##### Table of Contents









UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549


Form 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31,
2003

Commission file numbers:

333-44473


333-77905

The Holmes Group, Inc.

(Exact name of registrant as specified in its
charter)


|                                                                                   |  |                                                   
|---------------------------------------------------------------------------------- |  | --------------------------------------------------
|Massachusetts(State or other jurisdiction of
    incorporation or organization)    |  | 04-2768914(I.R.S. Employer
    Identification No.)
|                                                                                  
|One Holmes Way, Milford, Massachusetts(Address of principal executive
    offices) |  | 01757(Zip Code)                                   

(508) 634-8050

(Registrants telephone number)


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

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

Title of Class: Not Applicable

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

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

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

Documents incorporated by reference: Not
Applicable



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THE HOLMES GROUP, INC.

Form 10-K

Fiscal Year Ended December 31,
2003


TABLE OF CONTENTS






|                                                   |  |                                                                                                                             |  |      |    | 
|-------------------------------------------------- |  | --------------------------------------------------------------------------------------------------------------------------- |  | ---- | -- | 
|                                                   |  |                                                                                                                             |  | Page
|                                                   |  |                                                                                                                             |  |     
|PART I                                             |  |                                                                                                                             |  |     
|Item 1                                             |  | Business                                                                                                                    |  |      | 4  | 
|Item 2                                             |  | Properties                                                                                                                  |  |      | 14 | 
|Item 3                                             |  | Legal Proceedings                                                                                                           |  |      | 15 | 
|Item 4                                             |  | Submission of Matters to a
    Vote of Security Holders                                                                     |  |      | 15 | 
|Item 5                                             |  | Market for the
    Registrants Common Equity and Related Stockholder Matters
    and Issuer Purchases of Equity Securities |  |      | 15 | 
|PART II                                            |  |                                                                                                                             |  |     
|Item 6                                             |  | Selected Financial Data                                                                                                     |  |      | 16 | 
|Item 7                                             |  | Managements Discussion
    and Analysis of Financial Condition and Results of Operations                                   |  |      | 18 | 
|Item 7A                                            |  | Quantitative and Qualitative
    Disclosures About Market Risk                                                              |  |      | 27 | 
|Item 8                                             |  | Financial Statements and
    Supplementary Data                                                                             |  |      | 28 | 
|Item 9                                             |  | Changes in and Disagreements
    with Accountants on Accounting and Financial Disclosure                                    |  |      | 68 | 
|Item 9A                                            |  | Controls and Procedures                                                                                                     |  |      | 68 | 
|PART III                                           |  |                                                                                                                             |  |     
|Item 10                                            |  | Directors and Executive
    Officers of the Registrant                                                                      |  |      | 68 | 
|Item 11                                            |  | Executive Compensation                                                                                                      |  |      | 70 | 
|Item 12                                            |  | Security Ownership of
    Certain Beneficial Owners and Management                                                          |  |      | 73 | 
|Item 13                                            |  | Certain Relationships and
    Related Transactions                                                                          |  |      | 73 | 
|PART IV                                            |  |                                                                                                                             |  |     
|Item 14                                            |  | Principal Accountant Fees
    and Services                                                                                  |  |      | 74 | 
|Item 15                                            |  | Exhibits, Financial
    Statement Schedules, and Reports on Form 8-K                                                        |  |      | 76 | 
|Ex-10.29 Form of Revolving Credit & Term Loan Agr.
|Ex-10.30 Executive Employment Agreement           
|Ex-10.31 Form of Change of Control Severance Agr. 
|Ex-23.1 Consent of PricewaterhouseCoopers LLP     
|Ex-31.1 Section 302 Certification of CEO          
|Ex-31.2 Section 302 Certification of CFO          



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THE HOLMES GROUP, INC.

DISCLOSURE REGARDING FORWARD-LOOKING
STATEMENTS

This Form 10-K contains forward-looking
statements within the meaning of the Private Securities
Litigation Reform Act of 1995 and Section 21E of the
Securities Exchange Act of 1934. We caution investors that any
forward-looking statements presented in this report and
presented elsewhere by management from time to time are based on
managements beliefs and assumptions made by, and
information currently available to, management. When used, the
words anticipate, believe,
expect, intend, may,
might, plan, estimate,
project, should, will be,
will result and similar expressions, which do not
relate solely to historical matters, are intended to identify
forward-looking statements. Such statements are subject to
risks, uncertainties and assumptions and are not guarantees of
future performance, which may be affected by known or unknown
risks, trends, uncertainties and factors that are beyond our
control. Should one or more of these risks or uncertainties
materialize, or should underlying assumptions prove incorrect,
actual results may vary materially from those anticipated,
estimated or projected. We expressly disclaim any responsibility
to update forward-looking statements. Accordingly, past results
and trends should not be used by investors to anticipate future
results or trends.

Risks and uncertainties that may affect future
performance are detailed from time to time in reports we file
with the Securities and Exchange Commission (SEC),
including Forms 10-Q and 10-K and our most recent Registration
Statement on Form S-4 (File No. 333-77095), and
include, among others, the following:



| |   |                                                                         
| | - | ------------------------------------------------------------------------
| |  | Our degree of leverage and continued compliance
    with debt covenants.



| |                                                                                                                                    
| | -----------------------------------------------------------------------------------------------------------------------------------
| |  Our ability to obtain adequate
    financing to replace the Revolving Credit and Term Loan Facility
    expiring in January 2005.



| |   |                                                                                                                        
| | - | -----------------------------------------------------------------------------------------------------------------------
| |  | Our dependence on major customers and key
    employees.                                                               
|
| |  | Any significant decline in purchases by our
    larger customers or pressure from these customers to reduce
    prices.
|
| |  | The bankruptcy or loss of any major retail
    customer or supplier.                                                   
|
| |  | Weakness in the U.S. retail market.                                                                                    
|
| |  | The financial condition of the retail industry.                                                                        
|
| |  | The infringement or loss of our rights with
    respect to patents and trademarks related to our products.             
|
| |  | Fluctuations in cost and availability of raw
    materials and components.                                             
|
| |  | Product recalls and product liability claims
    against us or other regulatory actions.                               
|
| |  | Changes in demand for the Companys products.                                                                          
|
| |  | Changing conditions in foreign countries.                                                                              
|
| |  | An extended interruption in the operation of our
    manufacturing facilities in China.                                
|
| |  | Changes in trade relations with China.                                                                                 



| |                                                                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  Potential disruption in our supply
    chain due to health concerns relating to the disease known as
    severe acute respiratory syndrome or other illnesses.



| |   |                                                                                                        
| | - | -------------------------------------------------------------------------------------------------------
| |  | Currency fluctuations in our international
    operations.                                             
|
| |  | Difficulties in implementing and maintaining new
    computer systems.                                 
|
| |  | Changes in retailer inventory management or
    failure of our order processing and logistical systems.
|
| |  | Interruptions in data and communications systems.                                                      
|
| |  | Our ability to develop new and innovative
    products and customer acceptance of such products.       

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| |   |                                                                                       
| | - | --------------------------------------------------------------------------------------
| |  | Seasonality of our operating results, including
    counter-seasonal weather patterns.
|
| |  | Competition with other large companies that
    produce similar products.             
|
| |  | The success of our marketing and promotional
    programs.                            

The risks included here are not exhaustive. Other
sections of this report may include additional factors which
could adversely affect the Companys business and financial
performance. Moreover, the Company operates in a very
competitive and rapidly changing environment. New risk factors
emerge from time to time and it is not possible for management
to predict all such risk factors, nor can it assess the impact
of all such risk factors on the Companys business or the
extent to which any factor, or combination of factors, may cause
actual results to differ materially from those contained in any
forward-looking statements. Given these risks and uncertainties,
investors should not place undue reliance on forward-looking
statements as a prediction of actual results.

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PART I






|        |         
|------- | --------
|Item 1. | Business

General

The Holmes Group, Inc. is a leading
developer, manufacturer and marketer of quality, branded home
appliances, including home environment and small kitchen
appliances. Our home environment products include fans, heaters,
humidifiers and air purifiers. We believe that we have the
leading market share in each of these product categories in the
United States. Our home environment product offering also
includes lighting products. Home environment products, which in
the aggregate, accounted for approximately 46% of our net sales
for the fiscal year ended December 31, 2003, are sold under
our brand names including: Holmes®, Bionaire®,
Patton®, Family Care® and Titan®. Our kitchen
appliances include slow cookers, roaster ovens, skillets, deep
fryers, griddles, ice cream makers, vacuum food sealers and
other small kitchen electric appliances which are sold under the
Rival®, Crock-Pot® and White Mountain® brand
names. We believe we hold the #1 market share in the major
kitchen appliance categories in which we compete. Kitchen
appliances accounted for approximately 51% of our net sales for
fiscal 2003. We believe that our strong market position and
success are attributable to our well-known brand names,
continuous product innovation, engineering and manufacturing
expertise, close customer partnerships, breadth of product
offerings, reputation for quality and manufacturing presence and
experience in the Far East.

We sell our products to consumers through major
retail chains, including mass merchants, do-it-yourself home
centers, warehouse clubs, hardware, department and specialty
stores and national drugstore chains. Major customers in these
channels include Wal-Mart, Target, Kmart, Kohls, Lowes,
Home Depot, Costco, Sears, BJs Wholesale Club, TruServ and
Walgreens. We also market our products, especially replacement
filters for our home environment appliances, directly to
consumers through our various branded websites and our direct
mail program. We believe that the strength, scope and visibility
of our retail account base provide a competitive advantage with
respect to brand recognition, access to shelf space and
penetration of the consumer market.

Our Company was founded in 1982 by our Chairman
of the Board of Directors, Jordan (Jerry) Kahn, an innovator in
the home environment market with over 30 years of industry
experience. We added to our strength in the home environment
business and entered the kitchen appliance business with our
acquisition of The Rival Company in February 1999. Holmes opened
its first manufacturing facility in China in 1989, and currently
operates a manufacturing complex in China where we produce many
of our products and electric motors for use in our products. Our
vertically integrated manufacturing facilities provide direct
control over the production process and product quality. These
facilities also enhance operational flexibility and allow us to
quickly respond to changes in consumer demand and to specialized
production needs. We maintain distribution facilities in the
United States, Canada, Mexico, China and Europe, as well as
offices in Hong Kong and Taiwan which are responsible for
sourcing raw materials and overseeing the manufacture, quality
control and shipment of our products from our Chinese factories
and independent suppliers. We coordinate product development,
marketing, sales and distribution from our Milford,
Massachusetts headquarters.

Our principal executive offices are located at
One Holmes Way, Milford, Massachusetts 01757. Our telephone
number is (508) 634-8050 and our corporate web site is
located at www.theholmesgroup.com.

Our Business Strategy

Our strategy is to capitalize on our core
strengths to achieve growth in net sales, profitability and cash
flow. Continuous product innovation is the key element
supporting all of our business strategies. We intend to continue
our pursuit of the following initiatives as part of our strategy:

Strengthen the Kitchen
Franchise.The long-standing
reputation of the Rival® brand as a leader in the small
kitchen appliance market added a strong, complementary business
to our home environment product line. We are the leading
manufacturer and marketer of slow cookers through Rivals
Crock-Pot® brand, and believe we hold the #1
or #2 market share in other key cooking categories,
including roaster ovens, skillets,

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griddles and deep fryers. We also hold
the #1 position in the treats appliance
category, which includes our line of Rival® and White
Mountain® ice cream makers and other related products. We
intend to leverage our expertise in product innovation,
manufacturing, sourcing, marketing and distribution to further
strengthen the Rival® and Crock-Pot® kitchen franchise
and to enter new kitchen appliance product categories.


Expand Our Home Environment
Brands.The addition of Rivals
home environment brands in 1999 allowed us to increasingly
differentiate our home comfort offerings among retailers and
consumers. Through these additional brands, such as
Bionaire® and Patton®, we can offer a step-up brand
strategy for increased presence in the department and specialty
store and home center channels.

Further Penetrate Existing Distribution
Channels.Our goal is to further
penetrate our existing distribution channels as a result of
favorable industry dynamics and our strong relationships and
execution with mass merchant retailers. We believe that mass
merchants will continue to consolidate their vendor base and
focus on a smaller number of service-oriented suppliers that can
(1) provide a broad array of differentiated, quality
products, (2) efficiently and consistently fulfill logistical
requirements and volume demands and (3) provide full
product support from design to category management,
point-of-sale and after-market service with the consumer. We
work closely with key customers such as Wal-Mart, where we have
been selected to design and produce home environment and
selected kitchen products for their General Electric®
branded product program.

Expand Distribution into New Geographic
Regions.Currently, our international
sales represent 13% of our consolidated revenues. We believe
that the European, Latin American and Asian home comfort and
kitchen appliance markets are underdeveloped and represent
substantial growth opportunities. We intend to leverage the
greater international recognition of Rivals brands in
Europe and Latin America with our low cost flexible supply in
Asia to increase sales in these regions.

Develop New Distribution
Channels.We continue to develop new
channels of distribution by providing customized product
offerings that appeal to the specific needs of each channel. We
are also expanding our internet sales through the websites of
our Holmes®, Bionaire®, Rival® and
Crock-Pot® brands and independent on-line retail sites.

Develop Our Brand
Portfolio.We believe our wide
portfolio of brands allows us to increase market share by
penetrating new segments of distribution, as well as by
expanding our share of shelf in existing retail channels. Our
brand development focuses on both consumer brand awareness
vehicles and the development of new technologies and feature
enhancements unique to our products.

Improve the Overall Cost
Structure.Through our manufacturing
facilities in China and our sourcing capabilities with
independent Far East resources, we have the ability to be a
low-cost, high quality, flexible producer of appliance products.
Effective January 31, 2003, we closed Rivals
manufacturing facilities in the United States and shifted all
manufacturing to the Far East as a major step in achieving our
objectives.

Our Products

At The Holmes Group, product innovation is viewed
as a major priority in both the home environment and kitchen
businesses. We maintain internal product teams dedicated to new
product development and product enhancements. We staff our own
engineering and product development department to research new
product concepts as well as activities relating to improving
existing products. The product design and research development
team consists of employees located in our corporate headquarters
and our facilities in the Far East. We also retain the services
of outside consultants to assist our internal teams.

We utilize state-of-the-art design technology
including advanced computer-aided design software and a
laser-based stereolithography technique to design and engineer
new products. We believe this technology allows us to design and
develop new products quickly, enabling us to accurately assess
the feasibility, cost and tooling requirements of new products
prior to manufacturing. We believe this technology gives us a
competitive advantage in the design and development of new
products and product line extensions. Our expenditures,
including amounts expensed as incurred and capitalized as
property and equipment, for new

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product development and tooling, totaled
approximately $14.5 million, $12.6 million and
$16.0 million for the years ended December 31, 2001,
2002 and 2003, respectively.


The following paragraphs describe the major
product initiatives in each of our major businesses.

 Home
Environment Appliances

Our home environment products allow consumers to
better control the air quality, temperature and lighting of
their home and office environments. Many of our home environment
products include digital temperature displays and allow for
remote control adjustments.

Fans.We currently
manufacture and market approximately 100 different fan models
under the Holmes®, Bionaire® and Patton® brand
names and selected private label brands, including table, stand,
window, window-to-floor, high velocity and oscillating fans,
typically for purchase and use by household consumers. Many of
our higher-priced products include added convenience features
including Accutemp thermostat controls and remote control
features. Retail prices for our fans range from $5 to $100.

Heaters.Portable
electric heaters are used to heat areas of the house not
adequately reached by central heat and to heat an individual
room while that room is in use. We currently manufacture and
market approximately 75 different heater models under the
Holmes®, Patton®, Bionaire®, HeatSafe® and
Titan® brand names, including plastic, ceramic, metal,
radiant, oil filled and baseboard styles. Some of the
Bionaire® products include our Galileo wireless
climate center, which uses radio frequency control to set the
temperature from anywhere in the room. Retail prices for our
heaters range from $20 to $100.

Humidifiers.Consumers use humidifiers to provide greater comfort by
increasing moisture in their home environment during the winter
months. We currently manufacture and market approximately 50
different humidifiers under the Holmes®, Bionaire®,
and Family Care® brand names, including cool mist, warm
mist, ultrasonic and console models that range in moisture
output from one to 12 gallons per day. We also market products
under a licensing arrangement for the Halls® brand. Some of
our Bionaire® humidifiers include Galileo radio
frequency controls so that humidity levels can be set remotely
for individual preferences. Retail prices for our humidifiers
range between $15 and $150.

Air Purifiers.Air
purifiers circulate a rooms air through filters that
remove certain contaminants from the air. In recent years, high
efficiency particulate arresting (HEPA) filters have come
to dominate the industry. We currently manufacture and market
approximately 30 different air purifier models containing HEPA
filters under the Holmes®, Bionaire® and Family
Care® brand names. Our Holmes® Harmony air
purifier product line, which is powered by GE motors
manufactured in our facilities in China, offers a simplified
replacement filter system making it easier for consumers to
maintain the appliance at top functionality. Retail prices for
our air purifiers range between $10 and $300.

Accessories.Many of
our products require accessories, including replacement filters,
chemical treatments and replacement parts. For example, air
purifiers periodically need new replacement filter cartridges
and humidifiers need new replacement wick filters. As the
installed base of these products continues to expand, we expect
that the market for these accessories will grow as well. In
addition, we believe that sales of filters and accessories
increase brand awareness and customer loyalty. Accessories
should represent one of the fastest growing categories in the
home environment product line.

Lighting Products.We market over 150 different decorative and home/office lighting
products, including table, floor and wall-mounted models. These
products complement our traditional home environment appliance
line, provide an additional non-seasonal category, and are
distributed through the same distribution channels as our other
products. Holmes lighting products are manufactured by
independent suppliers in China. Retail prices for these products
range between $4 and $90.

 Kitchen
Electric Appliances

Small kitchen electric appliances have
constituted the Rival brands primary product line for over
60 years. Rival has been responsible for the invention of
several small appliances that can be found today in

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many American households, including the electric
can opener and the slow cooker, which we sell under our
Crock-Pot® trademark. We believe that Rival is the dominant
manufacturer and marketer of slow cookers in the United States,
with the brand maintaining, by far, the #1 market share in
this product category. Slow-cooking is often viewed
as a healthy method of food preparation and our Crock-Pot®
slow cooker represents a convenience for todays
time-starved consumers. In 2000, Rival introduced our
Smart-Pot® line of slow cookers which added programmable
features to certain models, allowing for increased cooking
convenience. We market over 25 models of slow cookers which
retail for between $10 and $100.


As part or our strategy to make Rival the
cooking company, we introduced an expanded line of kitchen
electric appliances in the second half of 2001. The Rival brand
entered new product categories including roaster ovens, skillets
and deep fryers. We also enhanced our product line in the
griddle category during this period. These new products built
upon the heritage that the Rival® and Crock-Pot® brand
names had established in the slow cooker category. Over the past
two years, we believe that Rival has earned the #1 market
share in our retail distribution channels for these new
categories so that we now hold the leading position in five
product segments within the cooking appliance category. The
Rival product line also includes toasters, toaster ovens, can
openers, food slicers and other kitchen appliances. In April
2003, Rival introduced updated products in its Seal-A-Meal®
vacuum food storage device product line. We view this product
category as a growth opportunity in 2004 and beyond.

In addition, we believe that we maintain a
leading market share in the ice cream freezer product category.
Under the Rival® and White Mountain® brands, we market
small electric appliances that allow consumers to make ice
cream, both traditional and soft serve varieties, in their
homes. The Rival treats products also include ice
shavers and other associated appliances, as well as mixes and
syrups for use with our products. The White Mountain® brand
has been known in the ice cream freezer business since 1853. In
fact, our White Mountain® wooden bucket ice cream maker
helped to launch one of Americas leading premium ice cream
brands in the 1970s.

We believe that the combination of our innovative
product development and our global manufacturing and sourcing
capabilities positions our kitchen business for growth and
market share gains in the future. We expect to grow in our
existing product categories and to enter new product categories
in the coming years.

 Electric
Motors

One of our Far East subsidiaries, Raider Motor
Corporation, has proven strengths in the design and manufacture
of a variety of electric motors for use in home and commercial
appliances. As part of our vertically integrated manufacturing
strategy, we manufacture many of the motors for our home
environment product line in our China motor facility. The motor
is obviously an integral component of our fans, humidifiers,
heaters and air purifiers and is a key element of product
quality to our consumers. In October 1998, we entered into a
joint venture with General Electric Company for motor
manufacturing, sales and distribution to General Electric
subsidiaries and other third parties. In 2001, Raider Motor
became the first Chinese motor manufacturer to receive GEs
Six Sigma status for product quality. The joint
venture entity is owned 49% by Holmes and 51% by GE with capital
expenditures necessary to support the growth of the joint
venture shared equally between the parties. Earnings from the
joint venture, which is accounted for in our financial
statements under the equity method, are distributed in cash to
each partner on a quarterly basis.

Our Manufacturing Capabilities

In 2003, we manufactured approximately 50% of our
products through our operations in southern China. Holmes has
been manufacturing quality products at its own facilities in
China for over fourteen years. Over the past three years, we
have invested in the development of a manufacturing complex in
southern China to further strengthen our capabilities. In
December 2002, we announced the decision to close our
manufacturing facilities in the United States, which specialized
in the production of selected small kitchen appliances,
particularly our Crock-Pot® slow cookers. The US facilities
were closed on January 31, 2003 and all production
activities were shifted to our expanded manufacturing facilities
in southern China or to independent suppliers in the Far East.

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We manufacture most of our home environment
products at our manufacturing facilities in China. These
facilities are highly integrated and produce many of the
electric motors, injection molded plastic components and other
components used in the manufacturing and assembly process. The
balance of our home environment products are produced through
subcontracted manufacturers in China and the United States,
generally under the supervision of Holmes employees. Our
expanded China manufacturing complex began the production of
Crock-Pot® slow-cookers during 2002 and
Seal-A-Meal®vacuum food storage devices and Rival® ice
cream appliances in 2003. We expect to manufacture other Rival
kitchen products in our facilities in future years. We will also
continue to maintain relationships with independent resources in
China for many items in the Rival product line.

We believe that we have a cost advantage as a
result of our degree of vertical integration, purchasing power
and low labor costs at our Chinese manufacturing facilities. In
addition, by operating our own manufacturing facilities, we have
control over the quality and production timing of our products
from design through final distribution.

Our Marketing and Distribution

Our products are sold in the United States,
Canada, Latin America, Europe and Asia to the retail trade by an
internal staff of regional sales managers, with assistance from
sales support staff, field sales associates and regional
independent manufacturers representative organizations. We
market our products through all major channels of retail
distribution including mass merchants, do-it-yourself home
centers, warehouse clubs, hardware stores, department stores,
home and kitchen specialty stores, national drugstore chains and
mail order and premium companies. Our sales managers are
actively involved in servicing all aspects of each retail
account.

In order to respond most efficiently to the
demands of our retail customers and ensure timely delivery, we
balance direct shipments from our Far East manufacturing
facilities with shipments from our domestic and international
warehouses. We operate distribution centers in California, Texas
and Massachusetts and service our international retailers from
warehouses in Canada, Mexico, the United Kingdom and the
Netherlands. We employ an electronic data interchange
(EDI) system with selected retail customers to expedite
order and invoice processing.

We also market certain of our products,
predominantly filters and accessories for our home environment
appliances, directly to consumers through our call center and
distribution facility in El Paso, Texas. This operation
also processes consumer orders taken over our internet web sites.

Our marketing department is responsible for
market analysis, new product development, pricing strategy,
promotions, key cooperative partnerships and overall category
development. We believe that our packaging is one of our most
powerful marketing tools because most consumers typically
purchase small appliances without the benefit of knowledgeable
retail sales staff. Holmes innovative packaging and
point-of-purchase support provide written information and
illustrations regarding product features, usage instructions,
safety features and product operation. We have an in-house art
department that develops much of our packaging and marketing
materials on state-of-the-art desktop graphics systems.

Our Major Customers

Our two largest retail customers, Wal-Mart
(including Sams Wholesale Club) and Target (including
Mervyns) accounted for approximately 44% of our net sales during
2003. Individually, Wal-Mart and Target each accounted for over
10% of our net sales during 2003. We do not have long-term
agreements with our major customers, and purchases are generally
made through the use of individual purchase orders. A
significant reduction in purchases by any of these customers
could have a material adverse effect on our business.

In January 2002, Kmart Corporation and certain of
its U.S. subsidiaries filed voluntary petitions for
reorganization under Chapter 11 of the U.S. Bankruptcy
Code. In January 2003, Kmart filed a reorganization plan with
the Bankruptcy Court and emerged from Bankruptcy Court
protection in May 2003. Kmart closed

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599 stores in 2002 and 2003 while the company was
operating under Chapter 11 protection. The Companys
sales to Kmart totaled approximately 6% of consolidated sales in
2003 compared to 10% of consolidated sales in 2001. We continue
to evaluate the effect of Kmarts plans on our sales in
future years.


The Seasonality of Our Business

Sales of our products are highly seasonal, and
counter-seasonal weather can adversely affect our results of
operations. Within the home environment product line, sales of
fans occur predominantly from January through June, and sales of
heaters and humidifiers occur predominantly from July through
December. Although kitchen appliances and certain home
environment products, such as air purifiers and lighting
products, are used year-round, the nature of these products tend
to draw increased sales during the winter months when people are
indoors. As a result, sales of these products tend to be
greatest in advance of the winter months from July through
December. Additionally, because many of our kitchen products are
given as gifts, we sell more of these products in anticipation
of the holiday season. When holiday shipments are combined with
seasonal products such as heaters and humidifiers, our sales
during the months of August through November are generally at a
higher level than during the other months of the year. In
addition, due to the seasonal fluctuations in sales, we
experience seasonality in gross profit, as margins realized on
fan products tend to be lower than those realized on heater,
humidifier, and air purifier products.

Our Competition

The markets for most of our product categories
are developed and highly competitive. Management believes that
competition is based on several factors, including price, access
to retail shelf space, product features, product enhancements,
brand names, new product introductions, marketing support and
distribution systems.

We compete with many well-established companies,
some of which have substantially greater facilities, personnel
and financial and other resources than Holmes. Our major
competitors include Applica, Hamilton Beach/ Proctor Silex, Kaz
(including its recently acquired business, Honeywell Consumer
Products), Salton and Sunbeam. We also compete with many
importers and foreign manufacturers of branded and unbranded
products.

We believe that our most important competitive
strengths are the quality, design and competitive pricing of our
products, our attention to retailer and consumer needs, our
stable of recognized brands, our access to major channels of
distribution, the development of new products and innovation in
existing products, our ability to provide timely shipments
through our manufacturing and distribution facilities and the
capabilities of our management team.

Our Patents and Trademarks

We hold a number of patents and trademarks
registered in the United States, Canada, and other countries for
various products and technologies. Of particular importance are
our trademarks: Holmes®, Rival®, Crock-Pot®,
Bionaire®, Patton®, White Mountain®, Family
Care® and Titan®. We have additional patent and
trademark applications pending in the United States, Canada and
Mexico. We also register trademarks on product names and unique
features in the United States and other countries. We believe
that, other than with respect to the Crock-Pot® trademark,
none of our product lines is dependent upon any single
trademark, patent, group of patents or other intellectual
property rights.

The Regulation of Our Industry

We are subject to federal, state and local
regulations concerning the environment, occupational safety and
health, trade-related issues and consumer products safety. Most
of our products are listed by Underwriters
Laboratories, Inc. (UL), the Canadian Underwriters
Laboratories, Inc. (CUL), or similar organizations in other
markets. UL and CUL are independent, not-for-profit corporations
engaged in the testing of products for compliance with certain
public safety standards. We are also regulated by, and hold
ongoing discussions regarding specific products with, the United
States Consumer Products Safety Commission, the Food and

9



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Drug Administration and the Canadian Standards
Association. We believe that we are in material compliance with
all of the regulations applicable to us. There can be no
assurance, however, that such regulations will not negatively
affect us in the future. Our operations could also be adversely
affected by other regulations relating to our foreign
operations, including changes in trade laws, increased import
duties, import/export regulations and changes in foreign laws.


Our Employees

We had approximately 7,500 employees as of
December 31, 2003, of which approximately 350 were located
in the United States, Europe and Canada. Approximately 7,150 of
our employees were located at our manufacturing facilities in
Dongguan, China, and our product sourcing offices in Hong Kong
and Taiwan.

Certain Risk Factors Which May Affect Our
Future Operating Results

Investors should carefully consider the following
risk factors, together with the other information contained in
the Annual Report on Form 10-K, in evaluating our company
and our business. In particular, investors should note that this
Annual Report on Form 10-K contains forward-looking
statements within the meaning of Section 27A of the
Securities Act and Section 21E of the Exchange Act and that
actual results could differ materially from those contemplated
by such statements. See Disclosure Regarding
Forward-Looking Statements. The factors listed below
represent certain important factors which we believe could cause
such results to differ. These factors are not intended to
represent a complete list of the general or specific risks that
may affect us. It should be recognized that other risks may be
significant, presently or in the future, and the risks set forth
below may affect us to a greater extent than indicated.



| |                                                                             
| | ----------------------------------------------------------------------------
| | Our Substantial Debt Levels Could Adversely
    Affect Our Financial Health.

Holmes and Berkshire Partners LLC, a Boston-based
investment firm which is the Companys majority
shareholder, completed a recapitalization transaction in
November 1997. In that transaction, the Company issued
$105 million of Senior Subordinated Notes (the
Notes) due in November 2007 and entered into a
Credit Facility totaling $100 million. The Companys
debt level increased substantially with the February 1999
acquisition of The Rival Company. The Rival acquisition was
partially funded by the issuance of an additional
$31.3 million in Notes and an amended and restated Credit
Facility.

At December 31, 2003, our total debt was
$204.8 million, which included $105.2 million of
borrowings under our amended Credit Facility and
$99.6 million of our Notes. Borrowings under the Credit
Facility included $77.0 million in term loans due in 2005
and 2007 and $28.2 of outstanding obligations under the
Revolving Credit portion of the Credit Facility. Under the Fifth
Amendment to the Credit Facility, which was established in March
2002, lenders provided a total of $171 million of borrowing
capacity under the Revolving Credit Facility, subject to the
existence of appropriate levels of accounts receivable and
inventories. At December 31, 2003, we had
$115.1 million of availability under the Revolving Credit
Facility. The existing Revolving Credit Facility, as amended,
expires in January 2005. The Company anticipates that it will
refinance its existing borrowing arrangements prior to
July 1, 2004.

Our ability to service our debt obligations,
including the Notes, and to fund planned capital expenditures
will depend upon our future operating performance, which will be
affected by prevailing economic conditions in the markets we
serve and financial, business and other factors, certain of
which are beyond our control. We cannot give assurance that our
business will generate sufficient cash flow from operations or
that future borrowings will be available under our Amended
Credit Agreement or a new Credit Facility in an amount
sufficient to enable us to service our indebtedness, including
the Notes, or to fund our other liquidity needs. We cannot
assure investors that we will be able to effect any refinancing
of our existing borrowing facility on commercially reasonable
terms, or at all.

10



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Our high level of debt could have important
consequences, such as:



| |   |                                                                                                                                                                                                                                                                                                  
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Our leverage makes us more vulnerable to general
    adverse economic and industry conditions;                                                                                                                                                                                                   
|
| |  | Our ability to obtain additional financing for
    acquisitions, or to fund future working capital, capital
    expenditures or other general corporate requirements may be
    limited;                                                                                                         
|
| |  | We will need to use a substantial portion of our
    cash flow from operations for the payment of principal of, and
    interest on, our indebtedness, which will reduce the amount of
    money available to fund working capital, capital expenditures or
    other general corporate purposes;
|
| |  | We are required to comply with financial ratio
    and other restrictive covenants, which may place us in default
    or may limit our flexibility in planning for, or reacting to,
    changes in our business and the industry in which we
    compete; and                                    
|
| |  | Our debt level may place us at a competitive
    disadvantage to our less leveraged competitors.                                                                                                                                                                                                 



| |                                                                                              
| | ---------------------------------------------------------------------------------------------
| | Our Financial Results Would Suffer If We
    Were to Lose One or More of Our Major Customers.

Our success depends on sales to our significant
customers. Sales to our two largest customers during 2003 were
approximately 44% of consolidated net sales. We do not have
long-term agreements with our major customers, and purchases are
generally made through the use of individual purchase orders. A
significant reduction in purchases by any of these major
customers or a general economic downturn in retail sales could
have a material adverse effect on our business, financial
condition and results of operations.



| |                                                                                                             
| | ------------------------------------------------------------------------------------------------------------
| | Our Dependence on Manufacturing in China
    Subjects Us to the Risks of Doing Business
    Internationally.

Our owned manufacturing facilities in southern
China provided 50% of our total production requirements during
the year ended December 31, 2003. In addition, we also
source a large portion of our remaining products from
independent suppliers located in China. We believe that the loss
of any one independent supplier would not have a long term
material adverse effect on our business because other suppliers
with which we do business would be able to increase production
to fulfill our requirements. However, the loss of a supplier
could, in the short term, adversely affect our business until
alternative supply arrangements are secured.

Our arrangements with our China manufacturing
facility and our independent suppliers are subject to the risks
of dong business abroad, including:



| |   |                                                                    
| | - | -------------------------------------------------------------------
| |  | Import duties and trade restrictions;                              
|
| |  | Production delays due to unavailability of parts
    or components;
|
| |  | Increases in transportation costs and
    transportation delays;   
|
| |  | Work stoppages;                                                    
|
| |  | Public health concerns;                                            
|
| |  | Foreign currency fluctuations; and                                 
|
| |  | Political and economic instability.                                



| |                                                                                                                            
| | ---------------------------------------------------------------------------------------------------------------------------
| | We May Not Be Able to Compete Effectively
    in the Highly Competitive Home Environment and Kitchen Electric
    Business.

We believe that competition is based upon several
factors, including:



| |   |                                   
| | - | ----------------------------------
| |  | Price;                            
|
| |  | Access to retail shelf space;     
|
| |  | Product features and enhancements;
|
| |  | Brand names;                      

11



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| |   |                                               
| | - | ----------------------------------------------
| |  | New product introductions; and                
|
| |  | Marketing support and distribution approaches.

We compete with established companies, some of
which have substantially greater facilities, personnel and
financial and other resources than we have. Significant new
competitors or increased competition from existing competitors
may adversely affect our business, financial condition and
results of operations.



| |                                                                                         
| | ----------------------------------------------------------------------------------------
| | Our Ability to Grow Will Be Limited If We
    Do Not Effectively Introduce New Products.

We believe that our future success will depend in
part upon our ability to continue to introduce innovative
designs in our existing products and to develop, manufacture and
market new products. We may not successfully introduce new
products or product innovations or develop and introduce, in a
timely manner, innovations to our existing products, which
satisfy customer needs or achieve market acceptance. Our failure
to develop products and introduce them successfully and in a
timely manner would harm our ability to grow our business.



| |                                                                                                         
| | --------------------------------------------------------------------------------------------------------
| | Our Financial Results Will Be Adversely
    Affected by an Economic Slowdown in the Retail
    Industry.

We sell our product to consumers through major
retail channels, primarily mass merchandisers, department
stores, specialty stores, hardware stores and mail order
catalogs. As a result, our business and financial results can
fluctuate with the financial condition of our retail customers
and the retail industry. General slowdowns in the retail sector
may adversely impact the net sales of our products, our
operating margins and our net income. In the first half of 2003,
the general slowdown in the retail sector resulted in additional
pricing and marketing support pressures. The risks of terrorist
attacks and potential hostilities could prolong or worsen the
current economic downturn. We expect these market pressures to
continue in the future. If such conditions continue or worsen,
it could have a material adverse effect on our business,
financial condition and results of operations.



| |                                                                                                                    
| | -------------------------------------------------------------------------------------------------------------------
| | Our Efforts to Expand International Sales
    Will Subject Us to Additional Business Risks and Increased
    Costs.

For the year ended December 31, 2003, our
international sales accounted for 13% of our consolidated sales.
We intend to increase our international activities in the
future. Our pursuit of international growth opportunities may
require significant investments for an extended period before
returns on these investments, if any, are realized.
International operations are subject to a number of other risks
and potential costs, including:



| |   |                                                                         
| | - | ------------------------------------------------------------------------
| |  | The risk that our brand names may not be locally
    recognized;        
|
| |  | Unexpected changes in regulatory requirements;                          
|
| |  | Inadequate protection of intellectual property in
    foreign countries;
|
| |  | Foreign currency fluctuations;                                          
|
| |  | Transportation costs;                                                   
|
| |  | Adverse tax consequences; and                                           
|
| |  | Political and economic instability.                                     

We cannot assure investors that we will not incur
higher costs in addressing these potential risks.



| |                                                                                               
| | ----------------------------------------------------------------------------------------------
| | Extended Lead Times and Changing Customer
    Demand May Cause Us to Carry Excess Inventories.

Manufacturing lead times and a strong
concentration of our sales occurring during the August through
December time period require that we manufacture and purchase
products, and thereby increase inventories, based on anticipated
sales and forecasts provided by our customers and our sales
personnel. In an extended

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general economic slowdown, we cannot be assured
that our customers will order these inventories as anticipated.




| |                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------
| | Product Recalls or Lawsuits Relating to
    Defective Products Could Adversely Impact Our Financial
    Results.

We face exposure to product recalls and product
liability claims in the event that our products are alleged to
have manufacturing or safety defects or to have resulted in
injury or other adverse effects. There can be no assurance that
we will be able to maintain our product liability insurance on
acceptable terms, if at all, or that product liability claims
will not exceed the amount of our insurance coverage. We do not
maintain product recall insurance. As a result, product recalls
and product liability claims may adversely affect our business.



| |                                                                                                         
| | --------------------------------------------------------------------------------------------------------
| | The Infringement or Loss of Our Proprietary
    Rights Could Have an Adverse Effect on Our
    Business.

Our patents, copyrights, trademarks, service
marks and similar intellectual property are important to our
success. We rely on patent, copyright and trademark laws in the
United States and other jurisdictions to protect our proprietary
rights. We seek to register our trademarks in the United States
and elsewhere. These registrations could be challenged by others
or invalidated through administrative process or litigation. If
any of these rights were infringed or invalidated, our business
could be materially adversely affected.



| |                                                                                                                                 
| | --------------------------------------------------------------------------------------------------------------------------------
| | Litigation and Infringement Claims Could
    Cause Us to Incur Significant Expenses or Prevent Us From
    Selling Our Products.

