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                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

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

                                   FORM 10-K/A

                               (AMENDMENT NO. 3)

  /X/    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
         EXCHANGE ACT OF 1934

                   FOR THE FISCAL YEAR ENDED OCTOBER 3, 1998

                                       OR

  / /    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
         SECURITIES EXCHANGE ACT OF 1934

        For the transition period from ______________ to ______________

                        Commission File Number 1-14557

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

                             U.S. INDUSTRIES, INC.
             (Exact name of registrant as specified in its charter)

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

           101 WOOD AVENUE SOUTH
             ISELIN, NEW JERSEY                           08830
  (Address of principal executive offices)             (Zip Code)

                                 (732) 767-0700
              (Registrant's telephone number, including area code)

          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

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

    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 /X/  No / /

    Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of 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. / /

    Aggregate market value of the voting stock of the registrant held by
non-affiliates of the registrant at April 30, 1999 (based on the last reported
sale price of such stock on the New York Stock Exchange on such date):
$1,636,471,726

    On April 30, 1999, the registrant had outstanding 92,535,997 shares of
Common Stock.
                       DOCUMENTS INCORPORATED BY REFERENCE

                                     None.

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<PAGE>
EXPLANATORY NOTE

      This Amendment No. 3 on Form 10-K/A to the Annual Report on Form 10-K of
U.S. Industries, Inc. (the "Company") is being filed solely to reflect The Ertl
Company, a former wholly owned subsidiary of the Company, as a discontinued
operation and amends and restates in their entirety Items 1, 6, 7 and 8.


                                     PART I

ITEM 1. BUSINESS

GENERAL

    U.S. Industries, Inc. ("USI" and, together with its subsidiaries, the
"Company") manufactures and distributes a broad range of consumer and industrial
products through four operating divisions: USI Bath and Plumbing Products,
Lighting Corporation of America, USI Hardware and Tools and USI Diversified.
Many of the Company's businesses have leading market share positions, well-known
brand names and established manufacturing, sourcing and distribution
capabilities. The Company's strategy is to focus on basic manufacturing
businesses with long-term growth potential.

    In 1995, USI Atlantic, Inc. ("USI Atlantic"), a Company predecessor then
known as U.S. Industries, Inc., was spun-off from Hanson PLC ("Hanson") with 34
diverse businesses, a substantial amount of surplus real estate and other assets
and significant indebtedness (the "Demerger"). The Company immediately commenced
a program to reduce leverage and focus its operations through dispositions of
non-strategic assets. By mid-1996, the Company had significantly reduced its
debt level, enabling it to pursue selective acquisitions to broaden and enhance
its core businesses.

    In June 1998, USI Atlantic merged with Zurn Industries, Inc. ("Zurn"),
creating one of the leading bath and plumbing products companies in North
America. To effect this transaction, USI was formed as a new holding company for
USI Atlantic and Zurn. The total consideration for the Zurn merger (the
"Merger") was $784 million, consisting of 20.4 million shares of Common Stock to
the former Zurn shareholders and the assumption by the Company of $220 million
of debt. See "Senior Notes and Credit Facilities". The transaction was accounted
for as a pooling of interests and the Company's historical consolidated
financial information presents the results of USI Atlantic and Zurn as a single
entity.

    The Company also made several strategic acquisitions during fiscal 1998. The
assets of Siemens AG's European commercial lighting operations, subsequently
renamed SiTeco Beleuchtungstechnik GmbH ("SiTeco"), were acquired for the
Lighting Corporation of America. The assets of Spear & Jackson plc ("Spear &
Jackson"), a manufacturer and distributor of hand tools, lawn and garden tools,
saws, cutting and industrial tools, and certain metal component assets of
Philips Electronics ("Philips") were acquired for USI Hardware and Tools.
Sundance Spas, a manufacturer of high quality spas, was acquired for USI Bath
and Plumbing Products. The semiconductor leadframe assets of Philips were
purchased for USI Diversified.

    The Company received proceeds of $14 million from the sale of surplus real
estate in fiscal 1998.

                                       1
<PAGE>
    During fiscal 1998, the Company terminated its share buyback program. A
total of approximately 8 million shares were repurchased from inception of the
program.

    References to a fiscal year are to the applicable fiscal year ended on the
Saturday nearest September 30 and reflect a 52 or 53-week period. This Report
references trademarks of the Company such as JACUZZI, ZURN, ELJER, U.S. BRASS,
AMES, RAINBOW AND KELLER, as well as other trade names and product names.
SIEMENS is a registered trademark of Siemens AG, of which the Company is a
licensee.

    The Company's principal executive offices are located at 101 Wood Avenue
South, Iselin, New Jersey 08830; its telephone number at that address is (732)
767-0700.

FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS

    Following the Merger, the Company realigned its businesses into four
segments: USI Bath and Plumbing Products, Lighting Corporation of America, USI
Hardware and Tools and USI Diversified. The results of all operations sold or
classified as discontinued operations are discussed separately in Management's
Discussion and Analysis of Financial Condition and Results of Operations under
"Discontinued Operations and Extraordinary Loss". See Note 4 to the Consolidated
Financial Statements.

USI BATH AND PLUMBING PRODUCTS

    USI Bath and Plumbing Products manufactures and distributes a full line of
bath and plumbing products under the brand names JACUZZI, ELJER and ZURN. USI
Bath and Plumbing Products is one of the leading bath and plumbing products
businesses in North America. The Company's objective in combining these
businesses is to realize marketing synergies and cost savings and capitalize on
domestic and international growth opportunities, including product extensions
and expansion into new markets. The division's bath and plumbing products are
sold in North America, through wholesale distributors and home centers and in
certain international markets, including Europe, South America, the Middle East
and Asia.

    Jacuzzi is a leading worldwide manufacturer and distributor of whirlpool
bath products, spas, shower systems, non-jetted baths, swimming pool equipment
and water systems products. Sales of Jacuzzi products are seasonal as weather
may affect outdoor installation.

    Zurn's plumbing products include drains, flush valves, pressure-reducing and
regulating valves and other behind-the-wall plumbing products. Sales are
seasonal as weather may affect residential construction. Eljer is a leading
North American manufacturer of complementary vitreous china and cast iron
plumbing, faucets and flexible plumbing systems. Zurn, through its Selkirk
operations, is a leading manufacturer and distributor of commercial and
residential heating, ventilation and air conditioning systems.

LIGHTING CORPORATION OF AMERICA

    Lighting Corporation of America ("LCA"), through its subsidiaries,
manufacturers and distributes indoor and outdoor lighting fixtures and lighting
controls for markets in North America and Europe. During fiscal 1998, sales of
commercial/industrial and residential products accounted for approximately 80%
and 20%, respectively, of LCA's revenues.

    LCA's size, broad range of quality products and strong distribution network
allow it to compete as a full-line supplier in the commercial/industrial market.
Its outdoor lighting products are sold under the KIM, SPAULDING, MOLDCAST,
ARCHITECTURAL AREA LIGHTING, SIEMENS and SITECO brand names. These products
include street, area, parking garage and landscape lighting. Outdoor lighting
products are sold to electrical distributors, national accounts and utility
companies. National customer accounts include service stations, automobile
dealerships and fast food restaurants. Indoor commercial/industrial lighting
products, which are sold under the COLUMBIA, PRESCOLITE, SIEMENS and SITECO
brand names through electrical distributors and national accounts, include
incandescent and compact fluorescent, down light fixtures, emergency and exit
lighting controls, and other fluorescent lighting fixtures.

    Management believes that LCA is the largest residential lighting
manufacturer in North America, principally selling under the PROGRESS and
LITEWAY brand names. Progress' products include chandeliers, hall and foyer
sconces, pendants, bath and vanity, ceiling, fluorescent, under-cabinet, track,
outdoor and

                                       2
<PAGE>
landscape lighting. Residential lighting products are sold to home centers,
lighting showrooms and electrical distributors, who sell to builders, electrical
contractors and consumers.

    Sales of lighting products are seasonal to a degree, with weather affecting
construction and outdoor installation.

USI HARDWARE AND TOOLS

    USI Hardware and Tools manufactures and distributes tools, ladders and
windows through O. Ames Co. ("Ames"), Spear & Jackson and other subsidiaries.
The Company also manufactures a line of fabricated metal components used in the
production of television picture tubes.

    Ames is a leading manufacturer and distributor of non-powered lawn, garden
and industrial hand and striking tools in North America. The Company's Keller
subsidiary manufacturers wood, aluminum and fiberglass ladders for residential
and commercial use. Ames sells its products under the brand names AMES, EAGLE,
WOODINGS-VERONA, and GARANT and, to a lesser extent, under private labels. Ames'
product lines include garden and agricultural tools (shovels, cutting tools);
snow shovels and other winter tools; and wheelbarrows and other wheeled goods.
The Company also manufacturers and distributes windows under the BILTBEST brand
name. Sales are seasonal, with substantial portions made in spring and fall.
Weather may impact results materially.

    Spear & Jackson is a leading U.K. manufacturer and distributor of a broad
line of hand tools, lawn and garden tools, industrial saws and industrial
magnets. Products sold under the brand names SPEAR & JACKSON, NEILL TOOLS and
ECLIPSE MAGNETICS include garden and agricultural tools (shovels and spades);
contractor hand tools (pliers, cutting tools and builders' tools); industrial
cutting tools (circular saw blades, carbide tip saws, circular knives); and
industrial magnets (magnetic holding devices, precision measuring tools).

    Ames and Spear & Jackson distribute their products primarily through
independent wholesale distributors, home centers, mass merchants and large
buying groups including cooperatives. The sales of Ames products, and, to a
lesser extent, Spear & Jackson products, have become increasingly concentrated
among home centers and other mass merchants, including Home Depot, which, as the
division's largest customer, accounted for approximately 14%, 26% and 24% of the
total revenues of the USI Hardware and Tools division in fiscal 1998, 1997 and
1996, respectively.

USI DIVERSIFIED

    USI Diversified manufactures a wide range of consumer and industrial
products. Its principal businesses are described below.

    Rexair Inc. ("Rexair") is a leading manufacturer of premium vacuum cleaners.
Its Rainbow vacuum cleaners collect dirt particles by means of a water
filtration and separator system rather than the bag used in traditional vacuum
cleaners. Rexair manufactures its products at its Cadillac, Michigan facility.
Rexair sells the Rainbow and its accessories exclusively to independent
authorized distributors. Rexair's proportion of international unit sales to
total sales was 56% in fiscal 1996, 58% in fiscal 1997 and 52% in fiscal 1998.
In fiscal 1998, Rexair sold its products in over 75 foreign countries and its
principal international markets included Poland, Austria, the Czech Republic,
Japan and Portugal. As discussed under "International Operations" below, export
sales are subject to the usual risks of doing business abroad.

    The direct sales vacuum cleaner industry is mature and competition is based
on quality, sales technique, personnel, marketing and distribution approaches.
Rexair does not compete on price. Sales to consumers are made by distributors
and their dealers through in-the-home demonstrations typically set up by
referrals from other consumers. The Company estimates that approximately 66% of
domestic distributors' and subdistributors' sales to consumers are financed by
third parties; thus, Rexair's business could be adversely affected by a
decreased availability of consumer credit or increased consumer finance rates.


                                       3
<PAGE>

    Georgia Boot Inc. manufactures and markets work, hiking, hunting and western
boots under the Georgia Boot, Durango and Northlake brands. Trimfoot Co.
manufactures, imports and markets footwear products for infants and children.
These products are distributed through department stores, mass merchants and
other retail channels. Lehigh Safety Shoe Company ("Lehigh") manufactures and
markets protective safety shoes that are generally purchased by industrial
companies for their employees. Lehigh distributes its products through a network
of company-owned and independent shoe centers, and shoe-mobiles which visit
industrial locations. A portion of Lehigh's sales are derived from direct mail
and telemarketing efforts.

    Garden State Tanning, Inc. ("Garden State Tanning") manufactures high
quality leather for installation as automotive seating and trim. Garden State
Tanning produces precision cut "sets" that are shipped to automotive industry
customers' facilities where they are sewn and attached to automobile seats and
other vehicle parts. Hide purchases comprise approximately one-half of Garden
State Tanning's finished leather costs. Over two-thirds of the hides used in the
production of finished leather are purchased from one supplier.

    Huron Inc. ("Huron") manufactures precision metal products used in
automobile systems including screw machine parts, tubular assemblies, dowels,
fittings, shafts and air conditioning and fuel manifolds. Huron supplies its
precision metal products to domestic automotive OEMs and foreign automobile
manufacturers with United States assembly plants and their suppliers located in
North America and Europe.

    Leon Plastics, Inc. ("Leon Plastics") manufactures molded plastic parts and
assemblies for automotive interiors. Leon Plastics distributes its products
directly to automotive assembly plants and automotive interior trim
manufacturers.

    Native Textiles manufactures tricot products which are sold to bra, lingerie
and active sportswear manufacturers primarily in the United States.

    Bearing Inspection, Inc. overhauls and reconditions aircraft engine
bearings.

    Jade Technologies Singapore Ltd. ("Jade Singapore") manufactures leadframes
for the electronics industry. In January 1997, an initial public offering of 25%
of the shares of Jade Singapore was completed. Its shares are listed on the
Stock Exchange of Singapore Dealing and Automated Quotation System (SESDAQ).
Immediately after the transaction, the Company owned approximately 75% of the
outstanding shares of Jade.

INVESTMENT

    The Company has an equity interest in United Pacific Industries Limited
("UPI"), a limited liability company incorporated in Bermuda and listed on the
Stock Exchange of Hong Kong. UPI manufactures voltage converters, other
electronic components and consumer products. The Company's investment of $18
million at September 30, 1998 results in beneficial ownership of approximately
20% of UPI. The Company accounts for this investment using the equity method of
accounting.

COMPETITION

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


                                       4
<PAGE>
BACKLOG ORDERS

         The Company's backlogs believed to be firm as of September 30, 1998 and
1997 were as follows:

                                                           As of September 30
                                                              (in millions)

                                                              1998     1997
                                                              ----     ----

                  Bath and Plumbing Products                  $155     $164
                  Lighting Corporation of America               75       41
                  Hardware and Tools                            13       11
                  Diversified                                   65       69
                                                              ----     ----
                  Total Backlogs                              $308     $285
                                                              ====     ====

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 10%, 13% and 13% of total revenues in fiscal 1998, 1997 and
1996, respectively, principally reflecting sales by Rexair to foreign


                                       5
<PAGE>
distributors of Rainbow products in numerous countries, and sales by Garden
State Tanning to Japanese automobile manufacturers. Revenue from foreign
operations amounted to 20%, 11% and 9% of total revenues in fiscal 1998, 1997
and 1996, respectively, principally reflecting certain Jacuzzi operations, Spear
& Jackson and SiTeco during fiscal 1998. Identifiable assets of foreign
operations represented approximately 23%, 10% and 8% of total identifiable
assets at September 30, 1998, 1997 and 1996, respectively. Foreign identifiable
assets at September 30, 1998 principally reflect certain assets of Jacuzzi,
SiTeco and Spear & Jackson. Certain businesses obtain a significant amount of
finished goods from unaffiliated suppliers in East Asia.

    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. In particular, if China lost the "Most Favored Nation"
status currently accorded to it by the United States or if the United States
Trade Representative imposed retaliatory trade sanctions on China the cost of
imports from China could increase significantly.

EMPLOYEES

    As of September 30, 1998, the Company had approximately 24,000 employees
(excluding employees of companies in which the Company holds equity interests).
Approximately 42% of such employees were represented by unions. The Company
believes that the relations of its operating subsidiaries with employees and
unions are satisfactory.

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. No information currently available reasonably suggests that projected
expenditures associated with 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.

    A number of present and former operating units of the Company have been
named as Potentially Responsible Parties ("PRPs") at 19 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 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 its applications for certain licenses or permits on the basis that 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

                                       6
<PAGE>
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, 1998, the Company had accrued approximately $20 million for
various environmental related liabilities of which the Company is aware. The
Company believes that the range of liability which is reasonable for such
matters is between approximately $7 million and $25 million. 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.

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.

EXECUTIVE OFFICERS

    At September 30, 1998, the executive officers of the Company were as
follows:

<TABLE>
<CAPTION>
NAME                                                                              POSITION
--------------------------------------------------------  --------------------------------------------------------
<S>                                                       <C>
David H. Clarke.........................................  Chairman of the Board and Chief Executive Officer
John G. Raos............................................  President, Chief Operating Officer and Director
John F. Bendik..........................................  Executive Vice President
George H. MacLean.......................................  Senior Vice President, General Counsel and Secretary
James O'Leary...........................................  Senior Vice President and Chief Financial Officer
Dorothy E. Sander.......................................  Senior Vice President--Administration
Diana E. Burton.........................................  Vice President--Investor Relations
Robert P. Noonan........................................  Corporate Controller
Peter F. Reilly.........................................  Treasurer
</TABLE>

    David H. Clarke, 57, has served as Chairman of the Board and Chief Executive
Officer of the Company since the Demerger. Mr. Clarke was Vice Chairman of
Hanson from 1993 until the Demerger, Deputy Chairman and Chief Executive Officer
of Hanson Industries, the U.S. arm of Hanson, from 1992 until the Demerger and a
Director of Hanson from 1989 until May 1996. Mr. Clarke is a director of
Fiduciary Trust International, a public company engaged in investment management
and administration of assets for individuals.

    John G. Raos, 49, has served as President and Chief Operating Officer and a
Director of the Company since the Demerger. Mr. Raos was President and Chief
Operating Officer of Hanson Industries from 1992

                                       7
<PAGE>
until the Demerger and a Director of Hanson from 1989 until the Demerger. Mr.
Raos is a Director of TearDrop Golf Company.

    John F. Bendik, 47, has served as an Executive Vice President of the Company
since January 1998. Prior to that, Mr. Bendik was a Group Vice President from
June 1997. Mr. Bendik served as Director of Strategic Planning of the Company
since August 1995. For the balance of the previous five years, Mr. Bendik was
President and CEO of Histacount Corporation, a direct marketer of stationary
and related products.

    George H. MacLean, 63, has served as Senior Vice President, General Counsel
and Secretary of the Company since the Demerger. For the balance of the previous
five years, Mr. MacLean served as Vice President and Associate General Counsel
of Hanson Industries.

    James O'Leary, 35, has served as Senior Vice President and Chief Financial
Officer since June 1998. He served as Corporate Controller of the Company from
the Demerger until June 1998 and was elected as a Vice President in January
1996. Mr. O'Leary served as Group Controller for certain consumer and industrial
products businesses of Hanson Industries from September 1994 until the Demerger.
For the balance of the past five years, he served as Assistant Corporate
Controller for Hanson Industries.

    Dorothy E. Sander, 45, has served as Senior Vice President--Administration
since June 1998. Previously she had served as Vice President--Administration of
the Company since the Demerger. Ms. Sander served as Vice
President--Administration and Benefits of Hanson Industries from 1991 until the
Demerger and as an Associate Director of Hanson PLC from 1993 until the
Demerger. She is a member of the Advisory Board of the Bank of New York and the
Board of Editors of "HR-Law and Practice" magazine.

    Diana E. Burton, 53, has served as Vice President--Investor Relations of the
Company since the Demerger. From January 1995 through the Demerger, Ms. Burton
served as an investor relations consultant to Hanson Industries. For the balance
of the past five years, she was a Vice President of Marine Harvest
International, Inc. ("Marine Harvest"), a company engaged in the farming and
distribution of seafood products, with principal responsibility for
administration and investor relations.

    Robert P. Noonan, 36, has served as Corporate Controller of the Company
since June 1998. Mr. Noonan served as Assistant Corporate Controller of the
Company from February 1998 to June 1998 and was a Group Controller of the
Company from the Demerger to January 1998. For the balance of the past five
years, he was Corporate Controller of Marine Harvest.

    Peter F. Reilly, 34, has served as Treasurer since December 1997. Mr. Reilly
served as Assistant Treasurer from the Demerger until June 1997 and,
subsequently, as a Group Controller. Mr. Reilly was a financial advisor to
Hanson Industries from January 1995 through the Demerger. He was Assistant
Treasurer of Marine Harvest from April 1994 through November 1994. For the
balance of the past five years, he was Corporate Controller for Lynton Group,
Inc., a company engaged in aviation support services.


                                        8
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA

    The following tables sets forth the consolidated (combined) historical
selected financial data of the Company.
<TABLE>
<CAPTION>
                                                                               FOR THE FISCAL YEARS ENDED SEPTEMBER 30,
                                                                       ---------------------------------------------------------
<S>                                                                    <C>          <C>        <C>        <C>          <C>
                                                                        1998 (1)      1997       1996      1995 (5)      1994
                                                                       -----------  ---------  ---------  -----------  ---------

<CAPTION>
                                                                                    (IN MILLIONS, EXCEPT PER SHARE)
<S>                                                                    <C>          <C>        <C>        <C>          <C>
INCOME STATEMENT DATA:
Net sales............................................................   $   3,135   $   2,521  $   2,169   $   1,974   $   1,853
Operating income.....................................................         142         268        238          93         164
Income (loss) from continuing operations.............................           3         125        103         (50)         32
Net income (loss)....................................................         (44)        252        138         (72)         87
Income from continuing operations per share (2)
  Basic..............................................................         .03        1.35       1.08      --          --
  Diluted............................................................         .03        1.31       1.06      --          --
Net income (loss) per share (2)
  Basic..............................................................        (.46)       2.73       1.45      --          --
  Diluted............................................................        (.45)       2.64       1.42      --          --
Cash dividend declared per share (4).................................         .20         .05     --          --          --

BALANCE SHEET DATA (AT PERIOD END):
Cash and cash equivalents............................................   $      44   $      67  $      57   $      67   $      34
Working capital......................................................         876         731        779         807       1,188
Total assets.........................................................       2,776       2,499      2,477       2,203       2,566
Total debt (3).......................................................         966         746        930       1,000         997
Stockholders' equity/Invested capital................................         960         950        758         643       1,022
</TABLE>

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

(1) The fiscal year ended September 30, 1998 included non-recurring and unusual
    after-tax charges of $131 million of merger, restructuring and other costs,
    $7 million to write-off interest rate protection agreements, $34 million to
    discontinue a business, and $5 million associated with the refinancing of
    Zurn's outstanding indebtedness, totaling $177 million.

(2) All earnings per share data has been prepared in accordance with SFAS 128,
    which was adopted on December 31, 1997. The adoption of SFAS 128 did not
    have a material impact on the information previously presented. Prior to
    fiscal 1996, earnings per share information is not presented as such
    information is not indicative of the Company's continuing capital structure.

(3) Amount in fiscal 1994 primarily represents intercompany notes payable to
    Hanson plc.

(4) Cash dividends exclude dividends declared and paid by Zurn prior to the
    merger.

(5) USI changed its accounting policy for evaluating goodwill impairment in
    fiscal 1995, resulting in a charge of $98 million, which affects
    comparability between fiscal 1995 and fiscal 1994. Fiscal 1995 operating
    income includes charges of $2 million to close certain underutilized
    facilities of the lighting products operations.

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

RESULTS OF OPERATIONS

    On June 11, 1998, USI merged with Zurn by exchanging 20.4 million shares of
the Company's common stock for all of the common stock of Zurn. Each share of
Zurn common stock was exchanged for 1.6 shares of the Company's common stock.
Outstanding Zurn employee stock options were converted at the same exchange
ratio into options to purchase 2 million shares of the Company's common stock.

