and the assumption of borrowings outstanding under
Rexairs $200 million credit facility. In connection
with the reacquisition, the Company reduced the reacquired basis
in Rexair by the amount of its previously deferred gain and
reclassified its retained 25% share of Rexairs net
liabilities from other long-term liabilities. The allocation of
the purchase consideration, including the deferred gain and the
carrying value of the retained liabilities, to the assets
acquired and liabilities assumed resulted in intangible assets
of approximately $73.7 million, the majority of which have
indefinite lives and will not be amortized. The Company expensed
$17.4 million of deferred transaction costs associated with the
March 2000 sale of Rexair. The results of Rexair have been
included in the Rexair segment from the date of acquisition. The
Company accounted for Rexair under the equity method of
accounting during the time period from March 24, 2000 to
August 15, 2001 when the Company held only a 25% interest.

In June 2000, upon expiration of the contingency
period related to the December 1997 acquisition of
Spear & Jackson, the Company made additional cash
payments totaling $71.4 million to the former owners of
Spear & Jackson. The Company was required to pay
$36.0 million because the Companys stock price fell
below a guaranteed minimum as defined in the acquisition
agreement. This amount was recorded as an adjustment to paid-in
capital as it was based upon the market price of the
Companys stock. The remaining $35.4 million payment
was made in satisfaction of additional contingent consideration
based on other criteria set forth in the purchase agreement.
This amount was recorded as additional goodwill. In September
2002, the Company sold Spear & Jackson as part of its
Disposal Plan (see Note 4).



| |                                                                               
| | ------------------------------------------------------------------------------
| | Disposition of Businesses (excluding
    Disposals of Discontinued Operations)

In November 2000, the Company sold its European
HVAC business for proceeds of $7.5 million, which
approximated its carrying value.

On March 24, 2000, the Company disposed of a
majority equity interest in its Diversified segment in two
separate transactions. In the first transaction, the Company
disposed of the following subsidiaries: Atech Turbine
Components, Inc.; Bearing Inspection, Inc.; BiltBest Products,
Inc.; EJ Footwear Corp. (including Georgia Boot Inc. and Lehigh
Safety Shoe Co.); Garden State Tanning Inc.; Huron Inc.; Jade
Holdings Pte Ltd (including Jade Technologies Singapore Ltd and
FSM Europe B.B.); Leon Plastics Inc.; Native Textiles Inc. and
SCF Industries, Inc. The Company received gross cash proceeds of
approximately $203.4 million, retained a preferred equity
interest in the buyer, Strategic, having a stated value of

45



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##### Table of Contents



U.S. INDUSTRIES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

approximately $19.5 million, retained a
common equity interest in Strategic of 17.7% and received
approximately $209.0 million aggregate principal amount of
12% (12.5% effective August 18, 2000) senior notes (the
Strategic Notes) due 2007. In addition, Strategic
assumed approximately $7.9 million of existing bank debt.
As a result of its disposal of the Diversified businesses, the
Company recorded a pre-tax gain of $38.4 million.

In the second transaction, Rexair sold newly
issued shares to Strategic representing, after issuance, 75% of
the equity interest in Rexair. The Company received
approximately $195.0 million in cash and retained a 25%
direct equity interest in Rexair. In addition, the Company
guaranteed Rexairs $200 million credit facility. In
connection with the Rexair transaction, the Company recorded a
liability of $82.2 million, related to its retained 25%
share of Rexairs net liabilities and a deferred gain,
which together with the deferral of the related transaction
costs, was to be deferred until the release of the
Companys guarantee of Rexairs credit facility. On
August 15, 2001, the Company reacquired Rexair from
Strategic in exchange for $27.4 million in face value of
the Strategic Notes. Accordingly, the Companys retained
25% share of Rexairs net liabilities reduced the
reacquired basis in Rexair (see Acquisition of Businessesabove).

In August 2000, the Company sold
$25.0 million of the Strategic Notes, approximately
$1.8 million of the stated value of its preferred equity
interest in Strategic and approximately 1.9% of its common
equity interest in Strategic. This transaction resulted in a
pre-tax gain of $0.9 million. In January 2002, the Company
sold its remaining preferred equity interest in Strategic having
a stated value of approximately $18 million, its 15.8%
common equity interest and its Strategic Notes with a face value
of $156.9 million back to Strategic for net proceeds of
$105.9 million.

In the second quarter of fiscal 2000, the Company
sold its fire protection businesses. The cash consideration paid
for these businesses totaled approximately $23.0 million,
which approximated their carrying value.

During the first quarter of fiscal 2000, the
Company disposed of assets relating to its ladder operations and
the infant and children footwear operation. The total proceeds
of these separate transactions were $18.0 million, which
approximated their carrying values. The Company has retained
certain product liabilities of the ladder operations for which
$12.3 million has been accrued at September 30, 2003.

Note 4  Discontinued
Operations

On December 28, 2001, the Board of Directors
approved a formal Disposal Plan for five businesses in
connection with the Companys obligation to pay debt
amortization as set forth in the restructured debt agreements.
In connection with the Disposal Plan, the Company incurred a
charge of $232.6 million, net of tax, in fiscal 2001, which
represented the difference between the historical net carrying
value and the estimated net realizable value of the five
businesses  Ames True Temper, Selkirk, Lighting
Corporation of America, Spear & Jackson and SiTeco Lighting.
In fiscal 2002, the Company recorded income from discontinued
operations of $7.8 million, as it re-evaluated the
estimated loss on disposal of its discontinued operations. The
discontinued businesses previously comprised the Companys
Lawn & Garden and Lighting segments. The net assets of the
discontinued businesses are included in net assets held for sale
in all periods presented. The Company completed the sales of
Ames True Temper in January 2002, Lighting Corporation of
America in April 2002, Selkirk in June 2002 and Spear &
Jackson in September 2002. In October 2002, the
Company completed the sale of SiTeco Lighting.

The operating results of these businesses were
classified as discontinued operations in 2001 and 2000 and, in
accordance with APB No. 30, their estimated fiscal 2002
operating income was included in the Companys expected
loss on disposal of $232.6 million which was recorded in
September 2001 and adjusted in fiscal 2002.

46



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##### Table of Contents



U.S. INDUSTRIES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Summarized results of these businesses are as
follows:

|                                                                   |  |                            |       |      |  |      |         |   |  |   |         | 
|------------------------------------------------------------------ |  | -------------------------- | ----- | ---- |  | ---- | ------- | - |  | - | ------- | 
|                                                                   |  |                           
|                                                                   |  | For the Fiscal Years Ended
|                                                                   |  | September 30,             
|                                                                   |  |                           
|                                                                   |  | 2002                       |       | 2001 |  | 2000
|                                                                   |  |                            |       |      |  |     
|                                                                   |  |                           
|                                                                   |  | (In millions)             
|Net sales                                                          |  | $                          | 714.1 |      |  | $    | 1,346.1 |   |  | $ | 1,419.8 | 
|Operating income (loss)                                            |  |                            | 31.7  |      |  |      | (57.9   | ) |  |   | 3.9     | 
|Income (loss) from discontinued operations
    before income taxes |  |                            | 31.8  |      |  |      | (66.6   | ) |  |   | 3.4     | 

Included in operating income (loss) in
fiscal 2001 and 2000 are goodwill impairment charges totaling
$121.4 million and $84.0 million, respectively. These
goodwill impairment charges resulted from an evaluation of the
recoverability of goodwill performed by the Company based on a
fair value methodology. The impairment charges were recorded as
part of continuing operations before the approval of the
Disposal Plan and were reclassified into discontinued operations
after the approval of the Disposal Plan.

Amounts classified as net assets held for sale
consist of the following:

|                                              |  |                  |       |      |  |   |       | 
|--------------------------------------------- |  | ---------------- | ----- | ---- |  | - | ----- | 
|                                              |  |                 
|                                              |  | At September 30,
|                                              |  |                 
|                                              |  | 2002             |       | 2001
|                                              |  |                  |       |     
|                                              |  |                 
|                                              |  | (In millions)   
|Net current assets                            |  | $                | 64.2  |      |  | $ | 144.8 | 
|Property, plant and equipment, net            |  |                  | 49.2  |      |  |   | 277.3 | 
|Other non-current assets and liabilities, net |  |                  | (9.6  | )    |  |   | 69.5  | 
|                                              |  |                  |       |      |  |   |       | 
|Net assets held for sale                      |  | $                | 103.8 |      |  | $ | 491.6 | 
|                                              |  |                  |       |      |  |   |       | 

Note 5  Impairment,
Restructuring and Other Non-Recurring Charges



| |                            
| | ---------------------------
| | Goodwill Impairment Charges

Operating results at a number of the
Companys subsidiaries declined during 2001. In the third
quarter of 2001, the Company evaluated the recoverability of the
goodwill of these subsidiaries based on a fair value
methodology. This evaluation indicated that the carrying value
of the goodwill of certain of its subsidiaries was impaired. As
a result, the Company recorded goodwill impairment charges
totaling $100.2 million in the Bath & Plumbing
segment in fiscal 2001.

In fiscal 2000, the Company conducted a strategic
review of certain operations in the Bath & Plumbing
segment. Upon completion of its review, the Company decided to
dispose of its European HVAC operations and to exit three
product lines at its U.S. Brass operations. In reaching this
decision, the Company considered the profitability of these
operations, the fact that the Company was not a market leader in
these businesses and the fact that significant investment would
be required in order to make these businesses competitive with
no assurance of a reasonable return on such investment. As a
result of this decision, the Company recorded goodwill
impairment charges totaling $24.1 million related to its
European HVAC operations and $1.4 million related to its
U.S. Brass operations. Other non-recurring charges recorded in
conjunction with this decision are discussed below.



| |                                                  
| | -------------------------------------------------
| | Restructuring and Other Non-recurring
    Charges

In the latter half of 2002, the Company recorded
restructuring charges of $7.2 million, which included
$3.4 million associated with a lease obligation, $3.1
million in severance charges and $0.7 million to increase
the reserve related to the discontinued U.S. Brass product
lines. The $3.4 million lease charge related to a revised
estimate on the lease obligation associated with the decision to
close the Zurn

47



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##### Table of Contents



U.S. INDUSTRIES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

corporate office in January 2000 (see below). In
estimating its lease obligation, the Company assumed that it
would be able to sublease sections of the building over the
course of the lease. Due to the current real estate conditions
in that market, the Company has not been able to sublease the
office space. The severance charges relate to the elimination of
the executive layer of management within the Bath &
Plumbing segment and recent Jacuzzi management changes, which
resulted in the termination of four employees. These charges
consist of $2.3 million in cash related charges, which the
Company expects to pay within the next twelve months and
$0.8 million in non-cash related charges associated with
the accelerated vesting of restricted stock. The reserve related
to the U.S. Brass product lines discontinued in fiscal 2000 was
increased largely due to an increase in the amount of estimated
product liability and warranty claims related to those products.

In September 2000, the Companys
Bath & Plumbing segment announced to its employees and
to the marketplace that U.S. Brass was exiting its Valley line
of faucets, Eastman line of connectors and Sanitary Dash line of
under-the-sink pipes. Accordingly, in 2000, the Company recorded
restructuring and other non-recurring charges of
$19.4 million, which consists of severance and commitment
costs of $3.4 million, inventory related charges of
$16.0 million ($13.9 million recorded in cost of goods
sold and $2.1 million recorded in selling, general and
administrative expenses). The Company also recorded other
non-recurring charges of $4.8 million in 2001 consisting
primarily of accelerated depreciation on machinery that was used
to complete the remaining in-process inventory. The
Companys decision to exit these three product lines
required the closure of two manufacturing facilities in Abilene
and Plano, Texas and the termination of approximately 335
employees.

The Company recorded restructuring and other
non-recurring charges of $21.7 million in 2000 related to its
decision to dispose of its European HVAC operations (see
Goodwill Impairment Charges). These charges consisted of
$18.2 million in fixed asset impairments and
$3.5 million in inventory-related charges (recorded in Cost
of Goods Sold). The European HVAC operation was subsequently
sold in November 2000 (See Acquisition and Disposition of
Businesses and Discontinued Operations).

In January 2000, a decision was made to close the
former Zurn corporate office in Dallas, Texas which resulted in
the termination of 30 employees. The Company recorded a
restructuring charge in fiscal 2000 of $13.1 million
relating to this decision, which included severance costs of
$1.9 million, lease costs of $9.1 million for a lease
expiring November 2007 and write-offs of $2.1 million
relating to leasehold improvements and other fixed assets.

The principal components of impairment and
restructuring charges recorded for continuing operations are:

|                                                         |       |               |     |      |  |      |       |       |  |   |      |      | 
|-------------------------------------------------------- | ----- | ------------- | --- | ---- |  | ---- | ----- | ----- |  | - | ---- | ---- | 
|                                                         |       | 2002          |     | 2001 |  | 2000
|                                                         |       |               |     |      |  |     
|                                                         |       |              
|                                                         |       | (In millions)
|Impairment of goodwill                                   |       | $             |    |      |  | $    | 100.2 |       |  | $ | 25.5 |     
|Lease obligations, impairment of equipment and
    other |       |               | 4.1 |      |  |      |      |       |  |   | 29.6 |     
|Severance and related costs                              |       |               | 3.1 |      |  |      |      |       |  |   | 5.1  |     
|                                                         |       |               |     |      |  |      |       |       |  |   |      |     
|                                                         | Total |               | $   | 7.2  |  |      | $     | 100.2 |  |   | $    | 60.2 | 
|                                                         |       |               |     |      |  |      |       |       |  |   |      |     
|Cash charges                                             |       | $             | 6.4 |      |  | $    |      |       |  | $ | 16.4 |     
|Non-cash charges                                         |       |               | 0.8 |      |  |      | 100.2 |       |  |   | 43.8 |     
|                                                         |       |               |     |      |  |      |       |       |  |   |      |     
|                                                         | Total |               | $   | 7.2  |  |      | $     | 100.2 |  |   | $    | 60.2 | 
|                                                         |       |               |     |      |  |      |       |       |  |   |      |     

48



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##### Table of Contents



U.S. INDUSTRIES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

As of September 30, 2002, the Company had
remaining accruals of $9.4 million for restructuring costs.
The activity in the restructuring liability accounts by cost
category is as follows:

|                              |                                 |               |      |             |   |       |     |      |   |   |      |      |  
|----------------------------- | ------------------------------- | ------------- | ---- | ----------- | - | ----- | --- | ---- | - | - | ---- | ---- | -
|                              |                                 | Lease and     |      |             |   |      
|                              |                                 | Contract      |      | Severance   |   |      
|                              |                                 | Related       |      | and Related |   | Total
|                              |                                 | Costs         |      | Costs       |   | Costs
|                              |                                 |               |      |             |   |      
|                              |                                 |              
|                              |                                 | (In millions)
|Balance at September 30, 2000 |                                 | $             | 10.1 |             |   | $     | 4.9 |      |   | $ | 15.0 |     
|2001 activity:                |                                 |               |      |             |   |       |     |      |   |   |      |     
|                              | Cash payments                   |               |      | (3.3        | ) |       |     | (1.6 | ) |   |      | (4.9 | )
|                              | Reserves of divested businesses |               |      |            |   |       |     | (3.0 | ) |   |      | (3.0 | )
|                              |                                 |               |      |             |   |       |     |      |   |   |      |     
|Balance at September 30, 2001 |                                 |               | 6.8  |             |   |       | 0.3 |      |   |   | 7.1  |     
|2002 activity:                |                                 |               |      |             |   |       |     |      |   |   |      |     
|                              | Fiscal 2002 charges             |               |      | 4.1         |   |       |     | 2.3  |   |   |      | 6.4  |  
|                              | Cash payments                   |               |      | (2.1        | ) |       |     | (2.0 | ) |   |      | (4.1 | )
|                              |                                 |               |      |             |   |       |     |      |   |   |      |     
|Balance at September 30, 2002 |                                 | $             | 8.8  |             |   | $     | 0.6 |      |   | $ | 9.4  |     
|                              |                                 |               |      |             |   |       |     |      |   |   |      |     

Approximately $2.2 million of the reserves
are included in the balance sheet caption Accrued expenses
and other current liabilities, while the remaining
$7.2 million are recorded in the balance sheet caption
Other liabilities. The Company expects the remaining
accruals to be paid with cash over the periods provided by the
severance and lease agreements of one and five years,
respectively.



| |      
| | -----
| | Other

In 2001, the Company incurred $8.1 million
for professional fees associated with the previously planned
spin-off of the LCA Group; recorded charges of
$45.1 million to reflect the Strategic Notes at their net
realizable value; expensed $17.4 million in deferred
transaction costs previously incurred as part of the original
sale of Rexair; and incurred $6.7 million in advisory and
other related costs associated with the Companys debt
restructuring executed on August 15, 2001. During 2002, the
Company sold the Strategic Notes together with its equity
interest in Strategic for net proceeds of $105.9 million,
which approximated their carrying value. In 2000, the Company
recorded $0.9 million in charges related to the abandoned
sale of the LCA Group. All of these costs have been classified
as Other expenses in the Companys consolidated
statement of operations.

49



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##### Table of Contents



U.S. INDUSTRIES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Note 6  Long-Term Debt

Long-term debt consisted of the following:

|                                         |  |                  |        |      |  |   |         |  
|---------------------------------------- |  | ---------------- | ------ | ---- |  | - | ------- | -
|                                         |  |                 
|                                         |  | At September 30,
|                                         |  |                 
|                                         |  | 2002             |        | 2001
|                                         |  |                  |        |     
|                                         |  |                 
|                                         |  | (In millions)   
|7.125% Senior Notes, net                 |  | $                | 249.5  |      |  | $ | 249.1   |  
|7.25% Senior Notes, net                  |  |                  | 124.1  |      |  |   | 123.9   |  
|Restructured Facilities, Rexair          |  |                  | 92.8   |      |  |   | 166.2   |  
|Restructured Facilities, U.S. Industries |  |                  | 317.5  |      |  |   | 665.3   |  
|Other long-term debt                     |  |                  | 8.9    |      |  |   | 10.3    |  
|                                         |  |                  |        |      |  |   |         |  
|                                         |  |                  | 792.8  |      |  |   | 1,214.8 |  
|Less current maturities                  |  |                  | (275.9 | )    |  |   | (436.5  | )
|                                         |  |                  |        |      |  |   |         |  
|Long-term debt                           |  | $                | 516.9  |      |  | $ | 778.3   |  
|                                         |  |                  |        |      |  |   |         |  

Current maturities include payments made
subsequent to September 30, 2002 as part of the exchange of
Senior Notes and the sale of SiTeco discussed further below.

Principal reductions of senior debt and other
borrowings for the next five years ended September 30 and
thereafter are as follows (amounts due for the Senior Notes are
net of their related escrow deposits):

|           |  |               |       | 
|---------- |  | ------------- | ----- | 
|           |  | (In millions)
|           |  |              
|2003       |  | $             | 275.9 | 
|2004       |  |               | 13.1  | 
|2005       |  |               | 296.5 | 
|2006       |  |               | 134.4 | 
|2007       |  |               | 71.1  | 
|Thereafter |  |               | 1.8   | 
|           |  |               |       | 
|           |  | $             | 792.8 | 
|           |  |               |       | 

In October 1998, USI and USI American Holdings,
Inc. (USIAH), issued $250.0 million aggregate
principal amount of Senior Notes due October 15, 2003,
which bear interest at 7.125%, payable semiannually
(7.125% Notes). The net cash proceeds were
$247.7 million after transaction fees and discounts. A
supplemental indenture was later executed adding USI Global
Corporation (USI Global), a wholly owned subsidiary
of USI, as a co-obligor under the 7.125% Notes. On
September 9, 2002, the Company commenced an Exchange Offer
to exchange cash and notes with an interest rate of 11.25%
payable December 31, 2005 (the New Notes) for
all outstanding 7.125% Notes due October 2003. In connection
with the Exchange Offer, the Company also solicited consents
from a majority of the 7.125% Note holders to a proposed
amendment to the indenture under which the 7.125% Notes were
issued so that the cash deposited into a cash collateral account
from the sales of the Companys non-core assets that is
proportionally allocable to tendering holders may be used to pay
the cash consideration in the Exchange Offer (Consent
Solicitation).

On November 4, 2002, the Company announced
that it had accepted for payment all 7.125% Notes validly
tendered in the exchange offer. Approximately $238.2 million or
95% of the 7.125% Notes were tendered for exchange. Note holders
who tendered their 7.125% Notes received an amount of cash and
principal amount of New Notes that together equaled the
principal amount of the 7.125% Notes tendered. The transaction
resulted in $104.8 million paid to the note holders from
the 7.125% Notes escrow account,

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U.S. INDUSTRIES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

New Notes issued of $133.4 million and a
balance remaining in 7.125% Notes of $11.8 million. The
other terms of the New Notes are substantially similar to the
7.125% Notes. A consent payment of $15 per $1,000 principal
amount of the New Notes issued was paid out of the
Companys general working capital to all holders who
delivered their consents on or prior to the consent date,
resulting in an additional payment to tendering note holders of
approximately $2.0 million.

In fiscal 1997, USIAH issued $125.0 million
aggregate principal amount of Senior Notes due December 1,
2006, which bear interest at 7.25%, payable semiannually
(7.25% Notes). The net cash proceeds were
$123.0 million after transaction fees and discounts. A
supplemental indenture was later executed adding USI and USI
Global as co-obligors with USIAH under the 7.25% Notes. On
October 24, 2002, the Company commenced an offer to
purchase up to $54.8 million in aggregate principal amount of
its outstanding 2006 Notes. On November 7, 2002, the
Company announced that it received tenders, and related
consents, from a majority of the holders of its outstanding
7.25% Notes. An amount just shy of 100% or $125.0 million
of the 7.25% Notes were tendered for exchange. The transaction
resulted in $54.8 million paid to the note holders from the
7.25% Notes escrow account.

The 7.25% Notes, 7.125% Notes and New Notes
(collectively, the Senior Notes) are guaranteed by
USI Atlantic. The 7.25% and 7.125% Senior Notes are redeemable
at the option of the Company, in whole or in part, at a
redemption price equal to the greater of (i) 100% of the
principal amount to be redeemed or (ii) the sum of the
present values of the remaining scheduled payments of principal
and interest on the Senior Notes to be redeemed, discounted at a
rate based on the yield to maturity of the comparable U.S.
Government securities plus a spread (10 basis points for the
7.25% Notes and 50 basis points for the 7.125% Notes) plus, in
each case, accrued interest to the date of redemption. The New
Notes are redeemable without premium or penalty using the New
Notes escrow account or otherwise at 103% if redeemed from the
issue date to, but not including, the first anniversary of
issuance, 102% thereafter through December 30, 2004 and
101% from December 31, 2004 to, but not including, the
maturity date. Certain restrictions on dividends and the
purchase of common stock for treasury contained in the indenture
for the 7.25% Notes were eliminated in August 1998 based
upon the Companys credit rating at that time. The 7.125%
Notes and New Notes were issued without such restriction;
however, the Restructured Facilities (discussed below) contain
restrictions on dividends as well as the purchase of common
stock for treasury. The security interests granted to the
holders of the Senior Notes as a result of the Restructured
Facilities are discussed in more detail below.

During fiscal 2001, the Company had a
$300 million 364-day credit facility (the Credit
Facility) scheduled to expire on October 26, 2001.
The Company also had a five-year revolving line of credit
providing for borrowings in both U.S. dollars and foreign
currencies and letters of credit, which had original
availability of $500 million (the Credit
Agreement), scheduled to terminate on December 12,
2001. The Credit Facility and Credit Agreement (together, the
Revolving Facilities) were restructured on
August 15, 2001. The Company completed the re-acquisition
of Rexair and restructured the Rexair Credit Facilities on the
same date. The amended facilities (including the Rexair Credit
Facility, the Restructured Facilities) extended the
final maturity date of the Companys debt under the
Revolving Facilities to November 30, 2002, which coincided
with the final maturity of the Rexair Credit Facility. On
October 21, 2002, the Company announced that it obtained an
amendment to Restructured Facilities, providing for an extension
of the maturity date to October 2004 (see further below for more
details on the amended facilities).

The Restructured Facilities originally provided
for an increase in availability under the five-year Credit
Agreement from $500 million to $830 million,
availability under the Rexair Credit Facility of
$195 million (reduced by $5 million in May 2002), the
termination of the multi-currency borrowing feature under the
five-year Credit Agreement, the elimination of the 364-day
Credit Facility and scheduled permanent reductions of the
Companys senior debt (a combination of the Restructured
Facilities, the Senior Notes and other defined obligations). The
required cumulative permanent principal reductions of

51



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U.S. INDUSTRIES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

the Companys senior debt were scheduled at
$75 million, $200 million, $450 million and
$600 million during the periods ending December 31,
2001; March 31, 2002; June 30, 2002 and
October 15, 2002, respectively.