We face claims that our proprietary or licensed
products are infringing the intellectual property rights of
other parties. There can be no assurance that we do not in fact
infringe those intellectual property rights. If someone claimed
that our proprietary or licensed products infringed their
intellectual property rights, any resulting litigation could be
costly and time consuming and would divert the attention of
management and key personnel from other business issues. We also
may be subject to significant damages or an injunction against
sale of our proprietary or licensed products. A successful claim
of patent or other intellectual property infringement against us
could harm our financial condition.



| |                                                                                                                                           
| | ------------------------------------------------------------------------------------------------------------------------------------------
| | Compliance With Governmental Regulations
    Could Significantly Increase Our Operating Costs or Prevent Us
    From Selling Our Products.

Most federal, state and local authorities require
certification by Underwriters Laboratory, Inc. (UL), an
independent, not-for-profit corporation engaged in the testing
of products for compliance with certain public safety standards,
or other safety regulation certification prior to marketing
electrical appliances. Foreign jurisdictions also have
regulatory authorities overseeing the safety of consumer
products. Our products, or additional electrical appliances
which may be developed by us, may not meet the specifications
required by these authorities. A determination that we are not
in compliance with these rules and regulations could result in
the imposition of fines or an award of damages to private
litigants.



| |                                                                                 
| | --------------------------------------------------------------------------------
| | Our Dependence on West Coast Ports Could
    Interrupt Service to Our Customers.

Because of our Far East manufacturing and
sourcing activities, we rely on the West Coast ports and our
distribution facilities in California to process a large portion
of the shipments to our retail customers. This reliance
increased beginning in 2003, as the restructuring actions, which
were announced in December 2002, included the phase-out of our
distribution facilities in Missouri and the transfer of these
activities to our California operations. Actions taken by the
Pacific Maritime Association (PMA) and the
International Longshore and Warehouse Union (ILWU)
related to a labor contract which expired on July 1, 2002,
did adversely impact our ability to deliver products to
retailers during the fourth quarter of 2002. While the
disruptive actions were resolved with the PMA and ILWU agreeing
to a new, long-term contract in December 2002 and we did not
encounter similar disruptions during 2003, future disputes could
affect our operations.

13



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##### Table of Contents



Additional Information

We will provide paper or electronic copies of any
of our filings with the Securities and Exchange Commission free
of charge upon request to Paul Izzo, Esq., Corporate Clerk,
The Holmes Group, Inc., One Holmes Way, Milford, MA 01757.
Such filings may also be obtained at the Commissions web
site, www.sec.gov. Our corporate web site,
www.theholmesgroup.com, is primarily designed for end users of
our products, and accordingly does not currently include such
filings.






|        |           
|------- | ----------
|Item 2. | Properties

The following table sets forth our principal
facilities, the primary activity at each of the facilities
listed and the expiration date of the applicable lease, in the
case of leased facilities.

|                       |  |      |                       |             |  |                                         |                                |  |      |  |              | 
|---------------------- |  | ---- | --------------------- | ----------- |  | --------------------------------------- | ------------------------------ |  | ---- |  | ------------ | 
|Location               |  | Size |                       | Primary use |  | Lease Expiration                       
|                       |  |      |                       |             |  |                                        
|Milford, Massachusetts |  |      | 415,000 square feet   |             |  | Corporate Headquarters and Distribution |                                |  | 2015 | 
|El Paso, Texas         |  |      | 161,000 square feet   |             |  |                                         | Distribution                   |  |      |  | 2005         | 
|Fontana, California    |  |      | 828,000 square feet   |             |  |                                         | Distribution                   |  |      |  | 2008         | 
|Ontario, California    |  |      | 432,000 square feet   |             |  |                                         | Distribution                   |  |      |  | 2005         | 
|Dongguan, China        |  |      | 269,000 square feet   |             |  |                                         | Motor Manufacturing            |  |      |  | 2005         | 
|Dongguan, China        |  |      | 1,549,000 square feet |             |  |                                         | Manufacturing and Distribution |  |      |  | Owned/2004-6 | 
|Hong Kong, China       |  |      | 21,000 square feet    |             |  |                                         | Office                         |  |      |  | 2005         | 
|London, England        |  |      | 5,300 square feet     |             |  |                                         | Office                         |  |      |  | 2014         | 
|Mississaugua, Ontario  |  |      | 9,100 square feet     |             |  |                                         | Office                         |  |      |  | 2012         | 
|Taipei, Taiwan         |  |      | 1,700 square feet     |             |  |                                         | Office                         |  |      |  | 2004         | 

During 2000, we began construction of a new
manufacturing complex on land that was purchased in Tangxia
Town, Dongguan City in Guangdong Province, which is
approximately 70 miles northwest of Hong Kong. In 2001, we
began to move manufacturing activity to this facility and it
became fully operational during 2003. As of December 31,
2003, the construction of the new complex was close to
completion, with the last major assembly facility, consisting of
approximately 219,000 square feet, under construction and
scheduled to be occupied in November 2004. Most of the buildings
in the complex are owned by the Company. A portion of the office
and manufacturing space and certain worker dormitories are
leased with the initial term of the leases expiring in December
2004 and November 2006. The Company has the option to renew the
leases or to purchase the underlying asset at the end of each
lease. When complete, the new Dongguan complex will total
approximately 1.8 million square feet. We transferred
manufacturing and assembly activity from our existing
466,000 square foot Dongguan facility to the new complex
during 2003 and we did not renew the existing lease when it
expired in December 2003. In February 2004, the Company executed
a fifteen year lease for a new motor manufacturing facility,
totaling 558,000 square feet, in Dongguan, China which is
presently under construction. The Company expects to shift
manufacturing activity to the new facility when the lease on its
existing motor facility expires in March 2005.

We also contract for distribution and warehousing
services at facilities in Mexico City, Mexico, Brampton,
Ontario, Waddington, England and Rotterdam in the Netherlands,
which are managed by independent third party providers. At
December 31, 2003, these facilities represented
approximately 140,000 square feet of space.

Over the past two years, we initiated
restructuring actions that affected several of the manufacturing
and distribution facilities in the United States which were
acquired as part of our 1999 acquisition of The Rival Company.
In June 2001 and January 2002, we announced the closing of a
manufacturing facility and a distribution center in Sedalia,
Missouri. On December 2, 2002, we announced the closure of
all remaining manufacturing facilities in the United States,
effective January 31, 2003, which affected our production
activities in Flowood, Mississippi, Sweet Springs, Missouri and
Clinton, Missouri. Production at these facilities, which
consisted primarily of Rivals Crock-Pot® slow-cooker
product line, was shifted to our

14



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##### Table of Contents



expanded facilities in southern China or to other
independent manufacturers in the Far East. As part of this
restructuring, we also announced the closing of a distribution
center in Clinton, Missouri, an administrative office in Kansas
City, Missouri and a returns processing facility in Worcester,
Massachusetts. The activities at these facilities were shifted
to other company facilities in Massachusetts and California. The
Company sold substantially all of the affected facilities during
2003.







|        |                  
|------- | -----------------
|Item 3. | Legal Proceedings

The Company is involved in various legal
proceedings incident to our normal business operations,
including product liability and patent and trademark litigation.
Management believes that the outcome of all pending litigation
will not have a material adverse effect on our business,
financial condition or results of operations. In the case of
product liability litigation, the Company has product liability
and general liability insurance policies in amounts management
believes to be reasonable.

During 2003, Tilia International, Inc. filed
a patent infringement action against The Rival Company in the
United States District Court in San Francisco, California.
In addition, Tilia International requested that the
International Trade Commission (ITC) investigate the
Company and two other unrelated companies. In both the federal
court action and in its complaint to the ITC, Tilia
International claimed that the Rival Seal-A-Meal® vacuum
seal food storage device infringes certain patent claims
allegedly owned by Tilia International. In the federal court
action, Tilia International also contended that the
Companys food storage bags infringe certain patent claims
allegedly owned by Tilia International. The Company denied these
allegations and aggressively litigated the matter. Following a
December 2003 decision by the ITC which denied Tilias
request for a temporary exclusion order against Rival, the
Company and Tilia reached an agreement which resulted in the
dismissal of both the ITC action and the federal court case.

The Company also faces exposure to voluntary or
mandatory product recalls in the event that our products are
alleged to present a substantial product hazard
under applicable law. In 2003, the Company received
communications from the United States Consumer Products Safety
Commission (CPSC), requesting information concerning
a limited number of Crock-Pot® slow cooker models. The CPSC
and the Company currently are assessing the situation, in
particular, whether the models identified present a substantial
product hazard and whether corrective action, such as a recall,
is warranted. On March 17, 2004, Company representatives
met with the CPSC to discuss the situation further, and
discussions are likely to continue in the second quarter of
2004. At the present time, the Company is unable to determine
whether, and if so to what extent, corrective action, in the
form of a product recall or otherwise, will be necessary and/or
taken. As a result, the Company is unable to determine the
costs, if any, which will be incurred by the Company as a result
of any action taken following the conclusion of the discussions
with the CPSC. The Company does not maintain product recall
insurance.






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

Not applicable.






|        |                                                                                                                            
|------- | ---------------------------------------------------------------------------------------------------------------------------
|Item 5. | Market for the Registrants Common
    Equity and Related Stockholder Matters and Issuer Purchases of
    Equity Securities

The Holmes Group, Inc. is privately-owned
and there is no public trading market for our equity securities.

15



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##### Table of Contents



PART II






|        |                        
|------- | -----------------------
|Item 6. | Selected Financial Data

The following selected financial data as of and
for the years ended December 31, 1999 through
December 31, 2003, set forth below, have been derived from
our audited consolidated financial statements. This information
should be read in conjunction with Managements Discussion
and Analysis of Financial Condition and Results of Operations
and our consolidated financial statements, including the notes
thereto, included elsewhere in the Annual Report. A
reconciliation between operating income presented in accordance
with GAAP in the consolidated statement of operations and
EBITDA, along with restructuring charges and certain significant
items which impacted results during the five years ended
December 31, 2003 is provided as part of this table.

|                                                                                |  |                         |         |      |  |                        |         |      |  |      |         |   |  |   |         |   |  |   |         | 
|------------------------------------------------------------------------------- |  | ----------------------- | ------- | ---- |  | ---------------------- | ------- | ---- |  | ---- | ------- | - |  | - | ------- | - |  | - | ------- | 
|                                                                                |  |                        
|                                                                                |  | Year Ended December 31,
|                                                                                |  |                        
|                                                                                |  | 2003                    |         | 2002 |  | 2001                   |         | 2000 |  | 1999
|                                                                                |  |                         |         |      |  |                        |         |      |  |     
|                                                                                |  |                         |         |      |  |                        |         |     
|                                                                                |  |                         |         |      |  | (Dollars in thousands) |         |     
|Statement of Operations Data:                                                   |  |                         |         |      |  |                        |         |      |  |      |         |   |  |   |         |   |  |   |         | 
|Net sales(1)                                                                    |  | $                       | 623,756 |      |  | $                      | 608,554 |      |  | $    | 612,240 |   |  | $ | 500,810 |   |  | $ | 497,860 | 
|Gross profit(2)                                                                 |  |                         | 191,099 |      |  |                        | 163,977 |      |  |      | 149,969 |   |  |   | 118,605 |   |  |   | 133,552 | 
|Selling and administrative expenses(1)(3)                                       |  |                         | 115,618 |      |  |                        | 120,566 |      |  |      | 124,315 |   |  |   | 110,663 |   |  |   | 99,307  | 
|Restructuring costs(4)                                                          |  |                         | 1,899   |      |  |                        | 28,006  |      |  |      | 1,744   |   |  |   | 340     |   |  |   | 2,439   | 
|Operating income                                                                |  |                         | 73,582  |      |  |                        | 15,405  |      |  |      | 23,910  |   |  |   | 7,602   |   |  |   | 31,806  | 
|Income (loss) before cumulative effect of change
    in accounting principle(5) |  |                         | 52,178  |      |  |                        | 21,934  |      |  |      | (15,555 | ) |  |   | (32,170 | ) |  |   | 1,812   | 
|Cumulative effect of change in accounting
    principle(6)                      |  |                         |        |      |  |                        | (79,838 | )    |  |      |        |   |  |   |        |   |  |   |        | 
|Net income (loss)(5)                                                            |  |                         | 52,178  |      |  |                        | (57,904 | )    |  |      | (15,555 | ) |  |   | (32,170 | ) |  |   | 1,812   | 
|Other Data:                                                                     |  |                         |         |      |  |                        |         |      |  |      |         |   |  |   |         |   |  |   |         | 
|Ratio of earnings to fixed charges(7)                                           |  |                         | 2.9     | x    |  |                        | 1.7     | x    |  |      | 0.7     | x |  |   | 0.3     | x |  |   | 1.0x    | 
|EBITDA(8)                                                                       |  |                         | 85,374  |      |  |                        | 64,390  |      |  |      | 42,242  |   |  |   | 24,331  |   |  |   | 50,330  | 
|Depreciation and amortization                                                   |  |                         | 10,747  |      |  |                        | 13,989  |      |  |      | 16,180  |   |  |   | 15,737  |   |  |   | 15,133  | 
|Capital expenditures                                                            |  |                         | 12,917  |      |  |                        | 14,554  |      |  |      | 17,020  |   |  |   | 28,341  |   |  |   | 17,614  | 
|Balance Sheet Data:                                                             |  |                         |         |      |  |                        |         |      |  |      |         |   |  |   |         |   |  |   |         | 
|Cash and cash equivalents                                                       |  |                         | 6,080   |      |  |                        | 8,426   |      |  |      | 10,115  |   |  |   | 3,017   |   |  |   | 6,647   | 
|Working capital                                                                 |  |                         | 136,825 |      |  |                        | 140,137 |      |  |      | 171,081 |   |  |   | 203,473 |   |  |   | 211,646 | 
|Total assets                                                                    |  |                         | 311,563 |      |  |                        | 322,844 |      |  |      | 438,355 |   |  |   | 452,854 |   |  |   | 455,492 | 
|Total long-term debt                                                            |  |                         | 198,197 |      |  |                        | 266,100 |      |  |      | 344,704 |   |  |   | 360,361 |   |  |   | 338,710 | 
|Total stockholders equity (deficit)                                            |  |                         | (18,560 | )    |  |                        | (74,516 | )    |  |      | (9,383  | ) |  |   | 5,474   |   |  |   | 37,800  | 



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                              
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Net sales and operating costs for 1999 through
    2001 have been restated to reflect the reclassification of
    co-operative advertising costs, which had previously been
    included in expenses, as a deduction from net sales. Net sales
    included $16.8 million in 2001, $11.6 million in 2000
    and $12.1 million in 1999 related to the Pollenex®
    personal comfort business which was sold in January 2001.
|   
|(2) | Gross profit in 2002 included $7.2 million
    of inventory writedowns in connection with the Companys
    decision to exit its domestic manufacturing operations.                                                                                                                                                                                                                                                          
|   
|(3) | Selling and administrative expenses in 2001
    included a charge of $14.1 million taken in connection with
    the Kmart bankruptcy.                                                                                                                                                                                                                                                                                        
|   
|(4) | Restructuring costs in 2003 and 2002 represent
    expenses and asset impairment charges primarily related to the
    Companys decision to exit manufacturing operations in the
    United States. Restructuring costs in 2001, 2000 and 1999
    related to facility closings associated with the integration of
    the Rival business. See Note 7 to the consolidated
    financial statements.                          

16



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##### Table of Contents





|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(5) | Net income (loss) in 2002 included pre-tax gains
    of $9.5 million related to the sale of the Pollenex®
    business and $22.4 million on the repurchase of
    $36.2 million principal amount of the Companys Senior
    Subordinated Notes.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   
|(6) | The Company adopted Statement of Financial
    Accounting Standards No. 142, Goodwill and Other
    Intangible Assets effective January 1, 2002. In
    connection with the adoption of the new Standard, the Company
    recorded a non-cash impairment charge of $79.8 million                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   
|(7) | For purposes of determining the ratio of earnings
    to fixed charges, earnings represent income before income taxes,
    plus equity in earnings from joint venture and fixed charges as
    presented, without adjustment for the items discussed in
    (8) below. Fixed charges consist of interest expense on all
    indebtedness plus the portion of rental payments on operating
    leases that is considered representative of the interest factor.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   
|(8) | The Company defines EBITDA as the total of
    operating income before depreciation and amortization, other
    income and expense items and joint venture earnings. EBITDA is
    presented because it is a widely accepted measure to provide
    information regarding a companys ability to service and/or
    incur debt. EBITDA should not be considered in isolation or as a
    substitute for net income, cash flows from operations or other
    income or cash flow data prepared in accordance with generally
    accepted accounting principles (GAAP), or as a measure of a
    companys profitability or liquidity. Additionally, our
    calculation of EBITDA may differ from that performed by other
    companies, and thus the amounts disclosed may not be directly
    comparable to those disclosed by other companies. A
    reconciliation between operating income presented in accordance
    with GAAP in the consolidated statements of operations and
    EBITDA, along with restructuring charges and certain significant
    items for the five years ended December 31, 2003 is as
    follows:

|                                                                                     |                                                                 |      |        |        |   |      |        |         |   |      |         |         |   |   |        |        |   |   |         |        |  
|------------------------------------------------------------------------------------ | --------------------------------------------------------------- | ---- | ------ | ------ | - | ---- | ------ | ------- | - | ---- | ------- | ------- | - | - | ------ | ------ | - | - | ------- | ------ | -
|                                                                                     |                                                                 | 2003 |        | 2002   |   | 2001 |        | 2000(a) |   | 1999
|                                                                                     |                                                                 |      |        |        |   |      |        |         |   |     
|Operating income  GAAP                                                              |                                                                 | $    | 73,582 |        |   | $    | 15,405 |         |   | $    | 23,910  |         |   | $ | 7,602  |        |   | $ | 31,806  |       
|                                                                                     | Depreciation and amortization, net(b)                           |      |        | 9,733  |   |      |        | 12,989  |   |      |         | 12,876  |   |   |        | 12,763 |   |   |         | 12,433 |  
|                                                                                     | Amortization of goodwill(c)                                     |      |        |       |   |      |        |        |   |      |         | 2,494   |   |   |        | 2,597  |   |   |         | 2,700  |  
|                                                                                     | Other income (expense)                                          |      |        | (489   | ) |      |        | 33,006  |   |      |         | 608     |   |   |        | 758    |   |   |         | 2,489  |  
|                                                                                     | Equity in earnings of joint venture                             |      |        | 2,548  |   |      |        | 2,990   |   |      |         | 2,354   |   |   |        | 611    |   |   |         | 902    |  
|                                                                                     |                                                                 |      |        |        |   |      |        |         |   |      |         |         |   |   |        |        |   |   |         |       
|EBITDA                                                                               |                                                                 | $    | 85,374 |        |   | $    | 64,390 |         |   | $    | 42,242  |         |   | $ | 24,331 |        |   | $ | 50,330  |       
|                                                                                     |                                                                 |      |        |        |   |      |        |         |   |      |         |         |   |   |        |        |   |   |         |       
|Restructuring and certain significant income
    (expense) items included in EBITDA: |                                                                 |      |        |        |   |      |        |         |   |      |         |         |   |   |        |        |   |   |         |       
|                                                                                     | Restructuring costs                                             |      |        | (1,899 | ) |      |        | (28,006 | ) |      |         | (1,744  | ) |   |        | (340   | ) |   |         | (2,439 | )
|                                                                                     | Inventory writedowns related to manufacturing
    restructuring |      |        |       |   |      |        | (7,236  | ) |      |         |        |   |   |        |       |   |   |         |       |  
|                                                                                     | Trade credits asset impairment charges                          |      |        | (1,122 | ) |      |        | (1,200  | ) |      |         |        |   |   |        |       |   |   |         |       |  
|                                                                                     | Credit Facility amendment costs                                 |      |        | (46    | ) |      |        | (459    | ) |      |         | (2,271  | ) |   |        | (1,000 | ) |   |         |       |  
|                                                                                     | Kmart bankruptcy                                                |      |        | 743    |   |      |        | (1,089  | ) |      |         | (14,082 | ) |   |        |       |   |   |         |       |  
|                                                                                     | Recovery (cost) of faulty heater component                      |      |        | 950    |   |      |        |        |   |      |         |        |   |   |        | (3,118 | ) |   |         | (2,196 | )
|                                                                                     | Acquisition integration costs                                   |      |        |       |   |      |        |        |   |      |         |        |   |   |        | (2,689 | ) |   |         | (3,380 | )
|                                                                                     | Gains on asset sales                                            |      |        |       |   |      |        | 9,488   |   |      |         | 559     |   |   |        |       |   |   |         | 1,700  |  
|                                                                                     | Gain on retirement of debt                                      |      |        |       |   |      |        | 22,388  |   |      |         |        |   |   |        |       |   |   |         |       |  
|                                                                                     | Operating results of divested businesses                        |      |        |       |   |      |        |        |   |      |         |        |   |   |        |       |   |   |         | (4,755 | )
|                                                                                     |                                                                 |      |        |        |   |      |        |         |   |      |         |         |   |   |        |        |   |   |         |       
|                                                                                     |                                                                 | $    | (1,374 | )      |   | $    | (6,114 | )       |   | $    | (17,538 | )       |   | $ | (7,147 | )      |   | $ | (11,070 | )     
|                                                                                     |                                                                 |      |        |        |   |      |        |         |   |      |         |         |   |   |        |        |   |   |         |       



---



|    |  |                                                                                                                                                                      
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) |  | Operating income and EBITDA amounts in 2000 were
    reduced by a fourth quarter charge of $25.6 million related
    to inventory and accounts receivable writedowns.
|   
|(b) |  | Net of amounts rebilled to the Companys
    joint venture with General Electric.                                                                                    
|   
|(c) |  | The Company ceased amortizing goodwill in 2002 in
    accordance with the provisions of SFAS No. 142.                                                                

17



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

Background

The Holmes Group, Inc. is a leading
developer, manufacturer and marketer of quality, branded home
appliances, including home environment and small kitchen
electric appliances. Our home environment products include fans,
heaters, humidifiers, air purifiers and lighting products. Our
kitchen appliances include Crock-Pot® slow cookers,
Seal-A-Meal® vacuum food sealers and Rival® roaster
ovens, skillets and deep fryers, and other similar small kitchen
electric appliances. Our products are sold under the
Holmes®, Rival®, Crock-Pot®, Bionaire®,
Seal-A-Meal®, White Mountain®, Patton®, Family
Care® and Titan® brand names. We also sell products to
certain retailers under licensed brand names, including General
Electric®, Sunbeam® and Halls®. Our products are
sold to consumers through major retail chains, including mass
merchants, do-it-yourself home centers, warehouse clubs,
hardware, department and specialty stores and national drug
store chains.

Sales of most of our products follow season
patterns that affect our results of operations. In general,
sales of fans occur predominantly from January through June, and
sales of heaters and humidifiers occur predominantly from July
to December. Although kitchen electrics, air purifiers, lighting
products and accessories are used year-round, these products
tend to draw increased sales during the winter months when
people are indoors and, as a result, sales of these products
tend to be greatest in advance of the winter months from July
through December. Additionally, many of our kitchen products are
given as gifts and, as such, sell at larger volumes during the
holiday season. When holiday shipments are combined with
seasonal products, our sales during the months of August through
November are generally at a higher level than during the other
months of the year. In addition to the seasonal fluctuations in
sales, we experience seasonality in gross profit, as margins
realized on fan products tend to be lower than those realized in
kitchen electrics and other home environment products.

A summary of the risks and uncertainties which
may affect future performance is presented on pages 2 and 3
of this Form 10-K and a discussion of the risk
factors affecting our business is presented on
pages 10 through 13 of this Annual Report. Risks and
uncertainties are detailed from time to time in reports filed by
the Company with the SEC, including Forms 10-Q and 10-K and the
Companys most recent Registration Statement on
Form S-4 (File No. 333-77095).

Critical Accounting Policies and
Estimates

The discussion and analysis of our financial
condition and results of operations are based upon financial
statements of The Holmes Group, Inc. which have been
prepared in accordance with accounting principles generally
accepted in the United States. The preparation of these
financial statements requires management to make estimates and
assumptions about future events that affect the reported amounts
in the financial statements and accompanying notes. Future
events cannot be determined with absolute certainty. Therefore,
the determination of estimates requires the exercise of
judgment. Actual results may differ from those estimates under
different assumptions and conditions.

We believe the most significant accounting
estimates inherent in the preparation of the financial
statements include estimates associated with managements
evaluation of the allowance for doubtful accounts, reserves for
inventory valuation, accruals for product returns, as well as
those used in the determination of liabilities related to
litigation, product liability and taxation. In addition,
significant estimates are used for reserves associated with
warranty obligations, restructuring actions and employee
benefits.

The following critical accounting policies affect
the most significant estimates used in the preparation of our
consolidated financial statements:



| |                                                            
| | -----------------------------------------------------------
| | Allowance for Doubtful Accounts and
    Customer Deductions

We record allowances for estimated losses
resulting from the inability of our customers to make required
payments. We assess the credit worthiness of our customers using
multiple sources of information and analyze such factors as our
historical bad debt experience, publicly available information
regarding our customers and

18



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##### Table of Contents



the inherent credit risk related to them,
information from subscription based credit reporting companies,
trade association data and reports, current economic trends and
changes in customer payment terms or payment patterns We also
establish reserves to cover sales incentives offered to and
deducted by our customers. These accruals include programs such
as co-operative advertising, volume incentives and other sales
allowances. These assessments require significant judgment. If
the financial condition of our customers were to worsen, or if
our customers claim allowances in excess of our accruals,
additional write-offs may be required, resulting in costs that
are not included in the allowance for doubtful accounts at
December 31, 2003.




| |                   
| | ------------------
| | Inventory Reserves

We value our inventory at the lower of cost or
market, and regularly review the book value of discontinued
product lines and current and expected market conditions, to
determine if these items are properly valued. If market value is
less than cost, we write down the related inventory to net
realizable value using estimates of our eventual selling price
for the products. We regularly evaluate the composition of our
inventory to identify slow-moving and obsolete inventories to
determine if additional write-offs are required. Changes in
consumer purchasing patterns, however, could result in the need
for additional write-offs.



| |                
| | ---------------
| | Product Returns

We establish reserves for product returns based
on historical experience due to the seasonal nature of our
business. In addition, we monitor product quality and returns
activity throughout the year and subsequent to the year-end
based on ongoing customer communications. If necessary, we
record additional accruals to reflect unfavorable trends, such
as counterseasonal weather that may increase returns.



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

We record income tax liabilities utilizing known
obligations and estimates of potential obligations. A deferred
tax asset or liability is recognized whenever there are future
tax effects from existing temporary differences and operating
loss and tax credit carryforwards. We must make estimates and
judgments on future taxable income, considering feasible tax
planning strategies and taking into account existing facts and
circumstances, to determine if a valuation allowance is
necessary. At December 31, 2003, the Company had
$17.1 million and $62.0 million of federal and state
net operating loss carryforwards, respectively, which can be
used to offset future taxes on income earned in the United
States. We also have a federal tax refund claim, which is
pending at December 31, 2003, involving the carryback of
$11.7 million of net operating losses. We have established
valuation allowances against deferred tax assets as the
Companys ability to generate sufficient taxable income to
ensure realization of all deferred tax assets cannot be assured.
An assessment of the realization of deferred tax assets requires
estimates of future taxable income. When we determine that
deferred tax assets could be realized in greater or lesser
amounts than recorded, the asset balance and income statement
reflects the change in the period such determination is made. In
2003, after considering all available positive and negative
evidence, the Company decreased the valuation allowance by $5.6
million. Due to changes in facts and circumstances and the
estimates and judgments that are involved in determining the
proper valuation allowance, differences between actual future
events and prior estimates and judgments could result in
adjustments to the recorded valuation allowance. Also, we use an
estimate of our annual effective tax rate at each interim period
based on the facts and circumstances known at that time, while
the actual effective tax rate is calculated at year-end. This
estimation process periodically results in a change to our
expected effective tax rate for the fiscal year. When this
occurs, we adjust the income tax provision during the period in
which the change in estimate occurs so that the year-to-date
provision equals the expected annual rate. The preparation of
federal and state tax returns requires interpretations,
judgments and estimates which are subject to the review and
audit of taxing authorities. We believe that the results of
audits will not materially change tax filings or adversely
affect earnings.



| |                       
| | ----------------------
| | Restructuring Reserves

During 2002, we established reserves and accruals
related to the costs associated primarily with our decisions to
close certain manufacturing and distribution facilities in the
United States. We made judgments and estimates on the net
realizable value and timing of the sales of the assets
associated with these decisions.

19



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##### Table of Contents



Substantially all of the assets affected by our
restructuring actions were sold during 2003, resulting in an
immaterial gain.


We base our estimates on historical experience
and on various other assumptions that we believe to be
reasonable under the circumstances including current and
expected economic conditions, product mix and in some cases
actuarial valuations. The results of these estimates form the
basis for making judgments about the carrying values of assets
and liabilities that are not readily apparent from other sources.

Results of Operations

The following table presents our operating
results for the three years ended December 31, 2003 as a
percentage of net sales:

|                                                                |  |                     |       |      |  |      |       |    |  |  |       |   
|--------------------------------------------------------------- |  | ------------------- | ----- | ---- |  | ---- | ----- | -- |  |  | ----- | --
|                                                                |  |                    
|                                                                |  | For the Years Ended
|                                                                |  | December 31,       
|                                                                |  |                    
|                                                                |  | 2003                |       | 2002 |  | 2001
|                                                                |  |                     |       |      |  |     
|Net sales                                                       |  |                     | 100.0 | %    |  |      | 100.0 | %  |  |  | 100.0 | % 
|Cost of sales                                                   |  |                     | 69.4  | %    |  |      | 73.1  | %  |  |  | 75.5  | % 
|                                                                |  |                     |       |      |  |      |       |    |  |  |       |   
|Gross profit                                                    |  |                     | 30.6  | %    |  |      | 26.9  | %  |  |  | 24.5  | % 
|Selling and administrative expenses                             |  |                     | 18.5  | %    |  |      | 19.8  | %  |  |  | 20.3  | % 
|                                                                |  |                     |       |      |  |      |       |    |  |  |       |   
|Operating profit before restructuring costs                     |  |                     | 12.1  | %    |  |      | 7.1   | %  |  |  | 4.2   | % 
|Restructuring costs                                             |  |                     | 0.3   | %    |  |      | 4.6   | %  |  |  | 0.3   | % 
|                                                                |  |                     |       |      |  |      |       |    |  |  |       |   
|Operating income                                                |  |                     | 11.8  | %    |  |      | 2.5   | %  |  |  | 3.9   | % 
|Interest expense                                                |  |                     | 4.1   | %    |  |      | 4.9   | %  |  |  | 6.2   | % 
|Other expense (income), net                                     |  |                     |      |      |  |      | (5.5  | )% |  |  | (0.1  | )%
|Income tax expense (benefit)                                    |  |                     | (0.3  | )%   |  |      |      |    |  |  | 0.7   | % 
|Equity in earnings from joint venture                           |  |                     | (0.4  | )%   |  |      | (0.5  | )% |  |  | (0.4  | )%
|                                                                |  |                     |       |      |  |      |       |    |  |  |       |   
|Income (loss) before cumulative effect of
    accounting change |  |                     | 8.4   | %    |  |      | 3.6   | %  |  |  | (2.5  | )%
|                                                                |  |                     |       |      |  |      |       |    |  |  |       |   



| |                                                                      
| | ---------------------------------------------------------------------
| | Comparison of Years Ended December 31,
    2003 and December 31, 2002



| |          
| | ---------
| | Net Sales

During 2003, net sales increased
$15.2 million or 2.5% as compared to the net sales achieved
in 2002. Sales of Rival® kitchen appliances increased 1%
during 2003, following the 24% revenue gain achieved in 2002.
During 2003, the initial shipments of the Seal-A-Meal®
vacuum food sealer product line and a 65% sales increase in the
Rival® roaster oven and skillet product categories offset a
6% decline in sales of Crock-Pot® slow cookers.

Sales of Holmes® and Bionaire® home
environment products decreased 2% during 2003 as the fan segment
of the market remained extremely competitive. Fan sales
decreased 23% in 2003 as compared to 2002 with the Company
focusing on higher price point models in an effort to improve
profitability. The unseasonably cool start to the 2003 summer
season also negatively affected sales in the fan category. This
sales decrease was offset to a large extent by a successful
winter season as sales of heaters and humidifiers in 2003
increased by 19% from the 2002 sales level.

International sales in 2003 increased 21% from
2002 with all of the Companys major markets posting higher
revenues. The sales growth was led by continuing increases in
Canada and Europe. Currency exchange rates had a favorable
impact on international sales trends, accounting for
approximately 5% of the revenue increase in 2003. Sales of
motors, which are manufactured by our facility in China, to our
joint venture with General Electric totaled $21.1 million
in 2003, an increase of 20% from 2002s net sales.

20



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##### Table of Contents





| |             
| | ------------
| | Gross Profit

Gross profit totaled $191.1 million in 2003,
an increase of $27.1 million or 16.5% above the 2002 level.
The Companys gross profit percent improved 3.7 percentage
points during the year, finishing at 30.6% in 2003 compared to
26.9% in 2002. The 2002 gross profit performance was
reduced by $7.2 million of inventory writedowns related to
closure of the Companys domestic manufacturing operations.
After removing the effects of these writedowns, the
2003 gross profit percent improved 2.5 percentage
points from 2002s adjusted rate of 28.1%. Both the kitchen
and the home environment businesses showed improved margins in
2003 due to the shift of production to lower cost resources in
the Far East. Changes in sales mix also helped the gross profit
performance in the home environment business as margins on the
growing winter product lines tend to be better than on the fan
category. During 2003, the Company incurred $1.1 million of
unfavorable manufacturing variances related to the domestic
facilities which were closed effective January 31, 2003.
These variances were lower than in 2002 when the domestic
manufacturing performance reduced gross profit by
$3.5 million or 0.6% of net sales. Gross profit in 2003 was
also favorably impacted by a cost recovery of $0.9 million
from the settlement of a claim against a former supplier.



| |                                    
| | -----------------------------------
| | Selling and Administrative Expenses

In 2003, selling and administrative expenses
decreased $4.9 million or 4.1% below the spending level in
2002. Operating expenses represented 18.5% of net sales in 2003
compared to 19.8% in 2002. Bad debt expense decreased
$5.9 million in 2003 as compared to 2002. The current
years provision includes a recovery of $0.7 million
realized upon the sale of the Companys Kmart bankruptcy
claim to a financial institution, while the 2002 expense
included a charge of $3 million related to the bankruptcy
of a distributor and a provision of $0.7 million based on
an updated assessment of the fair value of the Companys
Kmart receivables. Information technology expenses decreased
$2.4 million during 2003 as costs in 2002 included
$4.7 million of expenses related to the implementation of
new computer systems. Distribution and warehousing costs were
also lower in 2003, decreasing $1.1 million or 5.4% from
2002 due to the facility consolidations included in last
years restructuring actions. In 2003, these cost decreases
were partially offset by $1.5 million of higher legal
expenses, $2.2 million of increased international expenses
to support the sales growth of 21%, $1.5 million of
additional engineering costs related to new product development
initiatives and $1.4 million of increased advertising
spending related to product introductions in the Companys
Crock-Pot® slow cookers, Seal-A-Meal® vacuum food
sealers and Holmes® air purifier product lines.



| |                    
| | -------------------
| | Restructuring Costs

Restructuring costs totaled $1.9 million in
2003, substantially below the $28 million of restructuring
costs incurred in 2002, which were primarily related to the
closing of the Companys domestic manufacturing operations.
The 2003 restructuring expenses include a non-cash charge of
$1.6 million related to the Companys pension plan for
employees at the closed facilities. During 2003, the Company
expended $5.1 million of cash to pay for severance and
facility exit costs that were accrued in 2002 and expects to
disburse approximately $1.5 million of cash for remaining
accruals during 2004 and 2005. The Company does not expect any
material changes to the accruals for these restructuring actions.



| |                                                
| | -----------------------------------------------
| | Interest Expense and Other Expense
    (Income)

During 2003, interest expense decreased
$4.2 million or 14.3% below 2002 due primarily to reduced
levels of bank borrowings. The weighted average borrowings
outstanding under the Companys Revolving Credit Facility
totaled $63.7 million in 2003, a reduction of 25.1% from
the average borrowings of $85 million in 2002. The Company
also repaid $14.5 million of term loans during 2003 through
scheduled principal payments and the proceeds from asset sales.
Interest rates on the Companys Credit Facility borrowings
averaged 5.3% during 2003, a reduction of 50 basis points
from the 5.8% rate in 2002 due to the generally favorable
interest rate environment during the year.

Other income and expense items reduced pre-tax
earnings by $0.5 million in 2003 compared to an income
increase of $33 million in 2002. Other expense in 2003
includes $1.0 million of losses related to the sale of

21



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##### Table of Contents



accounts receivable from certain customers,
including Kmart Holding Corporation, to a financial institution
as part of a credit risk management strategy. Other income in
2002 included gains of $9.5 million related to the sale of
the Companys Pollenex® business and
$22.4 million from the repurchase of Senior Subordinated
Notes.




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

During 2003, the Company recorded an income tax
benefit of $1.9 million compared to a tax benefit of
$0.1 million in 2002. The tax benefit in 2003 includes a
$5.6 million impact associated with a reduction in the
Companys deferred tax valuation allowance based on a
reassessment made during the fourth quarter of 2003 concerning
the realizability of future tax benefits. In 2002, the tax
benefit included $5.1 million in tax refunds related to
additional net operating loss carrybacks which were made
possible by recent tax law changes.



| |                                    
| | -----------------------------------
| | Equity in Earnings of Joint Venture

Under the equity method of accounting, the
Company recorded $2.5 million of income in 2003 and
$3 million in 2002 related to its joint venture with
General Electric Company involving the manufacture and sale of
motors.



| |                      
| | ---------------------
| | Net Income and EBITDA

Net income in 2003 totaled $52.2 million
compared to a net loss of $57.9 million in 2002. The
2002 net loss included a non-cash impairment charge of
$79.8 million representing the cumulative effect of an
accounting change related to implementation of Statement of
Financial Accounting Standards. No. 142, Goodwill and
Other Intangible Assets. Income before cumulative effect
of change in accounting principle increased $30.3 million
during 2003 as compared to the adjusted net income of
$21.9 million in 2002. In 2003, EBITDA totaled
$85.4 million, above the 2002 EBITDA of $64.4 million
by $21 million or 32.6%. EBITDA was reduced by
restructuring costs and certain significant income and expense
items totaling $1.4 million in 2003 and $6.1 million
in 2002.



| |                                                                      
| | ---------------------------------------------------------------------
| | Comparison of Years Ended December 31,
    2002 and December 31, 2001



| |          
| | ---------
| | Net Sales

During 2002, net sales decreased
$3.7 million or 0.6% as compared to the sales total
achieved in 2001. After excluding $16.8 million in sales of
the Pollenex® business, a line of personal care products
which the Company sold in January 2002, from the 2001 net
sales total, the Companys experienced a sales increase of
$13.1 million in 2002, or 2.2% above the adjusted 2001
sales level. The Companys sales performance in 2002 was
highlighted by the Rival® kitchen appliance business which
produced a 24% sales increase as compared to 2001s revenue
total. A more diverse product line in new cooking appliance
categories such as roaster ovens, skillets and deep fryers
contributed to the sales increase in the kitchen business.
Rivals core product categories of Crock-Pot® slow
cookers and ice cream freezers also showed higher sales in 2002
as new products delivered increased revenues.