    The Merger has been accounted for as a pooling of interest under Accounting
Principles Board Opinion No. 16. All prior period consolidated financial
statements presented have been restated to include the results of operations,
financial position and cash flows of USI and Zurn as a single entity. There were
no transactions between USI and Zurn prior to the combination. Certain
reclassifications were made to the Zurn financial statements to conform to USI's
presentations.

    The Company's operations are grouped into four segments: USI Bath and
Plumbing Products, Lighting Corporation of America, USI Hardware and Tools and
USI Diversified. The results of all operations sold or classified as
discontinued are excluded from the table and discussion below. (See Note 4 to
the Consolidated Financial Statements.) Prior to the Merger, Zurn's fiscal year
ended on March 31. In recording the business combination Zurn's results of
operations, financial position and cash flows as of and for the year ended
September 30, 1998 and 1997 have been restated to conform to USI's fiscal year
end.

                                       9
<PAGE>
For the year ended September 30, 1996, USI's results of operations and cash
flows have been combined with the results of operations and cash flows of Zurn
for the year ended March 31, 1997. Zurn's results are included in USI Bath and
Plumbing Products.

<TABLE>
<CAPTION>
                                                                           FOR THE FISCAL YEARS ENDED
                                                                                  SEPTEMBER 30,
                                                                         -------------------------------
                                                                           1998       1997       1996
                                                                         ---------  ---------  ---------
<S>                                                                      <C>        <C>        <C>
                                                                                  (IN MILLIONS)
NET SALES
Bath and Plumbing Products.............................................  $   1,105  $     879  $     685
Lighting Corporation of America........................................        766        538        508
Hardware and Tools.....................................................        430        308        238
Diversified............................................................        834        796        738
                                                                         ---------  ---------  ---------
  TOTAL NET SALES......................................................  $   3,135  $   2,521  $   2,169
                                                                         ---------  ---------  ---------
                                                                         ---------  ---------  ---------
OPERATING INCOME (LOSS) (1)
Bath and Plumbing Products.............................................  $      93  $     101  $      88
Lighting Corporation of America........................................         52         42         36
Hardware and Tools.....................................................         (2)        34         31
Diversified (2)........................................................         31        118        110
                                                                         ---------  ---------  ---------
Operating income before corporate expenses.............................        174        295        265
Corporate expenses.....................................................        (32)       (27)       (27)
                                                                         ---------  ---------  ---------
  TOTAL OPERATING INCOME...............................................  $     142  $     268  $     238
                                                                         ---------  ---------  ---------
                                                                         ---------  ---------  ---------
</TABLE>

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

(1) Operating income (loss) for the year ended September 30, 1998 includes
    merger, restructuring and other related costs of $142 million and product
    change costs in connection with the restructuring of approximately $11
    million. (See Note 5 to the Consolidated Financial Statements.) Operating
    income (loss) for the USI Bath and Plumbing Products, Lighting Corporation
    of America, USI Hardware and Tools, USI Diversified Operations and Corporate
    expenses include merger, restructuring and other charges of $40, $3, $37,
    $66 and $7 million, respectively.

(2) Fiscal 1998 and 1997 operating income for the USI Diversified Operations
    includes $(3) and $2 million, respectively of equity (loss) earnings from
    the Company's investment in UPI. Fiscal 1998 equity (loss) includes a charge
    associated with an impairment of a UPI subsidiary of $4 million.

FISCAL 1998 COMPARED TO FISCAL 1997

    The Company had sales of $3,135 million in fiscal 1998, an increase of $614
million (24.4%). The operating income for the year was $142 million compared to
$268 million in the prior year. The current year's operating income includes
merger, restructuring and other charges of $153 million which are discussed
below. Excluding these non-recurring and unusual charges, operating income would
have been $295 million, an increase of $27 million (10.1%).

    USI Bath and Plumbing Products operations had sales of $1,105 million and
operating income of $93 million, a sales increase of $226 million (25.7%) and a
decrease in operating income of $8 million. Operating income in the current year
includes non-recurring and unusual charges of $40 million incurred in connection
with (i) the Merger, including investment banking, legal, and accounting fees as
well as change in control payments to certain Zurn employees, (ii) the closure
of a manufacturing facility, (iii) the consolidation of several distribution
centers between the Jacuzzi and Zurn operations and (iv) the reduction of
duplicate administrative functions resulting from the Merger. Excluding these
charges, operating income would have been $133 million, an increase of $32
million (31.7%) over the prior year. The increase in sales and operating profit,
excluding non-recurring and unusual charges, is primarily due to the full year
inclusion of Eljer (which was acquired in January 1997), the acquisition of
Sundance Spas in June 1998, continued strength in the European bath operations
and increased market penetration by Zurn Plumbing Products. These gains were
partially offset by shortfalls in South America and Asia attributable to
difficult local economic conditions.

    Lighting Corporation of America had sales of $766 million and operating
income of $52 million in fiscal 1998, increases of $228 million (42.4%) and $10
million (23.8%), respectively, over the prior year. Operating income in the
current year includes restructuring charges of $3 million incurred in connection
with plant shutdowns at two facilities. Excluding these charges, operating
income in the current year would

                                       10
<PAGE>
have been $55 million, an increase of $13 million (31.0%) over the prior year.
The increase in sales and operating income, excluding these charges, is due to
the October 1997 acquisition of SiTeco, and strong sales of outdoor and
residential lighting. Sales of commercial indoor florescent fixtures continue to
be adversely affected by price competition.

    USI Hardware and Tools operations had sales of $430 million and an operating
loss of $2 million for the current year, a sales increase of $122 million
(39.6%), and a decrease of $36 million from the prior year's operating income of
$34 million. The operating loss in the current year includes charges of $37
million which consists of (i) impairments of goodwill and property, plant and
equipment in the Company's ladder operations, (ii) severance incurred in
connection with the consolidation of certain administrative functions at the
ladder operations with Ames and (iii) the elimination of a product line at
Keller's window operations. Excluding these charges, the operating income would
have been $35 million, an increase of $1 million (2.9%) from the prior year. The
increase in sales is due to the first time inclusion of Spear & Jackson,
acquired in December 1997, and a metal components business acquired from Philips
in May 1998. The increase in operating income, excluding these charges, is due
to these acquisitions, partially offset by the operating losses at the ladder
operations, which lost a major customer in 1997, and reduced operating income at
Ames. Ames operating income was negatively affected by price pressure from the
mass retailers, poor winter and spring tool sales due to a lack of snowfall and
unusually hot summer weather, partially offset by the favorable impact of prior
year acquisitions. The first half of fiscal 1999 operating results for Ames are
expected to be unfavorably affected by high retail inventories carried over from
fiscal 1998.

    USI Diversified Operations had sales of $834 million and operating income of
$31 million, an increase of $38 million and a decrease of $87 million,
respectively, from the prior year. Operating income in the current year includes
total charges of $66 million consisting of (i) impairments of goodwill at the
automotive leather tanning business, (ii) obsolescence, severance and impairment
charges at the vacuum cleaner operations incurred in connection with management
changes and the changeover to a new model, (iii) severance and impairment
charges in the footwear operations incurred in connection with the closure of a
manufacturing facility, (iv) severance and other charges in the Company's
plastic automotive business incurred in connection with the discontinuance of a
business line and (v) severance, impairment and obsolescence charges incurred in
connection with the elimination of a product line in the Company's textile
operations. Excluding these charges operating income in the current year would
have been $97 million, a decrease of $21 million from the prior year. The
decrease in sales and operating profit, excluding these charges, is primarily
due to lower sales of vacuum cleaners. Operating income in the vacuum cleaner
business declined due to lower sales, particularly in certain foreign markets,
which were affected by the strength of the dollar. Domestic vacuum cleaner sales
were adversely affected by dealers' difficulties in recruiting sales
representatives due to low unemployment rates. Operating profits were also
negatively impacted by lower sales of western footwear and plastic automotive
components and increased price concessions and reduced scrap prices in the
automotive leather division and the Company's equity share of an impairment
charge recorded by UPI. These unfavorable factors were partially offset by
increased sales and operating income in the refurbished aircraft bearing
business, the January 1998 acquisition of the Philips leadframe business, and a
favorable settlement of certain environmental obligations in the footwear
operations.

    Corporate expenses include $7 million of charges for severance of certain
executive staff and employment costs in connection with the Company's
realignment of its business units.

MERGER, RESTRUCTURING AND OTHER RELATED COSTS

    During the third quarter, the Company reorganized into four operating
divisions:

o        Bath and Plumbing Products
o        Lighting
o        Hardware and Tools
o        Diversified Operations

    Each division has full operational and financial responsibility and, with
the exception of Lighting Corporation of America, is headed by new executives.
In conjunction with the reorganization and the closing of the merger , the
Company reviewed its long-term strategy for the newly combined entity and
reviewed each operating company's performance and future prospects. As a result,
the Company adopted a plan to improve efficiency and enhance competitiveness.

                                       11
<PAGE>
    In addition, due to indications of impairment, the Company evaluated the
recoverability of certain long-lived assets, primarily goodwill at Garden State
Tanning and Keller Ladders. In arriving at the fair value of Garden State
Tanning the Company considered a number of factors including: (i) annual price
concessions in the automotive industry and Garden State Tanning's inability to
reduce costs due to antiquated facilities and equipment, (ii) a dramatic decline
in scrap leather prices attributable to the Asian economic crisis, (iii) capital
investment that would be required to make Garden State Tanning a lower cost
manufacturer, (iv) Garden State Tanning's long-term financial plan and (v)
analysis of values for similar companies. In arriving at the fair value of
Keller Ladders the Company considered (i) the impact from the loss of a major
customer, (ii) the inability to replace this business due to aggressive
competition, (iii) continued pressure for price concessions from mass merchants,
(iv) Keller Ladder's long term financial plan and (iv) analysis of values for
similar companies. In determining the amount of the impairment, the Company
compared the net book values to the estimated fair values of Garden State
Tanning and Keller Ladders. Based on the above, the Company determined that
impairments to goodwill of $55 million and $28 million were necessary at Garden
State Tanning and Keller, respectively. The reduced goodwill amortization at
Garden State Tanning and Keller will be $3 million per annum.

    The restructuring plan includes the closing of certain manufacturing and
warehouse facilities in the bath and plumbing products, shoe and lighting
operations. The closure of the remainder of these facilities will occur at
various dates through December 1999. The production and distribution activities
of these facilities will be either outsourced, relocated off-shore, or
consolidated into existing facilities. The restructuring plan included a
reduction in the work force by approximately 700 employees, which included
salaried and administrative employees at the restructured facilities as well as
administrative and executive employees. As of September 30, 1998 approximately
300 employees had been terminated. In certain cases severance and related
benefits will be paid subsequent to the termination date.

    The restructuring is not anticipated to have a significant impact on the
ongoing operations during the periods that manufacturing is transitioned from
the facilities to be closed. The expected benefits from the restructuring are
primarily reduced depreciation; reduced fixed costs associated with leased
facilities and reduced compensation costs. The final anticipated benefit will be
approximately $8 million per annum and realized subsequent to the completion of
all plans. The Company expects that approximately 50% of the annual benefit will
be realized in fiscal 1999 and substantially all of the benefit will be realized
in fiscal 2000 and thereafter.

    The merger, integration and other costs also includes investment banking,
legal and accounting fees and other miscellaneous costs, as well as costs
related to change-in-control payments to certain Zurn employees.

    The principal components of the merger, restructuring and other related
costs are:

<TABLE>
<CAPTION>
                                                                                   (IN MILLIONS)
                                                                                   -------------
<S>                                                                                <C>
Impairment of goodwill...........................................................    $      83
Lease obligations and impairment of equipment....................................           11
Merger, integration and other costs..............................................           26
Severance and related costs......................................................           22
                                                                                         -----
  Total..........................................................................    $     142
                                                                                         -----
                                                                                         -----

Cash charges.....................................................................    $      52
Non-cash charges.................................................................           90
                                                                                         -----
  Total..........................................................................    $     142
                                                                                         -----
                                                                                         -----
</TABLE>

    $31 million of the cash charges were paid ($24 million for merger,
integration and other costs and $7 million for severance and related costs.)
prior to September 30, 1998 and the remaining cash charges will be paid by
December 31, 1999, or through the respective lease termination date.

    In addition to the $142 million of merger, restructuring and other related
costs, the Company has incurred $11 million of product change costs related to
the elimination of product lines and the reduction of manufacturing and
warehouse facilities at its operations which have been restructured.

    After an income tax benefit of $22 million, the charges detailed above
impact the results from continuing operations for the period ended September 30,
1998 by $131 million.

    OTHER (INCOME) EXPENSE, NET

    In anticipation of the offering of senior notes, the Company entered into
certain interest rate protection agreements in March and April 1998. Due to
subsequent market changes, the principal amount and term of the notes sold in
the offering varied from those originally anticipated. The portion of the costs
of the agreements, in the amount of $10 million, related to the notes sold will
be amortized over the term of the notes. The Company recorded a pre-tax charge
of $12 million ($7 million after-tax) to write off the remainder of the costs of
the agreements in other (income) expense, net. This charge was partially offset
by, among other things, gains on sales of real estate and the Company's
airplane.

    INTEREST AND TAXES

    Interest expense was $69 million for fiscal 1998, a $10 million (16.9%)
increase from the prior fiscal year. The increase reflects higher levels of debt
outstanding, primarily related to acquisitions, partially offset by lower
effective interest rates. Interest income was $8 million for fiscal 1998, a $1
million increase from fiscal 1997.

    The provision for income taxes was $75 million on pre-tax income of $78
million (a 96.1% effective rate) for fiscal 1998 compared to $94 million on
pre-tax income of $219 million (42.9% effective rate)

                                       12
<PAGE>
from the prior fiscal year. The current year includes the impact of goodwill
impairment and nondeductible non-recurring charges. Excluding these items the
effective rate would have been approximately 41%.

    DISCONTINUED OPERATIONS AND EXTRAORDINARY LOSS

    For fiscal 1998, the Company recorded a loss from discontinued operations
of $42 million, net of tax, which primarily consisted of the loss for the
Company's outdoor furniture operations, which was sold in September 1998, and
the income of Ertl, the Company's toy operations. When the Company acquired
Sunlite, the Company's outdoor casual furniture business, in March 1997 for $60
million, it anticipated it would have to reorganize Sunlite's manufacturing
operation and improve customer relations. Sunlite was a seasonal business with a
selling season primarily in the second and third fiscal quarters. As the
business entered the 1998 selling season, the operations were negatively
impacted by manufacturing problems arising from plant consolidations and
customer reluctance to place orders. The Company conducted an assessment of the
business to determine the future viability of Sunlite during the third fiscal
quarter. As a result of its assessment, the Company adopted a plan to dispose of
Sunlite. The Company sold Sunlite for a nominal amount and recorded a pre-tax
loss in conjunction with impairments and the sale of $41 million. The Company
adopted a formal plan to dispose of Ertl in the second quarter of fiscal 1999.
Ertl was sold in April 1999 for gross proceeds of approximately $105 million
subject to a post closing adjustment. This resulted in a net-of-tax loss of $12
million recorded in March 1999. The Company has restated its financial
statements to reflect this business as a discontinued operation.

    In the prior year, the Company reported income from discontinued operations
of $129 million, net of tax, consisting of net gains on disposals of
discontinued operations of $113 million and income from operations of
discontinued operations of $16 million. The gains on dispositions resulted from
the sales of Tubular Textile Machinery, SCM Metal Products, Inc., the assets of
QPF, Inc. and Odyssey Golf, partially offset by losses on the sales of Lynx
Golf, the Power Transmission Segment and portions of the Power Systems Segment.
The income from operations of discontinued operations consisted of the results
of the above companies, the Armour Golf Operations (Tommy Armour Golf and
Odyssey Golf), SunLite Casual Furniture and Ertl.

    Management regularly evaluates its exposure to contingencies related to
Zurn's discontinued Power Systems Segment. Management does not expect
discontinued operations to have a material impact on the future operations or
liquidity of the Company.

    In conjunction with the repayment of all outstanding indebtedness of Zurn
during the year ended September 30, 1998, a net-of-tax, non-cash, extraordinary
charge of $5 million was incurred to write off unamortized deferred financing
costs and for losses associated with interest rate swaps. In conjunction with
the repayment of all outstanding indebtedness under a prior credit agreement,
during the first quarter of fiscal 1997, a net of tax, non-cash, extraordinary
charge of $2 million was incurred to write off unamortized deferred financing
costs and for losses associated with interest rate swaps.

FISCAL 1997 COMPARED TO FISCAL 1996

    The Company had sales of $2,521 million and operating income of $268 million
in fiscal 1997, increases of $352 million (16.2%) and $30 million (12.6%),
respectively, from fiscal 1996.

    USI Bath and Plumbing Products operations had sales of $879 million and
operating income of $101 million, increases of $194 million (28.3%) and $13
million (14.8%), respectively. The increase in sales and operating profit is
primarily due to the acquisition of Eljer in January 1997. The Bath and Plumbing
Products operations had strong domestic sales to large do-it-yourself (DIY)
retailers and an increase in sales in the fire protection business due to
construction activity on the West Coast. An increase in operating profits from
domestic bath operations was substantially offset by a decline in operating
income in European bath products operations.

    The Lighting Corporation of America had sales of $538 million and operating
income of $42 million, increases of $30 million (5.9%) and $6 million (16.7%),
respectively, from fiscal 1996. Strong results were reported by the Company's
outdoor and residential lighting companies. The outdoor lighting companies
benefited from new product introductions and favorable market conditions in the
high-end architectural and commercial outdoor categories. In the residential
lighting segment, sales and profits increased due to the strong housing market.
In commercial indoor lighting, operating income was flat on slightly increased
sales as competitive pricing conditions continued.

    USI Hardware and Tools operations had sales of $308 million and operating
income of $34 million, increases of $70 million (29.4%) and $3 million (9.7%),
respectively. The operating income was negatively impacted due to a difficult
fourth quarter experienced by the Company's ladder operations. Fourth quarter
sales and operating profits declined in the ladder business, due to highly
competitive market conditions in the DIY distribution channels, which also
resulted in a negative profit comparison for the full year. Sales and operating
income from lawn and garden products increased as the Company benefited from new
product introductions in the wheeled goods category. Also adding to results were
contributions from Woodings-Verona Tool Works, Inc., a manufacturer of striking
tools acquired in January 1997, and IXL Manufacturing Company, Inc., a
manufacturer of tool handles acquired in July 1997.

                                       13
<PAGE>
    USI Diversified operations had sales of $796 million and operating income of
$118 million, increases of $58 million (7.9%) and $8 million (7.3%),
respectively. The significant increase in operating income was primarily due to
the increases in textile, metal automotive components and bearing refurbishment
businesses, partially offset by declines in vacuum cleaner sales and footwear
operations. Improved tricot sales, reduced provisions for lace inventories and
better manufacturing performance contributed to the improved textile operations.
Domestic and international vacuum cleaner unit sales were lower due to continued
weakness in the domestic market and weather related problems and weakness in the
international market. Sales and operating profits in the footwear operations
suffered from the absence of promotional programs in child and infant shoe
categories that positively affected fiscal 1996. Sales in the automotive leather
products operations increased significantly, however the market was highly
competitive during the year reducing profitability that was also affected by the
poor quality of hides available in the marketplace.

    DISCONTINUED OPERATIONS AND EXTRAORDINARY LOSS

    In fiscal 1996, the Company had income from discontinued operations of $60
million, net of tax, consisting of net gains on disposals of discontinued
operations of $58 million and income from operations of discontinued operations
of $2 million. The gains resulted from the sales of Office Group America, Inc.,
Blue Mountain Industries, Farberware, Inc., Spartus Electronics Corporation,
Piedmont Moulding Corporation, Jade Holdings, Inc., Universal Gym Equipment,
Inc. and Franklin Dyed Yarns for total cash consideration of $241 million and
notes of $6 million, which resulted in gains of $68 million, net of tax. This
was offset by a charge of $2 million, net of a tax benefit of $1 million, to
reduce the carrying value of the Company's equity investment in Ground Round to
its estimated realizable value and losses of $8 million, net of a tax benefit of
$1.6 million, on the sale of Lynx Golf, Power Transmission Segments and portions
of the Power Systems Segment for total consideration of $68 million. The income
from operations of discontinued operations consisted of the results of the above
named companies, as well as companies discontinued in subsequent years.

    During the first quarter of fiscal 1996, a net of tax, non-cash,
extraordinary charge of $25 million was incurred to write off unamortized
deferred financing costs and previously deferred losses associated with interest
rate swaps.

    GAIN ON SALE OF SUBSIDIARY STOCK

    In January 1997, an initial public offering of 25% of the shares of Jade
Singapore, a manufacturer of lead frames for the electronics industry, was
completed. Jade sold 8 million shares at approximately $.53 per share,
generating cash proceeds of approximately $4 million. The Company recorded a
gain of approximately $1 million ($700,000 after provision for deferred income
taxes) in connection with the sale. Immediately after the transaction, the
Company owned approximately 75% of the outstanding shares of Jade.

    INTEREST AND TAXES

    Interest expense was $59 million for fiscal 1997, a $5 million (8%) decrease
from the prior fiscal year. The decrease reflects the impact of lower levels of
debt outstanding and lower borrowing costs in the first half of the year.
Interest income was $7 million for fiscal 1997, a $4 million decrease from
fiscal 1996.

    The provision for income taxes for continuing operations totaled $94 million
for fiscal 1997 on pre-tax income of $219 million (a 42.9% effective tax rate)
compared to a $82 million provision on pre-tax income of $185 million for fiscal
1996 (a 44.3% effective rate). The lower tax rate was primarily attributable to
the increased utilization of foreign tax credits.

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 revolving credit facility.

                                       14
<PAGE>
    Net cash provided by operating activities of continuing operations was $106
million and $110 million for the year ended September 30, 1998 and 1997,
respectively. The decrease is due to the $31 million of cash disbursed in
connection with the merger, restructuring and other charges.

    Cash used in discontinued operations of $30 million in the year ended
September 30, 1998 is primarily due to the Company's outdoor furniture
operations and tax payments in connection with the sale of discontinued
operations partially offset by cash provided by the Company's discontinued toy
operations. Net cash used in discontinued operations of $70 million in the year
ended September 30, 1997, primarily relates to the operations of SunLite and the
Power Systems Segment, partially offset by cash provided by the Company's
discontinued toy operations.

    Investing activities used net cash of $228 million and provided net cash of
$114 million in fiscal 1998 and 1997, respectively. Fiscal 1998 included net
cash used for acquisitions including SiTeco, Spear & Jackson, Sundance and the
Philips leadframe and metal components operations, funding the U.S. Brass Trust
and capital expenditures, partially offset by the cash proceeds from the sale of
net assets held for disposition and sales of excess real estate. The prior year
included proceeds from the sale of net assets held for disposition, partially
offset by capital expenditures. The prior year also included net cash used for
the acquisitions of Eljer, SunLite, Woodings-Verona, IXL Manufacturing Company,
Inc. and Britains Petite.