On December 21, 2001, the Company obtained a
waiver from its lenders under the Restructured Facilities that
permitted the Company to satisfy the remaining balance of the
December 31, 2001 $75 million reduction through a
permanent reduction of the unfunded commitments under the
Restructured Facilities, to the extent not satisfied through
cash flow or asset sale proceeds. Under the terms of the waiver,
the permanent reduction resulting from the sale of Ames True
Temper was reduced by the amount of the unfunded commitment
(approximately $58 million) used to satisfy the
December 31, 2001 amortization. In October 2002, the
Company obtained a similar waiver from its lenders to satisfy
the remaining balance of the October 15, 2002 reduction
(approximately $27 million), through a reduction of the
unfunded commitments. With the sale of SiTeco on October 18,
2002, this portion of the unfunded commitment was restored. On
June 30, 2002, the Company obtained an amendment to the
Rexair Credit Facility which contained, among other things,
revised ratios for interest coverage and consolidated leverage
as well as revised minimum EBITDA covenants.

Under the Restructured Facilities, substantially
all proceeds from the sale of assets are required to be applied
to reduce the Companys funded and unfunded senior debt, on
a pro rata basis. The senior debt includes the Senior Notes in
those cases when the Company or any subsidiary subject to the
Senior Notes covenants completes an asset sale. Proceeds
allocable to the Senior Notes and other defined obligations are
required to be deposited in cash collateral accounts for the
benefit of the relevant holders; any claims of the lenders of
the Restructured Facilities to amounts on deposit in the cash
collateral accounts are subordinated to the claims of the
relevant holders, including the payment in full of their Senior
Notes and other obligations. Any reductions of senior debt with
asset sale proceeds are credited dollar-for-dollar towards the
scheduled permanent principal reductions. Below is a summary of
significant asset sales completed in fiscal 2002.

|                                |  |             |           |          |  |                 |       |           |  |              |      |  |  |   |      |  |  |   |       | 
|------------------------------- |  | ----------- | --------- | -------- |  | --------------- | ----- | --------- |  | ------------ | ---- |  |  | - | ---- |  |  | - | ----- | 
|                                |  |             |           |          |  | Estimated       |       | Deposited |  | Reduction of
|                                |  | Transaction |           | Gross    |  | Transaction and |       | in Escrow |  | Restructured
|                                |  | Date        |           | Proceeds |  | Other Costs(1)  |       | Accounts  |  | Facilities  
|                                |  |             |           |          |  |                 |       |           |  |             
|Ames True Temper                |  |             | 1/14/2002 |          |  | $               | 165.0 |           |  | $            | 21.9 |  |  | $ | 44.1 |  |  | $ | 99.0  | 
|Strategic Notes                 |  |             | 1/16/2002 |          |  |                 | 107.6 |           |  |              | 1.7  |  |  |   | 31.9 |  |  |   | 74.0  | 
|Lighting Corporation of America |  |             | 4/26/2002 |          |  |                 | 250.0 |           |  |              | 39.8 |  |  |   | 64.3 |  |  |   | 145.9 | 
|Selkirk                         |  |             | 6/24/2002 |          |  |                 | 40.0  |           |  |              | 5.1  |  |  |   | 7.1  |  |  |   | 27.8  | 



---



|    |                                                                                                                                                                                                                                                                                                              
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Estimated transaction and other costs include
    working capital adjustments and escrows for future liabilities.
    Approximately $24.3 million of these costs are still
    outstanding as of September 30, 2002 ($15.8 million in
    current liabilities and $8.5 million in long-term
    liabilities).

On September 6, 2002, the Company sold
substantially all of the assets of Spear & Jackson to
MegaPro Tools, Inc. (MegaPro). Net proceeds
consisted of notes from the buyer and an equity interest in the
common shares of the buyer. The Company is subject to
restrictions on the voting and disposition of these shares and
has no involvement in the continuing management or operations of
MegaPro. The investment was recorded at its fair value at the
date of acquisition based on an independent valuation.

On October 18, 2002, the Company completed
the sale of SiTeco to funds advised by JPMorgan Partners, the
private equity arm of JPMorgan Chase & Company. Net proceeds
of approximately $103.8 million were applied to reduce the
Companys funded and unfunded senior debt, including
$34.0 million deposited into escrow accounts for the
benefit of the holders of the Companys Senior Notes and
certain other creditors.

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U.S. INDUSTRIES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Also in October 2002, the Restructured Facilities
were amended, extending the maturity of the facilities to
October 4, 2004. The amended Restructured Facilities
decrease the availability for USI borrowings (excluding Rexair,
the USI Facility) to $365 million, which
consists of a $250 million term loan and $115 million
revolving facility. Availability on the Rexair portion of the
facilities was reduced to $90 million, which includes a
$75 million term loan and $15 million revolver.
Required cumulative permanent reductions of the USI Facility are
scheduled on July 31, 2003 and August 31, 2004 for
$20 million and $50 million, respectively. The Rexair
Facility requires cumulative permanent reductions of
$2 million per quarter in fiscal 2003 and $3 million
for each of the first three quarters of 2004.

The Restructured Facilities require that the
Company and Rexair maintain minimum monthly EBITDA, as defined;
comply with maximum monthly capital expenditure limits; maintain
minimum availability (as defined) of no less than
$25 million and comply with other customary affirmative and
negative covenants. In addition, the amended Rexair Credit
Facility requires that excess cash generated by Rexair be
segregated from excess cash generated by the remainder of the
Companys operations and used only to reduce the debt
outstanding on the Rexair Credit Facility. The Senior Notes and
the Restructured Facilities contain cross-default and
cross-acceleration provisions.

The Restructured Facilities provide for
increasing interest rates over the remaining term. The spread
over London Interbank Offered Rate (LIBOR) was 275
basis points until December 31, 2001, after which the
spread increased by 50 basis points each quarter thereafter
through December 2002. With the amendment in October 2002, the
interest rate increases to 675 basis points over LIBOR from
December 2002 through June 2003. Beginning July 2003 the spread
will increase by 50 basis points on the first day of each
quarter through the maturity date. The Restructured Facilities
also provide for several new fees including an unused commitment
fee of 0.50% (which increases to 0.75% with the October 2002
amendment) and a facing fee on all outstanding letters of credit
of 0.25% per annum. Interest paid was $77.2 million,
$87.2 million and $84.6 million for fiscal 2002, 2001 and
2000, respectively.

The lenders of the Revolving Facilities were
granted on April 30, 2001 security interests in
substantially all of the assets of the Company and its domestic
subsidiaries, including shares of the Companys domestic
subsidiaries and 65% of the shares of certain of the
Companys foreign subsidiaries. As a result of having the
Revolving Facilities secured, the Rexair Guarantee became
secured with certain assets. In addition, the Companys
Senior Notes also became equally and ratably secured with the
Revolving Facilities and the Rexair Guarantee with respect to
the assets of the Company and its subsidiaries that are subject
to the covenant restrictions under the Senior Notes. The
covenants contained in the indentures under which the Senior
Notes were issued apply to the Company and any domestic
subsidiary that is a significant subsidiary (within
the meaning of rule 1-02(w) of Regulation S-X promulgated
under the Securities and Exchange Act of 1934 or any successor
provision). In accordance with the Rule, the determination that
a subsidiary is a significant subsidiary is made on
a consolidated basis, taking into account such subsidiary and
all of its consolidated subsidiaries. Those subsidiaries
identified as significant subsidiaries at September 30,
2002 include USI Atlantic Corp., USI American Holdings, Inc.,
USI Global Corp., JUSI Holdings, Inc., Jacuzzi, Inc. and Zurn
Industries, Inc. After considering the equal and ratable
security interest of the Senior Notes, separate financial
statements for USI Atlantic Corp.; USI American Holdings, Inc.;
USI Global Corp. and JUSI Holdings, Inc. are included elsewhere
in this annual report. A significant subsidiary may itself have
one or more subsidiaries that, when looked at on a consolidated
basis, do not constitute significant subsidiaries
under the Rule. As a result, these subsidiaries, on a
stand-alone basis, are not subject to the covenant restrictions
under the Senior Notes, and no portion of the proceeds of assets
sales completed by these subsidiaries would be allocable to the
Senior Notes.

The security interests that were granted to the
lenders of the Revolving Facilities on April 30, 2001
remain in place under the Restructured Facilities, as do the
arrangements to equally and ratably secure the

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U.S. INDUSTRIES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Rexair Guaranty and to equally and ratably secure
the Senior Notes with certain assets. In addition, certain
domestic and foreign subsidiaries of the Company that are not
subject to the Senior Notes covenant restrictions have
guaranteed the Restructured Facilities. Under the Restructured
Facilities, the Company also agreed to provide the lenders with
security interest in the shares and assets of certain of the
Companys foreign subsidiaries.

Below is a pro forma summary of the new debt
structure of the Company after considering the exchange
offerings on the Senior Notes, the proceeds received on the sale
of SiTeco and the amendment to the Restructured Facilities.

|                                         |  |               |        |   |  |   |       |  
|---------------------------------------- |  | ------------- | ------ | - |  | - | ----- | -
|                                         |  |              
|                                         |  | (In millions)
|                                         |  |              
|Notes Payable                            |  | $             | 15.3   |   |  | $ | 15.3  |  
|7.125% Senior Notes due fiscal 2004      |  |               | 249.5  |   |  |   | 11.8  |  
|7.25% Senior Notes due fiscal 2007       |  |               | 124.1  |   |  |   | 69.8  |  
|11.25% Senior Notes due fiscal 2006      |  |               |       |   |  |   | 133.1 |  
|Restructured Facilities, Rexair          |  |               | 92.8   |   |  |   | 78.8  |  
|Restructured Facilities, U.S. Industries |  |               | 317.5  |   |  |   | 245.7 |  
|Other long-term debt                     |  |               | 8.9    |   |  |   | 8.9   |  
|                                         |  |               |        |   |  |   |       |  
|                                         |  |               | 808.1  |   |  |   | 563.4 |  
|Less escrow for Senior Notes             |  |               | (134.1 | ) |  |   | (4.9  | )
|                                         |  |               |        |   |  |   |       |  
|Net debt outstanding                     |  | $             | 674.0  |   |  | $ | 558.5 |  
|                                         |  |               |        |   |  |   |       |  

At November 23, 2002, the Company had
approximately $355.0 million committed under the USI
Facility, of which approximately $261.2 million had been
utilized and the balance of $93.8 million was available.
Also as of November 23, 2001, $14.3 million was
available for borrowing solely by Rexair under the Rexair Credit
Facility. These amounts are net of letters of credit outstanding
of $15.1 million. The Company also had letters of credit
outstanding with other financial institutions totaling
$28.6 million as of November 23, 2002.

Note 7  Pension and Retirement
Plans

Domestic
Benefit Arrangements

The Company and its subsidiaries sponsor a number
of non-contributory defined benefit pension plans covering the
majority of its United States employees. The benefits under
these plans are based primarily on years of credited service
and/or compensation as defined under the respective plan
provisions. The Companys funding policy is to contribute
amounts to the plans sufficient to meet the minimum funding
requirements set forth in the Employee Retirement Income
Security Act of 1974, plus such additional amounts as the
Company may determine to be appropriate from time to time.

The Company and certain of its subsidiaries also
sponsor defined contribution plans. Contributions relating to
defined contribution plans are made based upon the respective
plans provisions.

Additionally, the Company provides health care
and life insurance benefits to certain groups of retirees with
most retirees contributing a portion of its costs. These are
presented as other benefits in the tables that follow.

54



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##### Table of Contents



U.S. INDUSTRIES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The assumptions and the net periodic pension
income for the Companys defined benefit plans, as well as
the total contributions charged to pension expense for the
defined contribution plans covering employees in the United
States are presented below:

|             |                                   |                  |  |                |   |      |  |      |   |      |  |      |   |  |  |      |   |  |  |      |   |  |  |      |  
|------------ | --------------------------------- | ---------------- |  | -------------- | - | ---- |  | ---- | - | ---- |  | ---- | - |  |  | ---- | - |  |  | ---- | - |  |  | ---- | -
|             |                                   |                  |  |               
|             |                                   | Pension Benefits |  | Other Benefits
|             |                                   |                  |  |               
|             |                                   | 2002             |  | 2001           |   | 2000 |  | 2002 |   | 2001 |  | 2000
|             |                                   |                  |  |                |   |      |  |      |   |      |  |     
|Assumptions: |                                   |                  |  |                |   |      |  |      |   |      |  |      |   |  |  |      |   |  |  |      |   |  |  |     
|             | Discount rate                     |                  |  | 6.75           | % |      |  | 7.50 | % |      |  | 8.00 | % |  |  | 6.75 | % |  |  | 7.50 | % |  |  | 8.00 | %
|             | Rate of compensation increases    |                  |  | 3.25           | % |      |  | 4.50 | % |      |  | 4.50 | % |  |  |     |   |  |  |     |   |  |  |     |  
|             | Expected rate of return on assets |                  |  | 8.75           | % |      |  | 9.50 | % |      |  | 9.50 | % |  |  |     |   |  |  |     |   |  |  |     |  

The components of net periodic (income) cost are
presented below:

|                            |                                               |                                                                 |   |                |       |      |   |       |       |      |   |       |       |   |   |      |     |  |   |      |     |  |   |      |     | 
|--------------------------- | --------------------------------------------- | --------------------------------------------------------------- | - | -------------- | ----- | ---- | - | ----- | ----- | ---- | - | ----- | ----- | - | - | ---- | --- |  | - | ---- | --- |  | - | ---- | --- | 
|                            |                                               |                                                                 |   |               
|                            |                                               | Pension Benefits                                                |   | Other Benefits
|                            |                                               |                                                                 |   |               
|                            |                                               | 2002                                                            |   | 2001           |       | 2000 |   | 2002  |       | 2001 |   | 2000 
|                            |                                               |                                                                 |   |                |       |      |   |       |       |      |   |      
|                            |                                               |                                                                
|                            |                                               | (In millions)                                                  
|Defined benefit plans:      |                                               |                                                                 |   |                |       |      |   |       |       |      |   |       |       |   |   |      |     |  |   |      |     |  |   |     
|                            | Service cost                                  |                                                                 | $ | 8.5            |       |      | $ | 9.4   |       |      | $ | 11.5  |       |   | $ | 0.3  |     |  | $ | 0.3  |     |  | $ | 0.5  |    
|                            | Interest cost                                 |                                                                 |   | 19.1           |       |      |   | 20.4  |       |      |   | 24.5  |       |   |   | 2.5  |     |  |   | 2.3  |     |  |   | 3.2  |    
|                            | Expected return on plan assets                |                                                                 |   | (40.8          | )     |      |   | (46.4 | )     |      |   | (47.7 | )     |   |   |     |     |  |   |     |     |  |   |     |    
|                            | Prior service cost                            |                                                                 |   | 1.0            |       |      |   | 1.5   |       |      |   | 1.5   |       |   |   | (0.1 | )   |  |   |     |     |  |   |     |    
|                            | Amortization of unrecognized transition asset |                                                                 |   |               |       |      |   | (0.1  | )     |      |   | (1.1  | )     |   |   |     |     |  |   |     |     |  |   |     |    
|                            | Net actuarial gain                            |                                                                 |   | (1.9           | )     |      |   | (4.6  | )     |      |   | (3.7  | )     |   |   | (1.3 | )   |  |   | (1.9 | )   |  |   | (0.7 | )  
|                            | Curtailments/ settlements                     |                                                                 |   | 58.3           |       |      |   |      |       |      |   | (20.4 | )     |   |   |     |     |  |   |     |     |  |   |     |    
|                            |                                               |                                                                 |   |                |       |      |   |       |       |      |   |       |       |   |   |      |     |  |   |      |     |  |   |     
|                            |                                               | Periodic (income) cost of defined benefit
    plans             |   |                | 44.2  |      |   |       | (19.8 | )    |   |       | (35.4 | ) |   |      | 1.4 |  |   |      | 0.7 |  |   |      | 3.0 | 
|                            |                                               | Net reclassification adjustment for discontinued
    operations |   |                | (56.7 | )    |   |       | 6.7   |      |   |       |      |   |   |      |    |  |   |      |    |  |   |      |    | 
|                            |                                               |                                                                 |   |                |       |      |   |       |       |      |   |       |       |   |   |      |     |  |   |      |     |  |   |     
|Net periodic (income) cost: |                                               |                                                                 |   |                |       |      |   |       |       |      |   |       |       |   |   |      |     |  |   |      |     |  |   |     
|                            | Defined benefit plans                         |                                                                 |   | (12.5          | )     |      |   | (13.1 | )     |      |   | (35.4 | )     |   |   | 1.4  |     |  |   | 0.7  |     |  |   | 3.0  |    
|                            | Defined contribution plans                    |                                                                 |   | 0.9            |       |      |   | 1.0   |       |      |   | 2.0   |       |   |   |     |     |  |   |     |     |  |   |     |    
|                            |                                               |                                                                 |   |                |       |      |   |       |       |      |   |       |       |   |   |      |     |  |   |      |     |  |   |     
|                            |                                               | Net periodic (income) cost                                      |   | $              | (11.6 | )    |   | $     | (12.1 | )    |   | $     | (33.4 | ) |   | $    | 1.4 |  |   | $    | 0.7 |  |   | $    | 3.0 | 
|                            |                                               |                                                                 |   |                |       |      |   |       |       |      |   |       |       |   |   |      |     |  |   |      |     |  |   |     

Included in the fiscal year 2000 curtailment gain
of $20.4 million is $19.6 million related to the sale of
the Diversified businesses and is included in the statement of
operations caption Gain on sale of businesses.

55



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U.S. INDUSTRIES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The following table provides a reconciliation of
changes in the projected benefit obligation, fair value of plan
assets and the funded status of the Companys defined
benefit pension and postretirement benefit plans to the amounts
recorded in the Companys balance sheet at
September 30:

|                                            |                                                                       |                                                  |   |                |       |      |   |       |       |  |   |       |       |   |   |       |       |  
|------------------------------------------- | --------------------------------------------------------------------- | ------------------------------------------------ | - | -------------- | ----- | ---- | - | ----- | ----- |  | - | ----- | ----- | - | - | ----- | ----- | -
|                                            |                                                                       |                                                  |   |               
|                                            |                                                                       | Pension Benefits                                 |   | Other Benefits
|                                            |                                                                       |                                                  |   |               
|                                            |                                                                       | 2002                                             |   | 2001           |       | 2002 |   | 2001 
|                                            |                                                                       |                                                  |   |                |       |      |   |      
|                                            |                                                                       |                                                 
|                                            |                                                                       | (In millions)                                   
|Change in projected benefit
    obligation: |                                                                       |                                                  |   |                |       |      |   |       |       |  |   |       |       |   |   |      
|                                            | Benefit obligation at beginning of year                               |                                                  | $ | 308.4          |       |      | $ | 261.8 |       |  | $ | 34.7  |       |   | $ | 40.6  |      
|                                            | Service cost                                                          |                                                  |   | 8.5            |       |      |   | 9.4   |       |  |   | 0.3   |       |   |   | 0.3   |      
|                                            | Interest cost                                                         |                                                  |   | 19.2           |       |      |   | 20.4  |       |  |   | 2.5   |       |   |   | 2.3   |      
|                                            | Plan amendments                                                       |                                                  |   | 5.3            |       |      |   |      |       |  |   |      |       |   |   |      |      
|                                            | Actuarial (gains) losses                                              |                                                  |   | 22.7           |       |      |   | 21.3  |       |  |   | 12.5  |       |   |   | (5.7  | )    
|                                            | Benefits paid                                                         |                                                  |   | (18.4          | )     |      |   | (20.2 | )     |  |   | (4.7  | )     |   |   | (4.3  | )    
|                                            | Acquisitions (divestitures)                                           |                                                  |   | (78.5          | )     |      |   | 15.7  |       |  |   |      |       |   |   | 1.5   |      
|                                            |                                                                       |                                                  |   |                |       |      |   |       |       |  |   |       |       |   |   |      
|                                            |                                                                       | Benefit obligation at end of year                |   | $              | 267.2 |      |   | $     | 308.4 |  |   | $     | 45.3  |   |   | $     | 34.7  |  
|                                            |                                                                       |                                                  |   |                |       |      |   |       |       |  |   |       |       |   |   |      
|Change in fair value of plan assets:        |                                                                       |                                                  |   |                |       |      |   |       |       |  |   |       |       |   |   |      
|                                            | Fair value of plan assets at beginning of year                        |                                                  | $ | 454.5          |       |      | $ | 514.0 |       |  | $ |      |       |   | $ |      |      
|                                            | Actual return on plan assets                                          |                                                  |   | (18.8          | )     |      |   | (54.1 | )     |  |   |      |       |   |   |      |      
|                                            | Contributions                                                         |                                                  |   | 2.0            |       |      |   | 2.6   |       |  |   | 4.7   |       |   |   | 4.3   |      
|                                            | Benefits paid                                                         |                                                  |   | (18.4          | )     |      |   | (20.2 | )     |  |   | (4.7  | )     |   |   | (4.3  | )    
|                                            | Acquisitions (divestitures)                                           |                                                  |   | (119.4         | )     |      |   | 12.2  |       |  |   |      |       |   |   |      |      
|                                            |                                                                       |                                                  |   |                |       |      |   |       |       |  |   |       |       |   |   |      
|                                            |                                                                       | Fair value of plan assets at end of year         |   | $              | 299.9 |      |   | $     | 454.5 |  |   | $     |      |   |   | $     |      |  
|                                            |                                                                       |                                                  |   |                |       |      |   |       |       |  |   |       |       |   |   |      
|Funded status of plans:                     |                                                                       |                                                  |   |                |       |      |   |       |       |  |   |       |       |   |   |      
|                                            | Plan assets in excess of (less than) projected
    benefit obligation |                                                  | $ | 32.7           |       |      | $ | 146.1 |       |  | $ | (45.3 | )     |   | $ | (34.7 | )    
|                                            | Unrecognized net actuarial losses (gains)                             |                                                  |   | 87.7           |       |      |   | 9.8   |       |  |   | 3.7   |       |   |   | (10.0 | )    
|                                            | Unrecognized prior service cost                                       |                                                  |   | 5.4            |       |      |   | 12.1  |       |  |   | (0.1  | )     |   |   | (0.2  | )    
|                                            |                                                                       |                                                  |   |                |       |      |   |       |       |  |   |       |       |   |   |      
|                                            |                                                                       | Total recognized                                 |   | $              | 125.8 |      |   | $     | 168.0 |  |   | $     | (41.7 | ) |   | $     | (44.9 | )
|                                            |                                                                       |                                                  |   |                |       |      |   |       |       |  |   |       |       |   |   |      
|Amounts recorded in the balance
    sheet:  |                                                                       |                                                  |   |                |       |      |   |       |       |  |   |       |       |   |   |      
|                                            | Prepaid benefits                                                      |                                                  | $ | 139.2          |       |      | $ | 181.1 |       |  | $ |      |       |   | $ |      |      
|                                            | Accrued benefits                                                      |                                                  |   | (19.7          | )     |      |   | (15.1 | )     |  |   | (41.7 | )     |   |   | (44.9 | )    
|                                            | Intangible assets                                                     |                                                  |   | 1.2            |       |      |   | 0.5   |       |  |   |      |       |   |   |      |      
|                                            | Accumulated other comprehensive income                                |                                                  |   | 5.1            |       |      |   | 1.5   |       |  |   |      |       |   |   |      |      
|                                            |                                                                       |                                                  |   |                |       |      |   |       |       |  |   |       |       |   |   |      
|                                            |                                                                       | Total recognized                                 |   |                | 125.8 |      |   |       | 168.0 |  |   |       | (41.7 | ) |   |       | (44.9 | )
|                                            | Net reclassification adjustment for discontinued
    operations       |                                                  |   |               |       |      |   | (35.1 | )     |  |   |      |       |   |   |      |      
|                                            |                                                                       |                                                  |   |                |       |      |   |       |       |  |   |       |       |   |   |      
|                                            |                                                                       | Total recorded in the consolidated balance sheet |   | $              | 125.8 |      |   | $     | 132.9 |  |   | $     | (41.7 | ) |   | $     | (44.9 | )
|                                            |                                                                       |                                                  |   |                |       |      |   |       |       |  |   |       |       |   |   |      

56



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U.S. INDUSTRIES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The aggregate projected benefit obligation and
the aggregate fair value of plan assets, for the plans that have
a projected benefit obligation in excess of plan assets, are
$33.3 million and $10.3 million, respectively, in 2002
and $29.1 million and $11.7 million, respectively, in
2001.

The aggregate accumulated benefit obligation and
the aggregate fair value of plan assets, for the plans that have
an accumulated benefit obligation in excess of plan assets, are
$29.8 million and $10.3 million, respectively, in 2002
and $25.6 million and $11.7 million, respectively, in
2001.

The assets for the Companys U.S. plans are
included in a master trust which principally invests in listed
stocks and bonds, including common stock of the Company. At both
September 30, 2002 and 2001, 1,333,100 shares of the
Companys common stock, representing $3.1 million of
the master trusts assets, were included in plan assets.
During fiscal 2001, $0.1 million in dividends were paid to
the master trust.