The kitchen sales increase was partially offset
by reduced sales of Holmes® and Bionaire® home
environment products due to increased competition during 2002.
Sales levels were below 2001 by 15% with all product lines in
the home environment business producing lower revenues during
the year. The largest sales decline occurred in the fan product
line due to the Companys decision to de-emphasize lower
margin categories in 2002 in an effort to improve overall
profitability.

International sales in 2002 increased 17% from
2001 due to increased activity in Canada and Europe. Sales of
motors, which are manufactured by our facility in China, to the
joint venture with General Electric totaled $17.6 million
in 2002 compared to $17.1 in motor sales during 2001.

22



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##### Table of Contents





| |             
| | ------------
| | Gross Profit

Gross profit totaled $164 million in 2002,
an increase of $14 million or 9.3% above the 2001 level.
The Companys gross profit percent improved 2.4 percentage
points during the year to finish at 26.9% in 2002 compared to
24.5% in 2001. During 2002, the Companys gross profit was
reduced by $7.2 million of inventory writedowns related to
the decision to close its domestic manufacturing operations.
Excluding these writedowns, gross profit would have been 28.1%
of net sales, an improvement of 3.6 percentage points above
the 2001 gross profit rate. Both of the Companys
major businesses showed gross profit improvements, with the
kitchen business benefiting from product innovation and
favorable sales trends and the profitability of the home
environment business favorably affected by the move away from
less profitable, opening price point products. The
Companys domestic manufacturing operations, which were
closed effective January 31, 2003, had unfavorable
variances of $3.5 million during 2002, slightly below the
unfavorable variances of $4 million incurred in 2001.



| |                                    
| | -----------------------------------
| | Selling and Administrative Expenses

In 2002, selling and administrative expenses
decreased $3.7 million or 3% from the spending total in
2001. These expenses represented 19.8% of net sales in 2002
compared to 20.3% in 2001. The Companys bad debt provision
decreased substantially during 2002, $6.1 million in 2002
compared to $15.2 million last year, as the 2001 expense
included charges of $14.1 million related to the bankruptcy
filing of Kmart. The 2002 bad debt expense included a charge of
$0.7 million to further adjust the Kmart pre-bankruptcy
receivables to net realizable value and a charge of
$3 million related to the bankruptcy of a distributor.
After removing the impact of the Kmart bankruptcy, selling and
administrative expenses increased $9.7 million during 2002
as compared to 2001. The increased spending in 2002 included
$4.7 million of expenses related to the implementation of
new computer systems, higher legal costs of $1 million and
$1 million in increased insurance costs. Expenses in 2002
also included an impairment charge of $1.2 million related
to unused trade credits based on a re-examination of the
Companys plan to use these credits.



| |                    
| | -------------------
| | Restructuring Costs

During 2002, the Company provided for
$28 million in restructuring costs related to actions
initiated during the year. Restructuring costs were
substantially higher than in 2001 when the Company incurred
$1.7 million of costs related to the closure of a
manufacturing facility in Missouri. In December 2002, the
Company announced the shift of all manufacturing activities to
its facilities in southern China and to independent suppliers in
the Far East resulting in the closure of three domestic
manufacturing facilities in January 2003, the phase-out of two
distribution centers in Clinton, Missouri and Worcester,
Massachusetts and the shutdown of an administrative office in
Kansas City, Missouri. The Company also announced the closing of
a distribution center in Sedalia, Missouri during 2002. The
restructuring costs in 2002 included $19.9 million of
non-cash asset impairment charges to writedown redundant
property and equipment to their net realizable value,
$4 million of severance and benefit costs for approximately
750 employees and $4.1 million of facility exit and lease
termination costs.



| |                                  
| | ---------------------------------
| | Interest Expense and Other Income

Interest expense was lower by $8.3 million
in 2002 than in 2001 reflecting the Companys lower debt
level and reduced interest rates, which were in effect during
2002. The repurchase of $36.2 million of the Companys
Senior Subordinated Notes in March 2002 reduced interest expense
by approximately $2.2 million during 2002. Interest expense
related to the Companys Credit Facility was also lower in
2002 as the term loan portion of the facility was reduced by
continuing principal payments and the application of the
$15.1 million in cash proceeds from the sale of the
Pollenex® business in January 2002. During 2002, the
average outstanding balance on the Revolver portion of the
Credit Facility totaled $85 million, a reduction of 23%
below the average outstanding balance of $110.2 million
during 2001. In 2001, interest expense had also included a
charge of $1 million related to the issuance of warrants to
the lenders to acquire up to 5% of the Companys common
stock at $5.04 per share. Non-cash interest costs,
representing the amortization of debt issuance costs

23



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##### Table of Contents



and fees related to the guaranties provided by
Berkshire Partners, totaled $7 million in 2002 compared to
$5.7 million in 2001.


Other income in 2002 totaled $33.0 million
compared to $0.6 million of income in 2001. The 2002 amount
included gains of $9.5 million related to the sale of the
Pollenex® business in January 2002 and $22.4 million
from the repurchase of $36.2 million of the Companys
Senior Subordinated Notes in March 2002. Other income in 2001
included a gain of $0.6 million related to the sale of a
manufacturing facility which had been closed during 2000.



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

During 2002, the Company recorded an income tax
benefit of $0.1 million compared to income tax expense of
$4.5 million in 2001. In 2002, a tax benefit of
$5.1 million related to additional net operating loss
carrybacks, which were made possible by recent tax law changes
in the United States, more than offset other income tax expense.
Tax benefits related to domestic losses during 2001 were not
recorded in the consolidated financial statements as there was
no assurance that these tax benefits would be realized.



| |                                    
| | -----------------------------------
| | Equity in Earnings of Joint Venture

The Company recorded $3 million in earnings
from our joint venture with General Electric during 2002
compared to earnings of $2.4 million in 2001.



| |                                           
| | ------------------------------------------
| | Cumulative Effect of Accounting
    Change

The Company adopted Statement of Financial
Accounting Standards No. 142, Goodwill and Other
Intangible Assets effective January 1, 2002. In
connection with adopting this Standard, the Company, assisted by
independent valuation consultants, completed the transitional
testing of goodwill using a measurement date of January 1,
2002. The Companys consolidated balance sheet as of
December 31, 2001 included goodwill with a net book value
of $79.8 million as a result of the Rival acquisition in
1999. The results of this testing indicated that the carrying
values of the goodwill asset for both the home environment and
kitchen reporting units exceeded the estimated fair value of the
units as determined utilizing various valuation techniques,
including discounted cash flow and comparative market analysis.
Accordingly, a non-cash impairment charge was recognized as a
change in accounting principle as of the beginning of 2002. The
impairment charge was $79.8 million on a before and
after-tax basis.



| |                    
| | -------------------
| | Net Loss and EBITDA

As a result of the cumulative effect of the
accounting change and the restructuring charges described above,
the Company incurred a net loss of $57.9 million during
2002 compared to a net loss of $15.6 million in 2001. In
2002, EBITDA totaled $64.4 million, an increase of
$22.2 million or 52.6% above the $42.2 million of
EBITDA earned in 2001. EBITDA was reduced by restructuring costs
and certain significant income and expense items totaling
$6.1 million in 2002 and $17.5 million in 2001.

Liquidity and Capital Resources



| |                       
| | ----------------------
| | Analysis of Cash Flows

Following the Companys recapitalization
transaction in November 1997 and the Rival acquisition in
February 1999, we have funded our liquidity requirements with
cash flows from operations and borrowings under our Credit
Facility. Our primary liquidity requirements have been for
working capital, to service our indebtedness and to fund capital
expenditures. While there can be no assurance, we believe that
existing cash resources, cash flows from operations and
borrowings under the Credit Facility, as most recently amended,
will be sufficient to meet our liquidity needs for the next
twelve months. The Companys $171 million Revolving Credit
Facility expires in January 2005. We are in the process of
carefully evaluating our financing requirements and we expect to
refinance our borrowing arrangements during the second quarter
of 2004.

24



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The Companys cash and cash equivalents
decreased to $6.1 million at December 31, 2003, from
$8.4 million at December 31, 2002. Cash provided by
operations was $70.0 million in 2003 and $50.9 million
in 2002. Operating earnings, adjusted for non-cash items,
improved to $69.0 million in 2003 as compared to adjusted
operating earnings of $40.0 million in 2002. Changes in
other operating assets and liabilities provided
$1.0 million of cash in 2003 compared to $10.9 million
in 2002. While inventory levels at December 31, 2003 were
essentially even with last year, accounts receivable balances
decreased from the year ago levels, down $8.8 million or
6.8% from the accounts receivable amount at December 31,
2002. Days sales outstanding (DSO) at December 31,
2003 stood at 52 days, 8.8% below the DSO statistic of
57 days in 2002. Inventory turnover was 3.4 times
during 2003, below the 3.7 turnover statistic in 2002 by
8.1%. The Company carried higher inventory levels in the first
half of 2003 to ensure that the manufacturing transition to the
Far East did not impact service to its customers.

Cash used for investing activities in 2003
totaled $3 million, while investing activities provided
$3 million of cash in 2002. In both years, cash flows
included proceeds from asset sales with the 2003 amount
including $6.9 million in cash from the sale of assets
related to the domestic manufacturing operations shut down in
January 2003 and the 2002 amount including $15.1 million in
cash proceeds received in connection with the sale of the
Pollenex® division in January 2002. These cash proceeds
were offset by amounts invested in capital expenditures for
property and equipment, $12.9 million during 2003 and
$14.6 million in 2002. We expect to spend approximately
$16 million on capital expenditures in 2004, primarily
related to the expansion of our China manufacturing facilities,
and on-going tooling costs to support new product development
initiatives. The Company also received $2.7 million in
earnings distributions from its joint venture with General
Electric in 2003 compared to cash distributions of
$2.5 million in 2002.

Cash used for financing activities in 2003 and
2002 was $70.5 million and $55.4 million,
respectively, as borrowings outstanding under the Companys
Credit Facility were repaid. Cash used for financing in 2002
also included the use of $11.5 million in cash to
repurchase $36.2 million of our outstanding Senior
Subordinated Notes. The outstanding Revolver portion of our
Credit Facility totaled $28.2 million at December 31,
2003, a reduction of $56.0 from the $84.2 million
outstanding balance at the end of 2002. During 2003, the average
outstanding balance on the Revolver portion of the Credit
Facility totaled $63.7 million, 25.1% below the average
outstanding balance of $85.0 million during 2002.

The Company recorded pension liabilities at
December 31, 2003 and 2002, which totaled $6.5 million
and $5.8 million, respectively. These liabilities were
created based on the shortfall of plan assets versus the
accumulated benefit obligation. The Companys pension
liabilities are developed from actuarial calculations and
valuations. Inherent in these valuations are assumptions,
including discount rates and the expected return on plan assets.
The expected long-term rate of return on our plan assets was
developed by examining historical return rates based on the
pension plans asset allocation and considering such
factors as return differentials for active investment
management. The expected long-term rate of return used for
fiscal year 2003 was 8.0%, which is lower than the 9.0% rate
used 2002, primarily due to market conditions. The discount rate
used for the calculation of plan liabilities at
December 31, 2003 was 6.25%, which is 25 basis points
below the 6.5% rate used in 2002. We consider market conditions,
including changes in interest and investment rates, in
developing these assumptions. Pension expense was
$3.3 million in 2003 and $1.0 million in 2002. The
2003 pension expense amount included a charge of
$1.6 million under the plan curtailment accounting
provisions of FAS No. 88. Pension expense, determined
in accordance with FAS 87, is expected to be approximately
$1.6 million in fiscal 2004. During 2002 and 2003, we were
not required to make cash contributions to the Companys
defined benefit pension plan. Current actuarial estimates
anticipate a pension cash contribution of approximately
$2.3 million for 2004, and as such, this portion of the
minimum pension liability is included in current liabilities at
December 31, 2003.



| |                       
| | ----------------------
| | Financing Arrangements

As part of the 1997 recapitalization transaction,
we issued $105.0 million of 9.875% Senior Subordinated
Notes due November 2007 (the Notes), and an additional
$31.3 million of Notes to partially finance the Rival
acquisition in 1999. While we may repurchase Notes from time to
time in open market or privately negotiated transactions, the
Notes are also subject to redemption at any time at our option,
in whole or in part, at stated

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redemption prices. The payment of principal and
interest on the Notes is subordinated to the prior payment in
full of all of our senior debt, including borrowings under the
Credit Facility. The Notes are cross-defaulted to payment
defaults under the Credit Facility.


In March 2002, the Company and its lending group
agreed to a Fifth Amendment to the Credit Facility. The Fifth
Amendment revised certain of the financial ratio covenants for
the periods ending December 31, 2001 through June 30,
2004. Under the Fifth Amendment, the lenders committed to a
Revolving Credit Loan A of $131 million and a
Revolving Credit Loan B of $40 million. Revolving
Credit Loan B is supported by the guarantee of Berkshire
Partners, the Companys majority shareholder. Actual
availability under these revolving credit facilities, which was
$115.1 million at December 31, 2003, is subject to a borrowing
base formula based on inventory and accounts receivable. In
December 2003, the Company and its lending group agreed to a
Sixth Amendment to the Credit Facility which extended the
maturity dates of Revolving Credit Loans A and B to
January 3, 2005 and January 4, 2005, respectively. The
maturity dates of Term Loans A and B remained
February 5, 2005 and February 5, 2007, respectively.
As a result of maturity dates of the Revolving Credit Facility
and Term Loan A, the current portion of the Credit Facility
will substantially increase in the Companys financial
statements for the three-month period ending March 31, 2004.

The Credit Facility, as amended, and the
Notes Indentures include certain financial and operating
covenants, which, among other things, restrict our ability to
incur additional indebtedness, grant liens, make investments and
take certain other actions. Our ability to meet our debt service
obligations will be dependent upon our future performance, which
will be impacted by general economic conditions and other
factors.

In conjunction with the Fifth Amendment in March
2002, the Company repurchased from two Berkshire Partners
investment funds an aggregate principal amount of approximately
$36.2 million of the Notes. The purchase price of the
Notes, representing Berkshire Partners cost, was
$11.5 million plus accrued interest on the Notes, which was
funded with proceeds of the Revolving Credit Loan B. The
Notes repurchased were retired and cancelled. This transaction
resulted in a gain of $22.4 million, which is included in
other income in the consolidated statement of operations for the
year ended December 31, 2002. The Company may consider
repurchases of additional Notes in the future utilizing utilize
the proceeds of the Credit Facility for this purpose.

As a result of the Note repurchase transaction,
the January 2002 sale of the Pollenex® business and
improvements in profitability and operating cash flow, we made
substantial progress in reducing our debt level during the last
two years. Total debt amounted to $204.8 million at
December 31, 2003, a reduction of $70.4 million or
25.6% below the 2002 year-end debt level of
$275.2 million. Total debt has been reduced by
$148.4 million in the past two years such that the debt
level at December 31, 2003 is 42% lower than the
outstanding borrowings of $353.2 million in December 2001.
The following summarizes our contractual obligations at
December 31, 2003, and the effect such obligations are
expected to have on the Companys liquidity and cash flow
in future periods.

|                                              |  |                |         |           |  |           |        |         |  |   |        |  |  |   |        | 
|--------------------------------------------- |  | -------------- | ------- | --------- |  | --------- | ------ | ------- |  | - | ------ |  |  | - | ------ | 
|                                              |  |                |         | Less Than |  |           |        | After 3
|                                              |  | Total          |         | 1 Year    |  | 1-3 Years |        | Years  
|                                              |  |                |         |           |  |           |        |        
|                                              |  |               
|                                              |  | (In thousands)
|Long-term debt  variable rate                |  | $              | 105,159 |           |  | $         | 6,594  |         |  | $ | 98,565 |  |  |   |       | 
|Long-term debt  fixed rate                   |  |                | 99,632  |           |  |           |       |         |  |   | 99,632 |  |  |   |       | 
|Non-cancelable operating lease obligations    |  |                | 59,266  |           |  |           | 10,267 |         |  |   | 20,498 |  |  | $ | 28,501 | 
|Outstanding letters of credit                 |  |                | 7,283   |           |  |           | 7,283  |         |  |   |       |  |  |   |       | 
|Purchase commitments for capital expenditures |  |                | 6,598   |           |  |           | 6,598  |         |  |   |       |  |  |   |       | 
|Pension obligation contributions              |  |                | 2,628   |           |  |           | 2,299  |         |  |   | 329    |  |  |   |       | 

Investor Conference Call

Following our press release announcing fourth
quarter results, Holmes management held a telephone
conference call on March 4, 2004 in order for investors and
other interested stakeholders to hear managements views on
our results of operations during the year ended
December 31, 2003. A replay of this call is

26



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##### Table of Contents



available until April 4, 2004. If you are
interested in accessing the replay, please call Ms. Kay
Ford, Executive Assistant, at (508) 422-1642 for access
instructions.







|         |                                                               
|-------- | --------------------------------------------------------------
|Item 7A. | Quantitative and Qualitative Disclosures
    About Market Risk

At December 31, 2003, the carrying value of
our debt totaled $204.8 million. The fair value
approximated $208.0 million. This debt includes amounts at
both fixed and variable interest rates. For fixed rate debt,
interest rate changes affect the fair market value, but do not
impact earnings or cash flows. Conversely, for variable rate
debt, interest rate changes generally do not affect the fair
market value, but do impact earnings and cash flows, assuming
other factors are held constant.

At December 31, 2003, the Company had fixed
rate debt of $99.6 million and variable rate debt of
$105.2 million. Assuming a constant debt level, a one
percentage point decrease in interest rates would increase the
unrealized fair market value of fixed rate debt by approximately
$1.0 million. Based on the amounts of variable rate debt
outstanding at December 31, 2003, the earnings and cash
flows impact for the next year resulting from a one percentage
point increase in interest rates would be approximately
$1.0 million, net of tax, holding other variables constant.

27



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|        |                                                
|------- | -----------------------------------------------
|ITEM 8. | Financial Statements and Supplementary
    Data

INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS

|                                                                                                                      |  |      |    | 
|--------------------------------------------------------------------------------------------------------------------- |  | ---- | -- | 
|                                                                                                                      |  | Page
|                                                                                                                      |  |     
|Report of PricewaterhouseCoopers
    LLP, Independent Auditors                                                        |  |      | 29 | 
|Consolidated Balance Sheet at December 31,
    2002 and 2003                                                          |  |      | 30 | 
|Consolidated Statement of Operations for the
    years ended December 31, 2001, 2002 and 2003                         |  |      | 31 | 
|Consolidated Statement of Comprehensive Income
    (Loss) for the years ended December 31, 2001, 2002 and 2003        |  |      | 32 | 
|Consolidated Statement of Stockholders
    Equity (Deficit) for the years ended December 31, 2001,
    2002 and 2003 |  |      | 33 | 
|Consolidated Statement of Cash Flows for the
    years ended December 31, 2001, 2002 and 2003                         |  |      | 34 | 
|Notes to Consolidated Financial Statements                                                                            |  |      | 35 | 
|Financial Statement Schedule: For each of the
    three years in the period ended December 31, 2003:                  |  |      |    | 



|     |                                      
|---- | -------------------------------------
|II  | Valuation and Qualifying
    Accounts

All other schedules are omitted because they are
not applicable or the required information is shown in the
consolidated financial statements or the notes thereto.

28



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##### Table of Contents



REPORT OF INDEPENDENT AUDITORS

To the Board of Directors and Stockholders

of The Holmes Group, Inc.:


In our opinion, the consolidated financial
statements listed in the accompanying index present fairly, in
all material respects, the financial position of The Holmes
Group, Inc. and its subsidiaries at December 31, 2003
and 2002, and the results of their operations and their cash
flows for each of the three years in the period ended
December 31, 2003 in conformity with accounting principles
generally accepted in the United States of America. In addition,
in our opinion, the financial statement schedules listed in the
accompanying index present fairly, in all material respects, the
information set forth therein when read in conjunction with the
related consolidated financial statements. These financial
statements and financial statement schedules are the
responsibility of the Companys management; our
responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally
accepted in the United States of America, which require that we
plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the
overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

As discussed in Note 3 to the consolidated
financial statements, the Company adopted Financial Accounting
Standards Board Statement of Financial Accounting Standards
No. 142 Goodwill and Other Intangible Assets,
and changed its method of accounting for goodwill and other
intangible assets as of January 1, 2002.

/S/ PRICEWATERHOUSECOOPERS LLP

Boston, Massachusetts

February 19, 2004 except for Note 14,


as to which the date is March 18, 2004


29



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##### Table of Contents



THE HOLMES GROUP, INC.

CONSOLIDATED BALANCE SHEETS

|                                                   |                                                                                  |                                                |         |         |         |   |         |         |         |  
|-------------------------------------------------- | -------------------------------------------------------------------------------- | ---------------------------------------------- | ------- | ------- | ------- | - | ------- | ------- | ------- | -
|                                                   |                                                                                  |                                               
|                                                   |                                                                                  | December 31,                                  
|                                                   |                                                                                  |                                               
|                                                   |                                                                                  | 2003                                           |         | 2002   
|                                                   |                                                                                  |                                                |         |        
|                                                   |                                                                                  |                                               
|                                                   |                                                                                  | (In thousands except                          
|                                                   |                                                                                  | share and                                     
|                                                   |                                                                                  | per share amounts)                            
|ASSETS                                            
|Current assets:                                    |                                                                                  |                                                |         |         |         |   |         |        
|                                                   | Cash and cash equivalents                                                        |                                                | $       | 6,080   |         |   | $       | 8,426   |        
|                                                   | Accounts receivable, net of allowances of $7,043
    in 2003 and $18,351 in 2002 |                                                |         | 119,631 |         |   |         | 128,409 |        
|                                                   | Inventories                                                                      |                                                |         | 110,957 |         |   |         | 110,236 |        
|                                                   | Prepaid expenses and other current assets                                        |                                                |         | 4,864   |         |   |         | 4,817   |        
|                                                   | Deferred income taxes                                                            |                                                |         | 12,317  |         |   |         | 5,067   |        
|                                                   |                                                                                  |                                                |         |         |         |   |         |        
|                                                   |                                                                                  | Total current assets                           |         |         | 253,849 |   |         |         | 256,955 |  
|Assets held for sale                               |                                                                                  |                                                |        |         |         |   | 6,466   |        
|Property and equipment, net                        |                                                                                  |                                                | 44,805  |         |         |   | 42,446  |        
|Deposits and other assets                          |                                                                                  |                                                | 3,097   |         |         |   | 837     |        
|Debt issuance costs, net                           |                                                                                  |                                                | 5,885   |         |         |   | 10,184  |        
|Deferred income taxes                              |                                                                                  |                                                | 3,927   |         |         |   | 5,956   |        
|                                                   |                                                                                  |                                                |         |         |         |   |         |        
|                                                   |                                                                                  | $                                              | 311,563 |         |         | $ | 322,844 |        
|                                                   |                                                                                  |                                                |         |         |         |   |         |        
|                                                  
|LIABILITIES AND STOCKHOLDERS EQUITY
    (DEFICIT)
|Current liabilities:                               |                                                                                  |                                                |         |         |         |   |         |        
|                                                   | Accounts payable                                                                 |                                                |         | 49,634  |         |   |         | 44,267  |        
|                                                   | Current portion of Credit Facility                                               |                                                |         | 6,594   |         |   |         | 9,078   |        
|                                                   | Accrued income taxes                                                             |                                                |         | 8,708   |         |   |         | 7,405   |        
|                                                   | Accrued expenses and other current liabilities                                   |                                                |         | 48,969  |         |   |         | 53,101  |        
|                                                   | Current portion of pension obligation                                            |                                                |         | 2,299   |         |   |         |        |        
|                                                   | Deferred income taxes                                                            |                                                |         | 820     |         |   |         | 2,967   |        
|                                                   |                                                                                  |                                                |         |         |         |   |         |        
|                                                   |                                                                                  | Total current liabilities                      |         |         | 117,024 |   |         |         | 116,818 |  
|Long-term portion of Credit Facility               |                                                                                  |                                                | 98,565  |         |         |   | 166,556 |        
|Senior Subordinated Notes                          |                                                                                  |                                                | 99,632  |         |         |   | 99,544  |        
|Long-term portion of pension obligation            |                                                                                  |                                                | 4,191   |         |         |   | 5,840   |        
|Other liabilities                                  |                                                                                  |                                                | 8,587   |         |         |   | 7,613   |        
|Deferred income taxes                              |                                                                                  |                                                | 2,124   |         |         |   | 989     |        
|Commitments and contingencies                      |                                                                                  |                                                |         |         |         |   |         |        
|Stockholders equity (deficit):                    |                                                                                  |                                                |         |         |         |   |         |        
|                                                   | Common stock, $.001 par value.
    Authorized  28,500,000 shares;               |                                                |         |         |         |   |         |         |        
|                                                   |                                                                                  | Issued and outstanding 
    20,331,566 shares |         |         | 20      |   |         |         | 20      |  
|                                                   | Additional paid in capital                                                       |                                                |         | 68,874  |         |   |         | 68,874  |        
|                                                   | Accumulated other comprehensive income (loss)                                    |                                                |         | (3,453  | )       |   |         | (7,231  | )      
|                                                   | Treasury stock, at cost 
    880 shares                                         |                                                |         | (62,076 | )       |   |         | (62,076 | )      
|                                                   | Retained earnings (deficit)                                                      |                                                |         | (21,925 | )       |   |         | (74,103 | )      
|                                                   |                                                                                  |                                                |         |         |         |   |         |        
|                                                   |                                                                                  | Total stockholders equity (deficit)           |         |         | (18,560 | ) |         |         | (74,516 | )
|                                                   |                                                                                  |                                                |         |         |         |   |         |        
|                                                   |                                                                                  | $                                              | 311,563 |         |         | $ | 322,844 |        
|                                                   |                                                                                  |                                                |         |         |         |   |         |        

The accompanying notes are an integral part of
these consolidated financial statements.

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THE HOLMES GROUP, INC.

CONSOLIDATED STATEMENTS OF
OPERATIONS

|                                                                                                                                         |                            |                                  |         |        |  |      |         |         |   |   |         |        |  
|---------------------------------------------------------------------------------------------------------------------------------------- | -------------------------- | -------------------------------- | ------- | ------ |  | ---- | ------- | ------- | - | - | ------- | ------ | -
|                                                                                                                                         |                            |                                 
|                                                                                                                                         |                            | For the Years Ended December 31,
|                                                                                                                                         |                            |                                 
|                                                                                                                                         |                            | 2003                             |         | 2002   |  | 2001
|                                                                                                                                         |                            |                                  |         |        |  |     
|                                                                                                                                         |                            |                                 
|                                                                                                                                         |                            | (In thousands)                  
|Net sales                                                                                                                                |                            | $                                | 623,756 |        |  | $    | 608,554 |         |   | $ | 612,240 |       
|Cost of sales                                                                                                                            |                            |                                  | 432,657 |        |  |      | 444,577 |         |   |   | 462,271 |       
|                                                                                                                                         |                            |                                  |         |        |  |      |         |         |   |   |         |       
|Gross profit                                                                                                                             |                            |                                  | 191,099 |        |  |      | 163,977 |         |   |   | 149,969 |       
|Selling and administrative expenses                                                                                                      |                            |                                  | 115,618 |        |  |      | 120,566 |         |   |   | 124,315 |       
|Restructuring costs                                                                                                                      |                            |                                  | 1,899   |        |  |      | 28,006  |         |   |   | 1,744   |       
|                                                                                                                                         |                            |                                  |         |        |  |      |         |         |   |   |         |       
|Operating income                                                                                                                         |                            |                                  | 73,582  |        |  |      | 15,405  |         |   |   | 23,910  |       
|Other income and expense:                                                                                                                |                            |                                  |         |        |  |      |         |         |   |   |         |       
|                                                                                                                                         | Interest expense           |                                  |         | 25,389 |  |      |         | 29,615  |   |   |         | 37,900 |  
|                                                                                                                                         | Gain on sale of business   |                                  |         |       |  |      |         | (9,488  | ) |   |         |       |  
|                                                                                                                                         | Gain on retirement of debt |                                  |         |       |  |      |         | (22,388 | ) |   |         |       |  
|                                                                                                                                         | Other, net                 |                                  |         | 489    |  |      |         | (1,130  | ) |   |         | (608   | )
|                                                                                                                                         |                            |                                  |         |        |  |      |         |         |   |   |         |       
|                                                                                                                                         |                            |                                  | 25,878  |        |  |      | (3,391  | )       |   |   | 37,292  |       
|                                                                                                                                         |                            |                                  |         |        |  |      |         |         |   |   |         |       
|Income (loss) before income taxes, equity in
    earnings from joint venture and cumulative effect of change in
    accounting principle |                            |                                  | 47,704  |        |  |      | 18,796  |         |   |   | (13,382 | )     
|Income tax expense (benefit)                                                                                                             |                            |                                  | (1,926  | )      |  |      | (148    | )       |   |   | 4,527   |       
|Equity in earnings from joint venture                                                                                                    |                            |                                  | (2,548  | )      |  |      | (2,990  | )       |   |   | (2,354  | )     
|                                                                                                                                         |                            |                                  |         |        |  |      |         |         |   |   |         |       
|Income (loss) before cumulative effect of change
    in accounting principle                                                             |                            |                                  | 52,178  |        |  |      | 21,934  |         |   |   | (15,555 | )     
|Cumulative effect of change in accounting
    principle                                                                                  |                            |                                  |        |        |  |      | (79,838 | )       |   |   |        |       
|                                                                                                                                         |                            |                                  |         |        |  |      |         |         |   |   |         |       
|Net income (loss)                                                                                                                        |                            | $                                | 52,178  |        |  | $    | (57,904 | )       |   | $ | (15,555 | )     
|                                                                                                                                         |                            |                                  |         |        |  |      |         |         |   |   |         |       

The accompanying notes are an integral part of
these consolidated financial statements.

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THE HOLMES GROUP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE
INCOME (LOSS)

|                                   |                                          |                                  |        |       |  |      |         |        |   |   |         |      |  
|---------------------------------- | ---------------------------------------- | -------------------------------- | ------ | ----- |  | ---- | ------- | ------ | - | - | ------- | ---- | -
|                                   |                                          |                                 
|                                   |                                          | For the Years Ended December 31,
|                                   |                                          |                                 
|                                   |                                          | 2003                             |        | 2002  |  | 2001
|                                   |                                          |                                  |        |       |  |     
|                                   |                                          |                                 
|                                   |                                          | (In thousands)                  
|Net income (loss)                  |                                          | $                                | 52,178 |       |  | $    | (57,904 | )      |   | $ | (15,555 | )   
|Other comprehensive income (loss): |                                          |                                  |        |       |  |      |         |        |   |   |         |     
|                                   | Foreign currency translation adjustments |                                  |        | 1,149 |  |      |         | (187   | ) |   |         | (243 | )
|                                   | Minimum pension liability adjustment     |                                  |        | 2,629 |  |      |         | (7,042 | ) |   |         |     |  
|                                   |                                          |                                  |        |       |  |      |         |        |   |   |         |     
|Comprehensive income (loss)        |                                          | $                                | 55,956 |       |  | $    | (65,133 | )      |   | $ | (15,798 | )   
|                                   |                                          |                                  |        |       |  |      |         |        |   |   |         |     

The accompanying notes are an integral part of
these consolidated financial statements.

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THE HOLMES GROUP, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS
EQUITY (DEFICIT)

|                                                                |  |                 |        |            |  |               |    |          |  |          |        |               |  |           |        |   |  |   |         |   |  |   |         |   |  |   |         |  
|--------------------------------------------------------------- |  | --------------- | ------ | ---------- |  | ------------- | -- | -------- |  | -------- | ------ | ------------- |  | --------- | ------ | - |  | - | ------- | - |  | - | ------- | - |  | - | ------- | -
|                                                                |  |                 |        |            |  | Accumulated   |    |          |  |          |        |              
|                                                                |  | Common Stock    |        |            |  | Other         |    |          |  |          |        | Total        
|                                                                |  | $.001 Par Value |        | Additional |  | Comprehensive |    |          |  | Retained |        | Stockholders
|                                                                |  |                 |        | Paid In    |  | Income        |    | Treasury |  | Earnings |        | Equity       
|                                                                |  | Shares          |        | Par        |  | Capital       |    | (Loss)   |  | Stock    |        | (Deficit)     |  | (Deficit)
|                                                                |  |                 |        |            |  |               |    |          |  |          |        |               |  |          
|                                                                |  |                
|                                                                |  | (In thousands) 
|Balance at December 31, 2000                                    |  |                 | 20,337 |            |  | $             | 20 |          |  | $        | 67,915 |               |  | $         | 241    |   |  | $ | (62,058 | ) |  | $ | (644    | ) |  | $ | 5,474   |  
|Issuance of stock warrants and repurchase of
    treasury stock |  |                 | (5     | )          |  |               |   |          |  |          | 959    |               |  |           |       |   |  |   | (18     | ) |  |   |        |   |  |   | 941     |  
|Foreign currency translation adjustments                        |  |                 |       |            |  |               |   |          |  |          |       |               |  |           | (243   | ) |  |   |        |   |  |   |        |   |  |   | (243    | )
|Net loss                                                        |  |                 |       |            |  |               |   |          |  |          |       |               |  |           |       |   |  |   |        |   |  |   | (15,555 | ) |  |   | (15,555 | )
|                                                                |  |                 |        |            |  |               |    |          |  |          |        |               |  |           |        |   |  |   |         |   |  |   |         |   |  |   |         |  
|Balance at December 31, 2001                                    |  |                 | 20,332 |            |  |               | 20 |          |  |          | 68,874 |               |  |           | (2     | ) |  |   | (62,076 | ) |  |   | (16,199 | ) |  |   | (9,383  | )
|                                                                |  |                 |        |            |  |               |    |          |  |          |        |               |  |           |        |   |  |   |         |   |  |   |         |   |  |   |         |  
|Foreign currency translation adjustments                        |  |                 |       |            |  |               |   |          |  |          |       |               |  |           | (187   | ) |  |   |        |   |  |   |        |   |  |   | (187    | )
|Minimum pension liability adjustment                            |  |                 |       |            |  |               |   |          |  |          |       |               |  |           | (7,042 | ) |  |   |        |   |  |   |        |   |  |   | (7,042  | )
|Net loss                                                        |  |                 |       |            |  |               |   |          |  |          |       |               |  |           |       |   |  |   |        |   |  |   | (57,904 | ) |  |   | (57,904 | )
|                                                                |  |                 |        |            |  |               |    |          |  |          |        |               |  |           |        |   |  |   |         |   |  |   |         |   |  |   |         |  
|Balance at December 31, 2002                                    |  |                 | 20,332 |            |  |               | 20 |          |  |          | 68,874 |               |  |           | (7,231 | ) |  |   | (62,076 | ) |  |   | (74,103 | ) |  |   | (74,516 | )
|                                                                |  |                 |        |            |  |               |    |          |  |          |        |               |  |           |        |   |  |   |         |   |  |   |         |   |  |   |         |  
|Foreign currency translation adjustments                        |  |                 |       |            |  |               |   |          |  |          |       |               |  |           | 1,149  |   |  |   |        |   |  |   |        |   |  |   | 1,149   |  
|Minimum pension liability adjustment                            |  |                 |       |            |  |               |   |          |  |          |       |               |  |           | 2,629  |   |  |   |        |   |  |   |        |   |  |   | 2,629   |  
|Net income                                                      |  |                 |       |            |  |               |   |          |  |          |       |               |  |           |       |   |  |   |        |   |  |   | 52,178  |   |  |   | 52,178  |  
|                                                                |  |                 |        |            |  |               |    |          |  |          |        |               |  |           |        |   |  |   |         |   |  |   |         |   |  |   |         |  
|Balance at December 31, 2003                                    |  |                 | 20,332 |            |  | $             | 20 |          |  | $        | 68,874 |               |  | $         | (3,453 | ) |  | $ | (62,076 | ) |  | $ | (21,925 | ) |  | $ | (18,560 | )
|                                                                |  |                 |        |            |  |               |    |          |  |          |        |               |  |           |        |   |  |   |         |   |  |   |         |   |  |   |         |  

The accompanying notes are an integral part of
these consolidated financial statements.