    Financing activities provided net cash of $130 million and used net cash of
$139 million in fiscal 1998 and 1997, respectively. Fiscal 1998 included
proceeds from long-term debt and notes payable in excess of repayments of $166
million, primarily used to finance acquisitions and capital expenditures, the
purchase of $35 million of the Company's common stock for treasury and dividend
payments of $21 million. The prior year included repayments of long-term debt
and notes payable in excess of proceeds of $75 million and the purchase of $67
million of common stock for treasury.

    At September 30, 1998 the Company had current maturities of long-term debt
and short-term notes payable aggregating $19 million. The Company had $235
million of unused availability under uncommitted short-term lines of credit and
$294 million of unused credit available under the Existing Credit facility (as
defined below) at September 30, 1998. During October 1998, the Company
strengthened its sources of liquidity and capital resources by issuing $250
million aggregate principal amount of 7.125% Senior Notes due in 2003 and
obtaining a new $300 million, 364 day revolving credit facility (the "364 Day
Facility"). See SENIOR NOTES AND CREDIT FACILITIES within this section. The
Company believes that cash provided by operations and availability under unused
credit facilities will adequately support cash needs for working capital,
capital expenditures for existing businesses and future principal payments on
outstanding borrowings.

    Total stockholders' equity increased by $10 million from September 1997 to
September 1998, principally due to the issuance of $118 million in the Company's
Common Stock in conjunction with the acquisition of Spear & Jackson and the
exercise of employee stock options partially offset by the net loss of $44
million for fiscal 1998, the purchases of $35 million of the Company's Common
Stock for treasury and dividends declared of $20 million. See the Consolidated
Statement of Changes in Stockholders' Equity and Note 3 to the Consolidated
Financial Statements.

SENIOR NOTES AND CREDIT FACILITIES

    In fiscal 1997, USI American Holdings, Inc. ("USIAH"), a wholly owned
subsidiary of USI Atlantic, issued $125 million aggregate principal amount of
Senior Notes due December 1, 2006, which bear interest at 7.25%, payable
semiannually (the "7.25% Notes"). The net cash proceeds were $123 million after
transaction fees and discounts. In connection with the Merger, a supplemental
indenture was executed adding USI as a co-obligor with USIAH under the Notes.
The Notes remain fully and unconditionally guaranteed by USI Atlantic Corp. See
Note 17 to the Consolidated Financial Statements.

    In October 1998, USI and USIAH jointly issued $250 million aggregate
principal amount of Senior Notes due October 15, 2003, which bear interest at
7.125%, payable semiannually (the "7.125% Notes"). The net cash proceeds were
$247 million after transaction fees and discounts. As discussed below, $200
million of the proceeds were used to repay a short-term note and the remainder
was used to repay borrowings under uncommitted bank credit lines. The Company
has agreed to exchange the 7.125% Notes, which are not registered under the
Securities Act of 1933, for registered notes having substantially the

                                       15
<PAGE>
same terms. If the Company fails to comply with this requirement, then the
interest rate on the 7.125% Notes will increase 0.5% per annum until such time
as they are registered.

    The 7.25% Notes and the 7.125% Notes (collectively, the "Notes") are
guaranteed by USI Atlantic. The 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
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 Notes are unsecured but the
indentures place restrictions on, among other things, liens and subsidiary
indebtedness. Certain restrictions on dividends and the purchase of common stock
for treasury were eliminated pursuant to the indenture for the 7.25% Notes in
August 1998 when Moody's Investors Services, Inc. raised its rating on the notes
to Baa2, the 7.125% Notes were issued without such restrictions.

    The Company has a five year revolving line of credit providing for
borrowings of up to an aggregate amount of $750 million (the "Credit
Agreement"). The revolving credit commitment will be permanently reduced by $100
million on December 12, 1999 and by an additional $150 million on December 12,
2000, and terminates on December 12, 2001. The Credit Agreement includes
committed advances and uncommitted bid option advances. The committed advances
bear interest based on, at the option of the Company, (i) specified spreads over
London Interbank Offer Rate ("LIBOR") or (ii) the higher of the agent bank's
reference rate or 50 basis points above federal funds rate in effect on such
date. The spreads on the LIBOR-based borrowings range between 15 and 62.5 basis
points, based on the Company's senior unsecured debt rating for the relevant
period. At September 30, 1998 three-month LIBOR was 5.3125% per annum and the
spread over LIBOR was 22.5 basis points. A facility fee, regardless of the
amount utilized, is payable on a quarterly basis in arrears on the full amount
of the Credit Agreement. The facility fee ranges between 7.5 and 25 basis points
per annum, based upon the Company's senior unsecured debt ratings for the
relevant period. At September 30, 1998, the facility fee was 10.0 basis points
per annum. The Credit Agreement places restrictions on, among other things,
liens, mergers, consolidations and additional indebtedness. Its financial
covenants require USI to comply with maximum ratio of total funded debt to
capital and a consolidated leverage ratio. The maximum ratios are .60:1.00 and
3.5:1.0, respectively.

    During fiscal 1998, the Company amended the Credit Agreement to allow a
portion of the available facility to be used for borrowings in currencies other
than the U.S. dollar, to eliminate the previous restriction limiting certain
unsecured indebtedness to $200 million, to permit the Merger and to add USI as a
co-obligor. USIAH is the other co-obligor, and USI Atlantic is the guarantor of
the Credit Agreement.

    Zurn, prior to the Merger, was an obligor under a $250 million secured
credit facility. As a result of the Merger, the facility became due and was
repaid by the Company on June 11, 1998. The Company used $200 million of the
proceeds from a short-term note, advanced by one of its lenders, to repay the
borrowings under the facility. The note bore interest at a rate of approximately
6.1% per annum. The Company repaid this obligation in October 1998 using a
portion of the proceeds from the 7.125% Notes, and accordingly it has been
classified as long-term.

    On October 30, 1998, the Company entered into an unsecured revolving line of
credit maturing on October 29, 1999, providing for borrowings of up to an
aggregate amount of $300 million with a group of lenders, principally including
certain of the lenders under the Credit Agreement. A facility fee of 12.5 basis
points per annum is payable on the full amount of the facility. Borrowings under
the agreement bear interest at either the agent bank's base rate or the London
Interbank Offer Rate ("LIBOR"), plus a margin of 42.5 basis points per annum. An
additional fee of 5 basis points per annum will accrue on the outstanding amount
during any period in which the outstanding amount exceeds $150 million. The
facility contains restrictive covenants consistent with the Credit Agreement.

    RISK MANAGEMENT

    In anticipation of an offering of debt securities, the Company entered into
certain interest rate protection agreements in March and April 1998. Due to
subsequent market changes, the principal amount and term of the 7.125% Notes
that were ultimately sold in the offering varied from those originally
anticipated. These interest rate protection agreements were terminated in
September 1998 and settled with payments in October 1998 aggregating $22
million. The portion of the cost of the agreements deemed related to the 7.125%
Notes of $10 million will be amortized over the term of the 7.125% Notes
bringing the reported interest rate to 8.4%. The Company recorded a
non-recurring net of tax charge of $7 million

                                       16
<PAGE>
to write-off the remainder of the cost of the agreements in the fourth quarter
of fiscal 1998, which is included in other (income) expense, net.

    Prior to the Merger, Zurn had entered into certain interest rate protection
agreements. These agreements were settled via cash payment of $6 million, in
connection with the repayment of the Zurn Facility as discussed above. To manage
its interest rate exposure, the Company entered into interest rate swaps to
receive a floating rate based on three-month LIBOR and pay a weighted average
fixed rate. The fixed interest rates under the interest rate swaps currently
outstanding range from 5.43% to 6.78% per annum. Net payments under the
agreements amounted to approximately $3 million, $5 million and $7 million for
fiscal 1998, 1997 and 1996, respectively. The swaps are of notional amounts and
maturities that relate to specific portions of outstanding debt, and
accordingly, are accounted for as hedge transactions. The aggregate notional
amounts and periods covered by such agreements are as follows:

<TABLE>
<S>                                                              <C>
October 1, 1998 through September 30, 1999.....................  $300 million
October 1, 1999 through September 30, 2001.....................  $200 million
</TABLE>

    To protect the U.S. dollar value of its anticipated profits denominated in
foreign currencies, the Company may purchase foreign currency put option
contracts. The contracts are purchased and settled in U.S. dollars. The Company
had no exposure with respect to these foreign currency options contracts other
than the cost of such options. The cost of such foreign currency options was not
material. There are no such options outstanding at September 30, 1998. The
Company has also entered into foreign exchange forward contracts to manage
expected cash flows at foreign operations. Such contracts have not been
significant.

    The interest rate protection agreements, foreign exchange options and
foreign exchange forward contracts described above were the only derivative
instruments held or entered into by the Company at year end or during fiscal
1998 and 1997. See Note 2 to the Consolidated Financial Statements.

MARKET RISK EXPOSURES

    The Company, in the normal course of doing business, 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 and
procedures. See Note 2 to the Consolidated Financial Statements. The Company
does not engage in such transactions for trading purposes.

    To manage exposure to interest rate movements the Company uses interest rate
protection agreements. Based on the Company's overall exposure to interest rate
changes, a hypothetical change of 100 basis points across all maturities of the
Company's floating rate debt obligations, after considering interest rate
protection agreements, would be immaterial to the Company's pre-tax earnings in
fiscal 1999.

    The Company utilizes foreign currency-denominated borrowings to selectively
hedge its net investments in subsidiaries in foreign countries. Such borrowings
at September 30, 1998 are denominated in German marks, British pounds, Dutch
guilders and Hong Kong dollars. A 10% change in the relevant currency exchange
rates is estimated to have an impact of $20 million on the fair value of such
borrowings. This quantification of the Company's exposure to the market risk of
foreign exchange sensitive financial instruments is necessarily limited, as it
does not take into account the offsetting impact of the Company's underlying
investment exposures.

    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.

FOREIGN CURRENCY MATTERS

    The functional currency of each of the Company's foreign operations at
September 30, 1998 is the local currency. The operations in Brazil operated in a
hyperinflationary economy until on or about October 1, 1997, when Brazil was no
longer considered hyperinflationary. During the hyperinflationary period, the
functional currency of the Company's operation in Brazil was the U.S. Dollar.
Assets and liabilities of foreign subsidiaries are translated at the exchange
rates in effect at the balance sheet dates,

                                       17
<PAGE>
while revenue, expenses and cash flows are translated at average exchange rates
for the period. Except for companies operating in hyperinflationary economies,
translation gains and losses are reported as a component of Stockholders'
Equity. Losses resulting from the translation of the financial statements of the
Company's operations in Brazil of $1 million are included in other (income)
expense, net, in each of fiscal years 1997 and 1996.

EFFECT 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 1998, 1997 or 1996.

YEAR 2000 READINESS DISCLOSURE

    Many computer systems and other equipment with embedded technology use only
two digits to define the applicable year and may recognize a date using "00" as
the year 1900 rather than the year 2000. This could result in failures or
miscalculations causing disruptions of normal business activities and operations
(the "Year 2000 issue").

    The Company is actively addressing the Year 2000 issue. The compliance
program is led by information technology staff at each operating company, with
assistance from manufacturing staff and outside technology consultants where
necessary. Progress is being monitored by each operating company president and
reported to USI management. The Company uses outside technology consultants to
provide independent reviews of Year 2000 readiness.

    The Company's Year 2000 efforts focus on three areas: information technology
("IT") related systems and processes, such as operating systems, applications
and programs; embedded logic ("non-IT") systems and processes, such as
manufacturing machinery, telecommunications equipment and security devices; and
compliance efforts of third parties (such as customers, suppliers and service
providers). Within each of the IT and non-IT areas, the project spans four
phases: assessment of programs and devices to identify those that are affected
by the Year 2000 issue; development of remediation strategies; testing such
strategies; and implementing the solutions.

    The Company is presently evaluating each of its critical and principal
customers, supplier, service providers and other business associates to
determine each of such party's Year 2000 readiness status. The evaluation of
each third party includes a request for a Year 2000 readiness certification.
Then, depending upon each party's response, evaluation procedures may be
expanded to include obtaining Year 2000 disclosures contained in SEC filings of
those third parties, where available; testing interfaced systems; holding
face-to-face discussions with third parties; and developing and refining
contingency plans to address the possibility of a third party failure to
complete their year 2000 initiatives on a timely basis. The Company anticipates
that this evaluation will be ongoing through the remainder of 1999.

    The Company has completed an assessment of its critical IT systems and, as a
result, the operating companies have decided to modify, upgrade or replace
portions of their systems. The remediation efforts achieved significant progress
in fiscal 1997 and 1998, and remain underway. The Company expects that the
remediation, testing and implementation of all critical IT systems will be
completed at dates ranging from January to September 1999. The Company is
continuing the process of assessing and remediating critical non-IT systems, as
well, and expects that the assessment, remediation, testing and implementation
of such systems will be completed by the fourth quarter of calendar year 1999.

    Year 2000 costs for computer equipment, software and outside consultants
incurred through September 30, 1998 are approximately $13 million, of which $2
million was expensed and $11 million was capitalized. Estimated future costs to
complete the Year 2000 program are $23 million, of which $5 million are expected
to be expensed as incurred and the remaining $18 million are expected to be
capitalized. These costs have been, and will continue to be, funded from
operating cash flow and available credit facilities. Most of the costs are for
new systems and improved functionality. These costs exclude internal costs,
principally related to payroll costs for its employees who are involved in the
Year 2000 program, which are not separately tracked by the Company.

    The Company is developing contingency plans to address the possibility of
failure by the Company or third parties to complete their Year 2000 initiatives
on a timely basis. The Company expects that preliminary plans will be in place
by March 1999, with further refinements anticipated through the end of 1999
based on the Company's ongoing evaluation of its readiness as well as the status
of compliance of third parties. Such contingency plans may include using
alternative processes, such as manual procedures to substitute for non-compliant
systems; arranging for alternate suppliers and service providers; increasing
inventory levels; and developing procedures internally and in conjunction with
significant third parties to address compliance issues as they arise.

                                       18
<PAGE>
    No amount of preparation and testing can guarantee Year 2000 compliance.
However, the Company believes it is taking appropriate preventive measures and
will be successful in avoiding any material adverse effect on the Company's
operations or financial condition. Nevertheless, the Company recognizes that
failing to resolve its Year 2000 issues on a timely basis would, in a worst case
scenario, significantly limit its ability to manufacture and distribute its
products and process its daily business transactions for a period of time,
especially if such failure is coupled with third party or infrastructure
failures. Similarly, the Company could be significantly affected by the failure
of one or more significant suppliers, customers or components of the
infrastructure to conduct their respective operations without interruption after
1999. Because of the difficulty of assessing the Year 2000 compliance of such
third parties, the Company considers the potential disruptions caused by such
parties to present the most reasonably likely worst-case scenarios. Adverse
effects on the Company could include business disruption, increased costs, loss
of sales and other similar ramifications.

    The costs of the Company's Year 2000 initiatives, the dates on which the
Company believes that it will complete such activities and the Company's
evaluation of third-party effects are estimates and subject to change. Actual
results could differ from those currently anticipated. Factors that could cause
such differences include, but are not limited to, the availability of key Year
2000 personnel, the Company's ability to respond to unforeseen Year 2000
complications, the readiness of third parties, the accuracy of third party
assurances regarding Year 2000 compliance and similar uncertainties.

EURO CONVERSION

    On January 1, 1999, eleven of the fifteen member countries of the European
Union are scheduled to establish fixed conversion rates between their sovereign
currencies (the "legacy currencies") and a single European currency (the
"euro"). During a transition period from January 1, 1999 through December 31,
2001, legacy currencies will continue in use; however, the value of such
currencies will be set at fixed and irrevocable conversion rates to the euro.
Beginning in January 2002, new euro-denominated bills and coins will be issued
and the legacy currencies will be withdrawn from circulation. The Company is
addressing issues raised by the conversion to the euro, such as assessing
whether cross-border price transparency will limit the Company's flexibility to
charge different prices for similar products and adapting its information
technology systems. The Company's efforts to adapt its systems differ at its
various European operations. Some operations are expected to be able to
accommodate euro-denominated invoicing and purchasing transactions by January 1,
1999. The Company's significant European operations have formulated plans to
accommodate all euro-denominated transactions and conversion conventions by
January 1, 2002. The Company anticipates that its costs in connection with the
euro conversion will not be material. The Company does not anticipate that the
conversion from the legacy currencies to the euro would have a material adverse
impact on its financial condition or results of operations.

OUTLOOK

    The Company believes that, based on initial forecasts for fiscal 1999 and
subject to the factors described above under "Disclosures Concerning
Forward-Looking Statements", it should achieve earnings per share from
continuing operations in the range of $1.65 to $1.70. Management expects that
earnings for fiscal 1999 will be more heavily weighted towards the third and
fourth fiscal quarters than it was in fiscal 1997 and 1998. The re-distribution
reflects the increased share of the Company's sales and profits derived from its
plumbing and lighting businesses, which record higher activity in the spring and
summer due to the seasonal nature of the construction industry. Also, weaker
comparisons during the first and second fiscal quarters at USI Diversified and
USI Hardware and Tools will impact the overall distribution of earnings during
fiscal 1999.

ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK

    See Item 7, Managements Discussion and Analysis of Financial Condition and
Results of Operations.

                                       19
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                         REPORT OF INDEPENDENT AUDITORS

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, 1998 and 1997 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, 1998. 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 management
of the Company. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits. We did not audit the financial
statements of certain subsidiary companies (U.S. Industries' Automotive Group
and Jacuzzi Companies in 1997 and 1996) which statements reflect 22% of
consolidated total assets as of September 30, 1997, and 29% and 28% of
consolidated revenues for the years ended September 30, 1997 and 1996,
respectively. Those statements and Schedule II information were audited by other
auditors whose report has been furnished to us, and our opinion, insofar as it
relates to data included for these companies in 1997 and 1996, is based solely
on the report of the other auditors.

    We conducted our audits in accordance with generally accepted auditing
standards. 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 and the report of other auditors for 1997 and 1996
provide a reasonable basis for our opinion.

    In our opinion, based on our audits and the report of other auditors for
1997 and 1996, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of the Company at
September 30, 1998 and 1997, and the consolidated results of its operations and
its cash flows for each of the three years in the period ended September 30,
1998, in conformity with generally accepted accounting principles. Also, in our
opinion, based on our audits and the reports of other auditors for 1997 and
1996, 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.

                                          /s/ Ernst & Young LLP

New York, New York
November 12, 1998,
except for Note 16
as to which the date
is April 26, 1999


                                       20
<PAGE>
                      REPORT OF PRICEWATERHOUSECOOPERS LLP
                       REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors of
U.S. Industries, Inc.

    We have audited the accompanying combined balance sheets of the U.S.
Industries Automotive Group and Jacuzzi Companies as of September 30, 1997 and
1996, and the related combined statements of operations and cash flows for the
years then ended (not presented separately herein). Our audits also included
Financial Statement Schedule II of the U.S. Industries Automotive Group and
Jacuzzi Companies for the years ended September 30, 1997 and 1996 (not presented
separately herein). These financial statements and schedules are the
responsibility of the Companies' management. Our responsibility is to express an
opinion on these financial statements and schedules based on our audits.

    We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 combined financial statements audited by us present
fairly, in all material respects, the combined financial position of the U.S.
Industries Automotive Group and Jacuzzi Companies at September 30, 1997 and
1996, and the results of their operations and cash flows for the years then
ended in conformity with generally accepted accounting principles. Also, the
financial statement schedules referred to above, when considered in relation to
the basic combined financial statements taken as a whole, present fairly in all
material respects the information set forth therein.

/s/ PricewaterhouseCoopers LLP
Florham Park, New Jersey
November 14, 1997


                                       21
<PAGE>
                             U.S. INDUSTRIES, INC.

                     CONSOLIDATED STATEMENTS OF OPERATIONS

                         (IN MILLIONS EXCEPT PER SHARE)

<TABLE>
<CAPTION>
                                                                                         FOR THE FISCAL YEARS ENDED
                                                                                                SEPTEMBER 30,
                                                                                       -------------------------------
<S>                                                                                    <C>        <C>        <C>
                                                                                         1998       1997       1996
                                                                                       ---------  ---------  ---------
Net sales............................................................................  $   3,135  $   2,521  $   2,169
Operating costs and expenses:
  Cost of products sold..............................................................      2,202      1,739      1,488
  Selling, general and administrative expenses.......................................        649        514        443
  Goodwill impairment and non-recurring and unusual charges..........................        142     --         --
                                                                                       ---------  ---------  ---------
      Operating income...............................................................        142        268        238
Interest expense.....................................................................         69         59         64
Interest income......................................................................         (8)        (7)       (11)
Gain on sale of subsidiary shares....................................................     --             (1)    --
Other (income) expense, net..........................................................          3         (2)    --
                                                                                       ---------  ---------  ---------
Income before income taxes, discontinued operations and extraordinary loss...........         78        219        185
Provision for income taxes...........................................................         75         94         82
                                                                                       ---------  ---------  ---------
      Income from continuing operations..............................................          3        125        103
                                                                                       ---------  ---------  ---------
Discontinued operations:
  Income (loss) from operations (net of income taxes of ($9), $11 and $3)............        (35)        16          2
  Gain (loss) on disposals (net of income taxes of ($4), $68 and $8).................         (7)       113         58
                                                                                       ---------  ---------  ---------
  Income (loss) from discontinued operations.........................................        (42)       129         60
                                                                                       ---------  ---------  ---------
Income (loss) before extraordinary loss..............................................        (39)       254        163
Extraordinary loss from early extinguishment of debt (net of income tax benefits of
  $3, $1 and $16)....................................................................         (5)        (2)       (25)
                                                                                       ---------  ---------  ---------
Net income (loss)....................................................................  $     (44) $     252  $     138
                                                                                       ---------  ---------  ---------
                                                                                       ---------  ---------  ---------
Earnings per basic share:
  Income from continuing operations..................................................  $     .03  $    1.35  $    1.08
  Income (loss) from discontinued operations.........................................       (.44)      1.40       0.63
  Extraordinary loss.................................................................       (.05)     (0.02)     (0.26)
                                                                                       ---------  ---------  ---------
  Net income (loss)..................................................................  $    (.46) $    2.73  $    1.45
                                                                                       ---------  ---------  ---------
                                                                                       ---------  ---------  ---------
Earnings per diluted share:
  Income from continuing operations..................................................  $     .03  $    1.31  $    1.06
  Income (loss) from discontinued operations.........................................       (.43)      1.35       0.62
  Extraordinary loss.................................................................       (.05)     (0.02)     (0.26)
                                                                                       ---------  ---------  ---------
  Net income (loss)..................................................................  $    (.45) $    2.64  $    1.42
                                                                                       ---------  ---------  ---------
                                                                                       ---------  ---------  ---------
</TABLE>

                See notes to consolidated financial statements.

                                       22
<PAGE>
                             U.S. INDUSTRIES, INC.