The weighted average annual assumed rate of
increase in the per capita cost of covered benefits (i.e., the
health care cost trend rate) for the other postretirement
benefit plans was 8.0% for 2002 and is assumed to decrease 0.5%
a year to 5.5%. A one-percentage-point change in the assumed
health care cost trend rate would have the following effects at
and for the year ended September 30, 2002 (in millions):

|                                                                   |                                                |                     |   |      |  
|------------------------------------------------------------------ | ---------------------------------------------- | ------------------- | - | ---- | -
|                                                                   |                                                | Increase (Decrease)
|                                                                   |                                                | Costs/Obligations  
|                                                                   |                                                |                    
|Effect of a 1% increase in the health care cost
    trend rate on: |                                                |                     |   |     
|                                                                   | Service cost plus interest cost                |                     | $ | 0.2  |  
|                                                                   | Accumulated post-retirement benefit obligation |                     |   | 3.0  |  
|                                                                  
|Effect of a 1% decrease in the health care cost
    trend rate on: |                                                |                     |   |     
|                                                                   | Service cost plus interest cost                |                     | $ | (0.2 | )
|                                                                   | Accumulated post-retirement benefit obligation |                     |   | (2.7 | )

The tables above and on the previous page set
forth the historical components of net periodic pension cost and
a reconciliation of the funded status of the pension and other
postretirement benefit plans for the employees associated with
the Company and is not necessarily indicative of the amounts to
be recognized by the Company on a prospective basis.



| |                             
| | ----------------------------
| | Foreign Benefit Arrangements

The Companys foreign defined benefit
pension plan covers salaried employees of Spring Ram. The
assumptions used and the net periodic pension cost for the
Companys foreign defined benefit plan is presented below:

|             |                                             |                  |  |      |   |      |  |      |   |  |  |      |  
|------------ | ------------------------------------------- | ---------------- |  | ---- | - | ---- |  | ---- | - |  |  | ---- | -
|             |                                             |                 
|             |                                             | Pension Benefits
|             |                                             |                 
|             |                                             | 2002             |  | 2001 |   | 2000
|             |                                             |                  |  |      |   |     
|Assumptions: |                                             |                  |  |      |   |      |  |      |   |  |  |     
|             | Discount rate                               |                  |  | 5.75 | % |      |  | 6.25 | % |  |  | 6.50 | %
|             | Rate of compensation increase               |                  |  | 3.00 | % |      |  | 3.25 | % |  |  | 3.75 | %
|             | Expected long-term rate of return on assets |                  |  | 7.50 | % |      |  | 7.50 | % |  |  | 8.50 | %

57



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##### Table of Contents



U.S. INDUSTRIES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

|                                   |                                |                     |   |      |   |      |   |      |      |   |   |      |      |  
|---------------------------------- | ------------------------------ | ------------------- | - | ---- | - | ---- | - | ---- | ---- | - | - | ---- | ---- | -
|                                   |                                |                    
|                                   |                                | Pension Benefits   
|                                   |                                |                    
|                                   |                                | 2002                |   | 2001 |   | 2000
|                                   |                                |                     |   |      |   |     
|                                   |                                |                    
|                                   |                                | (In millions)      
|Components of net periodic income: |                                |                     |   |      |   |      |   |      |      |   |   |     
|                                   | Service cost                   |                     | $ | 0.8  |   |      | $ | 0.5  |      |   | $ | 0.7  |     
|                                   | Interest cost                  |                     |   | 2.5  |   |      |   | 2.1  |      |   |   | 2.1  |     
|                                   | Expected return on plan assets |                     |   | (3.4 | ) |      |   | (3.5 | )    |   |   | (2.6 | )   
|                                   | Net actuarial loss             |                     |   | 0.1  |   |      |   |     |      |   |   |     |     
|                                   | Curtailments                   |                     |   |     |   |      |   |     |      |   |   | (0.9 | )   
|                                   |                                |                     |   |      |   |      |   |      |      |   |   |     
|                                   |                                | Net periodic income |   | $    |  |      |   | $    | (0.9 | ) |   | $    | (0.7 | )
|                                   |                                |                     |   |      |   |      |   |      |      |   |   |     

The following table provides a reconciliation of
changes in the projected benefit obligation, the fair value of
plan assets and the funded status of the Companys foreign
defined benefit pension plan with the amounts recognized in the
Companys balance sheet as of September 30:

|                                            |                                                    |                                          |   |       |      |  |   |      |      | 
|------------------------------------------- | -------------------------------------------------- | ---------------------------------------- | - | ----- | ---- |  | - | ---- | ---- | 
|                                            |                                                    |                                         
|                                            |                                                    | Pension Benefits                        
|                                            |                                                    |                                         
|                                            |                                                    | 2002                                     |   | 2001 
|                                            |                                                    |                                          |   |      
|                                            |                                                    |                                         
|                                            |                                                    | (In millions)                           
|Change in projected benefit
    obligation: |                                                    |                                          |   |       |      |  |   |     
|                                            | Benefit obligation at beginning of year            |                                          | $ | 38.6  |      |  | $ | 33.4 |     
|                                            | Service cost                                       |                                          |   | 0.8   |      |  |   | 0.5  |     
|                                            | Interest cost                                      |                                          |   | 2.5   |      |  |   | 2.1  |     
|                                            | Employee contributions                             |                                          |   | 0.4   |      |  |   | 0.4  |     
|                                            | Foreign currency exchange rate changes             |                                          |   | 2.3   |      |  |   |     |     
|                                            | Actuarial (gains) losses                           |                                          |   | (1.2  | )    |  |   | 3.7  |     
|                                            | Benefits paid                                      |                                          |   | (0.9  | )    |  |   | (1.5 | )   
|                                            |                                                    |                                          |   |       |      |  |   |     
|                                            |                                                    | Benefit obligation at end of year        |   | $     | 42.5 |  |   | $    | 38.6 | 
|                                            |                                                    |                                          |   |       |      |  |   |     
|Change in fair value of plan assets:        |                                                    |                                          |   |       |      |  |   |     
|                                            | Fair value of plan assets at beginning of year     |                                          | $ | 38.4  |      |  | $ | 39.8 |     
|                                            | Actual return on plan assets                       |                                          |   | (12.7 | )    |  |   | (0.8 | )   
|                                            | Foreign currency exchange rate changes             |                                          |   | 2.2   |      |  |   |     |     
|                                            | Employer contributions                             |                                          |   | 0.6   |      |  |   | 0.5  |     
|                                            | Employee contributions                             |                                          |   | 0.4   |      |  |   | 0.4  |     
|                                            | Benefits paid                                      |                                          |   | (0.9  | )    |  |   | (1.5 | )   
|                                            |                                                    |                                          |   |       |      |  |   |     
|                                            |                                                    | Fair value of plan assets at end of year |   | $     | 28.0 |  |   | $    | 38.4 | 
|                                            |                                                    |                                          |   |       |      |  |   |     
|                                            | Plan assets less than projected benefit obligation |                                          |   | (14.5 | )    |  |   | (0.2 | )   
|                                            | Unrecognized net actuarial losses                  |                                          |   | 21.1  |      |  |   | 5.8  |     
|                                            |                                                    |                                          |   |       |      |  |   |     
|                                            |                                                    | Total recognized in the balance sheet    |   | $     | 6.6  |  |   | $    | 5.6  | 
|                                            |                                                    |                                          |   |       |      |  |   |     

58



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##### Table of Contents



U.S. INDUSTRIES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

|                                           |                                        |                                     |   |       |     |  |   |     |     | 
|------------------------------------------ | -------------------------------------- | ----------------------------------- | - | ----- | --- |  | - | --- | --- | 
|                                           |                                        |                                    
|                                           |                                        | Pension Benefits                   
|                                           |                                        |                                    
|                                           |                                        | 2002                                |   | 2001 
|                                           |                                        |                                     |   |      
|                                           |                                        |                                    
|                                           |                                        | (In millions)                      
|Amounts recorded in the balance
    sheet: |                                        |                                     |   |       |     |  |   |    
|                                           | Prepaid benefits                       |                                     | $ |      |     |  | $ | 5.6 |    
|                                           | Accrued benefits                       |                                     |   | (10.0 | )   |  |   |    |    
|                                           | Accumulated other comprehensive income |                                     |   | 16.6  |     |  |   |    |    
|                                           |                                        |                                     |   |       |     |  |   |    
|                                           |                                        | Total recorded in the balance sheet |   | $     | 6.6 |  |   | $   | 5.6 | 
|                                           |                                        |                                     |   |       |     |  |   |    

Note 8  Income
Taxes

The Companys income (loss) from continuing
operations consisted of the following:

|              |  |                            |       |      |  |      |        |   |  |   |       |  
|------------- |  | -------------------------- | ----- | ---- |  | ---- | ------ | - |  | - | ----- | -
|              |  |                           
|              |  | For the Fiscal Years Ended
|              |  | September 30,             
|              |  |                           
|              |  | 2002                       |       | 2001 |  | 2000
|              |  |                            |       |      |  |     
|              |  |                           
|              |  | (In millions)             
|United States |  | $                          | (14.0 | )    |  | $    | (141.9 | ) |  | $ | 69.0  |  
|Foreign       |  |                            | 25.8  |      |  |      | (43.2  | ) |  |   | (16.1 | )
|              |  |                            |       |      |  |      |        |   |  |   |       |  
|              |  | $                          | 11.8  |      |  | $    | (185.1 | ) |  | $ | 52.9  |  
|              |  |                            |       |      |  |      |        |   |  |   |       |  

The Companys (benefit) provision for
income taxes attributable to income (loss) from continuing
operations consisted of the following:

|         |         |                            |       |      |  |      |      |       |   |   |      |      |  
|-------- | ------- | -------------------------- | ----- | ---- |  | ---- | ---- | ----- | - | - | ---- | ---- | -
|         |         |                           
|         |         | For the Fiscal Years Ended
|         |         | September 30,             
|         |         |                           
|         |         | 2002                       |       | 2001 |  | 2000
|         |         |                            |       |      |  |     
|         |         |                           
|         |         | (In millions)             
|Current: |         |                            |       |      |  |      |      |       |   |   |      |     
|         | Federal |                            | $     |     |  |      | $    | (11.2 | ) |   | $    | (5.4 | )
|         | State   |                            |       | 3.2  |  |      |      | 3.5   |   |   |      | 1.8  |  
|         | Foreign |                            |       | 9.2  |  |      |      | 5.0   |   |   |      | 8.2  |  
|Deferred |         |                            | (34.4 | )    |  |      | (2.6 | )     |   |   | 9.6  |     
|         |         |                            |       |      |  |      |      |       |   |   |      |     
|         |         | $                          | (22.0 | )    |  | $    | (5.3 | )     |   | $ | 14.2 |     
|         |         |                            |       |      |  |      |      |       |   |   |      |     

Due to a change in tax law under the Job Creation
and Workers Assistance Act of 2002, the Company is able to
carryback net operating losses for which it had previously
established a valuation allowance. In accordance with
FAS 109, the release of the valuation allowance due to a
change in tax law is reflected through continuing operations.

59



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##### Table of Contents



U.S. INDUSTRIES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The components of deferred income tax assets and
liabilities consisted of the following:

|                          |                                                                      |                                       |   |       |       |  |   |       |       |  
|------------------------- | -------------------------------------------------------------------- | ------------------------------------- | - | ----- | ----- |  | - | ----- | ----- | -
|                          |                                                                      |                                      
|                          |                                                                      | At September 30,                     
|                          |                                                                      |                                      
|                          |                                                                      | 2002                                  |   | 2001 
|                          |                                                                      |                                       |   |      
|                          |                                                                      |                                      
|                          |                                                                      | (In millions)                        
|Deferred tax assets:      |                                                                      |                                       |   |       |       |  |   |      
|                          | Accruals and allowances                                              |                                       | $ | 52.4  |       |  | $ | 37.7  |      
|                          | Postretirement benefits                                              |                                       |   | 7.9   |       |  |   | 9.7   |      
|                          | Foreign tax credits                                                  |                                       |   | 8.2   |       |  |   |      |      
|                          | Expected benefit from Disposal Plan & capital
    loss carryforwards |                                       |   | 42.8  |       |  |   | 75.0  |      
|                          |                                                                      |                                       |   |       |       |  |   |      
|                          |                                                                      | Gross deferred tax assets             |   |       | 111.3 |  |   |       | 122.4 |  
|                          | Valuation allowance                                                  |                                       |   | (65.9 | )     |  |   | (89.9 | )    
|                          |                                                                      |                                       |   |       |       |  |   |      
|                          |                                                                      | Total deferred tax assets             |   | $     | 45.4  |  |   | $     | 32.5  |  
|                          |                                                                      |                                       |   |       |       |  |   |      
|Deferred tax liabilities: |                                                                      |                                       |   |       |       |  |   |      
|                          | Property, plant and equipment                                        |                                       | $ | 11.1  |       |  | $ | 14.6  |      
|                          | Inventory                                                            |                                       |   | 3.5   |       |  |   | 4.9   |      
|                          | Net pension assets                                                   |                                       |   | 13.4  |       |  |   | 14.8  |      
|                          | Deductible goodwill                                                  |                                       |   | 2.9   |       |  |   |      |      
|                          | Other                                                                |                                       |   | 1.4   |       |  |   | 4.5   |      
|                          |                                                                      |                                       |   |       |       |  |   |      
|                          |                                                                      | Total deferred tax liabilities        |   | $     | 32.3  |  |   | $     | 38.8  |  
|                          |                                                                      |                                       |   |       |       |  |   |      
|                          |                                                                      | Net deferred tax assets (liabilities) |   | $     | 13.1  |  |   | $     | (6.3  | )
|                          |                                                                      |                                       |   |       |       |  |   |      

The Company has established a valuation allowance
principally related to deferred tax assets resulting from the
losses recognized in connection with the Disposal Plan,
reflecting the uncertainty of the future realization of these
assets. The federal income tax returns for fiscal 1995 through
1997 are currently under IRS examination. While the ultimate
results of such examination cannot be predicted with certainty,
management believes the examination will not have a material
adverse impact on the Companys consolidated financial
position or results of operations.

For the fiscal year ended September 30,
2002, the Company has approximately $122 million in capital
loss carryforwards for which the Company has established a
valuation allowance.

The deferred tax balances have been classified in
the balance sheet as follows:

|                        |                             |                                       |       |       |      |   |       |       |      |  
|----------------------- | --------------------------- | ------------------------------------- | ----- | ----- | ---- | - | ----- | ----- | ---- | -
|                        |                             |                                      
|                        |                             | At September 30,                     
|                        |                             |                                      
|                        |                             | 2002                                  |       | 2001 
|                        |                             |                                       |       |      
|                        |                             |                                      
|                        |                             | (In millions)                        
|Current assets          |                             | $                                     | 34.4  |       |      | $ | 11.1  |      
|Current liabilities     |                             |                                       | (3.4  | )     |      |   | (4.9  | )    
|                        |                             |                                       |       |       |      |   |       |      
|                        | Net current assets          |                                       |       | 31.0  |      |   |       | 6.2   |     
|                        |                             |                                       |       |       |      |   |       |      
|Non-current assets      |                             |                                       | 11.7  |       |      |   | 21.4  |      
|Non-current liabilities |                             |                                       | (29.6 | )     |      |   | (33.9 | )    
|                        |                             |                                       |       |       |      |   |       |      
|                        | Net non-current liabilities |                                       |       | (17.9 | )    |   |       | (12.5 | )   
|                        |                             |                                       |       |       |      |   |       |      
|                        |                             | Net deferred tax assets (liabilities) |       | $     | 13.1 |   |       | $     | (6.3 | )
|                        |                             |                                       |       |       |      |   |       |      

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##### Table of Contents



U.S. INDUSTRIES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The following is a reconciliation of income taxes
at the federal statutory rate of 35% to the
(benefit) provision for income taxes attributable to
continuing operations:

|                                                                   |  |                            |       |      |  |      |       |   |  |   |       |  
|------------------------------------------------------------------ |  | -------------------------- | ----- | ---- |  | ---- | ----- | - |  | - | ----- | -
|                                                                   |  |                           
|                                                                   |  | For the Fiscal Years Ended
|                                                                   |  | September 30,             
|                                                                   |  |                           
|                                                                   |  | 2002                       |       | 2001 |  | 2000
|                                                                   |  |                            |       |      |  |     
|                                                                   |  |                           
|                                                                   |  | (In millions)             
|Federal tax (benefit) provision computed at
    the statutory rate |  | $                          | 4.1   |      |  | $    | (64.8 | ) |  | $ | 18.5  |  
|Foreign income tax differential                                    |  |                            | 2.0   |      |  |      | 1.3   |   |  |   | (1.0  | )
|State income taxes (net of federal benefit)                        |  |                            | 2.1   |      |  |      | 2.3   |   |  |   | 1.2   |  
|Non-deductible goodwill amortization                               |  |                            |      |      |  |      | 2.7   |   |  |   | 3.2   |  
|Non-deductible goodwill impairment charges                         |  |                            |      |      |  |      | 35.1  |   |  |   | 7.3   |  
|Resolution of tax contingencies                                    |  |                            |      |      |  |      |      |   |  |   | (20.0 | )
|Non-deductible items                                               |  |                            | (0.6  | )    |  |      | 2.8   |   |  |   | 4.4   |  
|Valuation allowance                                                |  |                            | (29.6 | )    |  |      | 14.9  |   |  |   |      |  
|Other, net                                                         |  |                            |      |      |  |      | 0.4   |   |  |   | 0.6   |  
|                                                                   |  |                            |       |      |  |      |       |   |  |   |       |  
|                                                                   |  | $                          | (22.0 | )    |  | $    | (5.3  | ) |  | $ | 14.2  |  
|                                                                   |  |                            |       |      |  |      |       |   |  |   |       |  

The Company reduced the fiscal 2000 tax provision
by approximately $20.0 million as certain tax liabilities with
respect to foreign subsidiaries, which arose as a result of the
spin-off from Hanson plc in 1995 (the Spin-off),
were resolved that year.

Income taxes paid during fiscal 2002, 2001 and
2000 were $20.1 million, $24.1 million and
$56.8 million, respectively.

Note 9  Stockholders
Equity and Stock Compensation Plans



| |                      
| | ---------------------
| | Incentive Stock Plans

The Company maintains stock incentive plans (the
Stock Plans) that provides for the grants of stock
options and restricted stock awards to the Companys
directors, officers and key employees. As of September 30,
2002, the Company had 5,440,461 shares of common stock
reserved for issuance under the Companys Stock Plans. In
accordance with the guidelines of the Stock Plans, stock options
are granted at an option price equal to the market value of the
stock on the date of the grant. Options granted under this plan
become exercisable over four years in equal annual installments
after the date of grant, provided that the individual is
continuously employed by the Company. The Company had
authorization under the Stock Option Plan to grant 1,399,681
additional options at September 30, 2002.

Common stock issued under the Stock Plans is
restricted, with vesting periods of seven years from the date of
grant (either in thirds  on the third year, fifth
year and seventh year  or solely at the end of the
seventh year). Although subject to certain restrictions and
forfeiture provisions, restricted stock is considered to be
issued and outstanding common stock of the Company. Compensation
expense (i.e., the market value of the shares at the date of the
grant) is recognized over the vesting period. Unamortized
compensation expense (unearned restricted stock) is included as
a separate component of stockholders equity. At
September 30, 2002 and 2001, respectively, the Company had
237,665 and 977,660 shares of restricted stock outstanding.



| |                                            
| | -------------------------------------------
| | Accounting for Stock-based
    Compensation

The Company applies Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to
Employees, and related Interpretations in accounting for
its stock-based compensation plans. Thus, the

61



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##### Table of Contents



U.S. INDUSTRIES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Company uses the intrinsic value method to
determine the compensation cost for its stock-based awards. The
compensation cost that has been charged against income for Stock
Plans approximated $2.4 million, $2.9 million and
$3.3 million in 2002, 2001 and 2000, respectively. No other
compensation costs have been recognized under the Companys
stock-based compensation plans. Had compensation cost for awards
under its stock-based compensation plans been determined using
the fair value method prescribed by SFAS No. 123,
Accounting for Stock-Based Compensation, the
Companys net income (loss) and income (loss) per
share would have been reduced to the pro forma amounts presented
below:

|                                 |             |                                 |   |      |  |      |   |        |   |  |   |      | 
|-------------------------------- | ----------- | ------------------------------- | - | ---- |  | ---- | - | ------ | - |  | - | ---- | 
|                                 |             | 2002                            |   | 2001 |  | 2000
|                                 |             |                                 |   |      |  |     
|                                 |             |                                
|                                 |             | (In millions, except per share)
|Net income (loss):               |             |                                 |   |      |  |      |   |        |   |  |   |     
|                                 | As reported |                                 | $ | 41.6 |  |      | $ | (524.6 | ) |  | $ | 35.6 | 
|                                 | Pro forma   |                                 |   | 39.7 |  |      |   | (526.6 | ) |  |   | 33.3 | 
|Basic income (loss) per share:   |             |                                 |   |      |  |      |   |        |   |  |   |     
|                                 | As reported |                                 | $ | 0.56 |  |      | $ | (7.09  | ) |  | $ | 0.44 | 
|                                 | Pro forma   |                                 |   | 0.54 |  |      |   | (7.11  | ) |  |   | 0.41 | 
|Diluted income (loss) per share: |             |                                 |   |      |  |      |   |        |   |  |   |     
|                                 | As reported |                                 | $ | 0.56 |  |      | $ | (7.09  | ) |  | $ | 0.43 | 
|                                 | Pro forma   |                                 |   | 0.54 |  |      |   | (7.11  | ) |  |   | 0.40 | 

These pro forma results are not necessarily
indicative of results that may be expected in future disclosures
since additional options may be granted and the estimated fair
value of the stock options is assumed to be amortized to expense
over the vesting periods.

The fair value of each stock option granted is
established on the date of the grant using the Black-Scholes
option pricing model with the following weighted average
assumptions for grants in 2002, 2001 and 2000:



| |   |                                                                                   
| | - | ----------------------------------------------------------------------------------
| |  | expected volatility rates of 58% for 2002, 49%
    for 2001, and 36% for 2000     
|
| |  | risk-free interest rates of 3.99% for 2002, 4.88%
    for 2001, and 6.55% for 2000
|
| |  | expected option lives of 4 years for all
    three years                          
|
| |  | expected dividend yield of 0% for 2002 and 2% for
    both 2001 and 2000          

As of September 30, 2002, the weighted
average fair values of options granted during 2002, 2001 and
2000 were $1.80, $2.94 and $4.02, respectively.