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THE HOLMES GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH
FLOWS

|                                                         |                                                                                                         |                                                                    |        |         |         |      |        |         |         |   |        |         |         |  
|-------------------------------------------------------- | ------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------ | ------ | ------- | ------- | ---- | ------ | ------- | ------- | - | ------ | ------- | ------- | -
|                                                         |                                                                                                         |                                                                   
|                                                         |                                                                                                         | For the Years Ended December 31,                                  
|                                                         |                                                                                                         |                                                                   
|                                                         |                                                                                                         | 2003                                                               |        | 2002    |         | 2001
|                                                         |                                                                                                         |                                                                    |        |         |         |     
|                                                         |                                                                                                         |                                                                   
|                                                         |                                                                                                         | (In thousands)                                                    
|Cash flows from operating activities:                    |                                                                                                         |                                                                    |        |         |         |      |        |         |         |   |        |        
|                                                         | Net income (loss)                                                                                       |                                                                    | $      | 52,178  |         |      | $      | (57,904 | )       |   | $      | (15,555 | )      
|                                                         | Adjustments to reconcile net income (loss) to net
    cash provided by (used for) operating activities: |                                                                    |        |         |         |      |        |         |         |   |        |         |        
|                                                         |                                                                                                         | Depreciation and amortization                                      |        |         | 10,747  |      |        |         | 13,989  |   |        |         | 16,180  |  
|                                                         |                                                                                                         | Amortization of debt related costs and other
    non-cash interest |        |         | 6,902   |      |        |         | 7,010   |   |        |         | 5,678   |  
|                                                         |                                                                                                         | Provision for doubtful accounts                                    |        |         | 236     |      |        |         | 6,134   |   |        |         | 15,219  |  
|                                                         |                                                                                                         | Loss on disposal of assets                                         |        |         | 33      |      |        |         | 884     |   |        |         | 564     |  
|                                                         |                                                                                                         | Gain on sale of business                                           |        |         |        |      |        |         | (9,488  | ) |        |         |        |  
|                                                         |                                                                                                         | Gain on retirement of debt                                         |        |         |        |      |        |         | (22,388 | ) |        |         |        |  
|                                                         |                                                                                                         | Cumulative effect of change in accounting
    principle            |        |         |        |      |        |         | 79,838  |   |        |         |        |  
|                                                         |                                                                                                         | Deferred income taxes                                              |        |         | (3,814  | )    |        |         | 790     |   |        |         | 1,528   |  
|                                                         |                                                                                                         | Restructuring and other asset impairment charges                   |        |         | 1,122   |      |        |         | 21,090  |   |        |         | 417     |  
|                                                         |                                                                                                         | Pension plan settlement charge, net                                |        |         | 1,581   |      |        |         |        |   |        |         | 487     |  
|                                                         | Changes in operating assets and liabilities:                                                            |                                                                    |        |         |         |      |        |         |         |   |        |         |        
|                                                         |                                                                                                         | Accounts receivable                                                |        |         | 5,849   |      |        |         | 4,614   |   |        |         | (34,969 | )
|                                                         |                                                                                                         | Inventories                                                        |        |         | (721    | )    |        |         | (11,539 | ) |        |         | 27,855  |  
|                                                         |                                                                                                         | Prepaid expenses and other current assets                          |        |         | (1,169  | )    |        |         | 500     |   |        |         | 1,140   |  
|                                                         |                                                                                                         | Deposits and other assets                                          |        |         | (5,414  | )    |        |         | 1,094   |   |        |         | 305     |  
|                                                         |                                                                                                         | Accounts payable                                                   |        |         | 5,367   |      |        |         | 7,524   |   |        |         | 6,311   |  
|                                                         |                                                                                                         | Accrued expenses and other liabilities                             |        |         | (1,753  | )    |        |         | 7,761   |   |        |         | 9,350   |  
|                                                         |                                                                                                         | Accrued income taxes                                               |        |         | (1,116  | )    |        |         | 948     |   |        |         | 1,740   |  
|                                                         |                                                                                                         |                                                                    |        |         |         |      |        |         |         |   |        |        
|                                                         |                                                                                                         | Net cash provided by operating activities                          |        |         | 70,028  |      |        |         | 50,857  |   |        |         | 36,250  |  
|Cash flows from investing activities:                    |                                                                                                         |                                                                    |        |         |         |      |        |         |         |   |        |        
|                                                         | Proceeds from sale of business and assets held
    for sale                                             |                                                                    |        | 6,883   |         |      |        | 15,100  |         |   |        | 2,228   |        
|                                                         | Distribution of earnings from joint venture                                                             |                                                                    |        | 2,693   |         |      |        | 2,472   |         |   |        | 1,876   |        
|                                                         | Purchases of property and equipment                                                                     |                                                                    |        | (12,917 | )       |      |        | (14,554 | )       |   |        | (17,020 | )      
|                                                         | Cash received from joint venture partner                                                                |                                                                    |        | 293     |         |      |        |        |         |   |        | 700     |        
|                                                         |                                                                                                         |                                                                    |        |         |         |      |        |         |         |   |        |        
|                                                         |                                                                                                         | Net cash provided by (used for) investing
    activities           |        |         | (3,048  | )    |        |         | 3,018   |   |        |         | (12,216 | )
|Cash flows from financing activities:                    |                                                                                                         |                                                                    |        |         |         |      |        |         |         |   |        |        
|                                                         | Repayments of Credit Facility                                                                           |                                                                    |        | (70,475 | )       |      |        | (42,248 | )       |   |        | (14,543 | )      
|                                                         | Redemption of Senior Subordinated Notes                                                                 |                                                                    |        |        |         |      |        | (11,550 | )       |   |        |        |        
|                                                         | Debt issuance costs                                                                                     |                                                                    |        |        |         |      |        | (1,579  | )       |   |        | (2,393  | )      
|                                                         |                                                                                                         |                                                                    |        |         |         |      |        |         |         |   |        |        
|                                                         |                                                                                                         | Net cash used for financing activities                             |        |         | (70,475 | )    |        |         | (55,377 | ) |        |         | (16,936 | )
|Effect of exchange rate changes on cash                  |                                                                                                         |                                                                    | 1,149  |         |         |      | (187   | )       |         |   |       |        
|                                                         |                                                                                                         |                                                                    |        |         |         |      |        |         |         |   |        |        
|Net increase (decrease) in cash and cash
    equivalents |                                                                                                         |                                                                    | (2,346 | )       |         |      | (1,689 | )       |         |   | 7,098  |        
|Cash and cash equivalents, beginning of period           |                                                                                                         |                                                                    | 8,426  |         |         |      | 10,115 |         |         |   | 3,017  |        
|                                                         |                                                                                                         |                                                                    |        |         |         |      |        |         |         |   |        |        
|Cash and cash equivalents, end of period                 |                                                                                                         | $                                                                  | 6,080  |         |         | $    | 8,426  |         |         | $ | 10,115 |        
|                                                         |                                                                                                         |                                                                    |        |         |         |      |        |         |         |   |        |        
|Supplemental disclosure of cash flow information:        |                                                                                                         |                                                                    |        |         |         |      |        |         |         |   |        |        
|                                                         | Cash paid for interest                                                                                  |                                                                    | $      | 18,809  |         |      | $      | 23,252  |         |   | $      | 33,305  |        
|                                                         | Cash paid for (refund of) income taxes                                                                  |                                                                    | $      | 3,782   |         |      | $      | (2,716  | )       |   | $      | 1,041   |        

The accompanying notes are an integral part of
these consolidated financial statements.

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THE HOLMES GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

1.     Nature of
Business

The Holmes Group, Inc. (the
Company or THG), along with its
wholly-owned subsidiaries, including The Rival Company (Rival)
which was acquired in February 1999, designs, develops,
manufactures, imports and sells consumer durable goods,
including fans, heaters, humidifiers, air purifiers, small
kitchen electric appliances and lighting products to retailers
throughout the United States and Canada, and to a lesser extent,
Europe, Latin America and Asia.

Holmes Products (Far East) Limited
(HPFEL) and its subsidiaries manufacture, source and sell
consumer durable goods, mainly to THG and its subsidiaries.
HPFEL operates facilities in China and Taiwan.

2.     Summary of
Significant Accounting Policies

In preparing financial statements in conformity
with accounting principles generally accepted in the United
States of America, management is required to make estimates and
assumptions about future events that affect the amounts reported
in the financial statements and accompanying notes. Future
events and their effects cannot be determined with absolute
certainty. Therefore, the determination of estimates requires
the exercise of judgment. Actual results inevitably will differ
from those estimates, and such differences may be material to
the financial statements.

The most significant accounting estimates
inherent in the preparation of the Companys financial
statements include estimates used in the determination of
liabilities and valuation allowances related to warranty
activity, taxation and restructuring allowances, collectibles of
accounts receivable, inventory valuations and certain benefits
provided to current employees. Various assumptions and other
factors underlie the determination of these significant
estimates. The process of determining significant estimates is
fact specific and takes into account factors such as historical
experience, current and expected economic conditions, product
mix, and in some cases, actuarial techniques. The Company
constantly re-evaluates these significant factors and makes
adjustments where facts and circumstances dictate.

A summary of the Companys significant
accounting policies consistently applied in the preparation of
the accompanying consolidated financial statement is as follows:



| |                       
| | ----------------------
| | Basis of Consolidation

The accompanying financial statements include the
accounts of THG and its wholly-owned subsidiaries. All
significant inter-company balances and transactions have been
eliminated. THG and its consolidated subsidiaries, including
Rival, HPFEL and their respective subsidiaries, are referred to
herein as the Company.



| |                  
| | -----------------
| | Reclassifications

Certain amounts in the prior years
financial statements have been reclassified to conform to the
current period presentation.



| |                                      
| | -------------------------------------
| | Translation of Foreign
    Currencies

Assets and liabilities are of foreign entities,
where the functional currency is not the U.S. dollar, are
translated into U.S. dollars at exchange rates in effect at
the balance sheet date. Stockholders equity
(deficit) is translated at historical exchange rates and
income, expense and cash flow items are translated at average
exchange rates for the period. Adjustments resulting from the
translation of foreign functional currency financial statements
into U.S. dollars are recorded as an adjustment to the
accumulated other comprehensive income component of
stockholders equity (deficit). Gains and losses resulting
from remeasurement of balances or transactions denominated in a
currency other than the functional currency, totaling a

35



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##### Table of Contents



THE HOLMES GROUP, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

net loss of $910,000 in 2003, a net gain of
$62,000 in 2002 and a net loss of $792,000 in 2001, are included
in other income and expense in the consolidated statement of
operations.



| |                          
| | -------------------------
| | Cash and Cash Equivalents

All highly liquid debt instruments, which
primarily consist of cash and money market accounts, with
original maturities of three months or less are considered to be
cash equivalents. Cash overdrafts are classified as accounts
payable in the consolidated balance sheets.



| |                                       
| | --------------------------------------
| | Business and Credit
    Concentrations

The Company sells its products to retailers
throughout the United States, Canada, Latin America and Europe.
Three customers accounted for approximately 32%, 12% and 10% of
total sales in 2001. Two customers accounted for approximately
31% and 12% of consolidated sales in 2002 and approximately 31%
and 13% of sales in 2003. Accounts receivable due from the two
largest customers amounted to 39% and 37% of total accounts
receivable at December 31, 2002 and 2003, respectively.

Certain of the Companys retail customers
have filed for bankruptcy protection during the last three
years. Management monitors and evaluates the credit status of
its customers, and adjusts sales terms as appropriate. The
Company maintains reserves for potential credit losses based on
managements estimates of the creditworthiness of its
customers. Should conditions warrant, the Company may need to
increase these reserves, which would have an adverse impact on
the Companys earnings. The Company has also entered into
an agreement with an insurance company to insure the
Companys receivables from certain pre-determined
customers, up to specified limits, if the customer defaults on
payment.

On January 22, 2002, Kmart Corporation, a
significant customer of the Company in 2001, filed a petition
for voluntary bankruptcy under Chapter 11 of the
U.S. Bankruptcy Code. With respect to the accounts
receivable balances due from Kmart Corporation at
December 31, 2001, management estimated and recorded an
allowance for doubtful accounts of approximately
$14.1 million in 2001 and increased the allowance by
$700,000 during 2002 based on an updated assessment of the fair
value of the receivables. During 2003, the Company recorded a
bad debt recovery of $743,000 upon the sale of the
Companys Kmart claims to a financial institution.

Kmart Corporation emerged from Chapter 11
bankruptcy protection in May 2003. In April 2003, the Company
entered into an agreement with a financial institution covering
the sale of accounts receivable from certain customers,
including Kmart. This arrangement has been treated as a sale of
financial assets in accordance with Financial Accounting
Standards Board No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of
Liabilities. Accordingly, the receivables are removed from
the Companys consolidated balance sheet as of the date of
sale. These arrangements are strictly for the purpose of
insuring selected receivables. The Company pays fees based upon
a percentage of the gross amount of each receivable purchased by
the financial institution. Other income and expense in the 2003
consolidated statement of operations includes costs of $953,000
related to this arrangement. During 2003, the Company was
obligated to repurchase the accounts receivable from the
financial institution in certain circumstances if the balance
remained unpaid for a period of 60 days beyond the due date
of the receivable. However, if within 90 days of the
repurchase transaction, the customer filed a voluntary or
involuntary bankruptcy petition or publicly declared a general
moratorium on payment of trade vendor obligations, the financial
institution was required to repurchase the unpaid receivable
from the Company. In February 2004, this agreement was amended
retroactively to remove the 60 day repurchase obligation.
There were no repurchase transactions under this arrangement
before the February 2004 amendment. At December 31, 2003,
the financial institution held $3.5 million of accounts
receivable which had been purchased for cash from the Company.

36



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##### Table of Contents



THE HOLMES GROUP, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Management does not believe that the Company is
subject to any other unusual risks beyond the normal credit risk
attendant to operating its business.



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

All inventories are stated at the lower of cost
or market. Cost is determined using the first-in, first-out
(FIFO) method on approximately 8094% of inventories and the
last-in, first-out method (LIFO) for the domestically
manufactured component of Rivals inventory, which
represents the remaining 206% of inventory.



| |                       
| | ----------------------
| | Property and Equipment

Property and equipment are recorded at cost.
Depreciation is computed over the estimated useful lives of the
assets using the straight-line method. Repairs and maintenance
costs are expensed as incurred.



| |                                    
| | -----------------------------------
| | Impairment of Long-Lived
    Assets

The Company adopted the provisions of Statement
of Financial Accounting Standards No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets in
2002. The Company reviews long-lived assets for impairment
whenever events or changes in business circumstances indicate
that the carrying amount of the assets may not be fully
recoverable or that the useful lives of these assets are no
longer appropriate. An impairment loss would be recognized when
estimated, undiscounted cash flows are less than recorded value
of the asset. If impairment is determined to exist, the asset is
written down to its estimated fair value as determined using an
appraisal or a valuation using discounted cash flows.



| |                                         
| | ----------------------------------------
| | Goodwill and Other Intangible
    Assets

Effective at the beginning of fiscal year 2002,
the Company adopted Statement of Financial Accounting Standards
No. 142, Goodwill and Other Intangible Assets
(FAS 142), which establishes financial accounting and
reporting standards for acquired goodwill and other intangible
assets. Under FAS 142, goodwill and indefinite-lived
intangible assets are no longer amortized, but are reviewed at
least annually for impairment. Separate intangible assets that
have finite useful lives continue to be amortized over their
useful lives.

FAS 142 requires that goodwill be tested
annually for impairment using a two-step process. The first step
is to identify a potential impairment and, in transition, this
step must be measured as of the beginning of the year of
adoption. The second step of the impairment test measures the
amount of the impairment loss. The Company completed the
transitional and annual impairment test in 2002 and concluded
its goodwill was impaired (see Note 3). Intangible assets
deemed to have an indefinite life are tested for impairment
using a one-step process which compares the fair value to the
carrying amount of the asset. There are no indefinite-lived
intangible assets recorded as of December 31, 2002 or 2003.
Deposits and other assets at December 31, 2003 include
$1,778,000 related to patent license rights acquired during
2003, which are being amortized on a straight-line basis over a
six-year period.



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

The Companys stockholders equity is
net of 880 shares of treasury stock with a cost of
$62.1 million. The treasury shares, which were not affected
by a 1998 stock split, were repurchased as part of a
recapitalization transaction in November 1997. Prior to 2003,
treasury shares were presented on a post-split basis.

37



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##### Table of Contents



THE HOLMES GROUP, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)



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

The Company adopted recognizes revenue in
accordance with Staff Accounting Bulletin No. 104,
Revenue Recognition in Financial Statements. Revenue
is recognized upon transfer of title and risk of loss, which
generally occurs upon shipment, or for certain shipments, upon
delivery to the customer.

Upon the recognition of revenue, the Company
estimates and records, as a component of net sales, provisions
for anticipated sales returns and other customer sales
incentives such as volume rebates, co-operative advertising
programs, warranty programs and other trade allowances. These
provisions are estimated based on historical experience and
negotiated arrangements with certain customers.

Revenues for shipping and handling are recorded
as net sales, while the associated costs are recorded in selling
and administrative expenses in the consolidated statements of
operations. Selling and administrative expenses include freight
costs of approximately $11.7 million, $12.6 million
and $14.0 million in 2001, 2002 and 2003, respectively.



| |                    
| | -------------------
| | Product Development

Research, engineering and product development
costs are expensed as incurred. These expenses totaled
$11.4 million, $9.0 million and $9.8 million in
2001, 2002 and 2003, respectively.



| |            
| | -----------
| | Advertising

Advertising costs, which are expensed as incurred
and included in selling and administrative expenses in the
accompanying statements of operations, totaled
$0.8 million, $1.7 million and $3.1 million in
2001, 2002 and 2003, respectively. The Company also offers
co-operative advertising arrangements to its retail customers.
In November 2001, FASB Emerging Issues Task Force
(EITF) reached a consensus on Issue No. 01-9,
Accounting for Consideration Given to a Customer or a
Reseller of the Vendors Products. EITF No. 01-9
addresses the recognition, measurement and income statement
classification of consideration from a vendor to a customer in
connection with the customers purchase or promotion of the
vendors products. The consensus affects revenue and
expense classifications and does not change reported net income.
In accordance with the consensus, the Company adopted the
required accounting as of January 1, 2002, and reclassified
approximately $15.8 million of co-operative advertising
expenses as deductions from net sales for the year ended
December 31, 2001. These costs were previously classified
as selling and administrative expenses in the consolidated
statement of operations.

In conjunction with transfers of inventory in
1998, the Company received trade credits totaling
$2.4 million to be used for the purchase of advertising
media, merchandise or services, subject to certain limitations
and cash co-payments. In 2002, the company recorded a non-cash
impairment charge of $1.2 million to adjust the value of
the credits to the amount expected to be utilized in a consumer
advertising campaign planned for fiscal 2003. Prepaid expenses
in the consolidated balance sheet included $1.1 million
related to these credits at December 31, 2002. In the
second quarter of 2003, the Company recorded an additional
impairment charge of $1.1 million based on a re-evaluation
of its plan to use these credits. While the Company may evaluate
other alternatives to use the remaining trade credits before
they expire in 2006, no value has been assigned to the credits
as of December 31, 2003.



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

The Company utilizes the asset and liability
method of accounting for income taxes, as set forth in Statement
of Financial Accounting Standards No. 109, Accounting
for Income Taxes. FAS 109 requires recognition of
deferred tax assets and liabilities for the expected future tax
consequences of temporary differences between the financial
statement carrying amounts of existing assets and liabilities
and their

38



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##### Table of Contents



THE HOLMES GROUP, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates in effect for
the year in which those temporary differences are expected to be
recovered or settled.



| |                    
| | -------------------
| | Pension Obligations

The Company recognizes obligations associated
with its defined benefit pension plans in accordance with
Statement of Financial Accounting Standards No. 87,
Employers Accounting for Pensions (FAS 87).
Liabilities and expenses are calculated by accredited
independent actuaries. As required by FAS 87, the Company
makes certain assumptions to value liabilities and to estimate
the components of pension costs. These assumptions are evaluated
annually, or whenever otherwise required by FAS 87, based
on reviews of current plan information and current market
information. The selection of assumptions requires a high degree
of judgment and may materially change from period to period. The
Company does not offer other defined benefits associated with
post-retirement benefit plans other than pensions.



| |                         
| | ------------------------
| | Stock Based Compensation

As permitted under Statement of Financial
Accounting Standards No. 123, Accounting for
Stock-Based Compensation (FAS 123), the Company
accounts for its stock-based compensation plans using the
intrinsic value method prescribed by Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to
Employees (APB 25) and FASB Interpretation
No. 44, Accounting for Certain Transactions Involving
Stock Compensation  an interpretation of
APB 25 (FIN 44). All awards were granted with an
exercise price equal to fair value of the Companys stock.
Accordingly, no stock compensation expense has been recognized
in the consolidated statement of operations in 2001, 2002 or
2003.

FAS 123 requires the presentation of certain
proforma information as if the Company has accounted for its
employee stock options under the fair value method. For purposes
of this disclosure, the fair value of the fixed option grants
was estimated using the Black Scholes option-pricing model. The
weighted average fair value of the Companys option grants
for 2001, 2002 and 2003 was $0.80, $0.84 and $0.70,
respectively, calculated utilizing the following weighted
average assumptions:

|                                       |  |      |      |      |  |      |      |   |  |  |      |  
|-------------------------------------- |  | ---- | ---- | ---- |  | ---- | ---- | - |  |  | ---- | -
|                                       |  | 2003 |      | 2002 |  | 2001
|                                       |  |      |      |      |  |     
|Risk free interest rate                |  |      | 3.12 | %    |  |      | 4.62 | % |  |  | 4.39 | %
|Weighted average expected life (years) |  |      | 6.0  |      |  |      | 6.0  |   |  |  | 6.0  |  

If compensation expense for the Companys
option grants was determined in accordance with the provisions
of FAS 123, the Companys net income (loss) for the
three years ended December 31, 2003 would have been
adjusted to the proforma amounts indicated below:

|                                                                                            |  |                |        |      |  |      |         |   |  |   |         |  
|------------------------------------------------------------------------------------------- |  | -------------- | ------ | ---- |  | ---- | ------- | - |  | - | ------- | -
|                                                                                            |  | 2003           |        | 2002 |  | 2001
|                                                                                            |  |                |        |      |  |     
|                                                                                            |  |               
|                                                                                            |  | (In thousands)
|Reported net income (loss)                                                                  |  | $              | 52,178 |      |  | $    | (57,904 | ) |  | $ | (15,555 | )
|Stock based employee compensation included in net
    income (loss)                         |  |                |       |      |  |      |        |   |  |   |        |  
|Stock based employee compensation determined
    under the fair value method for all awards |  |                | (650   | )    |  |      | (1,164  | ) |  |   | (1,086  | )
|                                                                                            |  |                |        |      |  |      |         |   |  |   |         |  
|Proforma net income (loss)                                                                  |  | $              | 51,528 |      |  | $    | (59,068 | ) |  | $ | (16,641 | )
|                                                                                            |  |                |        |      |  |      |         |   |  |   |         |  

In 2003, the proforma adjustment is net of tax
benefits of $415,000. No tax benefits were assumed in
calculating the proforma net loss in 2001 and 2002 as a
valuation allowance would have been recorded against these
benefits.

39



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##### Table of Contents



THE HOLMES GROUP, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)



| |              
| | -------------
| | Joint Venture

In October 1998, the Company entered into an
agreement with General Electric Company creating a limited
liability corporation engaged in the manufacturing, sales and
distribution of motors. The Company sells motors manufactured by
HPFEL to the joint venture at fair market prices. The joint
venture, GE Holmes Industries (GEHI), is owned 49% by a
subsidiary of THG, the Company. GEHI had sales of
$27.4 million, $28.1 million and $30.9 million
during 2001, 2002 and 2003, respectively, resulting in pre-tax
earnings of $4.9 million in 2001, $6.0 million in 2002
and $5.1 million in 2003. The investment in the joint
venture is accounted for in the consolidated financial
statements using the equity method of accounting, which requires
that the Companys share of the joint ventures income
or loss be included in the consolidated statement of operations.
The Companys portion of the joint venture earnings, which
are distributed in cash on a quarterly basis, and the gross
profit earned by HPFEL were as follows for the three years ended
December 31, 2002 2003 (in thousands):

|     |  |              |       |                    |  |       |       |  |  |   |       | 
|---- |  | ------------ | ----- | ------------------ |  | ----- | ----- |  |  | - | ----- | 
|     |  |              |       | Recorded as        |  |      
|     |  | Recorded as  |       | Equity in Earnings |  |      
|     |  | HPFEL        |       | from Joint         |  |      
|     |  | Gross Profit |       | Venture            |  | Total
|     |  |              |       |                    |  |      
|2003 |  | $            | 2,219 |                    |  | $     | 2,548 |  |  | $ | 4,767 | 
|2002 |  |              | 1,939 |                    |  |       | 2,990 |  |  |   | 4,929 | 
|2001 |  |              | 2,058 |                    |  |       | 2,354 |  |  |   | 4,412 | 

At December 31, 2002 and 2003, accounts
receivable in the consolidated balance sheet included
$3.5 million and $3.4 million, respectively,
representing amounts due from GEHI. The Companys sales of
motors to GEHI were approximately $17.1 million,
$17.6 million and $21.1 million during the years ended
December 31, 2001, 2002 and 2003, respectively.



| |                            
| | ---------------------------
| | Comprehensive Income (Loss)

The Company accounts for comprehensive income
(loss) in accordance with Statement of Financial Accounting
Standard No. 130, Reporting Comprehensive
Income (FAS 130). As it relates to the Company,
comprehensive income (loss) is defined as net income (loss) plus
the change in currency translation adjustments and the minimum
pension liability adjustment.



| |                      
| | ---------------------
| | Financial Instruments

The Company enters into various types of
financial instruments in the normal course of business. Fair
values are estimated based on assumptions concerning the amount
and timing of estimated future cash flows and assumed discount
rates reflecting varying degrees of perceived risk. Accordingly,
the fair values may not represent actual values of the financial
instruments that could have been realized as of year end or that
will be realized in the future.

Fair values for cash and cash equivalents,
accounts receivable, other receivables, accounts payable,
accrued expenses and accrued income taxes approximate their
carrying values at December 31, 2002 and 2003, due to their
relatively short maturity. The fair values of the Companys
Credit Facility approximate its carrying values at
December 31, 2002 and 2003 because the interest rates on
these borrowings approximate current market rates. The fair
value of the Companys Senior Subordinated Notes was
approximately 70% in 2002 and 103% in 2003 of their carrying
value.



| |                                     
| | ------------------------------------
| | Recent Accounting
    Pronouncements

The Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standards
No. 145, Rescission of FASB Statements No. 4, 44
and 64, Amendment of FASB Statement No. 13,

40



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##### Table of Contents



THE HOLMES GROUP, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

and Technical Corrections in April 2002.
This statement updates, clarifies and simplifies existing
accounting pronouncements. Specifically, the statement rescinds
FASB Statement No. 4, Reporting Gains and Losses from
Extinguishment of Debt, FASB Statement No. 64,
Extinguishment of Debt Made to Satisfy Sinking Fund
Requirements and FASB Statement No. 44,
Accounting for Intangible Assets of Motor Carriers.
The statement also amends FASB Statement No. 13,
Accounting for Leases and certain other existing
authoritative pronouncements to make technical corrections or
clarifications. FAS 145 became effective for THG related to
the rescission of FAS 4 and FAS 64 on January 1,
2003. FAS 145 was effective related to the amendment of
FAS 13 for all transactions occurring after May 15,
2002. All other provisions of FAS 145 became effective for
financial statements issued after May 15, 2002. In
accordance with the new standard, the Company reclassified the
gain related to the Senior Notes repurchase, which was treated
as extraordinary item in 2002, as a component of other income in
the consolidated statement of operations.

On December 23, 2003 the Financial
Accounting Standards Board (FASB or the Board)
released revised FASB Statement No. 132 (FAS 132),
Employers Disclosures about Pensions and Other
Postretirement Benefits. The revised standard provides
required disclosures for pensions and other postretirement
benefit plans and is designed to improve disclosure transparency
in financial statements. The revised standard replaces existing
pension disclosure requirements. The requirements of the
standard are effective for the Company as of December 31,
2003. These revised disclosures have been incorporated into the
2003 consolidated financial statements.

In 2003, the FASB issued FASB Interpretation
No. 46, (FIN 46), Consolidation of Variable
Interest Entities, FIN 46 was intended to provide
guidance in determining (1) whether consolidation is
required under the controlling financial interest
model of Accounting Research Bulletin No. 51 (ARB 51),
Consolidated Financial Statements (or other existing
authoritative guidance) or, alternatively, (2) whether the
variable interest model under FIN 46 should be used to
account for existing and new entities. In December 2003, the
FASB released a revised version of FIN 46 (FIN 46R)
clarifying certain aspects of FIN 46 and providing certain
entities with exemptions from the requirements of FIN 46.
The variable interest model looks to identify the primary
beneficiary (PB) of a variable interest entity (VIE).
The PB is the party that is exposed to the majority of the risk
or stands to benefit the most from the VIEs activities. A
VIE would be required to be consolidated if certain specified
conditions are met. While FIN 46R only slightly modified
the variable interest model from that contained in FIN 46,
it did change guidance in many other areas. Some of the
differences between FIN 46 and FIN 46R include, among
others, (i) the addition of a scope exception for certain
entities that meet the definition of a business provided that
specified criteria are met, (ii) the addition of a scope
exception in situations whereby an enterprise is unable to
obtain certain information pertaining to the entity to comply
with FIN 46R and (iii) the addition of a list of
events that require reconsideration of whether an entity is a
VIE and whether an enterprise is the primary beneficiary of a
VIE, rather than stating a general principle with examples as
had been previously provided. Additionally, FIN 46R
incorporates the guidance found in the eight final FASB Staff
Positions (FSPs) that were issued as of the release of
FIN 46R. For entities that exist prior to December 31,
2003, FIN 46R must be adopted no later than the beginning
of the first interim period of Fiscal 2005 and the provisions of
FIN 46 are not required to be adopted. For new entities
created after December 31, 2003, the Company will apply
FIN 46R from the first date the Company becomes involved in
the potential variable interest entity. The Company is in the
process of determining the impact of the provisions of
FIN 46R on the consolidated financial statements.

In January 2004, the FASB issued FASB Staff
Position No. FAS 106-1, Accounting and
Disclosure Requirements Related to the Medicare Prescription
Drug, Improvement and Modernization Act of 2003 (FSP
106-1). The FSP permits employers that sponsor postretirement
benefit plans that provide prescription drug benefits to
retirees to make a one-time election to defer accounting for any
effects of the Medicare Prescription Drug, Improvement, and
Modernization Act of 2003. The Company does not believe that the
adoption of this standard will have a material impact to the
consolidated financial statements.

41



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##### Table of Contents



THE HOLMES GROUP, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

3.     Change in
Accounting Principle

In June 2001, the FASB issued Statement of
Financial Accounting Standards No. 142, Goodwill and
Other Intangible Assets. Under FAS 142, goodwill and
intangible assets with indefinite lives are no longer amortized,
but are reviewed annually at a minimum for potential impairment
by comparing the carrying value to the fair value of the
reporting unit to which they are assigned. The provisions of
FAS 142 were effective for the Companys 2002 fiscal
year and, accordingly, the Company adopted the new standard
effective January 1, 2002. The Companys consolidated
balance sheet as of December 31, 2001 included goodwill
with a net book value of $79.8 million as a result of the
Rival acquisition in 1999. There were no other finite or
infinite lived intangible assets recorded as a result of this
acquisition. In accordance with the new standard, the Company
has ceased goodwill amortization as of the beginning of fiscal
2002. FAS 142 requires that goodwill be tested for
impairment at the reporting unit level at adoption utilizing a
two-step methodology. The initial step of the process requires
the Company to determine the fair value of each reporting unit
and compare it to the carrying value, including the goodwill of
such unit. If the fair value exceeds the carrying value, no
impairment loss would be recognized. However, if the carrying
value of the reporting unit exceeds the corresponding fair
value, the goodwill of the unit may be impaired. The amount, if
any, of the impairment would then be evaluated in the second
step of the impairment testing which places the value of the
goodwill balance to that which would be accounted for under
purchase accounting.

In connection with adopting this standard, the
Company, assisted by independent valuation consultants,
completed the transitional testing of goodwill using a
measurement date of January 1, 2002. The results of this
the transitional impairment testing indicated that the carrying
values of the goodwill asset for both the home environment and
kitchen reporting units exceeded the estimated fair value of the
units. The Companys policy is to value goodwill and other
intangible assets using a discounted cash flow and comparative
market analysis. Accordingly, a non-cash impairment charge has
been recognized as a change in accounting principle as of the
beginning of 2002. The impairment charge, which relates to the
Companys Consumer Durables segment, was $79.8 million
on a before and after-tax basis.

Prior to the adoption of FAS 142, the
Company amortized goodwill. If the Company had adopted
FAS 142 in earlier periods, the net loss in 2001 would have
been reduced by $2.5 million, resulting in an adjusted loss
of $13.1 million.

4.     Inventories

Inventories in the consolidated balance sheets
are as follows:

|                |  |                |         |      |  |   |         |  
|--------------- |  | -------------- | ------- | ---- |  | - | ------- | -
|                |  |               
|                |  | December 31,  
|                |  |               
|                |  | 2003           |         | 2002
|                |  |                |         |     
|                |  |               
|                |  | (In thousands)
|Finished goods  |  | $              | 97,799  |      |  | $ | 95,789  |  
|Raw materials   |  |                | 10,627  |      |  |   | 12,501  |  
|Work-in-process |  |                | 2,594   |      |  |   | 2,312   |  
|                |  |                |         |      |  |   |         |  
|                |  |                | 111,020 |      |  |   | 110,602 |  
|LIFO allowance  |  |                | (63     | )    |  |   | (366    | )
|                |  |                |         |      |  |   |         |  
|                |  | $              | 110,957 |      |  | $ | 110,236 |  
|                |  |                |         |      |  |   |         |  

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##### Table of Contents



THE HOLMES GROUP, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

5.     Property and
Equipment

Property and equipment in the consolidated
balance sheets are as follows:

|                                               |  |                   |                           |                |  |      |         |   |  |   |         |  
|---------------------------------------------- |  | ----------------- | ------------------------- | -------------- |  | ---- | ------- | - |  | - | ------- | -
|                                               |  |                   |                           |               
|                                               |  |                   |                           | December 31,  
|                                               |  |                   |                           |               
|                                               |  | Depreciable Lives |                           | 2003           |  | 2002
|                                               |  |                   |                           |                |  |     
|                                               |  |                   |                           |               
|                                               |  |                   |                           | (In thousands)
|Mold costs and tooling                         |  |                   | 1 1/2 - 5 years           |                |  | $    | 38,837  |   |  | $ | 34,204  |  
|Machinery and equipment                        |  |                   | 7 - 10 years              |                |  |      | 32,623  |   |  |   | 31,879  |  
|Buildings and leasehold improvements           |  |                   | Life of lease - 40  years |                |  |      | 17,250  |   |  |   | 14,400  |  
|Computer equipment and software                |  |                   | 5 - 7 years               |                |  |      | 13,203  |   |  |   | 11,451  |  
|Furniture and fixtures                         |  |                   | 5 - 10 years              |                |  |      | 2,857   |   |  |   | 2,777   |  
|Land                                           |  |                   | Not applicable            |                |  |      | 1,418   |   |  |   | 1,418   |  
|Motor vehicles                                 |  |                   | 4 - 5 years               |                |  |      | 490     |   |  |   | 490     |  
|                                               |  |                   |                           |                |  |      |         |   |  |   |         |  
|                                               |  |                   |                           |                |  |      | 106,678 |   |  |   | 96,619  |  
|Less accumulated depreciation and amortization |  |                   |                           |                |  |      | (61,873 | ) |  |   | (54,173 | )
|                                               |  |                   |                           |                |  |      |         |   |  |   |         |  
|                                               |  |                   |                           |                |  | $    | 44,805  |   |  | $ | 42,446  |  
|                                               |  |                   |                           |                |  |      |         |   |  |   |         |  

6.     Accrued
Expenses

Accrued expenses in the consolidated balance
sheets are as follows:

|                                    |  |                |        |      |  |   |        | 
|----------------------------------- |  | -------------- | ------ | ---- |  | - | ------ | 
|                                    |  |               
|                                    |  | December 31,  
|                                    |  |               
|                                    |  | 2003           |        | 2002
|                                    |  |                |        |     
|                                    |  |               
|                                    |  | (In thousands)
|Sales returns                       |  | $              | 6,525  |      |  | $ | 7,674  | 
|Payroll and incentive compensation  |  |                | 6,240  |      |  |   | 9,188  | 
|Interest                            |  |                | 2,014  |      |  |   | 2,377  | 
|Co-operative advertising allowances |  |                | 7,139  |      |  |   | 5,974  | 
|Restructuring costs                 |  |                | 1,504  |      |  |   | 7,083  | 
|Guarantee fee due related party     |  |                | 7,854  |      |  |   | 5,338  | 
|Other                               |  |                | 17,693 |      |  |   | 15,467 | 
|                                    |  |                |        |      |  |   |        | 
|                                    |  | $              | 48,969 |      |  | $ | 53,101 | 
|                                    |  |                |        |      |  |   |        | 

7.     Restructuring
Charges and Other Business Divestitures

On February 5, 1999, the Company completed
its acquisition of The Rival Company for an aggregate purchase
price of $279.6 million, including $129.4 million of
cash payments in connection with a tender offer for all of the
outstanding shares of common stock of Rival (including payments
to optionees), $142.9 million to refinance Rivals
outstanding debt and $7.3 million in acquisition costs. The
acquisition was accounted for as a purchase, and the results of
operations of Rival are included in the consolidated financial
statements since the date of acquisition.

In connection with the acquisition, the Company
recorded a restructuring reserve of $6.4 million as an
assumed liability in accordance with EITF 95-3,
Recognition of Liabilities in Connection with a Purchase
Business Combination (EITF 95-3). Management determined
that certain restructuring actions would be required to
effectively integrate the Rival operations. These restructuring
actions were comprised primarily of the elimination of certain
overlapping positions within the management and support staff
layers of the

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THE HOLMES GROUP, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

combined company, the relocation of key personnel
from Kansas City, Missouri to Milford, Massachusetts, the
consolidation of the Rival Hong Kong and Canadian offices into
other existing local offices, and the closure of the
Warrensburg, Missouri manufacturing facility. These actions
resulted in the elimination of 216 Rival employees. Severance
for some of these employees was paid during fiscal 2001 and
2002. Exit costs related to these restructuring plans were
comprised primarily of lease termination costs in Canada and
Hong Kong and facility closure and exit costs related to the
Warrensburg facility. All actions were completed during 1999 and
2000 with the Warrensburg facility being sold during the first
quarter of 2001 for $1,965,000 in cash, resulting in a gain of
$559,000 which is included in other income in the 2001
consolidated statement of operations.

Subsequent to the acquisition of the Rival
business, the Company initiated certain restructuring actions to
further integrate and consolidate Rivals operations and to
reduce operating costs. In June 2001, the Company announced the
closure of Rivals Sedalia, Missouri manufacturing
facility. The activities of this plant were moved to
Rivals other plants resulting in the elimination of
approximately 300 manufacturing, engineering and office
positions. In connection with the closure, the Company recorded
a restructuring charge of $727,000 to cover severance and other
employee related costs. Severance payments to these employees
were paid during 2001 and 2002. The Company also recorded
$467,000 in restructuring charges related to the Sedalia plant
closure, including asset write-downs of redundant property and
equipment of $417,000 and facility exit costs of $50,000.