                          CONSOLIDATED BALANCE SHEETS

                        (IN MILLIONS EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
                                                                                                   AT SEPTEMBER 30,
                                                                                                 --------------------
<S>                                                                                              <C>        <C>
                                                                                                   1998       1997
                                                                                                 ---------  ---------
                                                       ASSETS
Current assets:
  Cash and cash equivalents....................................................................  $      44  $      67
  Trade receivables, net.......................................................................        609        452
  Inventories..................................................................................        539        443
  Deferred income taxes........................................................................         75        102
  Other current assets.........................................................................         73         53
  Net assets held for disposition..............................................................        143        228
                                                                                                 ---------  ---------
      Total current assets.....................................................................      1,483      1,345

Property, plant and equipment, net.............................................................        508        385
Deferred income taxes..........................................................................         16          8
Other assets...................................................................................        220        209
Goodwill, net..................................................................................        549        552
                                                                                                 ---------  ---------
                                                                                                 $   2,776  $   2,499
                                                                                                 ---------  ---------
                                                                                                 ---------  ---------
                                        LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Notes payable................................................................................  $      15  $       4
  Current maturities of long-term debt.........................................................          4         41
  Trade accounts payable.......................................................................        247        171
  Accrued expenses and other liabilities.......................................................        301        326
  Income taxes payable.........................................................................         40         72
                                                                                                 ---------  ---------
      Total current liabilities................................................................        607        614

Long-term debt.................................................................................        947        701
Other liabilities..............................................................................        262        234
                                                                                                 ---------  ---------
      Total liabilities........................................................................      1,816      1,549
                                                                                                 ---------  ---------
Commitments and contingencies
Stockholders' equity:
  Common stock (par value $.01) per share, authorized 300,000,000 shares; issued 105,005,316
    and 101,109,040, respectively; outstanding 98,409,878 and 94,496,490, respectively)........          1          1
  Paid in capital..............................................................................        724        612
  Retained earnings............................................................................        406        470
  Unearned restricted stock....................................................................        (17)       (16)
  Other equity.................................................................................        (24)        (6)
  Treasury stock (6,595,438 and 6,612,550 shares, respectively) at cost........................       (130)      (111)
                                                                                                 ---------  ---------
      Total stockholders' equity...............................................................        960        950
                                                                                                 ---------  ---------
                                                                                                 $   2,776  $   2,499
                                                                                                 ---------  ---------
                                                                                                 ---------  ---------
</TABLE>
                See notes to consolidated financial statements.

                                       23
<PAGE>
                             U.S. INDUSTRIES, INC.

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

                                 (IN MILLIONS)
<TABLE>
<CAPTION>
                                                                                               FOR THE FISCAL YEARS ENDED
                                                                                                      SEPTEMBER 30,
                                                                                             -------------------------------
<S>                                                                                          <C>        <C>        <C>
                                                                                               1998       1997       1996
                                                                                             ---------  ---------  ---------
OPERATING ACTIVITIES:
  Income from continuing operations........................................................  $       3  $     125  $     103
  Adjustments to reconcile income from continuing operations to net cash provided by
    operating activities of continuing operations:
    Depreciation and amortization..........................................................         83         62         53
    Provision for deferred income taxes....................................................         20         24         11
    Provision for doubtful accounts........................................................          8          2          5
    Gain on sale of excess real estate.....................................................         (4)        (3)        (5)
    Gain on sale of subsidiary stock.......................................................     --             (1)    --
    Gain on sale of property, plant and equipment..........................................         (5)    --         --
    Goodwill impairment & non-recurring charges............................................         90     --         --
  Changes in operating assets and liabilities, excluding the effects of acquisitions and
    dispositions:
    Increase in trade receivables..........................................................        (91)       (23)       (19)
    Increase in inventories................................................................        (24)        (1)       (16)
    Decrease in other current assets.......................................................          3          8         29
    Increase in other non-current assets...................................................        (12)       (53)       (11)
    Increase (Decrease) in trade accounts payable..........................................         36        (17)        16
    Increase (Decrease) in income taxes payable............................................         11        (21)         1
    (Decrease) Increase in accrued expenses and other liabilities..........................         (6)         6        (13)
    (Decrease) Increase in other non-current liabilities...................................         (6)         4         (6)
    Other, net.............................................................................     --             (2)         1
                                                                                             ---------  ---------  ---------
    NET CASH PROVIDED BY OPERATING ACTIVITIES OF CONTINUING OPERATIONS.....................        106        110        149
                                                                                             ---------  ---------  ---------
  Income (loss) from discontinued operations...............................................        (42)       129         60
  Adjustments to reconcile income (loss) from discontinued operations to net cash used in
    discontinued operations:
    Loss (Gain) on disposal of discontinued operations.....................................          7       (113)       (58)
    Increase in net assets held for disposition............................................         (5)       (86)       (17)
                                                                                             ---------  ---------  ---------
    NET CASH USED IN DISCONTINUED OPERATIONS...............................................        (30)       (70)       (15)
                                                                                             ---------  ---------  ---------
    NET CASH PROVIDED BY OPERATING ACTIVITIES..............................................         76         40        134
                                                                                             ---------  ---------  ---------
INVESTING ACTIVITIES:
  Proceeds from sale of net assets held for disposition....................................         11        390        314
  Proceeds from sale of excess real estate.................................................         14         28         31
  Proceeds from sale of subsidiary stock...................................................     --              4     --
  Proceeds from collection of notes receivable.............................................          5     --              7
  Acquisition of companies, net of cash acquired...........................................       (173)      (260)      (239)
  Purchase of investment...................................................................         (7)        (1)       (12)
  Proceeds from sale of marketable securities..............................................     --             24          6
  Purchases of property, plant and equipment...............................................        (99)       (68)       (42)
  Proceeds from sale of property, plant and equipment......................................         34          2          4
  Other net................................................................................        (13)        (5)         2
                                                                                             ---------  ---------  ---------
    NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES....................................       (228)       114         71
FINANCING ACTIVITIES:
  Proceeds from long-term debt.............................................................      1,406      1,626      1,135
  Repayment of long-term debt..............................................................     (1,245)    (1,705)    (1,296)
  Proceeds from (repayment of) notes payable...............................................          5          4         (3)
  Payment of dividends.....................................................................        (21)        (4)        (5)
  Purchase of treasury stock...............................................................        (35)       (67)       (46)
  Proceeds from exercise of stock options..................................................         20          7     --
                                                                                             ---------  ---------  ---------
    NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES....................................        130       (139)      (215)
Effect of exchange rate changes on cash....................................................         (1)        (5)    --
                                                                                             ---------  ---------  ---------
    NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS...................................        (23)        10        (10)
Cash and cash equivalents at beginning of year.............................................         67         57         67
                                                                                             ---------  ---------  ---------
    CASH AND CASH EQUIVALENTS AT END OF YEAR...............................................  $      44  $      67  $      57
                                                                                             ---------  ---------  ---------
                                                                                             ---------  ---------  ---------
</TABLE>
                See notes to consolidated financial statements.

                                       24
<PAGE>
                             U.S. INDUSTRIES, INC.

                     CONSOLIDATED STATEMENTS OF CHANGES IN
                              STOCKHOLDERS' EQUITY

          FOR THE FISCAL YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996

                        (IN MILLIONS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
                                                                                                    UNEARNED
                                                            COMMON        PAID IN     RETAINED     RESTRICTED       OTHER
                                                             STOCK        CAPITAL     EARNINGS        STOCK        EQUITY
                                                         -------------  -----------  -----------  -------------  -----------
<S>                                                      <C>            <C>          <C>          <C>            <C>
Balance at September 30, 1995..........................    $       1     $     584    $      93     $     (24)    $      (6)
Net income.............................................                                     138
Cash dividend declared ($0.25 per share) Zurn..........                                      (5)
Amortization of unearned restricted stock..............                                                     7
Purchase of 3,581,386 shares of common stock...........
Common stock issued (58,707 shares) upon exercise of
  options..............................................           --            --
Common stock issued (35,993 shares) to employee and
  directors............................................           --            --
Treasury stock issued (93,000 shares) to employees and
  directors............................................                          1                         (2)
Forfeiture of 25,460 shares of unearned restricted
  stock................................................           --            --
Deferred tax benefit--Note 10..........................                         20
Translation adjustment.................................                                                                  (1)
Minimum pension liability adjustment...................                                                                   2
                                                                  --
                                                                             -----        -----           ---           ---
Balance at September 30, 1996..........................            1           605          226           (19)           (5)
                                                                  --
                                                                             -----        -----           ---           ---
Net Income.............................................                                     252
Less net income for Zurn for the six months ended March
  31, 1997.............................................                                      (2)
Cash dividend declared ($0.05 per share)...............                                      (4)
Cash dividend declared ($0.12 per share) Zurn..........                                      (2)
Amortization of unearned restricted stock..............                                                     7
Purchase of 3,134,343 shares of common stock...........
Common stock issued to employees and directors (11,360
  shares)..............................................           --            --
Common stock issued (336,714 shares) upon exercise of
  options..............................................           --             3
Common stock issued (46,576 shares) to Zurn pension
  plans................................................           --             1
Treasury stock issued (550,307 shares) to employees and
  directors............................................                          1                         (5)
Forfeiture of 166,065 shares of unearned restricted
  stock................................................                         (1)                         1
Income tax benefit relating to stock plans.............                          3
Translation adjustment.................................                                                                  (2)
Minimum pension liability adjustment...................                                                                   1
                                                                  --
                                                                             -----        -----           ---           ---
Balance at September 30, 1997..........................            1           612          470           (16)           (6)
                                                                  --
                                                                             -----        -----           ---           ---
Net loss...............................................                                     (44)
Cash dividends declared ($0.20 per share)..............                                     (20)
Amortization of unearned restricted stock..............                                                     6
Purchase of 1,260,900 shares of common stock...........
Retirement of 348,603 shares of treasury stock.........                         (5)
Forfeiture of 373,709 shares of restricted stock.......                                                     2
Treasury stock issued (1,303,118 shares) to employees,
  directors and upon exercise of options...............                          4                         (9)
Common stock issued (559,359 shares) upon exercise of
  options and to Zurn pension plans....................           --            12
Common stock issued (3,685,520 shares) for
  acquisition..........................................           --            96
Income tax benefit relating to stock plans.............                          5
Translation adjustment.................................                                                                  (9)
Minimum pension liability adjustment...................                                                                  (9)
                                                                  --
                                                                             -----        -----           ---           ---
Balance at September 30, 1998..........................    $       1     $     724    $     406     $     (17)    $     (24)
                                                                  --
                                                                  --
                                                                             -----        -----           ---           ---
                                                                             -----        -----           ---           ---
<CAPTION>
                                                          TREASURY
                                                            STOCK        TOTAL
                                                         -----------     -----
<S>                                                      <C>          <C>
Balance at September 30, 1995..........................   $      (5)   $     643
Net income.............................................                      138
Cash dividend declared ($0.25 per share) Zurn..........                       (5)
Amortization of unearned restricted stock..............                        7
Purchase of 3,581,386 shares of common stock...........         (46)         (46)
Common stock issued (58,707 shares) upon exercise of
  options..............................................                       --
Common stock issued (35,993 shares) to employee and
  directors............................................                       --
Treasury stock issued (93,000 shares) to employees and
  directors............................................           1           --
Forfeiture of 25,460 shares of unearned restricted
  stock................................................                       --
Deferred tax benefit--Note 10..........................                       20
Translation adjustment.................................                       (1)
Minimum pension liability adjustment...................                        2

                                                              -----        -----
Balance at September 30, 1996..........................         (50)         758

                                                              -----        -----
Net Income.............................................                      252
Less net income for Zurn for the six months ended March
  31, 1997.............................................                       (2)
Cash dividend declared ($0.05 per share)...............                       (4)
Cash dividend declared ($0.12 per share) Zurn..........                       (2)
Amortization of unearned restricted stock..............                        7
Purchase of 3,134,343 shares of common stock...........         (67)         (67)
Common stock issued to employees and directors (11,360
  shares)..............................................                       --
Common stock issued (336,714 shares) upon exercise of
  options..............................................                        3
Common stock issued (46,576 shares) to Zurn pension
  plans................................................                        1
Treasury stock issued (550,307 shares) to employees and
  directors............................................           6            2
Forfeiture of 166,065 shares of unearned restricted
  stock................................................                   --
Income tax benefit relating to stock plans.............                        3
Translation adjustment.................................                       (2)
Minimum pension liability adjustment...................                        1

                                                              -----        -----
Balance at September 30, 1997..........................        (111)         950

                                                              -----        -----
Net loss...............................................                      (44)
Cash dividends declared ($0.20 per share)..............                      (20)
Amortization of unearned restricted stock..............                        6
Purchase of 1,260,900 shares of common stock...........         (35)         (35)
Retirement of 348,603 shares of treasury stock.........           5           --
Forfeiture of 373,709 shares of restricted stock.......          (4)          (2)
Treasury stock issued (1,303,118 shares) to employees,
  directors and upon exercise of options...............          15           10
Common stock issued (559,359 shares) upon exercise of
  options and to Zurn pension plans....................                       12
Common stock issued (3,685,520 shares) for
  acquisition..........................................                       96
Income tax benefit relating to stock plans.............                        5
Translation adjustment.................................                       (9)
Minimum pension liability adjustment...................                       (9)

                                                              -----        -----
Balance at September 30, 1998..........................   $    (130)   $     960

                                                              -----        -----
                                                              -----        -----
</TABLE>
                See notes to consolidated financial statements.

                                       25
<PAGE>
                             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 grouped into four segments: USI Bath and Plumbing Products,
Lighting Corporation of America, USI Hardware and Tools and USI Diversified.

    On June 11, 1998, U.S. Industries, Inc. ("USI") merged with Zurn Industries,
Inc. ("Zurn") (the "Merger"), hereafter collectively referred to as the Company,
by exchanging 20.4 million shares of its common stock for all of the common
stock of Zurn. Each share of Zurn common stock was exchanged for 1.6 shares of
USI common stock. Outstanding Zurn employee stock options were converted at the
same exchange ratio into options to purchase 2 million shares of USI common
stock.

    The consolidated financial statements give retroactive effect to the Merger
in a transaction accounted for as a pooling of interests. The pooling of
interests method of accounting requires the restatement of all periods presented
as if USI and Zurn had always been combined. The consolidated statement of
changes in stockholders' equity reflects the accounts of the Company as if the
common stock to complete the Merger had been issued prior to the periods
presented.

    Prior to the Merger, Zurn's financial year ended on March 31. In recording
the business combination, Zurn's results of operations, financial position and
cash flows have been restated to conform to USI's fiscal year ended September
30, 1998 and 1997. For the year ended September 30, 1996, USI's results of
operations and cash flows have been combined with the results of operations and
cash flows of Zurn for the year ended March 31, 1997. As a result, the Company's
results of operations and cash flows for the years ended September 30, 1997 and
1996 both include Zurn's results of operations and cash flows for the six months
ended March 31, 1997. Zurn's net sales, operating income and net income for the
six months then ended were $190 million, $16 million and $2 million,
respectively. In addition, the cash flows during the same six month period
includes $52 million of proceeds provided by the sale of net assets held for
disposition and $176 million of cash used in the acquisition of companies.

    There were no transactions between USI and Zurn prior to the combination.
Certain reclassifications have been made to the Zurn financial statements to
conform to USI's presentations.

    The results of operations for the separate companies and the combined
amounts presented in the consolidated financial statements follow. For the year
ended September 30, 1998, the results of Zurn's operations are presented
separately through June 10, 1998. Thereafter, the Zurn results are included with
USI.

<TABLE>
<CAPTION>
                                                                   FOR THE FISCAL YEARS ENDED
                                                                         SEPTEMBER 30,
                                                                --------------------------------
                                                                  1998        1997       1996
                                                                ---------  ----------  ---------
<S>                                                             <C>        <C>         <C>
                                                                         (IN MILLIONS)
NET SALES
  USI.........................................................  $   2,673  $    2,009  $   1,816
  Zurn........................................................        462         512        353
                                                                ---------  ----------  ---------
    COMBINED..................................................  $   3,135  $    2,521  $   2,169
                                                                ---------  ----------  ---------
                                                                ---------  ----------  ---------

INCOME (LOSS) FROM CONTINUING OPERATIONS
  USI.........................................................  $     (18) $      101  $      81
  Zurn........................................................         21          24         22
                                                                ---------  ----------  ---------
    COMBINED..................................................  $       3  $      125  $     103
                                                                ---------  ----------  ---------
                                                                ---------  ----------  ---------
</TABLE>

                                       26
<PAGE>
                             U.S. INDUSTRIES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 1--BASIS OF PRESENTATION (CONTINUED)

<TABLE>
<CAPTION>
                                                                   FOR THE FISCAL YEARS ENDED
                                                                         SEPTEMBER 30,
                                                                --------------------------------
                                                                  1998        1997       1996
                                                                ---------  ----------  ---------
                                                                         (IN MILLIONS)
<S>                                                             <C>        <C>         <C>
NET INCOME (LOSS)
  USI.........................................................  $     (61) $      236  $     133
  Zurn........................................................         17          16          5
                                                                ---------  ----------  ---------
    COMBINED..................................................  $     (44) $      252  $     138
                                                                ---------  ----------  ---------
                                                                ---------  ----------  ---------
</TABLE>

    In January 1997, an initial public offering of 25% of the shares of the
Company's wholly-owned subsidiary Jade Technologies Singapore Ltd ("Jade"), a
manufacturer of leadframes for the electronics industry, was completed. Jade
sold 8 million shares at approximately $0.53 per share, generating cash proceeds
of approximately $4 million. The Company recorded a gain of $1 million ($700,000
after provision for deferred income taxes) in connection with the sale. After
the transaction, the Company owned 75% of the outstanding shares of Jade.

NOTE 2--ACCOUNTING POLICIES

    FISCAL YEAR:  USI's fiscal year ends on the Saturday nearest to September
30. All USI fiscal year data contained herein reflect results of operations for
the 53, 52 and 52 week periods ended on the Saturday nearest to September 30,
1998, 1997 and 1996, respectively, but are presented as of such date for
convenience.

    PRINCIPLES OF CONSOLIDATION:  The consolidated financial statements include
the accounts of the Company and its subsidiaries. Intercompany accounts and
transactions are eliminated. Companies which are 20% to 50% owned are accounted
for using the equity method.

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

    CASH EQUIVALENTS:  Cash equivalents represent short-term investments which
have maturities of ninety days or less when purchased.

    DEPRECIATION AND AMORTIZATION:

<TABLE>
<CAPTION>
                                                                          FOR THE FISCAL YEARS ENDED
                                                                                 SEPTEMBER 30,
                                                                     -------------------------------------
                                                                        1998         1997         1996
                                                                        -----        -----        -----
<S>                                                                  <C>          <C>          <C>
                                                                                 (IN MILLIONS)
Depreciation.......................................................   $      59    $      41    $      34
Amortization of goodwill...........................................          19           15           12
Amortization of deferred financing costs...........................           1            1            2
Amortization of unearned restricted stock..........................           6            7            7
Amortization of deferred income....................................          (2)          (2)          (2)
                                                                            ---          ---          ---
                                                                      $      83    $      62    $      53
                                                                            ---          ---          ---
                                                                            ---          ---          ---
</TABLE>

                                       27
<PAGE>
                             U.S. INDUSTRIES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 2--ACCOUNTING POLICIES (CONTINUED)
    TRADE RECEIVABLES AND CONCENTRATIONS OF CREDIT RISK:

<TABLE>
<CAPTION>
                                                                               AT SEPTEMBER 30,
                                                                           ------------------------
                                                                              1998         1997
                                                                           -----------  -----------
<S>                                                                        <C>          <C>
                                                                                (IN MILLIONS)
Trade receivables........................................................   $     647    $     483
Allowance for doubtful accounts..........................................         (38)         (31)
                                                                                -----        -----
                                                                            $     609    $     452
                                                                                -----        -----
                                                                                -----        -----
</TABLE>

    The Company operates in the United States and, to a lesser extent, in
Europe, South America, Canada and Asia. The Company performs periodic credit
evaluations of its customers' financial condition and generally does not require
collateral. Credit losses have been within management's expectations.

    INVENTORIES:

<TABLE>
<CAPTION>
                                                                               AT SEPTEMBER 30,
                                                                           ------------------------
                                                                              1998         1997
                                                                           -----------  -----------
<S>                                                                        <C>          <C>
                                                                                (IN MILLIONS)
Finished products........................................................   $     250    $     210
In-process products......................................................         109          103
Raw materials............................................................         180          130
                                                                                -----        -----
                                                                            $     539    $     443
                                                                                -----        -----
                                                                                -----        -----
</TABLE>

    Inventories are valued at the lower of cost, determined under both the
first-in, first-out and last-in, first-out methods, or market. The percentage of
inventory under each method follows:

<TABLE>
<CAPTION>
                                                                               AT SEPTEMBER 30,
                                                                           ------------------------
                                                                              1998         1997
                                                                           -----------  -----------
<S>                                                                        <C>          <C>
                                                                                (IN MILLIONS)
First-in, first-out (FIFO) method........................................         83%          76%
Last-in, first-out (LIFO) method.........................................         17%          24%
</TABLE>

    The increase in the carrying value of the inventory if only the FIFO method,
which approximates replacement costs, had been used, would be $4 million and $7
million at September 30, 1998 and 1997, respectively.

    PROPERTY, PLANT AND EQUIPMENT:

<TABLE>
<CAPTION>
                                                                               AT SEPTEMBER 30,
                                                                           ------------------------
                                                                              1998         1997
                                                                           -----------  -----------
<S>                                                                        <C>          <C>
                                                                                (IN MILLIONS)
Land and buildings.......................................................   $     282    $     236
Machinery, equipment and furniture.......................................         628          503
Accumulated depreciation.................................................        (402)        (354)
                                                                                -----        -----
                                                                            $     508    $     385
                                                                                -----        -----
                                                                                -----        -----
</TABLE>

    Property, plant and equipment is stated on the basis of cost less
accumulated depreciation provided under the straight-line method.

                                       28
<PAGE>
                             U.S. INDUSTRIES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 2--ACCOUNTING POLICIES (CONTINUED)
    In March 1998, the AICPA issued SOP 98-1, ACCOUNTING FOR THE COSTS OF
COMPUTER SOFTWARE DEVELOPED FOR OR OBTAINED FOR INTERNAL USE. The Company plans
to adopt the SOP on October 1, 1998. The SOP will require the capitalization of
certain costs incurred after the date of adoption in connection with developing
or obtaining software for internal use. The Company does not expect the impact
of adopting this SOP to be material.

    OTHER ASSETS:  Excess properties held for sale primarily consist of land and
buildings no longer used in operations which are included in other assets and
carried at the lower of cost or fair value less costs to sell. The carrying
value of such properties was $43 million and $44 million as of September 30,
1998 and 1997, respectively. The income (loss), net, from excess properties of
$3 million, $1 million and ($1) million in fiscal 1998, 1997 and 1996,
respectively, is included in other (income) expense, net and includes net gains
on the sale of these properties, adjustments to net realizable value and the
carrying costs incurred in the period.

    GOODWILL:  Goodwill represents the excess of the purchase price over the
fair value of net assets acquired. The Company reviews operating results and
other relevant facts every fiscal quarter for each of its businesses to
determine if there are indications that the carrying value of an enterprise may
be impaired. The fair value methodology is used by the Company to ascertain the
recoverability of the carrying value of an enterprise, when there are
indications of impairment. In the event that such fair value is below the
carrying value of an enterprise, for those companies with goodwill, the Company
first reduces goodwill and then other long-lived assets to the extent such
differential exists.