62



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##### Table of Contents



U.S. INDUSTRIES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

A summary of the status of and changes in the
Companys stock option plans for the last three years is
presented below:

|                                 |  |           |            |          |  |           |       |          |  |           |           |          |  |   |       |  |  |  |           |   |  |   |       | 
|-------------------------------- |  | --------- | ---------- | -------- |  | --------- | ----- | -------- |  | --------- | --------- | -------- |  | - | ----- |  |  |  | --------- | - |  | - | ----- | 
|                                 |  |           |            |          |  |          
|                                 |  | 2002      |            | 2001     |  | 2000     
|                                 |  |           |            |          |  |          
|                                 |  |           |            | Weighted |  |           |       | Weighted |  |           |           | Weighted
|                                 |  |           |            | Average  |  |           |       | Average  |  |           |           | Average 
|                                 |  | Number of |            | Exercise |  | Number of |       | Exercise |  | Number of |           | Exercise
|                                 |  | Options   |            | Price    |  | Options   |       | Price    |  | Options   |           | Price   
|                                 |  |           |            |          |  |           |       |          |  |           |           |         
|Outstanding at beginning of year |  |           | 6,170,932  |          |  | $         | 13.57 |          |  |           | 6,812,418 |          |  | $ | 13.72 |  |  |  | 5,921,264 |   |  | $ | 14.75 | 
|Granted                          |  |           | 731,500    |          |  |           | 3.73  |          |  |           | 240,000   |          |  |   | 8.04  |  |  |  | 2,168,125 |   |  |   | 12.25 | 
|Exercised                        |  |           |           |          |  |           | N/A   |          |  |           | (30,000   | )        |  |   | 9.42  |  |  |  | (429,104  | ) |  |   | 9.18  | 
|Canceled/expired                 |  |           | (1,699,636 | )        |  |           | 14.52 |          |  |           | (851,486  | )        |  |   | 13.33 |  |  |  | (847,867  | ) |  |   | 19.43 | 
|                                 |  |           |            |          |  |           |       |          |  |           |           |          |  |   |       |  |  |  |           |   |  |   |       | 
|Outstanding at end of year       |  |           | 5,202,796  |          |  | $         | 11.88 |          |  |           | 6,170,932 |          |  | $ | 13.57 |  |  |  | 6,812,418 |   |  | $ | 13.72 | 
|                                 |  |           |            |          |  |           |       |          |  |           |           |          |  |   |       |  |  |  |           |   |  |   |       | 
|Exercisable at end of year       |  |           | 3,678,995  |          |  | $         | 13.34 |          |  |           | 3,965,777 |          |  | $ | 13.81 |  |  |  | 3,713,357 |   |  | $ | 13.50 | 
|                                 |  |           |            |          |  |           |       |          |  |           |           |          |  |   |       |  |  |  |           |   |  |   |       | 

The following table summarizes the status of the
stock options outstanding and exercisable at September 30,
2002:

|                         |       |                     |           |                     |  |          |     |           |  |          |       |       |  |  |           |           |  |   |       |       | 
|------------------------ | ----- | ------------------- | --------- | ------------------- |  | -------- | --- | --------- |  | -------- | ----- | ----- |  |  | --------- | --------- |  | - | ----- | ----- | 
|                         |       |                     |           |                     |  |         
|                         |       | Options Outstanding |           |                    
|                         |       |                     |           | Options Exercisable
|                         |       |                     |           | Weighted            |  |          |     |          
|                         |       |                     |           | Average             |  | Weighted |     |           |  | Weighted
|                         |       |                     |           | Remaining           |  | Average  |     |           |  | Average 
|                         |       | Number of           |           | Contractual         |  | Exercise |     | Number of |  | Exercise
|Range of Exercise Prices |       | Options             |           | Life (in years)     |  | Price    |     | Options   |  | Price   
|                         |       |                     |           |                     |  |          |     |           |  |         
|$2.20 to $7.99           |       |                     | 730,000   |                     |  |          | 9.6 |           |  | $        | 3.73  |       |  |  | 30,000    |           |  | $ | 2.20  |      
|$8.00 to $13.19          |       |                     | 2,950,538 |                     |  |          | 4.8 |           |  |          | 10.98 |       |  |  | 2,287,600 |           |  |   | 10.94 |      
|$13.20 to $20.46         |       |                     | 1,264,269 |                     |  |          | 4.2 |           |  |          | 16.34 |       |  |  | 1,103,406 |           |  |   | 16.28 |      
|$20.47 to $28.88         |       |                     | 257,989   |                     |  |          | 2.9 |           |  |          | 23.30 |       |  |  | 257,989   |           |  |   | 23.30 |      
|                         |       |                     |           |                     |  |          |     |           |  |          |       |       |  |  |           |           |  |   |       |      
|                         | Total |                     |           | 5,202,796           |  |          |     | 5.2       |  |          | $     | 11.88 |  |  |           | 3,678,995 |  |   | $     | 13.34 | 
|                         |       |                     |           |                     |  |          |     |           |  |          |       |       |  |  |           |           |  |   |       |      

Note 10  Capital
Stock

Common
Stock

In March 2001, the Companys Board of
Directors indefinitely suspended the Companys quarterly
payment of dividends on its Common Stock.



| |                        
| | -----------------------
| | Stockholder Rights Plan

The Company adopted a Stockholder Rights Plan
(the Rights Plan) effective October 15, 1998.
Under the Rights Plan, each of the Companys stockholders
on the date of record were issued one right (the
Right) to acquire one-hundredth of a share of the
Companys Series A Junior Preferred Stock, having a
market value of two times the exercise price for the Rights, for
each outstanding share of USI Common Stock they own.

Initially, the Rights trade with the common stock
of the Company and are not exercisable. The Rights will separate
from the Common Stock and only become exercisable when a single
person or company acquires or makes an offer to acquire 15% or
more of the Companys outstanding Common Stock, unless
otherwise agreed by the Companys Board of Directors. Upon
exercise of the Right, the

63



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U.S. INDUSTRIES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

economic and voting terms of the Preferred Stock
acquired by the stockholders will be equivalent to those
possessed when they held shares of the Companys Common
Stock. The Rights will expire on October 15, 2008 or
90 days following the date the Rights become exercisable,
whichever is earlier. The Board of Directors has agreed to
permit Southeastern Asset Management, Inc. and its managed funds
to purchase up to 19.9% of the outstanding voting securities
without causing the Rights to separate and become exercisable,
and the Company has entered into a standstill agreement with
Southeastern Asset Management containing limitations and
restrictions on the voting and transfer of shares of common
stock acquired in excess of 15%.



| |               
| | --------------
| | Treasury Stock

During October 1999, the Company entered into
equity instrument contracts to purchase 2.8 million shares
of its Common Stock. These contracts were settled during 2001
for $43.1 million. During 1999 and 2000, the Companys
Board of Directors authorized share repurchase programs
aggregating $350 million. Under these programs, the Company
repurchased $331.8 million of its Common Stock for
treasury, of which $43.1 million and $99.2 million was
purchased in 2001 and 2000, respectively. During June 2000, in a
separate transaction authorized and undertaken outside the
existing share repurchase program, the Company repurchased all
of its Common Stock held by the former owners of Spear &
Jackson for $44.2 million. The repurchase programs have
been suspended indefinitely, as the Restructured Credit
Agreement entered into on August 15, 2001 contains a
restriction on the purchase of the Companys Common Stock.

Note 11  Commitments and
Contingencies



| |                 
| | ----------------
| | Operating Leases

The table below shows the Companys future
minimum lease payments due under non-cancelable leases as of
September 30, 2002. Certain of these leases contain stated
escalation clauses while others contain renewal options. These
minimum lease payments (presented in millions) do not include
facility leases that were accrued as restructuring costs (See
Note 5).

|           |                                                                           |   |     |      | 
|---------- | ------------------------------------------------------------------------- | - | --- | ---- | 
|2003       |                                                                           | $ | 9.2 |     
|2004       |                                                                           |   | 6.7 |     
|2005       |                                                                           |   | 5.1 |     
|2006       |                                                                           |   | 4.0 |     
|2007       |                                                                           |   | 2.4 |     
|Thereafter |                                                                           |   | 2.1 |     
|           |                                                                           |   |     |     
|           | Total (not reduced by minimum sublease rental
    income of $2.3 million) |   | $   | 29.5 | 
|           |                                                                           |   |     |     

Rent expense, including equipment rental, was
approximately $11.7 million, $13.3 million and
$15.9 million in 2002, 2001 and 2000, respectively.



| |           
| | ----------
| | Litigation

The Company is subject to a wide range of
environmental protection laws. Approximately 23 present and
former operating sites, or portions thereof, currently or
previously owned and/or leased by current or former operating
units of the Company have remedial and investigatory activities
underway. In addition, the Company has been named as a
Potentially Responsible Party (PRP) at 11
Superfund sites pursuant to the Comprehensive
Environmental Response, Compensation and Liability Act of 1980
or comparable statutes.

64



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##### Table of Contents



U.S. INDUSTRIES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

It is often difficult to estimate the future
impact of environmental matters, including potential
liabilities. The Company accrues for losses associated with
environmental remediation obligations when such losses are
probable and reasonably estimable. This practice is followed
whether the claims are asserted or unasserted. Reserves for
estimated losses from environmental remediation are, depending
on the site, based primarily upon internal or third party
environmental studies, and estimates as to the number,
participation level and financial viability of any other
PRPs, the extent of contamination and the nature of
required remedial actions. Such accruals are adjusted as further
information develops or circumstances change. Costs of future
expenditures for environmental remediation obligations are not
discounted to their present fair value. Recoveries of
environmental remediation costs from other parties are
recognized as assets when their receipt is deemed probable.
Management expects that the amount reserved will be paid out
over the periods of remediation for the applicable sites, which
range up to 30 years, and that such reserves are adequate
based on all current data. Each of the sites in question is at
various stages of investigation or remediation; however, no
information currently available reasonably suggests that
projected expenditures associated with remedial action or
compliance with environmental laws for any single site or for
all sites in the aggregate, will have a material adverse affect
on the Companys financial condition, results of operations
or cash flows.

At September 30, 2002, the Company had
accrued approximately $9.1 million ($0.6 million
accrued as current liabilities and $8.5 million as
non-current liabilities), including $4.5 million for
discontinued operations, for various environmental liabilities
of which the Company is aware. The Company believes that the
range of liability for these matters could reach
$15.2 million if it included cases where the likelihood of
an unfavorable outcome is only reasonably possible.

Zurn is a wholly-owned subsidiary of the Company
which, along with many other companies, is a co-defendant in
numerous asbestos related lawsuits pending in the United States.
Plaintiffs claims against Zurn allege personal injuries
allegedly caused by exposure to asbestos used primarily in
industrial boilers formerly manufactured by a segment of Zurn
that has been presented as a discontinued operation as of the
date of the merger. Zurn did not manufacture asbestos or
asbestos components but purchased it from other suppliers. As of
September 30, 2002, the number of asbestos claims pending
against Zurn was approximately 65,000.

Since Zurn received its first asbestos claim in
the 1980s, Zurn has settled or otherwise disposed of
approximately 48,000 asbestos claims. Zurns insurers have
paid all settlement costs relating to these claims. Defense
costs are currently being paid by Zurns insurers without
eroding the coverage amounts of its insurance policies.

Zurn estimates that its potential liability for
asbestos claims pending against it and for claims estimated to
be filed through 2012 is approximately $145 million. This
estimate is based on its view of the current and anticipated
number of future asbestos claims, the timing and amounts of
asbestos payments, the status of ongoing litigation and the
potential impact of defense strategies and settlement
initiatives. However, there are inherent uncertainties involved
in estimating both the number of future asbestos claims as well
as future settlement costs, and the actual liability could
exceed Zurns estimate due to changes in facts and
circumstances after the date of the estimate. Zurns
present estimate of its asbestos liability is predicated on the
assumption that its recent vigorous defense strategy will enable
it to reduce both its claim frequency and claim severity in the
future. While Zurn believes there is evidence, in recent claims
settlements, for such an impact of a successful defense
strategy, if the defense strategy ultimately is not successful,
to the extent assumed by Zurn, the severity and frequency of
asbestos claims could increase substantially above Zurns
estimates. Further, while there is presently no reasonable basis
for estimating Zurns asbestos liability beyond 2012, such
liability may continue beyond 2012, and such liability could be
substantial.

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U.S. INDUSTRIES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Zurns analysis of its available insurance
to cover its potential asbestos liability is between
approximately $282 million to $350 million. The
$68 million range involves a dispute with one of
Zurns insurers regarding the availability of
$68 million in insurance coverage under certain excess
policies. Subject to completion of a definitive settlement
agreement, the parties have preliminarily agreed to the terms of
settlement of an action commenced by Zurn in the United States
District Court of the Western District of Pennsylvania seeking,
among other things, a declaration that the insurance coverage
limits of certain excess policies provide $68 million in
coverage. Under the terms of the proposed settlement,
Zurns available insurance to cover its potential asbestos
liability would be approximately $350 million.

Zurn believes, based on its experience in
defending and dismissing such claims and the amount of insurance
coverage available, that it has sufficient insurance to cover
the pending and reasonably estimable future claims. This
conclusion was reached after considering Zurns experience
in asbestos litigation, the insurance payments made to date by
Zurns insurance carriers, existing insurance policies, the
industry ratings of the insurers and the advice of insurance
coverage counsel with respect to applicable insurance coverage
law relating to the terms and conditions of those policies.
After review of the foregoing with Zurn and its consultants, the
Company believes that the resolution of Zurns pending and
reasonably estimable asbestos claims will not have a material
adverse effect on the Companys financial condition,
results of operations or cash flows.

The Company continues to guarantee the lease
payments of the Ames True Temper master distribution center. The
lease obligation will expire in 2015. The lease payments totaled
$3.6 million for 2002, and increase by 2.25% each year
thereafter. In connection with the sale of Ames True Temper in
January 2002, the Company obtained a security interest and
indemnification from Ames True Temper on the lease that would
enable it to exercise remedies in the event of default.

Note 12  Segment
Information

The Company currently operates in two reportable
business segments  Bath & Plumbing and
Rexair. Bath & Plumbing manufacturers whirlpools, spas,
faucets, chinaware, bathtubs, shower enclosures, bath
accessories, plumbing fittings and other behind the wall
plumbing products. Bath & Plumbings products are
primarily sold to the home improvement and home construction
markets through mass merchandisers, hardware stores, home
centers, distributors, wholesalers and other outlets. Rexair is
a leading manufacturer of premium vacuum cleaner systems. Its
RAINBOW® vacuum cleaners collect dirt particles by means of
a water filtration and separator system. Rexair distributes its
RAINBOW® vacuum cleaners and related accessories through an
extensive network of independent authorized distributors and
sub-distributors. Prior to March 2000, the Company also operated
a wide range of businesses through its Diversified segment.
These businesses manufactured automotive interiors,
precision-engineered products for the automotive, jet aviation
and electronics industries and various other consumer products.

The financial information of the segments is
regularly evaluated by the corporate operating executives in
determining resource allocation and assessing performance and is
periodically reviewed by the Companys Board of Directors.
The Companys senior management evaluates the performance
of each business segment based on its operating results and,
other than general corporate expenses, allocates specific
corporate overhead to each segment. Accounting policies for the
segments are the same as those for the Company (see Note 2).

66



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U.S. INDUSTRIES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The following is a summary of our significant
accounts and balances by segment, reconciled to our consolidated
totals.

|                                 |      |               |   |         |   |                |   |           |  |              |   |       |  |  |   |       |   |  |   |         |  
|-------------------------------- | ---- | ------------- | - | ------- | - | -------------- | - | --------- |  | ------------ | - | ----- |  |  | - | ----- | - |  | - | ------- | -
|                                 |      | Bath &        |   |         |   |                |   |           |  | Consolidated
|                                 |      | Plumbing      |   | Rexair  |   | Diversified(3) |   | Corporate |  | Total       
|                                 |      |               |   |         |   |                |   |           |  |             
|                                 |      |              
|                                 |      | (In millions)
|Net Sales                        |      |               |   |         |   |                |   |           |  |              |   |       |  |  |   |       |   |  |   |        
|                                 | 2002 |               | $ | 1,060.9 |   |                | $ | 98.6      |  |              | $ |      |  |  | $ |      |   |  | $ | 1,159.5 |  
|                                 | 2001 |               |   | 1,093.8 |   |                |   | 13.3      |  |              |   |      |  |  |   |      |   |  |   | 1,107.1 |  
|                                 | 2000 |               |   | 1,309.6 |   |                |   |          |  |              |   | 415.3 |  |  |   |      |   |  |   | 1,724.9 |  
|Total Operating Income (Loss)(1) |      |               |   |         |   |                |   |           |  |              |   |       |  |  |   |       |   |  |   |        
|                                 | 2002 |               | $ | 90.3    |   |                | $ | 28.5      |  |              | $ |      |  |  | $ | (20.3 | ) |  | $ | 98.5    |  
|                                 | 2001 |               |   | (2.8    | ) |                |   | 3.0       |  |              |   |      |  |  |   | (23.1 | ) |  |   | (22.9   | )
|                                 | 2000 |               |   | 62.2    |   |                |   |          |  |              |   | 35.7  |  |  |   | (14.1 | ) |  |   | 83.8    |  
|Capital Expenditures             |      |               |   |         |   |                |   |           |  |              |   |       |  |  |   |       |   |  |   |        
|                                 | 2002 |               | $ | 14.3    |   |                | $ | 1.3       |  |              | $ |      |  |  | $ |      |   |  | $ | 15.6    |  
|                                 | 2001 |               |   | 22.4    |   |                |   | 0.2       |  |              |   |      |  |  |   | 0.3   |   |  |   | 22.9    |  
|                                 | 2000 |               |   | 20.4    |   |                |   |          |  |              |   | 12.7  |  |  |   |      |   |  |   | 33.1    |  
|Depreciation and Amortization    |      |               |   |         |   |                |   |           |  |              |   |       |  |  |   |       |   |  |   |        
|                                 | 2002 |               | $ | 21.4    |   |                | $ | 3.1       |  |              | $ |      |  |  | $ | 2.5   |   |  | $ | 27.0    |  
|                                 | 2001 |               |   | 34.4    |   |                |   | 0.4       |  |              |   |      |  |  |   | 3.1   |   |  |   | 37.9    |  
|                                 | 2000 |               |   | 34.1    |   |                |   |          |  |              |   | 12.5  |  |  |   | 1.4   |   |  |   | 48.0    |  
|Assets(2)                        |      |               |   |         |   |                |   |           |  |              |   |       |  |  |   |       |   |  |   |        
|                                 | 2002 |               | $ | 1,023.1 |   |                | $ | 117.3     |  |              | $ |      |  |  | $ | 434.9 |   |  | $ | 1,575.3 |  
|                                 | 2001 |               |   | 1,009.6 |   |                |   | 118.4     |  |              |   |      |  |  |   | 755.6 |   |  |   | 1,883.6 |  



---



|    |                                                                                                                                                                                                                                                        
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Operating income (loss) for the
    Bath & Plumbing segment includes restructuring,
    impairment and other non-recurring charges of $7.2 million,
    $105.0 million, and $79.7 million in fiscal 2002, 2001
    and 2000, respectively (See Note 5).
|   
|(2) | Corporate assets include net assets held for sale
    of $103.8 million and $491.6 million for fiscal 2002
    and 2001, respectively.                                                                                                                 
|   
|(3) | The Diversified segment includes the operations
    of Rexair.                                                                                                                                                                                         

Aside from the operating income
(loss) amounts noted above, the Companys income from
continuing operations includes interest income and expense,
other income and expense items and income taxes, none of which
are included in the Companys measurement of segment
operating profit. Corporate assets consist primarily of real
property, net assets held for sale, escrow deposits, cash and
cash equivalents and other investments.

The Companys operations are principally
located in North America and Europe and to a lesser extent, in
other regions of the world. The Companys country of
domicile is the United States. Export sales represented 7%, 4%
and 9% of the Companys total net sales for fiscal years
2002, 2001 and 2000, respectively. Principal international
markets served include Europe, South America, Canada and Asia.

67



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U.S. INDUSTRIES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The following table presents summarized financial
information by geographic area:

|                          |                         |               |       |         |  |      |       |         |   |   |         |         | 
|------------------------- | ----------------------- | ------------- | ----- | ------- |  | ---- | ----- | ------- | - | - | ------- | ------- | 
|                          |                         | 2002          |       | 2001    |  | 2000
|                          |                         |               |       |         |  |     
|                          |                         |              
|                          |                         | (In millions)
|Net Sales                 |                         |               |       |         |  |      |       |         |   |   |         |        
|United States             |                         | $             | 848.6 |         |  | $    | 807.6 |         |   | $ | 1,266.6 |        
|Foreign                   |                         |               | 310.9 |         |  |      | 299.5 |         |   |   | 458.3   |        
|                          |                         |               |       |         |  |      |       |         |   |   |         |        
|                          | Total Net Sales         |               | $     | 1,159.5 |  |      | $     | 1,107.1 |   |   | $       | 1,724.9 | 
|                          |                         |               |       |         |  |      |       |         |   |   |         |        
|Operating Income(Loss)(1) |                         |               |       |         |  |      |       |         |   |   |         |        
|United States             |                         | $             | 63.2  |         |  | $    | 5.4   |         |   | $ | 56.9    |        
|Foreign                   |                         |               | 35.3  |         |  |      | (28.3 | )       |   |   | 26.9    |        
|                          |                         |               |       |         |  |      |       |         |   |   |         |        
|                          | Total Operating Income  |               | $     | 98.5    |  |      | $     | (22.9   | ) |   | $       | 83.8    | 
|                          |                         |               |       |         |  |      |       |         |   |   |         |        
|Long-lived Assets         |                         |               |       |         |  |      |       |         |   |   |         |        
|United States             |                         | $             | 342.7 |         |  | $    | 357.3 |         |   | $ | 323.7   |        
|Foreign                   |                         |               | 111.6 |         |  |      | 103.6 |         |   |   | 169.2   |        
|                          |                         |               |       |         |  |      |       |         |   |   |         |        
|                          | Total long-lived assets |               | $     | 454.3   |  |      | $     | 460.9   |   |   | $       | 492.9   | 
|                          |                         |               |       |         |  |      |       |         |   |   |         |        



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Operating income for the year ended
    September 30, 2002 included restructuring charges of
    $7.2 million related to operations in the United States.
    The operating loss for the year ended September 30, 2001
    included goodwill impairment charges of $100.2 million and
    other related costs of $4.8 million. Of these charges,
    $44.2 million and $60.8 million relate to operating
    income of the United States and foreign locations, respectively.
    Operating income for the year ended September 30, 2000
    included goodwill impairment and restructuring charges of
    $60.2 million and other related costs of
    $19.5 million. Of these charges, $34.0 million and
    $45.7 million relate to operating income of the United
    States and foreign locations, respectively.

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U.S. INDUSTRIES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Note 13  Quarterly Financial Data
(Unaudited)

Summarized quarterly financial information for
the fiscal years ended September 30, 2002 and 2001 is as follows
(in millions, except per share amounts):

|                                         |  |         |       |          |  |         |       |          |  |         |       |          |  |         |       |          |  |   |       |   |  |   |       |   |  |   |        |   |  |   |        |  
|---------------------------------------- |  | ------- | ----- | -------- |  | ------- | ----- | -------- |  | ------- | ----- | -------- |  | ------- | ----- | -------- |  | - | ----- | - |  | - | ----- | - |  | - | ------ | - |  | - | ------ | -
|                                         |  |         |       |         
|                                         |  | 2002    |       | 2001    
|                                         |  |         |       |         
|                                         |  | Dec. 31 |       | March 31 |  | June 30 |       | Sept. 30 |  | Dec. 31 |       | March 31 |  | June 30 |       | Sept. 30
|                                         |  |         |       |          |  |         |       |          |  |         |       |          |  |         |       |         
|Net sales                                |  | $       | 254.4 |          |  | $       | 276.3 |          |  | $       | 319.0 |          |  | $       | 309.8 |          |  | $ | 251.8 |   |  | $ | 266.5 |   |  | $ | 308.1  |   |  | $ | 280.7  |  
|Gross profit                             |  |         | 75.6  |          |  |         | 85.4  |          |  |         | 103.9 |          |  |         | 94.8  |          |  |   | 70.0  |   |  |   | 78.5  |   |  |   | 94.4   |   |  |   | 80.8   |  
|Income (loss) from continuing operations |  |         | (7.0  | )        |  |         | 3.0   |          |  |         | 7.0   |          |  |         | 30.8  |          |  |   | (3.6  | ) |  |   | (1.1  | ) |  |   | (115.0 | ) |  |   | (60.1  | )
|Income (loss) before cumulative effect   |  |         | (7.0  | )        |  |         | 3.0   |          |  |         | 22.0  |          |  |         | 23.6  |          |  |   | (3.5  | ) |  |   | 0.6   |   |  |   | (243.4 | ) |  |   | (277.6 | )
|Net income (loss)                        |  |         | (7.0  | )        |  |         | 3.0   |          |  |         | 22.0  |          |  |         | 23.6  |          |  |   | (4.2  | ) |  |   | 0.6   |   |  |   | (243.4 | ) |  |   | (277.6 | )
|Income (loss) per basic common share:    |  |         |       |          |  |         |       |          |  |         |       |          |  |         |       |          |  |   |       |   |  |   |       |   |  |   |        |   |  |   |        |  
|Continuing operations                    |  | $       | (0.10 | )        |  | $       | 0.04  |          |  | $       | 0.09  |          |  | $       | 0.41  |          |  | $ | (0.05 | ) |  | $ | (0.01 | ) |  | $ | (1.57  | ) |  | $ | (0.82  | )
|Income (loss) before cumulative effect   |  |         | (0.10 | )        |  |         | 0.04  |          |  |         | 0.29  |          |  |         | 0.32  |          |  |   | (0.05 | ) |  |   | 0.01  |   |  |   | (3.32  | ) |  |   | (3.79  | )
|Net Income (loss)                        |  |         | (0.10 | )        |  |         | 0.04  |          |  |         | 0.29  |          |  |         | 0.32  |          |  |   | (0.06 | ) |  |   | 0.01  |   |  |   | (3.32  | ) |  |   | (3.79  | )
|Income (loss) per diluted common share:  |  |         |       |          |  |         |       |          |  |         |       |          |  |         |       |          |  |   |       |   |  |   |       |   |  |   |        |   |  |   |        |  
|Continuing operations                    |  | $       | (0.10 | )        |  | $       | 0.04  |          |  | $       | 0.09  |          |  | $       | 0.41  |          |  | $ | (0.05 | ) |  | $ | (0.01 | ) |  | $ | (1.57  | ) |  | $ | (0.82  | )
|Income (loss) before cumulative effect   |  |         | (0.10 | )        |  |         | 0.04  |          |  |         | 0.29  |          |  |         | 0.32  |          |  |   | (0.05 | ) |  |   | 0.01  |   |  |   | (3.32  | ) |  |   | (3.79  | )
|Net Income (loss)                        |  |         | (0.10 | )        |  |         | 0.04  |          |  |         | 0.29  |          |  |         | 0.32  |          |  |   | (0.06 | ) |  |   | 0.01  |   |  |   | (3.32  | ) |  |   | (3.79  | )

The results for the quarter ended June 30,
2001 includes goodwill impairment charges of $100.2 million
in continuing and $121.4 million in discontinued
operations, as well as a $29.4 million write-down of the
Strategic Notes. The results for the quarter ended
September 30, 2001 includes a $15.7 million write-down
of the Strategic Notes and a $17.4 million write-off of
deferred transaction costs related to the original sale of
Rexair in March 2000. Also recorded in discontinued operations
in the quarter ending September 30, 2001 was the
$232.6 million estimated loss on disposal of the operations
discontinued in connection with the Disposal Plan. The results
for the quarter ended June 30, 2002 includes income from
discontinued operations of $15.0 million, as the Company
decreased the estimated loss on disposal of its discontinued
operations. The results for the quarter ended September 30,
2002 includes a net tax benefit of $27.0 million largely
attributable to benefits realized from completion of certain
asset sales and changes in the tax laws regarding the
utilization of loss carrybacks as well as a charge to
discontinued operations of $7.2 million as a result of
reduced proceeds from the sale of discontinued operations.