In January 2002, the Company announced the
closing of its Sedalia, Missouri distribution center. The
activities of this facility were moved to the other existing
distribution centers. In connection with this facility closure,
the Company recorded restructuring charges totaling $4,898,000
in 2002, which included $4,220,000 of asset write-downs of
redundant property and equipment to their estimated net
realizable value, facility exit costs of $612,000 and $66,000 in
severance payments for employees who elected not to transfer to
other facilities.

On December 2, 2002, the Company announced
the closure of its remaining US manufacturing operations
effective January 31, 2003, in an effort to enhance
efficiencies and to reduce operating costs. The production
activities of the facilities in Flowood, Mississippi, Sweet
Springs, Missouri and Clinton, Missouri were shifted to the
Companys expanded manufacturing complex in southern China
and to other independent suppliers in the Far East. As part of
this restructuring action, the Company also announced the
closure of an administrative office in Kansas City, Missouri and
the phase out of two distribution and service centers in
Clinton, Missouri and Worcester, Massachusetts. As a result of
these changes, the Company recorded restructuring charges
totaling $23,108,000 during the fourth quarter of 2002. The
charges included $3,935,000 for severance payments to 706
employees, $15,670,000 of non-cash asset write-downs of
redundant property and equipment to their estimated net
realizable value, $1,531,000 of liabilities related to
outstanding lease obligations and facility exit costs of
$1,972,000. Approximately 691 employees were terminated during
2003, with the remaining expected to be severed during 2004. In
addition, cost of sales in 2002 included $7,625,000 of inventory
losses related to the restructuring actions as the Company
disposed of certain products at selling

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THE HOLMES GROUP, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

prices below cost as part of the facility
closures. A reconciliation of the restructuring reserve activity
for the three years ended December 31, 2003 is as follows:

|                             |  |                  |        |             |  |               |        |   |  |   |        |  
|---------------------------- |  | ---------------- | ------ | ----------- |  | ------------- | ------ | - |  | - | ------ | -
|                             |  | Employee         |        | Facility    |  | Total        
|                             |  | Severance and    |        | Exit and    |  | Accrued      
|                             |  | Relocation Costs |        | Other Costs |  | Restructuring
|                             |  |                  |        |             |  |              
|                             |  |                 
|                             |  | (In thousands)  
|Balance at December 31, 2000 |  | $                | 712    |             |  | $             | 233    |   |  | $ | 945    |  
|Restructuring charges        |  |                  | 727    |             |  |               | 50     |   |  |   | 777    |  
|Cash payments                |  |                  | (1,043 | )           |  |               |       |   |  |   | (1,043 | )
|Adjustments                  |  |                  |       |             |  |               | (233   | ) |  |   | (233   | )
|                             |  |                  |        |             |  |               |        |   |  |   |        |  
|Balance at December 31, 2001 |  |                  | 396    |             |  |               | 50     |   |  |   | 446    |  
|Restructuring charges        |  |                  | 4,001  |             |  |               | 4,115  |   |  |   | 8,116  |  
|Cash payments                |  |                  | (766   | )           |  |               | (713   | ) |  |   | (1,479 | )
|                             |  |                  |        |             |  |               |        |   |  |   |        |  
|Balance at December 31, 2002 |  |                  | 3,631  |             |  |               | 3,452  |   |  |   | 7,083  |  
|Cash payments                |  |                  | (3,241 | )           |  |               | (1,827 | ) |  |   | (5,068 | )
|Adjustments                  |  |                  | 124    |             |  |               | (635   | ) |  |   | (511   | )
|                             |  |                  |        |             |  |               |        |   |  |   |        |  
|Balance at December 31, 2003 |  | $                | 514    |             |  | $             | 990    |   |  | $ | 1,504  |  
|                             |  |                  |        |             |  |               |        |   |  |   |        |  

During 2003, the Company incurred $1,899,000 of
expenses associated with the 2002 restructuring actions which
were not accrued at December 31, 2002 in accordance with
Emerging Issues Task Force Issue No. 94-3. In addition,
cost of sales in 2003 includes $1,109,000 of unfavorable
manufacturing variances incurred during the shutdown of the
domestic facilities and $223,000 of freight costs associated
with the transfer of distribution activities from Missouri to a
new facility in California. The restructuring charges in 2003
are net of $511,000 in adjustments as actual facility exit costs
were lower than the amounts accrued at December 31, 2002.
The restructuring expenses in 2003 include a non-cash charge of
$1,581,000 related to the Companys pension plan for
employees at the closed facilities. This charge, which was
accrued in accordance with the provisions of Financial
Accounting Standards Board No. 88, Employers
Accounting for Settlements and Curtailments of Defined Benefit
Pension Plans and for Termination Benefits (FAS 88),
includes a partial plan settlement of $1,911,000 due to lump sum
benefits paid to terminated employees at the closed facilities,
partially offset by a pension plan curtailment gain of $330,000.
The restructuring reserve adjustments in 2001 included a
reduction of the facility exit cost accruals related to the
Warrensburg, Missouri facility, which were initially recorded in
accordance with EITF 95-3. Accordingly, these adjustments were
recorded as reductions of goodwill.

As a result of the restructuring actions in 2002,
assets held for sale in the consolidated balance sheet totaled
$6,466,000 at December 31, 2002. During 2003, the Company
sold four facilities in Missouri and Mississippi and certain
manufacturing equipment for cash proceeds of $6.9 million,
resulting in an immaterial gain, net of transaction closing
costs.

Following the Rival acquisition, the Company
divested three of Rivals non-core business units. In
October 1999, the Company sold the assets of Rivals sump
and utility pumps division for $11.4 million. In December
1999, the Company sold the net assets of Rivals industrial
and building supply products businesses for proceeds of
$11.9 million. As these transactions were contemplated as
of the original Rival acquisition date, the net loss on these
transactions of $2.5 million was recorded as an increase in
goodwill. During 2001, the Company finalized the Rival
industrial and building supply products businesses divestiture.
Additional consideration of $1.2 million was recorded as a
reduction of goodwill. In January 2002, the Company sold
substantially all of the assets of its Rivals
Pollenex® division, which marketed personal care products,
for approximately $15.1 million. The cash proceeds received
in this transaction exceeded the net assets of the

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THE HOLMES GROUP, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

business, which consisted primarily of inventory
and property and equipment, by approximately $9.5 million,
resulting in a gain which has been recorded as other income in
the consolidated statement of operations for the year ended
December 31, 2002.

8.     Long-Term
Debt

Long-term debt in the consolidated balance sheet
consists of the following:

|                                                                                         |  |                |         |      |  |   |         |  
|---------------------------------------------------------------------------------------- |  | -------------- | ------- | ---- |  | - | ------- | -
|                                                                                         |  |               
|                                                                                         |  | December 31,  
|                                                                                         |  |               
|                                                                                         |  | 2003           |         | 2002
|                                                                                         |  |                |         |     
|                                                                                         |  |               
|                                                                                         |  | (In thousands)
|Revolving Credit Facility (Loans A and B)                                                |  | $              | 28,209  |      |  | $ | 84,209  |  
|Term Loan A due February 2005                                                            |  |                | 6,159   |      |  |   | 15,397  |  
|Term Loan B due February 2007                                                            |  |                | 70,791  |      |  |   | 76,028  |  
|                                                                                         |  |                |         |      |  |   |         |  
|Total Credit Facility                                                                    |  |                | 105,159 |      |  |   | 175,634 |  
|9 7/8% Senior Subordinated Notes, net
    of unamortized discount, due November 15, 2007 |  |                | 99,632  |      |  |   | 99,544  |  
|                                                                                         |  |                |         |      |  |   |         |  
|Total debt                                                                               |  |                | 204,791 |      |  |   | 275,178 |  
|Less current maturities of Credit Facility                                               |  |                | (6,594  | )    |  |   | (9,078  | )
|                                                                                         |  |                |         |      |  |   |         |  
|                                                                                         |  | $              | 198,197 |      |  | $ | 266,100 |  
|                                                                                         |  |                |         |      |  |   |         |  



| |                
| | ---------------
| | Credit Facility

In March 2002, the Company and its Bank Group
agreed to a Fifth Amendment to the Credit Facility. The Fifth
Amendment revised certain of the financial ratio covenants for
the periods ending December 31, 2001 through June 30,
2004. Under the Fifth Amendment, the lenders committed to a
Revolving Credit Loan A of $131 million and a
Revolving Credit Loan B of $40 million. Revolving
Credit Loan B is supported by the guarantee of Berkshire
Partners, the Companys majority shareholder. Actual
availability under the Revolving Credit Facility is subject to a
borrowing base formula based on inventory and accounts
receivable. In December 2003, the Company and its Bank Group
agreed to a Sixth Amendment to the Credit Facility which
extended the maturity dates of Revolving Credit Loans A and B to
January 3, 2005 and January 4, 2005, respectively. The
maturity dates of the Term Loans A and B remained
February 5, 2005 and February 5, 2007, respectively.
The Company is in the process of refinancing its borrowing
arrangements and anticipates concluding these negotiations prior
to July 1, 2004.

The weighted average borrowings outstanding under
the Revolving Credit portion of the Credit Facility totaled
$110.2 million, $85.0 million and $63.7 million
during 2001, 2002 and 2003, respectively. As of
December 31, 2002 and 2003, the Companys availability
was $64.7 million and $115.1 million, respectively,
net of outstanding letters of credit totaling $8.9 million
and $7.3 million, respectively. The Credit Facility bears
interest at variable rates based on either the prime rate or
Eurodollar rate at the Companys option, plus a margin
which, in the case of the Term Loan A and a portion of the
Revolving Credit Facility, varies depending on certain financial
ratios. The weighted average interest rate of borrowings under
the Credit Facility was 5.6% at December 31, 2002 and 5.4%
at December 31, 2003. The Credit Facility, and the
guarantees thereof by the Companys domestic subsidiaries,
are collateralized by substantially all of the Companys
domestic and certain foreign assets.

The Companys financial performance in the
fourth quarter of 2000 resulted in a default of certain
financial ratio covenants in the Credit Facility as of
December 31, 2000. In May 2001, the Credit Facility was
amended to waive the defaults, revise certain of the financial
ratio covenants and change the maximum availability. As partial
consideration for the amendments, the Company issued warrants to
the lenders to

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THE HOLMES GROUP, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

acquire up to 5% of THGs common stock on a
fully-diluted basis. The warrants are currently exercisable at a
price of $5.04 per share, and expire May 7, 2006. The
fair value of the warrants amounted to $1.0 million, which
was recorded as a charge to interest expense during 2001.

Effective May 2001, the Company agreed to pay
Berkshire Partners a fee of $1.1 million as consideration
for Berkshires guarantee of up to $43.5 million of
the obligations under the Credit Facility. As part of the Fifth
Amendment to the Credit Facility in 2002, the guarantee fee
arrangement was changed to provide for a fee of 2.25% per year,
compounded annually, on the $40 million Revolving Credit
Loan B commitment, less the portion of this facility
designated as subordinated debt funding loans (which portion is
subordinated to the other obligations under the Credit
Facility). The guarantee fee related to the subordinated debt
funding loan is calculated at 20% per year, compounded
annually. The subordinated debt funding loan totaled
$18.8 million at December 31, 2002 and
$12.8 million at December 31, 2003. The guarantee fees
have not been paid, but have been accrued in the consolidated
balance sheet at December 31, 2002 and 2003. Payment of
these fees is subordinated to the Companys obligations
under the Credit Facility.



| |                          
| | -------------------------
| | Senior Subordinated Notes

The Companys Senior Subordinated Notes were
issued as part of a recapitalization transaction in 1997
($105 million) and to partially finance the Rival
acquisition in 1999 ($31.3 million). The Notes, which are
due November 15, 2007, bear interest at 9.875% and are
subordinated to the Companys other debt, including the
Credit Facility.

In conjunction with the Fifth Amendment of the
Credit Facility, as described above, the Company repurchased
from two Berkshire Partners investment funds an aggregate
principal amount of approximately $36.2 million of the
Senior Subordinated Notes. The purchase price of the Notes,
representing Berkshire Partners cost, was
$11.5 million plus accrued interest. The repurchase was
funded with proceeds of the Revolving Credit Loan B and the
Notes repurchased were retired and cancelled. This transaction
resulted in a gain on the early retirement of debt totaling
$22.4 million, which has been reflected in the consolidated
statement of operations for the year ended December 31,
2002. The gain is net of approximately $1.9 million of debt
issuance costs and $0.3 million of debt issuance discount
written off as part of the transaction and $0.1 million of
transaction fees. A provision for income taxes was not recorded
in connection with this transaction as the Company offset the
gain with available net operating loss carry forwards. The
Company may consider repurchases of additional Notes in the
future, and may utilize the proceeds of the Credit Facility for
this purpose.

The Credit Facility as amended, and the
Notes Indentures include certain financial and operating
covenants, which, among other things, restricts the ability of
the Company to incur additional indebtedness, grant liens, make
investments and take certain other actions. The ability of the
Company to meet its debt service obligations is dependent upon
the future performance of the Company, which will be impacted by
general economic conditions and other factors.

The aggregate maturities of long-term debt are as
follows as of December 31, 2003 (in thousands):

|     |  |   |        | 
|---- |  | - | ------ | 
|2005 |  | $ | 67,744 | 
|2006 |  |   | 30,821 | 
|2007 |  |   | 99,632 | 

9.     Stock
Options

In connection with the Companys
recapitalization transaction, the Companys Board of
Directors adopted and the stockholders approved the 1997 Stock
Option Plan (the Plan). The Plan provides for the
grant of incentive stock options and non-qualified stock options
to employees, officers, directors, and

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THE HOLMES GROUP, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

consultants of the Company, except that incentive
stock options may not be issued to consultants or non-employee
directors. A total of 5,960,978 shares of common stock are
reserved for issuance under the Plan, as amended. The exercise
price and period over which options become exercisable is
determined by the Board of Directors. However, the exercise
price of incentive stock options is equal to at least 100% of
the fair market value of the Companys common stock on the
date of grant (110% for individuals holding more than 10% of
common stock). Options expire no later than ten years after date
of grant (five years for individuals holding more than 10% of
the Companys common stock). The Plan expires in November
2006. The following table summarizes stock option activity under
the Plan for the three years ended December 31, 2003:

|                                    |           |        |           |                |   |          |      |      |  |          |   |   |  |   |      |      |  |   |      |      | 
|----------------------------------- | --------- | ------ | --------- | -------------- | - | -------- | ---- | ---- |  | -------- | - | - |  | - | ---- | ---- |  | - | ---- | ---- | 
|                                    |           |        |           |                |   |          |      |      |  | Weighted
|                                    |           |        |           |                |   | Average 
|                                    |           |        |           | Exercise Price |   | Exercise
|                                    |           | Shares |           | Range          |   | Price   
|                                    |           |        |           |                |   |         
|                                    |           |        |           |                |   |          |      |      |  |         
|Outstanding as of December 31, 2000 |           |        | 4,266,906 |                |   | $        | 3.50 |      |  |          | - |   |  | $ | 5.04 |      |  | $ | 4.55 |     
|                                    | Granted   |        |           | 1,544,840      |   |          | 3.50 |      |  | 3.50     |  
|                                    | Forfeited |        |           | (169,750       | ) |          |      | 3.50 |  |          |   | - |  |   |      | 5.04 |  |   |      | 4.70 | 
|                                    |           |        |           |                |   |          |      |      |  |         
|Outstanding as of December 31, 2001 |           |        | 5,641,996 |                |   |          | 3.50 |      |  |          | - |   |  |   | 5.04 |      |  |   | 4.26 |     
|                                    | Granted   |        |           | 219,000        |   |          | 3.50 |      |  | 3.50     |  
|                                    | Forfeited |        |           | (406,780       | ) |          |      | 3.50 |  |          |   | - |  |   |      | 5.04 |  |   |      | 4.50 | 
|                                    |           |        |           |                |   |          |      |      |  |          |   |   |  |   |      |      |  |   |      |     
|Outstanding as of December 31, 2002 |           |        | 5,454,216 |                |   |          | 3.50 |      |  |          | - |   |  |   | 5.04 |      |  |   | 4.21 |     
|                                    | Granted   |        |           | 492,300        |   |          |      | 3.50 |  |          |   |   |  |   |      | 5.04 |  |   |      | 4.26 | 
|                                    | Forfeited |        |           | (486,820       | ) |          |      | 3.50 |  |          |   | - |  |   |      | 5.04 |  |   |      | 4.20 | 
|                                    |           |        |           |                |   |          |      |      |  |         
|Outstanding as of December 31, 2003 |           |        | 5,459,696 |                |   | $        | 3.50 |      |  |          | - |   |  | $ | 5.04 |      |  | $ | 4.20 |     
|                                    |           |        |           |                |   |          |      |      |  |         

As of December 31, 2001, 2002 and 2003,
exercisable options and options available for future grants are
as follows:

|     |  |             |           |                  |  |                   |      |  |  |  |         | 
|---- |  | ----------- | --------- | ---------------- |  | ----------------- | ---- |  |  |  | ------- | 
|     |  | Exercisable |           | Weighted Average |  | Options Available
|     |  | Options     |           | Exercise Price   |  | For Future Grant 
|     |  |             |           |                  |  |                  
|2001 |  |             | 2,122,347 |                  |  | $                 | 4.36 |  |  |  | 318,983 | 
|2002 |  |             | 2,924,166 |                  |  |                   | 4.31 |  |  |  | 506,762 | 
|2003 |  |             | 3,616,511 |                  |  |                   | 4.27 |  |  |  | 501,282 | 

No options were exercised during the three year
period ended December 31, 2003. The following table
summarizes information about stock options under the 1997 plan
which were outstanding at December 31, 2003.

|                |      |                     |  |                     |           |          |  |                |     |          |  |   |      |  |  |  |           |  |  |   |      | 
|--------------- | ---- | ------------------- |  | ------------------- | --------- | -------- |  | -------------- | --- | -------- |  | - | ---- |  |  |  | --------- |  |  | - | ---- | 
|                |      |                     |  |                     |           |         
|                |      | Options Outstanding |  |                    
|                |      |                     |  | Options Exercisable
|                |      |                     |  | Weighted            |           |          |  |               
|                |      | Number              |  | Average             |           | Weighted |  | Number         |     | Weighted
|                |      | Outstanding at      |  | Remaining           |           | Average  |  | Exercisable at |     | Average 
|Range of        |      | December 31,        |  | Contractual         |           | Exercise |  | December 31,   |     | Exercise
|Exercise Prices |      | 2003                |  | Life (Years)        |           | Price    |  | 2003           |     | Price   
|                |      |                     |  |                     |           |          |  |                |     |         
|$               | 3.50 |                     |  |                     | 2,738,492 |          |  |                | 6.4 |          |  | $ | 3.50 |  |  |  | 1,807,448 |  |  | $ | 3.50 | 
|                | 4.25 |                     |  |                     | 475,500   |          |  |                | 9.3 |          |  |   | 4.25 |  |  |  |          |  |  |   |     | 
|                | 5.04 |                     |  |                     | 2,245,704 |          |  |                | 5.5 |          |  |   | 5.04 |  |  |  | 1,809,063 |  |  |   | 5.04 | 
|                |      |                     |  |                     |           |          |  |                |     |          |  |   |      |  |  |  |           |  |  |   |      | 
|                |      |                     |  |                     | 5,459,696 |          |  |                |     |          |  | $ | 4.20 |  |  |  | 3,616,511 |  |  | $ | 4.27 | 
|                |      |                     |  |                     |           |          |  |                |     |          |  |   |      |  |  |  |           |  |  |   |      | 

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THE HOLMES GROUP, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

All of the holders of the Companys
outstanding stock are subject to stockholders agreements.
These agreements provide the Company with a right of first
refusal on any proposed sales of stock to outside parties.
Additionally, THG has certain rights to repurchase shares of
Common Stock and options from employees upon their termination
of employment.

10.     Income
Taxes

Pre-tax income (loss) is summarized as follows:

|         |  |                         |        |      |  |      |         |   |  |   |         |  
|-------- |  | ----------------------- | ------ | ---- |  | ---- | ------- | - |  | - | ------- | -
|         |  |                        
|         |  | Year Ended December 31,
|         |  |                        
|         |  | 2003                    |        | 2002 |  | 2001
|         |  |                         |        |      |  |     
|         |  |                        
|         |  | (In thousands)         
|Domestic |  | $                       | 23,783 |      |  | $    | (4,741  | ) |  | $ | (38,035 | )
|Foreign  |  |                         | 23,921 |      |  |      | 23,537  |   |  |   | 24,653  |  
|         |  |                         |        |      |  |      |         |   |  |   |         |  
|         |  | $                       | 47,704 |      |  | $    | (18,796 | ) |  | $ | (13,382 | )
|         |  |                         |        |      |  |      |         |   |  |   |         |  

Income tax expense (benefit) consists of the
following:

|               |         |                         |        |        |   |      |      |        |   |   |       |       | 
|-------------- | ------- | ----------------------- | ------ | ------ | - | ---- | ---- | ------ | - | - | ----- | ----- | 
|               |         |                        
|               |         | Year Ended December 31,
|               |         |                        
|               |         | 2003                    |        | 2002   |   | 2001
|               |         |                         |        |        |   |     
|               |         |                        
|               |         | (In thousands)         
|Current:       |         |                         |        |        |   |      |      |        |   |   |       |      
|               | Federal |                         | $      | 602    |   |      | $    | (4,937 | ) |   | $     |      | 
|               | State   |                         |        | 630    |   |      |      | 700    |   |   |       | 357   | 
|               | Foreign |                         |        | 656    |   |      |      | 3,299  |   |   |       | 2,642 | 
|               |         |                         |        |        |   |      |      |        |   |   |       |      
|Total current  |         |                         | 1,888  |        |   |      | (938 | )      |   |   | 2,999 |      
|               |         |                         |        |        |   |      |      |        |   |   |       |      
|Deferred:      |         |                         |        |        |   |      |      |        |   |   |       |      
|               | Federal |                         |        | (3,231 | ) |      |      |       |   |   |       |      | 
|               | State   |                         |        | (563   | ) |      |      |       |   |   |       |      | 
|               | Foreign |                         |        | (20    | ) |      |      | 790    |   |   |       | 1,528 | 
|               |         |                         |        |        |   |      |      |        |   |   |       |      
|Total deferred |         |                         | (3,814 | )      |   |      | 790  |        |   |   | 1,528 |      
|               |         |                         |        |        |   |      |      |        |   |   |       |      
|               |         | $                       | (1,926 | )      |   | $    | (148 | )      |   | $ | 4,527 |      
|               |         |                         |        |        |   |      |      |        |   |   |       |      

A reconciliation between the Companys
actual income tax expense (benefit) and amounts determined using
the statutory U.S. federal tax rate of 35% is as follows:

|                                                            |  |                         |        |      |  |      |        |   |  |   |        |  
|----------------------------------------------------------- |  | ----------------------- | ------ | ---- |  | ---- | ------ | - |  | - | ------ | -
|                                                            |  |                        
|                                                            |  | Year Ended December 31,
|                                                            |  |                        
|                                                            |  | 2003                    |        | 2002 |  | 2001
|                                                            |  |                         |        |      |  |     
|Statutory U.S. federal tax                                  |  | $                       | 16,696 |      |  | $    | (6,579 | ) |  | $ | (3,978 | )
|State tax expense (benefit), net of federal tax
    benefit |  |                         | 44     |      |  |      | 455    |   |  |   | (1,750 | )
|Utilization of available NOL benefits                       |  |                         | (6,428 | )    |  |      | (7,837 | ) |  |   |       |  
|Federal tax refund due to NOL carryback                     |  |                         |       |      |  |      | (5,123 | ) |  |   |       |  
|Foreign earnings taxed at different rates                   |  |                         | (7,738 | )    |  |      | (4,149 | ) |  |   | (4,458 | )
|Change in valuation allowance on deferred tax
    assets    |  |                         | (5,573 | )    |  |      | 9,732  |   |  |   | 13,890 |  
|Goodwill amortization                                       |  |                         |       |      |  |      |       |   |  |   | 748    |  
|Other                                                       |  |                         | 1,073  |      |  |      | 195    |   |  |   | 75     |  
|                                                            |  |                         |        |      |  |      |        |   |  |   |        |  
|Actual income tax expense (benefit)                         |  | $                       | (1,926 | )    |  | $    | (148   | ) |  | $ | 4,527  |  
|                                                            |  |                         |        |      |  |      |        |   |  |   |        |  

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THE HOLMES GROUP, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Deferred income taxes reflect the tax impact of
temporary differences between the amount of assets and
liabilities for financial reporting purposes and such amounts as
measured by tax laws and regulations. Under FAS 109, the
benefits associated with future deductible temporary differences
and operating loss or credit carryforwards is recognized if it
is more likely than not that a benefit will be realized.
Deferred tax assets and liabilities are comprised of the
following:

|                          |                                                    |                |        |         |   |   |       |         |  
|------------------------- | -------------------------------------------------- | -------------- | ------ | ------- | - | - | ----- | ------- | -
|                          |                                                    |               
|                          |                                                    | December 31,  
|                          |                                                    |               
|                          |                                                    | 2003           |        | 2002   
|                          |                                                    |                |        |        
|                          |                                                    |               
|                          |                                                    | (In thousands)
|Deferred tax assets:      |                                                    |                |        |         |   |   |       |        
|                          | Net operating losses                               |                | $      | 13,589  |   |   | $     | 15,268  |  
|                          | Contribution carryover                             |                |        | 78      |   |   |       | 69      |  
|                          | Accrued expenses                                   |                |        | 5,148   |   |   |       | 6,545   |  
|                          | Inventory                                          |                |        | 4,487   |   |   |       | 2,686   |  
|                          | Property and equipment                             |                |        |        |   |   |       | 5,306   |  
|                          | Intangibles                                        |                |        | 3,893   |   |   |       | 4,173   |  
|                          | Employee pension plan                              |                |        | 3,087   |   |   |       | 2,196   |  
|                          | Interest limitation carryforward                   |                |        |        |   |   |       | 964     |  
|                          | Accounts receivable                                |                |        | 10,595  |   |   |       | 14,014  |  
|                          |                                                    |                |        |         |   |   |       |        
|                          | Gross deferred tax assets                          |                |        | 40,877  |   |   |       | 51,221  |  
|                          |                                                    |                |        |         |   |   |       |        
|Deferred tax liabilities: |                                                    |                |        |         |   |   |       |        
|                          | Inventory                                          |                |        | (820    | ) |   |       | (548    | )
|                          | Property and equipment                             |                |        | (2,124  | ) |   |       | (989    | )
|                          | Accrued expenses                                   |                |        |        |   |   |       | (2,419  | )
|                          |                                                    |                |        |         |   |   |       |        
|                          | Gross deferred tax liabilities                     |                |        | (2,944  | ) |   |       | (3,956  | )
|                          |                                                    |                |        |         |   |   |       |        
|                          | Net deferred tax assets before valuation allowance |                |        | 37,933  |   |   |       | 47,265  |  
|                          | Valuation allowance                                |                |        | (24,633 | ) |   |       | (40,198 | )
|                          |                                                    |                |        |         |   |   |       |        
|Net deferred tax assets   |                                                    | $              | 13,300 |         |   | $ | 7,067 |        
|                          |                                                    |                |        |         |   |   |       |        

During 2002, the Company received a cash refund
of $5.1 related to additional net operating loss carrybacks
which were made possible by recent tax law changes. As of
December 31, 2003, the Company had net operating loss
carryforwards for federal and state income tax purposes of
approximately $17.1 and $62.0 million, respectively,
expiring between 2004 and 2021. In addition, the Company filed
an amended federal income tax return in January 2004 for its
2001 fiscal year claiming $3.7 million in refunds related
to the carryback of net operating losses.

In the fourth quarter of 2003, after considering
all available positive and negative evidence, including the
improved profitability of the Companys operations,
projections of future taxable income and the expiration dates of
available net operating loss carryforward benefits, the Company
determined that it was more likely than not that approximately
$13.3 million of net deferred tax assets will be realized.
As a result, the Companys deferred tax asset valuation
allowance was reduced from $40.2 million at
December 31, 2002 to $24.6 million at
December 31, 2003.

The Company does not provide for U.S. income
tax liabilities on undistributed earnings of foreign
subsidiaries as it is managements intention that these
earnings will continue to be reinvested. Total undistributed
earnings of foreign subsidiaries as of December 31, 2003
are approximately $122.1 million.

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THE HOLMES GROUP, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

11.     Leases

The Company has various noncancellable operating
leases for facilities, vehicles and office equipment that expire
at various dates through 2015. Certain of these leases contain
options for renewal or purchase of the underlying asset. Rent
expense was approximately $9,300,000, $10,003,000, and
$12,114,000 in 2001, 2002 and 2003, respectively. At
December 31, 2002, future minimum rental payments under
noncancellable lease arrangements are as follows (in thousands):

|                    |  |           |        | 
|------------------- |  | --------- | ------ | 
|                    |  | Operating
|                    |  | Leases   
|                    |  |          
|2004                |  | $         | 10,267 | 
|2005                |  |           | 7,621  | 
|2006                |  |           | 6,532  | 
|2007                |  |           | 6,345  | 
|2008 and thereafter |  |           | 28,501 | 
|                    |  |           |        | 
|                    |  | $         | 59,266 | 
|                    |  |           |        | 

12.     Employee
Benefit Plans

The Company provides its employees with two
defined contribution retirement plans under Section 401(k)
of the Internal Revenue Code. The Holmes Group 401K
Plan  Plant Employees is for all employees at the
Companys domestic manufacturing facilities. Plant
employees were eligible to contribute up to 15% of their
compensation, which is then invested in one or more investment
funds. Holmes matched 50% of the contribution per year for
employees who worked 1000 hours in the year and were
employed as of year end. The Holmes Group Savings and Investment
Plan is for all salaried, hourly and clerical workers not
working in the manufacturing facilities. Employees are eligible
to contribute up to 25% of their compensation, which is then
invested in one or more investment funds. The Company does not
provide a matching contribution under this plan. In addition,
HPFEL provides its Hong Kong based employees with a defined
contribution retirement plan. All Hong Kong based employees of
HPFEL and Esteem Industries Ltd. may contribute 5% of their
compensation, with the Company contributing an additional 5% to
7.5% of an employees compensation. The Companys
contributions to these plans approximated $261,000, $501,000 and
$649,000 in 2001, 2002 and 2003, respectively.

As part of the Rival transaction in 1999, the
Company acquired three defined benefit pension plans. Under
these plans, pension benefits for plant employees were primarily
based on years of service. Sales, administrative and clerical
employees received a retirement benefit based on final pay at
retirement and years of service. During fiscal 2000, one of the
Rival plans was amended and restated to allow the vesting of
benefits for certain plan participants under a cash balance plan
formula. All employees who were aged 50 with 5 years of
credited service on February 28, 2000 were grandfathered
under the old plan formula. The new plan was renamed The Holmes
Group Retirement Benefit Accumulation Plan. Effective
December 30, 2000, the other two Rival plans were merged
into the Holmes Group Retirement Benefit Accumulation Plan, but
retained their respective benefit formulas. All benefits under
the Plan are noncontributory. The Companys funding policy
is consistent with the funding requirements under ERISA and the
Internal Revenue Code.

The measurement date used to determine pension
benefits is December 31 of each fiscal period. Pension
expense, including the amortization of prior service costs over
the remaining service periods of active

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THE HOLMES GROUP, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

employees and the remaining lives of vested and
retired employees, consists of the following for the three years
in the period ended December 31, 2003:

|                                   |  |                         |       |      |  |      |        |   |  |   |        |  
|---------------------------------- |  | ----------------------- | ----- | ---- |  | ---- | ------ | - |  | - | ------ | -
|                                   |  |                        
|                                   |  | Year Ended December 31,
|                                   |  |                        
|                                   |  | 2003                    |       | 2002 |  | 2001
|                                   |  |                         |       |      |  |     
|                                   |  |                        
|                                   |  | (In thousands)         
|Service cost                       |  | $                       | 1,026 |      |  | $    | 1,151  |   |  | $ | 991    |  
|Interest cost                      |  |                         | 1,056 |      |  |      | 1,089  |   |  |   | 1,062  |  
|Expected return on plan assets     |  |                         | (767  | )    |  |      | (1,312 | ) |  |   | (1,496 | )
|Amortization of prior service cost |  |                         | (20   | )    |  |      | (49    | ) |  |   | (58    | )
|Amortization of net actuarial loss |  |                         | 403   |      |  |      | 147    |   |  |   | 35     |  
|                                   |  |                         |       |      |  |      |        |   |  |   |        |  
|Net periodic pension cost          |  | $                       | 1,698 |      |  | $    | 1,026  |   |  | $ | 534    |  
|                                   |  |                         |       |      |  |      |        |   |  |   |        |  
|FAS 88 expense                     |  | $                       | 1,581 |      |  | $    |       |   |  | $ | 487    |  
|                                   |  |                         |       |      |  |      |        |   |  |   |        |  

The 2001 FAS 88 expense included charges for
contractual termination benefits of $235,000 and a partial plan
settlement of $472,000. These charges were partially offset by a
curtailment gain of $220,000. As a result of the facility
closings in January 2003, the Company recognized $1,581,000 in
pension expense in accordance with FAS 88. The 2003 amount
included a partial plan settlement charge of $1,911,000 due to
lump sum benefits paid to terminated employees at the closed
facilities, partially offset by a pension plan curtailment gain
of $330,000.

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THE HOLMES GROUP, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

The following provides a reconciliation of
benefit obligations, plan assets, the funded status and various
information with respect to actuarial assumptions, investment
strategies and future cash flows related to the Companys
defined benefit pension plan:

|                                                                                                 |                     |                   |        |            |   |   |        |      |  
|------------------------------------------------------------------------------------------------ | ------------------- | ----------------- | ------ | ---------- | - | - | ------ | ---- | -
|                                                                                                 |                     |                  
|                                                                                                 |                     | Fiscal Year Ended
|                                                                                                 |                     | December 31,     
|                                                                                                 |                     |                  
|                                                                                                 |                     | 2003              |        | 2002      
|                                                                                                 |                     |                   |        |           
|                                                                                                 |                     |                  
|                                                                                                 |                     | (In thousands)   
|Change in Benefit Obligation:                                                                    |                     |                   |        |            |   |   |        |     
|Benefit obligation at beginning of year                                                          |                     | $                 | 18,117 |            |   | $ | 15,183 |     
|Service cost                                                                                     |                     |                   | 1,026  |            |   |   | 1,151  |     
|Interest cost                                                                                    |                     |                   | 1,057  |            |   |   | 1,089  |     
|Amendments                                                                                       |                     |                   | 51     |            |   |   |       |     
|Actuarial loss                                                                                   |                     |                   | 1,221  |            |   |   | 2,177  |     
|Curtailment                                                                                      |                     |                   | (505   | )          |   |   |       |     
|Benefits and lump sums paid                                                                      |                     |                   | (5,255 | )          |   |   | (1,483 | )   
|                                                                                                 |                     |                   |        |            |   |   |        |     
|Benefit obligation at end of year                                                                |                     | $                 | 15,712 |            |   | $ | 18,117 |     
|                                                                                                 |                     |                   |        |            |   |   |        |     
|Change in Plan Assets:                                                                           |                     |                   |        |            |   |   |        |     
|Fair value of plan assets at beginning of year                                                   |                     |                   | 11,592 |            |   |   | 14,998 |     
|Actual return on plan assets                                                                     |                     |                   | 1,623  |            |   |   | (1,923 | )   
|Benefits and lump sums paid                                                                      |                     |                   | (5,255 | )          |   |   | (1,483 | )   
|                                                                                                 |                     |                   |        |            |   |   |        |     
|Fair value of plan assets at end of year                                                         |                     | $                 | 7,960  |            |   | $ | 11,592 |     
|                                                                                                 |                     |                   |        |            |   |   |        |     
|Funded Status:                                                                                   |                     |                   |        |            |   |   |        |     
|Difference between benefit obligations and plan
    assets                                       |                     |                   | (7,752 | )          |   |   | (6,525 | )   
|Unrecognized prior service cost (benefit)                                                        |                     |                   | (204   | )          |   |   | (606   | )   
|Unrecognized actuarial loss (gain)                                                               |                     |                   | 5,879  |            |   |   | 8,333  |     
|                                                                                                 |                     |                   |        |            |   |   |        |     
|Net amount recognized                                                                            |                     | $                 | (2,077 | )          |   | $ | 1,202  |     
|                                                                                                 |                     |                   |        |            |   |   |        |     
|Amounts Recognized in the Statement of
    Financial Position:                                   |                     |                   |        |            |   |   |        |     
|Accrued benefit liability                                                                        |                     |                   | (6,490 | )          |   |   | (5,840 | )   
|Accumulated other comprehensive income                                                           |                     |                   | 4,413  |            |   |   | 7,042  |     
|                                                                                                 |                     |                   |        |            |   |   |        |     
|Net amount recognized                                                                            |                     | $                 | (2,077 | )          |   | $ | 1,202  |     
|                                                                                                 |                     |                   |        |            |   |   |        |     
|Weighted-Average Assumptions to Determine
    Benefit Obligations and Net Periodic Pension Cost: |                     |                   |        |            |   |   |        |     
|Discount rate:                                                                                   |                     |                   |        |            |   |   |        |     
|                                                                                                 | Benefit obligations |                   |        | 6.25       | % |   |        | 6.50 | %
|                                                                                                 | Pension cost        |                   |        | 6.50%/6.00 | % |   |        | 6.50 | %
|Expected return on plan assets                                                                   |                     |                   | 8.00   | %          |   |   | 9.00   | %   
|Rate of compensation increase                                                                    |                     |                   | 4.50   | %          |   |   | 4.50   | %   

The discount rate, which is used to value our
pension obligations, was reduced to 6.25% during 2003 to reflect
the decrease in high quality bond yields over the past year. The
expected long-term rate of return for fiscal 2003 was reduced to
8.0% as compared to the 9.0% rate used in 2002. The expected
long-term rate of

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THE HOLMES GROUP, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

return on our plan assets was developed by
examining historical return rates based on the pension
plans asset allocation and considering such factors as
return differentials for active investment management.