    The fair value methodology is applied to determine the recoverable value for
each business on a stand alone basis using ranges of fair values obtained from
independent appraisers. In developing these ranges, the independent appraisers
consider (a) publicly available information, (b) financial projections of each
business based on management's best estimates, (c) the future prospects of each
business as discussed with senior operating and financial management, (d)
publicly available information regarding comparable publicly traded companies in
each industry, (e) market prices, capitalizations and trading multiples of
comparable public companies and (f) other information deemed relevant. In
reviewing these valuations and considering the need to record a charge for
impairment of enterprise value and goodwill to the extent it is part of the
enterprise value, the Company also evaluates solicited and unsolicited bids for
the businesses of the Company.

    Goodwill is amortized straight-line over periods not exceeding forty years.
Accumulated amortization aggregated $274 million and $279 million, at September
30, 1998 and 1997, respectively. Amortization and adjustments to the carrying
value of goodwill amounted to $102 million, $15 million and $12 million for
fiscal 1998, 1997 and 1996, respectively.

    FOREIGN CURRENCY TRANSLATION:  The functional currency of each of the
Company's foreign operations at September 30, 1998 is the local currency. The
operations in Brazil operated in a hyperinflationary economy until on or about
October 1, 1997, when Brazil was no longer considered hyperinflationary. During
the hyperinflationary period, the functional currency of the Company's operation
in Brazil was the U.S. Dollar. 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. Except for companies operating in hyperinflationary economies,
translation gains and losses are reported as a component of Stockholders'
Equity. Losses resulting from the translation of the Company's operations in
Brazil of $1 million are included in other (income) expense, net, in fiscal 1997
and 1996.

                                       29
<PAGE>
                             U.S. INDUSTRIES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 2--ACCOUNTING POLICIES (CONTINUED)
    INCOME TAXES:  Deferred tax assets and liabilities are computed based on the
difference between the financial reporting and tax bases of assets and
liabilities using enacted tax rates and laws. Deferred income tax expense or
benefit is based on the changes in the asset or liability from period to period.

    REVENUE RECOGNITION:  Revenue is recognized upon shipment of product to the
customer. Provisions are made for warranty and return costs at the time of sale.
Such provisions have not been material.

    ADVERTISING COSTS:  Advertising costs are expensed as incurred. Such amounts
totaled $46 million, $36 million and $32 million for fiscal 1998, 1997, and
1996, respectively.

    RESEARCH AND DEVELOPMENT COSTS: Research and development costs are expensed
as incurred. Such amounts totaled $14 million, $10 million and $9 million for
fiscal 1998, 1997 and 1996, respectively.

    FAIR VALUE OF FINANCIAL INSTRUMENTS:  The fair value of all short-term
financial instruments approximate their carrying value due to their short
maturity. The Company's 7.25% Senior Notes are currently traded at a price which
approximates par value based on market prices for such securities. At September
30, 1998, the Company had several interest rate swap agreements covering various
periods. The notional amount of these agreements do not exceed $300 million for
any future period. The Company would have been required to pay approximately $10
million and $3 million to settle all outstanding agreements based upon their
fair value as of September 30, 1998 and 1997, respectively. These fair values
are based upon estimates received from financial institutions.

    The fair value of all other long-term financial instruments approximated
carrying value as they were based on terms that continue to be available to the
Company.

    DERIVATIVE FINANCIAL INSTRUMENTS:  The Company uses interest rate swap
agreements and treasury lock agreements to manage exposure to fluctuating
interest rates and foreign exchange option and forward contracts to manage
exposure to fluctuating foreign currencies.

    Interest rate differentials to be paid or received as a result of interest
rate swap agreements are accrued and recognized as an adjustment of interest
expense related to the designated debt. The fair values of interest rate swap
agreements are not recognized in the financial statements as they qualify as
hedge transactions. The value of treasury lock agreements are not recorded in
the financial statements until such time as the agreements are terminated or the
related anticipated transaction is no longer expected to occur. The foreign
currency options and forward contracts are marked to market at the end of each
period and any resulting gain or loss is recognized immediately in income.

    Realized and unrealized gains or losses at the time of maturity,
termination, sale or repayment of a derivative contract are recorded in a manner
consistent with the original designation of the derivative in view of the nature
of the termination, sale or repayment transaction. Amounts arising at the
settlement of interest rate swaps and treasury locks are deferred and amortized
as an adjustment to interest expense over the period of interest rate exposure,
provided the designated liability continues to exist or is probable of
occurring. Realized and unrealized changes in fair value of derivatives
designated with items that no longer exist or are no longer probable of
occurring are recorded as a component of the gain or loss arising from the
disposition of the designated item.

    In June 1998, the Financial Accounting Standards Board issued Statement No.
133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, which is
required to be adopted beginning in fiscal 2000. The statement will require the
Company to recognize all derivatives on the balance sheet at fair value.
Derivatives that are not hedges must be adjusted to fair value through income.
If the derivative is a hedge, depending on the nature of the hedge, changes in
the fair value of derivatives will either be offset against

                                       30
<PAGE>
                             U.S. INDUSTRIES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 2--ACCOUNTING POLICIES (CONTINUED)
the change in fair value of the hedged assets, liabilities, or firm commitments
through earnings or recognized in other comprehensive income until the hedged
item is recognized in earnings. Management does not anticipate that the adoption
of the new Statement will have a significant effect on earnings or the financial
position of the Company.

    STOCK BASED COMPENSATION:  In October 1995, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 123
("SFAS 123"), "Accounting for Stock-Based Compensation", which establishes a
fair value method of accounting for stock-based compensation plans. SFAS 123
encourages, but does not require, adoption of a fair value method; it allows for
a company to continue to report under Accounting Principles Board Opinion No. 25
("APB 25"), "Accounting for Stock Issued to Employees". The Company continues to
account for its stock-based compensation under APB 25. (See Note 11).

    EARNINGS PER SHARE:  In February 1997, the Financial Accounting Standards
Board issued Statement No. 128 ("SFAS 128"), "Earnings Per Share" which was
adopted on December 31, 1997. The Company has restated all prior periods. The
adoption of SFAS 128 did not have a material impact on the earnings per share
information previously presented.

    The following is a reconciliation of the numerators and denominators of the
basic and diluted earnings per share calculation:
<TABLE>
<CAPTION>
                                                                     (FOR THE FISCAL YEAR ENDED
                                                                         SEPTEMBER 30, 1998)
                                                              -----------------------------------------
                                                                INCOME FROM
                                                                CONTINUING                   PER SHARE
                                                                OPERATIONS       SHARES       AMOUNT
                                                              ---------------  -----------  -----------
<S>                                                           <C>              <C>          <C>
                                                                   (IN MILLIONS EXCEPT PER SHARE)
Earnings per basic share....................................     $       3           95.4    $     .03
Effect of dilutive securities
  Stock options.............................................                          1.5
  Nonvested stock...........................................                          1.3
                                                                     -----            ---        -----
Earnings per diluted share..................................     $       3           98.2    $     .03
                                                                     -----            ---        -----
                                                                     -----            ---        -----

<CAPTION>

                                                                     (FOR THE FISCAL YEAR ENDED
                                                                         SEPTEMBER 30, 1997)
                                                              -----------------------------------------
                                                                INCOME FROM
                                                                CONTINUING                   PER SHARE
                                                                OPERATIONS       SHARES       AMOUNT
                                                              ---------------  -----------  -----------
                                                                   (IN MILLIONS EXCEPT PER SHARE)
<S>                                                           <C>              <C>          <C>
Earnings per basic share....................................     $     125           92.5    $    1.35
Effect of dilutive securities
  Stock options.............................................                          1.5
  Nonvested stock...........................................                          1.5
                                                                     -----            ---        -----
Earnings per diluted share..................................     $     125           95.5    $    1.31
                                                                     -----            ---        -----
                                                                     -----            ---        -----
</TABLE>

                                       31
<PAGE>
                             U.S. INDUSTRIES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 2--ACCOUNTING POLICIES (CONTINUED)
<TABLE>
<CAPTION>
                                                                     (FOR THE FISCAL YEAR ENDED
                                                                         SEPTEMBER 30, 1996)
                                                              -----------------------------------------
                                                                INCOME FROM
                                                                CONTINUING                   PER SHARE
                                                                OPERATIONS       SHARES       AMOUNT
                                                              ---------------  -----------  -----------
                                                                   (IN MILLIONS EXCEPT PER SHARE)
<S>                                                           <C>              <C>          <C>
Earnings per basic share....................................     $     103           95.2    $    1.08
Effect of dilutive securities
  Stock options.............................................                          0.9
  Nonvested stock...........................................                          1.0
                                                                     -----            ---        -----
Earnings per diluted share..................................     $     103           97.1    $    1.06
                                                                     -----            ---        -----
                                                                     -----            ---        -----
</TABLE>

    Diluted common shares include shares that would be outstanding assuming the
fulfillment of conditions that would remove the restriction on nonvested shares
and the exercise of stock options. Options to purchase 0.3 million, 1.6 million
and 0.9 million shares in the years ended September 30, 1998, 1997 and 1996,
respectively, were not included in the computation of earnings per share because
the option's exercise price was greater than the average market price of the
common shares.

NOTE 3--ACQUISITIONS

    In January 1997, the Company purchased the stock of Eljer Industries, Inc.
("Eljer") for $176 million in cash plus the assumption of debt. Eljer
manufactures and distributes china and cast iron plumbing fixtures, flexible
plumbing systems, and heating, ventilation and air conditioning products. The
transaction has been accounted for as a purchase, resulting in goodwill of $193
million. The results of Eljer are included in the USI Bath and Plumbing Products
operations.

    Presented below are the unaudited pro forma results of the Company giving
effect to the acquisition of Eljer as if it had occurred as of the beginning of
the fiscal year ended September 30, 1996.

<TABLE>
<CAPTION>
                                                               FOR THE FISCAL YEARS ENDED
                                                                     SEPTEMBER 30,
                                                             ------------------------------
                                                                 1997            1996
                                                             -------------  ---------------
<S>                                                          <C>            <C>
                                                             (IN MILLIONS EXCEPT PER SHARE)
Net Sales..................................................    $   2,641       $   2,482
Income from continuing operations..........................          123             105
Income before extraordinary loss...........................          252             165
Net income.................................................          250             140
Basic earnings per share
  Income from continuing operations........................         1.33            1.10
  Income before extraordinary loss.........................         2.72            1.74
  Net income...............................................         2.70            1.47
Diluted earnings per share
  Income from continuing operations........................         1.29            1.08
  Income before extraordinary loss.........................         2.64            1.70
  Net income...............................................         2.62            1.44
</TABLE>

                                       32
<PAGE>
                             U.S. INDUSTRIES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 3--ACQUISITIONS (CONTINUED)
    The following is a summary of the fair value of the assets and liabilities
assumed after allocation of the purchase price:

<TABLE>
<CAPTION>
                                                                                   (IN MILLIONS)
                                                                                   -------------
<S>                                                                                <C>
Current assets...................................................................    $     201
Property, plant and equipment....................................................           70
Goodwill.........................................................................          193
Other assets.....................................................................           15
Current liabilities..............................................................         (190)
Long-term liabilities............................................................         (113)
                                                                                         -----
                                                                                     $     176
                                                                                         -----
                                                                                         -----
</TABLE>

    The proforma effect of the acquisitions and the aggregate assets acquired
and liabilities assumed detailed below is not material. These acquisitions have
been accounted for as purchases and their results of operations have been
included in the financial statements from the date of acquisition.

    In June 1998, the Company acquired Sundance Spas for approximately $32
million in cash, resulting in goodwill of $20 million. Sundance Spas, based in
Chino, California, is a manufacturer of high quality self-contained spas. The
results of Sundance Spas are included in the USI Bath and Plumbing Products
operations.

    In May 1998, the Company purchased certain metal components assets from
Philips Components B.V. ("Philips") for $31 million, resulting in goodwill of
$12 million. The Company and Philips have entered into a multi-year supply
agreement. The acquired operations are located in the Netherlands. The results
of Philips are included in USI Hardware and Tools operations.

    In January 1998, the Company acquired certain semiconductor leadframe assets
from Philips Electronics for $16 million in cash. The acquired operations
facilities are located in the Netherlands. The results of Philips Electronics
are included in the USI Diversified operations.

    In December 1997, the Company purchased Spear & Jackson plc ("Spear &
Jackson") for $11 million in cash and $96 million in the Company's Common Stock,
resulting in goodwill of approximately $63 million. Spear & Jackson,
manufactures and distributes hand tools, lawn and garden tools, saws, cutting
and industrial tools. The purchase price is subject to a cash contingency,
payable on or before June 2000. The cash contingency is based upon certain
performance criteria and the market value of the Company's stock and, at
present, approximates L44 million. The maximum payout is limited to
approximately L47 million. The results of Spear & Jackson are included in the
USI Hardware and Tools operations.

    In October 1997, the Company purchased the assets of Siemens AG's European
commercial lighting operations, for $67 million. The acquired business is a
leading European manufacturer and marketer of standard and customized indoor and
outdoor lighting products for commercial and industrial use. The business,
renamed SiTeco, operates manufacturing facilities in Germany, Austria and
Slovenia. The results of SiTeco are included in the Lighting Corporation of
America operations.

    In July 1997, the Company purchased IXL Manufacturing Company, Inc. ("IXL")
for $12 million and the assumption of $1.3 million of debt, resulting in
goodwill of approximately $6 million. IXL manufactures fiberglass and wood
handles for striking tools and lawn and garden tools. The results of IXL are
included in the USI Hardware and Tools operations.

                                       33
<PAGE>
                             U.S. INDUSTRIES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

    NOTE 3--ACQUISITIONS (CONTINUED) In May 1997, the Company purchased Britains
Petite Limited ("Britains") for $9 million in cash, resulting in goodwill of
approximately $5 million. Britains, located in Nottingham, England, is a
manufacturer of military soldier collectibles, metal and plastic models of
agricultural vehicles, figures, animals, buildings and accessories and preschool
plastic toys. The results of Britains are included in the USI Diversified
operations. See Note 16 regarding the Sale of Ertl in April 1999, which included
Britains.

    In April 1997, the Company purchased certain assets of the outdoor furniture
division of Sunbeam Corporation for $60 million in cash, resulting in goodwill
of approximately $14 million. The acquired business, renamed SunLite Casual
Furniture, Inc. ("SunLite"), manufactured casual outdoor furniture. SunLite has
since been sold (see Note 4).

    In January 1997, the Company purchased the assets of Woodings-Verona Tool
Works, Inc. ("Woodings-Verona") for $5 million in cash plus the assumption of $1
million of debt. Woodings-Verona manufactures hot-forged heavy striking tools
including sledge hammers, axes, bars, picks and railroad tools. The results of
Woodings-Verona are included in the USI Hardware and Tools operations.

    In July 1996, the Company purchased the assets of Keller Industries, Inc.
("Keller"), for $37 million in cash plus the assumption of certain liabilities,
resulting in goodwill of approximately $30 million. Keller is a leading
manufacturer and marketer of ladders in the United States. The results of Keller
are included in the USI Hardware and Tools operations.

    In July 1996, the Company acquired an equity interest in United Pacific
Industries Limited ("UPI"), a limited liability company incorporated in Bermuda
and listed on the Stock Exchange of Hong Kong. UPI manufactures voltage
converters, other electronic components and consumer products. The Company's
investment of $18 million at September 30, 1998 results in beneficial ownership
of 20% of UPI. The results of UPI are accounted for under the equity method and
are included in the USI Diversified operations.

    In April 1996, the Company purchased the assets of a Canadian manufacturer
of above-ground swimming pools and equipment for $12 million and the assumption
of $12 million in debt, resulting in goodwill of approximately $9 million. The
results of the acquired business, now known as Atlantic Pools, Inc., are
included in the USI Bath and Plumbing Products operations.

NOTE 4--DISPOSITIONS AND DISCONTINUED OPERATIONS

    In fiscal 1998, the Company sold the assets of Tommy Armour Golf for $10
million cash, certain convertible preferred stock of the purchaser, and one
million shares of common stock of the purchaser. During the third quarter of
fiscal 1998, the Company adopted a plan to dispose of Sunlite, its outdoor
furniture operations, and has reflected this business as a discontinued
operation. In connection with this plan, the Company recorded an impairment
charge of $38 million for the difference between the estimated net realizable
value and the carrying value of long lived assets and an estimated loss of $3
million, for the disposal of other assets of this business.

    In fiscal 1997, the Company, in separate transactions, sold Tube-Tex, SCM
Metals, certain assets of QPF, Inc., Odyssey, SunLite resin furniture business,
Lynx Golf, Zurn's Power Transmissions segment and portions of the Power Systems
segment and the equity interest in Ground Round for an aggregate of $390 million
in cash and notes of $3 million and recorded gains of $113 million, net of tax.
The Company has commitments to certain projects not yet disposed. The carrying
value of these projects of approximately $20 million at September 30, 1998 is
included in other assets. Management continues to evaluate its commitments and
exposure to contingencies related to these projects. Management believes that
the resolution of the discontinued operations are not expected to have a
material impact on the future operations and liquidity of the Company.

    In fiscal 1996, the Company, in separate transactions, sold the Office
Furniture Group and Blue Mountain Industries, Farberware, Spartus, Piedmont,
Jade, Universal and Franklin for an aggregate of $241 million in cash and notes
of $6 million and recorded gains of $68 million, net of tax. The Company


                                       34
<PAGE>
                             U.S. INDUSTRIES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 4--DISPOSITIONS AND DISCONTINUED OPERATIONS (CONTINUED)

also entered into a non-compete agreement with the purchaser of the Office
Furniture Group for five years for $11 million. Also during fiscal 1996, the
Company recorded a charge of $2 million, net of a tax benefit of $1 million, to
reduce the carrying value of its equity investment in Ground Round to its
estimated realizable value.

    Net assets held for disposition consists of the following:

<TABLE>
                                                                           (In Millions)
                                                                          At September 30,
                                                                           1998      1997
                                                                           ----      ----
<S>                                                                        <C>       <C>
Net current assets....................................................     $ 68      $102
Property, plant and equipment.........................................       30        61
Other non-current assets and liabilities, net.........................       45        65
                                                                           ----      ----
Net assets held for disposition.......................................     $143      $228
                                                                           ----      ----
                                                                           ----      ----

</TABLE>

    The following summarizes the operating results of the businesses classified
as discontinued operations:

<TABLE>
<CAPTION>
                                                                           FOR THE FISCAL YEARS ENDED
                                                                                  SEPTEMBER 30,
                                                                         -------------------------------
                                                                           1998       1997       1996
                                                                         ---------  ---------  ---------
<S>                                                                      <C>        <C>        <C>
                                                                                  (IN MILLIONS)
Net sales..............................................................  $227        $392        $739
Pre-tax income (loss)..................................................   (44)         27           5
</TABLE>

NOTE 5--MERGER, RESTRUCTURING AND OTHER RELATED COSTS

    During the third quarter, the Company reorganized into four operating
divisions:

o        Bath and Plumbing Products
o        Lighting
o        Hardware and Tools
o        Diversified Operations

    Each division has full operational and financial responsibility and, with
the exception of Lighting Corporation of America, is headed by new executives.
In conjunction with the reorganization and the closing of the merger, the
Company reviewed its long-term strategy for the newly combined entity and
reviewed each operating Company's performance and future prospects. As a result,
the Company adopted a plan to improve efficiency and enhance competitiveness.

    In addition, due to indications of impairment, the Company evaluated the
recoverability of certain long-lived assets, primarily goodwill at Garden State
Tanning and Keller Ladders. In arriving at the fair value of Garden State
Tanning the Company considered a number of factors including: (i) annual price
concessions in the automotive industry and Garden State Tanning's inability to
reduce costs due to antiquated facilities and equipment, (ii) a dramatic decline
in scrap leather prices attributable to the Asian economic crisis, (iii) capital
investment that would be required to make Garden State Tanning a lower cost
manufacturer, (iv) Garden State Tanning's long-term financial plan and (v)
analysis of values for similar companies. In arriving at the fair value of
Keller Ladders the Company considered (i) the impact from the loss of a major
customer, (ii) the inability to replace this business due to aggressive
competition, (iii) continued pressure for price concessions from mass merchants,
(iv) Keller Ladder's long term financial plan and (iv) analysis of values for
similar companies. In determining the amount of the impairment, the Company
compared the net book values to the estimated fair values of Garden State
Tanning and Keller Ladders. Based on the above, the Company determined that
impairments to goodwill of $55 million and $28 million were necessary at Garden
State Tanning and Keller, respectively. The reduced goodwill amortization at
Garden State Tanning and Keller will be $3 million per annum.

    The restructuring plan includes the closing of certain manufacturing and
warehouse facilities in the bath and plumbing products, toy, shoe and lighting
operations. The closure of the remainder of these facilities will occur at
various dates through December 1999. The production and distribution activities
of these facilities will be either outsourced, relocated off-shore, or
consolidated into existing facilities. The restructuring plan included a
reduction in the work force by approximately 700 employees which included
salaried and administrative employees at the restructured facilities as well as
administrative and executive employees. As of September 30, 1998 approximately
300 employees had been terminated. In certain cases severance and related
benefits will be paid subsequent to the termination date.

    The restructuring is not anticipated to have a significant impact on the
ongoing operations during the periods that manufacturing is transitioned from
the facilities to be closed. The expected benefits from the restructuring are
primarily reduced depreciation; reduced fixed costs associated with leased
facilities and reduced compensation costs. The final anticipated benefit will be
approximately $8 million per annum and realized subsequent to the completion of
all plans. The Company expects that approximately 50% of the annual benefit will
be realized in fiscal 1999 and substantially all of the benefit will be realized
in fiscal 2000 and thereafter.

    The merger, integration and other costs also includes investment banking,
legal and accounting fees and other miscellaneous costs, as well as costs
related to change-in-control payments to certain Zurn employees.

                                       35
<PAGE>
                             U.S. INDUSTRIES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 5--MERGER, RESTRUCTURING AND OTHER RELATED COSTS (CONTINUED)

    The principal components of the merger, restructuring and other related
costs are:

<TABLE>
<CAPTION>
                                                                                   (IN MILLIONS)
                                                                                   -------------
<S>                                                                                <C>
Impairment of goodwill...........................................................    $      83
Lease obligations and impairment of equipment....................................           11
Merger, integration and other costs..............................................           26
Severance and related costs......................................................           22
                                                                                         -----
  Total..........................................................................    $     142
                                                                                         -----
                                                                                         -----
Cash charges.....................................................................    $      52
Non-cash charges.................................................................           90
                                                                                         -----
  Total..........................................................................    $     142
                                                                                         -----
                                                                                         -----
</TABLE>

    $31 million of the cash charges were paid ($24 million for merger,
integration and other costs and $7 million for severance and related costs.)
prior to September 30, 1998 and the remaining cash charges will be paid by
December 31, 1999, or through the respective lease termination date.

    In addition to the $142 million of merger, restructuring and other related
costs, the Company has incurred $11 million of product change costs related to
the elimination of product lines and the reduction of manufacturing and
warehouse facilities at its operations which have been restructured.

    After an income tax benefit of $22 million, the charges detailed above
impact income from continuing operations for the period ended September 30, 1998
by $131 million.