Note 14  Supplemental Joint Issuer
and Guarantor Financial Information

The following represents the supplemental
consolidating condensed financial statements of U.S. Industries,
Inc. (USI), USI Global and USIAH which are the
jointly obligated issuers of the Companys Senior Notes,
and USI Atlantic, which is the guarantor of the Notes, and their
subsidiaries which are not guarantors of the Notes, as of
September 30, 2002 and September 30, 2001 and for each
of the three years in the period ended September 30, 2002.
Certain of the other subsidiaries have pledged their stock and
assets as collateral for the Senior Notes. Separate consolidated
financial statements of USI, USI Global, USI Atlantic and USIAH
are not presented, as management has determined that they would

69



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U.S. INDUSTRIES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

not be material to investors. Refer to Note 6
with respect to certain security interests in favor of the
holders of the Notes.

|                                                                    |                                              |                                       |       |        |       |          |       |       |   |              |      |              |   |              |       |   |   |   |         |       |       |   |        |   |   |   |         |       |      | 
|------------------------------------------------------------------- | -------------------------------------------- | ------------------------------------- | ----- | ------ | ----- | -------- | ----- | ----- | - | ------------ | ---- | ------------ | - | ------------ | ----- | - | - | - | ------- | ----- | ----- | - | ------ | - | - | - | ------- | ----- | ---- | 
|                                                                    |                                              |                                      
|                                                                    |                                              | For the Year Ended September 30, 2002
|                                                                    |                                              |                                      
|                                                                    |                                              |                                       |       | USI    |       | USI      |       |       |   | Other        |      |             
|                                                                    |                                              | USI                                   |       | Global |       | Atlantic |       | USIAH |   | Subsidiaries |      | Eliminations |   | Consolidated
|                                                                    |                                              |                                       |       |        |       |          |       |       |   |              |      |              |   |             
|Net sales                                                           |                                              | $                                     |      |        |       | $        |      |       |   | $            |     |              |   | $            |      |   |   | $ | 1,159.5 |       |       | $ |       |   |   | $ | 1,159.5 |      
|Operating costs and expenses:                                       |                                              |                                       |       |        |       |          |       |       |   |              |      |              |   |              |       |   |   |   |         |       |       |   |        |   |   |   |         |      
|                                                                    | Cost of products sold                        |                                       |       |       |       |          |       |      |   |              |      |             |   |              |       |  |   |   |         | 799.8 |       |   |        |  |   |   |         | 799.8 |     
|                                                                    | Selling, general and administrative expenses |                                       |       | 20.4   |       |          |       |      |   |              |      |             |   |              |       |  |   |   |         | 233.6 |       |   |        |  |   |   |         | 254.0 |     
|                                                                    | Impairment and restructuring charges         |                                       |       |       |       |          |       |      |   |              |      |             |   |              |       |  |   |   |         | 7.2   |       |   |        |  |   |   |         | 7.2   |     
|                                                                    |                                              |                                       |       |        |       |          |       |       |   |              |      |              |   |              |       |   |   |   |         |       |       |   |        |   |   |   |         |      
|                                                                    |                                              | Operating income (loss)               |       |        | (20.4 | )        |       |       |  |              |      |              |  |              |       |   |  |   |         |       | 118.9 |   |        |   |  |   |         |       | 98.5 | 
|Interest expense                                                    |                                              |                                       | (36.7 | )      |       |          | (24.4 | )     |   |              |     |              |   |              |      |   |   |   | (14.6   | )     |       |   |       |   |   |   | (75.7   | )    
|Interest income                                                     |                                              |                                       | 3.0   |        |       |          |      |       |   |              |     |              |   |              |      |   |   |   | 1.6     |       |       |   |       |   |   |   | 4.6     |      
|Intercompany interest income (expense), net                         |                                              |                                       | (29.5 | )      |       |          | 55.4  |       |   |              |     |              |   |              |      |   |   |   | (25.9   | )     |       |   |       |   |   |   |        |      
|Management fee income (expense)                                     |                                              |                                       | 73.2  |        |       |          | (61.6 | )     |   |              |     |              |   |              | 61.6  |   |   |   | (73.2   | )     |       |   |       |   |   |   |        |      
|Equity in earnings (losses) of investees, net                       |                                              |                                       | 9.9   |        |       |          | 52.8  |       |   |              | 53.2 |              |   |              | 11.3  |   |   |   |        |       |       |   | (127.2 | ) |   |   |        |      
|Minority interest income (expense)                                  |                                              |                                       | 19.7  |        |       |          |      |       |   |              |     |              |   |              | (19.7 | ) |   |   |        |       |       |   |       |   |   |   |        |      
|Other expense, net                                                  |                                              |                                       | 9.8   |        |       |          |      |       |   |              |     |              |   |              |      |   |   |   | (25.4   | )     |       |   |       |   |   |   | (15.6   | )    
|                                                                    |                                              |                                       |       |        |       |          |       |       |   |              |      |              |   |              |       |   |   |   |         |       |       |   |        |   |   |   |         |      
|Income (losses) before income taxes and
    discontinued operations |                                              |                                       | 29.0  |        |       |          | 22.2  |       |   |              | 53.2 |              |   |              | 53.2  |   |   |   | (18.6   | )     |       |   | (127.2 | ) |   |   | 11.8    |      
|Benefit (provision) for income taxes                                |                                              |                                       | 4.8   |        |       |          | (10.9 | )     |   |              |     |              |   |              |      |   |   |   | 28.1    |       |       |   |       |   |   |   | 22.0    |      
|                                                                    |                                              |                                       |       |        |       |          |       |       |   |              |      |              |   |              |       |   |   |   |         |       |       |   |        |   |   |   |         |      
|Income (loss) from continuing operations                            |                                              |                                       | 33.8  |        |       |          | 11.3  |       |   |              | 53.2 |              |   |              | 53.2  |   |   |   | 9.5     |       |       |   | (127.2 | ) |   |   | 33.8    |      
|Income (loss) from discontinued operations                          |                                              |                                       | 7.8   |        |       |          | 8.4   |       |   |              | 8.4  |              |   |              | 8.4   |   |   |   | 7.8     |       |       |   | (33.0  | ) |   |   | 7.8     |      
|                                                                    |                                              |                                       |       |        |       |          |       |       |   |              |      |              |   |              |       |   |   |   |         |       |       |   |        |   |   |   |         |      
|Net income (loss)                                                   |                                              | $                                     | 41.6  |        |       | $        | 19.7  |       |   | $            | 61.6 |              |   | $            | 61.6  |   |   | $ | 17.3    |       |       | $ | (160.2 | ) |   | $ | 41.6    |      
|                                                                    |                                              |                                       |       |        |       |          |       |       |   |              |      |              |   |              |       |   |   |   |         |       |       |   |        |   |   |   |         |      

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U.S. INDUSTRIES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

|                                                                                                                |                                              |                                       |        |        |       |          |        |       |   |              |        |              |   |              |        |   |   |   |         |       |      |   |         |   |   |   |         |       |       |  
|--------------------------------------------------------------------------------------------------------------- | -------------------------------------------- | ------------------------------------- | ------ | ------ | ----- | -------- | ------ | ----- | - | ------------ | ------ | ------------ | - | ------------ | ------ | - | - | - | ------- | ----- | ---- | - | ------- | - | - | - | ------- | ----- | ----- | -
|                                                                                                                |                                              |                                      
|                                                                                                                |                                              | For the Year Ended September 30, 2001
|                                                                                                                |                                              |                                      
|                                                                                                                |                                              |                                       |        | USI    |       | USI      |        |       |   | Other        |        |             
|                                                                                                                |                                              | USI                                   |        | Global |       | Atlantic |        | USIAH |   | Subsidiaries |        | Eliminations |   | Consolidated
|                                                                                                                |                                              |                                       |        |        |       |          |        |       |   |              |        |              |   |             
|Net sales                                                                                                       |                                              | $                                     |       |        |       | $        |       |       |   | $            |       |              |   | $            |       |   |   | $ | 1,107.1 |       |      | $ |        |   |   | $ | 1,107.1 |      
|Operating costs and expenses:                                                                                   |                                              |                                       |        |        |       |          |        |       |   |              |        |              |   |              |        |   |   |   |         |       |      |   |         |   |   |   |         |      
|                                                                                                                | Cost of products sold                        |                                       |        |       |       |          |        |      |   |              |        |             |   |              |        |  |   |   |         | 783.4 |      |   |         |  |   |   |         | 783.4 |      
|                                                                                                                | Selling, general and administrative expenses |                                       |        | 22.1   |       |          |        |      |   |              |        |             |   |              |        |  |   |   |         | 224.3 |      |   |         |  |   |   |         | 246.4 |      
|                                                                                                                | Impairment and restructuring charges         |                                       |        |       |       |          |        |      |   |              |        |             |   |              |        |  |   |   |         | 100.2 |      |   |         |  |   |   |         | 100.2 |      
|                                                                                                                |                                              |                                       |        |        |       |          |        |       |   |              |        |              |   |              |        |   |   |   |         |       |      |   |         |   |   |   |         |      
|                                                                                                                |                                              | Operating income (loss)               |        |        | (22.1 | )        |        |       |  |              |        |              |  |              |        |   |  |   |         |       | (0.8 | ) |         |   |  |   |         |       | (22.9 | )
|Interest expense                                                                                                |                                              |                                       | (43.3  | )      |       |          | (40.7  | )     |   |              |       |              |   |              |       |   |   |   | (4.8    | )     |      |   |        |   |   |   | (88.8   | )    
|Interest income                                                                                                 |                                              |                                       | 23.3   |        |       |          |       |       |   |              |       |              |   |              |       |   |   |   | 1.9     |       |      |   |        |   |   |   | 25.2    |      
|Intercompany interest income (expense), net                                                                     |                                              |                                       | (28.0  | )      |       |          | 61.4   |       |   |              |       |              |   |              |       |   |   |   | (33.4   | )     |      |   |        |   |   |   |        |      
|Management fee income (expense)                                                                                 |                                              |                                       | 72.3   |        |       |          | (61.6  | )     |   |              |       |              |   |              | 61.6   |   |   |   | (72.3   | )     |      |   |        |   |   |   |        |      
|Equity in earnings (losses) of investees, net                                                                   |                                              |                                       | (25.1  | )      |       |          | (78.3  | )     |   |              | (3.5   | )            |   |              | (126.7 | ) |   |   | (1.4    | )     |      |   | 233.6   |   |   |   | (1.4    | )    
|Minority interest income (expense)                                                                              |                                              |                                       | (61.6  | )      |       |          |       |       |   |              |       |              |   |              | 61.6   |   |   |   |        |       |      |   |        |   |   |   |        |      
|Other expense, net                                                                                              |                                              |                                       | (74.4  | )      |       |          | (0.4   | )     |   |              |       |              |   |              |       |   |   |   | (22.4   | )     |      |   |        |   |   |   | (97.2   | )    
|                                                                                                                |                                              |                                       |        |        |       |          |        |       |   |              |        |              |   |              |        |   |   |   |         |       |      |   |         |   |   |   |         |      
|Income (losses) before income taxes,
    discontinued operations and cumulative effect of accounting
    change |                                              |                                       | (158.9 | )      |       |          | (119.6 | )     |   |              | (3.5   | )            |   |              | (3.5   | ) |   |   | (133.2  | )     |      |   | 233.6   |   |   |   | (185.1  | )    
|Benefit (provision) for income taxes                                                                            |                                              |                                       | (21.6  | )      |       |          | (7.1   | )     |   |              |       |              |   |              |       |   |   |   | 34.0    |       |      |   |        |   |   |   | 5.3     |      
|                                                                                                                |                                              |                                       |        |        |       |          |        |       |   |              |        |              |   |              |        |   |   |   |         |       |      |   |         |   |   |   |         |      
|Income (loss) from continuing operations                                                                        |                                              |                                       | (180.5 | )      |       |          | (126.7 | )     |   |              | (3.5   | )            |   |              | (3.5   | ) |   |   | (99.2   | )     |      |   | 233.6   |   |   |   | (179.8  | )    
|Income (loss) from discontinued operations                                                                      |                                              |                                       | (344.1 | )      |       |          | (239.8 | )     |   |              | (239.8 | )            |   |              | (239.8 | ) |   |   | (344.1  | )     |      |   | 1,063.5 |   |   |   | (344.1  | )    
|Cumulative effect of accounting change, net                                                                     |                                              |                                       |       |        |       |          |       |       |   |              |       |              |   |              |       |   |   |   | (0.7    | )     |      |   |        |   |   |   | (0.7    | )    
|                                                                                                                |                                              |                                       |        |        |       |          |        |       |   |              |        |              |   |              |        |   |   |   |         |       |      |   |         |   |   |   |         |      
|Net income (loss)                                                                                               |                                              | $                                     | (524.6 | )      |       | $        | (366.5 | )     |   | $            | (243.3 | )            |   | $            | (243.3 | ) |   | $ | (444.0  | )     |      | $ | 1,297.1 |   |   | $ | (524.6  | )    
|                                                                                                                |                                              |                                       |        |        |       |          |        |       |   |              |        |              |   |              |        |   |   |   |         |       |      |   |         |   |   |   |         |      

71



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##### Table of Contents



U.S. INDUSTRIES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

|                                                                                                                |                                              |                                       |       |        |       |          |       |       |     |              |      |              |   |              |       |   |   |   |         |         |      |   |        |   |   |   |         |         |      | 
|--------------------------------------------------------------------------------------------------------------- | -------------------------------------------- | ------------------------------------- | ----- | ------ | ----- | -------- | ----- | ----- | --- | ------------ | ---- | ------------ | - | ------------ | ----- | - | - | - | ------- | ------- | ---- | - | ------ | - | - | - | ------- | ------- | ---- | 
|                                                                                                                |                                              |                                      
|                                                                                                                |                                              | For the Year Ended September 30, 2000
|                                                                                                                |                                              |                                      
|                                                                                                                |                                              |                                       |       | USI    |       | USI      |       |       |     | Other        |      |             
|                                                                                                                |                                              | USI                                   |       | Global |       | Atlantic |       | USIAH |     | Subsidiaries |      | Eliminations |   | Consolidated
|                                                                                                                |                                              |                                       |       |        |       |          |       |       |     |              |      |              |   |             
|Net sales                                                                                                       |                                              | $                                     |      |        |       | $        |      |       |     | $            |     |              |   | $            |      |   |   | $ | 1,724.9 |         |      | $ |       |   |   | $ | 1,724.9 |        
|Operating costs and expenses:                                                                                   |                                              |                                       |       |        |       |          |       |       |     |              |      |              |   |              |       |   |   |   |         |         |      |   |        |   |   |   |         |        
|                                                                                                                | Cost of products sold                        |                                       |       |       |       |          |       |      |     |              |      |             |   |              |       |  |   |   |         | 1,250.8 |      |   |        |  |   |   |         | 1,250.8 |     
|                                                                                                                | Selling, general and administrative expenses |                                       |       | 16.3   |       |          |       | (0.8  | )   |              |      |             |   |              |       |  |   |   |         | 314.6   |      |   |        |  |   |   |         | 330.1   |     
|                                                                                                                | Impairment and restructuring charges         |                                       |       |       |       |          |       |      |     |              |      |             |   |              |       |  |   |   |         | 60.2    |      |   |        |  |   |   |         | 60.2    |     
|                                                                                                                |                                              |                                       |       |        |       |          |       |       |     |              |      |              |   |              |       |   |   |   |         |         |      |   |        |   |   |   |         |        
|                                                                                                                |                                              | Operating income (loss)               |       |        | (16.3 | )        |       |       | 0.8 |              |      |              |  |              |       |   |  |   |         |         | 99.3 |   |        |   |  |   |         |         | 83.8 | 
|Interest expense                                                                                                |                                              |                                       | (40.0 | )      |       |          | (40.3 | )     |     |              |     |              |   |              |      |   |   |   | (5.0    | )       |      |   |       |   |   |   | (85.3   | )      
|Interest income                                                                                                 |                                              |                                       | 13.1  |        |       |          |      |       |     |              |     |              |   |              |      |   |   |   | 3.6     |         |      |   |       |   |   |   | 16.7    |        
|Intercompany interest income (expense), net                                                                     |                                              |                                       | 9.6   |        |       |          | 51.1  |       |     |              |     |              |   |              |      |   |   |   | (60.7   | )       |      |   |       |   |   |   |        |        
|Management fee income (expense)                                                                                 |                                              |                                       | 25.1  |        |       |          | (61.6 | )     |     |              |     |              |   |              | 61.6  |   |   |   | (25.1   | )       |      |   |       |   |   |   |        |        
|Gain (loss) on sale of businesses                                                                               |                                              |                                       | (2.8  | )      |       |          |      |       |     |              |     |              |   |              |      |   |   |   | 42.1    |         |      |   |       |   |   |   | 39.3    |        
|Equity in earnings (losses) of investees, net                                                                   |                                              |                                       | 23.0  |        |       |          | 67.0  |       |     |              | 63.2 |              |   |              | 12.9  |   |   |   | 3.1     |         |      |   | (166.1 | ) |   |   | 3.1     |        
|Minority interest income (expense)                                                                              |                                              |                                       | 11.3  |        |       |          |      |       |     |              |     |              |   |              | (11.3 | ) |   |   |        |         |      |   |       |   |   |   |        |        
|Other expense, net                                                                                              |                                              |                                       |      |        |       |          |      |       |     |              |     |              |   |              |      |   |   |   | (4.7    | )       |      |   |       |   |   |   | (4.7    | )      
|                                                                                                                |                                              |                                       |       |        |       |          |       |       |     |              |      |              |   |              |       |   |   |   |         |         |      |   |        |   |   |   |         |        
|Income (losses) before income taxes,
    discontinued operations and cumulative effect of accounting
    change |                                              |                                       | 23.0  |        |       |          | 17.0  |       |     |              | 63.2 |              |   |              | 63.2  |   |   |   | 52.6    |         |      |   | (166.1 | ) |   |   | 52.9    |        
|Benefit (provision) for income taxes                                                                            |                                              |                                       | 15.7  |        |       |          | (4.1  | )     |     |              |     |              |   |              |      |   |   |   | (25.8   | )       |      |   |       |   |   |   | (14.2   | )      
|                                                                                                                |                                              |                                       |       |        |       |          |       |       |     |              |      |              |   |              |       |   |   |   |         |         |      |   |        |   |   |   |         |        
|Income (loss) from continuing operations                                                                        |                                              |                                       | 38.7  |        |       |          | 12.9  |       |     |              | 63.2 |              |   |              | 63.2  |   |   |   | 26.8    |         |      |   | (166.1 | ) |   |   | 38.7    |        
|Income (loss) from discontinued operations                                                                      |                                              |                                       | (3.1  | )      |       |          | (1.6  | )     |     |              | (1.6 | )            |   |              | (1.6  | ) |   |   | (3.1    | )       |      |   | 7.9    |   |   |   | (3.1    | )      
|                                                                                                                |                                              |                                       |       |        |       |          |       |       |     |              |      |              |   |              |       |   |   |   |         |         |      |   |        |   |   |   |         |        
|Net income (loss)                                                                                               |                                              | $                                     | 35.6  |        |       | $        | 11.3  |       |     | $            | 61.6 |              |   | $            | 61.6  |   |   | $ | 23.7    |         |      | $ | (158.2 | ) |   | $ | 35.6    |        
|                                                                                                                |                                              |                                       |       |        |       |          |       |       |     |              |      |              |   |              |       |   |   |   |         |         |      |   |        |   |   |   |         |        