The Companys pension plan weighted average
asset allocations at December 31, 2002 and 2003 are as
follows:

|                        |  |      |     |      |  |  |     |  
|----------------------- |  | ---- | --- | ---- |  |  | --- | -
|                        |  | 2003 |     | 2002
|                        |  |      |     |     
|Equity Securities       |  |      | 59  | %    |  |  | 55  | %
|Fixed Income Securities |  |      | 39  | %    |  |  | 41  | %
|Cash                    |  |      | 2   | %    |  |  | 4   | %
|                        |  |      |     |      |  |  |     |  
|Total                   |  |      | 100 | %    |  |  | 100 | %
|                        |  |      |     |      |  |  |     |  

The Companys pension plan investment
guidelines are based on a targeted asset allocation of 50%
equities and 50% fixed income securities. The equity allocation,
which focuses on large capitalization common stocks, has a
minimum asset allocation of 25% and a maximum allocation of 60%.
The range of the fixed income asset allocation calls for a
minimum allocation of 25% and a maximum allocation of 75%. The
Company has established investment diversification policies such
that no one equity security or corporate debt issuer will
account for more than 5% of the pension plans assets.

As the accumulated benefit obligation
($14,450,000 in 2003 and $14,648,000 in 2002) exceeded the fair
value of plan assets, the Company recorded a minimum pension
liability of $7,042,000 at December 31, 2002 and $4,413,000
at December 31, 2003. The Company did not make any cash
contributions to the pension plan in the three years ended
December 31, 2003. As a result of the current unfunded
status, the Company expects that minimum cash contributions of
approximately $2.3 million will be required in fiscal 2004.

13.     Business
Segments

Statement of Financial Accounting Standards
No. 131, Disclosure about Segments of an Enterprise
and Related Information, established standards for
reporting information about business segments in annual
financial statements. It also established standards for related
disclosures about products and services, major customers and
geographic areas. Business segments are defined as components of
a business about which separate financial information is
available that is evaluated regularly by the chief operating
decision maker, or decision making group, in deciding how to
allocate resources and in assessing performance. The business
segments are managed separately because each segment represents
a strategic business unit whose main business is entirely
different.

The Company currently manages its operations
through three business segments: Consumer
Durables, International and Far East. The Consumer Durables
segment sells products including fans, heaters, humidifiers, air
purifiers, lighting, Crock-Pot® slow cookers, roasters,
skillets, vacuum food sealers, ice cream freezers, and other
kitchen electric products and is considered one business segment
due to the similar customer base, distribution channels and
economic characteristics. The International segment sells the
Companys products outside the U.S. The Far East
segment constitutes the Companys manufacturing and
sourcing operations, which are located primarily at HPFEL.

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THE HOLMES GROUP, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Segment information is as follows for the three
years ended December 31, 2003 (in thousands):

|                              |  |  |      |          |  |          |         |               |  |              |         |              |  |   |        |  |  |   |          |   |  |   |         |  
|----------------------------- |  |  | ---- | -------- |  | -------- | ------- | ------------- |  | ------------ | ------- | ------------ |  | - | ------ |  |  | - | -------- | - |  | - | ------- | -
|                              |  |  |      | Consumer |  |          |         |               |  |              |         | Consolidated
|                              |  |  |      | Durables |  | Far East |         | International |  | Eliminations |         | Total       
|                              |  |  |      |          |  |          |         |               |  |              |         |             
|Net sales to customers        |  |  | 2003 |          |  | $        | 521,552 |               |  | $            | 26,465  |              |  | $ | 75,739 |  |  |   |         |   |  | $ | 623,756 |  
|                              |  |  | 2002 |          |  |          | 523,922 |               |  |              | 20,475  |              |  |   | 64,157 |  |  |   |         |   |  |   | 608,554 |  
|                              |  |  | 2001 |          |  |          | 537,700 |               |  |              | 21,862  |              |  |   | 52,678 |  |  |   |         |   |  |   | 612,240 |  
|Intersegment net sales        |  |  | 2003 |          |  |          | 3,654   |               |  |              | 347,192 |              |  |   | 556    |  |  | $ | (351,402 | ) |  |   |        |  
|                              |  |  | 2002 |          |  |          | 7,021   |               |  |              | 309,736 |              |  |   | 186    |  |  |   | (316,943 | ) |  |   |        |  
|                              |  |  | 2001 |          |  |          |        |               |  |              | 290,162 |              |  |   |       |  |  |   | (290,162 | ) |  |   |        |  
|Depreciation and amortization |  |  | 2003 |          |  |          | 2,644   |               |  |              | 7,804   |              |  |   | 299    |  |  |   |         |   |  |   | 10,747  |  
|                              |  |  | 2002 |          |  |          | 5,828   |               |  |              | 7,926   |              |  |   | 235    |  |  |   |         |   |  |   | 13,989  |  
|                              |  |  | 2001 |          |  |          | 8,728   |               |  |              | 7,292   |              |  |   | 160    |  |  |   |         |   |  |   | 16,180  |  
|Net interest expense (income) |  |  | 2003 |          |  |          | 25,384  |               |  |              | (2      | )            |  |   | 7      |  |  |   |         |   |  |   | 25,389  |  
|                              |  |  | 2002 |          |  |          | 29,545  |               |  |              | (12     | )            |  |   | 82     |  |  |   |         |   |  |   | 29,615  |  
|                              |  |  | 2001 |          |  |          | 37,940  |               |  |              | (40     | )            |  |   |       |  |  |   |         |   |  |   | 37,900  |  
|Other costs                   |  |  | 2003 |          |  |          | 468,951 |               |  |              | 345,781 |              |  |   | 72,622 |  |  |   | (351,912 | ) |  |   | 535,442 |  
|                              |  |  | 2002 |          |  |          | 492,590 |               |  |              | 305,557 |              |  |   | 61,238 |  |  |   | (316,369 | ) |  |   | 543,016 |  
|                              |  |  | 2001 |          |  |          | 526,275 |               |  |              | 286,211 |              |  |   | 51,731 |  |  |   | (290,502 | ) |  |   | 573,715 |  
|Segment income (loss)         |  |  | 2003 |          |  |          | 28,227  |               |  |              | 20,074  |              |  |   | 3,367  |  |  |   | 510      |   |  |   | 52,178  |  
|                              |  |  | 2002 |          |  |          | 2,980   |               |  |              | 16,740  |              |  |   | 2,788  |  |  |   | (574     | ) |  |   | 21,934  |  
|                              |  |  | 2001 |          |  |          | (35,243 | )             |  |              | 18,561  |              |  |   | 787    |  |  |   | 340      |   |  |   | (15,555 | )
|Segment assets                |  |  | 2003 |          |  |          | 530,742 |               |  |              | 172,358 |              |  |   | 55,935 |  |  |   | (447,472 | ) |  |   | 311,563 |  
|                              |  |  | 2002 |          |  |          | 509,265 |               |  |              | 140,803 |              |  |   | 51,613 |  |  |   | (378,837 | ) |  |   | 322,844 |  
|Segment capital expenditures  |  |  | 2003 |          |  |          | 1,779   |               |  |              | 10,726  |              |  |   | 412    |  |  |   |         |   |  |   | 12,917  |  
|                              |  |  | 2002 |          |  |          | 5,333   |               |  |              | 9,024   |              |  |   | 197    |  |  |   |         |   |  |   | 14,554  |  
|                              |  |  | 2001 |          |  |          | 6,769   |               |  |              | 10,203  |              |  |   | 48     |  |  |   |         |   |  |   | 17,020  |  

The accounting policies of the reportable
segments are the same as those described in Note 2 to
consolidated financial statements. The results are disaggregated
using a management approach, which is consistent with the manner
in which the Companys management internally disaggregates
financial information for the purposes of assisting in making
internal operational decisions. Other operating costs include:
cost of sales, operating expenses, other income and expense,
equity in earnings from joint venture and income taxes.
Operating costs in the Consumer Durables segment include
restructuring costs of $1,744,000, $28,006,000 and $1,899,000
for 2001, 2002 and 2003, respectively. In 2002, the Consumer
Durables income excludes goodwill impairment charges of
$79,838,000 related to the adoption of FAS 142, effective
January 1, 2002, but includes the gain of $22,388,000
related to the repurchase of the Companys Senior
Subordinated Notes (see Note 8).

The following information (in thousands) is
summarized by geographic area. Net sales are grouped based on
the geographic origin of the transaction.

55



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THE HOLMES GROUP, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

|                   |                              |               |   |          |  |            |   |              |  |  |   |        |  |  |   |         | 
|------------------ | ---------------------------- | ------------- | - | -------- |  | ---------- | - | ------------ |  |  | - | ------ |  |  | - | ------- | 
|                   |                              |               |   |          |  | Canada,    |   |             
|                   |                              |               |   |          |  | Europe and |   | Consolidated
|                   |                              | United States |   | Far East |  | Mexico     |   | Total       
|                   |                              |               |   |          |  |            |   |             
|Net sales:         |                              |               |   |          |  |            |   |              |  |  |   |        |  |  |   |        
|                   | Year ended December 31, 2003 |               | $ | 521,552  |  |            | $ | 26,465       |  |  | $ | 75,739 |  |  | $ | 623,756 | 
|                   | Year ended December 31, 2002 |               |   | 523,922  |  |            |   | 20,475       |  |  |   | 64,157 |  |  |   | 608,554 | 
|                   | Year ended December 31, 2001 |               |   | 537,700  |  |            |   | 21,862       |  |  |   | 52,678 |  |  |   | 612,240 | 
|Long-lived assets: |                              |               |   |          |  |            |   |              |  |  |   |        |  |  |   |        
|                   | December 31, 2003            |               |   | 10,697   |  |            |   | 36,515       |  |  |   | 690    |  |  |   | 47,902  | 
|                   | December 31, 2002            |               |   | 16,226   |  |            |   | 33,028       |  |  |   | 495    |  |  |   | 49,749  | 

The Companys manufacturing entities in the
Far East sell completed products to its U.S. and international
subsidiaries at intercompany transfer prices which reflect
managements estimate of amounts which would be charged by
an unrelated third party. These sales are excluded from the
above table and are eliminated in consolidation. The remaining
Far East sales are to the GEHI joint venture and unrelated third
parties.

14.     Commitments,
Guarantees and Contingencies

At December 31, 2003, the Company had
commitments outstanding for capital expenditures under purchase
orders and contracts of approximately $6.6 million.

The Company entered into employment and
non-competition agreements with certain of its senior executives
in November 1997, the original terms of which expired on
December 31, 2001, but which are automatically renewable
for additional annual periods. These agreements provide that if
employment is terminated without cause, the employees will
receive severance payments of their respective salaries for
12 months. In January 2004, the Company entered into
agreements with certain additional senior executives providing
for the continuance of their respective salaries for a period
not to exceed 12 months if employment is terminated under
certain circumstances.

Effective August 1, 2001, the Company
entered into an employment and non-competition agreement with
Peter J. Martin, the Companys Chief Executive Officer, for
an initial term expiring on December 31, 2002. This
agreement is subject to additional annual renewal periods and
has been extended to December 31, 2004. This agreement
provides that if Mr. Martins employment is terminated
by Holmes without cause or by Mr. Martin for good reason
(as defined therein), Mr. Martin will receive severance
payments of up to 18 months salary, as well as a
pro-rated bonus payment and certain other benefits. Effective
February 1, 2002, the Company entered into an amended
employment and non-competition agreement with Jordan A. Kahn for
a term expiring on January 31, 2003. The term of this
agreement was subsequently extended to April 30, 2004.
Under this agreement, the Company agreed to accelerate the
vesting of Mr. Kahns stock options upon a termination
of employment and to extend the post-termination exercise period
for the full duration of the option term. The agreement provides
that upon termination without cause, non-renewal of the
agreement, death or disability, Mr. Kahn will receive a
lump-sum severance of $375,000 plus 25% of his base salary, as
well as a pro-rated bonus payment and certain other benefits.
The lump-sum severance payment, but not the other benefits,
would be payable in the event of termination for cause.

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THE HOLMES GROUP, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

The Company issues warranties to consumers for
certain of its home environment and kitchen appliances. Warranty
costs, representing the value of replacement goods sent to
consumers making warranty claims, are expensed as incurred. The
Company maintains a warranty reserve for consumer claims in
process at year-end. A reconciliation of the warranty reserve
for the years ended December 31, 2002 and 2003 is as
follows (in thousands):

|                                             |  |      |      |      |  |   |     |  
|-------------------------------------------- |  | ---- | ---- | ---- |  | - | --- | -
|                                             |  | 2003 |      | 2002
|                                             |  |      |      |     
|Balance at beginning of period               |  | $    | 375  |      |  | $ | 373 |  
|Accruals for warranties issued during period |  |      | 417  |      |  |   | 47  |  
|Settlements made during period               |  |      | (256 | )    |  |   | (45 | )
|                                             |  |      |      |      |  |   |     |  
|Balance at end of period                     |  | $    | 536  |      |  | $ | 375 |  
|                                             |  |      |      |      |  |   |     |  

The Company also faces exposure to voluntary or
mandatory product recalls in the event that our products are
alleged to present a substantial product hazard
under applicable law. In 2003, the Company received
communications from the United States Consumer Products Safety
Commission (CPSC), requesting information concerning
a limited number of Crock-Pot® slow cooker models. The CPSC
and the Company currently are assessing the situation, in
particular, whether the models identified present a substantial
product hazard and whether corrective action, such as a recall,
is warranted. On March 17, 2004, Company representatives
met with the CPSC to discuss the situation further, and
discussions are likely to continue in the second quarter of
2004. At the present time, the Company is unable to determine
whether, and if so to what extent, corrective action, in the
form of a product recall or otherwise, will be necessary and/or
taken. As a result, the Company is unable to determine the
costs, if any, which will be incurred by the Company as a result
of any action taken following the conclusion of the discussions
with the CPSC. The Company does not maintain product recall
insurance.

15.     Related Party
Transactions

The Company has retained Jordan Kahn
Co., Inc. (JKC), a corporation owned
principally by a director and stockholder of the Company, to
serve as a sales representative for the Company in the
northeastern United States. Pursuant to a representation
agreement between the Company and JKC, the Company has agreed to
pay to JKC a commission on net sales to JKCs customers in
its territory, which fee is the same fee paid by the Company to
other unaffiliated sales representative organizations
representing the Company in other territories throughout the
United States. Pursuant to this arrangement, the Company paid a
total of $215,000, $235,000 and $189,000 to JKC for the years
ended December 31, 2001, 2002 and 2003, respectively.

In addition, the Company entered into a
consulting agreement with Berkshire Partners LLC, its majority
stockholder, to provide management, financial, advisory and
strategic support and analysis. The agreement expires in
November 2004, or earlier if the stockholders ownership
percentage declines to less than 40% or less than the percentage
owned by management of the Company, taken as a group. Fees under
this agreement were $400,000 per year and increased to
$500,000 per year in February 1999, following the Rival
acquisition.

Effective May 2001, Holmes agreed to pay the
Companys majority stockholder a guarantee fee of
$1.1 million as consideration for Berkshires
guarantee of up to $43.5 million of the obligations under
the Credit Facility. Payment of these fees is subordinated to
the Companys obligations under the Credit Facility. In
March 2002, the guarantee fee arrangement was amended to provide
for the payment of a fee of 2.25% per annum, compounded
annually, on the $40 million Revolving Credit Loan B
commitment, less the portion of this facility designated as
subordinated debt funding loans (which portion is subordinated
to the other obligations under the Credit Facility), on which
portion such fee is 20% per annum, compounded annually.

57



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THE HOLMES GROUP, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

During the fourth quarter of 2001, the
Companys majority stockholder purchased $36.2 million
aggregate principal amount of the Companys Senior
Subordinated Notes Due 2007 on the open market. The Company
repurchased these notes from the majority stockholder at the
majority stockholders cost plus accrued interest as part
of the Fifth Amendment to the Credit Facility as fully described
in Note 8.

16.     Distribution
of Profit

Amounts that can be distributed by HPFELs
subsidiaries in China are based on the financial regulations of
China, which differ from accounting principles generally
accepted in the United States. HPFELs three Chinese
operating subsidiaries, Dongguan Huixun Electrical Products
Company, Ltd., Dongguan Raider Motor Corp. Ltd. and Dongguan
Holmes Electrical Products Company, Ltd., are deemed to be
wholly-owned foreign enterprises and, as such, Chinese laws and
regulations require these companies to transfer a certain
portion of after-tax profit each year to a reserve fund and an
employee bonus and welfare fund. The amount transferred to the
reserve fund must be at least 10% of the after-tax profit each
year, determined in accordance with the financial regulations of
China, up to a cumulative maximum of 50% of the entitys
registered capital stock. As the Company had contributed the
statutory maximum to the reserve fund, no contributions were
paid in 2001 or 2002 The Company contributed $186,000 to the
reserve fund in 2003. Transfers to the staff welfare fund are
voluntary and are determined by the Companys management.
No transfers were made to the employee staff welfare fund in the
three years ended December 31, 2003.

The retained earnings (deficit) of the three
Chinese operating subsidiaries, on the basis of accounting
principles generally accepted in the United States, are as
follows at December 31, 2002 and 2003 (in thousands):

|                                                      |  |      |        |      |  |   |        |  
|----------------------------------------------------- |  | ---- | ------ | ---- |  | - | ------ | -
|                                                      |  | 2003 |        | 2002
|                                                      |  |      |        |     
|Dongguan Raider Motor Corp. Ltd.                      |  | $    | 12,297 |      |  | $ | 11,171 |  
|Dongguan Huixun Electrical Products Company,
    Ltd. |  |      | 22,527 |      |  |   | 16,490 |  
|Dongguan Holmes Electrical Products Company,
    Ltd. |  |      | (254   | )    |  |   | (122   | )

The currency of China, the renminbi, is not
freely convertible and the ability of these subsidiaries to
remit retained earnings to the parent company is dependent on
their ability to generate foreign currency denominated earnings
or to obtain government approval for the purchase of foreign
currency.

17.     Condensed
Consolidating Information

The Senior Subordinated Notes described in
Note 8 were issued by the Company and are guaranteed by
Rival and its domestic subsidiary, Holmes Manufacturing Corp.
(Manufacturing), Holmes Motor Corp. (Motor) and Holmes Air
(Taiwan) Corp. (Taiwan), but are not guaranteed by THGs
other subsidiaries, HPFEL or Rivals four foreign
subsidiaries. The guarantor subsidiaries are directly or
indirectly wholly-owned by THG, and the guarantees are full,
unconditional and joint and several. The following condensed
consolidating financial information presents (in thousands) the
financial position, results of operations and cash flows of
(i) THG, as parent, as if it accounted for its subsidiaries
on the equity method, (ii) Rival, Manufacturing, Motor and
Taiwan, the guarantor subsidiaries, and (iii) HPFEL, The
Holmes Group Canada Ltd., Bionaire International B.V., Waverly
Products Company, Ltd., and Rival de Mexico S.A. de C.V., the
non-guarantor subsidiaries. There were no transactions between
Rival, Manufacturing, Motor and Taiwan during any of the periods
presented. Taiwan had no revenues or operations during the
periods presented, and Manufacturing ceased operations in March
1997. As further described in Note 16, certain of
HPFELs subsidiaries in China have restrictions on
distributions to their parent companies.

58



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THE HOLMES GROUP, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

CONSOLIDATING BALANCE SHEET

|                                         |                                                |                            |         |              |         |               |         |              |         |              |         |         |         |   |          |          |          |   |         |         |         |  
|---------------------------------------- | ---------------------------------------------- | -------------------------- | ------- | ------------ | ------- | ------------- | ------- | ------------ | ------- | ------------ | ------- | ------- | ------- | - | -------- | -------- | -------- | - | ------- | ------- | ------- | -
|                                         |                                                |                           
|                                         |                                                | December 31, 2003         
|                                         |                                                |                           
|                                         |                                                |                            |         | Guarantor    |         | Non-Guarantor |         |             
|                                         |                                                | Parent                     |         | Subsidiaries |         | Subsidiaries  |         | Eliminations |         | Consolidated
|                                         |                                                |                            |         |              |         |               |         |              |         |             
|ASSETS                                  
|Current assets:                          |                                                |                            |         |              |         |               |         |              |         |              |         |         |         |   |          |          |          |   |         |        
|                                         | Cash and cash equivalents                      |                            | $       | 1,099        |         |               |         |              |         |              | $       | 4,981   |         |   |          |          |          |   | $       | 6,080   |        
|                                         | Accounts receivable, net                       |                            |         | 17,381       |         |               | $       | 66,525       |         |              |         | 35,725  |         |   |          |          |          |   |         | 119,631 |        
|                                         | Inventories                                    |                            |         | 38,039       |         |               |         | 45,634       |         |              |         | 32,223  |         |   | $        | (4,939   | )        |   |         | 110,957 |        
|                                         | Prepaid expenses and other current assets      |                            |         | 2,783        |         |               |         | 63           |         |              |         | 2,018   |         |   |          |          |          |   |         | 4,864   |        
|                                         | Deferred income taxes                          |                            |         | 11,577       |         |               |         | 378          |         |              |         | 362     |         |   |          |          |          |   |         | 12,317  |        
|                                         | Due from affiliates                            |                            |         | 279,582      |         |               |         | 89           |         |              |         | 112,082 |         |   |          | (391,753 | )        |   |         |        |        
|                                         |                                                |                            |         |              |         |               |         |              |         |              |         |         |         |   |          |          |          |   |         |        
|                                         |                                                | Total current assets       |         |              | 350,461 |               |         |              | 112,689 |              |         |         | 187,391 |   |          |          | (396,692 | ) |         |         | 253,849 |  
|                                         |                                                |                            |         |              |         |               |         |              |         |              |         |         |         |   |          |          |          |   |         |        
|Assets held for sale                     |                                                |                            |        |              |         |               |        |              |         |              |         |         |         |   |          |          |          |   |        |        
|Property and equipment, net              |                                                |                            | 8,579   |              |         |               |        |              |         |              | 36,226  |         |         |   |         |          |          |   | 44,805  |        
|Deposits and other assets                |                                                |                            | 7,379   |              |         |               | 1       |              |         |              | 978     |         |         |   | (5,261   | )        |          |   | 3,097   |        
|Debt issuance costs, net                 |                                                |                            | 5,885   |              |         |               |        |              |         |              |        |         |         |   |         |          |          |   | 5,885   |        
|Deferred income taxes                    |                                                |                            | 3,484   |              |         |               | 443     |              |         |              |        |         |         |   |          |          |          |   | 3,927   |        
|Investment in consolidated subsidiaries  |                                                |                            | 57,113  |              |         |               |        |              |         |              | 3,701   |         |         |   | (60,814  | )        |          |   |        |        
|                                         |                                                |                            |         |              |         |               |         |              |         |              |         |         |         |   |          |          |          |   |         |        
|                                         |                                                | $                          | 432,901 |              |         | $             | 113,133 |              |         | $            | 228,296 |         |         | $ | (462,767 | )        |          | $ | 311,563 |        
|                                         |                                                |                            |         |              |         |               |         |              |         |              |         |         |         |   |          |          |          |   |         |        
|                                        
|LIABILITIES AND STOCKHOLDERS
    EQUITY
|Current liabilities:                     |                                                |                            |         |              |         |               |         |              |         |              |         |         |         |   |          |          |          |   |         |        
|                                         | Accounts payable                               |                            |         | 5,598        |         |               |         | 4,425        |         |              |         | 44,872  |         |   |          | (5,261   | )        |   |         | 49,634  |        
|                                         | Current portion of Credit Facility             |                            |         | 6,594        |         |               |         |             |         |              |         |        |         |   |          |          |          |   |         | 6,594   |        
|                                         | Accrued income taxes                           |                            |         | 5,262        |         |               |         | (1,372       | )       |              |         | 4,818   |         |   |          |         |          |   |         | 8,708   |        
|                                         | Deferred income taxes                          |                            |         | (1,400       | )       |               |         | 2,582        |         |              |         | (362    | )       |   |          |          |          |   |         | 820     |        
|                                         | Accrued expenses and other current liabilities |                            |         | 19,791       |         |               |         | 17,620       |         |              |         | 11,558  |         |   |          |          |          |   |         | 48,969  |        
|                                         | Current portion of pension obligation          |                            |         | 2,299        |         |               |         |             |         |              |         |        |         |   |          |          |          |   |         | 2,299   |        
|                                         | Due to affiliates                              |                            |         | 211,572      |         |               |         | 142,267      |         |              |         | 37,914  |         |   |          | (391,753 | )        |   |         |        |        
|                                         |                                                |                            |         |              |         |               |         |              |         |              |         |         |         |   |          |          |          |   |         |        
|                                         |                                                | Total current liabilities  |         |              | 249,716 |               |         |              | 165,522 |              |         |         | 98,800  |   |          |          | (397,014 | ) |         |         | 117,024 |  
|                                         |                                                |                            |         |              |         |               |         |              |         |              |         |         |         |   |          |          |          |   |         |        
|Long-term portion of Credit Facility     |                                                |                            | 98,565  |              |         |               |        |              |         |              |        |         |         |   |         |          |          |   | 98,565  |        
|Senior Subordinated Notes                |                                                |                            | 99,632  |              |         |               |        |              |         |              |        |         |         |   |         |          |          |   | 99,632  |        
|Long-term portion of pension obligation  |                                                |                            | 3,242   |              |         |               | 949     |              |         |              |        |         |         |   |         |          |          |   | 4,191   |        
|Other liabilities                        |                                                |                            | 1,000   |              |         |               |        |              |         |              | 7,587   |         |         |   |         |          |          |   | 8,587   |        
|Deferred income taxes                    |                                                |                            | (694    | )            |         |               | 861     |              |         |              | 1,957   |         |         |   |         |          |          |   | 2,124   |        
|Stockholders equity:                    |                                                |                            |         |              |         |               |         |              |         |              |         |         |         |   |          |          |          |   |         |        
|                                         | Common stock, $.001 par value                  |                            |         | 20           |         |               |         | 2            |         |              |         |        |         |   |          | (2       | )        |   |         | 20      |        
|                                         | Common stock, $1 par value                     |                            |         |             |         |               |         |             |         |              |         | 3,810   |         |   |          | (3,810   | )        |   |         |        |        
|                                         | Additional paid in capital                     |                            |         | 68,874       |         |               |         |             |         |              |         |         |         |   |          |         |          |   |         | 68,874  |        
|                                         | Accumulated other comprehensive income         |                            |         | (3,453       | )       |               |         |             |         |              |         | 798     |         |   |          | (798     | )        |   |         | (3,453  | )      
|                                         | Treasury stock                                 |                            |         | (62,076      | )       |               |         |             |         |              |         |         |         |   |          |         |          |   |         | (62,076 | )      
|                                         | Retained earnings (deficit)                    |                            |         | (21,925      | )       |               |         | (54,201      | )       |              |         | 115,344 |         |   |          | (61,143  | )        |   |         | (21,925 | )      
|                                         |                                                |                            |         |              |         |               |         |              |         |              |         |         |         |   |          |          |          |   |         |        
|                                         |                                                | Total stockholders equity |         |              | (18,560 | )             |         |              | (54,199 | )            |         |         | 119,952 |   |          |          | (65,753  | ) |         |         | (18,560 | )
|                                         |                                                |                            |         |              |         |               |         |              |         |              |         |         |         |   |          |          |          |   |         |        
|                                         |                                                | $                          | 432,901 |              |         | $             | 113,133 |              |         | $            | 228,296 |         |         | $ | (462,767 | )        |          | $ | 311,563 |        
|                                         |                                                |                            |         |              |         |               |         |              |         |              |         |         |         |   |          |          |          |   |         |        

The accompanying notes are an integral part of
these consolidated financial statements.

59



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##### Table of Contents



THE HOLMES GROUP, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

CONSOLIDATING BALANCE SHEET

|                                         |                                                |                            |         |              |         |               |         |              |         |              |         |        |         |   |          |          |          |   |         |         |         |  
|---------------------------------------- | ---------------------------------------------- | -------------------------- | ------- | ------------ | ------- | ------------- | ------- | ------------ | ------- | ------------ | ------- | ------ | ------- | - | -------- | -------- | -------- | - | ------- | ------- | ------- | -
|                                         |                                                |                           
|                                         |                                                | December 31, 2002         
|                                         |                                                |                           
|                                         |                                                |                            |         | Guarantor    |         | Non-Guarantor |         |             
|                                         |                                                | Parent                     |         | Subsidiaries |         | Subsidiaries  |         | Eliminations |         | Consolidated
|                                         |                                                |                            |         |              |         |               |         |              |         |             
|ASSETS                                  
|Current Assets:                          |                                                |                            |         |              |         |               |         |              |         |              |         |        |         |   |          |          |          |   |         |        
|                                         | Cash and cash equivalents                      |                            | $       | 2,599        |         |               | $       | (488         | )       |              | $       | 6,315  |         |   |          |          |          |   | $       | 8,426   |        
|                                         | Accounts receivable, net                       |                            |         | 21,383       |         |               |         | 77,428       |         |              |         | 29,598 |         |   |          |          |          |   |         | 128,409 |        
|                                         | Inventories                                    |                            |         | 30,357       |         |               |         | 53,394       |         |              |         | 31,935 |         |   | $        | (5,450   | )        |   |         | 110,236 |        
|                                         | Prepaid expenses and other current assets      |                            |         | 2,360        |         |               |         | 237          |         |              |         | 2,220  |         |   |          |          |          |   |         | 4,817   |        
|                                         | Deferred income taxes                          |                            |         | 4,689        |         |               |         | 378          |         |              |         |       |         |   |          |          |          |   |         | 5,067   |        
|                                         | Due from affiliates                            |                            |         | 283,734      |         |               |         | 89           |         |              |         | 84,673 |         |   |          | (368,496 | )        |   |         |        |        
|                                         |                                                |                            |         |              |         |               |         |              |         |              |         |        |         |   |          |          |          |   |         |        
|                                         |                                                | Total current assets       |         |              | 345,122 |               |         |              | 131,038 |              |         |        | 154,741 |   |          |          | (373,946 | ) |         |         | 256,955 |  
|                                         |                                                |                            |         |              |         |               |         |              |         |              |         |        |         |   |          |          |          |   |         |        
|Assets held for sale                     |                                                |                            |        |              |         |               | 6,466   |              |         |              |         |        |         |   |          |          |          |   | 6,466   |        
|Property and equipment, net              |                                                |                            | 9,073   |              |         |               | 238     |              |         |              | 33,135  |        |         |   |         |          |          |   | 42,446  |        
|Deposits and other assets                |                                                |                            | 5,212   |              |         |               | 1       |              |         |              | 515     |        |         |   | (4,891   | )        |          |   | 837     |        
|Debt issuance costs, net                 |                                                |                            | 10,184  |              |         |               |        |              |         |              |        |        |         |   |         |          |          |   | 10,184  |        
|Deferred income taxes                    |                                                |                            | 5,513   |              |         |               | 443     |              |         |              |        |        |         |   |          |          |          |   | 5,956   |        
|Investment in consolidated subsidiaries  |                                                |                            | 16,247  |              |         |               |        |              |         |              | 3,701   |        |         |   | (19,948  | )        |          |   |        |        
|                                         |                                                |                            |         |              |         |               |         |              |         |              |         |        |         |   |          |          |          |   |         |        
|                                         |                                                | $                          | 391,351 |              |         | $             | 138,186 |              |         | $            | 192,092 |        |         | $ | (398,785 | )        |          | $ | 322,844 |        
|                                         |                                                |                            |         |              |         |               |         |              |         |              |         |        |         |   |          |          |          |   |         |        
|                                        
|LIABILITIES AND STOCKHOLDERS
    EQUITY
|Current Liabilities:                     |                                                |                            |         |              |         |               |         |              |         |              |         |        |         |   |          |          |          |   |         |        
|                                         | Accounts payable                               |                            |         | 4,604        |         |               |         | 7,709        |         |              |         | 36,845 |         |   |          | (4,891   | )        |   |         | 44,267  |        
|                                         | Current portion of Credit Facility             |                            |         | 9,078        |         |               |         |             |         |              |         |       |         |   |          |          |          |   |         | 9,078   |        
|                                         | Accrued income taxes                           |                            |         | 3,543        |         |               |         | (1,074       | )       |              |         | 4,936  |         |   |          |         |          |   |         | 7,405   |        
|                                         | Deferred income taxes                          |                            |         | (1,892       | )       |               |         | 2,582        |         |              |         | 2,277  |         |   |          |          |          |   |         | 2,967   |        
|                                         | Accrued expenses and other current liabilities |                            |         | 28,741       |         |               |         | 17,846       |         |              |         | 6,514  |         |   |          |          |          |   |         | 53,101  |        
|                                         | Due to affiliates                              |                            |         | 156,324      |         |               |         | 178,249      |         |              |         | 37,624 |         |   |          | (372,197 | )        |   |         |        |        
|                                         |                                                |                            |         |              |         |               |         |              |         |              |         |        |         |   |          |          |          |   |         |        
|                                         |                                                | Total current liabilities  |         |              | 200,398 |               |         |              | 205,312 |              |         |        | 88,196  |   |          |          | (377,088 | ) |         |         | 116,818 |  
|                                         |                                                |                            |         |              |         |               |         |              |         |              |         |        |         |   |          |          |          |   |         |        
|Long-term portion of Credit Facility     |                                                |                            | 166,556 |              |         |               |        |              |         |              |        |        |         |   |         |          |          |   | 166,556 |        
|Senior Subordinated Notes                |                                                |                            | 99,544  |              |         |               |        |              |         |              |        |        |         |   |         |          |          |   | 99,544  |        
|Long-term portion of pension obligation  |                                                |                            |        |              |         |               | 5,840   |              |         |              |        |        |         |   |         |          |          |   | 5,840   |        
|Other liabilities                        |                                                |                            |        |              |         |               |        |              |         |              | 7,613   |        |         |   |         |          |          |   | 7,613   |        
|Deferred income taxes                    |                                                |                            | (631    | )            |         |               | 861     |              |         |              | 759     |        |         |   |         |          |          |   | 989     |        
|Stockholders equity:                    |                                                |                            |         |              |         |               |         |              |         |              |         |        |         |   |          |          |          |   |         |        
|                                         | Common stock, $.001 par value                  |                            |         | 20           |         |               |         | 2            |         |              |         |       |         |   |          | (2       | )        |   |         | 20      |        
|                                         | Common stock, $1 par value                     |                            |         |             |         |               |         |             |         |              |         | 3,810  |         |   |          | (3,810   | )        |   |         |        |        
|                                         | Additional paid in capital                     |                            |         | 68,874       |         |               |         |             |         |              |         |        |         |   |          |         |          |   |         | 68,874  |        
|                                         | Accumulated other comprehensive income         |                            |         | (7,231       | )       |               |         |             |         |              |         | (189   | )       |   |          | 189      |          |   |         | (7,231  | )      
|                                         | Treasury stock                                 |                            |         | (62,076      | )       |               |         |             |         |              |         |        |         |   |          |         |          |   |         | (62,076 | )      
|                                         | Retained earnings (deficit)                    |                            |         | (74,103      | )       |               |         | (73,829      | )       |              |         | 91,903 |         |   |          | (18,074  | )        |   |         | (74,103 | )      
|                                         |                                                |                            |         |              |         |               |         |              |         |              |         |        |         |   |          |          |          |   |         |        
|                                         |                                                | Total stockholders equity |         |              | (74,516 | )             |         |              | (73,827 | )            |         |        | 95,524  |   |          |          | (21,697  | ) |         |         | (74,516 | )
|                                         |                                                |                            |         |              |         |               |         |              |         |              |         |        |         |   |          |          |          |   |         |        
|                                         |                                                | $                          | 391,351 |              |         | $             | 138,186 |              |         | $            | 192,092 |        |         | $ | (398,785 | )        |          | $ | 322,844 |        
|                                         |                                                |                            |         |              |         |               |         |              |         |              |         |        |         |   |          |          |          |   |         |        

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THE HOLMES GROUP, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

CONSOLIDATING STATEMENT OF
OPERATIONS

|                                                                         |                             |                   |         |              |   |               |         |              |  |              |         |       |  |   |          |   |  |   |         |        | 
|------------------------------------------------------------------------ | --------------------------- | ----------------- | ------- | ------------ | - | ------------- | ------- | ------------ |  | ------------ | ------- | ----- |  | - | -------- | - |  | - | ------- | ------ | 
|                                                                         |                             |                  
|                                                                         |                             | December 31, 2003
|                                                                         |                             |                  
|                                                                         |                             |                   |         | Guarantor    |   | Non-Guarantor |         |             
|                                                                         |                             | Parent            |         | Subsidiaries |   | Subsidiaries  |         | Eliminations |  | Consolidated
|                                                                         |                             |                   |         |              |   |               |         |              |  |             
|Net sales                                                                |                             | $                 | 178,433 |              |   | $             | 342,563 |              |  | $            | 449,952 |       |  | $ | (347,192 | ) |  | $ | 623,756 |       
|Cost of sales                                                            |                             |                   | 125,962 |              |   |               | 256,690 |              |  |              | 397,707 |       |  |   | (347,702 | ) |  |   | 432,657 |       
|                                                                         |                             |                   |         |              |   |               |         |              |  |              |         |       |  |   |          |   |  |   |         |       
|Gross profit                                                             |                             |                   | 52,471  |              |   |               | 85,873  |              |  |              | 52,245  |       |  |   | 510      |   |  |   | 191,099 |       
|Selling and administrative expenses                                      |                             |                   | 34,633  |              |   |               | 56,336  |              |  |              | 24,649  |       |  |   |         |   |  |   | 115,618 |       
|Restructuring costs                                                      |                             |                   |        |              |   |               | 1,899   |              |  |              |        |       |  |   |         |   |  |   | 1,899   |       
|                                                                         |                             |                   |         |              |   |               |         |              |  |              |         |       |  |   |          |   |  |   |         |       
|Operating income (loss)                                                  |                             |                   | 17,838  |              |   |               | 27,638  |              |  |              | 27,596  |       |  |   | 510      |   |  |   | 73,582  |       
|                                                                         |                             |                   |         |              |   |               |         |              |  |              |         |       |  |   |          |   |  |   |         |       
|Other income and expense:                                                |                             |                   |         |              |   |               |         |              |  |              |         |       |  |   |          |   |  |   |         |       
|                                                                         | Interest expense, net       |                   |         | 17,511       |   |               |         | 7,874        |  |              |         | 4     |  |   |          |  |  |   |         | 25,389 | 
|                                                                         | Other expense (income), net |                   |         | (3,328       | ) |               |         | 136          |  |              |         | 3,681 |  |   |          |  |  |   |         | 489    | 
|                                                                         |                             |                   |         |              |   |               |         |              |  |              |         |       |  |   |          |   |  |   |         |       
|                                                                         |                             |                   | 14,183  |              |   |               | 8,010   |              |  |              | 3,685   |       |  |   |         |   |  |   | 25,878  |       
|                                                                         |                             |                   |         |              |   |               |         |              |  |              |         |       |  |   |          |   |  |   |         |       
|Income before income taxes and equity in earnings
    from joint venture |                             |                   | 3,655   |              |   |               | 19,628  |              |  |              | 23,911  |       |  |   | 510      |   |  |   | 47,704  |       
|Income tax expense (benefit)                                             |                             |                   | (2,396  | )            |   |               |        |              |  |              | 470     |       |  |   |         |   |  |   | (1,926  | )     
|Equity in earnings from joint venture                                    |                             |                   | (2,548  | )            |   |               |        |              |  |              |        |       |  |   |         |   |  |   | (2,548  | )     
|                                                                         |                             |                   |         |              |   |               |         |              |  |              |         |       |  |   |          |   |  |   |         |       
|Income before equity in income of consolidated
    subsidiaries          |                             |                   | 8,599   |              |   |               | 19,628  |              |  |              | 23,441  |       |  |   | 510      |   |  |   | 52,178  |       
|Equity in income of consolidated subsidiaries                            |                             |                   | 43,579  |              |   |               |        |              |  |              |        |       |  |   | (43,579  | ) |  |   |        |       
|                                                                         |                             |                   |         |              |   |               |         |              |  |              |         |       |  |   |          |   |  |   |         |       
|Net income (loss)                                                        |                             | $                 | 52,178  |              |   | $             | 19,628  |              |  | $            | 23,441  |       |  | $ | (43,069  | ) |  | $ | 52,178  |       
|                                                                         |                             |                   |         |              |   |               |         |              |  |              |         |       |  |   |          |   |  |   |         |       