NOTE 6--LONG-TERM DEBT

    Long-term debt consists of the following:

<TABLE>
<CAPTION>
                                                                               AT SEPTEMBER 30,
                                                                             --------------------
                                                                               1998       1997
                                                                             ---------  ---------
<S>                                                                          <C>        <C>
                                                                                (IN MILLIONS)
7.25% Senior Notes, net....................................................  $     123  $     123
Revolving Credit Facility--U.S. dollar.....................................        300        350
Revolving Credit Facility--foreign currencies..............................        156     --
Short-term committed note..................................................        200     --
Other long-term debt.......................................................        172         79
Zurn debt..................................................................     --            190
                                                                             ---------  ---------
                                                                                   951        742
Less current maturities....................................................         (4)       (41)
                                                                             ---------  ---------
Long-term debt.............................................................  $     947  $     701
                                                                             ---------  ---------
                                                                             ---------  ---------
</TABLE>

    Principal payments on long-term debt, after giving effect to the issuance of
new borrowings in October 1998 discussed below, for the next five years ended
September 30 are as follows:

<TABLE>
<CAPTION>
                                                                                   (IN MILLIONS)
                                                                                   -------------
<S>                                                                                <C>
1999.............................................................................    $       4
2000.............................................................................    $       5
2001.............................................................................    $      26
2002.............................................................................    $     578
2003.............................................................................    $       7
</TABLE>

                                       36
<PAGE>
                             U.S. INDUSTRIES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 6--LONG-TERM DEBT (CONTINUED)

    In fiscal 1997, USI American Holdings, Inc. ("USIAH"), a wholly owned
subsidiary of USI Atlantic Corp. ("USI Atlantic"), issued $125 million of Senior
Notes due December 1, 2006, which bear interest at 7.25%, payable semiannually
(the "7.25% Notes"). The net cash proceeds were $123 million after transaction
fees and discounts. USI, which was formed in conjunction with the Merger, is a
co-obligor with USIAH under the Notes. The Notes are fully and unconditionally
guaranteed by USI Atlantic, which at the time of issuance was known as U.S.
Industries, Inc. and is now a wholly-owned subsidiary of USI. See Note 17 to the
Consolidated Financial Statements.

    In October 1998, USI and USIAH jointly issued $250 million of Senior Notes
due October 15, 2003, which bear interest at 7.125%, payable semiannually (the
"7.125% Notes"). The net proceeds were $247 million after transaction fees and
discounts. $200 million of the proceeds were used to repay a short-term note and
the remainder was used to repay borrowings under uncommitted bank credit lines.
The Company will exchange the 7.125% Notes, which are not registered under the
Securities Act of 1933, for registered notes having substantially the same
terms. If the Company fails to comply with this requirement, then the interest
rate on the 7.125% Notes will increase 0.5% per annum until such time as they
are registered.  The 7.125% Notes are fully and unconditionally guaranteed by
USI Atlantic Corp.

    The 7.25% Notes and the 7.125% Notes (collectively, the "Notes") are
guaranteed by USI Atlantic and 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 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 Notes place restrictions on liens and subsidiary
indebtedness. Certain restrictions on dividends and the purchase of common stock
for treasury were eliminated pursuant to the indenture for the 7.25% Notes in
August 1998 when Moody's Investors Services, Inc. raised its rating on the notes
to Baa2.

    The Company has a five year revolving line of credit for $750 million (the
"Credit Agreement"). The revolving credit commitment will be permanently reduced
by $100 million on December 12, 1999, an additional $150 million on December 12,
2000, and terminates on December 12, 2001. The Credit Agreement includes
committed advances and uncommitted bid option advances. The committed advances
bear interest based on, at the option of the Company, (i) specified spreads over
London Interbank Offer Rate ("LIBOR") or (ii) the higher of the agent bank's
reference rate or 50 basis points above the federal funds rate in effect on such
date. The spreads on the LIBOR-based borrowings range between 15 and 62.5 basis
points, based on the Company's senior unsecured debt rating for the relevant
period. At September 30, 1998 three-month LIBOR was 5.3125% per annum and the
spread over LIBOR was 22.5 basis points. A facility fee, regardless of the
amount utilized, is payable on a quarterly basis in arrears on the full amount
of the Credit Agreement. The facility fee ranges between 7.5 and 25 basis points
per annum, based upon the Company's senior unsecured debt ratings for the
relevant period. At September 30, 1998, the facility fee was 10.0 basis points
per annum. The Credit Agreement places restrictions on, among other things,
liens, mergers, consolidations and additional indebtedness. Its financial
covenants require USI to comply with maximum ratio of total funded debt to
capital and a consolidated leverage ratio. The maximum ratios are .60:1.00 and
3.5:1.0, respectively.

    During fiscal 1998, the Company amended the Credit Agreement to allow a
portion of the available facility to be used for borrowings in currencies other
than the U.S. dollar, to eliminate the previous restriction limiting certain
unsecured indebtedness to $200 million, to permit the Merger and to add USI as a
co-obligor. USIAH is the co-obligor, and USI Atlantic is the guarantor of the
Credit Agreement.

                                       37
<PAGE>
                             U.S. INDUSTRIES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 6--LONG-TERM DEBT (CONTINUED)

    Zurn, prior to the Merger, was an obligor under a $250 million secured
credit facility. Upon the Merger, the facility became due and was repaid on June
11, 1998. The Company used $200 million of the proceeds from a short-term note,
advanced by one of its lenders, to repay the borrowings under the facility. The
note bore interest at a rate of approximately 6.1% per annum. The Company repaid
this obligation in October 1998 using a portion of the proceeds from the 7.125%
Notes, and accordingly it has been classified as long-term.

    At September 30, 1998, the Company had long-term indebtedness of $71
million, $51 million, $48 million and $18 million denominated in German marks,
British pounds, Dutch guilders and Hong Kong dollars, respectively. These
borrowings hedge the Company's net investments in several operating companies
and an equity investment. $156 million was borrowed through the Company's credit
agreement and $32 million through other long-term debt.

    Interest paid during fiscal 1998, 1997 and 1996, including amounts under
swap agreements of $3 million, $5 million and $7 million, was $71 million, $63
million, and $67 million, respectively.

    Other long-term debt at September 30, 1998 includes $120 million of notes
payable, which bear interest at a weighted average interest rate of 5.7%, with
maturities due within one year which the Company has repaid using proceeds from
the New Notes or expects to repay using borrowings under the Credit Agreement.
All of this amount was borrowed under uncommitted short-term lines of credit.
Uncommitted short-term lines of credit at September 30, 1998, used and unused,
total $355 million.

    In connection with the fiscal 1998 repayment of borrowings under the Zurn
Facility, the Company recorded a net-of-tax extraordinary charge of $5 million
to write-off unamortized deferred financing costs and to settle outstanding
interest rate swaps for $6 million in cash. In conjunction with the fiscal 1997
repayment of outstanding indebtedness under a previous credit agreement, a
net-of-tax, non-cash, extraordinary charge of $2 million was incurred to
write-off unamortized deferred financing costs and previously deferred losses
associated with interest rate swaps. In fiscal 1996, in connection with entering
into a previous credit agreement, the Company recorded a net-of-tax, non-cash
extraordinary charge of $25 million to write-off unamortized deferred financing
costs and previously deferred losses associated with interest rate swaps.

    In anticipation of an offering of debt securities, the Company entered into
certain interest rate protection agreements in March and April 1998. Due to
subsequent market changes, the principal amount and term of the 7.125% Notes
that were ultimately sold varied from those originally anticipated. These
interest rate protection agreements were settled in September 1998 for $22
million. The portion of the costs of the agreements deemed related to the 7.125%
Notes of $10 million will be amortized over the term of the 7.125% Notes
bringing the effective interest rate to approximately 8.4%. The Company has
recorded a non-recurring, net-of-tax charge of $7 million, to write-off the
remainder of the costs of the agreements in the fourth quarter of fiscal 1998,
which is included in other (income) expense, net.

    On December 12, 1996 the Company paid $2 million to settle treasury lock
agreements associated with the 7.25% Notes. This amount is being amortized over
the life of the 7.25% Notes.

    The Company entered into interest rate protection agreements to receive a
floating rate based on three-month LIBOR and pay a weighted average fixed rate.
The fixed interest rates under the interest rate swaps currently outstanding
range from 5.43% to 6.78% per annum. All interest rate swaps are of notional
amounts and maturities that hedge specific portions of outstanding debt, and
accordingly, are accounted

                                       38
<PAGE>
                             U.S. INDUSTRIES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 6--LONG-TERM DEBT (CONTINUED)
for as hedge transactions. The aggregate notional amounts and periods covered by
such agreements are as follows:

<TABLE>
<S>                                                              <C>
October 1, 1998 through September 30, 1999.....................  $300 million
October 1, 1999 through September 30, 2001.....................  $200 million
</TABLE>

    The Company had issued standby letters of credit aggregating $33 million at
September 30, 1998.

NOTE 7--PENSION PLANS

DOMESTIC BENEFIT ARRANGEMENTS

    The Company and its subsidiaries have noncontributory defined benefit
pension plans covering substantially all of its United States employees. The
benefits under these plans are based primarily on years of credited service and
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 and also participate in multi-employer plans, which provide
defined benefits to union employees of the Company's subsidiaries. Contributions
relating to defined contribution plans are made based upon the respective plans'
provisions. Contributions relating to multi-employer plans are based on
negotiated collective bargaining agreements.

    Net periodic pension cost for the Company's defined benefit plans covering
employees in the United States and the total contributions charged to pension
expense for defined contribution and multi-employer plans covering employees in
the United States are:

<TABLE>
<CAPTION>
                                                                       FOR THE FISCAL YEARS ENDED
                                                                              SEPTEMBER 30,
                                                                     -------------------------------
                                                                       1998       1997       1996
                                                                     ---------  ---------  ---------
<S>                                                                  <C>        <C>        <C>
                                                                              (IN MILLIONS)
Defined benefit plans:
Service cost--benefits earned during the period....................  $      14  $      12  $      13
Interest cost on projected benefit obligation......................         30         26         27
Actual return on plan assets.......................................        (17)      (118)       (66)
Net amortization and deferral......................................        (34)        77         26
                                                                           ---  ---------        ---
  Net periodic pension income for defined benefit plans............         (7)        (3)    --
Defined contribution plans.........................................          7          4          7
Multi-employer plans...............................................          2          2          2
                                                                           ---  ---------        ---
  Net pension expense..............................................  $       2  $       3  $       9
                                                                           ---  ---------        ---
                                                                           ---  ---------        ---
</TABLE>

    Assumptions used in the accounting for the defined benefit plans were as
follows:

<TABLE>
<CAPTION>
                                               FOR THE FISCAL YEARS ENDED SEPTEMBER 30,
                                        ------------------------------------------------------
                                               1998               1997              1996
                                        ------------------  ----------------  ----------------
<S>                                     <C>                 <C>               <C>
Weighted average discount
  rates...............................               6.75%     7.00 to 7.50%     7.50 to 7.75%
Rates of increase in compensation
  levels..............................      4.50% to 5.75%     4.10 to 4.50%     4.50 to 7.75%
Expected long-term rate of return on
  assets..............................        9.0 to 11.0%              9.0%              9.0%
</TABLE>

                                       39
<PAGE>
                             U.S. INDUSTRIES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 7--PENSION PLANS (CONTINUED)

    The change in the weighted average discount rate from 7.5% for fiscal 1997
to 6.75% for fiscal 1998 and other actuarial assumptions caused the projected
benefit obligation at September 30, 1998 to increase by approximately $58
million.

    The funded status and amounts recognized in the consolidated balance sheets
at September 30, 1998 and 1997 for the Company's defined benefit pension plans
are:

<TABLE>
<CAPTION>
                                                                         1998                               1997
                                                           --------------------------------  ----------------------------------
                                                             PLANS WHOSE      PLANS WHOSE      PLANS WHOSE       PLANS WHOSE
                                                            ASSETS EXCEED     ACCUMULATED     ASSETS EXCEED      ACCUMULATED
                                                             ACCUMULATED    BENEFITS EXCEED    ACCUMULATED     BENEFITS EXCEED
                                                              BENEFITS          ASSETS          BENEFITS           ASSETS
                                                           ---------------  ---------------  ---------------  -----------------
<S>                                                        <C>              <C>              <C>              <C>
                                                                                      (IN MILLIONS)
Actuarial present value of benefit obligations:
  Vested benefit obligation..............................     $    (338)       $     (80)       $    (308)        $     (41)
  Nonvested benefit obligation...........................           (10)             (10)             (12)               (4)
                                                                  -----            -----            -----               ---
Accumulated benefit obligation...........................     $    (348)       $     (90)       $    (320)        $     (45)
                                                                  -----            -----            -----               ---
                                                                  -----            -----            -----               ---
Projected benefit obligation.............................     $    (381)       $     (95)       $    (351)        $     (50)
Plan assets at fair value................................           539               64              606                26
                                                                  -----            -----            -----               ---
Projected benefit obligation less than (or in excess of)
  plan assets............................................           158              (31)             255               (24)
Add (deduct):
  Unrecognized prior service cost........................             4               10                7                 4
  Unrecognized net (gain) loss...........................           (55)              16             (163)                7
  Unrecognized net asset at date of adoption, net of
    amortization.........................................            (5)          --                   (7)           --
  Adjustment required to recognize minimum liability.....        --                  (21)          --                    (6)
                                                                  -----            -----            -----               ---
Prepaid (accrued) pension costs..........................     $     102        $     (26)       $      92         $     (19)
                                                                  -----            -----            -----               ---
                                                                  -----            -----            -----               ---
</TABLE>

    The Company's plan assets are included in a master trust which principally
invests in listed stocks and bonds, including common stock of the Company. The
Company's Common Stock included in plan assets was 783,100 and 383,100 shares at
September 30, 1998 and 1997, respectively, representing $12 million and $11
million of the master trust's assets for the same respective periods.

FOREIGN BENEFIT ARRANGEMENTS

    Fiscal 1998 periodic pension cost for the Company's foreign defined benefit
plans primarily covering SiTeco's (see Note 3) employees in Germany and Austria
was $3 million, including $1 million of service costs and $2 million of interest
cost. The weighted average discount rate used in the accounting for the defined
benefit plans was 6% and the rates of increase in compensation levels ranged
from 2.5% to 4.5%.

                                       40
<PAGE>
                             U.S. INDUSTRIES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 7--PENSION PLANS (CONTINUED)
    The following table sets forth the plans' unfunded status and amounts
recognized in the consolidated balance sheets at September 30, 1998.

<TABLE>
<CAPTION>
                                                                                   PLANS WHOSE
                                                                                   ACCUMULATED
                                                                                 BENEFITS EXCEED
                                                                                     ASSETS
                                                                                -----------------
<S>                                                                             <C>
                                                                                  (IN MILLIONS)
Actuarial present value of benefit obligations:
  Vested benefit obligation...................................................      $     (15)
  Nonvested benefit obligation................................................             (4)
                                                                                          ---
Accumulated benefit obligation................................................      $     (19)
                                                                                          ---
                                                                                          ---
Projected benefit obligation and accrued pension costs........................      $     (24)
                                                                                          ---
                                                                                          ---
</TABLE>

NOTE 8--POSTRETIREMENT PLANS

    The Company provides health care and life insurance benefits to certain
groups of retirees.

    The following table presents the plans' unfunded status reconciled with
amounts recognized in the Company's consolidated balance sheets:

<TABLE>
<CAPTION>
                                                                                AT SEPTEMBER 30,
                                                                              --------------------
                                                                                1998       1997
                                                                              ---------  ---------
<S>                                                                           <C>        <C>
                                                                                 (IN MILLIONS)
Accumulated postretirement benefit obligation:
  Retirees..................................................................  $     (44) $     (48)
  Fully eligible active plan participants...................................         (5)        (6)
  Other active plan participants............................................        (10)       (10)
                                                                                    ---        ---
                                                                                    (59)       (64)
  Unrecognized prior service cost...........................................         (2)    --
  Unrecognized gain.........................................................         (5)        (8)
                                                                                    ---        ---
                                                                              $     (66) $     (72)
                                                                                    ---        ---
                                                                                    ---        ---
</TABLE>

    Net periodic postretirement benefit cost includes the following components:

<TABLE>
<CAPTION>
                                                                        FOR THE FISCAL YEARS ENDED SEPTEMBER
                                                                                         30,
                                                                        -------------------------------------
                                                                           1998         1997         1996
                                                                           -----        -----        -----
<S>                                                                     <C>          <C>          <C>
                                                                                    (IN MILLIONS)
Service cost..........................................................   $       1    $       1    $       1
Interest cost.........................................................           4            4            3
                                                                                --           --           --
Net periodic postretirement benefit cost..............................   $       5    $       5    $       4
                                                                                --           --           --
                                                                                --           --           --
</TABLE>

    The weighted average annual assumed rate of increase in the health care cost
trend rate ranged from 8.5% to 10.0% for fiscal 1998 and is assumed to decrease
0.5% a year to 5.0% to 5.5%. The effect of increasing the assumed health care
cost trend rate by 1% in each year would increase the accumulated postretirement
benefit obligation as of September 30, 1998 by $5 million and the aggregate of
service and interest components of net periodic post retirement benefit for 1998
by less than $1 million.

    The weighted average discount rate used was 6.75% and 7.50% at September 30,
1998 and 1997, respectively.

                                       41
<PAGE>
                             U.S. INDUSTRIES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 9--LEASES

    Rental expense for operating leases is:

<TABLE>
<CAPTION>
                                                                        FOR THE FISCAL YEARS ENDED SEPTEMBER
                                                                                         30,
                                                                        -------------------------------------
                                                                           1998         1997         1996
                                                                           -----        -----        -----
<S>                                                                     <C>          <C>          <C>
                                                                                    (IN MILLIONS)
Minimum rentals.......................................................   $      26    $      19    $      20
Contingent rentals....................................................           3            1    $       2
                                                                               ---          ---          ---
                                                                         $      29    $      20    $      22
                                                                               ---          ---          ---
                                                                               ---          ---          ---
</TABLE>

    Future minimum rental commitments under noncancellable operating leases as
of September 30, 1998 are:

<TABLE>
<CAPTION>
                                                                                    (IN MILLIONS)
                                                                                   ---------------
<S>                                                                                <C>
1999.............................................................................     $      24
2000.............................................................................            18
2001.............................................................................            13
2002.............................................................................            10
2003.............................................................................             7
Thereafter.......................................................................            17
</TABLE>

NOTE 10--INCOME TAXES

    Income before income taxes, discontinued operations and extraordinary loss
consists of:

<TABLE>
<CAPTION>
                                                                         FOR THE FISCAL YEARS ENDED
                                                                                SEPTEMBER 30,
                                                                      ---------------------------------
                                                                         1998        1997       1996
                                                                         -----     ---------  ---------
<S>                                                                   <C>          <C>        <C>
                                                                                (IN MILLIONS)
United States.......................................................   $      10   $     173  $     137
Foreign.............................................................          68          46         48
                                                                             ---   ---------  ---------
                                                                       $      78   $     219  $     185
                                                                             ---   ---------  ---------
                                                                             ---   ---------  ---------
</TABLE>

    The provisions for federal, foreign, and state income taxes attributable to
income from continuing operations consist of:

<TABLE>
<CAPTION>
                                                                         FOR THE FISCAL YEARS ENDED
                                                                                SEPTEMBER 30,
                                                                      ---------------------------------
                                                                         1998        1997       1996
                                                                         -----     ---------  ---------
<S>                                                                   <C>          <C>        <C>
                                                                                (IN MILLIONS)
Current:
  Federal...........................................................   $      28   $      45  $      43
  Foreign...........................................................          23          17         22
  State.............................................................           4           8          6
                                                                             ---   ---------  ---------
                                                                              55          70         71
  Deferred..........................................................          20          24         11
                                                                             ---   ---------  ---------
                                                                       $      75   $      94  $      82
                                                                             ---   ---------  ---------
                                                                             ---   ---------  ---------
</TABLE>

                                       42
<PAGE>
                             U.S. INDUSTRIES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 10--INCOME TAXES (CONTINUED)

    The Company's effective income tax provision attributable to continuing
operations differs from the statutory federal income tax provision as follows:

<TABLE>
<CAPTION>
                                                                           FOR THE FISCAL YEARS ENDED
                                                                                  SEPTEMBER 30,
                                                                       -----------------------------------
                                                                          1998        1997        1996
                                                                          -----     ---------     -----
<S>                                                                    <C>          <C>        <C>
                                                                                  (IN MILLIONS)
Statutory federal income tax provision...............................   $      27   $      77   $      65
Foreign income tax differential......................................           2           3           5
State income taxes (net of federal benefit)..........................           3           6           5
Goodwill amortization................................................           6           5           3
Goodwill impairment..................................................          29      --          --
Non-deductible non-recurring and unusual charges.....................           8      --          --
Miscellaneous........................................................          --           3           4
                                                                              ---   ---------         ---
                                                                        $      75   $      94   $      82
                                                                              ---   ---------         ---
                                                                              ---   ---------         ---
</TABLE>

<TABLE>
<CAPTION>
                                                                               AT SEPTEMBER 30,
                                                                           ------------------------
                                                                              1998         1997
                                                                           -----------  -----------
<S>                                                                        <C>          <C>
                                                                                (IN MILLIONS)
Deferred tax liabilities:
Property, plant and equipment............................................   $      28    $      24
Inventory................................................................           5            6
Net pension assets.......................................................          15           17
Other....................................................................           3            4
                                                                                -----        -----
Total deferred tax liabilities...........................................          51           51
                                                                                -----        -----
Deferred tax assets:
Accruals and allowances..................................................         101          114
Postretirement benefits..................................................          20           26
Deductible goodwill......................................................          21           21
                                                                                -----        -----
Total deferred tax assets................................................         142          161
                                                                                -----        -----
Net deferred tax asset...................................................   $      91    $     110
                                                                                -----        -----
                                                                                -----        -----
</TABLE>

    The classification of the deferred tax balances is:

<TABLE>
<CAPTION>
                                                                               AT SEPTEMBER 30,
                                                                           ------------------------
                                                                              1998         1997
                                                                           -----------  -----------
<S>                                                                        <C>          <C>
                                                                                (IN MILLIONS)
Current asset............................................................   $      80    $     109
Current liability........................................................          (5)          (7)
                                                                                  ---        -----
                                                                                   75          102
                                                                                  ---        -----
Noncurrent asset.........................................................          62           52
Noncurrent liability.....................................................         (46)         (44)
                                                                                  ---        -----
                                                                                   16            8
                                                                                  ---        -----
Net deferred tax asset...................................................   $      91    $     110
                                                                                  ---        -----
                                                                                  ---        -----
</TABLE>

    As a result of certain tax elections, the tax basis of assets received and
liabilities assumed, from the Company's former parent ("Hanson"), have changed.
The final determination of the full extent of the tax benefit related to these
changes was finalized in fiscal 1996 and has been credited to paid in capital in
that year.

                                       43
<PAGE>
                             U.S. INDUSTRIES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 10--INCOME TAXES (CONTINUED)
    The Company entered into a tax sharing and indemnification agreement in
which Hanson generally agreed to indemnify the Company for all federal and state
income tax liabilities in respect to periods prior to May 31, 1995.

    Income taxes paid during fiscal 1998, 1997 and 1996 were $72 million, $93
million, and $63 million, respectively.