72



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##### Table of Contents



U.S. INDUSTRIES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

|                                         |                                                |                                            |         |        |       |          |       |       |       |              |       |              |       |              |       |   |       |  |         |       |         |  |          |   |          |   |       |       |         | 
|---------------------------------------- | ---------------------------------------------- | ------------------------------------------ | ------- | ------ | ----- | -------- | ----- | ----- | ----- | ------------ | ----- | ------------ | ----- | ------------ | ----- | - | ----- |  | ------- | ----- | ------- |  | -------- | - | -------- | - | ----- | ----- | ------- | 
|                                         |                                                |                                           
|                                         |                                                | At September 30, 2002                     
|                                         |                                                |                                           
|                                         |                                                |                                            |         | USI    |       | USI      |       |       |       | Other        |       |             
|                                         |                                                | USI                                        |         | Global |       | Atlantic |       | USIAH |       | Subsidiaries |       | Eliminations |       | Consolidated
|                                         |                                                |                                            |         |        |       |          |       |       |       |              |       |              |       |             
|ASSETS                                  
|Current assets:                          |                                                |                                            |         |        |       |          |       |       |       |              |       |              |       |              |       |   |       |  |         |       |         |  |          |   |          |   |       |      
|                                         | Cash and cash equivalents                      |                                            | $       | 0.3    |       |          | $     |      |       |              | $     |             |       |              | $     |  |       |  | $       | 31.8  |         |  | $        |  |          |   | $     | 32.1  |        
|                                         | Restricted cash collateral accounts            |                                            |         | 98.2   |       |          |       | 44.7  |       |              |       |             |       |              |       |  |       |  |         |      |         |  |          |  |          |   |       | 142.9 |        
|                                         | Trade receivables, net                         |                                            |         |       |       |          |       |      |       |              |       |             |       |              |       |  |       |  |         | 230.7 |         |  |          |  |          |   |       | 230.7 |        
|                                         | Inventories                                    |                                            |         |       |       |          |       |      |       |              |       |             |       |              |       |  |       |  |         | 183.0 |         |  |          |  |          |   |       | 183.0 |        
|                                         | Deferred income taxes                          |                                            |         | 47.0   |       |          |       | (12.4 | )     |              |       |             |       |              |       |  |       |  |         | (3.6  | )       |  |          |  |          |   |       | 31.0  |        
|                                         | Net assets held for sale                       |                                            |         |       |       |          |       |      |       |              |       |             |       |              |       |  |       |  |         | 103.8 |         |  |          |  |          |   |       | 103.8 |        
|                                         | Income tax receivable                          |                                            |         | 37.2   |       |          |       |      |       |              |       |             |       |              |       |  |       |  |         |      |         |  |          |  |          |   |       | 37.2  |        
|                                         | Other current assets                           |                                            |         | 5.8    |       |          |       | 0.2   |       |              |       |             |       |              |       |  |       |  |         | 18.6  |         |  |          |  |          |   |       | 24.6  |        
|                                         |                                                |                                            |         |        |       |          |       |       |       |              |       |              |       |              |       |   |       |  |         |       |         |  |          |   |          |   |       |      
|                                         |                                                | Total current assets                       |         |        | 188.5 |          |       |       | 32.5  |              |       |              |      |              |       |   |      |  |         |       | 564.3   |  |          |   |         |   |       |       | 785.3   | 
|Restricted cash collateral accounts      |                                                |                                            | 15.4    |        |       |          |      |       |       |              |      |              |       |              |      |   |       |  |        |       |         |  |         |   |          |   | 15.4  |      
|Property, plant and equipment, net       |                                                |                                            | 0.6     |        |       |          |      |       |       |              |      |              |       |              |      |   |       |  | 143.7   |       |         |  |         |   |          |   | 144.3 |      
|Pension assets                           |                                                |                                            | 70.9    |        |       |          |      |       |       |              |      |              |       |              |      |   |       |  | 69.5    |       |         |  |         |   |          |   | 140.4 |      
|Insurance for asbestos claims            |                                                |                                            |        |        |       |          |      |       |       |              |      |              |       |              |      |   |       |  | 145.0   |       |         |  |         |   |          |   | 145.0 |      
|Other assets                             |                                                |                                            | 5.8     |        |       |          | 2.0   |       |       |              |      |              |       |              |      |   |       |  | 27.1    |       |         |  |         |   |          |   | 34.9  |      
|Goodwill and other intangibles, net      |                                                |                                            |        |        |       |          |      |       |       |              |      |              |       |              |      |   |       |  | 310.0   |       |         |  |         |   |          |   | 310.0 |      
|Investments in subsidiaries              |                                                |                                            | 1,046.4 |        |       |          | 889.1 |       |       |              | 696.6 |              |       |              | 659.4 |   |       |  |        |       |         |  | (3,291.5 | ) |          |   |      |      
|Intercompany receivable (payable), net   |                                                |                                            | (573.1  | )      |       |          | (8.2  | )     |       |              |      |              |       |              | 190.3 |   |       |  | 391.0   |       |         |  |         |   |          |   |      |      
|                                         |                                                |                                            |         |        |       |          |       |       |       |              |       |              |       |              |       |   |       |  |         |       |         |  |          |   |          |   |       |      
|                                         |                                                | Total assets                               |         | $      | 754.5 |          |       | $     | 915.4 |              |       | $            | 696.6 |              |       | $ | 849.7 |  |         | $     | 1,650.6 |  |          | $ | (3,291.5 | ) |       | $     | 1,575.3 | 
|                                         |                                                |                                            |         |        |       |          |       |       |       |              |       |              |       |              |       |   |       |  |         |       |         |  |          |   |          |   |       |      
|LIABILITIES AND STOCKHOLDERS
    EQUITY
|Current liabilities:                     |                                                |                                            |         |        |       |          |       |       |       |              |       |              |       |              |       |   |       |  |         |       |         |  |          |   |          |   |       |      
|                                         | Notes payable                                  |                                            | $       |       |       |          | $     |      |       |              | $     |             |       |              | $     |  |       |  | $       | 15.3  |         |  | $        |  |          |   | $     | 15.3  |        
|                                         | Current maturities of long-term debt           |                                            |         | 198.0  |       |          |       | 54.5  |       |              |       |             |       |              |       |  |       |  |         | 23.4  |         |  |          |  |          |   |       | 275.9 |        
|                                         | Trade accounts payable                         |                                            |         |       |       |          |       |      |       |              |       |             |       |              |       |  |       |  |         | 99.5  |         |  |          |  |          |   |       | 99.5  |        
|                                         | Accrued expenses and other current liabilities |                                            |         | 32.2   |       |          |       | 3.9   |       |              |       |             |       |              |       |  |       |  |         | 95.6  |         |  |          |  |          |   |       | 131.7 |        
|                                         |                                                |                                            |         |        |       |          |       |       |       |              |       |              |       |              |       |   |       |  |         |       |         |  |          |   |          |   |       |      
|                                         |                                                | Total current liabilities                  |         |        | 230.2 |          |       |       | 58.4  |              |       |              |      |              |       |   |      |  |         |       | 233.8   |  |          |   |         |   |       |       | 522.4   | 
|Long-term debt                           |                                                |                                            | 241.0   |        |       |          | 197.6 |       |       |              |      |              |       |              |      |   |       |  | 78.3    |       |         |  |         |   |          |   | 516.9 |      
|Minority interest                        |                                                |                                            |        |        |       |          |      |       |       |              |      |              |       |              | 153.1 |   |       |  |        |       |         |  | (153.1   | ) |          |   |      |      
|Deferred income taxes                    |                                                |                                            | 5.2     |        |       |          |      |       |       |              |      |              |       |              |      |   |       |  | 12.7    |       |         |  |         |   |          |   | 17.9  |      
|Asbestos claims                          |                                                |                                            |        |        |       |          |      |       |       |              |      |              |       |              |      |   |       |  | 145.0   |       |         |  |         |   |          |   | 145.0 |      
|Other liabilities                        |                                                |                                            | 40.4    |        |       |          |      |       |       |              |      |              |       |              |      |   |       |  | 95.0    |       |         |  |         |   |          |   | 135.4 |      
|                                         |                                                |                                            |         |        |       |          |       |       |       |              |       |              |       |              |       |   |       |  |         |       |         |  |          |   |          |   |       |      
|                                         |                                                | Total liabilities                          |         |        | 516.8 |          |       |       | 256.0 |              |       |              |      |              |       |   | 153.1 |  |         |       | 564.8   |  |          |   | (153.1   | ) |       |       | 1,337.6 | 
|Stockholders equity                     |                                                |                                            | 237.7   |        |       |          | 659.4 |       |       |              | 696.6 |              |       |              | 696.6 |   |       |  | 1,085.8 |       |         |  | (3,138.4 | ) |          |   | 237.7 |      
|                                         |                                                |                                            |         |        |       |          |       |       |       |              |       |              |       |              |       |   |       |  |         |       |         |  |          |   |          |   |       |      
|                                         |                                                | Total liabilities and stockholders equity |         | $      | 754.5 |          |       | $     | 915.4 |              |       | $            | 696.6 |              |       | $ | 849.7 |  |         | $     | 1,650.6 |  |          | $ | (3,291.5 | ) |       | $     | 1,575.3 | 
|                                         |                                                |                                            |         |        |       |          |       |       |       |              |       |              |       |              |       |   |       |  |         |       |         |  |          |   |          |   |       |      

73



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##### Table of Contents



U.S. INDUSTRIES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

|                                         |                                                |                                            |         |        |       |          |       |       |         |              |       |              |       |              |       |   |       |  |         |       |         |  |          |   |          |   |       |       |         | 
|---------------------------------------- | ---------------------------------------------- | ------------------------------------------ | ------- | ------ | ----- | -------- | ----- | ----- | ------- | ------------ | ----- | ------------ | ----- | ------------ | ----- | - | ----- |  | ------- | ----- | ------- |  | -------- | - | -------- | - | ----- | ----- | ------- | 
|                                         |                                                |                                           
|                                         |                                                | At September 30, 2001                     
|                                         |                                                |                                           
|                                         |                                                |                                            |         | USI    |       | USI      |       |       |         | Other        |       |             
|                                         |                                                | USI                                        |         | Global |       | Atlantic |       | USIAH |         | Subsidiaries |       | Eliminations |       | Consolidated
|                                         |                                                |                                            |         |        |       |          |       |       |         |              |       |              |       |             
|ASSETS                                  
|Current assets:                          |                                                |                                            |         |        |       |          |       |       |         |              |       |              |       |              |       |   |       |  |         |       |         |  |          |   |          |   |       |      
|                                         | Cash and cash equivalents                      |                                            | $       | (0.3   | )     |          | $     |      |         |              | $     |             |       |              | $     |  |       |  | $       | 65.5  |         |  | $        |  |          |   | $     | 65.2  |        
|                                         | Restricted cash collateral accounts            |                                            |         |       |       |          |       |      |         |              |       |             |       |              |       |  |       |  |         |      |         |  |          |  |          |   |       |      |        
|                                         | Trade receivables, net                         |                                            |         |       |       |          |       |      |         |              |       |             |       |              |       |  |       |  |         | 228.8 |         |  |          |  |          |   |       | 228.8 |        
|                                         | Inventories                                    |                                            |         |       |       |          |       |      |         |              |       |             |       |              |       |  |       |  |         | 191.0 |         |  |          |  |          |   |       | 191.0 |        
|                                         | Deferred income taxes                          |                                            |         | 22.2   |       |          |       | (12.4 | )       |              |       |             |       |              |       |  |       |  |         | (3.6  | )       |  |          |  |          |   |       | 6.2   |        
|                                         | Net assets held for sale                       |                                            |         |       |       |          |       |      |         |              |       |             |       |              |       |  |       |  |         | 491.6 |         |  |          |  |          |   |       | 491.6 |        
|                                         | Income tax receivable                          |                                            |         | 6.8    |       |          |       |      |         |              |       |             |       |              |       |  |       |  |         |      |         |  |          |  |          |   |       | 6.8   |        
|                                         | Other current assets                           |                                            |         | 118.7  |       |          |       |      |         |              |       |             |       |              |       |  |       |  |         | 18.7  |         |  |          |  |          |   |       | 137.4 |        
|                                         |                                                |                                            |         |        |       |          |       |       |         |              |       |              |       |              |       |   |       |  |         |       |         |  |          |   |          |   |       |      
|                                         |                                                | Total current assets                       |         |        | 147.4 |          |       |       | (12.4   | )            |       |              |      |              |       |   |      |  |         |       | 992.0   |  |          |   |         |   |       |       | 1,127.0 | 
|Restricted cash collateral accounts      |                                                |                                            | 4.4     |        |       |          |      |       |         |              |      |              |       |              |      |   |       |  |        |       |         |  |         |   |          |   | 4.4   |      
|Property, plant and equipment, net       |                                                |                                            | 0.6     |        |       |          |      |       |         |              |      |              |       |              |      |   |       |  | 157.9   |       |         |  |         |   |          |   | 158.5 |      
|Pension assets                           |                                                |                                            | 7.2     |        |       |          |      |       |         |              |      |              |       |              |      |   |       |  | 144.9   |       |         |  |         |   |          |   | 152.1 |      
|Insurance for asbestos claims            |                                                |                                            |        |        |       |          |      |       |         |              |      |              |       |              |      |   |       |  | 107.0   |       |         |  |         |   |          |   | 107.0 |      
|Other assets                             |                                                |                                            | 4.8     |        |       |          | 0.2   |       |         |              |      |              |       |              |      |   |       |  | 27.2    |       |         |  |         |   |          |   | 32.2  |      
|Goodwill and other intangibles, net      |                                                |                                            |        |        |       |          |      |       |         |              |      |              |       |              |      |   |       |  | 302.4   |       |         |  |         |   |          |   | 302.4 |      
|Investments in subsidiaries              |                                                |                                            | 1,168.9 |        |       |          | 687.6 |       |         |              | 647.7 |              |       |              | 652.4 |   |       |  |        |       |         |  | (3,156.6 | ) |          |   |      |      
|Intercompany receivable (payable), net   |                                                |                                            | (592.3  | )      |       |          | 524.3 |       |         |              |      |              |       |              | 128.7 |   |       |  | (60.7   | )     |         |  |         |   |          |   |      |      
|                                         |                                                |                                            |         |        |       |          |       |       |         |              |       |              |       |              |       |   |       |  |         |       |         |  |          |   |          |   |       |      
|                                         |                                                | Total assets                               |         | $      | 741.0 |          |       | $     | 1,199.7 |              |       | $            | 647.7 |              |       | $ | 781.1 |  |         | $     | 1,670.7 |  |          | $ | (3,156.6 | ) |       | $     | 1,883.6 | 
|                                         |                                                |                                            |         |        |       |          |       |       |         |              |       |              |       |              |       |   |       |  |         |       |         |  |          |   |          |   |       |      
|LIABILITIES AND STOCKHOLDERS
    EQUITY
|Current liabilities:                     |                                                |                                            |         |        |       |          |       |       |         |              |       |              |       |              |       |   |       |  |         |       |         |  |          |   |          |   |       |      
|                                         | Notes payable                                  |                                            | $       |       |       |          | $     |      |         |              | $     |             |       |              | $     |  |       |  | $       | 12.0  |         |  | $        |  |          |   | $     | 12.0  |        
|                                         | Current maturities of long-term debt           |                                            |         | 189.1  |       |          |       | 236.3 |         |              |       |             |       |              |       |  |       |  |         | 11.1  |         |  |          |  |          |   |       | 436.5 |        
|                                         | Trade accounts payable                         |                                            |         | 0.7    |       |          |       |      |         |              |       |             |       |              |       |  |       |  |         | 100.6 |         |  |          |  |          |   |       | 101.3 |        
|                                         | Accrued expenses and other current liabilities |                                            |         | 18.5   |       |          |       | 5.5   |         |              |       |             |       |              |       |  |       |  |         | 99.5  |         |  |          |  |          |   |       | 123.5 |        
|                                         |                                                |                                            |         |        |       |          |       |       |         |              |       |              |       |              |       |   |       |  |         |       |         |  |          |   |          |   |       |      
|                                         |                                                | Total current liabilities                  |         |        | 208.3 |          |       |       | 241.8   |              |       |              |      |              |       |   |      |  |         |       | 223.2   |  |          |   |         |   |       |       | 673.3   | 
|Long-term debt                           |                                                |                                            | 307.3   |        |       |          | 305.5 |       |         |              |      |              |       |              |      |   |       |  | 165.5   |       |         |  |         |   |          |   | 778.3 |      
|Minority interest                        |                                                |                                            |        |        |       |          |      |       |         |              |      |              |       |              | 133.4 |   |       |  |        |       |         |  | (133.4   | ) |          |   |      |      
|Deferred income taxes                    |                                                |                                            | (0.9    | )      |       |          |      |       |         |              |      |              |       |              |      |   |       |  | 13.4    |       |         |  |         |   |          |   | 12.5  |      
|Asbestos claims                          |                                                |                                            |        |        |       |          |      |       |         |              |      |              |       |              |      |   |       |  | 107.0   |       |         |  |         |   |          |   | 107.0 |      
|Other liabilities                        |                                                |                                            | 26.7    |        |       |          |      |       |         |              |      |              |       |              |      |   |       |  | 86.2    |       |         |  |         |   |          |   | 112.9 |      
|                                         |                                                |                                            |         |        |       |          |       |       |         |              |       |              |       |              |       |   |       |  |         |       |         |  |          |   |          |   |       |      
|                                         |                                                | Total liabilities                          |         |        | 541.4 |          |       |       | 547.3   |              |       |              |      |              |       |   | 133.4 |  |         |       | 595.3   |  |          |   | (133.4   | ) |       |       | 1,684.0 | 
|Stockholders equity                     |                                                |                                            | 199.6   |        |       |          | 652.4 |       |         |              | 647.7 |              |       |              | 647.7 |   |       |  | 1,075.4 |       |         |  | (3,023.2 | ) |          |   | 199.6 |      
|                                         |                                                |                                            |         |        |       |          |       |       |         |              |       |              |       |              |       |   |       |  |         |       |         |  |          |   |          |   |       |      
|                                         |                                                | Total liabilities and stockholders equity |         | $      | 741.0 |          |       | $     | 1,199.7 |              |       | $            | 647.7 |              |       | $ | 781.1 |  |         | $     | 1,670.7 |  |          | $ | (3,156.6 | ) |       | $     | 1,883.6 | 
|                                         |                                                |                                            |         |        |       |          |       |       |         |              |       |              |       |              |       |   |       |  |         |       |         |  |          |   |          |   |       |      

74



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##### Table of Contents



U.S. INDUSTRIES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

|                                                                 |  |                                       |        |        |  |          |        |       |  |              |   |              |  |              |   |  |  |   |        |   |  |   |       |   |  |   |        |  
|---------------------------------------------------------------- |  | ------------------------------------- | ------ | ------ |  | -------- | ------ | ----- |  | ------------ | - | ------------ |  | ------------ | - |  |  | - | ------ | - |  | - | ----- | - |  | - | ------ | -
|                                                                 |  |                                      
|                                                                 |  | For the Year Ended September 30, 2002
|                                                                 |  |                                      
|                                                                 |  |                                       |        | USI    |  | USI      |        |       |  | Other        |   |             
|                                                                 |  | USI                                   |        | Global |  | Atlantic |        | USIAH |  | Subsidiaries |   | Eliminations |  | Consolidated
|                                                                 |  |                                       |        |        |  |          |        |       |  |              |   |              |  |             
|NET CASH (USED IN) PROVIDED BY OPERATING
    ACTIVITIES          |  | $                                     | (62.7  | )      |  | $        | 16.7   |       |  | $            |  |              |  | $            |  |  |  | $ | 106.5  |   |  | $ |      |   |  | $ | 60.5   |  
|INVESTING ACTIVITIES:                                            |  |                                       |        |        |  |          |        |       |  |              |   |              |  |              |   |  |  |   |        |   |  |   |       |   |  |   |        |  
|Proceeds from sale of businesses                                 |  |                                       |       |        |  |          |       |       |  |              |  |              |  |              |  |  |  |   | 388.2  |   |  |   |      |   |  |   | 388.2  |  
|Proceeds from sale of Strategic Notes                            |  |                                       | 105.9  |        |  |          |       |       |  |              |  |              |  |              |  |  |  |   |       |   |  |   |      |   |  |   | 105.9  |  
|Purchases of property, plant and equipment                       |  |                                       |       |        |  |          |       |       |  |              |  |              |  |              |  |  |  |   | (15.6  | ) |  |   |      |   |  |   | (15.6  | )
|Proceeds from sale of property, plant and
    equipment          |  |                                       |       |        |  |          |       |       |  |              |  |              |  |              |  |  |  |   | 1.5    |   |  |   |      |   |  |   | 1.5    |  
|Proceeds from sale of excess real estate                         |  |                                       |       |        |  |          |       |       |  |              |  |              |  |              |  |  |  |   | 0.5    |   |  |   |      |   |  |   | 0.5    |  
|Net transfers with subsidiaries                                  |  |                                       | 123.0  |        |  |          | 442.8  |       |  |              |  |              |  |              |  |  |  |   | (636.1 | ) |  |   | 70.3  |   |  |   |       |  
|Other investing activities, net                                  |  |                                       |       |        |  |          |       |       |  |              |  |              |  |              |  |  |  |   | 1.3    |   |  |   |      |   |  |   | 1.3    |  
|                                                                 |  |                                       |        |        |  |          |        |       |  |              |   |              |  |              |   |  |  |   |        |   |  |   |       |   |  |   |        |  
|NET CASH (USED IN) PROVIDED BY INVESTING
    ACTIVITIES          |  |                                       | 228.9  |        |  |          | 442.8  |       |  |              |  |              |  |              |  |  |  |   | (260.2 | ) |  |   | 70.3  |   |  |   | 481.8  |  
|FINANCING ACTIVITIES:                                            |  |                                       |        |        |  |          |        |       |  |              |   |              |  |              |   |  |  |   |        |   |  |   |       |   |  |   |        |  
|Proceeds from long-term debt                                     |  |                                       | 67.2   |        |  |          |       |       |  |              |  |              |  |              |  |  |  |   | 5.3    |   |  |   |      |   |  |   | 72.5   |  
|Repayment of long-term debt                                      |  |                                       | (125.0 | )      |  |          | (290.0 | )     |  |              |  |              |  |              |  |  |  |   | (83.3  | ) |  |   |      |   |  |   | (498.3 | )
|Escrow deposits                                                  |  |                                       | (108.3 | )      |  |          | (44.4  | )     |  |              |  |              |  |              |  |  |  |   |       |   |  |   |      |   |  |   | (152.7 | )
|Proceeds from notes payable, net                                 |  |                                       |       |        |  |          |       |       |  |              |  |              |  |              |  |  |  |   | 2.6    |   |  |   |      |   |  |   | 2.6    |  
|Net transfers with parent                                        |  |                                       |       |        |  |          | (123.0 | )     |  |              |  |              |  |              |  |  |  |   | 193.3  |   |  |   | (70.3 | ) |  |   |       |  
|                                                                 |  |                                       |        |        |  |          |        |       |  |              |   |              |  |              |   |  |  |   |        |   |  |   |       |   |  |   |        |  
|NET CASH USED IN FINANCING ACTIVITIES                            |  |                                       | (166.1 | )      |  |          | (457.4 | )     |  |              |  |              |  |              |  |  |  |   | 117.9  |   |  |   | (70.3 | ) |  |   | (575.9 | )
|Effect of exchange rate changes on cash and cash
    equivalents |  |                                       | 0.5    |        |  |          | (2.1   | )     |  |              |  |              |  |              |  |  |  |   | 2.1    |   |  |   |      |   |  |   | 0.5    |  
|                                                                 |  |                                       |        |        |  |          |        |       |  |              |   |              |  |              |   |  |  |   |        |   |  |   |       |   |  |   |        |  
|INCREASE (DECREASE) IN CASH AND CASH
    EQUIVALENTS             |  |                                       | 0.6    |        |  |          |       |       |  |              |  |              |  |              |  |  |  |   | (33.7  | ) |  |   |      |   |  |   | (33.1  | )
|CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR                   |  |                                       | (0.3   | )      |  |          |       |       |  |              |  |              |  |              |  |  |  |   | 65.5   |   |  |   |      |   |  |   | 65.2   |  
|                                                                 |  |                                       |        |        |  |          |        |       |  |              |   |              |  |              |   |  |  |   |        |   |  |   |       |   |  |   |        |  
|CASH AND CASH EQUIVALENTS AT END OF YEAR                         |  | $                                     | 0.3    |        |  | $        |       |       |  | $            |  |              |  | $            |  |  |  | $ | 31.8   |   |  | $ |      |   |  | $ | 32.1   |  
|                                                                 |  |                                       |        |        |  |          |        |       |  |              |   |              |  |              |   |  |  |   |        |   |  |   |       |   |  |   |        |  

75



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##### Table of Contents



U.S. INDUSTRIES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

|                                                                 |  |                                       |          |        |  |          |        |       |  |              |   |              |  |              |   |  |  |   |        |   |  |   |       |   |  |   |          |  
|---------------------------------------------------------------- |  | ------------------------------------- | -------- | ------ |  | -------- | ------ | ----- |  | ------------ | - | ------------ |  | ------------ | - |  |  | - | ------ | - |  | - | ----- | - |  | - | -------- | -
|                                                                 |  |                                      
|                                                                 |  | For the Year Ended September 30, 2001
|                                                                 |  |                                      
|                                                                 |  |                                       |          | USI    |  | USI      |        |       |  | Other        |   |             
|                                                                 |  | USI                                   |          | Global |  | Atlantic |        | USIAH |  | Subsidiaries |   | Eliminations |  | Consolidated
|                                                                 |  |                                       |          |        |  |          |        |       |  |              |   |              |  |             
|NET CASH (USED IN) PROVIDED BY OPERATING
    ACTIVITIES          |  | $                                     | (23.1    | )      |  | $        | 13.4   |       |  | $            |  |              |  | $            |  |  |  | $ | 106.2  |   |  | $ |      |   |  | $ | 96.5     |  
|INVESTING ACTIVITIES:                                            |  |                                       |          |        |  |          |        |       |  |              |   |              |  |              |   |  |  |   |        |   |  |   |       |   |  |   |          |  
|Proceeds from sale of businesses                                 |  |                                       |         |        |  |          |       |       |  |              |  |              |  |              |  |  |  |   | 7.5    |   |  |   |      |   |  |   | 7.5      |  
|Purchases of property, plant and equipment                       |  |                                       | (0.3     | )      |  |          |       |       |  |              |  |              |  |              |  |  |  |   | (22.6  | ) |  |   |      |   |  |   | (22.9    | )
|Proceeds from sale of property, plant and
    equipment          |  |                                       |         |        |  |          |       |       |  |              |  |              |  |              |  |  |  |   | 5.5    |   |  |   |      |   |  |   | 5.5      |  
|Proceeds from sale of excess real estate                         |  |                                       |         |        |  |          |       |       |  |              |  |              |  |              |  |  |  |   | 3.2    |   |  |   |      |   |  |   | 3.2      |  
|Net transfers with subsidiaries                                  |  |                                       | 45.8     |        |  |          | 22.0   |       |  |              |  |              |  |              |  |  |  |   | (138.1 | ) |  |   | 70.3  |   |  |   |         |  
|Other investing activities, net                                  |  |                                       |         |        |  |          |       |       |  |              |  |              |  |              |  |  |  |   | (0.7   | ) |  |   |      |   |  |   | (0.7     | )
|                                                                 |  |                                       |          |        |  |          |        |       |  |              |   |              |  |              |   |  |  |   |        |   |  |   |       |   |  |   |          |  
|NET CASH (USED IN) PROVIDED BY INVESTING
    ACTIVITIES          |  |                                       | 45.5     |        |  |          | 22.0   |       |  |              |  |              |  |              |  |  |  |   | (145.2 | ) |  |   | 70.3  |   |  |   | (7.4     | )
|FINANCING ACTIVITIES:                                            |  |                                       |          |        |  |          |        |       |  |              |   |              |  |              |   |  |  |   |        |   |  |   |       |   |  |   |          |  
|Proceeds from long-term debt                                     |  |                                       | 1,297.2  |        |  |          | 238.0  |       |  |              |  |              |  |              |  |  |  |   | 9.4    |   |  |   |      |   |  |   | 1,544.6  |  
|Repayment of long-term debt                                      |  |                                       | (1,265.3 | )      |  |          | (233.9 | )     |  |              |  |              |  |              |  |  |  |   | (15.7  | ) |  |   |      |   |  |   | (1,514.9 | )
|Escrow deposits                                                  |  |                                       | (4.4     | )      |  |          |       |       |  |              |  |              |  |              |  |  |  |   |       |   |  |   |      |   |  |   | (4.4     | )
|Repayment of notes payable, net                                  |  |                                       |         |        |  |          |       |       |  |              |  |              |  |              |  |  |  |   | (13.4  | ) |  |   |      |   |  |   | (13.4    | )
|Payment of dividends                                             |  |                                       | (7.7     | )      |  |          |       |       |  |              |  |              |  |              |  |  |  |   |       |   |  |   |      |   |  |   | (7.7     | )
|Proceeds from exercise of stock options                          |  |                                       | 0.3      |        |  |          |       |       |  |              |  |              |  |              |  |  |  |   |       |   |  |   |      |   |  |   | 0.3      |  
|Purchase of treasury stock                                       |  |                                       | (43.1    | )      |  |          |       |       |  |              |  |              |  |              |  |  |  |   |       |   |  |   |      |   |  |   | (43.1    | )
|Other financing activities, net                                  |  |                                       |         |        |  |          |       |       |  |              |  |              |  |              |  |  |  |   | (0.9   | ) |  |   |      |   |  |   | (0.9     | )
|Net transfers with parent                                        |  |                                       |         |        |  |          | (45.8  | )     |  |              |  |              |  |              |  |  |  |   | 116.1  |   |  |   | (70.3 | ) |  |   |         |  
|                                                                 |  |                                       |          |        |  |          |        |       |  |              |   |              |  |              |   |  |  |   |        |   |  |   |       |   |  |   |          |  
|NET CASH USED IN FINANCING ACTIVITIES                            |  |                                       | (23.0    | )      |  |          | (41.7  | )     |  |              |  |              |  |              |  |  |  |   | 95.5   |   |  |   | (70.3 | ) |  |   | (39.5    | )
|Effect of exchange rate changes on cash and cash
    equivalents |  |                                       | 0.2      |        |  |          | 6.3    |       |  |              |  |              |  |              |  |  |  |   | (15.6  | ) |  |   |      |   |  |   | (9.1     | )
|                                                                 |  |                                       |          |        |  |          |        |       |  |              |   |              |  |              |   |  |  |   |        |   |  |   |       |   |  |   |          |  
|INCREASE (DECREASE) IN CASH AND CASH
    EQUIVALENTS             |  |                                       | (0.4     | )      |  |          |       |       |  |              |  |              |  |              |  |  |  |   | 40.9   |   |  |   |      |   |  |   | 40.5     |  
|CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR                   |  |                                       | 0.1      |        |  |          |       |       |  |              |  |              |  |              |  |  |  |   | 24.6   |   |  |   |      |   |  |   | 24.7     |  
|                                                                 |  |                                       |          |        |  |          |        |       |  |              |   |              |  |              |   |  |  |   |        |   |  |   |       |   |  |   |          |  
|CASH AND CASH EQUIVALENTS AT END OF YEAR                         |  | $                                     | (0.3     | )      |  | $        |       |       |  | $            |  |              |  | $            |  |  |  | $ | 65.5   |   |  | $ |      |   |  | $ | 65.2     |  
|                                                                 |  |                                       |          |        |  |          |        |       |  |              |   |              |  |              |   |  |  |   |        |   |  |   |       |   |  |   |          |  