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THE HOLMES GROUP, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

CONSOLIDATING STATEMENT OF
OPERATIONS

|                                                                             |                             |                   |         |              |   |               |         |              |   |              |         |     |  |   |          |   |  |   |         |         |  
|---------------------------------------------------------------------------- | --------------------------- | ----------------- | ------- | ------------ | - | ------------- | ------- | ------------ | - | ------------ | ------- | --- |  | - | -------- | - |  | - | ------- | ------- | -
|                                                                             |                             |                  
|                                                                             |                             | December 31, 2002
|                                                                             |                             |                  
|                                                                             |                             |                   |         | Guarantor    |   | Non-Guarantor |         |             
|                                                                             |                             | Parent            |         | Subsidiaries |   | Subsidiaries  |         | Eliminations |   | Consolidated
|                                                                             |                             |                   |         |              |   |               |         |              |   |             
|Net sales                                                                    |                             | $                 | 173,489 |              |   | $             | 350,247 |              |   | $            | 394,554 |     |  | $ | (309,736 | ) |  | $ | 608,554 |        
|Cost of sales                                                                |                             |                   | 158,466 |              |   |               | 249,412 |              |   |              | 345,943 |     |  |   | (309,244 | ) |  |   | 444,577 |        
|                                                                             |                             |                   |         |              |   |               |         |              |   |              |         |     |  |   |          |   |  |   |         |        
|Gross profit                                                                 |                             |                   | 15,023  |              |   |               | 100,835 |              |   |              | 48,611  |     |  |   | (492     | ) |  |   | 163,977 |        
|Selling and administrative expenses                                          |                             |                   | 38,942  |              |   |               | 57,922  |              |   |              | 23,702  |     |  |   |         |   |  |   | 120,566 |        
|Restructuring costs                                                          |                             |                   |        |              |   |               | 28,006  |              |   |              |        |     |  |   |         |   |  |   | 28,006  |        
|                                                                             |                             |                   |         |              |   |               |         |              |   |              |         |     |  |   |          |   |  |   |         |        
|Operating income (loss)                                                      |                             |                   | (23,919 | )            |   |               | 14,907  |              |   |              | 24,909  |     |  |   | (492     | ) |  |   | 15,405  |        
|                                                                             |                             |                   |         |              |   |               |         |              |   |              |         |     |  |   |          |   |  |   |         |        
|Other income and expense:                                                    |                             |                   |         |              |   |               |         |              |   |              |         |     |  |   |          |   |  |   |         |        
|                                                                             | Interest expense, net       |                   |         | 20,351       |   |               |         | 9,194        |   |              |         | 70  |  |   |          |  |  |   |         | 29,615  |  
|                                                                             | Gain on sale of business    |                   |         |             |   |               |         | (9,488       | ) |              |         |    |  |   |          |  |  |   |         | (9,488  | )
|                                                                             | Gain on retirement of debt  |                   |         | (22,388      | ) |               |         |             |   |              |         |    |  |   |          |  |  |   |         | (22,388 | )
|                                                                             | Other expense (income), net |                   |         | (1,846       | ) |               |         | (94          | ) |              |         | 810 |  |   |          |  |  |   |         | (1,130  | )
|                                                                             |                             |                   |         |              |   |               |         |              |   |              |         |     |  |   |          |   |  |   |         |        
|                                                                             |                             |                   | (3,883  | )            |   |               | (388    | )            |   |              | 880     |     |  |   |         |   |  |   | (3,391  | )      
|                                                                             |                             |                   |         |              |   |               |         |              |   |              |         |     |  |   |          |   |  |   |         |        
|Income (loss) before income taxes, equity in
    earnings from joint venture |                             |                   | (20,036 | )            |   |               | 15,295  |              |   |              | 24,029  |     |  |   | (492     | ) |  |   | 18,796  |        
|Income tax expense (benefit)                                                 |                             |                   | (2,265  | )            |   |               | (2,385  | )            |   |              | 4,502   |     |  |   |         |   |  |   | (148    | )      
|Equity in earnings from joint venture                                        |                             |                   | (2,990  | )            |   |               |        |              |   |              |        |     |  |   |         |   |  |   | (2,990  | )      
|                                                                             |                             |                   |         |              |   |               |         |              |   |              |         |     |  |   |          |   |  |   |         |        
|Income (loss) before equity in income of
    consolidated subsidiaries       |                             |                   | (14,781 | )            |   |               | 17,680  |              |   |              | 19,527  |     |  |   | (492     | ) |  |   | 21,934  |        
|Equity in income of consolidated subsidiaries                                |                             |                   | (43,123 | )            |   |               |        |              |   |              |        |     |  |   | 43,123   |   |  |   |        |        
|                                                                             |                             |                   |         |              |   |               |         |              |   |              |         |     |  |   |          |   |  |   |         |        
|Income (loss) before cumulative effect of change
    in accounting principle |                             |                   | (57,904 | )            |   |               | 17,680  |              |   |              | 19,527  |     |  |   | 42,631   |   |  |   | 21,934  |        
|Cumulative effect of change in accounting
    principle                      |                             |                   |        |              |   |               | (79,838 | )            |   |              |        |     |  |   |         |   |  |   | (79,838 | )      
|                                                                             |                             |                   |         |              |   |               |         |              |   |              |         |     |  |   |          |   |  |   |         |        
|Net income (loss)                                                            |                             | $                 | (57,904 | )            |   | $             | (62,158 | )            |   | $            | 19,527  |     |  | $ | 42,631   |   |  | $ | (57,904 | )      
|                                                                             |                             |                   |         |              |   |               |         |              |   |              |         |     |  |   |          |   |  |   |         |        

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THE HOLMES GROUP, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

CONSOLIDATING STATEMENT OF
OPERATIONS

|                                                                                |                             |                   |         |              |  |               |         |              |  |              |         |        |   |   |          |   |  |   |         |        |  
|------------------------------------------------------------------------------- | --------------------------- | ----------------- | ------- | ------------ |  | ------------- | ------- | ------------ |  | ------------ | ------- | ------ | - | - | -------- | - |  | - | ------- | ------ | -
|                                                                                |                             |                  
|                                                                                |                             | December 31, 2001
|                                                                                |                             |                  
|                                                                                |                             |                   |         | Guarantor    |  | Non-Guarantor |         |             
|                                                                                |                             | Parent            |         | Subsidiaries |  | Subsidiaries  |         | Eliminations |  | Consolidated
|                                                                                |                             |                   |         |              |  |               |         |              |  |             
|Net sales                                                                       |                             | $                 | 221,275 |              |  | $             | 315,301 |              |  | $            | 365,826 |        |   | $ | (290,162 | ) |  | $ | 612,240 |       
|Cost of sales                                                                   |                             |                   | 183,279 |              |  |               | 244,918 |              |  |              | 324,576 |        |   |   | (290,502 | ) |  |   | 462,271 |       
|                                                                                |                             |                   |         |              |  |               |         |              |  |              |         |        |   |   |          |   |  |   |         |       
|Gross profit                                                                    |                             |                   | 37,996  |              |  |               | 70,383  |              |  |              | 41,250  |        |   |   | 340      |   |  |   | 149,969 |       
|Selling and administrative expenses                                             |                             |                   | 42,096  |              |  |               | 62,153  |              |  |              | 20,066  |        |   |   |         |   |  |   | 124,315 |       
|Restructuring costs                                                             |                             |                   |        |              |  |               | 1,744   |              |  |              |        |        |   |   |         |   |  |   | 1,744   |       
|                                                                                |                             |                   |         |              |  |               |         |              |  |              |         |        |   |   |          |   |  |   |         |       
|Operating income (loss)                                                         |                             |                   | (4,100  | )            |  |               | 6,486   |              |  |              | 21,184  |        |   |   | 340      |   |  |   | 23,910  |       
|                                                                                |                             |                   |         |              |  |               |         |              |  |              |         |        |   |   |          |   |  |   |         |       
|Other income and expense:                                                       |                             |                   |         |              |  |               |         |              |  |              |         |        |   |   |          |   |  |   |         |       
|                                                                                | Interest expense, net       |                   |         | 27,698       |  |               |         | 10,242       |  |              |         | (40    | ) |   |          |  |  |   |         | 37,900 |  
|                                                                                | Other expense (income), net |                   |         | 945          |  |               |         | 259          |  |              |         | (1,812 | ) |   |          |  |  |   |         | (608   | )
|                                                                                |                             |                   |         |              |  |               |         |              |  |              |         |        |   |   |          |   |  |   |         |       
|                                                                                |                             |                   | 28,643  |              |  |               | 10,501  |              |  |              | (1,852  | )      |   |   |         |   |  |   | 37,292  |       
|                                                                                |                             |                   |         |              |  |               |         |              |  |              |         |        |   |   |          |   |  |   |         |       
|Income (loss) before income taxes and equity in
    earnings from joint venture |                             |                   | (32,743 | )            |  |               | (4,015  | )            |  |              | 23,036  |        |   |   | 340      |   |  |   | (13,382 | )     
|Income tax expense (benefit)                                                    |                             |                   | 73      |              |  |               | 766     |              |  |              | 3,688   |        |   |   |         |   |  |   | 4,527   |       
|Equity in earnings from joint venture                                           |                             |                   | (2,354  | )            |  |               |        |              |  |              |        |        |   |   |         |   |  |   | (2,354  | )     
|                                                                                |                             |                   |         |              |  |               |         |              |  |              |         |        |   |   |          |   |  |   |         |       
|Income (loss) before equity in income of
    consolidated subsidiaries          |                             |                   | (30,462 | )            |  |               | (4,781  | )            |  |              | 19,348  |        |   |   | 340      |   |  |   | (15,555 | )     
|Equity in income of consolidated subsidiaries                                   |                             |                   | 14,907  |              |  |               |        |              |  |              |        |        |   |   | (14,907  | ) |  |   |        |       
|                                                                                |                             |                   |         |              |  |               |         |              |  |              |         |        |   |   |          |   |  |   |         |       
|Net income (loss)                                                               |                             | $                 | (15,555 | )            |  | $             | (4,781  | )            |  | $            | 19,348  |        |   | $ | (14,567  | ) |  | $ | (15,555 | )     
|                                                                                |                             |                   |         |              |  |               |         |              |  |              |         |        |   |   |          |   |  |   |         |       

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THE HOLMES GROUP, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

CONDENSED CONSOLIDATING STATEMENT OF CASH
FLOWS

|                                                         |                                                             |                                                          |        |              |        |               |        |              |         |   |        |         |         |   |        |         |         |  
|-------------------------------------------------------- | ----------------------------------------------------------- | -------------------------------------------------------- | ------ | ------------ | ------ | ------------- | ------ | ------------ | ------- | - | ------ | ------- | ------- | - | ------ | ------- | ------- | -
|                                                         |                                                             |                                                         
|                                                         |                                                             | December 31, 2003                                       
|                                                         |                                                             |                                                         
|                                                         |                                                             |                                                          |        | Guarantor    |        | Non-Guarantor |        |             
|                                                         |                                                             | Parent                                                   |        | Subsidiaries |        | Subsidiaries  |        | Consolidated
|                                                         |                                                             |                                                          |        |              |        |               |        |             
|Net cash provided by (used for) operating
    activities |                                                             | $                                                        | (1,113 | )            |        | $             | 35,989 |              |         | $ | 35,152 |         |         | $ | 70,028 |        
|                                                         |                                                             |                                                          |        |              |        |               |        |              |         |   |        |         |         |   |        |        
|Cash flows from investing
    activities:                |                                                             |                                                          |        |              |        |               |        |              |         |   |        |         |         |   |        |        
|                                                         | Proceeds from sale of business and assets held
    for sale |                                                          |        |             |        |               |        | 6,883        |         |   |        |        |         |   |        | 6,883   |        
|                                                         | Distribution of earnings from joint venture                 |                                                          |        | 2,693        |        |               |        |             |         |   |        |        |         |   |        | 2,693   |        
|                                                         | Purchases of property and equipment                         |                                                          |        | (1,785       | )      |               |        |             |         |   |        | (11,132 | )       |   |        | (12,917 | )      
|                                                         | Cash received from joint venture partner                    |                                                          |        | 293          |        |               |        |             |         |   |        |        |         |   |        | 293     |        
|                                                         |                                                             |                                                          |        |              |        |               |        |              |         |   |        |         |         |   |        |        
|                                                         |                                                             | Net cash provided by (used for) investing
    activities |        |              | 1,201  |               |        |              | 6,883   |   |        |         | (11,132 | ) |        |         | (3,048  | )
|                                                         |                                                             |                                                          |        |              |        |               |        |              |         |   |        |         |         |   |        |        
|Cash flows from financing
    activities:                |                                                             |                                                          |        |              |        |               |        |              |         |   |        |         |         |   |        |        
|                                                         | Repayments of Credit Facility                               |                                                          |        | (70,475      | )      |               |        |             |         |   |        |        |         |   |        | (70,475 | )      
|                                                         | Other activity with Parent, net                             |                                                          |        | 68,887       |        |               |        | (42,384      | )       |   |        | (26,503 | )       |   |        |        |        
|                                                         |                                                             |                                                          |        |              |        |               |        |              |         |   |        |         |         |   |        |        
|                                                         |                                                             | Net cash used for financing activities                   |        |              | (1,588 | )             |        |              | (42,384 | ) |        |         | (26,503 | ) |        |         | (70,475 | )
|                                                         |                                                             |                                                          |        |              |        |               |        |              |         |   |        |         |         |   |        |        
|                                                         | Effect of exchange rate changes on cash                     |                                                          |        |             |        |               |        |             |         |   |        | 1,149   |         |   |        | 1,149   |        
|Net increase (decrease) in cash and cash
    equivalents |                                                             |                                                          | (1,500 | )            |        |               | 488    |              |         |   | (1,334 | )       |         |   | (2,346 | )      
|Cash and cash equivalents, beginning of period           |                                                             |                                                          | 2,599  |              |        |               | (488   | )            |         |   | 6,315  |         |         |   | 8,426  |        
|                                                         |                                                             |                                                          |        |              |        |               |        |              |         |   |        |         |         |   |        |        
|Cash and cash equivalents, end of
    period             |                                                             | $                                                        | 1,099  |              |        | $             |       |              |         | $ | 4,981  |         |         | $ | 6,080  |        
|                                                         |                                                             |                                                          |        |              |        |               |        |              |         |   |        |         |         |   |        |        

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THE HOLMES GROUP, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

CONDENSED CONSOLIDATING STATEMENT OF CASH
FLOWS

|                                                         |                                                             |                                                          |         |              |        |               |        |              |         |   |        |         |         |   |        |         |         |  
|-------------------------------------------------------- | ----------------------------------------------------------- | -------------------------------------------------------- | ------- | ------------ | ------ | ------------- | ------ | ------------ | ------- | - | ------ | ------- | ------- | - | ------ | ------- | ------- | -
|                                                         |                                                             |                                                         
|                                                         |                                                             | December 31, 2002                                       
|                                                         |                                                             |                                                         
|                                                         |                                                             |                                                          |         | Guarantor    |        | Non-Guarantor |        |             
|                                                         |                                                             | Parent                                                   |         | Subsidiaries |        | Subsidiaries  |        | Consolidated
|                                                         |                                                             |                                                          |         |              |        |               |        |             
|Net cash provided by (used for) operating
    activities |                                                             | $                                                        | (12,623 | )            |        | $             | 40,168 |              |         | $ | 23,312 |         |         | $ | 50,857 |        
|                                                         |                                                             |                                                          |         |              |        |               |        |              |         |   |        |         |         |   |        |        
|Cash flows from investing
    activities:                |                                                             |                                                          |         |              |        |               |        |              |         |   |        |         |         |   |        |        
|                                                         | Proceeds from sale of business and assets held
    for sale |                                                          |         |             |        |               |        | 15,100       |         |   |        |        |         |   |        | 15,100  |        
|                                                         | Distribution of earnings from joint venture                 |                                                          |         | 2,472        |        |               |        |             |         |   |        |        |         |   |        | 2,472   |        
|                                                         | Purchases of property and equipment                         |                                                          |         | (4,961       | )      |               |        | (907         | )       |   |        | (8,686  | )       |   |        | (14,554 | )      
|                                                         |                                                             |                                                          |         |              |        |               |        |              |         |   |        |         |         |   |        |        
|                                                         |                                                             | Net cash provided by (used for) investing
    activities |         |              | (2,489 | )             |        |              | 14,193  |   |        |         | (8,686  | ) |        |         | 3,018   |  
|                                                         |                                                             |                                                          |         |              |        |               |        |              |         |   |        |         |         |   |        |        
|Cash flows from financing
    activities:                |                                                             |                                                          |         |              |        |               |        |              |         |   |        |         |         |   |        |        
|                                                         | Repayments of Credit Facility                               |                                                          |         | (42,248      | )      |               |        |             |         |   |        |        |         |   |        | (42,248 | )      
|                                                         | Other activity with Parent, net                             |                                                          |         | 69,005       |        |               |        | (56,161      | )       |   |        | (12,844 | )       |   |        |        |        
|                                                         | Redemption of Senior Subordinated Notes                     |                                                          |         | (11,550      | )      |               |        |             |         |   |        |        |         |   |        | (11,550 | )      
|                                                         | Debt issuance costs                                         |                                                          |         | (1,579       | )      |               |        |             |         |   |        |        |         |   |        | (1,579  | )      
|                                                         |                                                             |                                                          |         |              |        |               |        |              |         |   |        |         |         |   |        |        
|                                                         |                                                             | Net cash provided by (used for) financing
    activities |         |              | 13,628 |               |        |              | (56,161 | ) |        |         | (12,844 | ) |        |         | (55,377 | )
|                                                         |                                                             |                                                          |         |              |        |               |        |              |         |   |        |         |         |   |        |        
|                                                         | Effect of exchange rate changes on cash                     |                                                          |         |             |        |               |        |             |         |   |        | (187    | )       |   |        | (187    | )      
|Net increase (decrease) in cash and cash
    equivalents |                                                             |                                                          | (1,484  | )            |        |               | (1,800 | )            |         |   | 1,595  |         |         |   | (1,689 | )      
|Cash and cash equivalents, beginning of period           |                                                             |                                                          | 4,083   |              |        |               | 1,312  |              |         |   | 4,720  |         |         |   | 10,115 |        
|                                                         |                                                             |                                                          |         |              |        |               |        |              |         |   |        |         |         |   |        |        
|Cash and cash equivalents, end of
    period             |                                                             | $                                                        | 2,599   |              |        | $             | (488   | )            |         | $ | 6,315  |         |         | $ | 8,426  |        
|                                                         |                                                             |                                                          |         |              |        |               |        |              |         |   |        |         |         |   |        |        

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THE HOLMES GROUP, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

CONDENSED CONSOLIDATING STATEMENT OF CASH
FLOWS

|                                                         |                                                             |                                                          |       |              |        |               |        |              |         |   |         |         |        |   |        |         |         |  
|-------------------------------------------------------- | ----------------------------------------------------------- | -------------------------------------------------------- | ----- | ------------ | ------ | ------------- | ------ | ------------ | ------- | - | ------- | ------- | ------ | - | ------ | ------- | ------- | -
|                                                         |                                                             |                                                         
|                                                         |                                                             | December 31, 2001                                       
|                                                         |                                                             |                                                         
|                                                         |                                                             |                                                          |       | Guarantor    |        | Non-Guarantor |        |             
|                                                         |                                                             | Parent                                                   |       | Subsidiaries |        | Subsidiaries  |        | Consolidated
|                                                         |                                                             |                                                          |       |              |        |               |        |             
|Net cash provided by (used for) operating
    activities |                                                             | $                                                        | 8,352 |              |        | $             | 37,900 |              |         | $ | (10,002 | )       |        | $ | 36,250 |        
|                                                         |                                                             |                                                          |       |              |        |               |        |              |         |   |         |         |        |   |        |        
|Cash flows from investing
    activities:                |                                                             |                                                          |       |              |        |               |        |              |         |   |         |         |        |   |        |        
|                                                         | Proceeds from sale of business and assets held
    for sale |                                                          |       |             |        |               |        | 2,228        |         |   |         |        |        |   |        | 2,228   |        
|                                                         | Distribution of earnings from joint venture                 |                                                          |       | 1,876        |        |               |        |             |         |   |         |        |        |   |        | 1,876   |        
|                                                         | Purchases of property and equipment                         |                                                          |       | (3,890       | )      |               |        | (2,879       | )       |   |         | (10,251 | )      |   |        | (17,020 | )      
|                                                         | Cash received from joint venture partner                    |                                                          |       |             |        |               |        |             |         |   |         | 700     |        |   |        | 700     |        
|                                                         |                                                             |                                                          |       |              |        |               |        |              |         |   |         |         |        |   |        |        
|                                                         |                                                             | Net cash used for investing activities                   |       |              | (2,014 | )             |        |              | (651    | ) |         |         | (9,551 | ) |        |         | (12,216 | )
|                                                         |                                                             |                                                          |       |              |        |               |        |              |         |   |         |         |        |   |        |        
|Cash flows from financing
    activities:                |                                                             |                                                          |       |              |        |               |        |              |         |   |         |         |        |   |        |        
|                                                         | Repayments of Credit Facility                               |                                                          |       | (14,543      | )      |               |        |             |         |   |         |        |        |   |        | (14,543 | )      
|                                                         | Other activity with Parent, net                             |                                                          |       | 14,506       |        |               |        | (36,896      | )       |   |         | 22,390  |        |   |        |        |        
|                                                         | Debt issuance costs                                         |                                                          |       | (2,393       | )      |               |        |             |         |   |         |        |        |   |        | (2,393  | )      
|                                                         |                                                             |                                                          |       |              |        |               |        |              |         |   |         |         |        |   |        |        
|                                                         |                                                             | Net cash provided by (used for) financing
    activities |       |              | (2,430 | )             |        |              | (36,896 | ) |         |         | 22,390 |   |        |         | (16,936 | )
|                                                         |                                                             |                                                          |       |              |        |               |        |              |         |   |         |         |        |   |        |        
|Net increase in cash and cash
    equivalents            |                                                             |                                                          | 3,908 |              |        |               | 353    |              |         |   | 2,837   |         |        |   | 7,098  |        
|Cash and cash equivalents, beginning of period           |                                                             |                                                          | 175   |              |        |               | 959    |              |         |   | 1,883   |         |        |   | 3,017  |        
|                                                         |                                                             |                                                          |       |              |        |               |        |              |         |   |         |         |        |   |        |        
|Cash and cash equivalents, end of
    period             |                                                             | $                                                        | 4,083 |              |        | $             | 1,312  |              |         | $ | 4,720   |         |        | $ | 10,115 |        
|                                                         |                                                             |                                                          |       |              |        |               |        |              |         |   |         |         |        |   |        |        

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SCHEDULE II

THE HOLMES GROUP, INC.

VALUATION AND QUALIFYING ACCOUNTS

(In thousands)


|                                 |                              |                |   |            |  |            |   |               |  |           |  |   |  |  |   |        |  |  |   |        | 
|-------------------------------- | ---------------------------- | -------------- | - | ---------- |  | ---------- | - | ------------- |  | --------- |  | - |  |  | - | ------ |  |  | - | ------ | 
|                                 |                              |                |   |            |  |            |   |              
|                                 |                              |                |   | Additions  |  | Deductions |   |              
|                                 |                              |                |   |            |  |            |   |              
|                                 |                              | Balance at     |   | Charged to |  | Charged    |   | Write-off of  |  | Balance  
|                                 |                              | Beginning      |   | Costs and  |  | to Other   |   | Uncollectible |  | at End   
|                                 |                              | of Period      |   | Expenses   |  | Accounts   |   | Accounts      |  | of Period
|                                 |                              |                |   |            |  |            |   |               |  |          
|                                 |                              |               
|                                 |                              | (In thousands)
|Allowance for doubtful accounts: |                              |                |   |            |  |            |   |               |  |           |  |   |  |  |   |        |  |  |   |       
|                                 | Year ended December 31, 2001 |                | $ | 9,622      |  |            | $ | 15,219        |  |           |  |  |  |  | $ | 6,639  |  |  | $ | 18,202 | 
|                                 | Year ended December 31, 2002 |                |   | 18,202     |  |            |   | 6,134         |  |           |  |  |  |  |   | 5,985  |  |  |   | 18,351 | 
|                                 | Year ended December 31, 2003 |                |   | 18,351     |  |            |   | 236           |  |           |  |  |  |  |   | 11,544 |  |  |   | 7,043  | 

|                                  |                              |                |   |            |  |             |   |           |   |          |  |           |  |  |   |        |  |  |  |   |  |  |   |        | 
|--------------------------------- | ---------------------------- | -------------- | - | ---------- |  | ----------- | - | --------- | - | -------- |  | --------- |  |  | - | ------ |  |  |  | - |  |  | - | ------ | 
|                                  |                              |                |   |            |  |             |   |          
|                                  |                              |                |   | Additions  |  | Deductions  |   |          
|                                  |                              |                |   |            |  |             |   |          
|                                  |                              |                |   |            |  | Net         |   |           |   |         
|                                  |                              |                |   | Charged to |  | Operating   |   | Net       |   |          |  |          
|                                  |                              | Balance at     |   | Income     |  | Losses      |   | Operating |   | Charged  |  | Balance  
|                                  |                              | Beginning      |   | Tax        |  | Without Tax |   | Losses    |   | to Other |  | at End   
|                                  |                              | of Period      |   | Expense    |  | Benefit     |   | Utilized  |   | Accounts |  | of Period
|                                  |                              |                |   |            |  |             |   |           |   |          |  |          
|                                  |                              |               
|                                  |                              | (In thousands)
|Deferred tax valuation allowance: |                              |                |   |            |  |             |   |           |   |          |  |           |  |  |   |        |  |  |  |   |  |  |   |       
|                                  | Year ended December 31, 2001 |                | $ | 18,541     |  |             | $ | 13,890    |   |          |  |          |  |  |   |       |  |  |  |  |  |  | $ | 32,431 | 
|                                  | Year ended December 31, 2002 |                |   | 32,431     |  |             |   | 22,659    |   |          |  |          |  |  | $ | 14,892 |  |  |  |  |  |  |   | 40,198 | 
|                                  | Year ended December 31, 2003 |                |   | 40,198     |  |             |   | (5,573    | ) |          |  |          |  |  |   | 9,992  |  |  |  |  |  |  |   | 24,633 | 

|                                |                              |                |   |            |  |            |   |           |  |  |   |       |  |  |   |        | 
|------------------------------- | ---------------------------- | -------------- | - | ---------- |  | ---------- | - | --------- |  |  | - | ----- |  |  | - | ------ | 
|                                |                              |                |   | Additions  |  | Deductions |   |          
|                                |                              |                |   |            |  |            |   |          
|                                |                              | Balance at     |   | Charged to |  | Write-off  |   | Balance  
|                                |                              | Beginning      |   | Costs and  |  | of         |   | at End   
|                                |                              | of Period      |   | Expenses   |  | Inventory  |   | of Period
|                                |                              |                |   |            |  |            |   |          
|                                |                              |               
|                                |                              | (In thousands)
|Inventory obsolescence reserve: |                              |                |   |            |  |            |   |           |  |  |   |       |  |  |   |       
|                                | Year ended December 31, 2001 |                | $ | 18,425     |  |            | $ | 1,667     |  |  | $ | 9,780 |  |  | $ | 10,312 | 
|                                | Year ended December 31, 2002 |                |   | 10,312     |  |            |   | 9,491     |  |  |   | 7,443 |  |  |   | 12,360 | 
|                                | Year ended December 31, 2003 |                |   | 12,360     |  |            |   | 1,579     |  |  |   | 6,416 |  |  |   | 7,523  | 

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

Not applicable.






|          |                        
|--------- | -----------------------
|Item 9(a) | Controls and Procedures

(a)     Evaluation of
disclosure controls and procedures.

Our management, with the participation of our
Chief Executive Officer, or CEO, and Chief Financial Officer, or
CFO, evaluated the effectiveness of our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e)
under the Securities Exchange Act) as of December 31, 2003.
In designing and evaluating our disclosure controls and
procedures, our management recognized that any controls and
procedures, no matter how well designed and operated, can
provide only reasonable assurance of achieving their objectives,
and our management necessarily applied its judgment in
evaluating the cost-benefit relationship of possible controls
and procedures. Based on this evaluation, our CEO and CFO
concluded that, as of December 31, 2003, our disclosure
controls and procedures were (1) designed to ensure that
material information relating to us, including our consolidated
subsidiaries, is made known to our CEO and CFO by others within
those entities, particularly during the period in which this
report was being prepared and (2) effective, in that they
provide reasonable assurance that information required to be
disclosed by us in the reports that we file or submit under the
Securities Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the Securities and
Exchange Commissions rules and forms.

(b) Changes in Internal Controls.

No change in our internal control over financial
reporting (as defined in Rules 13a-15(f) and 15d-15(f)
under the Securities Exchange Act) occurred during the fiscal
quarter ended December 31, 2003 that has materially
affected, or is reasonably likely to materially affect, our
internal control over financial reporting.

PART III






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

The following table sets forth certain
information with respect to our directors and executive
officers. The directors are elected annually by the
stockholders. Pursuant to the terms of a Stockholders
Agreement entered into in connection with the 1997
recapitalization transactions, the stockholders have agreed to
vote in favor of the election of the persons named as directors
below.

|                     |  |     |    |          |  |                                                                         
|-------------------- |  | --- | -- | -------- |  | ------------------------------------------------------------------------
|Name                 |  | Age |    | Position
|                     |  |     |    |         
|Jordan A. Kahn       |  |     | 62 |          |  | Chairman of the Board of Directors                                      
|Peter J. Martin      |  |     | 48 |          |  | President, Chief Executive Officer and Director                         
|(Tommy) Woon Fai Liu |  |     | 51 |          |  | Managing Director of Holmes Far East
    Operations and Director       
|Richard K. Lubin     |  |     | 57 |          |  | Director                                                                
|Randy Peeler         |  |     | 39 |          |  | Director                                                                
|Gregory F. White     |  |     | 40 |          |  | Director                                                                
|Fred J. Musone       |  |     | 59 |          |  | Director                                                                
|Louis F. Cimini      |  |     | 49 |          |  | Senior Vice President  Human Resources
    and Organization Performance
|John M. Kelliher     |  |     | 52 |          |  | Senior Vice President and Chief Financial Officer                       

Jordan A. Kahn,Holmes founder and Chairman of
the Board of Directors, has served as President and Chief
Executive Officer and a director since Holmes organization
in 1982. Since 1968, Mr. Kahn has also been President of
Jordan Kahn Co., Inc. a manufacturers representative
representing small electric personal appliance manufacturers,
including the Company, to retailers across the Northeast.

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Peter J. Martinjoined the Company in August 2001 as
President and Chief Executive Officer. Prior thereto, he was
Group President Home Décor business for Newell Rubbermaid,
a NYSE-listed housewares company, since November 2000. From
December 1997 through October 2000 he was President of Newell
Window Fashions Europe. From May 1994 to November 1997 he was
Vice President  Group Controller.

(Tommy) Woon Fai Liubecame Managing Director of
Holmes Far East operations upon the closing of the 1997
recapitalization transactions. From 1993 to 1997, Mr. Liu
served as Chief Financial Officer and Executive Director of Asco
General Supplies Far East Limited, a subsidiary of Pentland
Group plc, our former majority stockholder, as well as Executive
Director of Holmes Far East since 1994. From 1989 to 1993,
Mr. Liu was Finance Director for Johnson & Johnson
Hong Kong. He became a director of Holmes during 1999.

Richard K. Lubinis
a Managing Director of Berkshire Partners, which he co-founded
in 1986. He became a director of Holmes in 1997, and has been a
director of many of Berkshires manufacturing, retailing
and transportation investments, including, among others,
U.S. Can Corporation and English Welsh & Scottish
Railway, Ltd.

Randy Peeleris a
Managing Director of Berkshire Partners, where he has been
employed since 1996. From 1994 to 1996, he was responsible for
new business ventures at Health Advances, a healthcare industry
consulting firm. From 1993 to 1994, he served as Chief of Staff
to the Assistant Secretary for Economic Policy at the
U.S. Department of the Treasury. Prior to that, he was a
consultant with Cannon Associates. Mr. Peeler became a
director of Holmes in 1997, and also serves as a director of
Casella Waste Systems, Inc. and Weigh-Tronix, LLC.

Gregory F. Whiteis
Executive Vice President and General Manager of iRobot Corp. a
marketer of robotic floor care products since April 2003.
Previously, Mr. White served as Executive Vice President,
Sales and Marketing of The Holmes Group from 1995 to 2003, and
from 1993 to 1995 as Vice President Marketing. He became a
director of Holmes in 1997.

Fred J. Musonejoined the Holmes Board of Directors
at the annual stockholders meeting in April 2002.
Mr. Musone is currently a consultant with several companies
in the automotive and furniture industries. From 1995 to 1998 he
was President of Morton Auto Safety Products, the worlds
largest manufacturer of air bag modules and inflators. Prior to
that, Mr. Musone spent over 25 years at Federal Mogul,
a worldwide automotive parts supplier, in various executive and
senior management positions.

Louis F. Ciminijoined Holmes in December 1999 from
CGU, an insurance company, where he was Vice President of Human
Resources for two years. Prior to joining CGU, Mr. Cimini
spent nine years with PHH (now Cendant Mobility), a Fortune 500
corporate services organization, as Senior Vice President of
Human Resources and Quality, where he led the human resources
elements of restructuring and re-engineering during several
acquisitions.

John M. Kelliher,
Senior Vice President and Chief Financial Officer, joined Holmes
in February 2002 from The Stride Rite Corporation, a NYSE-listed
footwear marketer, where he spent twenty years in a number of
financial management positions, including Chief Financial
Officer and Treasurer from February 1998 to April 2001 and Vice
President  Finance and Treasurer from February 1993
to January 1998.