NOTE 11--STOCK COMPENSATION PLANS

    The Company's stock-based compensation plans consist of USI's and Zurn's
respective plans that were in effect prior to the merger, as amended and as
adjusted to give effect to the exchange ratio in the merger.

    USI maintains stock incentive plans (the "Stock Plans") that provides for
awards of restricted stock and options to purchase common stock to key employees
at prices equal to the fair market value of the shares at the date of grant, and
for formula grants of Common Stock to non-employee directors of USI.

    In fiscal 1995, 2,764,995 restricted shares of Common Stock were awarded to
certain key employees and a total of 9,000 shares of common stock were issued to
non-employee directors. As holders of restricted stock have all the rights of
other stockholders, subject to certain restrictions and forfeiture provisions,
such restricted stock is considered to be issued and outstanding. Restrictions
on the shares will expire and are amortized over seven years. Unearned
restricted stock of $26 million was recorded at June 8, 1995 based on the market
value of the shares on the date of issuance and is included as a separate
component of stockholders' equity.

    In fiscal 1996, 108,260 incentive shares were awarded to certain key
employees and 20,733 shares of common stock were issued to non-employee
directors. The incentive shares are substantially identical in terms of issuance
and restrictions to restricted stock. Based on the market value of the shares on
the dates of issuance, $2 million of unearned restricted stock was recorded
during fiscal 1996.

    In fiscal 1998 and 1997, 345,602 and 195,750 restricted shares of Common
Stock, respectively, were awarded to certain key employees. The restrictions on
the shares will expire after seven years. The expiration of the restrictions can
be accelerated under certain circumstances. Based on the market value of the
shares on the various dates of issuance, $9 million and $5 million of additional
unearned restricted stock was recorded during fiscal 1998 and 1997,
respectively. Additionally, 373,709, 166,065 and 25,460 restricted shares were
forfeited in fiscal 1998, 1997 and 1996, respectively.

    Zurn's 1996 Employee Stock Plan provided for awarding no more than 800,000
shares of common stock (382,800 and 776,000 available at September 30, 1998 and
1997, respectively), with maximum award limits for each participant during any
twelve-month period, in the form of nonqualified and incentive stock options to
purchase common stock at its market value on the award date (200,000 share
limit); stock equivalent units based on common stock fair market values with
settlement in common stock or cash on the achievement of established performance
goals (24,000 share limit); performance units denominated in cash with
settlement in common stock or cash not exceeding $300,000 per participant per
year on the achievement of specific business objectives; and annual incentive
stock awards (48,000 share limit) to insiders, as defined, in settlement of
incentive compensation plan awards. Under Zurn's previous stock option plans,
nonqualified stock options were granted to key employees to purchase shares of
common stock at its market value on the grant date.

    Under the Company's stock compensation plans, the independent directors,
officers and employees may be granted options to purchase the Company's stock at
no less than the fair market value of the date

                                       44
<PAGE>
                             U.S. INDUSTRIES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 11--STOCK COMPENSATION PLANS (CONTINUED)
of the option grant. The Company has adopted the disclosure-only provisions of
SFAS 123. Accordingly, no compensation cost has been recognized for the stock
option plans. Had compensation cost for the Company's stock option plan been
determined based on the fair market value at the grant date for awards in fiscal
1998, 1997 and 1996, consistent with the provision of SFAS 123, the Company's
net income and income per share would have been reduced to the pro forma amounts
indicated below:

<TABLE>
<CAPTION>
                                                                       FOR THE FISCAL YEARS ENDED
                                                                     -------------------------------
                                                                       1998       1997       1996
                                                                     ---------  ---------  ---------
<S>                              <C>                                 <C>        <C>        <C>
                                                                     (IN MILLIONS, EXCEPT PER SHARE)
Net income (loss)--as reported.....................................  $     (44) $     252  $     138
Net income (loss)--pro forma.......................................        (46)       250        137

Net income (loss) per share--as reported basic.....................  $   (0.46) $    2.73  $    1.45
                                 --as reported diluted.............      (0.45)      2.64       1.42
Net income (loss) per share--pro forma basic.......................      (0.48)      2.70       1.44
                                 --pro forma diluted...............      (0.47)      2.61       1.41
</TABLE>

    These pro forma amounts may not be representative of future disclosures
since the estimated fair value of stock options is amortized to expense over the
vesting period, and additional options may be granted in future years. The fair
value for these options was estimated at the date of grant using the Black-
Scholes model with the following assumptions:

<TABLE>
<CAPTION>
                                                                      USI PLANS    ZURN PLAN
                                                                     -----------  -----------
<S>                                                                  <C>          <C>
Expected dividend yield at date of grant:
    1998...........................................................          1%           1%
    1997 and 1996..................................................          0%           2%
Expected stock price volatility:
    1998...........................................................         40%          26%
    1997 and 1996..................................................         36%          26%
Risk-free interest rate:
    1998...........................................................       5.42%        5.80%
    1997...........................................................       5.85%        6.84%
    1996...........................................................       5.89%        6.60%
Expected life of options...........................................     4 years      7 years
</TABLE>

    The weighted-average fair value of options, calculated using the
Black-Scholes option pricing model, granted during 1998, 1997 and 1996 is $9.14,
$6.87 and $4.61, respectively.

    A summary of the Company's stock option activity and related information for
the years ended September 30 follows:

<TABLE>
<CAPTION>
                                                       1998                     1997                     1996
                                             ------------------------  -----------------------  -----------------------
                                                           WEIGHTED                 WEIGHTED                 WEIGHTED
                                                            AVERAGE                  AVERAGE                  AVERAGE
                                              NUMBER OF    EXERCISE    NUMBER OF    EXERCISE    NUMBER OF    EXERCISE
                                               OPTIONS       PRICE      OPTIONS       PRICE      OPTIONS       PRICE
                                             -----------  -----------  ----------  -----------  ----------  -----------
<S>                                          <C>          <C>          <C>         <C>          <C>         <C>
Outstanding-beginning of year..............    6,377,677   $   13.45    6,419,176   $   11.94    5,890,495   $   11.95
Granted....................................      280,353       25.02    1,019,312       18.82      837,573       13.02
Exercised..................................   (1,401,231)      13.19     (681,523)       9.76      (69,907)       9.52
Non-exercised..............................     (419,902)      14.95     (379,288)      11.48     (238,985)      12.33
                                             -----------  -----------  ----------  -----------  ----------  -----------
Outstanding-end of year....................    4,836,897       14.07    6,377,677       13.45    6,419,176       11.94
                                             -----------  -----------  ----------  -----------  ----------  -----------
                                             -----------  -----------  ----------  -----------  ----------  -----------
Exercisable-end of year....................    3,488,907   $   13.73    2,713,998   $   14.70    2,046,295   $   15.12
                                             -----------  -----------  ----------  -----------  ----------  -----------
                                             -----------  -----------  ----------  -----------  ----------  -----------
</TABLE>

                                       45
<PAGE>
                             U.S. INDUSTRIES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 11--STOCK COMPENSATION PLANS (CONTINUED)
    The following table summarizes the status of the stock options outstanding
and exercisable at September 30, 1998:

<TABLE>
<CAPTION>
                                                                                  STOCK OPTIONS
                                            STOCK OPTIONS OUTSTANDING              EXERCISABLE
                                       ------------------------------------  -----------------------
                                                    WEIGHTED     WEIGHTED                 WEIGHTED
                                                    REMAINING     AVERAGE                  AVERAGE
                                       NUMBER OF   CONTRACTUAL   EXERCISE    NUMBER OF    EXERCISE
RANGE OF EXERCISE PRICES                OPTIONS       LIFE         PRICE      OPTIONS       PRICE
-------------------------------------  ----------  -----------  -----------  ----------  -----------
<S>                                    <C>         <C>          <C>          <C>         <C>
$8.75 to $12.97......................   3,033,613   6.73 years   $   10.31    2,291,286   $   10.67
$13.20 to $19.41.....................     677,287   7.90 years   $   15.85      575,901   $   15.77
$20.47 to $28.88.....................   1,125,997   6.19 years   $   23.14      621,720   $   23.13
                                       ----------  -----------  -----------  ----------  -----------
Total................................   4,836,897   6.76 years   $   14.07    3,488,907   $   13.73
                                       ----------  -----------  -----------  ----------  -----------
                                       ----------  -----------  -----------  ----------  -----------
</TABLE>

    Options granted under the Stock Option Plan vest annually in four equal
installments from the date of grant. The Company had authorization under the
Stock Option Plan to grant 1,306,417 and 455,309 additional options at September
30, 1998 and 1997, respectively.

NOTE 12--COMMITMENTS AND CONTINGENCIES

    The Company is subject to a wide range of environmental protection laws. The
Company has remedial and investigatory activities underway at approximately 35
sites. In addition, the Company has been named as a Potentially Responsible
Party ("PRP") at 19 "superfund" sites pursuant to the Comprehensive
Environmental Response, Compensation and Liability Act of 1980 or comparable
statutes.

    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, 1998, the Company had accrued approximately $20 million ($5
million accrued as current liabilities; $15 million as non-current liabilities)
for various environmental related liabilities of which the Company is aware. The
Company believes that the range of liability for such matters is between
approximately $7 million and $25 million.

    U.S. Brass Corporation, an Eljer indirect wholly-owned subsidiary ("US
Brass"), filed in 1994 a voluntary petition for reorganization under Chapter 11
of the United States Bankruptcy Code for the purpose of systemically resolving
issues resulting from sales of polybutylene plumbing systems and related
litigation. On January 29, 1998, the United States Bankruptcy Court for the
Eastern District of Texas

                                       46
<PAGE>
                             U.S. INDUSTRIES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 12--COMMITMENTS AND CONTINGENCIES (CONTINUED)
confirmed the Chapter 11 Bankruptcy Plan of Reorganization filed by US Brass. On
March 19, 1998 the plan became effective and the US Brass Trust was funded with
approximately $50 million in cash and a $20 million noninterest bearing note,
payable over ten years to pay claims resulting from US Brass polybutylene
plumbing systems. As a result, US Brass emerged from bankruptcy and future US
Brass polybutylene plumbing systems claims were enjoined and will be channeled
to the Trust and a national class action settlement fund.

    Also, 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.

NOTE 13--SEGMENT DATA

    The Company's operations are classified into four business segments: Bath
and Plumbing Products, Lighting Corporation of America, Hardware and Tools and
Diversified. These operations are conducted primarily in the United States, and
to a lesser extent, in other regions of the world. Export sales represented 9%,
12% and 13% of the Company's total net sales for fiscal years 1998, 1997 and
1996, respectively. Principal international markets served include Europe, South
America, Canada and Asia.

<TABLE>
<CAPTION>
                                                                     FOR THE FISCAL YEARS ENDED
                                                                            SEPTEMBER 30,
                                                                   -------------------------------
                                                                     1998       1997       1996
                                                                   ---------  ---------  ---------
<S>                                                                <C>        <C>        <C>
                                                                            (IN MILLIONS)
NET SALES
  Bath and Plumbing Products.....................................  $   1,105  $     879  $     685
  Lighting Corporation of America................................        766        538        508
  Hardware and Tools.............................................        430        308        238
  Diversified....................................................        834        796        738
                                                                   ---------  ---------  ---------
TOTAL NET SALES..................................................  $   3,135  $   2,521  $   2,169
                                                                   ---------  ---------  ---------
                                                                   ---------  ---------  ---------

OPERATING INCOME (LOSS) (1)
  Bath and Plumbing Products.....................................  $      93  $     101  $      88
  Lighting Corporation of America................................         52         42         36
  Hardware and Tools.............................................         (2)        34         31
  Diversified (2)................................................         31        118        110
                                                                   ---------  ---------  ---------
  Operating Income before corporate expenses.....................        174        295        265
  Corporate expenses.............................................        (32)       (27)       (27)
                                                                   ---------  ---------  ---------
TOTAL OPERATING INCOME...........................................  $     142  $     268  $     238
                                                                   ---------  ---------  ---------
                                                                   ---------  ---------  ---------
</TABLE>

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

(1) Operating income (loss) for the year ended September 30, 1998 include
    merger, restructuring and other related costs of $142 million and product
    change costs in connection with the restructuring of approximately $11
    million. Operating income (loss) for the Bath and Plumbing Products,
    Lighting Corporation of America, Hardware and Tools, Diversified Operations
    and Corporate expenses include charges of $40, $3, $37, $66 and $7 million,
    respectively.

(2) Fiscal 1998 and 1997 operating income for the Diversified Operations
    includes $(3) and $2 million, respectively of equity (loss) earnings from
    the Company's investment in UPI. Fiscal 1998 equity (loss) includes a charge
    associated with an impairment of a UPI subsidiary of $4 million.

                                       47
<PAGE>
                             U.S. INDUSTRIES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 13--SEGMENT DATA (CONTINUED)

<TABLE>
<CAPTION>
                                                                     FOR THE FISCAL YEARS ENDED
                                                                            SEPTEMBER 30,
                                                                   -------------------------------
                                                                     1998       1997       1996
                                                                   ---------  ---------  ---------
<S>                                                                <C>        <C>        <C>
                                                                            (IN MILLIONS)
IDENTIFIABLE ASSETS
  Bath and Plumbing Products.....................................  $   1,092  $   1,064  $   1,057
  Lighting Corporation of America................................        463        282        281
  Hardware and Tools.............................................        406        233        191
  Diversified....................................................        572        566        545
                                                                   ---------  ---------  ---------
                                                                       2,533      2,145      2,074
  Corporate......................................................        100        126        111
                                                                   ---------  ---------  ---------
  Total for continuing operations................................      2,633      2,271      2,185
  Net assets held for disposition................................        143        228        292
                                                                   ---------  ---------  ---------
TOTAL IDENTIFIABLE ASSETS........................................  $   2,776  $   2,499  $   2,477
                                                                   ---------  ---------  ---------
                                                                   ---------  ---------  ---------

DEPRECIATION AND GOODWILL AMORTIZATION
  Bath and Plumbing Products.....................................  $      28  $      22  $      15
  Lighting Corporation of America................................         18         10          9
  Hardware and Tools.............................................         13          7          4
  Diversified....................................................         19         17         18
                                                                   ---------  ---------  ---------
TOTAL DEPRECIATION AND GOODWILL AMORTIZATION.....................  $      78  $      56  $      46
                                                                   ---------  ---------  ---------
                                                                   ---------  ---------  ---------

CAPITAL EXPENDITURES
  Bath and Plumbing Products.....................................  $      35  $      18  $      14
  Lighting Corporation of America................................         19         13         10
  Hardware and Tools.............................................         18          9          8
  Diversified....................................................         27         17         10
                                                                   ---------  ---------  ---------
                                                                          99         57         42
  Corporate......................................................     --             11     --
                                                                   ---------  ---------  ---------
TOTAL CAPITAL EXPENDITURES.......................................  $      99  $      68  $      42
                                                                   ---------  ---------  ---------
                                                                   ---------  ---------  ---------
</TABLE>

                                       48
<PAGE>
                             U.S. INDUSTRIES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 14--GEOGRAPHIC AREAS--FINANCIAL DATA

    The following table presents certain data by geographic areas:

<TABLE>
<CAPTION>
                                                                                         FOR THE FISCAL YEARS ENDED
                                                                                                SEPTEMBER 30,
                                                                                       -------------------------------
                                                                                         1998       1997       1996
                                                                                       ---------  ---------  ---------
<S>                                                                                    <C>        <C>        <C>
                                                                                                (IN MILLIONS)
NET SALES
United States........................................................................  $   2,490  $  $2,243  $   1,974
Foreign..............................................................................        645        278        195
OPERATING EARNINGS (1)
United States........................................................................  $      75  $     223  $     191
Foreign..............................................................................         67         45         47
IDENTIFIABLE ASSETS
United States........................................................................  $   2,138  $   2,259  $   2,285
Foreign..............................................................................        638        240        192
</TABLE>

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

(1) Operating earnings for the year ended September 30, 1998 included merger,
    restructuring and other related costs of $142 million and product change
    costs in connection with the restructuring of approximately $11 million;
    $149 million and $4 million of these costs and charges relate to operating
    earnings of the United States and foreign locations, respectively.

NOTE 15--QUARTERLY FINANCIAL DATA (UNAUDITED)

    Summarized quarterly financial information for the fiscal years ended
September 30, 1998 and 1997 is as follows (in millions, except per share):
<TABLE>
<CAPTION>
                                                                     1998                                   1997
                                              --------------------------------------------------  ------------------------
QUARTER ENDED                                   DEC. 31     MARCH 31      JUNE 30     SEPT. 30      DEC. 31     MARCH 31
--------------------------------------------  -----------  -----------  -----------  -----------  -----------  -----------
<S>                                           <C>          <C>          <C>          <C>          <C>          <C>
Net sales...................................   $     695    $     790    $     825    $     825    $     522    $     631
Gross profit................................         212          234          247          240          163          194
Income (loss) from continuing operations....          29           36          (81)          19           22           30
Income (loss) before extraordinary loss.....          31           33         (125)          22           30          103
Net income (loss)...........................          31           33         (130)          22           28          103
Basic per share:
  Income (loss) from continuing
    operations..............................   $    0.31    $    0.38    ($   0.84)   $    0.20    $    0.24    $    0.32
  Income (loss) before extraordinary loss...   $    0.33    $    0.35    ($   1.30)   $    0.23    $    0.32    $    1.11
  Net income (loss).........................   $    0.33    $    0.35    ($   1.35)   $    0.23    $    0.30    $    1.11
Diluted per share:
  Income (loss) from continuing
    operations..............................   $    0.30    $    0.37    ($   0.84)   $    0.19    $    0.23    $    0.31
  Income (loss) before extraordinary loss...   $    0.32    $    0.34    ($   1.30)   $    0.22    $    0.31    $    1.07
  Net income (loss).........................   $    0.32    $    0.34    ($   1.35)   $    0.22    $    0.29    $    1.07

<CAPTION>

QUARTER ENDED                                   JUNE 30     SEPT. 30
--------------------------------------------  -----------  -----------
<S>                                           <C>          <C>
Net sales...................................   $     697    $     671
Gross profit................................         216          209
Income (loss) from continuing operations....          36           37
Income (loss) before extraordinary loss.....          41           80
Net income (loss)...........................          41           80
Basic per share:
  Income (loss) from continuing
    operations..............................   $    0.39    $    0.40
  Income (loss) before extraordinary loss...   $    0.44    $    0.87
  Net income (loss).........................   $    0.44    $    0.87
Diluted per share:
  Income (loss) from continuing
    operations..............................   $    0.38    $    0.39
  Income (loss) before extraordinary loss...   $    0.43    $    0.85
  Net income (loss).........................   $    0.43    $    0.85
</TABLE>

    The results for the quarters ended June 30 and September 30, 1998 include
$128 million and $14 million of merger, restructuring and other related costs,
respectively, and product change costs of $2 million and $9 million,
respectively.

                                       49
<PAGE>
                             U.S. INDUSTRIES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 16--SUBSEQUENT EVENTS

    On October 15, 1998, the Company adopted a Stockholder Rights Plan (the
"Plan") and declared a dividend of one Right on each outstanding share of Common
Stock held by stockholders of record on October 29, 1998. The Company had
approximately 98 million shares outstanding on October 29, 1998. The Plan was
designed to protect the Company's stockholders during a time when the Company's
share price has been under pressure due to the external factors.

    Initially, the Rights will trade with the common stock of the Company and
will not be exercisable. The Rights will separate from the common stock and
become exercisable upon the occurrence of events typical for stockholder rights
plans. In general, such separation will occur when any person or group of
affiliated persons acquires or makes an offer to acquire 15% or more of the
Company's Common Stock. Thereafter, separate Right certificates will be
distributed and each Right will entitle its holder to purchase one one-hundredth
of a share of the Company's Series A Junior preferred Stock for an exercise
price of $65.00. Each one one-hundredth of a share of Preferred Stock has
economic and voting terms equivalent to those of one share of the Company's
Common Stock.

    If not redeemed earlier, the Rights will expire on October 15, 2008, or at
the close of business on the 90th day following the date any person or group of
affiliated persons acquires or makes an offer to acquire 15% or more of the
Company's Common Stock.

    During April 1999, the Company completed the sale of its' investment in
Teardrop Golf. The Company realized a gain of $2 million ($1 million net of tax)
from the sale which will be recorded as a gain from discontinued operations
during fiscal 1999.

    In April of 1999, USIAH transferred substantially all of its assets and
liabilities to a new wholly owned subsidiary of USI named USI Global Corp. in
exchange for preferred stock in USI Global Corp. In connection with the asset
transfer, USI Global Corp. assumed joint and several obligations under the 7.25%
Notes, the 7.125% Notes and the Credit Facility, equally with USI and USIAH.
Neither USI nor USIAH, nor USI Atlantic as guarantor, was released from its
obligations under the 7.25% Notes, the 7.125% Notes or the Credit Agreement in
connection with the transfer of assets to USI Global Corp. Separate consolidated
financial statements for USI Global Corp. are not presented as management has
determined that they would not be material to investors.

    In the second quarter of fiscal 1999, the Company adopted a formal plan to
dispose of the Ertl Company Inc. ("Ertl"), which was sold in April for gross
proceeds of approximately $105 million subject to a post closing adjustment.
This resulted in a net-of-tax loss of $12 million recorded in March of 1999. The
Company has restated its financial statements to reflect this business as a
discontinued operation.

NOTE 17--SUPPLEMENTAL FINANCIAL INFORMATION

    The following represents the supplemental consolidating condensed financial
statements of USI and USIAH, which are the jointly obligated issuers of the
Notes, and USI Atlantic, which is the guarantor of the Notes, and their
non-guarantor subsidiaries, as of September 30, 1998 and 1997 and for each of
the three years in the period ended September 30, 1998. Separate consolidated
financial statements for USI, USI Atlantic and USIAH are not presented, as
management has determined that they would not be material to investors.

    In April of 1999, USIAH transferred substantially all of its assets and
liabilities to a new wholly owned subsidiary of USI named USI Global Corp. in
exchange for preferred stock in USI Global Corp. In connection with the asset
transfer, USI Global Corp. assumed joint and several obligations under the 7.25%
Notes, the 7.125% Notes and the Credit Facility, equally with USI and USIAH.
Neither USI nor USIAH, nor USI Atlantic as guarantor, was released from its
obligations under the 7.25% Notes, the 7.125% Notes or the Credit Agreement in
connection with the transfer of assets to USI Global Corp. Separate consolidated
financial statements for USI Global Corp. are not presented as management has
determined that they would not be material to investors.