76



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U.S. INDUSTRIES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

|                                                                 |  |                                       |          |        |  |          |        |       |  |              |   |              |  |              |   |  |  |   |        |   |  |   |       |   |  |   |          |  
|---------------------------------------------------------------- |  | ------------------------------------- | -------- | ------ |  | -------- | ------ | ----- |  | ------------ | - | ------------ |  | ------------ | - |  |  | - | ------ | - |  | - | ----- | - |  | - | -------- | -
|                                                                 |  |                                      
|                                                                 |  | For the Year Ended September 30, 2000
|                                                                 |  |                                      
|                                                                 |  |                                       |          | USI    |  | USI      |        |       |  | Other        |   |             
|                                                                 |  | USI                                   |          | Global |  | Atlantic |        | USIAH |  | Subsidiaries |   | Eliminations |  | Consolidated
|                                                                 |  |                                       |          |        |  |          |        |       |  |              |   |              |  |             
|NET CASH (USED IN) PROVIDED BY OPERATING
    ACTIVITIES          |  | $                                     | 26.0     |        |  | $        | (45.1  | )     |  | $            |  |              |  | $            |  |  |  | $ | (16.4  | ) |  | $ |      |   |  | $ | (35.5    | )
|INVESTING ACTIVITIES:                                            |  |                                       |          |        |  |          |        |       |  |              |   |              |  |              |   |  |  |   |        |   |  |   |       |   |  |   |          |  
|Proceeds from sale of businesses                                 |  |                                       |         |        |  |          |       |       |  |              |  |              |  |              |  |  |  |   | 402.2  |   |  |   |      |   |  |   | 402.2    |  
|Proceeds from sale of Strategic Notes                            |  |                                       | 24.3     |        |  |          |       |       |  |              |  |              |  |              |  |  |  |   |       |   |  |   |      |   |  |   | 24.3     |  
|Acquisition of companies, net of cash acquired                   |  |                                       |         |        |  |          |       |       |  |              |  |              |  |              |  |  |  |   | (78.4  | ) |  |   |      |   |  |   | (78.4    | )
|Purchases of property, plant and equipment                       |  |                                       |         |        |  |          | (0.1   | )     |  |              |  |              |  |              |  |  |  |   | (33.0  | ) |  |   |      |   |  |   | (33.1    | )
|Proceeds from sale of property, plant and
    equipment          |  |                                       |         |        |  |          |       |       |  |              |  |              |  |              |  |  |  |   | 1.2    |   |  |   |      |   |  |   | 1.2      |  
|Proceeds from sale of excess real estate                         |  |                                       |         |        |  |          |       |       |  |              |  |              |  |              |  |  |  |   | 5.5    |   |  |   |      |   |  |   | 5.5      |  
|Net transfers with subsidiaries                                  |  |                                       | 115.2    |        |  |          | 280.6  |       |  |              |  |              |  |              |  |  |  |   | (466.1 | ) |  |   | 70.3  |   |  |   |         |  
|Other investing activities, net                                  |  |                                       |         |        |  |          |       |       |  |              |  |              |  |              |  |  |  |   | 0.3    |   |  |   |      |   |  |   | 0.3      |  
|                                                                 |  |                                       |          |        |  |          |        |       |  |              |   |              |  |              |   |  |  |   |        |   |  |   |       |   |  |   |          |  
|NET CASH (USED IN) PROVIDED BY INVESTING
    ACTIVITIES          |  |                                       | 139.5    |        |  |          | 280.5  |       |  |              |  |              |  |              |  |  |  |   | (168.3 | ) |  |   | 70.3  |   |  |   | 322.0    |  
|FINANCING ACTIVITIES:                                            |  |                                       |          |        |  |          |        |       |  |              |   |              |  |              |   |  |  |   |        |   |  |   |       |   |  |   |          |  
|Proceeds from long-term debt                                     |  |                                       | 3,121.9  |        |  |          | 0.3    |       |  |              |  |              |  |              |  |  |  |   | 5.5    |   |  |   |      |   |  |   | 3,127.7  |  
|Repayment of long-term debt                                      |  |                                       | (3,131.2 | )      |  |          | (120.5 | )     |  |              |  |              |  |              |  |  |  |   | (33.2  | ) |  |   |      |   |  |   | (3,284.9 | )
|Proceeds from notes payable, net                                 |  |                                       |         |        |  |          |       |       |  |              |  |              |  |              |  |  |  |   | 5.5    |   |  |   |      |   |  |   | 5.5      |  
|Payment of dividends                                             |  |                                       | (16.8    | )      |  |          |       |       |  |              |  |              |  |              |  |  |  |   |       |   |  |   |      |   |  |   | (16.8    | )
|Proceeds from exercise of stock options                          |  |                                       | 4.4      |        |  |          |       |       |  |              |  |              |  |              |  |  |  |   |       |   |  |   |      |   |  |   | 4.4      |  
|Purchase of treasury stock                                       |  |                                       | (143.4   | )      |  |          |       |       |  |              |  |              |  |              |  |  |  |   |       |   |  |   |      |   |  |   | (143.4   | )
|Net transfers with parent                                        |  |                                       |         |        |  |          | (115.2 | )     |  |              |  |              |  |              |  |  |  |   | 185.5  |   |  |   | (70.3 | ) |  |   |         |  
|                                                                 |  |                                       |          |        |  |          |        |       |  |              |   |              |  |              |   |  |  |   |        |   |  |   |       |   |  |   |          |  
|NET CASH USED IN FINANCING ACTIVITIES                            |  |                                       | (165.1   | )      |  |          | (235.4 | )     |  |              |  |              |  |              |  |  |  |   | 163.3  |   |  |   | (70.3 | ) |  |   | (307.5   | )
|Effect of exchange rate changes on cash and cash
    equivalents |  |                                       |         |        |  |          |       |       |  |              |  |              |  |              |  |  |  |   | (12.0  | ) |  |   |      |   |  |   | (12.0    | )
|                                                                 |  |                                       |          |        |  |          |        |       |  |              |   |              |  |              |   |  |  |   |        |   |  |   |       |   |  |   |          |  
|INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                 |  |                                       | 0.4      |        |  |          |       |       |  |              |  |              |  |              |  |  |  |   | (33.4  | ) |  |   |      |   |  |   | (33.0    | )
|CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR                   |  |                                       | (0.3     | )      |  |          |       |       |  |              |  |              |  |              |  |  |  |   | 58.0   |   |  |   |      |   |  |   | 57.7     |  
|                                                                 |  |                                       |          |        |  |          |        |       |  |              |   |              |  |              |   |  |  |   |        |   |  |   |       |   |  |   |          |  
|CASH AND CASH EQUIVALENTS AT END OF YEAR                         |  | $                                     | 0.1      |        |  | $        |       |       |  | $            |  |              |  | $            |  |  |  | $ | 24.6   |   |  | $ |      |   |  | $ | 24.7     |  
|                                                                 |  |                                       |          |        |  |          |        |       |  |              |   |              |  |              |   |  |  |   |        |   |  |   |       |   |  |   |          |  

77



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

None.




PART III






|         |                                                       
|-------- | ------------------------------------------------------
|Item 10. | Directors and Executive Officers of the
    Registrant

Information concerning our executive officers is
set forth in Item 1 of this Annual Report on Form 10-K
under the caption Executive Officers.

Information with respect to our directors is
incorporated herein by reference to the information
Election of Directors in the Companys
definitive proxy statement to be filed with the Commission
pursuant to Regulation 14A of the Securities Exchange Act
of 1934 in connection with the 2003 Annual Meeting of
Stockholders to be held on February 20, 2003 (the
Proxy Statement).

Information required by Item 405 of
Regulation S-K is incorporated herein by reference to
Section 16(a) Beneficial Ownership Reporting
Compliance in the Proxy Statement for our 2003 Annual
Meeting of Stockholders.




Item 11.     Executive
Compensation

Information with respect to executive
compensation is incorporated herein by reference to the
information under the caption Executive Officer
Compensation in the Proxy Statement for the Companys
2003 Annual Meeting of Stockholders.






|         |                                                                   
|-------- | ------------------------------------------------------------------
|Item 12. | Security Ownership of Certain Beneficial
    Owners and Management

Information with respect to security ownership of
certain beneficial owners and management is incorporated herein
by reference to the information under the caption
Ownership of Common Stock in the Proxy Statement for
the Companys 2003 Annual Meeting of Stockholders.






|          |                                                   
|--------- | --------------------------------------------------
|Item  13. | Certain Relationships and Related
    Transactions

None.






|          |                        
|--------- | -----------------------
|Item  14. | Controls and Procedures

Within 90 days prior to the date of this
report, the Company, under the supervision and with the
participation of the Companys management, including the
Chief Executive Officer and the Chief Financial Officer,
performed an evaluation of the effectiveness of the
Companys disclosure controls and procedures. Based on this
evaluation, the Companys Chief Executive Officer and Chief
Financial Officer concluded that the Companys disclosure
controls and procedures are effective for gathering, analyzing
and disclosing the information the Company is required to
disclose in the reports it files under the Securities Exchange
Act of 1934, within the time periods specified in the SECs
rules and forms. The Companys management necessarily
applied its judgment in assessing the costs and benefits of such
controls and procedures, which by their nature can provide only
reasonable assurance regarding managements control
objectives. There have been no significant changes in the
Companys internal controls or other factors that could
significantly affect internal controls subsequent to the date of
their evaluation.

78



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|          |                                                                                   
|--------- | ----------------------------------------------------------------------------------
|Item  15. | Exhibits, Financial Statement Schedules,
    and Reports on Form 8-K [Not updated]

(a) The following documents are filed as
a part of this report:



| |                                                  
| | -------------------------------------------------
| | 1. The financial statements listed in
    Item 8.



| |    |                                                                
| | -- | ---------------------------------------------------------------
| | 2. | The financial statement schedule consists of the
    following:



| |                                      
| | -------------------------------------
| | II. Valuation and Qualifying Accounts



| |                                                       
| | ------------------------------------------------------
| | 3. The exhibits listed in the Index to
    Exhibits.

(b) Reports on Form 8-K. The
following reports on Form 8-K were filed during the fiscal
quarter ended September 28, 2002:



| |                                                                                                                                                                                                                                                                                           
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. A Current Report on Form 8-K was
    filed on August 13, 2002, responsive to Item 9 of such
    Form regarding the execution of Statements under Oath by the
    Companys Chairman and Chief Executive Officer and Senior
    Vice President and Chief Financial Officer.             
|
| | 2. An Amendment to Current Report on
    Form 8-K was filed on August 13, 2002 responsive to
    Item 9 of such Form regarding the execution of Statements
    under Oath by the Companys Chairman and Chief Executive
    Officer and Senior Vice President and Chief Financial Officer.
|
| | 3. A Current Report on Form 8-K was
    filed on September 9, 2002, responsive to Item 5
    regarding the commencement of an exchange offer involving the
    Companys 7 1/8% Senior Notes due 2003.                                                                                    

(c) Exhibits

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INDEX TO EXHIBITS

|        |    |         |  |                                                                                                                                                                                                                                                                                                                                                          |  |  |  | 
|------- | -- | ------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  |  | 
|        |    |         |  | Sequentially                                                                                                                                                                                                                                                                                                                                            
|Exhibit |    |         |  | Numbered                                                                                                                                                                                                                                                                                                                                                
|Number  |    | Exhibit |  | Page                                                                                                                                                                                                                                                                                                                                                    
|        |    |         |  |                                                                                                                                                                                                                                                                                                                                                         
|        | 3  | .1(a)   |  | Form of Amended and Restated Certificate of
    Incorporation (filed as part of the Companys Registration
    Statement No. 333-47101 on Form S-4 (the
    1998 S-4), as Appendix B-1 to the Joint
    Proxy Statement/Prospectus (the Merger Proxy)
    included therein)*                                                                         |  |  |  | 
|        | 3  | .1(b)   |  | Form of Certificate of Designations of
    Series A Junior Preferred Stock (filed as Exhibit (c)
    within the Rights Agreement filed as Exhibit (4) to the
    Companys Report on Form 8-K filed October 16,
    1998)*                                                                                                                               |  |  |  | 
|        | 3  | .2      |  | Amended and Restated By-laws of the Company
    (filed as Exhibit 3(ii) to the Form 10-Q filed
    Feb 16, 1999)*                                                                                                                                                                                                                                        |  |  |  | 
|        | 4  | .1      |  | Specimen form of certificate representing shares
    of Common Stock of USI (filed as Exhibit 4.1 to the
    Form 10 filed April 20, 1995 (the
    Form 10))*                                                                                                                                                                                          |  |  |  | 
|        | 4  | .2(a)   |  | Indenture, dated as of December 12, 1996
    (the 1996 Indenture), among USI American Holdings,
    Inc. (USIAH), USI Atlantic (then known as U.S.
    Industries, Inc.) and PNC Bank National Association, as Trustee
    (PNC) (filed as Exhibit 4.1 to the
    Companys Registration Statement No. 333-2083 on
    Form S-4 (the 1997 S-4))* |  |  |  | 
|        | 4  | .2(b)   |  | First Supplemental Indenture to the 1996
    Indenture, dated as of June 11, 1998, among USI, USIAH, USI
    Atlantic and PNC (filed as Exhibit 4.3 to the Form 10K
    filed December 15, 1998 (the 1998 10-K))*                                                                                                                                      |  |  |  | 
|        | 4  | .2(c)   |  | Second Supplemental Indenture to the 1996
    Indenture, dated as of April 30, 1999, among the Company,
    USI Global Corp., USI American Holding, Inc., USI Atlantic Corp.
    and The Chase Manhattan Bank as successor Trustee (filed as
    Exhibit 4.1 (b) to the Form 10-Q filed
    May 18, 1999)*                                               |  |  |  | 
|        | 4  | .2(d)   |  | Third Supplemental Indenture to the 1996
    Indenture, dated as of March 27, 2001, by and among U.S.
    Industries, Inc., USI American Holdings, Inc., USI Global Corp.,
    USI Atlantic Corp. and The Chase Manhattan Bank (filed as
    Exhibit 4.2 to the Form 10-Q filed May 15, 2001)*                                                           |  |  |  | 
|        | 4  | .2(e)   |  | Fourth Supplemental Indenture to the 1996
    Indenture, dated as of November 25, 2002, by and among USI,
    USI American Holdings, Inc., USI Global Corp., as issuers, USI
    Atlantic Corp., as Guarantor and Wells Fargo Bank Minnesota,
    N.A., as Trustee                                                                                       |  |  |  | 
|        | 4  | .3(a)   |  | Indenture, dated as of October 27, 1998 (the
    1998 Indenture), among USI, USIAH, USI Atlantic and
    the First National Bank of Chicago, as Trustee (filed as
    Exhibit 4.4 to the 1998 10-K)*                                                                                                                                                   |  |  |  | 
|        | 4  | .3(b)   |  | First Supplemental Indenture to the 1998
    Indenture, dated as of April 30, 1999, by and among the
    Company, USI Global Corp., USI American Holdings, Inc., USI
    Atlantic Corp. and The First National Bank of Chicago (filed as
    Exhibit 4.1(a) to the Form 10-Q filed May 18,
    1999)*                                                    |  |  |  | 
|        | 4  | .3(c)   |  | Second Supplemental Indenture to the 1998
    Indenture, dated as of March 27, 2001, by and among U.S.
    Industries, Inc., USI American Holdings, Inc., USI Global Corp.,
    USI Atlantic Corp. and Bank One Trust Company, N.A., as
    successor Trustee (filed as Exhibit 4.1 to the
    Form 10-Q filed May 15, 2001)*                            |  |  |  | 
|        | 4  | .3(d)   |  | Third Supplemental Indenture to the 1998
    Indenture dated as of November 8, 2002 among USI, USI
    American Holdings, Inc., USI Global Corp., as issuers, USI
    Atlantic Corp., as Guarantor, and Bank One Trust Company, N.A.,
    as Trustee (filed as Exhibit 4.1 to the Companys
    Report on Form 8-K filed on November 8, 2002)*           |  |  |  | 
|        | 10 | .1      |  | Subscription Agreement, dated May 31, 1995,
    between Hanson PLC and USI Atlantic (filed as Exhibit 10.10 to
    the 1995 10-K)*                                                                                                                                                                                                                       |  |  |  | 

80



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|        |    |         |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                             |  |  |  | 
|------- | -- | ------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  |  | 
|        |    |         |  | Sequentially                                                                                                                                                                                                                                                                                                                                                                                                                                               
|Exhibit |    |         |  | Numbered                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|Number  |    | Exhibit |  | Page                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|        |    |         |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|        | 10 | .2      |  | Tax Sharing and Indemnification Agreement, dated
    May 30, 1995, among HM Anglo-American Ltd., HM Holdings,
    Inc., Endicott Johnson Corporation, Kidde Industries, Inc., HMB
    Holdings Inc., Kaiser Cement Corporation, Spartus Corporation,
    USI Atlantic and USIAH (Filed as Exhibit 10.14 to the 1995
    10-K)*                                                                                                                              |  |  |  | 
|        | 10 | .3      |  | Tax Sharing and Indemnification Agreement, dated
    May 30, 1995, among HM Anglo-American Ltd., Quantum
    Chemical Corporation, Endicott Johnson Corporation, Spartus
    Corporation, USI Atlantic and USIAH (Filed as Exhibit 10.15
    to the 1995 10-K)*                                                                                                                                                                                             |  |  |  | 
|        | 10 | .4      |  | Amended and Restated Securities Purchase
    Agreement, dated as of March 24, 2000, by and among U.S.
    Industries, Inc., JUSI Holdings, Inc., Strategic Industries, LLC
    and Automotive Interior Products LLC (filed as Exhibit 10.1
    to the Companys Report on Form 8-K filed
    April 10, 2000)*                                                                                                                                               |  |  |  | 
|        | 10 | .5      |  | Indemnification Agreement, dated as of
    March 24, 2000, by and among Strategic Industries, LLC,
    U.S. Industries, Inc. and JUSI Holdings, Inc. (filed as
    Exhibit 10.2 to the Companys Report on Form 8-K
    filed April 10, 2000)*                                                                                                                                                                                                              |  |  |  | 
|        | 10 | .6      |  | Amended and Restated Subscription Agreement,
    dated as of March 24, 2000, by and among U.S. Industries,
    Inc., JUSI Holdings, Inc., Strategic Industries, LLC, Strategic
    Industries, Inc. and Automotive Interior Products LLC (filed as
    Exhibit 10.3 to the Companys Report on Form 8-K
    filed April 10, 2000)*                                                                                                                          |  |  |  | 
|        | 10 | .7      |  | Rexair Indemnification Agreement, dated as of
    March 24, 2000, by and among U.S. Industries, Inc., JUSI
    Holdings, Inc., Strategic Industries, LLC and Strategic
    Industries, Inc. (filed as Exhibit 10.4 to the
    Companys Report on Form 8-K filed April 10,
    2000)*                                                                                                                                                                       |  |  |  | 
|        | 10 | .8      |  | Amendment and Waiver dated as of
    February 16, 2001, by and among U.S. Industries, Inc., USI
    Global Corp., USI American Holdings, Inc., USI Atlantic Corp.,
    Bank of America Securities, LLC, Bank of America Securities,
    LLC, Bank of America, N.A. and the several banks, financial
    institutions and other institutional lenders named therein
    (filed as Exhibit 10.1 to the Companys Report on Form
    10-Q filed May 15, 2001)* |  |  |  | 
|        | 10 | .9      |  | Amendment dated as of February 16, 2001, by
    and among U.S. Industries, Inc., USI Global Corp., USI American
    Holdings, Inc., USI Atlantic Corp. and Bank of America, N.A.
    (filed as Exhibit 10.2 to the Companys Report on
    Form 10-Q filed May 15, 2001)*                                                                                                                                                                                   |  |  |  | 
|        | 10 | .10     |  | Waiver dated as of February 16, 2001, by and
    among U.S. Industries, Inc., USI Global Corp., USI American
    Holdings, Inc., USI Atlantic Corp. and Bank of America, N.A.
    (filed as Exhibit 10.3 to the Companys Report on
    Form 10-Q filed May 15, 2001)*                                                                                                                                                                                      |  |  |  | 
|        | 10 | .11     |  | Forbearance and Waiver Agreement, dated as of
    March 21, 2001, by and among U.S. Industries, Inc., USI
    Global Corp., the Secured Creditors (as defined therein),
    Rexair, Inc., and Strategic Industries, Inc. (filed as
    Exhibit 10.4 to the Companys Report on Form 10-Q
    filed May 15, 2001)*                                                                                                                                           |  |  |  | 