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|         |                       
|-------- | ----------------------
|Item 11. | Executive Compensation

Summary

The following Summary Compensation Table sets
forth information concerning the compensation paid or accrued by
Holmes to the Chief Executive Officer and certain other persons
who served as executive officers during the fiscal year ended
December 31, 2003.

|                     |                           |  |      |                     |  |                           |         |              |  |           |         |              |  |   |        |        |     |  |        |           |  |   |        |        | 
|-------------------- | ------------------------- |  | ---- | ------------------- |  | ------------------------- | ------- | ------------ |  | --------- | ------- | ------------ |  | - | ------ | ------ | --- |  | ------ | --------- |  | - | ------ | ------ | 
|                     |                           |  |      |                     |  |                          
|                     |                           |  |      | Annual Compensation |  | Long-Term Compensation(2)
|                     |                           |  |      |                     |  |                          
|Name and             |                           |  |      |                     |  | Other annual(1)           |         | Stock Option |  | All Other
|Principal Position   |                           |  |      | Salary              |  | Bonus                     |         | Compensation |  | Shares    |         | Compensation
|                     |                           |  |      |                     |  |                           |         |              |  |           |         |             
|Jordan A. Kahn       |                           |  | 2003 |                     |  | $                         | 500,000 |              |  | $         | 327,944 |              |  | $ | 14,400 |        |     |  |        |           |  | $ | 3,701  |       
|                     | Chairman of the Board of  |  |      | 2002                |  |                           |         | 503,663      |  |           |         | 315,188      |  |   |        | 14,400 |     |  |        |           |  |   |        | 3,663  | 
|                     | Directors                 |  |      | 2001                |  |                           |         | 501,430      |  |           |         | 115,000      |  |   |        | 15,600 |     |  |        |           |  |   |        | 2,322  | 
|                    
|Peter J. Martin      |                           |  | 2003 |                     |  |                           | 450,000 |              |  |           | 293,588 |              |  |   | 13,357 |        |     |  |        |           |  |   | 841    |       
|                     | President and Chief       |  |      | 2002                |  |                           |         | 450,845      |  |           |         | 378,935      |  |   |        | 49,344 | (3) |  |        |           |  |   |        | 845    | 
|                     | Executive Officer         |  |      | 2001                |  |                           |         | 178,200      |  |           |         | 89,100       |  |   |        | 60,765 | (3) |  |        | 1,000,000 |  |   |        | 338    | 
|                    
|(Tommy) Woon Fai Liu |                           |  | 2003 |                     |  |                           | 273,000 |              |  |           | 171,171 |              |  |   | 47,283 | (4)    |     |  | 35,000 |           |  |   | 45,045 |       
|                     | Managing Director of      |  |      | 2002                |  |                           |         | 260,000      |  |           |         | 218,530      |  |   |        | 44,701 | (4) |  |        |           |  |   |        | 42,900 | 
|                     | Holmes Far East           |  |      | 2001                |  |                           |         | 260,000      |  |           |         | 59,800       |  |   |        | 44,701 | (4) |  |        |           |  |   |        | 42,900 | 
|                    
|John M. Kelliher(5)  |                           |  | 2003 |                     |  |                           | 247,000 |              |  |           | 96,878  |              |  |   | 8,400  |        |     |  | 50,000 |           |  |   | 1,100  |       
|                     | Senior Vice President and |  |      | 2002                |  |                           |         | 214,355      |  |           |         | 121,035      |  |   |        | 7,700  |     |  |        | 50,000    |  |   |        | 1,119  | 
|                     | Chief Financial Officer   |  |      |                     |  |                           |         |              |  |           |         |              |  |   |        |        |     |  |        |           |  |   |        |        | 
|                    
|Louis F. Cimini      |                           |  | 2003 |                     |  |                           | 185,000 |              |  |           | 72,374  |              |  |   |        |        |     |  | 25,000 |           |  |   | 421    |       
|                     | Senior Vice President    |  |      | 2002                |  |                           |         | 175,000      |  |           |         | 104,453      |  |   |        |        |     |  |        |           |  |   |        | 397    | 
|                     | Human Resources and       |  |      | 2001                |  |                           |         | 175,000      |  |           |         | 36,409       |  |   |        |        |     |  |        | 25,000    |  |   |        | 382    | 
|                     | Organization Performance  |  |      |                     |  |                           |         |              |  |           |         |              |  |   |        |        |     |  |        |           |  |   |        |        | 



---



|    |                                                                                                                                                                                                                                                                                                                            
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Primarily represents automobile allowance or
    annual lease payments on automobile provided by Holmes, except
    as described in Notes (3) and (4) below.                                                                                                                                                               
|   
|(2) | For Messrs. Kahn, Martin, Kelliher and
    Cimini, the amounts represent insurance premiums paid by Holmes
    for term life insurance for the benefit of the executive. For
    Mr. Liu, the amount represents the Companys contribution
    to a defined contribution retirement plan for Hong Kong based
    employees.
|   
|(3) | In 2001, represents the payment of a signing
    bonus and related relocation expenses in connection with joining
    the Company in August 2001. In 2002, represents reimbursed
    relocation expenses and annual lease payments on automobile
    provided by Holmes.                                                   
|   
|(4) | Represents annual living expense allowance and
    annual lease payments on automobile provided by Holmes.                                                                                                                                                                                                                 
|   
|(5) | Mr. Kelliher joined the Company effective
    February 1, 2002.                                                                                                                                                                                                                                                            

70



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##### Table of Contents



Option Grants in Last Fiscal Year

The following table describes stock options
granted during 2003 to the executive officers set forth in the
Summary Compensation Table above.

|                     |  |               |        |               |  |              |      |            |  |                          |      |     |  |  |            |  |  |   |         |  |  |   |         | 
|-------------------- |  | ------------- | ------ | ------------- |  | ------------ | ---- | ---------- |  | ------------------------ | ---- | --- |  |  | ---------- |  |  | - | ------- |  |  | - | ------- | 
|                     |  |               |        |               |  |              |      |            |  |                         
|                     |  |               |        |               |  |              |      |            |  | Potential Realizable    
|                     |  |               |        |               |  |              |      |            |  | Value at Assumed        
|                     |  | Number of     |        | Percent of    |  |              |      |            |  | Annual Rate of          
|                     |  | Securities    |        | Total Options |  |              |      |            |  | Stock Price Appreciation
|                     |  | Underlying    |        | Granted to    |  |              |      |            |  | for Option Term ($)(2)  
|                     |  | Options       |        | Employees     |  | Exercise     |      | Expiration |  |                         
|Name                 |  | Granted(#)(1) |        | in 2003       |  | Price ($/Sh) |      | Date       |  | 5%                       |      | 10%
|                     |  |               |        |               |  |              |      |            |  |                          |      |    
|Jordan A. Kahn       |  |               |       |               |  |              |     |            |  |                          |     |     |  |  |           |  |  |   |        |  |  |   |        | 
|Peter J. Martin      |  |               |       |               |  |              |     |            |  |                          |     |     |  |  |           |  |  |   |        |  |  |   |        | 
|(Tommy) Woon Fai Liu |  |               | 35,000 |               |  |              | 7.4  | %          |  | $                        | 4.25 |     |  |  | 04/02/2012 |  |  | $ | 93,450  |  |  | $ | 236,950 | 
|John M. Kelliher     |  |               | 50,000 |               |  |              | 10.5 | %          |  |                          | 4.25 |     |  |  | 04/02/2012 |  |  |   | 133,500 |  |  |   | 338,500 | 
|Louis F. Cimini      |  |               | 25,000 |               |  |              | 5.3  | %          |  |                          | 4.25 |     |  |  | 04/02/2012 |  |  |   | 66,750  |  |  |   | 169,250 | 



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | These options to purchase Holmes common
    stock were granted under Holmes 1997 Stock Option Plan.
    The option price of $4.25 per share was based on an
    evaluation performed by Holmes majority stockholder. This
    value was used in setting all option grants during 2003.                                                                                                                                                                                    
|   
|(2) | Net gains from potential stock option exercises
    are estimated based on assumed rates of stock price appreciation
    over the option term as set forth in rules promulgated by the
    Securities and Exchange Commission, and are not intended to
    forecast future appreciation of Holmes common stock. The
    actual net gains, if any, are dependent on the actual future
    performance of the common stock, for which there is currently no
    public market.

Aggregated Option Exercises and Fiscal Year
End Values

The following table sets forth certain
information concerning the number and value of unexercised
options to purchase Holmes common stock at
December 31, 2003.

|                     |  |             |   |             |  |                             |   |                      |  |             |         |               |  |  |         |  |  |  |   |  |  |  |   | 
|-------------------- |  | ----------- | - | ----------- |  | --------------------------- | - | -------------------- |  | ----------- | ------- | ------------- |  |  | ------- |  |  |  | - |  |  |  | - | 
|                     |  |             |   |             |  |                             |   |                     
|                     |  |             |   |             |  | Number of Shares Underlying |   | Value of Unexercised
|                     |  |             |   |             |  | Unexercised Options at      |   | In-the-Money        
|                     |  |             |   |             |  | Year-End(#)                 |   | Options($)(2)       
|                     |  |             |   |             |  |                             |   |                     
|Name                 |  | Exercise(#) |   | Realized($) |  | Exercisable(1)              |   | Unexercisable        |  | Exercisable |         | Unexercisable
|                     |  |             |   |             |  |                             |   |                      |  |             |         |              
|Jordan A. Kahn(3)    |  |             |  |             |  |                             |  |                      |  |             | 690,147 |               |  |  | 48,108  |  |  |  |  |  |  |  |  | 
|Peter J. Martin(3)   |  |             |  |             |  |                             |  |                      |  |             | 400,000 |               |  |  | 550,000 |  |  |  |  |  |  |  |  | 
|(Tommy) Woon Fai Liu |  |             |  |             |  |                             |  |                      |  |             | 103,000 |               |  |  | 57,000  |  |  |  |  |  |  |  |  | 
|John M. Kelliher     |  |             |  |             |  |                             |  |                      |  |             | 10,000  |               |  |  | 90,000  |  |  |  |  |  |  |  |  | 
|Louis F. Cimini      |  |             |  |             |  |                             |  |                      |  |             | 25,000  |               |  |  | 50,000  |  |  |  |  |  |  |  |  | 



---



|    |                                                                                                                                                           
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Includes non-qualified options whose vesting is
    tied to specific Holmes performance measures.                                                         
|   
|(2) | There is currently no public market for
    Holmes common stock. No determination of the value of such
    common stock was made as of December 31, 2003.
|   
|(3) | In 2003, options for 50,000 shares previously
    issued to each Mr. Kahn and Mr. Martin were canceled.                                                   

71



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##### Table of Contents



Equity Compensation Plan Information

The following table provides information as of
December 31, 2003 about our equity compensation plans and
arrangements, in the aggregate.

|                                                           |  |                      |           |                     |  |                      |      |  |  |  |         | 
|---------------------------------------------------------- |  | -------------------- | --------- | ------------------- |  | -------------------- | ---- |  |  |  | ------- | 
|                                                           |  | (a)                  |           |                     |  | (c)                 
|                                                           |  | Number of Securities |           | (b)                 |  | Number of Securities
|                                                           |  | to be Issued Upon    |           | Weighted-Average    |  | Remaining Available 
|                                                           |  | Exercise of          |           | Exercise Price of   |  | for Future Issuance 
|Plan Category                                              |  | Outstanding Options  |           | Outstanding Options |  | Under Plans(2)      
|                                                           |  |                      |           |                     |  |                     
|Equity Compensation Plans Approved by
    Stockholders(1)  |  |                      | 5,459,696 |                     |  | $                    | 4.20 |  |  |  | 501,282 | 
|Equity Compensation Plans Not Approved by
    Stockholders |  |                      |          |                     |  |                      |     |  |  |  |        | 
|                                                           |  |                      |           |                     |  |                      |      |  |  |  |         | 
|Total                                                      |  |                      | 5,459,696 |                     |  | $                    | 4.20 |  |  |  | 501,282 | 
|                                                           |  |                      |           |                     |  |                      |      |  |  |  |         | 



---



|    |                                                                                                                                                                                                 
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Consists of Holmes 1997 Stock Option Plan,
    under which the Company may grant incentive and non-qualified
    stock options to purchase common stock as well as restricted
    stock awards.
|   
|(2) | Excluding shares of common stock reflected in
    column (a).                                                                                                                                   

Retirement Benefit Accumulation Plan

During fiscal 2000, the Company amended one of
the defined benefit plans acquired as part of the Rival
transaction in 1999 and extended pension benefits to all
domestic, full-time employees of the Company. The Holmes Group
Retirement Benefit Accumulation Plan, as amended and restated,
is a non-contributory defined benefit plan that allows for the
vesting of benefits for certain participants under a cash
balance plan formula. Under the Plan, each employee has an
individual account that earns a compensation credit which, in
2003, was computed at 4% of annual base salary up to $76,000 and
8% of base salary between $76,000 and the maximum eligible
compensation of $200,000. Each account is also increased by an
annual interest credit based on the yield of the one-year U.S.
Treasury bill plus 100 basis points. Participants are fully
vested after five years of employment. Upon retirement, each
person receives a benefit based on the value of their cash
balance account which is payable either as a lump sum or in the
form of an annuity.

The following table shows the estimated annual
benefits payable under the Plan upon retirement at age 65 for
each of the named executive officers. The amounts presented are
on a straight-life annuity basis, but alternative methods of
payment are available at the option of the participant. In no
event shall benefits payable under the Retirement Benefit
Accumulation Plan exceed the maximum allowed under the Employee
Retirement Income Security Act of 1974, as amended. The benefit
payments under the Plan are not subject to any deductions for
Social Security benefits or other offset amounts.

|                       |  |                           |        | 
|---------------------- |  | ------------------------- | ------ | 
|                       |  | Estimated Annual Benefits
|                       |  | Payable Upon Retirement  
|Name                   |  | At Age 65(1)             
|                       |  |                          
|Jordan A. Kahn         |  | $                         | 9,475  | 
|Peter J. Martin        |  |                           | 32,023 | 
|(Tommy) Won Fai Liu(2) |  |                           |       | 
|John M. Kelliher       |  |                           | 21,182 | 
|Louis F. Cimini        |  |                           | 30,114 | 



---



|    |                                                                                                                                                                                                 
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Assumes continued service until age 65 at current
    salary levels.                                                                                                                            
|   
|(2) | Mr. Liu is not covered under the Retirement
    Benefit Accumulation Plan, but is a participant in the defined
    contribution plan maintained for the Companys Hong Kong
    based employees.

72



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##### Table of Contents








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

The following table sets forth certain
information regarding the beneficial ownership of Holmes
common stock. Except as indicated in the footnotes to this
table, the Company believes that the persons named in this table
have sole voting and investment power with respect to all shares
of common stock indicated.

|                                                                           |                            |           |            |             |  |  |      |   | 
|-------------------------------------------------------------------------- | -------------------------- | --------- | ---------- | ----------- |  |  | ---- | - | 
|                                                                           |                            |           |            | Percent of 
|                                                                           |                            | Number    |            | Outstanding
|Name and Address of Beneficial Owner(1)                                    |                            | of Shares |            | Shares(2)  
|                                                                           |                            |           |            |            
|Berkshire Fund IV, Limited Partnership(3)                                  |                            |           | 15,052,594 |             |  |  | 74.0 | %
|Berkshire Fund V, Limited Partnership                                      |                            |           |            |             |  |  |      |  
|                                                                           | c/o Berkshire Partners LLC |           |            |             |  |  |      |   | 
|                                                                           | One Boston Place           |           |            |             |  |  |      |   | 
|                                                                           | Boston, MA 02108           |           |            |             |  |  |      |   | 
|Jordan A. Kahn(4)                                                          |                            |           | 3,334,920  |             |  |  | 15.9 | %
|Peter J. Martin(4)                                                         |                            |           | 400,000    |             |  |  | 1.9  | %
|(Tommy) Woon Fai Liu(4)                                                    |                            |           | 237,203    |             |  |  | 1.2  | %
|Richard Lubin(5)                                                           |                            |           | 15,052,594 |             |  |  | 74.0 | %
|Randy Peeler(5)                                                            |                            |           | 15,052,594 |             |  |  | 74.0 | %
|Gregory F. White(4)                                                        |                            |           | 763,577    |             |  |  | 3.6  | %
|Fred Musone(4)                                                             |                            |           | 2,000      |             |  |  | *    |  
|Louis F. Cimini(4)                                                         |                            |           | 25,000     |             |  |  | *    |  
|John M. Kelliher(4)                                                        |                            |           | 10,000     |             |  |  | *    |  
|All current directors and executive officers as a
    group (9 persons)(6) |                            |           | 19,825,294 |             |  |  | 82.8 | %



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Unless otherwise specified, the address of each
    person is c/o The Holmes Group, Inc., One Holmes Way,
    Milford, MA 01757.                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   
|(2) | Beneficial ownership is determined in accordance
    with the rules of the Commission and reflects general voting
    power and/or investment power with respect to securities. In
    addition to the 20,331,566 shares of common stock
    outstanding as of the date hereof, shares of common stock
    subject to options or warrants exercisable within 60 days
    are deemed outstanding.                                                                                                                                                                                    
|   
|(3) | Includes shares held by various investment
    entities affiliated with Berkshire Partners LLC.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   
|(4) | Includes shares which may be held by family
    members or affiliates. Includes the following shares subject to
    vested stock options: Mr. Kahn 
    690,147 shares; Mr. Martin 
    400,000 shares; Mr. Liu 
    103,000 shares; Mr. White 
    592,039 shares; Mr. Musone 
    2,000 shares; Mr. Cimini 
    25,000 shares and Mr. Kelliher 
    10,000 shares. With respect to Mr. Kahn, includes
    246,615 shares held in trust for employees of the Company
    as to which Mr. Kahn is voting trustee. Mr. Kahn
    disclaims beneficial ownership of such shares.
|   
|(5) | This person is affiliated with Berkshire Partners
    LLC and may be deemed to have a beneficial interest in certain
    of the shares held by its affiliates. This person disclaims
    beneficial ownership of shares in which he has no pecuniary
    interest.                                                                                                                                                                                                                                                                                                                  
|   
|(6) | Includes stock options and voting trust shares
    referred to in Note 4.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           



| |   |               
| | - | --------------
| | * | Less than 1.0%






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

Pursuant to a letter agreement dated
December 10, 1998 with two investment funds affiliated with
Berkshire Partners (the Letter Agreement), Berkshire Partners
received a fee of $2.0 million from Holmes as of the
closing of the Rival acquisition. Pursuant to a Management
Agreement (the Management Agreement), entered into in November
1997 in connection with the 1997 Transactions, Berkshire
Partners received a $1.5 million fee from Holmes and an
annual fee of $400,000 per year for the provision of
management and

73



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##### Table of Contents



advisory services. The Letter Agreement increased
the annual management fee to $500,000 following the closing of
the Rival acquisition. The Management Agreement will be in
effect until November, 2004, provided that the Management
Agreement will terminate on the later of the first date that
(i) Berkshire Partners owns less than 40.0% of Holmes
common stock on a fully diluted basis, and (ii) Berkshire
Partners owns fewer common shares than the members of
Holmes management, taken as a group, or fewer shares than
any other single stockholder. Berkshire Partners is also
entitled to designate two of Holmes directors and has the
right, at its election, to increase the size of the Board of
Directors and the number of directors designated by it by
an additional two directors. From time to time, Holmes may pay
additional consulting or other fees to Berkshire Partners.


Effective May 7, 2001, Holmes agreed to pay
two investment funds affiliated with Berkshire Partners a
guarantee fee as consideration for Berkshires guarantee of
up to $43.5 million of the obligations under the Credit
Facility. Payment of these fees is subordinated to our
obligations under the Credit Facility. As amended effective
March 22, 2002, the guarantee fee arrangement provides for
payment of a fee of 2.25% per annum, compounded annually,
on the $40.0 million Revolving Credit Loan B
commitment, less the portion of this facility designated as
subordinated debt funding loans (which portion is subordinated
to the other obligations under the Credit Facility), on which
portion such fee is 20% per annum, compounded annually.

During 2001, investment funds affiliated with
Berkshire Partners purchased the Companys Senior
Subordinated Notes due 2007 on the open market. They purchased
approximately $36.2 million principal amount of Notes,
which the Company repurchased from the Berkshire Partners funds
at cost plus accrued interest (approximately $12.8 million)
as part of the Fifth Amendment to the Credit Facility as fully
described in Note 8 of Notes to Consolidated Financial
Statements under Item 8 of this Report.

Since its inception in 1982, Holmes has retained
Jordan Kahn Co, Inc. (JKC), a corporation owned by Jordan
A. Kahn, to serve as a sales representative for Holmes in the
northeastern United States. Pursuant to a representation
agreement between Holmes and JKC, Holmes has agreed to pay to
JKC a commission on net sales to JKCs customers in its
territory, which fee is the same fee paid by Holmes to other
unaffiliated sales representative organizations representing
Holmes in other territories throughout the United States.
Pursuant to this arrangement, Holmes paid a total of $215,000,
$235,000 and $189,000 to JKC for the years ended
December 31, 2001, 2002 and 2003, respectively.

In connection with the November 1997
recapitalization transactions, the Company purchased a portion
of the shares of common stock of Holmes beneficially owned by an
affiliate of Pentland, its former majority stockholder. At this
time, Holmes entered into new employment agreements with
Messrs. Kahn and Liu, and made certain payments to
Mr. Kahn in connection with the 1997 transactions. The
agreement with Mr. Kahn was subsequently modified with the
current agreement extended to April 30, 2004. Holmes
entered into an employment agreement with Peter J. Martin in
connection with his joining the Company in August 2001. The
material terms of these employment agreements are described in
Note 14 of Notes to Consolidated Financial Statements under
Item 8 of this Annual Report. In January 2004, the Company
entered into Change of Control Severance Agreements with
approximately 20 employees, including executive officers Louis
Cimini and John Kelliher, providing for the continuation of
salary, bonus and benefits for a period of time following
certain terminations of employment after a change in control of
the Company.






|         |                                           
|-------- | ------------------------------------------
|Item 14. | Principal Accountant Fees and
    Services

Independent Auditor Fees and
Services

The Audit Committee of the Companys Board
of Directors engaged PricewaterhouseCoopers LLP
(PwC) to perform an annual audit of the
Companys financial statements for the fiscal year ended

74



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##### Table of Contents



December 31, 2003. The following table presents
fees earned by PwC for professional services in fiscal years
2002 and 2003:


|                   |  |      |         |      |  |   |         | 
|------------------ |  | ---- | ------- | ---- |  | - | ------- | 
|Services Rendered  |  | 2002 |         | 2003
|                   |  |      |         |     
|Audit fees         |  | $    | 649,000 |      |  | $ | 631,000 | 
|Audit-Related fees |  |      | 40,000  |      |  |   | 36,000  | 
|Tax fees           |  |      | 145,000 |      |  |   | 138,000 | 
|All other fees     |  |      | 28,000  |      |  |   | 49,000  | 

The audit fees are fees paid to PwC for
professional services for the audit of the Companys
consolidated financial statements included in the Annual Report
on Form 10-K and review of financial statements included in the
Companys Quarterly Reports on Form 10-Q, as well as for
services that are normally provided by the auditor in connection
with statutory and regulatory filings or engagements.

The audit-related fees for fiscal years 2002 and
2003 consisted principally of audits of employee pension and
other benefit plans. Tax fees for fiscal year 2002 and 2003
consisted principally of international tax planning,
consultations regarding compliance and other tax matters;
assistance with certain foreign tax authority examinations;
review of the Companys U.S. federal income tax return; and
advice and assistance with respect to transfer pricing matters.

All other fees for fiscal years 2002 and 2003
consisted primarily of non-audit services related to benefit
plan actuary services. In addition, fees paid by a Company
sponsored benefit plan trust to PwC for professional services
associated with assessments of funding requirements, the
preparation of benefit summaries and other compliance related
services totaled $92,000 and $105,000 in fiscal 2002 and 2003,
respectively.

75



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##### Table of Contents



PART IV






|         |                                                                     
|-------- | --------------------------------------------------------------------
|Item 15. | Exhibits, Financial Statement Schedules,
    and Reports on Form 8-K

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



| |                                                                                                                                                                   
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. Financial Statements are listed in the
    Index to Consolidated Financial Statements contained in
    Item 8 of this Report.                                  
|
| | 2. Financial Statement Schedules, to the
    extent required, are listed in the Index to Consolidated
    Financial Statements contained in Item 8 of this Report.
|
| | 3. Exhibits are listed in
    subsection (c) below.                                                                                                               

(b) Reports on Form 8-K:

None.

(c) Exhibits:

|        |   |             |  |                                                                                                                                                                                                                                                                                                                                                        
|------- | - | ----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |   |            
|Number  |   | Description
|        |   |            
|        | 3 | .1          |  | Articles of Organization (as amended) of The
    Holmes Group, Inc. f/k/a Holmes Products Corp.(1)                                                                                                                                                                                                                                                     
|        | 3 | .2          |  | Articles of Organization of Holmes Manufacturing
    Corp.(1)                                                                                                                                                                                                                                                                                          
|        | 3 | .3          |  | Articles of Organization of Holmes Air (Taiwan)
    Corp.(1)                                                                                                                                                                                                                                                                                           
|        | 3 | .4          |  | Certificate of Incorporation of Holmes Motor
    Corp.(4)                                                                                                                                                                                                                                                                                              
|        | 3 | .5          |  | Restated Certificate of Incorporation (as
    amended) of The Rival Company(4)                                                                                                                                                                                                                                                                         
|        | 3 | .6          |  | Certificate of Incorporation (as amended) of
    Rival Consumer Sales Corporation(4)                                                                                                                                                                                                                                                                   
|        | 3 | .7          |  | Bylaws (as amended) of The Holmes
    Group, Inc. f/k/a Holmes Products Corp.(1)                                                                                                                                                                                                                                                                       
|        | 3 | .8          |  | By-laws of Holmes Manufacturing Corp.(1)                                                                                                                                                                                                                                                                                                               
|        | 3 | .9          |  | By-laws of Holmes Air (Taiwan) Corp.(1)                                                                                                                                                                                                                                                                                                                
|        | 3 | .10         |  | By-laws of Holmes Motor Corp.(4)                                                                                                                                                                                                                                                                                                                       
|        | 3 | .11         |  | By-laws of The Rival Company(4)                                                                                                                                                                                                                                                                                                                        
|        | 3 | .12         |  | By-laws of Rival Consumer Sales Corporation(4)                                                                                                                                                                                                                                                                                                         
|        | 4 | .1          |  | Stockholders Agreement dated
    November 26, 1997 among The Holmes Group, Inc. f/k/a
    Holmes Products Corp. and certain stockholders thereof(1)                                                                                                                                                                                                   
|        | 4 | .2          |  | Registration Rights Agreement dated
    November 26, 1997 among The Holmes Group, Inc. f/k/a
    Holmes Products Corp. and certain stockholders thereof(1)                                                                                                                                                                                             
|        | 4 | .3          |  | Indenture dated November 26, 1997 among The
    Holmes Group, Inc. f/k/a Holmes Products Corp., Holmes
    Manufacturing Corp., Holmes Air (Taiwan) Corp. and State Street
    Bank and Trust Company(1)                                                                                                                                               
|        | 4 | .4          |  | Form of Senior Subordinated Notes due
    2007  (Included in Exhibit 4.3)(1)                                                                                                                                                                                                                                                                          
|        | 4 | .5          |  | Form of Note Guaranty  (Included
    in Exhibit 4.3)(1)                                                                                                                                                                                                                                                                                               
|        | 4 | .6          |  | First Supplemental Indenture and Guarantee dated
    October 14, 1998 among The Holmes Group, Inc. f/k/a
    Holmes Products Corp., Holmes Manufacturing Corp., Holmes Air
    (Taiwan) Corp., Holmes Motor Corp. and State Street Bank and
    Trust Company(4)                                                                                       
|        | 4 | .7          |  | Indenture dated February 5, 1999 among The
    Holmes Group, Inc. f/k/a Holmes Products Corp., Holmes
    Manufacturing Corp., Holmes Air (Taiwan) Corp., Holmes Motor
    Corp., The Rival Company, Patton Electric Company, Inc.,
    Patton Building Products, Inc., Rival Consumer Sales
    Corporation and State Street Bank and Trust Company(3)
|        | 4 | .8          |  | First Amendment to Registration Rights Agreement
    dated February 5, 1999 among The Holmes Group, Inc.
    f/k/a Holmes Products Corp. and certain stockholders thereof(4)                                                                                                                                                                           

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|        |    |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|------- | -- | ----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|Number  |    | Description
|        |    |            
|        | 4  | .9          |  | First Amendment to Stockholders Agreement
    dated February 5, 1999 among The Holmes Group, Inc.
    f/k/a Holmes Products Corp. and certain stockholders thereof(4)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|        | 4  | .10         |  | Second Supplemental Indenture and Guarantee dated
    February 5, 1999 among The Holmes Group, Inc. f/k/a
    Holmes Products Corp., Holmes Manufacturing Corp., Holmes Air
    (Taiwan) Corp., Holmes Motor Corp., Moriarty Acquisition Corp.,
    The Rival Company, Patton Electric Company, Inc., Patton
    Building Products, Inc., Rival Consumer Sales Corporation
    and State Street Bank and Trust Company(4)                                                                                                                                                                                                                                                                                                                                              
|        | 10 | .1          |  | Stock Purchase and Redemption Agreement dated as
    of October 27, 1997, as amended as of November 25,
    1997, among Asco Investments Ltd., Jordan A. Kahn, The Holmes
    Group, Inc. f/k/a Holmes Products Corp., Holmes Products
    (Far East) Limited and Holmes Acquisition LLC(1)                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|        | 10 | .2          |  | Stock Purchase Agreement dated as of
    October 27, 1997 among Jordan A. Kahn and Holmes
    Acquisition LLC(1)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|        | 10 | .3          |  | Executive Employment and Non-Competition
    Agreement dated November 26, 1997 among The Holmes
    Group, Inc. f/k/a Holmes Products Corp. and Jordan A. Kahn
    (superseded by Exhibit 10.25)(1)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|        | 10 | .4          |  | Employment Agreement dated November 16, 1997
    among Holmes Products (Far East) Limited and (Tommy) Woon Fai
    Liu(1)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|        | 10 | .5          |  | The Holmes Group, Inc. f/k/a Holmes Products
    Corp. Amended and Restated 1997 Stock Option Plan(4)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|        | 10 | .6          |  | The Holmes Group, Inc. f/k/a Holmes Products
    Corp. Employee Stock Purchase Plan(4)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|        | 10 | .7          |  | Agreement and Plan of Merger dated
    December 17, 1998, by and among The Holmes Group, Inc.
    f/k/a Holmes Products Corp., Moriarty Acquisition Corp. and The
    Rival Company(2)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|        | 10 | .8          |  | Confidentiality Agreement dated October 1,
    1998, by and between The Holmes Group, Inc. f/k/a Holmes
    Products Corp. and BancAmerica Securities, Inc., on behalf
    of The Rival Company(2)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|        | 10 | .9          |  | Purchase Agreement dated as of January 29,
    1999 among The Holmes Group, Inc. f/k/a Holmes Products
    Corp., BancBoston Robertson Stephens Inc. and Lehman Brothers
    Inc.(2)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|        | 10 | .10         |  | Investors Subscription Agreement dated
    February 5, 1999 by and among The Holmes Group, Inc.
    f/k/a Holmes Products Corp. and certain investors(3)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|        | 10 | .11         |  | Amended and Restated Revolving Credit and Term
    Loan Agreement dated as of February 5, 1999 among The
    Holmes Group, Inc. f/k/a Holmes Products Corp., Moriarty
    Acquisition Corp., The Rival Company, Holmes Products (Far East)
    Limited, Esteem Industries Limited, Raider Motor Corporation,
    Holmes Products (Europe) Limited, Bionaire International B.V.,
    Patton Electric Hong Kong, Limited, and The Rival Company of
    Canada, Ltd., BankBoston, and the other lending institutions
    party thereto, BankBoston, N.A. as Administrative Agent and
    Lehman Commercial Paper Inc. as Documentation Agent, with
    BankBoston Robertson Stephens Inc. as Syndication Agent and
    Arranger and Lehman Brothers Inc. as Co-Arranger(3)
|        | 10 | .12         |  | Asset Purchase Agreement dated October 1,
    1999 by and among The Holmes Group, Inc. f/k/a Holmes
    Products Corp., The Rival Company and Sta-Rite Industries(5)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|        | 10 | .13         |  | Agreement of Purchase and Sale of Assets dated
    December 21, 1999 by and among The Holmes Group, Inc.,
    The Rival Company, Patton Building Products, Inc., Patton
    Electric Company, Inc. and The Marley Company(6)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|        | 10 | .14         |  | Employee Stockholders Agreement dated
    April 23, 1998(7)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|        | 10 | .15         |  | Voting Trust Agreement dated April 23,
    1998(7)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|        | 10 | .16         |  | Lease Agreement between The Holmes
    Group, Inc. and ACRE HPC, LLC dated as of January 7,
    2000(8)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|        | 10 | .17         |  | Form of Second Amendment to Amended and Restated
    Revolving Credit and Term Loan Agreement dated as of
    June 30, 2000 by and among The Holmes Group, Inc., its
    subsidiaries party thereto, and the lenders party thereto(9)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

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##### Table of Contents



|        |    |             |  |                                                                                                                                                                                                                                                            
|------- | -- | ----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|Number  |    | Description
|        |    |            
|        | 10 | .18         |  | Amendment to Lease Agreement between The Holmes
    Group, Inc. and ACRE HPC, LLC dated as of December 21,
    2000(10)                                                                                                                                    
|        | 10 | .19         |  | Form of Forbearance Agreement and Third Amendment
    dated as of April 13, 2001 by and among The Holmes
    Group, Inc., its subsidiaries party thereto, and the
    lenders party thereto(10)                                                            
|        | 10 | .20         |  | Form of Fourth Amendment to Amended and Restated
    Revolving Credit and Term Loan Agreement and Limited Waiver
    dated as of May 7, 2001 by and among The Holmes
    Group, Inc., its subsidiaries party thereto, and the
    lenders party thereto(10)
|        | 10 | .21         |  | Form of Warrant Purchase Agreement and Common
    Stock Purchase Warrant dated as of May 7, 2001 by and among
    The Holmes Group, Inc. and the lenders party thereto, as
    investors(10)                                                               
|        | 10 | .22         |  | Form of Co-Sale Agreement dated as of May 7,
    2001 by and among The Holmes Group, Inc., certain
    affiliates of Berkshire Partners LLC, and the lenders party
    thereto, as investors(10)                                                           
|        | 10 | .23         |  | Executive Employment and Non-Competition
    Agreement dated August 1, 2001 between The Holmes
    Group, Inc. and Peter J. Martin(11)                                                                                                                     
|        | 10 | .24         |  | Agreement of Purchase and Sale of Assets relating
    to the Pollenex division dated January 11, 2002, among The
    Holmes Group, Inc., The Rival Company, and Conair
    Corporation(12)                                                                 
|        | 10 | .25         |  | Executive Employment and Non-Competition
    Agreement dated February 1, 2002 between The Holmes
    Group, Inc. and Jordan A. Kahn(13)                                                                                                                    
|        | 10 | .26         |  | Form of Fifth Amendment to Amended and Restated
    Revolving Credit and Term Loan Agreement dated as of
    March 22, 2002 by and among The Holmes Group, Inc.,
    its subsidiaries party thereto, and the lenders party thereto(13)                     
|        | 10 | .27         |  | Letter agreement regarding guaranty fees dated
    March 22, 2002 by and among The Holmes Group, Inc.,
    its subsidiaries party thereto, and certain affiliates of
    Berkshire Partners LLC(13)                                                        
|        | 10 | .28         |  | Amendment to Executive Employment and
    Non-Competition Agreement dated March 17, 2003 between The
    Holmes Group, Inc. and Jordan A. Kahn(14)                                                                                                         
|        | 10 | .29         |  | Form of Sixth Amendment to Amended and Restated
    Revolving Credit and Term Loan Agreement dated as of
    December 19, 2003 by and among The Holmes Group, Inc.,
    its subsidiaries party thereto, and the lenders party thereto(15)                  
|        | 10 | .30         |  | Amendment to Executive Employment and
    Non-Competition Agreement dated January 8, 2004 between The
    Holmes Group, Inc. and Jordan A. Kahn(15)                                                                                                        
|        | 10 | .31         |  | Form of Change of Control Severance Agreements
    dated as of January 10, 2004 between The Holmes
    Group, Inc, and John Kelliher and Louis Cimini(15)                                                                                                  
|        | 21 | .1          |  | Subsidiaries of Registrant(10)                                                                                                                                                                                                                             
|        | 23 | .1          |  | Consent of PricewaterhouseCoopers LLP(15)                                                                                                                                                                                                                  
|        | 31 | .1          |  | Certification pursuant to Section 302 of the
    Sarbanes-Oxley Act of 2002  Peter J. Martin(15)                                                                                                                                                          
|        | 31 | .2          |  | Certification pursuant to Section 302 of the
    Sarbanes-Oxley Act of 2002  John M. Kelliher(15)                                                                                                                                                         



---

Notes:



|    |                                                                                                                                    
|--- | -----------------------------------------------------------------------------------------------------------------------------------
|(1) | Incorporated by reference to the
    Registrants Registration Statement on Form S-4, as
    amended (Registration No. 333-44473). 
|   
|(2) | Incorporated by reference to the
    Registrants Tender Offer Statement on Schedule 14D-1
    dated December 23, 1998, as amended.
|   
|(3) | Incorporated by reference to the
    Registrants Current Report on Form 8-K dated
    February 5, 1999.                           
|   
|(4) | Incorporated by reference to the
    Registrants Annual Report on Form 10-K for the fiscal
    year ended December 31, 1998.      
|   
|(5) | Incorporated by reference to the
    Registrants Current Report on Form 8-K dated
    October 8, 1999.                            
|   
|(6) | Incorporated by reference to the
    Registrants Current Report on Form 8-K dated
    December 21, 1999.                          
|   
|(7) | Incorporated by reference to the
    Registrants Registration Statement on Form S-4, as
    amended (Registration No. 333-77905). 

78



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##### Table of Contents





|    |                                                                                                                              
|--- | -----------------------------------------------------------------------------------------------------------------------------
|(8) | Incorporated by reference to the
    Registrants Annual Report on Form 10-K for the fiscal
    year ended December 31, 1999.
|   
|(9) | Incorporated by reference to the
    Registrants Quarterly Report on Form 10-Q for the
    quarter ended June 30, 2000.     



|     |                                                                                                                              
|---- | -----------------------------------------------------------------------------------------------------------------------------
|(10) | Incorporated by reference to the
    Registrants Annual Report on Form 10-K for the fiscal
    year ended December 31, 2000.
|    
|(11) | Incorporated by reference to the
    Registrants Quarterly Report on Form 10-Q for the
    quarter ended September 30, 2001.
|    
|(12) | Incorporated by reference to the
    Registrants Current Report on Form 8-K dated
    January 14, 2002.                     
|    
|(13) | Incorporated by reference to the
    Registrants Annual Report on Form 10-K for the fiscal
    year ended December 31, 2001.
|    
|(14) | Incorporated by reference to the
    Registrants Annual Report on Form 10-K for the fiscal
    year ended December 31, 2002.
|    
|(15) | Filed herewith.                                                                                                              

79



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##### Table of Contents



SIGNATURES

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



| |                       
| | ----------------------
| | THE HOLMES GROUP, INC.



| |     |                    
| | --- | -------------------
| | By: | /s/ PETER J. MARTIN

| |                           
| | --------------------------
| |                           
| | Peter J. Martin, President
| | Chief Executive Officer   

Dated: March 16, 2004

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

|                                     |  |                                                                                                    |  |                |  | 
|------------------------------------ |  | -------------------------------------------------------------------------------------------------- |  | -------------- |  | 
|                                     |  |                                                                                                    |  |               
|Signature                            |  | Title                                                                                              |  | Date          
|                                     |  |                                                                                                    |  |               
|                                    
|/s/ PETER J. MARTINPeter J. Martin   |  | President, Chief Executive Officer and Director
    (Principal Executive Officer)                  |  | March 26, 2004
|                                    
|/s/ JOHN M. KELLIHERJohn M. Kelliher |  | Senior Vice President and Chief Financial Officer
    (Principal Financial and Accounting Officer) |  | March 26, 2004
|                                    
|/s/ JORDAN A. KAHNJordan A. Kahn     |  | Chairman of the Board of Directors                                                                 |  | March 26, 2004
|                                    
|/s/ TOMMY LIU(Tommy) Woon Fai Liu    |  | Director                                                                                           |  | March 26, 2004
|                                    
|/s/ RICHARD LUBINRichard Lubin       |  | Director                                                                                           |  | March 26, 2004
|                                    
|/s/ RANDY PEELERRandy Peeler         |  | Director                                                                                           |  | March 26, 2004
|                                    
|/s/ GREGORY F. WHITEGregory F. White |  | Director                                                                                           |  | March 26, 2004
|                                    
|/s/ FRED J. MUSONEFred J. Musone     |  | Director                                                                                           |  | March 26, 2004

80