<TABLE>
<CAPTION>
                                                                    FOR THE YEAR ENDED SEPTEMBER 30, 1998
                                                      -----------------------------------------------------------------
                                                                     USI                   NONGUARANTOR
                                                         USI      ATLANTIC       USIAH     SUBSIDIARIES   ELIMINATIONS
                                                      ---------  -----------  -----------  -------------  -------------
<S>                                                   <C>        <C>          <C>          <C>            <C>
                                                                                (IN MILLIONS)
Net Sales...........................................  $  --       $  --        $  --         $   3,135      $
Operating costs and expenses:
  Cost of products sold.............................     --          --           --             2,202
  Selling, general and administrative expenses......          4           4           17           624
  Goodwill impairment and non-recurring and unusual
    charges.........................................     --          --                7           135
                                                      ---------       -----        -----        ------         ------
    Operating income................................         (4)         (4)         (24)          174         --
Interest expense....................................     --               6           44            19
Interest income.....................................     --          --           --                (8)
Management fee (income) expense.....................     --             (27)         (28)           55
Intercompany interest, net..........................     --              (4)         (63)           67
Gain on the sale of subsidiary shares...............     --          --           --            --
Other (income) expense, net.........................     --              12           (3)           (6)
Equity in (earnings) loss of investees, net.........         41          42           58        --               (141)
                                                      ---------       -----        -----        ------         ------
Income before income taxes, discontinued operations
  and extraordinary loss............................        (45)        (33)         (32)           47            141
Provision for income taxes..........................         (1)          4           10            62
                                                      ---------       -----        -----        ------         ------
  Income (loss) from continuing operations..........        (44)        (37)         (42)          (15)           141
Income (loss) from discontinued operations, net of
  tax...............................................     --          --           --               (42)        --
                                                      ---------       -----        -----        ------         ------
Income before extraordinary loss....................        (44)        (37)         (42)          (57)           141
Extraordinary loss, net of tax......................     --          --           --                (5)
                                                      ---------       -----        -----        ------         ------
Net income (loss)...................................  $     (44)  $     (37)   $     (42)    $     (62)     $     141
                                                      ---------       -----        -----        ------         ------
                                                      ---------       -----        -----        ------         ------

<CAPTION>

                                                      CONSOLIDATED
                                                      -------------
<S>                                                   <C>

Net Sales...........................................    $   3,135
Operating costs and expenses:
  Cost of products sold.............................        2,202
  Selling, general and administrative expenses......          649
  Goodwill impairment and non-recurring and unusual
    charges.........................................          142
                                                           ------
    Operating income................................          142
Interest expense....................................           69
Interest income.....................................           (8)
Management fee (income) expense.....................       --
Intercompany interest, net..........................       --
Gain on the sale of subsidiary shares...............       --
Other (income) expense, net.........................            3
Equity in (earnings) loss of investees, net.........       --
                                                           ------
Income before income taxes, discontinued operations
  and extraordinary loss............................           78
Provision for income taxes..........................           75
                                                           ------
  Income (loss) from continuing operations..........            3
Income (loss) from discontinued operations, net of
  tax...............................................          (42)
                                                           ------
Income before extraordinary loss....................          (39)
Extraordinary loss, net of tax......................           (5)
                                                           ------
Net income (loss)...................................    $     (44)
                                                           ------
                                                           ------
</TABLE>

                                       50
<PAGE>
                             U.S. INDUSTRIES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 17--SUPPLEMENTAL FINANCIAL INFORMATION (CONTINUED)

<TABLE>
<CAPTION>
                                                                             FOR THE YEAR ENDED SEPTEMBER 30, 1997
                                                             ---------------------------------------------------------------------
                                                                 USI                   NONGUARANTOR
                                                              ATLANTIC       USIAH     SUBSIDIARIES   ELIMINATIONS   CONSOLIDATED
                                                             -----------  -----------  -------------  -------------  -------------
<S>                                                          <C>          <C>          <C>            <C>            <C>
                                                                                         (IN MILLIONS)
Net Sales..................................................   $  --        $  --         $   2,521      $  --          $   2,521
Operating costs and expenses:
  Cost of products sold....................................      --           --             1,739                         1,739
  Selling, general and administrative expenses.............           6           25           483                           514
  Goodwill impairment and non-recurring and unusual
    charges................................................      --           --            --                            --
                                                                  -----        -----        ------          -----         ------
    Operating income.......................................          (6)         (25)          299         --                268
Interest expense...........................................      --               35            24                            59
Interest income............................................      --           --                (7)                           (7)
Management fee (income) expense............................          (1)         (15)           16                        --
Intercompany interest, net.................................      --              (68)           68                        --
Gain on the sale of subsidiary shares......................      --           --                (1)                           (1)
Other (income) expense, net................................      --                1            (3)                           (2)
Equity in (earnings) loss of investees, net................        (255)        (227)       --                482         --
                                                                  -----        -----        ------          -----         ------
Income before income taxes, discontinued operations and
  extraordinary loss.......................................         250          249           202           (482)           219
Provision for income taxes.................................          (2)           9            87                            94
                                                                  -----        -----        ------          -----         ------
  Income (loss) from continuing operations.................         252          240           115           (482)           125
Income (loss) from discontinued operations, net of tax.....      --           --               129         --                129
                                                                  -----        -----        ------          -----         ------
Income before extraordinary loss...........................         252          240           244           (482)           254
Extraordinary loss, net of tax.............................      --               (1)           (1)                           (2)
                                                                  -----        -----        ------          -----         ------
Net income (loss)..........................................   $     252    $     239     $     243      $    (482)     $     252
                                                                  -----        -----        ------          -----         ------
                                                                  -----        -----        ------          -----         ------
</TABLE>

                                       51
<PAGE>
                             U.S. INDUSTRIES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 17--SUPPLEMENTAL FINANCIAL INFORMATION (CONTINUED)

<TABLE>
<CAPTION>
                                                                             FOR THE YEAR ENDED SEPTEMBER 30, 1996
                                                             ---------------------------------------------------------------------
                                                                 USI                   NONGUARANTOR
                                                              ATLANTIC       USIAH     SUBSIDIARIES   ELIMINATIONS   CONSOLIDATED
                                                             -----------  -----------  -------------  -------------  -------------
<S>                                                          <C>          <C>          <C>            <C>            <C>
                                                                                         (IN MILLIONS)
Net Sales..................................................   $  --        $  --         $   2,169      $  --          $   2,169
Operating costs and expenses:
  Cost of products sold....................................      --           --             1,488                         1,488
  Selling, general and administrative expenses.............           6           22           415                           443
  Goodwill impairment and non-recurring and unusual
    charges................................................      --           --            --                            --
                                                                  -----        -----        ------          -----         ------
    Operating income.......................................          (6)         (22)          266         --                238
Interest expense...........................................      --               51            13                            64
Interest income............................................      --               (1)          (10)                          (11)
Management fee (income) expense............................          (1)         (15)           16                        --
Intercompany interest, net.................................      --              (86)           86                        --
Gain on the sale of subsidiary shares......................      --           --            --                            --
Other (income) expense, net................................      --                1            (1)                       --
Equity in (earnings) loss of investees, net................        (141)        (137)       --                278         --
                                                                  -----        -----        ------          -----         ------
Income before income taxes, discontinued operations and
  extraordinary loss.......................................         136          165           162           (278)           185
Provision for income taxes.................................          (2)          11            73                            82
                                                                  -----        -----        ------          -----         ------
  Income (loss) from continuing operations.................         138          154            89           (278)           103
Income (loss) from discontinued operations, net of tax.....      --           --                60         --                 60
                                                                  -----        -----        ------          -----         ------
Income before extraordinary loss...........................         138          154           149           (278)           163
Extraordinary loss, net of tax.............................      --              (18)           (7)                          (25)
                                                                  -----        -----        ------          -----         ------
Net income (loss)..........................................   $     138    $     136     $     142      $    (278)     $     138
                                                                  -----        -----        ------          -----         ------
                                                                  -----        -----        ------          -----         ------
</TABLE>

                                       52
<PAGE>
                             U.S. INDUSTRIES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 17--SUPPLEMENTAL FINANCIAL INFORMATION (CONTINUED)

<TABLE>
<CAPTION>
                                                                                 AT SEPTEMBER 30, 1998
                                                      ---------------------------------------------------------------------------
                                                                    USI                NONGUARANTOR
                                                         USI     ATLANTIC     USIAH    SUBSIDIARIES   ELIMINATIONS  CONSOLIDATED
                                                      ---------  ---------  ---------  -------------  ------------  -------------
<S>                                                   <C>        <C>        <C>        <C>            <C>           <C>
                                                                                     (IN MILLIONS)
ASSETS
Current assets:
  Cash and cash equivalents.........................  $  --      $  --      $  --        $      44     $   --         $      44
  Trade receivables, net............................     --         --         --              609                          609
  Inventories.......................................     --         --         --              539                          539
  Deferred income taxes.............................         45     --         --               30                           75
  Other current assets..............................     --         --             11           62                           73
  Net assets held for disposition...................     --         --         --              143                          143
                                                      ---------  ---------  ---------       ------    ------------       ------
    Total current assets............................         45     --             11        1,427         --             1,483
  Property, plant and equipment, net................     --         --         --              508                          508
  Deferred income taxes.............................          8     --         --                8                           16
  Other assets......................................     --         --              7          213                          220
  Goodwill, net.....................................     --         --         --              549                          549
  Investments in subsidiaries.......................        996        745      1,221       --             (2,962)       --
  Intercompany receivable (payable).................        (51)       277        245         (471)                      --
                                                      ---------  ---------  ---------       ------    ------------       ------
    Total assets....................................  $     998  $   1,022  $   1,484    $   2,234     $   (2,962)    $   2,776
                                                      ---------  ---------  ---------       ------    ------------       ------
                                                      ---------  ---------  ---------       ------    ------------       ------

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Notes payable.....................................  $  --      $  --      $  --        $      15     $   --         $      15
  Current maturities of long-term debt..............     --         --         --                4                            4
  Trade accounts payable............................     --              2     --              245                          247
  Accrued expenses and other liabilities............          5          6         43          247                          301
  Income taxes payable..............................         33     --         --                7                           40
                                                      ---------  ---------  ---------       ------    ------------       ------
    Total current liabilities.......................         38          8         43          518         --               607
  Long-term debt....................................     --            270        629           48                          947
  Other liabilities.................................     --         --             67          195                          262
                                                      ---------  ---------  ---------       ------    ------------       ------
    Total liabilities...............................         38        278        739          761         --             1,816
  Stockholders' equity..............................        960        744        745        1,473         (2,962)          960
                                                      ---------  ---------  ---------       ------    ------------       ------
    Total liabilities and stockholders' equity......  $     998  $   1,022  $   1,484    $   2,234     $   (2,962)    $   2,776
                                                      ---------  ---------  ---------       ------    ------------       ------
                                                      ---------  ---------  ---------       ------    ------------       ------
</TABLE>

                                       53
<PAGE>
                             U.S. INDUSTRIES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 17--SUPPLEMENTAL FINANCIAL INFORMATION (CONTINUED)

<TABLE>
<CAPTION>
                                                                                 AT SEPTEMBER 30, 1997
                                                            ----------------------------------------------------------------
                                                               USI                NONGUARANTOR
                                                            ATLANTIC     USIAH    SUBSIDIARIES   ELIMINATIONS  CONSOLIDATED
                                                            ---------  ---------  -------------  ------------  -------------
<S>                                                         <C>        <C>        <C>            <C>           <C>
                                                                                     (IN MILLIONS)
ASSETS
Current assets:
  Cash and cash equivalents...............................  $  --      $      35    $      32     $   --         $      67
  Trade receivables, net..................................     --         --              452                          452
  Inventories.............................................     --         --              443                          443
  Deferred income taxes...................................         46     --               56                          102
  Other current assets....................................     --         --               53                           53
  Net assets held for disposition.........................     --         --              228                          228
                                                            ---------  ---------       ------    ------------       ------
    Total current assets..................................         46         35        1,264         --             1,345
  Property, plant and equipment, net......................     --             20          365                          385
  Deferred income taxes...................................          3     --                5                            8
  Other assets............................................     --              8          201                          209
  Goodwill, net...........................................     --         --              552                          552
  Investments in subsidiaries.............................      1,043        478       --             (1,521)       --
  Intercompany receivable (payable).......................        (66)       887         (821)        --            --
                                                            ---------  ---------       ------    ------------       ------
    Total assets..........................................  $   1,026  $   1,428    $   1,566     $   (1,521)    $   2,499
                                                            ---------  ---------       ------    ------------       ------
                                                            ---------  ---------       ------    ------------       ------

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Notes payable...........................................  $  --      $  --        $       4     $   --         $       4
  Current maturities of long-term debt....................     --         --               41                           41
  Trade accounts payable..................................     --              6          165                          171
  Accrued expenses and other liabilities..................          4         27          295                          326
  Income taxes payable....................................  $      72  $  --        $  --         $              $      72
                                                            ---------  ---------       ------    ------------       ------
    Total current liabilities.............................         76         33          505         --               614
  Long-term debt..........................................     --            532          169                          701
  Other liabilities.......................................     --             65          169                          234
                                                            ---------  ---------       ------    ------------       ------
    Total liabilities.....................................         76        630          843         --             1,549
  Stockholders' equity....................................        950        798          723         (1,521)          950
                                                            ---------  ---------       ------    ------------       ------
    Total liabilities and stockholders' equity............  $   1,026  $   1,428    $   1,566     $   (1,521)    $   2,499
                                                            ---------  ---------       ------    ------------       ------
                                                            ---------  ---------       ------    ------------       ------
</TABLE>

                                       54
<PAGE>
                             U.S. INDUSTRIES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 17--SUPPLEMENTAL FINANCIAL INFORMATION (CONTINUED)

<TABLE>
<CAPTION>
                                                                          FOR THE YEAR ENDED SEPTEMBER 30, 1998
                                                     -------------------------------------------------------------------------------
                                                                    USI                  NONGUARANTOR
                                                        USI      ATLANTIC      USIAH     SUBSIDIARIES    ELIMINATIONS   CONSOLIDATED
                                                     ---------  -----------  ---------  ---------------  -------------  ------------
<S>                                                  <C>        <C>          <C>        <C>              <C>            <C>
                                                                                      (IN MILLIONS)
NET CASH PROVIDED BY OPERATING ACTIVITIES..........  $     (33)  $      12   $      19     $      78       $  --         $       76

INVESTING ACTIVITIES:
Proceeds from sale of net assets held for
  disposition......................................     --          --          --                11                             11
Proceeds from sale of excess real estate...........     --          --          --                14                             14
Proceeds from sale of subsidiary stock.............     --          --          --            --                             --
Proceeds from collection of notes receivable.......     --          --          --                 5                              5
Acquisition of companies, net of cash acquired.....     --          --          --              (173)                          (173)
Capital contributions to subsidiaries..............        (10)     --             (73)       --                  83         --
Dividends from subsidiaries........................          2      --          --            --                  (2)        --
Net transfers with subsidiaries....................         77        (205)       (303)       --                 431         --
Purchase of investment.............................     --          --          --                (7)                            (7)
Proceeds from sale of marketable securities........     --          --          --            --                             --
Purchases of property, plant and equipment.........     --          --          --               (99)                           (99)
Proceeds from sale of property, plant and
  equipment........................................     --          --              20            14                             34
Other net..........................................     --          --          --               (13)                           (13)
                                                     ---------       -----   ---------         -----           -----    ------------
NET CASH PROVIDED BY INVESTING ACTIVITIES..........         69        (205)       (356)         (248)            512           (228)
FINANCING ACTIVITIES:
Proceeds from long-term debt.......................     --             270       1,075            61                          1,406
Repayment of long-term debt........................     --          --            (978)         (267)                        (1,245)
Proceeds from (repayment of) notes payable.........     --          --          --                 5                              5
Payment of dividends...............................        (21)     --          --                (2)              2            (21)
Purchase of treasury stock.........................        (35)     --          --            --                                (35)
Proceeds from exercise of stock options............         20      --          --            --                                 20
Capital contributions from parent..................     --          --          --                83             (83)        --
Net transfers with parent..........................     --             (77)        205           303            (431)        --
                                                     ---------       -----   ---------         -----           -----    ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES..........        (36)        193         302           183            (512)           130
Effect of exchange rate changes on cash............     --          --          --                (1)                            (1)

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS...     --          --             (35)           12          --                (23)
Cash and cash equivalents at beginning of year.....     --          --              35            32                             67
                                                     ---------       -----   ---------         -----           -----    ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR...........  $  --       $  --       $  --         $      44       $  --         $       44
                                                     ---------       -----   ---------         -----           -----    ------------
                                                     ---------       -----   ---------         -----           -----    ------------
</TABLE>

                                       55
<PAGE>
                             U.S. INDUSTRIES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 17--SUPPLEMENTAL FINANCIAL INFORMATION (CONTINUED)

<TABLE>
<CAPTION>
                                                                         FOR THE YEAR ENDED SEPTEMBER 30, 1997
                                                          --------------------------------------------------------------------
                                                              USI                  NONGUARANTOR
                                                           ATLANTIC      USIAH     SUBSIDIARIES    ELIMINATIONS   CONSOLIDATED
                                                          -----------  ---------  ---------------  -------------  ------------
<S>                                                       <C>          <C>        <C>              <C>            <C>
                                                                                     (IN MILLIONS)
NET CASH PROVIDED BY OPERATING ACTIVITIES...............   $      (4)  $  --         $      44       $  --         $       40

INVESTING ACTIVITIES:
Proceeds from sale of net assets held for disposition...      --          --               390                            390
Proceeds from sale of excess real estate................      --          --                28                             28
Proceeds from sale of subsidiary stock..................      --          --                 4                              4
Proceeds from collection of notes receivable............      --          --            --                             --
Acquisition of companies, net of cash acquired..........      --          --              (260)                          (260)
Capital contributions to subsidiaries...................          (2)         (5)       --                   7         --
Dividends from subsidiaries.............................           4          32        --                 (36)        --
Net transfers with subsidiaries.........................          66         248        --                (314)        --
Purchase of investment..................................      --          --                (1)                            (1)
Proceeds from sale of marketable securities.............      --          --                24                             24
Purchases of property, plant and equipment..............      --             (11)          (57)                           (68)
Proceeds from sale of property, plant and equipment.....      --          --                 2                              2
Other net...............................................      --          --                (5)                            (5)
                                                               -----   ---------         -----           -----    ------------
NET CASH PROVIDED BY INVESTING ACTIVITIES...............          68         264           125            (343)           114

FINANCING ACTIVITIES:
Proceeds from long-term debt............................      --           1,460           166                          1,626
Repayment of long-term debt.............................      --          (1,623)          (82)                        (1,705)
Proceeds from (repayment of) notes payable..............      --          --                 4                              4
Payment of dividends....................................          (4)     --               (36)             36             (4)
Purchase of treasury stock..............................         (67)     --            --                                (67)
Proceeds from exercise of stock options.................           7      --            --                                  7
Capital contributions from parent.......................      --          --                 7              (7)        --
Net transfers with parent...............................      --             (66)         (248)            314         --
                                                               -----   ---------         -----           -----    ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES...............         (64)       (229)         (189)            343           (139)
Effect of exchange rate changes on cash.................      --          --                (5)                            (5)

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........      --              35           (25)         --                 10
Cash and cash equivalents at beginning of year..........      --          --                57                             57
                                                               -----   ---------         -----           -----    ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR................   $  --       $      35     $      32       $  --         $       67
                                                               -----   ---------         -----           -----    ------------
                                                               -----   ---------         -----           -----    ------------
</TABLE>

                                       56
<PAGE>
                             U.S. INDUSTRIES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 17--SUPPLEMENTAL FINANCIAL INFORMATION (CONTINUED)

<TABLE>
<CAPTION>
                                                                   FOR THE YEAR ENDED SEPTEMBER 30, 1996
                                                    --------------------------------------------------------------------
                                                        USI                  NONGUARANTOR
                                                     ATLANTIC      USIAH     SUBSIDIARIES    ELIMINATIONS   CONSOLIDATED
                                                    -----------  ---------  ---------------  -------------  ------------
<S>                                                 <C>          <C>        <C>              <C>            <C>
                                                                               (IN MILLIONS)
NET CASH PROVIDED BY OPERATING ACTIVITIES.........   $     (31)  $      25     $     140       $  --         $      134

INVESTING ACTIVITIES:
Proceeds from sale of net assets held for
  disposition.....................................      --          --               314                            314
Proceeds from sale of excess real estate..........      --          --                31                             31
Proceeds from sale of subsidiary stock............      --          --            --                             --
Proceeds from collection of notes receivable......      --          --                 7                              7
Acquisition of companies, net of cash acquired....      --          --              (239)                          (239)
Capital contribution to subsidiaries..............      --          --            --                             --
Dividends from subsidiaries.......................          16          11        --                 (27)        --
Net transfers with subsidiaries...................          66         401        --                (467)        --
Purchase of investment............................      --          --               (12)                           (12)
Proceeds from sale of marketable securities.......      --          --                 6                              6
Purchases of property, plant and equipment........      --          --               (42)                           (42)
Proceeds from sale of property, plant and
  equipment.......................................      --               1             3                              4
Other net.........................................      --          --                 2                              2
                                                         -----   ---------         -----           -----    ------------
NET CASH PROVIDED BY INVESTING ACTIVITIES.........          82         413            70            (494)            71

FINANCING ACTIVITIES:
Proceeds from long-term debt......................      --             650           485                          1,135
Repayment of long-term debt.......................      --          (1,013)         (283)                        (1,296)
Proceeds from (repayment of) notes payable........      --          --                (3)                            (3)
Payment of dividends..............................          (5)        (11)          (16)             27             (5)
Purchase of treasury stock........................         (46)     --            --                                (46)
Proceeds from exercise of stock options...........      --          --            --                             --
Capital contributions from parent.................      --          --            --                             --
Net transfers with parent.........................      --             (66)         (401)            467         --
                                                         -----   ---------         -----           -----    ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES.........         (51)       (440)         (218)            494           (215)
Effect of exchange rate changes on cash...........      --          --            --                             --

INCREASE (DECREASE) IN CASH AND CASH
  EQUIVALENTS.....................................      --              (2)           (8)         --                (10)
Cash and cash equivalents at beginning of year....      --               2            65                             67
                                                         -----   ---------         -----           -----    ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR..........   $  --       $  --         $      57       $  --         $       57
                                                         -----   ---------         -----           -----    ------------
                                                         -----   ---------         -----           -----    ------------
</TABLE>

                                       57
<PAGE>
                                   SIGNATURES

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



                                U.S. INDUSTRIES, INC.

                                By:  /s/ George H. MacLean
                                     -----------------------------------------
                                     George H. MacLean
                                     Senior Vice President, General Counsel
                                     and Secretary
May 17, 1999

                                       58
<PAGE>

                                                                     SCHEDULE II
                              U.S INDUSTRIES, INC.

                        VALUATION AND QUALIFYING ACCOUNTS

                                  (in millions)

<TABLE>
<CAPTION>
                Column A                  Column B          Column C           Column D     Column E
                                                           Additions
                                                          ----------
                                                       Charged
                                         Balance at    to Costs    Charged                  Balance at
                                         Beginning       and       to Other                  End of
Description                              of period     Expenses    Accounts    Deductions    Period
-----------                              ---------     --------    --------    ----------    ------
<S>                                            <C>           <C>      <C>         <C>              <C>
Year ended September 30, 1996
Deducted from asset accounts:
  Allowance for doubtful accounts......        $24           $5       $4(1)                        $33
Year ended September 30, 1997
Deducted from asset accounts:
  Allowance for doubtful accounts......        $33           $2                      $(4)          $31
Year ended September 30, 1998
Deducted from asset accounts:
  Allowance for doubtful accounts......        $31           $8                   $(1)(2)          $38
</TABLE>

-----------

(1)   Amount in connection with acquisition.

(2)   Uncollectible accounts written off, net of recoveries