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|        |    |         |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |  |  |  | 
|------- | -- | ------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  |  | 
|        |    |         |  | Sequentially                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|Exhibit |    |         |  | Numbered                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|Number  |    | Exhibit |  | Page                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|        |    |         |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|        | 10 | .12     |  | Stock Purchase Agreement dated as of
    March 26, 2001, by and among JUSI Holdings, Inc., USI
    Global Corp., Strategic Industries, LLC (SILLC),
    Rexair Holdings, Inc. (f/k/a Strategic Industries, Inc. and
    prior thereto as Rexair Holdings, Inc.), Rexair, Inc., Strategic
    Finance Company, SILLC Holdings, LLC, Atech Turbine Components,
    Inc., Bearing Inspection Holdings, Inc., Biltbest Products,
    Inc., Carisbrook Industries, Inc., EJ Footwear LLC, Garden State
    Tanning, Inc., Huron, Inc., Leon Plastics, Inc., SCF Industries,
    Inc., Citicorp Mezzanine III, L.P. and Court Square Capital LTD
    (filed as Exhibit 10.5 to the Companys Report on
    Form 10-Q filed May 15, 2001)* |  |  |  | 
|        | 10 | .13     |  | Amendment, Restatement, General Provisions and
    Intercreditor Agreement dated as of August 15, 2001 by and
    among U.S. Industries, Inc., USI Global Corp., USI American
    Holdings, Inc., USI Atlantic Corp., Rexair Holdings, Inc.,
    Wilmington Trust Company, the Individual named as the Individual
    Trustee, Bank of America, N.A. and the several banks, financial
    institutions and other institutional lenders named therein
    (filed as Exhibit 10.2 to the Companys Report on
    Form 10-Q filed August 17, 2001)*                                                                                                                                                                                      |  |  |  | 
|        | 10 | .13(a)  |  | Amended and Restated Amendment, Restatement,
    General Provisions and Intercreditor Agreement dated as of
    September 23, 2002, among U.S. Industries, Inc., USI Global
    Corp., USI American Holdings, Inc., USI Atlantic Corp., Rexair
    Holdings, Inc., Rexair, Inc., and the other Subsidiaries of USI
    party thereto, Wilmington Trust Company, the individual named as
    the Individual Trustee, Bank of America, N.A. and the various
    bank and other lender parties thereto (filed as
    Exhibit 10.1 to the Companys Report on Form 8-K
    filed on October 22, 2002)*                                                                                                                                    |  |  |  | 
|        | 10 | .13(b)  |  | Waiver, dated as of October 30, 2002 to the
    Amendment, Restatement, General Provisions and Intercreditor
    Agreement dated as of August 15, 2002 and amended and
    restated as of September 23, 2002, among U.S. Industries,
    Inc., USI Global Corp., USI American Holdings, Inc., USI
    Atlantic Corp., Rexair Holdings, Inc., Rexair, Inc., and the
    other Subsidiaries of USI party thereto, Wilmington Trust
    Company, the individual named as the Individual Trustee, Bank of
    America, N.A., and the various bank and other lender parties
    thereto                                                                                                                                                    |  |  |  | 
|        | 10 | .13(c)  |  | Amendment and Consent, dated as of
    October 30, 2002, to the Amendment, Restatement, General
    Provisions and Intercreditor Agreement dated as of
    August 15, 2002 and amended and restated as of
    September 23, 2002, among U.S. Industries, Inc., USI Global
    Corp., USI American Holdings, Inc., USI Atlantic Corp., Rexair
    Holdings, Inc., Rexair, Inc., and the other Subsidiaries of USI
    party thereto, Wilmington Trust Company, the individual named as
    the Individual Trustee, Bank of America, N.A. and the various
    bank and other lender parties thereto                                                                                                                                     |  |  |  | 
|        | 10 | .14(a)  |  | Collateral Trust Agreement, dated as of
    April 30, 2001, by and among U.S. Industries, Inc., USI
    Global Corp., USI American Holdings, Inc., USI Atlantic Corp.,
    Wilmington Trust Company and the Individual named as the
    Individual Trustee (filed as Exhibit 10.6 to the
    Companys Report on Form 10-Q filed May 15, 2001)*                                                                                                                                                                                                                                                                                                                                                                                       |  |  |  | 
|        | 10 | .14(b)  |  | Amended and Restated Collateral Trust Agreement,
    dated as of August 15, 2001, by and among U.S. Industries,
    Inc., USI Global Corp., USI American Holdings, Inc., USI
    Atlantic Corp., Wilmington Trust Company and the Individual
    named as the Individual Trustee (filed as Exhibit 10.3 to
    the Companys Report on Form 10-Q filed
    August 17, 2001)*                                                                                                                                                                                                                                                                                                                                                          |  |  |  | 
|        | 10 | .14(c)  |  | Pledge and Security Agreement, dated as of
    April 30, 2001, by and among U.S. Industries, Inc., USI
    Global Corp., USI American Holdings, Inc., USI Atlantic Corp.,
    Wilmington Trust Company and the Individual named as the
    Individual Trustee (filed as Exhibit 10.7 to the
    Companys Report on Form 10-Q filed May 15, 2001)*                                                                                                                                                                                                                                                                                                                                                                                    |  |  |  | 

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|        |    |         |  |                                                                                                                                                                                                                                                                                                                                                                                 |  |  |  | 
|------- | -- | ------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  |  | 
|        |    |         |  | Sequentially                                                                                                                                                                                                                                                                                                                                                                   
|Exhibit |    |         |  | Numbered                                                                                                                                                                                                                                                                                                                                                                       
|Number  |    | Exhibit |  | Page                                                                                                                                                                                                                                                                                                                                                                           
|        |    |         |  |                                                                                                                                                                                                                                                                                                                                                                                
|        | 10 | .14(d)  |  | Amended and Restated Pledge and Security
    Agreement, dated as of August 15, 2001, by and among U.S.
    Industries, Inc., USI Global Corp., USI American Holdings, Inc.,
    USI Atlantic Corp., Wilmington Trust Company and the Individual
    named as the Individual Trustee (filed as Exhibit 10.4 to
    the Companys Report on Form 10-Q filed
    August 17, 2001)* |  |  |  | 
|        | 10 | .14(e)  |  | Security Agreement Supplement to the Amended and
    Restated Collateral Trust Agreement and Amended and Restated
    Pledge and Security Agreement, all dated as of August 15,
    2001 (filed as Exhibit 10.5 to the Companys Report on
    Form 10-Q filed August 17, 2001)*                                                                                                |  |  |  | 
|        | 10 | .15     |  | Form of Non-shared Guaranty dated as of
    August 15, 2001 from the Guarantors referred to therein, in
    favor of the Secured Parties referred to therein (filed as
    Exhibit 10.6 to the Companys Report on Form 10-Q
    filed August 17, 2001)*                                                                                                                        |  |  |  | 
|        | 10 | .16(a)  |  | Employment Agreement dated February 22, 1995
    between the Company and David H. Clarke (filed as
    Exhibit 10.9 to the Form 10)*                                                                                                                                                                                                                                            |  |  |  | 
|        | 10 | .16(b)  |  | First Amendment, dated June 12, 1995, to the
    Employment Agreement dated February 22, 1995 between the
    Company and David H. Clarke (filed as Exhibit 10.19(b) to
    the 1995 10- K)*                                                                                                                                                                                    |  |  |  | 
|        | 10 | .17(a)  |  | Restated Employment Agreement dated June 17,
    1998 between the Company and Dorothy E. Sander (filed as
    Exhibit 10.8 to the 1998 10-K)*                                                                                                                                                                                                                                   |  |  |  | 
|        | 10 | .17(b)  |  | Amendment dated September 1, 1999 to the
    Employment Agreement between the Company and Dorothy E.
    Sander                                                                                                                                                                                                                                                                 |  |  |  | 
|        | 10 | .18(a)  |  | Employment Agreement by and between the Company
    and Allan D. Weingarten, dated as of January 23, 2001
    (filed as Exhibit 10.8 to the Companys 10-Q filed
    May 15, 2001)*                                                                                                                                                                                             |  |  |  | 
|        | 10 | .18(b)  |  | Amendment dated June 5, 2002 to the
    Employment Agreement between the Company and Allan D.
    Weingarten                                                                                                                                                                                                                                                                    |  |  |  | 
|        | 10 | .19(a)  |  | Employment Agreement by and between the Company
    and Francisco V Punal, dated as of December 15, 2000 (filed
    as Exhibit 10.9 to the Companys 10-Q filed
    May 15, 2001)*                                                                                                                                                                                              |  |  |  | 
|        | 10 | .19(b)  |  | Amendment dated May 1, 2001 to the
    Employment Agreement between the Company and Francisco V.
    Puñal                                                                                                                                                                                                                                                                      |  |  |  | 
|        | 10 | .20     |  | Letter Agreement dated July 23, 2001 by and
    between the Company and James OLeary amending the Restated
    Employment Agreement dated September 1, 1999 (filed as
    Exhibit 10.1 to the Form 10-Q filed August 17,
    2001)*                                                                                                                                            |  |  |  | 
|        | 10 | .21     |  | Amended U.S. Industries, Inc. Stock Option Plan,
    as restated June 11, 1998 (filed as Exhibit 10.9 to
    the 1998 10-K)*                                                                                                                                                                                                                                                    |  |  |  | 
|        | 10 | .22     |  | U.S. Industries, Inc. Supplemental Retirement
    Plan (filed as Exhibit 10.14 to the Form 10)*                                                                                                                                                                                                                                                                                 |  |  |  | 
|        | 10 | .23     |  | U. S. Industries, Inc. Restricted Stock Plan, as
    restated June 11, 1998 (filed as Exhibit 10.11 to the
    1998 10-K)*                                                                                                                                                                                                                                                      |  |  |  | 
|        | 10 | .24     |  | U.S. Industries, Inc. Long-Term Incentive Plan
    (filed as Exhibit 10.15 to the Form 10)*                                                                                                                                                                                                                                                                                     |  |  |  | 
|        | 10 | .25     |  | Credit Agreement, dated December 12, 1996,
    as amended through June 11, 1998 (the Credit
    Agreement), among USIAH, USI Atlantic, USI and Bank of
    America National Trust and Savings Association, as Agent, and BA
    Securities, Inc., as Arranger (filed as Exhibit 10.2 to the
    Report on Form 8-K filed on June 12, 1998)*                                   |  |  |  | 

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|        |    |         |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |  |  |  | 
|------- | -- | ------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  |  | 
|        |    |         |  | Sequentially                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|Exhibit |    |         |  | Numbered                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|Number  |    | Exhibit |  | Page                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|        |    |         |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|        | 10 | .26     |  | First Amendment and Consent, dated as of
    April 22, 1999, among the Company, USI American Holdings,
    Inc., USI Atlantic Corp., USI Global Corp., Various Banks named
    therein, Bank of America National Trust and Savings Association,
    as Issuing Bank, Swingline Bank and Agent, and BA Securities,
    Inc. as Arranger (filed as Exhibit 10.1 to the
    Form 10-Q filed May 18, 1999)*                                                                                         |  |  |  | 
|        | 10 | .27     |  | Agreement and Plan of Merger, dated
    February 16, 1998, among USI, USI Atlantic, Zurn
    Industries, Inc. and certain other parties named therein
    (included as Appendix A-1 to the Merger Proxy)*                                                                                                                                                                                                                                                                                       |  |  |  | 
|        | 10 | .28     |  | Rights Agreement dated as of October 15,
    1998 between the Company and the Chase Manhattan Bank, as Rights
    Agent (filed as Exhibit (4) to the Companys Report on
    Form 8-K filed October 16, 1998)*                                                                                                                                                                                                                                                                                  |  |  |  | 
|        | 10 | .29     |  | Employment Agreement, dated January 2, 2001
    between the Company and Alan Schutzman (filed as
    Exhibit 10.31 to the 2001 10-K)*                                                                                                                                                                                                                                                                                                                                                           |  |  |  | 
|        | 10 | .30     |  | First Amendment, dated September 11, 2001 to
    the Employment Agreement dated January 2, 2001 between the
    Company and Alan Schutzman (filed as Exhibit 10.32 to the
    2001 10-K)*                                                                                                                                                                                                                                                                                                       |  |  |  | 
|        | 10 | .31     |  | Stock and Asset Purchase Agreement dated as of
    December 21, 2001, by and among JUSI Holdings, Inc., Spear
    & Jackson Plc, USI Global Corp., USI Canda Inc., U.S.
    Industries, Inc. and ATT Acquisition Co. (filed as
    Exhibit 10.33 to the 2001 10-K)*                                                                                                                                                                                                                             |  |  |  | 
|        | 10 | .32(a)  |  | Employment Agreement, March 31, 2000, of
    Steven C. Barre (filed as Exhibit 10.12(a) to the
    2000 10-K)*                                                                                                                                                                                                                                                                                                                                                                                  |  |  |  | 
|        | 10 | .32(b)  |  | Letter Agreement, dated November 3,2000
    between the Company and Steven C. Barre (filed as
    Exhibit 10.12(b) to the 2000 10-K)*                                                                                                                                                                                                                                                                                                                                                           |  |  |  | 
|        | 10 | .32(c)  |  | First Amendment, dated September 11, 2001,
    to the Employment Agreement dated March 31, 2001 between
    the Company and Steven C. Barre (filed as
    Exhibit 10.34(c) to the 2001 10-K)*                                                                                                                                                                                                                                                                                                   |  |  |  | 
|        | 10 | .33     |  | Waiver and Consent dated as of January 7,
    2002, by and among U.S. Industries, Inc., USI Global Corp., USI
    American Holdings, Inc., USI Atlantic Corp., Rexair Holdings,
    Inc., and other subsidiaries of USI party thereto, Wilmington
    Trust Company, the Individual named as the Individual Trustee,
    bank of America, N.A., and the several banks, financial
    institutions and other institutional lenders named therein
    (filed as Exhibit 10.35 to the 2001 10-K)*  |  |  |  | 
|        | 10 | .34     |  | Waiver and Consent dated as of December 21,
    2001, by and among U.S. Industries, Inc., USI Global Corp., USI
    American Holdings, Inc., USI Atlantic Corp., Rexair Holdings,
    Inc., and other subsidiaries of USI party thereto Wilmington
    Trust Company, the Individual named as the Individual Trustee,
    Bank of America, N.A., and the several banks, financial
    institutions and other institutional lenders named therein
    (filed as Exhibit 10.36 to the 2001 10-K)* |  |  |  | 
|        | 10 | .35     |  | Amendment No. 1 to the Stock and Asset
    Purchase Agreement dated as of January 14, 2002 among JUSI
    Holdings, Inc., Spear & Jackson plc, USI Global Corp., USI
    Canada Inc., U.S. Industries, Inc. and ATT Acquisition Co (filed
    as Exhibit 2.2 of the Companys Report on
    Form 8-K filed on January 18, 2002)*                                                                                                                                                                |  |  |  | 
|        | 10 | .36     |  | Securities Purchase Agreement dated as of
    January 15, 2002 among U.S. Industries, Inc., JUSI
    Holdings, Inc., USI Global Corp., Strategic Industries, Inc.,
    Strategic Finance Company, as agent, Strategic Finance, LLC, as
    agent, and other parties listed on the signature pages thereto
    (filed as Exhibit 2.3 of the Companys Report on
    Form 8-K filed on January 18, 2002)*                                                                                         |  |  |  | 
|        | 10 | .37     |  | Securities Purchase Agreement dated as of
    January 15, 2002 among U.S. Industries, Inc., Strategic
    Membership Company and Citicorp Venture Capital Equity Partners,
    L.P. (filed as Exhibit 2.4 of the Companys Report on
    Form 8-K filed on January 18, 2002)*                                                                                                                                                                                                                   |  |  |  | 

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|        |    |         |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |  |  |  | 
|------- | -- | ------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  |  | 
|        |    |         |  | Sequentially                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|Exhibit |    |         |  | Numbered                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|Number  |    | Exhibit |  | Page                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|        |    |         |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|        | 10 | .38     |  | Stock and Asset Purchase Agreement dated as of
    March 19, 2002 among U.S. Industries, Inc., JUSI Holdings,
    Inc., USI Canada Inc. and Hubbell Incorporated (filed as
    Exhibit 2.1 of the Companys Report on Form 8-K
    filed on May 10, 2002)*                                                                                                                                                                                                                                                                                                                                                                                          |  |  |  | 
|        | 10 | .39     |  | Amendment No. 1 to Stock and Asset Purchase
    Agreement dated as of April 26, 2002 among JUSI Holdings,
    Inc. and Hubbell Incorporated (filed as Exhibit 2.2 of the
    Companys Report on Form 8-K filed on May 10,
    2002)*                                                                                                                                                                                                                                                                                                                                                                                                               |  |  |  | 
|        | 10 | .40     |  | Escrow Agreement dated as of April 26, 2002
    among U.S. Industries, Inc., JUSI Holdings, Inc. and Hubbell
    Incorporated (filed as Exhibit 2.3 of the Companys
    Report on Form 8-K filed on May 10, 2002)*                                                                                                                                                                                                                                                                                                                                                                                                                                 |  |  |  | 
|        | 10 | .41     |  | Tax Sharing and Indemnification Agreement
    effective as of March 19, 2002 among U.S. Industries, Inc.,
    JUSI Holdings Inc., USI Canada Inc. and Hubbell Incorporated
    (filed as Exhibit 2.4 of the Companys Report on
    Form 8-K filed on May 10, 2002)*                                                                                                                                                                                                                                                                                                                                                                                |  |  |  | 
|        | 10 | .42     |  | Termination Agreement and General Release dated
    May 10, 2002 by and between the Company and James
    OLeary (filed as Exhibit 10.1 to the Companys
    10-Q filed August 13, 2002)*                                                                                                                                                                                                                                                                                                                                                                                                                                                          |  |  |  | 
|        | 10 | .43     |  | Amendment dated June 5, 2002 to the
    employment agreement dated as of January 23, 2001 by and
    between U.S. Industries Inc. and Allan D. Weingarten (filed as
    Exhibit 10.2 to the Companys 10-Q filed
    August 13, 2002)*                                                                                                                                                                                                                                                                                                                                                                                                              |  |  |  | 
|        | 10 | .44     |  | Amendment No. 1 dated as of June 30,
    2002, to the Amendment, Restatement, General Provisions and
    Intercreditor Agreement dated as of August 15, 2001 by and
    among U.S. Industries Inc., USI Global Corp., USI American
    Holdings, Inc., USI Atlantic Corp., Rexair Holdings, Inc., and
    other subsidiaries of USI party thereto as Loan Parties,
    Wilmington Trust Company, the Individual named as Individual
    Trustee, Bank of America, N.A. and the several banks, financial
    institutions and other institutional lenders named therein
    (filed as Exhibit 10.3 to the Companys 10-Q filed
    August 13, 2002)* |  |  |  | 
|        | 10 | .45     |  | Stock and Asset Purchase Agreement dated as of
    May 17, 2002 by and among U.S. Industries, Inc., Eljer
    Plumbingware, Inc., Selkirk, Inc., Selkirk Canada U.S.A., Inc.,
    Selkirk Canada, Inc., Selkirk Acquisition Partners, L.P. and
    Tinicum Capital Partners, L.P. (filed as Exhibit 10.4 to
    the Companys 10-Q filed August 13, 2002)*                                                                                                                                                                                                                                                                                          |  |  |  | 
|        | 10 | .46(a)  |  | Share Purchase Agreement dated as of
    August 2, 2002 among JUSI Holdings, Inc., U.S. Industries,
    Inc. and SiTeco Beteiligungs GmbH & Co KG (filed as
    Exhibit 2.1 to the Companys Report on Form 8-K
    filed on October 24, 2002)*                                                                                                                                                                                                                                                                                                                                                                                                     |  |  |  | 
|        | 10 | .46(b)  |  | Amendment Agreement dated as of August 2,
    2002 among JUSI Holdings, Inc., U.S. Industries, Inc. and SiTeco
    Beteiligungs GmbH & Co KG (filed as Exhibit 2.2 to the
    Companys Report on Form 8-K filed on October 24,
    2002)*                                                                                                                                                                                                                                                                                                                                                                                                          |  |  |  | 
|        | 10 | .47(a)  |  | Stock Purchase Agreement dated as of
    August 23, 2002 among USI Mayfair Limited and MegaPro
    Tools, Inc. and S and J Acquisition Corp.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |  |  |  | 
|        | 10 | .47(b)  |  | Stockholders Agreement dated as of
    September 6, 2002 among MegaPro Tools, Inc. and the
    stockholders party thereto                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |  |  |  | 
|        | 10 | .48     |  | Standstill Agreement dated as of December 5,
    2002 between U.S. Industries, Inc. and Southeastern Asset
    Management, Inc.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |  |  |  | 
|        | 21 | .1      |  | Subsidiaries of U.S. Industries, Inc.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |  |  |  | 
|        | 23 | .1      |  | Consent of Ernst & Young LLP                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |  |  |  | 

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|        |    |         |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |  |  |  | 
|------- | -- | ------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  |  | 
|        |    |         |  | Sequentially                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|Exhibit |    |         |  | Numbered                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|Number  |    | Exhibit |  | Page                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|        |    |         |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|        | 25 | .1      |  | Separate Company Financial Statements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |  |  |  | 
|        |    |         |  | As described elsewhere herein, the Company has
    pledged the shares of its domestic subsidiaries and 65% of the
    shares of certain of its foreign subsidiaries to the lenders
    under its Restructured Facilities. As a result of these pledges,
    the Companys Senior Notes became equally and ratably
    secured with respect to the subsidiaries of the Company that are
    subject to the covenant restrictions under the Senior Notes. The
    Companys legal structure utilizes subsidiary holding
    companies at various levels to hold the shares of its operating
    subsidiaries. The financial statements of four of the
    Companys subsidiary holding companies are presented
    separately, as each entity constitutes a substantial
    portion of the collateral (within the meaning of
    Rule 3.16 of the Securities and Exchange Commission) for
    the Companys 7.125% and 7.25% Senior Notes. Accordingly,
    the financial statements of USI Atlantic Corp., USI American
    Holdings, Inc., USI Global Corporation and JUSI Holdings, Inc.
    are included herein. |  |  |  | 



---



|  |                          
|- | -------------------------
|* | Incorporated by reference

86



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SIGNATURES

Pursuant to the requirements of Section 13
or 15(d) of the Securities Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized on this 24th day of
December, 2002.



| |                      
| | ---------------------
| | U.S. INDUSTRIES, INC.



| |     |                    
| | --- | -------------------
| | By: | /s/ DAVID H. CLARKE

| |                          
| | -------------------------
| |                          
| | David H. Clarke          
| | Chairman of the Board and
| | Chief Executive Officer  

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 indicated, and on the date set forth above.

|                                                             |  |                                                                                        
|------------------------------------------------------------ |  | ---------------------------------------------------------------------------------------
|Signature                                                    |  | Title                                                                                  
|                                                             |  |                                                                                        
|/s/ DAVID H. CLARKEDavid H. Clarke                           |  | Chairman of the Board and Chief Executive
    Officer
    (Principal Executive Officer)
|                                                            
|/s/ BRIAN C. BEAZERBrian C. Beazer                           |  | Director                                                                               
|                                                            
|/s/ WILLIAM E. BUTLERWilliam E. Butler                       |  | Director                                                                               
|                                                            
|/s/ JOHN J. MCATEE, JR.John J. McAtee, Jr.                   |  | Director                                                                               
|                                                            
|/s/ THE HON. CHARLES H. PRICE IIThe Hon. Charles H. Price II |  | Director                                                                               
|                                                            
|/s/ SIR HARRY SOLOMONSir Harry Solomon                       |  | Director                                                                               
|                                                            
|/s/ ROYALL VICTOR IIIRoyall Victor III                       |  | Director                                                                               
|                                                            
|/s/ ROBERT R. WOMACKRobert R. Womack                         |  | Director                                                                               
|                                                            
|/s/ ALLAN D. WEINGARTENAllan D. Weingarten                   |  | Senior Vice President and Chief Financial
    Officer
    (Principal Financial Officer)
|                                                            
|/s/ FRANCISCO V. PUÑALFrancisco V. Puñal                     |  | Vice President and Controller
    (Principal Accounting Officer)                       

87



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##### Table of Contents






CERTIFICATION

I, David H. Clarke, certify that:



| |    |                                                                                                                                                                                                                                                                                                                                             
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. | I have reviewed this annual report on
    Form 10-K of U.S. Industries, Inc.;                                                                                                                                                                                                                                                               
|
| | 2. | Based on my knowledge, this annual report does
    not contain any untrue statement of a material fact or omit to
    state a 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 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
    registrants board of directors (or persons performing the
    equivalent functions):



| |    |                                                                                                                                                                                                                                                                                                                   
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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 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: December 24, 2002

/s/ DAVID H. CLARKE




David H. Clarke


Chairman of the Board and Chief Executive
Officer


(Principal Executive Officer)


88



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##### Table of Contents






CERTIFICATION

I, Allan D. Weingarten, certify that:



| |    |                                                                                                                                                                                                                                                                                                                                             
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. | I have reviewed this annual report on
    Form 10-K of U.S. Industries, Inc.;                                                                                                                                                                                                                                                               
|
| | 2. | Based on my knowledge, this annual report does
    not contain any untrue statement of a material fact or omit to
    state a 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 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
    registrants board of directors (or persons performing the
    equivalent functions):



| |    |                                                                                                                                                                                                                                                                                                                   
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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 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: December 24, 2002

/s/ ALLAN D. WEINGARTEN




Allan D. Weingarten


Senior Vice President and Chief Financial
Officer


(Principal Financial Officer)


89



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##### Table of Contents






SCHEDULE II

U.S. INDUSTRIES, INC.

VALUATION AND QUALIFYING ACCOUNTS

|                                 |      |               |   |             |  |                          |   |            |  |  |   |       |   |  |   |     | 
|-------------------------------- | ---- | ------------- | - | ----------- |  | ------------------------ | - | ---------- |  |  | - | ----- | - |  | - | --- | 
|Column A                         |      | Column B      |   | Column C    |  | Column D                 |   | Column E  
|                                 |      |               |   |             |  |                          |   |           
|                                 |      | Balance at    |   | Additions  |  | Deductions  Write-offs, |   | Balance at
|                                 |      | Beginning     |   | Charged to  |  | Payments and Other       |   | End of    
|Description                      |      | of Period     |   | Expense     |  | Adjustments              |   | Period    
|                                 |      |               |   |             |  |                          |   |           
|                                 |      |              
|                                 |      | (In millions)
|Allowance for doubtful accounts: |      |               |   |             |  |                          |   |            |  |  |   |       |   |  |   |    
|                                 | 2002 |               | $ | 8.3         |  |                          | $ | 3.9        |  |  | $ | (3.6  | ) |  | $ | 8.6 | 
|                                 | 2001 |               |   | 7.5         |  |                          |   | 2.8        |  |  |   | (2.0  | ) |  |   | 8.3 | 
|                                 | 2000 |               |   | 15.8        |  |                          |   | 3.0        |  |  |   | (11.3 | ) |  |   | 7.5 | 

All other schedules have been omitted because
they are inapplicable, not required or the information is
included elsewhere herein.

90